Audit and Assurance – Page 12

AA – L2 – Q10 – Auditor’s Liability

Discuss auditor rights on dismissal, draft a letter to nominee auditors, and evaluate ethical implications for Jenson plc.

Question

Your firm has recently completed the audit of Jenson plc, and after extensive discussions with the directors of the company, the audit opinion has been qualified in respect of the auditors’ inability to agree with the directors on the appropriateness of a provision against obsolete inventories. The directors have informed you that they intend to dismiss your firm as auditors, and replace you with a small local firm of accountants. The directors have informed you verbally that the reason for your dismissal is the disagreement over the provision for inventory obsolescence, and, further, they intend to appoint the new auditors because they are more likely to accept the accounting policies of the directors. You have recently received a letter from the nominee auditors who ask if there are any professional reasons why they should not accept appointment as auditors of Jenson plc.

Required:
(a) Describe the rights which local legislation is likely to give to the auditor when the company proposes to dismiss him and has dismissed him.

(b) Draft a suitable letter in reply to the request from the nominee firm of audit asking if there are any professional reasons why they should not accept appointment as auditors.
(Marks will be given for the style and content of the letter.)

(c) In view of the attitude of the directors towards the present auditors, discuss factors which the nominee auditors need to consider before accepting appointment.

(d) Describe the ethical implications for the nominee auditor, if he decides to accept the appointment as auditor.

Answer

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Tags: Auditor Dismissal, Auditor Independence, Auditor Rights, Ethical Implications, Professional Communication
Level: Level 2

Topic: Auditor's Liability

AA – L2 – Q9 – Regulatory Framework for Auditing

Discuss current audit regulations and reasons for criticism regarding standards, fraud, non-audit services, and auditor tenure. Discuss reasons for criticism of current audit regulations on standards, fraud, non-audit services, and tenure.

Question

The auditing profession has been criticised recently for its role in monitoring potential corporate failure. Radical reforms have been called for in the way the audit is regulated. For example, there has been a call for a change of legislation in the following ways:

Auditing standards: Auditing standards should be set and enforced independently from the accounting profession.
Fraud: Auditing firms should have a duty to detect and report fraud.
Non-audit services: Non-audit services supplied to an audit client should be stopped.
The duration of the appointment of auditors: The appointment of auditors should be for a maximum period of seven years.

Required:
(a) Describe the current regulatory and professional requirements relating to each of the headings listed above.
(b) Discuss the reasons why you feel the audit profession has been criticised over the current regulations in the above areas.

Answer

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Tags: Auditing Standards, Auditor Tenure, Fraud Detection, IESBA Code, Non-Audit Services, Professional Ethics, Regulatory Reform
Level: Level 2

Topic: Professional Ethics and Code of Conduct for Auditors (IESBA Code)

AA – L2 – Q8 – Regulatory Framework for Auditing

Explain how legislation and IESBA Code ensure auditor independence at Apex Ventures. Discuss threats to auditor independence in three scenarios at Pinnacle Partners and suggest safeguards

Question

(a) State how legislation and the IESBA International Code of Ethics for Professional Accountants each seek to ensure the independence and objectivity of auditors at Apex Ventures.

(b) The following three situations have arisen in the audit firm of Pinnacle Partners:
(i) One of the partners, Mr. Thompson, and his wife, have been invited by the managing director of Summit Tiles, an audit client, to celebrate the company’s 20th anniversary with management over a long weekend at a beach resort. Mr. Thompson has been the engagement partner since incorporation of the company.
(ii) The firm has been approached and asked to accept appointment as auditors of Ridge Paints. One of the firm’s audit managers is company secretary of the company, although he takes no part in the management of the company. His parents are the directors and shareholders of Ridge Paints.
(iii) The directors of Crest Floors are unhappy with the level of fees charged by the firm. They are still refusing to agree an outstanding bill for taxation and advisory work and are demanding a reduction in the audit fee this year to match a quote they have received from another firm.

Required
Comment on the situations described above, recognising any threats to independence or objectivity, and suggesting what safeguards the firm should put in place to deal with such threats.

Answer

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Tags: Auditor Independence, Ethical Threats, Family Relationships, Fee Disputes Auditor Independence, Hospitality, IESBA Code, Legislation, Objectivity, Safeguards
Level: Level 2

Topic: Regulatory Framework for Auditing

AA – L2 – Q7 – The Role and Responsibilities of Auditors

Highlight directors' responsibilities for financial statements at Apex Ventures. Describe professional scepticism and explain its importance in auditing Apex Ventures.

Question

(a) Briefly highlight the directors’ responsibilities relating to the financial statements at Apex Ventures.

(b) During the audit team planning meeting for Apex Ventures, a member of the audit team passed a comment that, based on past experience with the client, he was confident that the management of the client was honest and there was no issue as regards management integrity or risk of fraud in the company. The audit manager responded that the auditor should always maintain an attitude of professional scepticism throughout the audit.

Briefly describe ‘professional scepticism’ and elaborate on the response of the audit manager.

