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ACCA P7 ADVANCED AUDIT & ASSURANCE
Sample Note
For exams in June2015
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© Lesco Group Limited, April 2015
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise,
without the prior written permission of Lesco Group Limited.
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CONTENTS CHAPTER1,BEFORE THE ENGAGEMENT SERVICES: ....................... 6
CHAPTER 1 ADVERTISING: (DEC2010 Q4) NEESON&CO ................................................................................. 7
ANSWER TO NEESON&CO: .......................................................................................................................... 8
CHAPTER 1 (JUNE 2004)HAWK ASSOCAITE .................................................................................................... 9
CHAPTER 1 TENDERING+FEES (JUNE09 Q2) ................................................................................................. 10
CHAPTER 1 JUNE2008Q1(C) .................................................................................................................... 15
DEC2007 Q1(C) .................................................................................................................................... 21
CHAPTER 1 ETHICS: ................................................................................................................................. 24
CHAPTER 1 JUNE2008 Q4 (SMITH & CO) ................................................................................................... 26
CHAPTER 1 DEC2008 Q4(BECKER & CO) ................................................................................................... 30
CHAPTER 1 ENGAGEMENT LETTER Q: .......................................................................................................... 35
CHAPTER 1 MONEY LAUNDERING (DEC2009 Q2(C)) .................................................................................... 36
CHAPTER 1 ISA250 ................................................................................................................................. 38
CHAPTER2 PERFORM AN ENGAGEMENT SERVICE: ........................ 39
CHAPTER 2 Q1: WHAT DOES AN AUDIT FLOWCHART LOOK LIKE? ....................................................................... 39
CHAPTER 2 Q2:JUNE2009 Q1(A) ............................................................................................................. 40
CHAPTER2 Q3:DEC2009 Q1(A)(B)........................................................................................................... 43
CHAPTER2 Q4: JUNE2008 Q1 (A+B)(BUSINESS RISKS) .................................................................................. 45
CHAPTER2 JUNE2012 Q1(RISK OF MATERIAL MISSTATEMENT/AUDIT RISKS) ..................................................... 51
CHAPTER2 Q7: JUNE2010 Q2 .................................................................................................................. 56
CHAPTER2 Q7: BIG ACCOUNTING QUESTIONS .............................................................................................. 61
Chapter2 Q7: 1, conceptual framework: ........................................................................................ 62
Chapter2 Q7: 2,IAS1 Presentation of Financial Statements ........................................................... 64
Chapter2 Q7: 3,IAS2 Inventories ..................................................................................................... 65
Audit Question [ DEC2009 Q2] IAS2 ........................................................................................................... 66
Chapter2 Q7: 4, IAS7 Statement of cash flows ............................................................................... 67
Chapter2 Q7: 5,IAS8 Accounting Policies, Changes in Accounting Estimates and errors ................ 68
Audit question [DEC2011 Q3 ] IAS 8 ........................................................................................................... 70
Chapter2 Q7: 6,IAS10 Events after the Reporting Period ............................................................... 72
Audit question ISA560 [DEC2009 Q5]......................................................................................................... 73
Chapter2 Q7: 7,IAS 11 Construction Contracts ............................................................................... 76
Audit question [june2011 Q2] IAS11: ......................................................................................................... 78
Chapter2 Q7: 8,IAS12 Income Taxes ............................................................................................... 80
Audit question: [Q11:DEC2008 Q1] IAS 12 ................................................................................................. 84
Chapter2 Q7: 9,IAS16 Property, Plant and Equipment ................................................................... 85
Chapter2 Q7: 10,IAS17 Leases ........................................................................................................ 89
Audit question1: [June2009Q3] leases ....................................................................................................... 93
Chapter2 Q7: 11,IAS 18 Revenue .................................................................................................... 95
Audit questions: (IAS18 revenue recognition) ............................................................................................ 96
Q Harrier (June2004) (IAS18 revenue recognition) .................................................................................... 97
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Chapter2 Q7: 12,IAS 19 Employee Benefit ..................................................................................... 98
