Short form questions

Question 1

Firm has requested second opinion on adverse opinion audit given due to a disagreement over the accounting policies. What are the ethical issues and how should the firm deal with the issue?

Answer 1

Threat

• May compromise the opinion of the existing auditor
• Client may be opinion shopping
• Threat to professional competence and due care if they are only being asked to review it and give an opinion. May not gather full facts
• May be tempted to give an unqualified opinion in order to obtain the audit in the future

Actions required

• Obtain clients permission to contact the existing auditor
• Notify the auditor of the work to be undertaken
• Ensure your firm is in full possession of the facts
• If the client refuses permission to contact, refuse the audit

Question 2

Regular fees from client company constitutes substantial proportion of fee income of an audit firm. Creates self-interest threat that may affect objectivity. What safeguards should be used and what procedures offsets it?

Answer 2

Safeguards
- Take regular reviews of the client position to ensure not becoming too higher proportion of income
Actions to offset risk
- Consider whether the client would be open to criticisms
Would need to refuse appointment or put safeguards in place to ensure the threat does not become active
- E.g. an indep review, and giving disclosure about the proportion of the fee to the ethics partner and those charged with governance
- Don’t accept the assignment if the total fees regularly exceed 15% of the annual income fee (or 10% for a listed company)
- Although it may be possible for another part of the firm to carry out this work

Question 3

In planning an audit, the company still owes you £15,000 from last years audit fee. What is the threat to independence and what action should be taken in respect of this matter?

Answer 3

Overdue fees create a self-interest threat to independence
Issue of unmodified opinion this year may increase the chances of getting the fee back
Ideally would arrange to settle the overdue fees
Would consider resigning from the engagement if not settled and the fees are significant and in dispute
If don’t resign, apply appropriate safeguards e.g. second partner review
Notify the ethics partner

Question 4

Discovery of periodic duplicate payments from a customer. Client has no intention to pay money back unless asked for it and is recording it as sales. State what action should be taken and why

Answer 4

Actions taken
Don’t tip off client, as this would harm any judicial proceedings.
This is a case of money laundering
Must be reported to the money laundering reporting officer (MLRO) of the firm
Must be reported to the National Crime Agency (NCA)
Must correct mis-allocation of duplicate payments into liabilities
Encourage the client to return the money
Why
Represents proceeds of crime/theft
It is a criminal for the auditors not to report it

Question 5

Fraud has been discovered, including buyer in purch dept and purchase ledger clerk in acc dept for last 2 years. Managing director wrote to company auditor to say it is their responsibility to have found it and want an explanation of how the auditor missed it.

Answer 5

Duty is to report on the financial statements
No responsibility to detect such fraud
Audit conducted in accordance with ISAs is to provide reasonable assurance that FS are free from material misstatement caused by fraud or error
Auditors may not find material frauds
Frauds involving collusion are more difficult to find than say material misstatements by errors
Responsibility is set out in the engagement letter
Management is responsible for implementing and monitoring the systems of control

Question 6

Company with doubled revenue each year, rapid expansion is expected to continue. Requires heavy inv in working capital, especially WIP and receivables. Company is seeking increase in borrowing facility when present facility is due for review in Sept. Growth this year has taken them over exemption threshold this year. What are the benefits they will obtain from the audit

Answer 6

Possible benefits
Independent confirmation of profits earned/net assets
Assurance of compliance with CA 2006
Recommendations on systems via management letter
Management is responsible for implementing and monitoring the system of control

Question 7

Invited to tender for audit for hotel chain. You currently audit another chain with all similar towns and prices. What are the ethical issues that must be consider when deciding whether to tender and consider the procedures you may need to implement if successful in tender.

Answer 7

Principle issue is confidentiality.
They will both be worried that there will be a disclosure/use of information
Creates conflict of interest for the audit firm
Difficult to act in the best interests of both clients
Procedures
Ensure the staff are all aware of confidentiality issues
Staff must certify they are aware of confidentiality issues
Obtain informed consent from both clients
Inform both clients of situation
Use different partners and teams
Put information barriers in place
Arrange independent review of arrangements for ensuring confidentiality maintenance

Question 8

Company has faced disappointing perf in last 3 months and seeking for extension to overdraft facility. Bank has asked audit to provide a report on working capital focusing on the trade receivables and inventory. Explain benefits and limitations to both bank and client of obtaining the working capital report

Answer 8

To the bank:
Reduces uncertainty about the reliability of the info and increases credibility
Reduces the risk of management bias/ improves independence of info
Enables to bak to determine risk in advancing more more to the company
May allow company to gain the overdraft they require to keep growing which might not have been possible without the audit report
Limitations to the bank
Only testing a sample, won’t look at all inventory and receivable balances can be looked at
There is always still a possibility of collusion/ misrepresentation
Evidence is likely to be persuasive rather than conclusive. Audit can’t provide absolute info. Will either be reasonable or limited depending on whether audit/assurance job
Report may not report the full extent of the problem/ may lack sufficient info
Inherent limitations of accounting system/ integrity of data

Question 9

Audit partner in her firm has been appointed as a trustee of a trust, with owns 20% shares in the audit firm. She replaced the family solicitor whose retired. The audit manager has given one months notice that he’ll be leaving to become finance director of the company. State the threats to independence that these situations impose, and the safeguards that should be carried out to maintain objectivity.

