short form questions

Question 1

List the quality control procedures you would expect to be in place at the engagement
level to ensure the appropriate audit opinion is given. (3 marks)

Answer 1

• Assignment of direction, supervision, performance and leadership responsibility to the engagement partner.
• A review of compliance with independence requirements for all team members.
• Communication of ethical requirements and need for professional scepticism to the team.
• Briefing/planning meeting.
• Assignment of work to staff with appropriate competence and qualifications.
• Staff with appropriate experience of the sector and/or client.
• Appropriate on-the-job training (particularly as there are 3 audit assistants).
• Continuance of client relationship review.
• Work is properly supervised:
  
  • Audit assistant supervised by audit senior, audit senior supervised by audit manager, audit manager supervised by engagement partner.
• Work is properly reviewed:
  
  • Audit work reviewed by audit senior, manager and partner.
• Consultation is undertaken on difficult or contentious matters.
• Resolution of differences of opinion.
• Consideration of impact of outcome of firm’s monitoring processes.
• Conclusions are properly documented.

Question 2

Explain the relationship between auditing standards issued in the UK and International
Standards on Auditing (as issued by the International Auditing and Assurance
Standards Board). (4 marks)

Answer 2

• ISAs aim to promote global consistency in auditing.
• ISAs as issued by the IAASB have no direct authority in the UK.
• National auditing regulations – ISAs (UK) – apply in the UK.
• FRC adapts ISAs for the UK market and compliance with the Companies Act 2006.
• ISAs (UK) are based on ISAs.
• ISAs (UK) contain additional paragraphs and other changes to make them relevant to the UK.
• Changes are shaded to make them clear.
• New and revised ISAs must be adopted by FRC before they apply in the UK.
• A UK auditor’s report states the audit is conducted in compliance with ISAs (UK).

Question 3

Explain what is meant by a ‘fully substantive audit’ and a ‘systems-based audit’.
Suggest two situations in which a fully substantive audit would be appropriate.
(4 marks)

Answer 3

Fully substantive audit

• Uses tests of detail and analytical procedures only/There is no reliance on internal controls.
• No reduction in tests of detail as no reliance on internal controls.

Situations where a fully substantive audit is appropriate

• Controls inadequately designed or insufficient
• Controls not working and cannot be relied on
• Few transactions
• Large proportion of non-routine transactions
• Holding company

Systems-based audit

• Document client’s internal control systems.
• Test client’s internal control systems.
• Rely on data produced by client’s systems if testing is successful.
• Can reduce substantive testing (in some areas analytical procedures may be sufficient).
• Some substantive testing always required.

Question 4

Your firm is the new external auditor of Parten Ltd, a company specialising in the
development and sale of luxury beauty products.

List the actions that your firm should take to understand the company and its
environment. (3 marks)

Answer 4

• Review laws and regulations facing the beauty industry.
• Review beauty industry trade magazines, surveys, analyst reports, media reports, and market research.
• Perform an Internet search or use social media.
• Consult industry experts.
• Consider firm’s knowledge of industry (from auditing other clients).
• Perform a Companies House search.
• Obtain references from credit reference agencies, banks and/or suppliers.
• Make enquiries of Parten’s management about the nature of the business/its objectives/strategies/control environment.
• Obtain and review details of the organisation’s structure.
• Review systems documentation.
• Obtain a list of Parten’s related parties.
• Read Parten’s website/product brochures.
• Read Parten’s past annual reports.
• Review Parten’s previous auditors’ reports.
• Review Parten’s management accounts.
• Review Parten’s accounting policies.
• Review Parten’s board/AGM/committee minutes.
• Consider information and workpapers provided by the previous auditor.

Question 5

Describe three business risks arising from climate change that may affect PetroCom’s
financial statements. (3 marks)

Answer 5

Business risks arising from climate change:

• Loss of core business as fossil fuels are phased out due to climate change.
• Change in customer preferences leading to a reduction in demand or loss of customers.
• Threat of other new energy sources and competitors.
• Need for investment in research and development.
• Lower margins on renewable energy products.
• Cost of diversification.
• Fines or loss of licence due to non-compliance with climate change regulation.
• Need to comply with new climate change regulations.
• Potential loss of investors if effects of climate change/regulations are not adequately considered.
• Effects of climate change events (eg, fires, lack of water at extraction sites).
• Potential going concern risk from all of the above.

Question 6

Simone Garcia has been the audit engagement partner of Ice Ltd (Ice) since undertaking the audit for the year ended 30 June 2012, and has built up a strong working relationship with the client. The audit of the financial statements for the year ended 30 June 2022 will soon begin with the strategy meeting.