Audit question (June2012 Q5(b)) IAS19 ................................................................................................... 100
Chapter2 Q7: 13,IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance ..................................................................................................................................... 102
Audit Question [june2010 Q1 (c)(ii)] IAS 20 ............................................................................................. 104
Chapter2 Q7: 14,IAS 21 The effects of Changes in Foreign Exchange Rates ................................. 105
Audit question: Grissom Co (June2010 Q1 extract) ................................................................................. 106
Chapter2 Q7: 15,IAS 23 Borrowing Costs ..................................................................................... 107
Audit question:[june2012 Q5] IAS23 Borrowing cost ............................................................................... 109
Chapter2 Q7: 16,IAS 24 Related Party Transactions ..................................................................... 111
Audit question:[Q15june2008 Q3]related party transactions .................................................................. 113
Chapter2 Q7: 17,IAS28 Investments in Associates ........................................................................ 117
Audit Question [June2010 Q1] IAS28 ....................................................................................................... 119
Chapter2 Q7: 18, Financial instruments IAS32,37,39 IFRS9 ......................................................... 120
Audit question [Q17] IAS32,39 IFRS7 ....................................................................................................... 126
Audit question:[DEC2011 Q3(b)] Financial instruments(relating to 3rd party work) ............................... 127
Chapter2 Q7: 19,IAS33 Earnings Per share................................................................................... 128
Audit question [june2009 Q5 Pluto] IAS 33: (Ajusted) .......................................................................... 131
Chapter2 Q7: 21,IAS 36 Impairment of Assets ............................................................................. 132
Audit question: [Q] impairment IAS36 ..................................................................................................... 134
Audit question [DEC2010 Q3 Clooney]impairment IAS36 ........................................................................ 136
Chapter2 Q7: 22,IAS 37 Provisions, Contingent liabilities and Contingent Assets ........................ 138
Audit question [ DEC2007 Q1(b)] provision.............................................................................................. 140
Chapter2 Q7: 23,IAS38 Intangible Assets ..................................................................................... 142
Audit question IAS 38 [ june2008 Q5] Blod .............................................................................................. 145
Audit question [ DEC2011 Q1] IAS 38 ....................................................................................................... 147
Chapter2 Q7: 24, IAS40 Investment Property ............................................................................... 148
Audit question [DEC2008 Q3] IAS40......................................................................................................... 150
Chapter2 Q7: 25, IFRS2 Share-based Payment ............................................................................. 153
Audit question [ DEC2008 Q1(b)(i)] IFRS2 share based payment: ............................................................ 156
Chapter2 Q7: 26, IFRS5 Non-current Assets Held for Sale and Discontinued Operations ............. 158
Audit question1 IFRS 5 [ DEC2007(a) ]...................................................................................................... 161
Audit question2 [june2011 Q1a]IFRS 5 .................................................................................................... 163
Chapter2 Q7: 27, IFRS8 Operating Segments ............................................................................... 166
Audit question1 IFRS8 [ DEC2009 Q1(d)].................................................................................................. 168
Chapter2 Q7 :28, IFRS10,11,12 ..................................................................................................... 170
Audit question [Shire DEC2005] IFRS11 Joint Arrangements ................................................................... 173
Chapter2 Q7 :29, IFRS13 Fair Value Measurement ...................................................................... 174
Audit question [DEC2008 Q3(a)]fair value ............................................................................................... 176
Group audit .................................................................................................................................. 177
June2012 Q1(a(i+iii)): Group audit ........................................................................................................... 179
STAGE 5 OF AUDIT FLOWCHART ................................................ 183
DEC2012 Q2 AUDIT FINDINGS ............................................................................................................... 184
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CHAPTER 2 JUNE2011 Q3 OPENING BALANCES (ISA510&ISA710)(B) ....................................................... 191
CHAPTER2 :DEC2010 Q2 NEWMAN & CO(C) [ISA720 OTHER INFORMATION] ............................................... 193
STAGE 6 AUDIT REPORT ............................................................ 195
NOTICE: [OTHER INFORMATION FOR INTEGRATED REPORT] .......................................................................... 195
OTHER INFORMATION PARAGRAPH DETAILS: ................................................................................................ 195