Answer 9

Audit partner
Creates self-interest threat as has position of power in both
Trustee interest held by a person in a position of influence to the audit is only allowed by ES S2 where
She is not a beneficiary of the trust
The Financial interest held by the trust in the company is not material to the trust
The trust isn’t able to exercise signif influence over the trust
The audit partner doesn’t have signify influence over investment decisions made by the trust
Therefore, must transfer the audit responsibility onto another partner
Audit manager
Creates a familiarity/self-interest/intimidation threat
He should be removed immediately from the audit role
Review of the audit work performed by the audit manager who is leaving in the current year must be done
Firm should reassess composition of the audit team

Question 10

The following is an extract from an indep profit forecast: ‘Based on evidence of assumptions, nothing has come to our attention to believe the assumptions don’t provide a reasonable basis for the forecast.’ Describe the level of assurance provided by this statement and explain how it differs from the level of assurance provided by an auditors report on annual historical FS

Answer 10

Accountants report provides -ve assurance (limited assurance)

How it differs
Audit provides a high level of assurance which is reasonable/not absolute assurance
Audit opinion is expressed in +ve terms - that the statements give a true and fair view in accordance with CA/directors’ report consistent

Why it differs
FS are based on facts as well as judgements
Persuasive evidence is available
Often the delay between reporting date and auditor’s report means that even items such as provisions/estimates can be substantiated
Scope of work on forecasts is limited as forecasts are based on assumptions about the future and as such as subject to uncertainty

Question 11

Discover during audit that company’s sales manager, helped by the accounts clerk, has deliberately falsified details of the value of vehicles sold to increase his monthly bonus issue. Set out the responsibilities of auditor for this, and contrast with the responsibilities of the management of company.

Answer 11

Auditors responsibility
Not their responsibility to prevent fraud
Responsibility is to detect material misstatements in the FS, whether due to fraud or error
Must design audit procedures to obtain reasonable assurance that FS are free from material misstatements, whether caused by fraud or error
Must make a report to relevant authorities under money laundering regulations
Mustn’t tip off the accounts clerk or the manager as this may damage judicial procedures
Management responsibilities
Responsible for preventing fraud
Responsible for detecting fraud
Must implement system of internal control suitable for business
Must monitor their internal control systems
Responsible for safeguarding the assets of the company

Question 12

Firm’s largest client account (non-listed) has audit fee of £468,000 per year. They also provide tax services for £179,000 per year. Total fee income is estimated at £6,200,000, including the above fees. Outline the ethical issues

Answer 12

Ethical issues
Fee income from company is 10.44% of firms total income
This is above to 10% ‘review’ limit for non-listed clients
But under 15% limit for being allowed to carry out the work
Creates self-interest threat- if the firms objectivity is impaired if they are worried they might lose the audit, which accounts for signify proportion of firms income
Creates self-review threat for tax work if the numbers significantly impact the FS
How to address the situation
Disclose fee % to ethics partner and those charged with governance at the company
Independent quality review required by a partner not connected with the audit
If it is likely to exceed the 10% on ar regular basis, they should arrange an external quality reviewer
Separate teams for the audit and tax work can reduce the self-review threat
Consider resignation from the tax work if the issues can’t be sufficiently safeguarded agains

Question 13

1.13 An audit firm is the external auditor for Kerry Ltd for year ended 31 May 20X9. Following due diligence claim, Kerry acquired trade and assets of Blue Ltd from liquidator in Jan 20X9 .These are included in SFP in 31 May 20X9. Identify and explain the principal threat to your firm’s objectivity in respect of audit of FS for Kerry for ye 31 May 20X9 and state safeguards that should be applied.

Answer 13

Self review threat- auditors may be reluctant to identify impairments
Audit team may rely too heavily on their colleagues work
Safeguards
Members of audit team shouldn’t be involved in due diligence investigation

Question 14

Explain why external auditor of a company should be objective and independent

Answer 14

because issues arising in FS are often judgemental
Audit needs to be unbiased in preparing the opinion
Need to determine if the directors have made biased judgements
Needs to adopt a rigorous and robust approach to identify bias or inappropriate judgement
Audit opinion must only be based on the evidence available to them
Independence increases the likelihood of objectivity
Lack of independence may negatively harm the public confidence in the auditors objectivity
This would reduce the credibility and reliability of audit reports
This would render them useless
Objecitivity and integrity are required by Ethical Standard S1 and the CA2006

Question 15

Long standing auditor for a firm. The engagement partner has held the position for 4 years and they are in the process of becoming a listed company. Directors have requested they continue as audit partner once the company is listed. What are the ethical issues arising and what safe guards should be adopted in respect of the request