Set out the ethical requirements and options available to Ice regarding whether Simone
can continue as audit engagement partner of Ice. (3 marks)

Answer 6

• Consider threats to integrity, objectivity and independence due to long association.
• Private company – no requirement to rotate engagement partner.
• When engagement partner in post for >10 years, consider FRC Ethical Standard’s objective, reasonable and informed third party test.
• Simone has been engagement partner for 10 years
• Potential for:
  
  • familiarity/trust threat
  • predisposition to accept or insufficiently questioning of the point of view of the entity.
• If conclude integrity/objectivity/independence compromised:
  
  • replace Simone as audit engagement partner with one with no previous involvement with Ice Ltd.
• If conclude can remain in post, apply safeguards, such as:
  
  • an additional independent partner review
  • arranging an engagement quality control review
  • arranging an external partner review; and
  • document reasoning as to why the engagement partner can continue
  • communicate the facts to those charged with governance
  • consult the ethics partner.
• If safeguards cannot be applied/no other partner available to replace Simone:
  
  • resign as auditor.

Question 7

Explain why analytical procedures are performed during the completion stage of an
external audit. (2 marks)

Answer 7

• Mandatory under ISA 520
• Assist with forming an overall conclusion/corroborate audit conclusions/audit opinion
• Identify previously unrecognised risks of material misstatement
• Financial statements consistent with auditor’s understanding
• Determine if further audit procedures are required/sufficient work performed

Question 8

‘How did you select this sample of invoices to test? I can’t tell from the audit documentation. You’ve also missed a key detail from the documentation - the invoice numbers.’

Explain why the method of sample selection and invoice numbers should be included in the audit documentation. State any further actions that the audit manager should take as a result of the deficiencies in the audit assistant’s work. (4 marks)

Answer 8

Demonstrate that sample is:

• unbiased
• representative of the whole population
• sufficient to reduce detection risk
• in line with firm’s policy

Invoice numbers:

• Supervisor can easily check the work to supporting detail
• Enable an experienced auditor to understand the work at a later date

Further actions:

• Update working papers to include invoice numbers/method of selection
• Detailed review of assistant’s other work
• Discuss with the assistant/offer training/feedback
• Consider the adequacy of supervision during fieldwork

Question 9

Bramford LLP (Bramford) is the prospective auditor of SRFP Ltd and has been granted permission to contact the outgoing auditor, MM LLP (MM). Despite Bramford’s repeated emails and letters sent by post, there has been no reply from MM.

Explain why it is necessary for prospective auditors to contact the outgoing auditor and
state the actions Bramford should now take. (4 marks)

Answer 9

Need to contact outgoing auditor

• Required by ICAEW Code of Ethics
• Alert incoming auditor to matters significant to their appointment/reasons for not accepting e.g.
  
  • unpaid fees
  • unlawful acts/fraud
  • disagreements with management
  • questionable financial reporting practices
  • indicators of poor management integrity/dishonesty
  • limitations on scope of audit/lack of access to evidence
• Allow new auditor to make a decision re accepting the client
• Obtain access to audit files (opening balances)

Actions to take

• Ensure contact details are correct
• Telephone call
• Send letter by recorded/registered delivery
• Stating intention to accept in absence of reply within a specified period
• Discuss with client (e.g. why not reappointed)
• Ask client to assist (e.g. prompt auditor to respond)
• Consider other information (e.g. internet search/prior year audit report)
• Review statement of circumstances

Question 10

Management override of controls has been identified as a key audit risk in the external audit of Billett Cars Ltd, a family run business.

Explain how management override of controls affects the auditor’s assessment of control risk and outline the audit procedures to be included in the audit plan to address this risk. (4 marks)

Answer 10

Assessment of control risk

• Control risk increased/higher
• Weak control environment/tone at the top/lack of integrity
• Controls may not operate effectively/can’t be relied on
• Errors/fraud not prevented/detected

Audit procedures

• Review journal entries
• Scrutinise accounting estimates for management bias
• Identify significant/unusual transactions/outside normal course of business
• Investigate related party transactions
• Investigate reconciling items
• Use of data analytics software to identify outliers

Question 11

Whilst testing cash at bank, the audit assistant noticed an unusually large payment made to a foreign bank account, with a similar amount shown as a receipt a few days later from a different bank account.