Answer

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Tags: Audit Planning, Corporate Governance, Directors Responsibilities, Fraud RiskFinancial Statements, Management Integrity, Professional Scepticism
Level: Level 2

Topic: The Role and Responsibilities of Auditors

AA – L2 – Q6 – Audit Engagement

Explain objectives of agreeing audit terms per ISA 210 and list main components of an engagement letter.

Question

Engagement letters

Required

(a) Explain the objectives of the auditor in agreeing the terms of an audit engagement for Zenith Enterprises.

(b) Set out the main components of an engagement letter for Zenith Enterprises.

Answer

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Tags: Audit Scope, Auditor Responsibilities, Engagement Letter, Financial Reporting Framework, Management Responsibilities
Level: Level 2

Topic: Regulatory Framework for Auditing

AA – L2 – Q5 – Fraud and Error

Explain how internal audit helps manage fraud and error risks in an entity.

Question

(a) Explain how the internal audit function helps an entity with the risk of fraud and error.

(b) Explain the responsibilities of external auditors in respect of the risk of fraud and error in an audit of financial statements.

(c) SunCity Travel is an independent travel agency. It does not operate holidays itself. It takes commission on holidays sold to customers through its chain of high street shops. Staff are partly paid on a commission basis. Well established tour operators run the holidays that SunCity Travel sells. The networked reservations system through which holidays are booked and the computerised accounting system are both well-established systems used by many independent travel agencies.

Payments by customers, including deposits, are accepted in cash and by debit and credit card. SunCity Travel is legally required to pay an amount of money (based on its total revenue for the year) into a central fund maintained to compensate customers if the agency should cease operations.
Describe the nature of the risks to which SunCity Travel is subject arising from fraud and error.

Answer

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Tags: Corporate Governance, Error Risk, Fraud Risk, Internal Audit
Level: Level 2

Topic: Fraud and Error

AA – L2 – Q4 – Ethical Issues in Auditing

Explain situations where auditors may disclose confidential client information.

Question

You are an audit manager in Apex & Co, a firm of Chartered Accountants. You are preparing the engagement letter for the audit of TechTrend, a listed company, for the year ended 31 December 20X8.

TechTrend has grown rapidly over the past few years, and is now one of your firm’s most important clients.

TechTrend has been an audit client for eight years and Apex & Co has provided audit, taxation, and management consultancy advice during this time. The client has been satisfied with the services provided, although the taxation fee for the period to 30 June 20X8 remains unpaid.

Audit personnel available for this year’s audit are most of the staff from last year, including Mr. Thompson, an audit partner, and Mr. Lee, an audit senior. Mr. Thompson has been the audit partner since TechTrend became an audit client. You are aware that Sarah Thompson, the daughter of Mr. Thompson, has recently been appointed the financial director at TechTrend.

To celebrate her new appointment, Sarah has suggested taking all of the audit staff out to an expensive restaurant prior to the start of the audit work for this year.

Required:

(a) Explain the situations where an auditor may disclose confidential information about a client.

(b) Identify and explain the risks to independence arising in carrying out your audit of TechTrend for the year ending 31 December 20X8, and suggest ways of mitigating each of the risks you identify.

Answer

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Tags: Auditor Independence, Confidentiality, Ethical Considerations, IESBA Code
Level: Level 1

Topic: Ethical Issues in Auditing

AA – L2 – Q3 – Auditor Appointment Considerations

Describe matters and procedures for accepting an audit appointment for a pharmacy chain.

Question

Nexcare is a company that operates a chain of pharmacies. It operates in a medium-sized city and your firm is the largest audit firm in the city. Nexcare is owned and run by two entrepreneurs with experience in this sector and has been in existence for five years. It is expanding rapidly in terms of its client base, the number of staff it employs and its profits. It is now 15 Mar 20X8 and you have been approached to perform an audit for the year ending 30 Mar 20X8. Your firm has not audited this company before. Nexcare has had three different firms of auditors since its incorporation.

Nexcare’s directors have indicated to you that the reason that they wish to change auditors is because of a disagreement about certain disclosures in the financial statements in the previous year. The directors consider that the disagreement is a trivial matter and have indicated that the company accountant will be able to provide you with the details once the audit has commenced. Your firm has explained that before accepting appointment, there are various matters to be considered within the firm and other procedures to be undertaken, some of which will require the cooperation of the directors.

Your firm has other clients that operate pharmacies.

The directors have asked your firm to commence the audit immediately because audited financial statements are needed by the bank by 30 April 20X8. Your firm is very busy at this time of year.

Required:

(a) Describe the matters to consider within your firm and the other procedures that must be undertaken before accepting the appointment as auditor to Nexcare.

(b) Explain why it would be inappropriate to commence the audit before consideration of the matters and the procedures referred to in (a) above have been completed.

(c) Explain the objectives of an auditor in agreeing the terms of an audit engagement in accordance with ISA 210 and set out the main contents of an engagement letter.

Answer

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Level: Level 2

Topic: Regulatory Framework for Auditing

AA – L2 – Q2 – The Role and Responsibilities of Auditors

Explain the purpose and role of external audit in large companies for training materials.