Answer 15

Creates long association issue between company and auditor
May give rise to familiarity threat
Audit partner may be too trusting of the client/client representations
Ethical Guidelines S3 are rotation of unlisted company eng partner is 10 years
For listed company, only 5 years
Where the entity becomes listed, length of time they have already acted as partner must be considered
If partner has served 4 years or more, can only continue for 2 years once listed with safeguards in place
So if he does continue for allowed further 2 years, safeguards must be put in place
Examples
Independent partner review of audit work
Communicate the maximum number of years with the client
Document reasons for allowing him to continue
Self-interest threat may arise for fear of losing the client if he doesn’t remain eng partner per their request
Seek advice from ethics partner

Question 16

Describe the role of the ethics partner within the external audit firm

Answer 16

Responsible for the adequacy of firms policies and procedures regarding integrity, objectivity and independence
Responsible for compliance with FRC Ethical Standard
Responsible for effectiveness of communication of ethical requirements with partners and staff
Provides ethical guidance to other partners and staff
Give consideration to whether policies and procedures are properly covered in training
Provide guidance where difficult and objective judgement needs to be made or a consistent position reached
Assesses the implications of any breach of the FRC Ethical Standard
Determines whether any safeguards are put in place o where there is a need to resign from engagements

Question 17

During audit, employee states MD asked employee not to record a transaction in acc records because it was not business related. It was a cash deposit paid into company bank account, and then a week later was paid out to friend of MD. Amount isn’t material in the context of any key figures in FS. How should the auditor deal with this matter?

Answer 17

Report MD to Money Laundering Reporting Officer (MLRO)
Must avoid tipping off the client as this may harm judicial procedures
Must report to National Crime Agency (NCA)
Legal requirement for auditor to do this
As there is a suspect of money laundering
Appears to be transferring/disguising proceeds
No ‘de minimis’ where money laundering is concerned
i.e. no materiality level

Question 18

1.18 Explain fundamental principle of professional competence and due care. Provide 2 examples of how chartered acc can identify whether partners and staff are complying with this principle.

Answer 18

Professional competence states that the CA must maintain a high standard of professional skill to ensure they can provide a professional service, based on current development in practice and techniques.
Due care means must act diligently in all professional work and in accordance with applicable technical and professional standards when providing an professional service.
Identify compliance
If there is on the job supervision of junior staff
Review of staff work by more senior members
Hot/internal quality control reviews
Cold reviews/monitoring
Staff appraisals
Staff training

Question 19

1.19 During audit, discover the directors have accounted for research costs inappropriately, creating material misstatement. Firm plans to issue modified statement if not corrected. During conversation, MD indicated man intend to seek the removal of the firm of you as external auditors if a modified opinion is given. Explain what actions should be taken in response to conversation.

Answer 19

Discuss the issue with directors and request that they amend the FS, as a modified opinion would be avoided if they amend appropriately and understand the problem of the incorrect accounting treatment.
Creates intimidation threat if they are threatening to remove them
This suggests the integrity of the man may be compromised, may want to consider further independent internal quality review, as this knowledge may mean the objectivity of other areas of the audit has been compromised.
Seek legal advice or advice from the ethics partner to ensure that the firm’s exposure to any risk is limited
Consider resignation as the directors’ actions represent an intimidation threat and could break down trust as well as raising doubts about the integrity of management

Question 20

Your firm receives notice that a listed company won’t reappoint you as the external auditor as the audit committee has recommended another firm. Set out the rights and responsibilities of your firm, including those under CA2006, relating to the change in appointment

Answer 20

Rights
Make written representations and request directors to circulate it to members
Attend and speak at a general meeting
Responsibilities
Prepare a statement of circumstances
Specifying reasons for ceasing to hold office
To be deposited at the company’s registered office and sent to the Registrar and Companies House
As they are listed, there is no option to state no circumstances
Obtain permission from client to reply to the prospective auditors’ communications
Return promptly all books and records of the company
Maintain client confidentiality after ceasing to act
Maintain anti-anti-money laundering identification records

Question 21

Audit irm has been approached to accept appointment as external auditor for YE 30 June 20X6. Previous auditor issued a qualified opinion, due to a disagreement in acc policies for inventory valuation. Was cited in their letter in response to your letter requesting info that might influence your decision about whether to accept the engagement Previous auditor stated existing fees remained unpaid

Answer 21

Ethical issues
Previous auditors don’t appear to have been reappointed due to giving an unqualified opinion
Directors may now be opinion shopping
Raises doubts over the man integrity and objectivity
Suggests possible intimidation threat, which could result in self-interest threat if the firm fees non-payment of their own fees
However, these don’t preclude the acceptance
Actions to take
Review prior year FS and auditors report to establish the acc policy for inventory valuation and ascertain the basis for the qualification
Consider whether you agree with the qualification basis
If the firm agrees, discuss with man whether they intend to change the acc policy
Ascertain from management the reason for overdue fees in respect of prior year audit
Consult with audit firm’s ethics partner
Decline appointment if they suggest that non-payment is a result of previous auditors’s qualification report
Carry out a background check on management