No documentary evidence to support these transactions was available. State, with reasons, the actions that the audit assistant should take. (3 marks)

Answer 11

Actions to take

• Report to MLRO
• No tipping off
• Retain all evidence

Reasons

• May not be a clear economic purpose for the transactions/No rational explanation
• Potentially money laundering
• Layering/disguising
• Illegal activity/POCA
• Personally responsible
• Duty to report/criminal offence NOT to report
• Criminal offence to tip off
• Not to prejudice subsequent investigation

Question 12

Hill Crest Interior Ltd’s (HCI) external auditor has proposed the following audit
adjustments to the financial statements for the year ended 30 September 2021:

Management has refused to adjust the financial statements, arguing that the combined
impact on profit is zero.

HCI’s draft financial statements for the year ended 30 September 2021 show profit
before tax of £5.2 million.

State, with reasons, the impact of management’s refusal to adjust the financial statements on the auditor’s opinion. (3 marks)

Answer 12

• Modified opinion
• Qualified/except for opinion
• Overstatement/misstatement
• 8.8% of PBT/£260k
• Material
• Not pervasive
• Limited to specific elements in SFP/isolated
• Offset discouraged by ISAs

Question 13

Explain the ethical issues arising in respect of the finance director’s two suggestions that your firm undertakes the audit on a contingent fee basis and that the audit team is provided with free lunches. (5 marks)

Answer 13

Audit fee on a contingent basis:

• A self-interest threat to objectivity, independence, and integrity exists as the audit firm has an incentive to ensure the loan application is successful.
• This could lead to errors being overlooked and an inappropriate audit opinion being issued.
• An advocacy threat may exist if it is perceived that the audit firm’s interests are too closely aligned with the directors’ interests.
• A threat to professional behavior exists if the auditor is associated with false or misleading information and, if this turns out to be the case, it will discredit the profession.
• There are no safeguards that could reduce these threats to an acceptable level.
• Contingent fees are prohibited under the FRC Ethical Standard.

Free lunches with directors:

• A self-interest threat to objectivity and independence exists as the free lunches could be perceived as an incentive.
• A familiarity threat could exist as relationships may develop between the audit team and the directors resulting in the audit team being insufficiently sceptical or too trusting of management.
• This could impact the auditor’s professional competence and due care when performing the audit work and reduce audit quality.
• The monetary value of the lunches should be considered. Individual lunches may be insignificant, but the cumulative value of multiple lunches may be significant in the view of a reasonable and informed third party.

Question 14

External audit firms are required to consider the integrity of management before accepting an engagement with a prospective client.

Outline the procedures that an external audit firm must undertake to assess the integrity
of management of a prospective client. (3 marks)

Answer 14

• Contact previous auditor to obtain professional clearance (with permission)
  
  • Reasons that they are not being re-appointed
• Inspect previous audit reports
  
  • Evidence of inappropriate accounting practices
• Due diligence/background checks
  
  • Undertake client ID procedures
• Obtain references from third parties
  
  • bank, credit agencies, professional advisers, suppliers
• Undertake Companies House/data base searches
  
  • Establish if disqualified as a director
• Review media coverage/newspapers/internet
  
  • fraud/criminal record
• Meet with directors to ascertain their attitude to:
  
  • business practices/control environment/regulation
• interpretation of accounting policies
• Consider the reputation of related parties/business associates

Question 15

Birchy LLP (Birchy) is the external auditor of Dracip plc which recently acquired a subsidiary. The subsidiary is in an overseas country in which Birchy does not have any offices. The engagement partner intends to use a firm of unconnected auditors based in the overseas country to perform the subsidiary’s external audit.

List the matters to be considered by the engagement partner when selecting the overseas audit firm. (3 marks)

Answer 15

• Competence/experience
• Knowledge/qualifications
• Resources
• Independence/objectivity
• Reputation
• Integrity
• Language barriers
• Cost
• Whether overseas auditor is subject to:
  
  • technical performance standards
  • ethical standards
• Previous experience of working with the overseas firm
• Willingness to cooperate with group auditor (GA)
• Ability for GA
  
  • to be involved in planning/risk assessment
  • to monitor/review/access to working papers

Question 16

Sedar LLP (Sedar) is the external auditor of Waterco plc (Waterco) for the year ended 31 December 2020. Waterco provides water and sewerage services. On 12 January 2021, the industry regulator imposed a substantial fine on Waterco after a leak at one of its sewerage treatment sites resulted in hazardous spillages of sewage into a nearby river in June 2020. The regulator commented that the size of the fine reflected the fact that the directors had breached regulations by deliberately failing to report the spillages. The directors have been notified that they may also face criminal proceedings.