CHAPTER 2 JUNE2012 Q5(B) ................................................................................................................. 196
CHAPTER 2 JUNE2011 Q5 NASSAU GROUP ............................................................................................... 198
NON AUDIT ENGAGEMENT SERVICES ......................................... 202
INTERIM FINANCIAL INFORMATION DEC2012 Q5(B) ................................................................................... 203
PROSPECTIVE FINANCIAL INFORMATION CHAPTER 2 JUNE2012 Q2(A) .......................................................... 205
DUE DILIGENCE REVIEW CHAPTER 2 JUNE2008 Q2 ..................................................................................... 210
FORENSIC AUDIT (CHAPTER 2 DEC2008 Q2) ...................................................................................... 214
SOCIAL AND ENVIRONMENTAL AUDIT DEC2008 Q1(C) ................................................................................ 219
JUNE2012 Q2(B)(II): SOCIAL AND ENVIRONMENTAL AUDIT ........................................................................... 221
CHAPTER 2 DEC2010 Q2(B) SOCIAL AND ENVIRONMENTAL AUDIT .............................................................. 223
PUBLIC SECTOR AUDIT ............................................................................................................................ 224
INTEGRATED REPORT .............................................................................................................................. 228
CHAPTER3 CURRENT ISSUES ..................................................... 229
CHAPTER3 JUNE2009 Q2(D) TRANSNATIONAL AUDIT ................................................................................ 230
CHAPTER3 DEC2009 Q4 ....................................................................................................................... 233
JUNE2008 Q2(C) JOINT AUDIT ............................................................................................................... 235
CHAPTER3 Q5 DEC2010 NEESON&CO(B) Q4 .......................................................................................... 237
CHAPTER3 JUNE2010 Q5(B) AUDITORS’ LIABILITY .................................................................................... 239
PROPOSED AUDIT REPORT CHANGES .......................................................................................................... 241
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Chapter1,Before the engagement services:
In this chapter we will be going through:
1. Advertisement issues
2. How to draft a tendering document
3. Professional appointment issues
4. Quality control issues
5. Regulatory issues
The best way to learn these knowledge is to copy note from tuition video.
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Chapter 1 Advertising: (DEC2010 Q4) Neeson&Co
An advertisement could be placed in national newspapers to attract new clients.
The draft advertisement has been given to you for review:
Neeson & Co is the largest and most professional accountancy and audit
provider in the country. We offer a range of services in addition to audit, which
are guaranteed to improve your business effi ciency and save you tax.
If you are unhappy with your auditors, we can offer a second opinion on the
report that has been given.
Introductory offer: for all new clients we offer a 25% discount when both audit
and tax services are provided. Our rates are approved by ACCA.
Required:
Evaluate each of the suggestions made above, commenting on the ethical and
professional issues raised. (8marks)
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Answer to Neeson&Co:
Back up
Any comments made by the advertisement should be backed up with evidence.
For example it says Neeson&Co is the largest and most professional
accountancy provider in the country so sales revenue and number offices should
be made to back up this evidence.
Definitely clear
The advertisement should be definitely clear.The business efficiency can not be
guaranteed by the firm and this seems that it’s not honest by Neeson.
The second opinion offered by Neeson&Co may imply that the audit work done
by Neeson&Co is low and as a result client would not be happy with the first
opinion given and hence second opinion would be issued again. And this
comment in the advertisement is not professional.
Ensure to comply with laws and regulation
The advertisement should comply with laws and regulation.
The guarantee to save tax means maybe Neeson would use some tricks to help
client save time which may not comply with laws and regulation because not in
every circumstance that the tax can be saved.
Fundamental ethics
Neeson&Co can’t quote rates are approved by ACCA because ACCA does not
approve any rates and this would be seen as unprofessional.
Legal obligation
It seems that if taxes can’t be saved and also business efficiency hasn't been
improved so that client may take potential legal action against Neeson&Co
resulting in further future cash outflow from Neeson&Co.
Low balling
The 25% of introductory fees is low balling and it’s not prohibited but
Neeson&Co should need to make sure by charging such a low amount of fees the
quality of the work should be maintained, ie, following ISAs to do the audit
work.
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Chapter 1 (June 2004)Hawk Assocaite
Displaying business cards alongside those of local tradesman and service
providers in supermarkets and libraries. The cards would read:
“Hawk ACCA Associates
For PROFRSSIONAL Accountancy, Audit,
Business Consultancy and Taxation services
Competitive rates. Money back guarantees.”
(4marks)
Answer to June2004 Hawk Associate:
Advertisement in the super markets and libraries is not professional and
they should advertise their firm using eg, financial magazines.