Question 22

Explain why external auditors must monitor length of time of eng partners serving on eng team for each audit

Answer 22

Audit firm is required by Ethical Standard S3 to establish policies and procedures because of long association with the audit eng, as this may create threats to objectivity and independence resulting from
Self interest
Self-review
Familiarity
E3 sets out mandatory requirement for audit of listed companies, where eng partner must be rotated every 5 years
E3 also sets out recommendations for rotation of eng partners for non-listed companies, which is every 10 years. However, this isn’t compulsory
A firm may need to
Apply safeguards to reduce any threats to an acceptable level
Resign from the audit if appropriate safeguards can’t be applied

Question 23

Audit firm, with 25 UK offices is planning to open a new office in Milton Keynes. The MD of a property company (who you externally audit) has suggested your firm leases one of their vacant properties at the market rate. State with reasons whether it is appropriate for the firm to lease the property

Answer 23

Business relations are permitted under E3 S2 as long as the arrangement is
In the ordinary course of business
At arms length
Not material to either party
For each business, leasing properties is in the ordinary course of their bsnsses
Market rate implies arms length basis
As both parties are large, it is unlikely to be a material issue
They each have multiple offices in various locations
Therefore, it is appropriate to accept

Question 24

audit firm has informed a client it will to seek to be reappointed at the end of its term because of an agreement re accounting treatment of an item. Another audit firm has written to the audit firm requesting info that might influence its decision to accept appointment as their new external auditor. State the audit firms responsibilities in terms of the new auditors request, as set out by ICAEW CoE

Answer 24

Need to obtain permission from client to respond to their information request
Answer their request for information promptly
Record in writing any discussions with the company
Confirm to Charn that tase are matters which they ought to be aware of
Explain that the matters meaningfully, with honesty and no ambiguity
This should include an explanation of the differences of opinion between the firm and the company regarding the acc treatment
if the company refuses to grant permission for the firm to discuss the clients affairs, the firm must report that fact to the potential new auditors requesting info

Question 25

During the course of an external audit of a client, an audit junior identified a payment in cash book as ‘commission’ with no supporting document. On equity, they were told it was made to gvmt official in a another country to faciliate the progress of a contract they were undertaking in that country. What actions should be taken by the audit junior.

Answer 25

This is suggestion of a bribe of a foreign gvmt and must be reported to the firms Money Laundering Reporting Officer (MLRO) or a senior member of the engagement team
Bribery is a criminal offence under the Bribery Act
Also required to be reported under the POCA (Proceeds of Crime Act 2002) as they are benefitting from a criminal activity (bribery)

Question 26

During your firm’s external audit, you were told an employee of the company frequently fails to provide factory workers with legally required protective clothing when working with hazardous chemicals. Explain why this should be considered by your firm during external audit.

Answer 26

The firm is required to consider non-compliance with laws and regulations under ISA 250A Consideration of Laws and Regulations in an Audit
Failure to provide protective clothing may breach health and safety regulations and may indicate lack of management integrity
There may be an impact on the FS for
Fines obtained due to non-compliance
Provisions and contingent liabilities arising from legal proceedings if an employer suffers an injury
Going concern if authorities close the factory/suspend their license
Breaching health and safety laws to save money can be breached as money laundering

Question 27

Firm has received a request for information from another auditor re a client you have chosen not to seek reappointment for. This was after discovering the manufacturing process includes unethical labour practices in oversea supply chain. State with reasons the actions your firm should take with respect to info request from another auditor.

Answer 27

Must obtain permission from the client to respond to the request for info, as bound by confidentiality until specific permission is granted.
If the firm refuses to grant permission to inform the new auditors, the new auditors can evaluate the impact on the decision about whether to accept or not
Once authority has been granted, should respond as quickly as possible
Set out reasons why your audit firm is not seeking reappointment, so they have a full understanding of the relevant facts before deciding to accept

Question 28

While reviewing the post year end purch invoices of a construction company, auditr senior discovered an invoice of 2 designer watches costing £5k each. On enquiry, they are informed the watches were given to the directors of construction company t MD of a property development company and his wife who they regularly submit tenders for for construction projects. State with reasons, what actions should be taken by audit senior.

Answer 28

Report to the firms MLRO/ senior member of engagement / ethics partner of audit firm
This is bribery/inducement
Its a criminal offence under Bribery Act 2010
The watches are excessive in value
Required to report under the Proceeds of Crime Act 2002
They are benefitting from criminal activity
Must not tip off the client, as this may harm judicial procedures

Question 29

FRC stated recently that review of auditors would particularly focus on appropriate professional scepticism that has been applied in specific areas. 2 of these ares are asset impairments and related parties. State what is meant by professional scepticism and why it is fundamental for asset impairment and related parties part of audit