Explain why this matter should be considered by Sedar. (4 marks)

Answer 16

• Risk of losing operating licence
• Reputation risk to client
• Fines and legal claims
• Going concern implications
• Engagement/audit risk increased
• Weak control environment
• Management integrity lacking
• Fraud risk increased
• Management representations unreliable
• Risk of material misstatement
• Implications for provisions and contingent liabilities
• Implications for audit report if non-provision or non-disclosure
• Breaches of other regulations
• Money laundering/deliberate breach
• Reporting to NCA may be required
• Reputational risk to audit firm by association
• Need to consider whether to continue/seek reappointment

Question 17

List the matters that should be considered as part of an engagement quality control review of a listed entity. (3 marks)

Answer 17

• Firm’s independence and compliance with Ethical Standards
• Whether consultation on contentious issues
• Significant judgement areas
• Conclusions reached
• Significant risks identified
• Fraud assessment
• How risks addressed
• Reasoning behind materiality
• Significance of uncorrected misstatements
• Auditor’s report/opinion
• Financial statements
• Matters communicated to TCWG/regulators/audit committee
• External expert’s advice

Question 18

Jason is the audit senior on the external audit of Rekir Ltd (Rekir). One of the areas of key audit risk identified in respect of Rekir is going concern. Whilst working on trade payables, Jason noticed an amount owed to Atad Ltd (Atad). Jason’s brother is both the finance director and a shareholder of Atad.

Identify and explain the ethical issues arising for Jason. (3 marks)

Answer 18

• Self-interest threat
  
  • to objectivity/independence
• Conflict of interest
  
  • favouring brother’s interest over duty to client
• Temptation to inform brother re irrecoverable debt
• Heightened risk of financial loss because of going concern focus
• Risk confidentiality breached
  
  • information acquired as a result of the audit
  • should not be disclosed to third parties
  • nor used for the personal advantage of third parties
  • without proper and specific authority
• Threat to professional behaviour
  
  • discredit profession

Question 19

In the financial year ended 31 December 2020 Que Ltd (Que) satisfied the criteria exempting it from requiring a UK statutory audit. Forecasts for the year ending 31 December 2021 indicate that Que will have 55 employees, gross assets of £4.7 million and revenue of £9.5 million.

Discuss whether Que is likely to require a statutory audit for the year ending 31 December 2021. (4 marks)

Answer 19

• Statutory audit required if 2 of following criteria apply:
  
  • Employees exceed 50
  • Turnover (revenue) exceeds £10.2m
  • Gross assets exceeds £5.1m
• Not required to have a statutory audit (award follow through marks)
• Unless:
  
  • Forecast figures are exceeded in at least one other threshold
  • 10% of shareholders request it

Question 20

Your firm is the external auditor of Earnshaw Ltd (Earnshaw). The directors of Earnshaw have requested that you, the audit senior, assist them with the preparation of the statutory
financial statements.

Requirement
Identify and explain the principal threats to independence and objectivity which may arise from providing this non-audit service and state how your firm can mitigate these threats.
(4 marks)

Answer 20

Threats

• Management threat
  
  • decisions/judgements
  • eg, estimates/accounting policies
  • views closely aligned with management
• Self-review
  
  • auditing FS that firm prepared
  • unwilling to highlight errors
  • over-reliance/insufficiently/sceptical/too trusting

Mitigate threats

• Ethics partner informed.
• Individual not part of audit team
• Informed management.
• Capable of making decisions.
• Work to be of routine/technical/mechanical nature/no decisions.
• Independent review of:
  
  • accounting work
  • audit work

Question 21

Your firm is the external auditor of Huntley Ltd (Huntley). The draft directors’ report includes the following statement: ‘Despite a challenging year, profits remained stable. However, the audited financial statements show that profit from operations fell by 10% and profit before tax fell by 12%.

Requirements
State, with reasons, the actions your firm should take and outline the implications, if any, for the auditor’s report. (4 marks)

Answer 21

• Inconsistency between DR and FS.
• Appears to be material (profit down 10/12%).
• FS are audited, unlikely to be misstated.
• CA 2006 responsibility to report.
• Ask directors to amend DR.

If DR report amended:

• no modification to report
• state FS and DR are consistent

If DR not amended:

• modify audit report.
• refer to inconsistency in sections headed:
• ‘opinion on other matters prescribed by CA 2006*
• “matters on which we are required to report by exception’

Question 22

Explain why the level of assurance provided by an assurance report on a cash flow forecast differs from the level of assurance provided by the auditor’s retort on the annual financial statements.
(4 marks)

Answer 22

• Examination of FF provides limited/moderate assurance.
• Audit provides reasonable/high level of assurance.
• Examination of CFF reduces risk to level that is acceptable in the circumstances.
• Audit of FS reduces risk to an acceptably low level.
• CFF based on assumptions/estimates:
  
  • subject to uncertainty
• Audit is based on historical information:
  
  • verified to a greater degree,
• Estimates often corroborated (by subsequent events).