Professional is in capital and this implies only their firm is professional while
others are not and firms shouldn’t criticize others.
Competitive rate is vague and compare to whom? So this information is
misleading.
Money back guarantees may mean they can help company save tax and if
not they would give money back to them and this will:
Firstly involving some illegal techniques to help company save tax and
hence it’s a breach of laws and regulations.
Secondly it implies that the quality of services provided to the company
may not be good and hence give their money back.
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Chapter 1 tendering+Fees (June09 Q2)
The Dragon Group is a large group of companies operating in the furniture retail
trade. The group has expanded rapidly in the last three years, by acquiring several
subsidiaries each year. The management of the parent company, Dragon Co, a
listed company, has decided to put the audit of the group and all subsidiaries out to
tender, as the current audit firm is not seeking re-election. The financial year end of
the Dragon Group is 30 September 2009.
You are a senior manager in Unicorn & Co, a global firm of Chartered Certified
Accountants, with offices in over 150 countries across the world. Unicorn & Co has
been invited to tender for the Dragon Group audit (including the audit of all
subsidiaries). You manage a department within the firm which specialises in the
audit of retail companies, and you have been assigned the task of drafting the
tender document. You recently held a meeting with Edmund Jalousie, the group
finance director, in which you discussed the current group structure, recent
acquisitions, and the group’s plans for future expansion.
Meeting notes – Dragon Group
Group structure
The parent company owns 20 subsidiaries, all of which are wholly owned. Half of the
subsidiaries are located in the same country as the parent, and half overseas. Most
of the foreign subsidiaries report under the same financial reporting framework as
Dragon Co, but several prepare financial statements using local accounting rules.
Acquisitions during the year
Two companies were purchased in March 2009, both located in this country:
(i) Mermaid Co, a company which operates 20 furniture retail outlets. The audit
opinion expressed by the incumbent auditors on the financial statements for the
year ended 30 September 2008 was qualified by a disagreement over the
non-disclosure of a contingent liability. The contingent liability relates to a court
case which is still on-going.
(ii) Minotaur Co, a large company, whose operations are distribution and
warehousing. This represents a diversification away from retail, and it is hoped that
the Dragon Group will benefit from significant economies of scale as a result of the
acquisition.
Other matters
The acquisitive strategy of the group over the last few years has led to significant
growth. Group revenue has increased by 25% in the last three years, and is
predicted to increase by a further 35% in the next four years as the acquisition of
more subsidiaries is planned. The Dragon Group has raised finance for the
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acquisitions in the past by becoming listed on the stock exchanges of three different
countries. A new listing on a foreign stock exchange is planned for January 2010.
For this reason, management would like the group audit completed by 31 December
2009.
Required:
(a)Recommend and describe the principal matters to be included in your
firm’s tender document to provide the audit service to the Dragon Group.
(10 marks)
(b) Explain FOUR reasons why a firm of auditors may decide NOT to seek
re-election as auditor. (6 marks)
(c) Using the specific information provided, evaluate the matters that
should be considered before accepting the audit engagement, in the
event of your firm being successful in the tender. (7 marks)
Professional marks will be awarded in part (c) for the clarity and presentation of the
evaluation. (4 marks)
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Answer to June2009 Q2a-c:
(a)
Recourses
Detailed background of our firm should be included for example the expertise
and clients we serve.
Clients needs
Because Dragon group is going to go listed onto the stock exchange and so we
can provide non audit services such as corporate governance advice relating to
the listing.
We have offices in over 150 countries across the world so we can deal with audit
with your subsidiaries all around the world more effectively.
Way to do the audit
We should include how we perform the audit service to ensure appropriate
quality of work maintained such as following ISA to do the risk assessment.
Also we ensure quality during the audit by having appropriate quality control
procedures during the audit such as hot review on the audit work we have done.
Extra benefit
We can provide recommendation to address internal control weakness to
management in the management letter as an extra service for example.
Fees
Fees should be broken down into how it’s calculated by clearly laying out
different classes of staff involved, such as hourly rate for audit manager and
partner.
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(b)
Overdue fees
Where a client hasn't paid their fees there has been outstanding for some time
and such overdue fees would be seen as loan to client which may cause a self
interest threat, ie, in order to keep the loan auditor may issue whatever opinion
that client wants so that a safeguard for this is not to seek re-election.