Answer 29

Professional scepticism is an attitude that must be held by an auditor that ensures
A questioning mind.
They must be alert to conditions that may indicate possible misstatement, whether due to error or fraud,
Must provide a critical assessment of audit evidence
Asset impairment
Involve estimates/assumptions/judgements about the future/discount factors/subject to uncertainty
Assets are more vulnerable to impairment in the current economic climate
Management may be reluctant to write down assets as may harm their performance
Especially if their bonuses are related to it
Related parties
Related party transactions can be used a vehicle for fraud
Man may be reluctant to disclose/deliberately conceal
Evidence is not readily available, means auditor may be reliant on management to disclose

Question 30

External auditor of listed company. Directors have request that Mullet undertakes an eng to revalue a class of company assets which amounts to 12% of total assets. Explain what Mullet must do

Answer 30

Must refuse the request
As it is not permitted by Ethical Standards
Material to the FS as it is greater than 2% of the FS
Self-review threat becomes too great, there are no adequate safeguards that can overcome this
May rely too heavily on the valuations in subsequent audits
May be reluctant to identify a misstatement in future audits re the assets
Management threat as valuations is judgemental and requires making assumptions

Question 31

Company has HQ in london and external audit client is ICAEW CA firm. Auditor received phone call from London Police requesting firm disclosing info about transactions re the firm to help with policy enquiries.

Answer 31

Ask the police for more info about the request in writing
Firm owes duty of confidentiality to client
Must not disclose any information unless their is a legal duty / court order
Must ask the client for permission to disclose info
Consider whether
Money laundering is involved
Report should be made to NCA
Should re-assess audit info in areas the police have requested information in
Must consider future involvement/reputational risk that may come as a result
Seek legal advice or contact the ICAEW Helpline

Question 32

Describe 2 procedures that an assurance firm should have in place to ensure that members of the audit team act with objectivity and independence

Answer 32

Rotation of engagement partners - partners of listed companies must be rotated every 5 years, non-listed are recommended to be rotated every 10
‘Fit and proper’/ independence declaration signed annually and at the start of each audit
Formal process in place for partners/employees to report family/personal relationships, financial interests in edited entity or decision to join audited entity
Must be adequately communicated to employees
Training/development/appraisal processes are important
Employees must understand how to identify objectivity and independence threats and actions to take when these are identified
Formal processes for considering appropriateness of appointment/reappointment
Such as
Evaluation of client integrity
Press/internet searches
Obtaining references
Discussion with partners
Background checks
Appointment of an ethics partner can be vital
Consulted on safeguards to ensure they are sufficient to address any potential threats
Require the engagement partner to be responsible for forming a conclusion on compliance with independence requirements for each engagement
Includes identifying and evaluating circumstances/relationships that cause threats and taking actions to eliminate them
Engagement quality control reviewer
Consider the adequacy of documentation of eng partner’s consideration of auditors objectivity and independence
Monitoring of compliance with firms policies and procedures
Periodic review on a test basis of audit eng partners’ documentation of consideration of objectivity and independence

Question 33

5.1. A prospective auditor is required to write to clients existing auditor to seek info which could influence his decision as to whether he may accept the auditor appointment. Give examples of relevant matters which could be within this letter and which would influence the prospective auditors’ decision to accept the audit appointment (2)

Answer 33

Unlawful acts or defaults by the client
Serious doubts re client’s integrity
Info required by auditor not deliberately withheld by client
Client’s reasons for change not in accordance with the facts
Important differences of principle or best practice behind the proposed change
A ‘statement of circumstances’ to be brought to attention of members/creditors
Note: existence of unpaid fees itself isn’t a reason to not accept nomination

Question 34

5.2 Certain rights are conferred on an auditor by CA2006 when a company proposes to remove him from office. State the rights the auditor has in these circumstances (2)

Answer 34

Copy of notice of resolution proposing removal
Representations in writing notified to members
Attendance at general meeting
Hearing at general meeting

Question 35

5.3 Firm has been eng to undertake a review of cash flow forecast prepared by a firm to support its request for a loan from the bank. Identify points specific to the cash flow forecast that the firms should include in eng letter and state why their inclusion is important.

Answer 35

To whom the report will be made available - to avoid reliance by unforeseen third parties
The period covered by forecast info and scope of work- to provide clarity on info that is subject to review
A clear statement of directors’ and reporting acc responsibilities- to avoid any misunderstanding regarding responsibility for the forecast info
A caveat warning that the forecast could be diff to actual performance- to avoid over reliance on any assurances providing regarding the forecast
Any limitation of liability agreed with the directors for this eng- to provide evidence of such an agreement should any issues arise in the future
Agree the nature of any assurance provided and the form of any reports to directors- to avoid any misunderstanding regarding the output from the engagement
The intended uses of the cash flow info and any reports produced by firm- to reduce liability of firm where such info is used for means other than those identified

Question 36

5.4 You are senior in charge of external audit of hair-dressing salon chain company. While observing, saw cashier place cash in an envelope with the stores managers’ name on and placed it in the safe. She said she was instructed to do this by the manager, and once a week must write ‘cancelled’ by the appointment the money comes from. What are the responsibilities regarding this matter?