Question 23

Your firm has decided not to seek reappointment as Datchet plo’s (Datchet) external auditor for the year ending 31 August 20X1. This followed a disagreement in relation to the audit of Datchet’s financial statements for the year ended 31 August 20X0.

Requirement
Set out your firm’s responsibilities and rights, under the Companies Act 2006, in connection with its decision not to seek reappointment.
(3 marks)

Answer 23

Responsibilities

• Statement of circumstances:
  
  • setting out details of disagreement/reasons
  • deposited at company’s registered office/Companies House
  • Datchet is a PIE so no option to deposit statement that there are no circumstances.

Rights

• Attend/speak at the company’s annual general meeting.
• Make written representations.

Question 24

Your firm is the external auditor of Dipton pl (Dipton) for the year ending 31 December 20X0. Dipton’s inventory includes liquid chemicals stored in tanks. Dipton intends to use the services of Chevington Ltd (Chevington), a firm specialising in the measurement of quantities and compositions of liquids, to assist in measuring Dipton’s inventory at 31 December 20X0. Your firm intends to use the work of Chevington as part of its audit procedures.

Requirement
Set out the matters to be considered by your firm when using the work of Chevington.
(3 marks)

Answer 24

• Level of risk re inventory/materiality of inventory.
• Terms of engagement/scope of work.
• Accessibility to expert’s working papers/ report.
• Competence/expertise.
• Qualifications/member of professional body.
• Independence/objectivity.
• Reputation/previous experience of their work.
• Use of auditor’s own expert.

Question 25

Hepscott pl (Hepscott) prepares both interim and full year results for external reporting. As part of its external audit for the year ended 30 September 20X0, your firm’s data analytics software has produced the following dashboard of Hepscott’s sales profile for the 13 months ended 31 October 20X0:

Requirement
Using the dashboard, identify and explain the matters which you consider to require further investigation
(2 marks)

Answer 25

• Spikes in March/September/interim/year end reporting periods
• Followed by dips in months April/October 20X0/October 20W9
• Seasonality of business
• Cut-off errors
• Early recognition of revenue/overstatement of revenue
• Window dressing/management bias

Question 26

The audit fee in respect of the financial statements for the year ended 31 March 2022 of Jasper plc (Jasper), an external audit client of Blake Lowe LLP (Blake Lowe), is eight months overdue.

Explain why this matter should be considered by Blake Lowe in deciding whether or not it is appropriate to continue to act as external auditor to Jasper. (2 marks)

Answer 26

• May impair independence/objectivity
• Self-interest threat as may be reluctant to report unfavourably for fear of not receiving fee
• May be construed as a loan to client which is not permitted
• Engagement partner in consultation with ethics partner need to consider whether any safeguards can be implemented to reduce the threat to an acceptable level
• If legal action is necessary to recover the fees it would result in both parties being placed in an adversarial position which may affect management’s willingness to make complete disclosure of relevant information

Question 27

Able Cole LLP (Able Cole) is the external auditor of both Ash Ltd (Ash) and Oak Ltd (Oak). Oak is a customer of Ash. During the planning meeting for the external audit of Oak for the year ended 31 March 2022 the engagement partner discovered, from a conversation with the finance director, that Oak’s bank was likely to withdraw the overdraft facility. Oak owed a substantial amount to Ash at 31 March 2022 and the whole of this amount is still outstanding. Able Cole is finalising the audit of Ash for the year ended 31 March 2022 because the company’s bankers require the audited financial statements by 30 June 2022 in accordance with the terms of the overdraft facility.

Explain the professional and ethical issues facing Able Cole in respect of the audits of Ash and Oak and outline the safeguards that should already be in place to address these issues. (4 marks)

Answer 27

Professional and ethical issues

• May result in a conflict of interest
• May not be perceived as acting in best interests of clients
• Financial difficulties may impact on the recoverability of the outstanding debt
• Possible overstatement of receivables of Ash
• Should only rely on routine audit work to assess recoverability
• Duty of confidentiality prevents audit firm from using this information for the benefit of Ash

Safeguards

• Prior to accepting appointment, circumstances should have been disclosed to clients and consent of clients obtained
• Separate teams
• Procedures to prevent access to information (eg, strict physical separation of such teams, confidential and secure data filing)
• Clear guidelines for members of the audit team on issues of security and confidentiality
• Use of confidentiality agreements signed by employees and partners
• Regular review of the application of safeguards by a senior individual not involved with either engagement

Question 28

During the external audit of Athenza Ltd (Athenza), which operates a chain of beauty salons, the audit senior discovered that the managing director, who owns all the shares, regularly collects cash from customers and does not include any details relating to these transactions in the accounting records of Athenza.