Resources
As the company expands the audit firm may not have enough resources to do
the audit any more. Such as the company is listing on a stock exchange and the
audit firm is a lack of relevant experts who know the regulation of the stock
exchange and so the firm may not seek re-election.
Integrity
When the management doesn't comply with specific accounting standards such
as a deliberate failure to provide a provision in the financial statements and this
action would be seen as a lack of integrity.
So in order for the audit firm to remain good reputation they should not seek
re-election.
Conflict of interest
Such as the existing company we are auditing is damaging the environment and
didn't disclose the fact.
Another company is waiting for out firm’s tendering but they are competitors
and if we audit both companies which would cause a conflict of interest so we
should resign the first company as by continuing to be an auditor for this would
damage our firm’s reputation.
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(c)
Evaluation of matters to be considered:
Recourses
As dragon group has expanded rapidly in the last three years so we must ensure
we have enough audit staff to audit those components.
Management integrity
As a qualified opinion issued by previous auditor over a deliberate
non-disclosure of contingent liability we should question management’s
integrity and if they not integrate then we should not accept the engagement
service because if after conducting the service and we find information we
obtained is fake then it will still have an impact on our audit opinion.
Previous auditor
It would be necessary to contact previous auditor to gather information
regarding the non disclosure of contingent liability with client’s permission of
whether it should be disclosed in the individual financial statements of Mermaid
Co, and at group level.
Experiences
Given Minotaur Co is involved in distribution and warehousing but this is not a
very complicated industry for Unicorn&Co because it has its offices over
150countries and it should have relevant experience into auditing this eg,
bringing in staff from a different department more experienced in clients with
distribution operations
Time
There will be only 3months for Unicorn&Co to complete the audit and
Unicorn&Co should consider whether to allocate more recourses to this
engagement given this client is large and it needs to spend more time into it.
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Chapter 1 June2008Q1(c)
You are a senior audit manager in Mitchell & Co, a firm of Chartered Certified
Accountants. You are reviewing some information regarding a potential new audit
client, Medix Co, a supplier of medical instruments. Extracts from notes taken at a
meeting that you recently held with the finance director of Medix Co, Ricardo Feller,
are shown below:
Meeting notes – meeting held 1 June 2008 with Ricardo Feller
Medix Co is a provider of specialised surgical instruments used in medical procedures. The
company is owner managed, has a financial year ending 30 June 2008, and has invited our firm to
be appointed as auditor for the forthcoming year end. The audit is not going out to tender. Ricardo
Feller has been with the company since January 2008, following the departure of the previous
finance director, who is currently taking legal action against Medix Co for unfair dismissal.
Company background
Medix Co manufactures surgical instruments which are sold to hospitals and clinics. Due to the
increased use of laser surgery in the last four years, demand for traditional metal surgical
instruments, which provided 75% of revenue in the year ended 30 June 2007, has declined
rapidly. Medix Co is expanding into the provision of laser surgery equipment, but research and
development is at an early stage. The directors feel confident that the laser instruments currently
being designed will eventually receive the necessary licence for commercial production, and that
the laser product will replace surgical instruments as a leading source of revenue. There is
currently one scientist working on the laser equipment, subcontracted by Medix Co on a freelance
basis. The building in which the research is being carried out has recently been significantly
extended by the construction of a large laboratory.
A considerable revenue stream is derived from agents who are not employed by Medix Co. The
agents earn a commission based on the value of sales they have secured for Medix Co during the
year. There are many suppliers into the market and agents are used by all manufacturers as a
means of marketing and distributing their products.
The company’s manufacturing facility is located in another country, where operating costs are
significantly lower. The facility is under the control of a local manager who visits the head office of
Medix Co annually for a meeting with senior management. Products are imported via aeroplane.
The overseas plant and equipment is owned by the company and was constructed 12 years ago
specifically for the manufacture of metal surgical instruments.
The company has a bank overdraft facility and makes use of the facility most months. A significant
bank loan, which will carry a variable interest rate, is currently being negotiated. The terms of the
loan will be finalised once the audited financial statements have been viewed by the bank.