Answer 36

Report to MLRO
MRLO decide whether to report to NCA
Avoid tipping off
Consider implications for understatement of revenue, tax and VAT, and implications for auditor’s report if figures materially understated
Reasons
Represents benefits from criminal conduct
Criminal offence if auditor doesn’t report suspicions of money laundering
Tipping off may prejudice subsequent investigation

Question 37

5.5 You are responsible for supervising junior staff on their audit Junior audit confirmed trade receivable balance and has reconciled the balance on one customer’s reply to the receivables ledger balance as follows.

Answer 37

Balance owing per reply from customer
Payment per customer 29 Nov 20X9 not on Sole’s ledger
Prompt payment discount per customer 21 Oct 20X9 not on Sole’s ledger
Sales invoice 25 Nov 20X9 not accepted by customers as goods returned (wrong items delivered)
State the information required for each of the reconciling items 1-3 above to draw a conclusion on the accuracy of the balance due to the customer
Payment not on Sole’s ledger- evidence that payment received after y/e or early December (remittance advice/ bank statement details/cash receipts book
Discount - whether entitled to discount/compliance with terms (terms of trading/contract/invoice)
Wrong goods - Evidence that goods returned/included in inventory (copy of goods returned record/credit note)

Question 38

5.6 You are the audit senior with responsibility for directing, supervising and reviewing the work of the junior members of the eng during the external audit of firm. Explain how you would discharge these responsibilities before and during the audit engagement (4)

Answer 38

Before audit
- Assess juniors’ skills and set out their areas of responsibility
- Brief juniors on the nature of the audit client, audit risks and issues which may arise during the audit engagement
- Explain the detailed approach to the eng including relevant timings
- Hold a meeting to enable the juniors to discuss the assignment and ask questions
During audit assignment
- Review specific pieces of juniors’ work to ensure sufficient and appropriate evidence is being obtained, that audit work supports conclusion reached, appropriate consultations have been made and that the results of these have been documented
- Check that juniors are carrying out their work per audit plan and that they understood the instructions given
Provide feedback to juniors on the work reviewed
Track the overall progress of the audit work against the audit plan and update the plan as and when necessary
Address matters arising during the audit eng and answer questions raised by juniors
Consider the need to consult upwards, with man/partner, on any issues raised during the audit eng

Question 39

5.7 Explain how and why the planned procedures for an engagement to review FS would differ from the planned procedures for an audit required under the CA2006 (4)

Answer 39

How planned procedures differ
- Planned procedures for a review eng will consist predominately of analytical procedures and enquiry of management
- Planned procedures for an audit under CA2006 will include additional substantive procedures (e.g. inspection of documents) and may also include tests of control
Why planned procedures differ
- Lower level of assurance is usually provided for review engagements
- So less evidences required
- Level of assurance is usually agreed with whoever requests the review eng
- It isn’t set out in law as with an audit required under CA2006

Question 40

5.8 Eng partner responsible for the external audit of a listed company. She is due to be rotated off as she has had the post for last 5 years. Following recent substantial changes in the structure of the comp business, the audit committee of Snipe has requested that she continues to act as eng partner for next 2 years. State (with why) whether it is appropriate for Erica to comply with audit committee’s request. (2)

Answer 40

Can cont as eng to maintain audit quality, ES S3 permits when substial change in the business provided
Only for additional 2 years/no longer than 7 in total
Expanded review of work undertaken by Eng QC reviewer
Fact and reasons disclosed to SH as early as practical
If company not prepared to make disclosures, don’t accept

Question 41

5.9 List the factors, for a recurring audit, that indicate that it may be appropriate for external audit firm to revise the terms of a audit eng or remind a client of existing terms (3)

Answer 41

Any indication that entity misunderstands the objective and scope of the audit
Any revised or special terms of aud eng
A signif change in ownership, man, nature or size of entity’s business
Change in legal/regulatory requirements, the fin rep framework adopted in prep of FS, other reporting requirements, eng partner or structure/status of the audit firm

Question 42

5.10 Firm has been the external auditor of plc for many years. Company operating in the pharmaceutical sector, has recently listed on the London Stock Exchange. Consequently, the audit work undertaken by your firm will be subjected to an eng quality control review.

Answer 42

Senior person/partner within firm or suitably qualified external person
Experience of pharmaceutical industry 
Experience of listed companies 
Independence of eng team
Not connected to the firm

Question 43

5.11 External audit firms are required to consider the integrity of key man before accepting an eng with a new client. Outline the procedures to be undertaken by an audit firm to assess the integrity of key man of a prospective client. For each procedure, explain how it helps with the assessment of the integrity of man. (4)

Answer 43

Obtain client permission to contact prep auditor for prof clearance
If refuses, may indicate something o hide
Outgoing auditor may provide info re unpaid fees, disagreements or unlawful acts
Obtain reference from reliable third parties (e.g. prof advisors/credit agencies) to help identify deficiencies in character/behav
Undertake searches on databases, e.g. companies house to see if directors are listed as undesirable characters/disqualified directors
Undertake internet/press cutting search to identify any scandals/adverse publicity/failed companies relating to directors that may indicate unscrupulous behave
Hold discussions with directors to provide evidence of cavalier attitude towards business ethics/lack of social responsibility (e.g. willingness to pay taxes)
Undertake client ID procedures to ensure they are who they say
Inspect prior year audit for evidence of disagreements/inappropriate acc policies