Explain the audit senior’s and the audit firm’s responsibilities in respect of this matter. (4 marks)

Answer 28

Senior

• Report to Money Laundering Reporting Officer of the firm

Firm

• Money laundering officer to decide whether to report to National Crime Agency
• Avoid tipping off as this may prejudice subsequent investigation
• Consider the implications for:
  
  • the risk assessment
  • understatement of revenue and taxation
  • reliability of written representations
  • auditor’s report if revenue materially understated

Reasons

• Represents benefits from criminal conduct
• Criminal offence if auditor does not report suspicions of money laundering

Question 29

Set out the purposes of exercising quality control procedures in the conduct of an assurance engagement. (3 marks)

Answer 29

• Provide reasonable assurance that:
  
  • work complies with professional standards and regulatory and legal requirements
  • compliance with the firm’s own procedures
  • assurance reports are appropriate in the circumstances
• Protect auditor in case of future litigation and or disciplinary investigations

Question 30

Your firm has been invited by John Vector, the managing director and majority shareholder of Vector Ltd (Vector), to accept appointment as external auditor. The client acceptance procedures have identified a recent newspaper article which provides details of court proceedings relating to an alleged fraud committed by John Vector.

Explain why this matter should be considered when deciding whether or not to accept the appointment as external auditor of Vector. (3 marks)

Answer 30

Matters to consider

• Affects assurance engagement risk – ie, risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated
• Affects reputational risk – firm’s reputation may be tarnished by association with unscrupulous characters
• May indicate a lack of integrity
• Consideration of integrity of client’s management required by ISA (UK) 220
• A lack of integrity may be indicative of:
  
  • aggressive interpretation of IFRSs
  • window dressing to ensure compliance with bank covenants
  • poor control environment
  • an inappropriate limitation in scope of work
  • money laundering or other criminal activities

Question 31

The ‘Independent Review into the Quality and Effectiveness of Audit’ (the Review) conducted by Sir Donald Brydon proposed a number of recommendations to reform the audit profession.

List three recommendations set out in the Review. (4 marks)

Answer 31

Brydon review recommendations

• Redefinition of audit and its purpose.
• Creation of a corporate auditing profession governed by principles.
• Introduction of suspicion into the qualities of auditing.
• Extension of the concept of auditing to areas beyond financial statements.
• Mechanisms to encourage greater engagement of shareholders with auditors.
• Change to the language of the opinion given by auditors.
• Introduction of a Corporate Audit and Assurance Policy, a Resilience Statement and a Public Interest Statement.
• Suggestions to inform the work of BEIS on reporting on the effectiveness of internal controls and improve clarity on capital maintenance when dividends are paid.
• Greater clarity around the role of the audit committee.
• A package of measures around fraud detection and prevention.
• Improved auditor communication and transparency.
• Obligations to acknowledge external signals of concern.
• Extension of audit to new areas including alternative performance measures.
• Increased use of technology.

Question 32

The Jumping Bean Company runs a chain of Mexican restaurants. The restaurants are in 26 locations around the country. Professional inventory counters are used to count and value inventory at the year end. As external auditors, you are considering whether you need to rely on the work of these professionals and if so, whether you should.

Explain the factors you need to consider before using them and list the actions you would take before placing reliance on their work. (4 marks)

Answer 32

To decide whether to use the experts, the auditor should:

• review the engagement’s team knowledge and previous experience of this type of inventory count and valuation.
• assess the risk of misstatement based on the nature and complexity of the inventory count and valuation.
• review the quality and quantity of other available audit evidence.

If you decide to use the experts, you should:

• discuss the matter with the management of Jumping Bean – their agreement is important as you are going to be using experts engaged by them.
• review appropriate documentation to ensure that the experts are appropriately qualified.
• review the experience and reputation of the experts to ensure that it is relevant and at the appropriate level for this assignment.
• form a view on the objectivity of the experts – you may consider that because management are employing the experts their independence might be impaired.
• review the work plans of the experts and assess whether they are adequate and how you might rely on their work and test its adequacy and accuracy. You would inspect some of their previous work and results to help you make a final decision and plan the coordination of your work and the experts’ work.
• produce the final work plan incorporating the work of the experts as appropriate based on your previous work and conclusions.

Question 33

Charlie and Co, a firm of chartered accountants, has asked you to review its internal procedures in relation to money laundering.