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After receiving permission from Medix Co, you held a discussion with the current
audit partner of Medix Co, Mick Evans, who runs a small accounting and audit
practice of which he is one of two partners. Mick told you the following:
‘Medix Co has been an audit client for three years. We took over from the previous
auditors following a disagreement between them and the directors of Medix Co over
fees. As we are a small practice with low overheads we could offer lower fees than
our predecessors. We could also do the audit very quickly, which pleased the client,
as they like to keep costs as low as possible.
During our audits we have found the internal systems and controls to be quite weak.
Despite our recommendations, there always seemed to be a lack of interest in
making improvements to the accounting systems, as this was seen to be a ‘waste of
money’. There have been two investigations by the tax authorities, which we did not
deal with, as we are not tax experts. In the end the directors sorted it all out, and I
believe that the tax matter is now resolved.
We never had a problem getting access to accounting books and records. However,
the managing director, Jon Tate, once gave us what he described as ‘the wrong cash
book’ by mistake, and replaced it with the ‘proper version’ later in the day. We never
found out why he was keeping two cash books, but cash was an immaterial asset so
we didn’t worry about it too much.
We are resigning as auditors because the work load is too much for our small
practice, and as Medix Co is our only audit client we have decided to focus on
providing non-audit services in the future.’
You have also found a recent press cutting regarding Medix Co:
Extract from local newspaper – business section, 2 June 2008
It appears that local company Medix Co has breached local planning regulations by building an
extension to its research and development building for which no local authority approval has been
given. The land on which the premises is situated has protected status as a ‘greenfield’ site which
means approval by the local authority is necessary for any modification to commercial buildings.
A representative of the local planning office stated today: ‘We feel that this is a serious breach of
regulations and it is not the first time that Medix Co has deliberately ignored planning rules. The
company was successfully sued in 2003 for constructing an access road without receiving planning
permission, and we are considering taking legal action in respect of this further breach of planning
regulations. We are taking steps to ensure that these premises should be shut down within a month.
A similar breach of regulations by a different company last year resulted in the demolition of the
building.’
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Required:
Prepare briefing notes, to be used by an audit partner in your firm,
assessing the professional, ethical and other issues to be considered in
deciding whether to proceed with the appointment as auditor of Medix
Co.
Note: requirement (c) includes 2 professional marks. (12 marks)
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Answer: June2008 Q1(c)
Briefing notes
To: Audit partner
From: Audit manager
Date: exam date
Subject: Factors to consider regarding appointment as auditor of Medix Co
Introduction:
This briefing note summarises the main factors we should consider in deciding
whether to take the appointment further.
Time to build up knowledge
Because this is the last month before the financial statement year end we would
questions whether we have enough time to quickly build up the knowledge of
Medixcompany.
Expertise
Given Medix company operates in a very sophisticated industry so we need to
question whether we should refer to expertise when doing the audit and if yes
this will increase audit fees charged to client and given client wants to keep the
audit costs as low as possible this may not be acceptable.
Control system
Given Medix company has a weak internal control system so we should not rely
on its system but rather we should use full substantive testing approach and this
increases the costs and also time spent as well and it may not be acceptable by
client given he wants to keep the costs down.
Opening balance
Because this is a new audit client and we should consider extra work done on the
opening balance of its financial statement given a weak internal control system
exists.
Management style
Medix company is being sued by previous finance director and previous auditor
resigned as a result of a disagreement with the management so the history
shows we may find it difficult to maintain the good relationship with
management.
Fee pressure
Medix company is now struggling to raise finance and so there would be a risk
that after we become its auditor we can’t collect our money back as audit fee
and as a result this creates lots of threats to objectivity, ie, intimidation threat
by threatening not to pay for us unless to give a wrong audit opinion satisfying
client.
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Reputation
Medix company has been in breach of laws an regulation and this has impair its
reputation within the industry and if we were to become its auditor then it will
impact on our reputation as well.
Advocacy threat
Medixcompany has in breach of laws and if we were to become an auditor of
them then we would be seen as promoting its status saying client’s breach of
laws is right and hence this will impair our objectivity in expressing an audit
opinion.
Competence
Medixcompany is in such a sophisticated industry and we should question
ourselves whether we have competence in carrying out such an audit, eg,
experience before in auditing the work in progress in a similar industry.
Public interest
Medix company has in breach of laws before involving in activities damaging the
environment and its doing harm to public interest so we would be better not to
become its auditor.