Question 44

5.12 You have been asked by a partner in your firm to help with the prep of a tender for the external audit of a plc, multi-national company operating in the oil and gas sector. Partner has asked you to prepare the section of the tender document that sets out the basis of the calc of the audit fee. Identify the actors that affect the basis of the audit fee to be included in the tender dec to be submitted to the plc (2)

Answer 44

Fees determined with ref to
Seniority and prof experience of team members
Number of staff and time expected for each
Greater amount of time required in first year
Risk associated with work
Inherent risk likely to be higher in gas/oil sector
Nature of business and complexity of operations
Priority and importance of work to client
Expenses properly incurred, e.g. overseas travel
Extent to which firm can rely on work of competent auditors
Extent to which reliance can be placed on internal audit
Whether auditor’s expert is required

Question 45

5.13 FD of Ltd comp has prepared profit and cash flow forecasts, which are to be submitted to company’s bank in support of an application for funding. BoD would like you to examine a provide an assurance report on the forecasts. List the matters, in respect of the purpose and scope of your firms work, to be incl in eng letter relating to examination of profit and cash flow forecasts. (4)

Answer 45

Examine the profit and cash flow forecasts for the period specified by directors
Consider reasonableness of assumptions
Provide limited/modertate assurance
Conclusion expressed negatively
In the form of nothing has come to our attention
Which causes us to believe that assumptions don’t provide reasonable basis of stated assumptions
Whether eng is to be conducted in accordance with ISAE 3400
Intended use/for the purpose of supporting the application for funding for use by bank and not general distribution

Question 46

5.14 Firm has been invited by the MD and majority SH of a Ltd company to accept appointment as external auditor. Firm’s client acceptance procedures have identified a recent newspaper article, which reported details of court proceedings relating to a fraud committed by the MD. Explain why this matter should be considered when deciding whether or not to accept the appointment as external auditor. (4)

Answer 46

Affects engagement risk (risk of expressing wrong opinion)- higher risk of misstatement
Affects repetitional risk if rep damaged for association with unscrupulous character
Indicates lack of integrity/honesty of MD, consideration of integrity of client man is required by Isa 220
Lack of integrity may be indicative of
Aggressive interpretation of acc standards
Window dressing
Poor control env/top at top
Inability to obtain sufficient aud evidence/intimidation
Money laundering/other criminal activities
Unreliable man representations

Question 47

5.15 In respect of quality control procedures, distinguish between an EQCR (hot review) and a review as part of the firm’s monitoring procedures (cold review) (4)

Answer 47

Only for audits of listed clients and for those eng the firm has determined an ECQR is required/high risk audits
Objective/indep evaluation of signify judgements the team has made and the conclusion it reached in forming the opinion
EQCR takes place on or before date of auditors report
Not a review of all working papers
Evaluation involves
Discussion of signify matters w/ eng partner
Review of FS and proposed auditors report
Review of selected documentation
Eval of proposed auditor’s report
Re-listed entities consideration of teams evaluation of firms indep and whether appropriate consultation re diffs of opinion
Cold review (monitoring review) conducted after date of auditor’s report on a sample of files to ensure compliance w firms procedures and international standards on auditing, ethical standard, legislative requirements and UK audit regulations
Identify areas requiring improvement
Take remedial action/training

Question 48

5.16 Animal Sanctuary is not-for-profit entity, which derives some of its income from donations received through the mail. Identify 2 internal controls that should be exercised by the entity in respect of donations received through the mail, and for each internal control identified, describe how you would test the effectiveness of that internal control.

Answer 48

Internal controls
- Upopened mail kept securely
Dual control over opening of mail/counting receipts
- Immediate recording of amounts
- Prompt banking of cash/cheques
Indep reconciliation of amount recorded with bank records
Approval of bank rec by responsible official
Segregation of duties between opening/recording of mail and banking

Test of controls
- Enquiry of relevant personnel re their responsibilities
Observation of procedures
Comparison of dates cash collected and cash banked
Inspection of bank rec for signature evidencing approval

Question 49

5.17 For the firm time, a ltd company is required to have its FS audited under CA2006. Your firm has accepted aud eng and has sent draft eng letter to the directors. The directors questions why they need to sign an engagement letter when the requirements of an audit are already set out by law and in auditing standards. List points for response. (4)

Answer 49

Eng letter is required by ISA 210
Even where the law prescribes requirements the letter needs to state that the relevant law applies and indicate that man acknowledges its responsibilities which are
- Prep of FS
- Internal controls
- Providing auditor with access to info/persons
- Providing written representations
May wish to include other elements not prescribed by law e.g.
- Form of other communications
- Practical arrangements, e.g. staffing, timing & locations
- Basis of fees and billing arrangements
Nature of level of assurance should be explained
Particularly important as first time Moose requires audit
Include any proposals to limit liability
Helps avoid any misunderstandings/expectations gap