List the requirements for firms of chartered accountants in respect of money laundering activities. (3 marks)

Answer 33

As a practicing firm of accountants, Charlie and Co should:

• undertake client identification procedures
• maintain records of client identification procedures
• appoint a Money Laundering Compliance Principal
• establish reporting procedures
• provide training to personnel in recognition and reporting
• report suspicions to NCA
• avoid tipping off the client

Question 34

Your firm has been engaged by the directors of Davis Ltd (Davis) to review an insurance claim for loss of profits that the directors have prepared following a fire at one of Davis’s warehouses. The directors believe that an assurance report provided by your firm will help to accelerate the processing of the claim.

Identify the points, specific to the review of the claim that your firm should include in its engagement letter and explain why their inclusion is necessary. (4 marks)

Answer 34

Points to include in an engagement letter and an explanation of why their inclusion is necessary:

• Responsibilities of the firm (auditor)
  
  • To review the claim
• Responsibilities of Davis (client)
  
  • To prepare the claim
  • To provide written representations and access to information
• Limited level of assurance
  
  • Expressed negatively
• To avoid any misunderstanding and reduce expectations gap
• Identify the intended users of the report
  
  • Limit liability to unforeseen parties
• Agreement to limit liability
  
  • Reduce exposure to damages

Question 35

Following a review of interim financial information for Partway Ltd, an independent accountant’s unmodified report has been issued. The report includes the following:

• “A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.*
• Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information does not give a true and fair view of the financial position of Partway Ltd as at 30 April 2022 and of its financial performance and its cash flows for the six-month period then ended in accordance with International Financial Reporting Standards…”*

Describe the level of assurance that has been provided by this statement and explain how and why it differs from the level of assurance provided by an external auditor’s report on annual financial statements. (3 marks)

Answer 35

Level of assurance provided by the review:

• Limited/moderate assurance expressed negatively
• The auditor is satisfied that the subject matter is plausible

How it differs from the annual audit:

• An annual audit provides a high level of assurance expressed positively (ie, in our opinion gives a true and fair view).
• The auditor is satisfied that the subject matter conforms in all material respects with suitable criteria.

Why the level of assurance differs:

• The level of assurance is determined by the level of work undertaken.
• The scope of a review is substantially less than that of an audit.
• A review does not include audit procedures such as tests of control and tests of detail.

Question 36

Describe the role of the ethics partner within an external audit firm. (3 marks)

Answer 36

Role of ethics partner within an external audit firm:

• Responsible for adequacy of firm’s policies and procedures regarding integrity, objectivity and independence
• Responsible for firm’s compliance with FRC Ethical Standard
• Responsible for effectiveness of communication on ethical matters to partners and staff
• Provides ethical guidance and advice to individual partners and teams
• Gives consideration to whether policies and procedures are properly covered in training
• Provides guidance where difficult and objective judgement needs to be made or a consistent position reached
• Assesses implications of any breach of FRC Ethical Standard
• Determines whether any safeguards can be put in place or whether there is a need to resign from engagement

Question 37

State the key purposes of:

1. an engagement quality control review; and
2. monitoring (‘cold’ audit file review).

(3 marks)

Answer 37

1. Key purpose of engagement quality control:

• Provide an independent check regarding the validity of the firm’s audit opinion by:
  
  • discussion of significant matters with the engagement partner review of the financial statements and proposed auditor’s report.
  • review of selected documentation relating to significant judgments.
  • evaluation of conclusions reached.
• Particularly where there are increased risks associated either with the:
  
  • client (eg, a listed client); or
  • objectivity of the firm

2. Key purposes of monitoring (cold review):

• Represents a continuing part of the firm’s quality control procedures
• Ensure that the firm’s policies and procedures are operating effectively and are complied with
• Assess the firm’s compliance with ISAs (UK)
• Identify areas where changes to firm’s policies and procedures are needed
• Identify where additional training is required
• Assess the effectiveness of review procedures

Question 38

You are the audit manager responsible for the audit of Fiver Ltd for the year ending 31 October 20X0.

Requirements
Outline the actions you would take in relation to junior members of the audit team, before and during the audit fieldwork, to ensure the quality of their work will be of a high standard.
(3 marks)

Answer 38

Actions in relation to junior members of the audit team to ensure the quality of their work is of a high standard

• Select a team with appropriate competence
• Assign work to team members according to experience
• Inform team of the need to:
  
  • comply with ethical standards
  • exercise professional scepticism
• Brief the audit team on:
  
  • industry/entity/risks/fraud
  • audit approach
• Ensure they understand instructions
• Supervise by:
  
  • regular communication/provide feedback
  • track progress of work
  • review work completed

Question 39

85.2 Explain why the Competition and Markets Authority (CMA) has recommended the introduction of mandatory joint audits for the UK’s biggest companies.