Time
It seems that there would be only 1 month before we start our audit and given
the complexity of client’s business activities we may not have enough time to
carry out such an audit service.
Integrity
Given there are two cash book presented by managing director and we can
reasonably assume that fraudulent transactions may occur here and hence we
should question the integrity of management and if they are lying then we
shouldn't accept as an auditor.
Staff and resources
We should consider whether we have enough staff and recourses to carry out
the audit given part of its Medixcompany’s operations are overseas and if no we
shouldn't accept as an auditor.
Easy
It seems that medix company is going to raise finance from the bank and the
audit report may be relied on by bank as well and this creates higher risk for us
because given time, recourses, expertise analysis maybe we don't have time to
carry out this audit as expected.
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Conclusion:
So from the above analysis it would be better for us not to be as an auditor for
Medixcompany.
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DEC2007 Q1(c)
(e) (i) Identify and describe FOUR quality control procedures that are
applicable to the individual audit engagement; and (8 marks)
(ii) Discuss TWO problems that may be faced in implementing quality
control procedures in a small firm of Chartered Certified
Accountants, and recommend how these problems may be
overcome. (4 marks)
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Answer to DEC2007 Q1(c):
(i)
Pre appointment checks
Auditors should check the client before accepting this engagement such as:
Obtaining professional clearance from previous auditors to ensure there’s no
problem to accept this engagement letter from previous auditors’
perspective.
Considering any conflict of interest among its existing clients.
Due diligence in client whether they are involved in money laundering
activities.
Planning
Auditor should plan their audit before it’s actually implemented by clearly
setting up appropriate audit strategy and detailed audit plan.
Planning meeting
Auditors should hold a planning meeting before audit is implemented by clearly
stating the responsibility of members for example.
Documenting the work
During the audit auditors should document the work properly according to ISA.
Direction, supervision and review of work
During the audit there should be an audit supervisor or manager directing the
audit work, eg, act as a mentor during the audit and if any problems arise from
audit junior they can come to supervisor or manager for a solution.
Audit work should be reviewed after the work has been done, ie, hot review on
the work before audit report is signed to identify any mistakes within the audit
work.
Delegate work based on knowledge and experience
Auditors should be delegated work based on knowledge and experience this
means for example audit junior should not be delegated the work to audit fair
value.
23 Accounting Practise Center (A.P.C) www.globalapc.com
(ii)Competence
Problem:
In order to keep up to date with the knowledge particularly for ISA and IFRS
staff should be trained but it’s too expensive to set up an inhouse training within
the small firm.
Recommendation:
So this can be outsourced to an external training company to do so because due
to economic of scale within that external training company a lower cost incurred
comparing to setting up in house.
Review
Problem:
It may not be possible to hold an independent review of an engagement within
the firm because of the small number of senior and experienced auditors.
Recommendation:
An external review service may be purchased.
24 Accounting Practise Center (A.P.C) www.globalapc.com
Chapter 1 Ethics:
Basic knowledge:
ACCA particularly identifies there are 5 principles we need to follow:
Professional behavior:
We shouldn’t do anything that discredits ACCA’s reputation.
Integrity:
Both accountant and auditor should lie to others.
Competence and due care:
Professional accountants should pass ACCA exams and accumulate relevant
experience and do annual continues professional development.
They should also follow rules to do the work and finish the work within the
reasonable amount of time.
Confidentiality
Professional accountants should keep client’s confidential information and
should not disclose them to 3rd parties.
If client’s company is involved in illegal activities and we can:
1. Seek legal advice
2. Disclose those to appropriate authority.
Objectivity
This means audit opinion should be trustable.
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And there are 6 threats to objectivity:
1. Self interest threat
In order for auditor to keep benefit then auditor helps to cover up the fraud by
client making its opinion not objective.
2. Self review threat
Checking auditor’s own work would mean auditor will lose profeesional
skepticism when trying to audit client and the opinion given wouldn’t be
objective.
3. Advocacy threat
It may seem that auditor is trying to promote the status of client’s company
making any audit opinion subsequently issued not objective.
4. Familiarity threat
This means there is a close relationship between auditor and Client Company
and this would mean:
a. auditor will cover up fraud made by client’s company;
b. auditor may lose professional skepticism when auditing the client’s company.
So it will make audit opinion not objective.