Question

The purpose of an external audit and its role are not well understood. You have been asked to write some material for inclusion of your firm’s training materials dealing with these issues in the audit of large companies.

Required:

(a) Draft an explanation dealing with the purpose of an external audit and its role in the audit of large companies, for the inclusion in your firm’s training materials.

(b) The external audit process for the audit of large entities generally involves two or more recognizable stages. One stage involves understanding the business and risk assessment, determining the response to assessed risk, testing of controls as the interim audit. Another stage involves further tests of controls and substantive procedures and audit finalisation procedures. This stage is sometimes known as the final audit.

Describe and explain the main audit procedures and processes that take place during the interim and final audit of a large entity.

Answer

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Tags: Auditor Responsibilities, External Audit, Financial Statements, Public Interest, Stewardship
Level: Level 2

Topic: The Role and Responsibilities of Auditors

AA – L2 – Q1 – Professional Ethics and Code of Conduct for Auditors

Discuss the independence threat from an audit manager holding shares in Sycamore and required safeguards.

Question

It has been suggested that the most important matter affecting the credibility of the auditor is that of ‘independence’.

Required

Comment on the following situations in the context of the independence of the auditor, showing clearly the threats involved and the safeguards required by the IESBA International Code of Ethics for Professional Accountants:

(a) The audit manager in charge of the audit assignment of Scott holds 1,000 $1 ordinary shares in the company (total shares in issue – 100,000). The audit partner holds no shares.

(b) An audit partner of a firm of Chartered Accountants is a personal friend of the chief accountant of Peters Ltd. The chief accountant is not a director of the company and the partner is not responsible for the audit of Peters Ltd.

(d) The audit senior in charge of the audit of Green, a bank, has a personal loan from the Green Bank of $2,000 on which he is currently paying a market rate of interest.

(e) An audit partner is responsible for two audit assignments: Pepper and Tomato. Pepper has recently tendered for a contract with Tomato for a supply of material quantities of goods over a number of years. Tomato has asked the audit partner to advise on the matter

Answer

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Tags: Audit Team, Auditor Independence, Financial Interest, IESBA Code, Self-Interest Threat
Level: Level 2

Topic: Professional Ethics and Code of Conduct for Auditors (IESBA Code)

Subject (SQ): Audit and Assurance

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AA – L2 – Q10 – Auditor’s Liability

Discuss auditor rights on dismissal, draft a letter to nominee auditors, and evaluate ethical implications for Jenson plc.

AA – L2 – Q9 – Regulatory Framework for Auditing

Discuss current audit regulations and reasons for criticism regarding standards, fraud, non-audit services, and auditor tenure. Discuss reasons for criticism of current audit regulations on standards, fraud, non-audit services, and tenure.

AA – L2 – Q8 – Regulatory Framework for Auditing

Explain how legislation and IESBA Code ensure auditor independence at Apex Ventures. Discuss threats to auditor independence in three scenarios at Pinnacle Partners and suggest safeguards

AA – L2 – Q7 – The Role and Responsibilities of Auditors

Highlight directors' responsibilities for financial statements at Apex Ventures. Describe professional scepticism and explain its importance in auditing Apex Ventures.

AA – L2 – Q6 – Audit Engagement

Explain objectives of agreeing audit terms per ISA 210 and list main components of an engagement letter.

AA – L2 – Q5 – Fraud and Error

Explain how internal audit helps manage fraud and error risks in an entity.

AA – L2 – Q4 – Ethical Issues in Auditing

Explain situations where auditors may disclose confidential client information.

AA – L2 – Q3 – Auditor Appointment Considerations

Describe matters and procedures for accepting an audit appointment for a pharmacy chain.

AA – L2 – Q2 – The Role and Responsibilities of Auditors

Explain the purpose and role of external audit in large companies for training materials.

AA – L2 – Q1 – Professional Ethics and Code of Conduct for Auditors

Discuss the independence threat from an audit manager holding shares in Sycamore and required safeguards.

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Subject (SQ): Audit and Assurance

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Discuss auditor rights on dismissal, draft a letter to nominee auditors, and evaluate ethical implications for Jenson plc.

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Discuss current audit regulations and reasons for criticism regarding standards, fraud, non-audit services, and auditor tenure. Discuss reasons for criticism of current audit regulations on standards, fraud, non-audit services, and tenure.

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Explain how legislation and IESBA Code ensure auditor independence at Apex Ventures. Discuss threats to auditor independence in three scenarios at Pinnacle Partners and suggest safeguards

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Highlight directors' responsibilities for financial statements at Apex Ventures. Describe professional scepticism and explain its importance in auditing Apex Ventures.

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Explain objectives of agreeing audit terms per ISA 210 and list main components of an engagement letter.

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Explain how internal audit helps manage fraud and error risks in an entity.

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Explain situations where auditors may disclose confidential client information.

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Describe matters and procedures for accepting an audit appointment for a pharmacy chain.

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Explain the purpose and role of external audit in large companies for training materials.

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Discuss the independence threat from an audit manager holding shares in Sycamore and required safeguards.

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