(3 marks)

Answer 39

• Concert over high profile corporate failures following clean audit reports
• Improve audit quality
• Second pair of eyes
• Increase competition in the audit market
• Increase public confidence
• Increase capacity/resources of smaller firms to perform listed company audits

Question 40

85.3 Your firm has accepted a non-audit engagement to perform a review of Bigwig Ltd’s financial statements

Requirement
List the matters that your firm should include in the engagement letter in respect of this engagement.
(4 marks)

Answer 40

• Intended use
• Distribution/restrictions on distribution
• Identification of applicable reporting framework
• Objective/scope of engagement
• Responsibilities of the firm
• Responsibilities of management
• Conducted in accordance with ISRE 2400
• Statement that:
  
  • engagement is not an audit
  • limited/moderate assurance
  • firm does not express an audit opinion/conclusion expressed negatively
• Written representations required from management
• Form and content of report
  
  • may change in light of findings
• Liability cap
• Fee arrangements

Question 41

85.4 You are working on the external audit of Keehar Ltd (Keehar) for the year ended 31 August 20X0. Using data provided by Keehar, your firm’s data analytics software has produced the following data visualisation relating to payroll costs. The visualisation shows the average gross salary per month and deductions as a percentage of gross salary.

The following events occurred in the year:

• December 20W9 - Keehar made a number of employees redundant
• May 20X0 - Keehar replaced its payroll software

Requirement
Using the information provided, list the questions you would ask the management of Keehar. (4 marks)

Answer 41

• Why is there a spike in the average salary in Dec?
• Does this include redundancy payments?
• Does this include redundancy payments?
• Why does the average salary fall in Jan?
• Were higher paid employees made redundant?
• Why are deductions so low as a % of gross salary in May/June?
• Did issues/errors occur with the new payroll software/migration?
• Why is there a dip in average salary in Aug?
• Could there be unrecorded payments at the year end?

Question 42

85.5 You are auditing the trade payables of Burrow Ltd as at 31 July 20X0. The purchase ledger clerk has provided you with the following supplier statement reconciliation in respect of Seer Ltd (Seer).

Requirement
List the audit procedures you would perform in respect of this supplier statement reconciliation.
(4 marks)

Answer 42

• Audit procedures in respect of supplier statement reconciliation
• Agree balance of £12,871 to purchase ledger at 31 July 20X0
• Agree amounts paid on 30 July to bank statements on/after year end
• Ascertain from management:
  
  • why the discount was not allowed by Seer/whether management intend to dispute this
  • why July invoices were not posted to the purchase ledger
• Inspect correspondence with Seer regarding the discount
• Check contract/terms of agreement with Seer
• Inspect goods received records re. the July invoices
• Inspect post year-end payments/delivery notes/orders for evidence of other missing invoices
• Trace July invoices to accruals/trade payables
• Agree balance of £17,524 to Seer’s supplier statement
• Check arithmetic accuracy of reconciliation

Question 43

85.6 On 18 August 20X0, your firm was appointed as the external auditor of Lapine Ltd (Lapine) for the year ended 30 June 20X0. Consequently, it did not attend the year-end inventory count. No other procedures could be performed during the audit to obtain sufficient evidence in respect of the existence of inventory at 30 June 20X0.

Requirement
The directors of Lapine have included closing inventory of £1.9 million in the financial statements at 30 June 20X0. Lapine’s profit before tax for the period is £14.8 million. State, with reasons, the implications for the auditor’s opinion on the financial statements for the year ended 30 June 20X0.
(2 marks)

Answer 43

• Implications for auditor’s opinion
• Modified opinion
• Unable to obtain sufficient appropriate evidence
• 12.8% of profit
• Material
• Not pervasive
• Isolated to one area/inventory
• Qualified opinion/’Except for’

Question 44

Hutch is negotiating the acquisition of Lendris, an interior design company. Hutch’s board of directors would your firm to accept an engagment to advise Hutch on an appropriate valuation of Lendris.

Discuss whether it would be appropriate for your firm to accept the engagement to advise Hutch’s board on the valuation of Lendris. (4 marks)

Answer 44

There may be threats to independence and objectivity, such as:
Self-review

• the valuation will be included in the financial statements and be subject to audit
• the audit team may be too trusting/insufficiently sceptical of the valuation work and reluctant to highlight any errors.

Management

• the firm’s views may become too closely aligned with management
• the valuation is subjective and requires judgement
• the auditor should not make management decisions.

The level of engagement risk may be high. If Lendris does not perform as expected, the firm may be liable to Hutch.

If the valuation is material to the financial statements, the firm must decline the engagement.

If the valuation is not material to the financial statements, then the firm may be able to accept the engagement with appropriate safeguards.