Question 50

5.18 Your firm is tendering for external audit of Ltd. Directors have requested your firm;firms tender doc include a section of procedures the firm will adopt to ensure quality of work performed from eng team is high. List points for inclusion in tender doc. (4)

Answer 50

Points to include in tender doc
Firm adopts system of internal control in accordance with ISA 220
Specific requirements in relation to quality of work eng team include:
Assignment of staff with relevant competence, expertise and experience
Ensuring adequate resources and time available to complete work to an appropriate standard
Eng meeting with team it on relevant matters such as obj of work, nature of client, risk and potential issues
Supervision of junior staff by senior staff throughout audit
Review of work by more senior staff and/or partner
Consultation by team on technical or contentious issues
EQCR is considered necessary

Firm also has human resources policies in place to ensure quality of work, including robust recruitment procedures, training and CPD for all staff, regulation perf evaluations and perf based promotion and compensation

Question 51

5.19 You are the auditor responsible for supervising the external audit of Ltd for y.e 30 June 20X3. You and 3 junior members are working at their premises performing the planned audit procedures. Explain your responsibilities as the audit senior for quality over the audit. (4)

Answer 51

Allocate work to juniors in acc with experience competency
Brief juniors to ensure they understand objectives of work, risk and nature of business and materiality levels
Track progress of eng to ensure sufficient time available to complete work and work is of an appropriate standard
Answer questions from juniors to ensure they understand instructions/responsibilities and ensure signify issues can be raised and the planned approach modified where necessary
Review juniors work to ensure perf properly/accordingly to audit plan, sufficient and appropriate audit evidence obtained, evidence supports conclusions reached, work appropriately documented, identification of signify matters to raise with more senior staff, juniors receive feedback on quality of their work

Question 52

5.20 Ltd not required an audit. But bank has requested that indep firm of acc review and report on end of year FS. Directors have requested that the firm provides a review and a report. Contrast you firms report for this review eng with a report issues for external audit of unlisted company under CA2006 (4)

Answer 52

Conducted in accordance with ISRE 2400
Limited assurance
procedures consist of making inquiries of man and analytical procedures
Don’t express audit opinion/not an audit/express a conclusion
Expressed -vely/ ‘nothing has come to our attention…’
Addressed to man/bank
Not for general distribution
Signed in name of assurance firm

Question 53

5.21 plc hsa 4 factories in UK and 1 in Poland. Required to prepare GHG emissions statement in accordance with specific industry regulations. Your firm has offies in UK and is appointed to perform a reasonable assurance eng in report of GHG statement and report findings. List factors firm should consider when planning how to resource this assurance engagement. (4)

Answer 53

Factors re resourcing need eng team members who understand the specific regulatory env, have relevant technical/scientific skills/qualifications and have info systems expertise if systems are complex
May require use of external/auditor’s expert
Reasonable assurance eng requires more work/resources
May need EQCR, to plan site visits to the factories, to rely on the work of another firm in respect of the factory in Poland if the firm does not have representation in Poland
Potential language issues

Question 54

5.22 Firm has accepted external audit of Herring ltd, a competitor is Hake Ltd. Your company has been external auditor for Hake for many years. Both companies have provided informed consent to act. Outline procedures to implement to address any potential conflicts of interests arising from appointment (3)

Answer 54

Procedures to address potential conflicts of interests:
Separate eng teams
Brief staff/clear guidelines on confidentiality issues/procedures
Info barriers e.g. physical separation/use of staff from diff offices or confidential/secure data filing
Procedures in place for dealing with any need to disseminate info beyond barrier
Staff to sign confidentiality agreements
Regular review of application of safeguards by a senior indiv not involved in the eng

Question 55

5.23 Audit firm is open to claims for damages arising out of professional negligence after providing inappropriate opinion on FS. Outline steps a firm should take to reduce its exposure to such claims.

Answer 55

Conduct audit in accordance with ISas
QC procedures such as
- Client due diligence before acceptance
- Use of experienced and competent staff
- Direction and planning
- Supervision and review
- Consultation on difficult or contentious matters
- Documentation of work performed
- Sufficient and appropriate evidence
- EQCR
- Having sufficient time to complete work
Disclaimer of liability in auditor’s report (Bannermans para)
Agree, with SH approval, a liability cap which is fair and reasonable
Professional indemnity insurance
Operate through an LLP

Question 56

5.24 You are audit senior responsible for audit of Ltd. Eng partner has requested you undertake a review of work recently performed by audit junior during audit. list purpose of review requested by eng partner. (3)

Answer 56

To consider if
Work performed in line w/ audit strategy/plan
Work performed in accordance with prog standards/regulatory requirements
Signif matters have been raised for further consideration
Appropriate consultations have taken place
Work adequately documented
There is a need to revise nature/timing/extent of audit procedures
Work performed supports conclusions reached
Sufficient and appropriate evidence obtained
Objectives of audit procedures achieved
To provide feedback for audit juniors development