5. Intimidation threat
Client’s Company threatens auditors and in order to keep benefit auditor would
issue whatever opinion that client’s wants and making it not objective.
6. Management threat
Audit form makes a management decision on behalf of client’s company and this
may run a risk that client’s company would fail.
In order not being affected by client’s company audit firm would issue an audit
opinion which is not trustable.
26 Accounting Practise Center (A.P.C) www.globalapc.com
Chapter 1 June2008 Q4 (Smith & Co)
You are an audit manager in Smith & Co, a firm of Chartered Certified
Accountants. You have recently been made responsible for reviewing invoices
raised to clients and for monitoring your firm’s credit control procedures.
Several matters came to light during your most recent review of client invoice
files:
Norman Co, a large private company, has not paid an invoice from Smith & Co
dated 5 June 2007 for work in respect of the financial statement audit for the
year ended 28 February 2007. A file note dated 30 November 2007 states that
Norman Co is suffering poor cash flows and is unable to pay the balance. This is
the only piece of information in the file you are reviewing relating to the invoice.
You are aware that the final audit work for the year ended 28 February 2008,
which has not yet been invoiced, is nearly complete and the audit report is due
to be issued imminently.
Wallace Co, a private company whose business is the manufacture of industrial
machinery, has paid all invoices relating to the recently completed audit
planning for the year ended 31 May 2008. However, in the invoice file you notice
an invoice received by your firm from Wallace Co. The invoice is addressed to
Valerie Hobson, the manager responsible for the audit of Wallace Co. The
invoice relates to the rental of an area in Wallace Co’s empty warehouse, with
the following comment handwritten on the invoice: ‘rental space being used for
storage of Ms Hobson’s speedboat for six months – she is our auditor, so only
charge a nominal sum of $100’. When asked about the invoice, Valerie Hobson
said that the invoice should have been sent to her private address. You are
aware that Wallace Co sometimes uses the empty warehouse for rental income,
though this is not the main trading income of the company.
In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been
raised to Software Supply Co, not a client of your firm. The comment box on the
invoice contains the note ‘referral fee for recommending Software Supply Co to
several audit clients regarding the supply of bespoke accounting software’.
27 Accounting Practise Center (A.P.C) www.globalapc.com
Required:
Identify and discuss the ethical and other professional issues raised by
the invoice file review, and recommend what action, if any, Smith & Co
should now take in respect of:
(a) Norman Co; (8 marks)
(b) Wallace Co; and (5 marks)
(c) Software Supply Co. (4 marks)
(17 marks)
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Answer to June2008 Q4:
(a)
Matters to consider:
In order to secure the payment, audit firm would issue a wrong audit opinion to
maximize its benefit and hence creating self interest threat to objectivity.
Audit firm is not chasing money from client company would suggest there is a
good relationship between them and a familiarity threat exists meaning audit
firm may help company conceal some mistakes in the financial statements but
still issue a clean audit report.
Because Norman is suffering poor cash flows and is unable to pay for audit firm
and this may create intimidation threat meaning Norman may threaten not to
pay the firm unless a clean audit report is given.
Before accepting an engagement letter to Norman company auditors should do
a detailed pre-appointment check to ensure this client is a going concern entity.
Actions:
1. Auditor should raise this issue to audit committee to secure payments.
2. Auditors should quickly invoice management about the audit work service
fees.
3. Auditor should have a detailed pre-appointment check client in the future
before working for them.
4. Auditors should perform an independent partner check for last year audit
work as well since they haven’t paid the firm in the last year.
29 Accounting Practise Center (A.P.C) www.globalapc.com
(b)
Matters to consider:
In order to keep the cheap rental expense of $100 auditor would issue a wrong
audit opinion and hence leads to self interest threat.
The $100 nominal value would suggest there’s a good relationship between
client and audit firm and hence familiarity threat would exist meaning auditors
would lose professional skepticism when doing the audit and hence giving a
wrong audit opinion.
The nominal $100 would create an intimidation threat as well because client
would threaten to withdraw this offer unless a clean audit report is given by
auditors.
This is about manager’s work and hence it’s senior so all its work done would
have a big impact onto the overall opinion given.
Actions:
1. Partners should perform an independent review on work done by audit
manager.
2. When necessary report to ACCA about this issue.
3. Remove managers from the audit team for this client.
4. Carefully check whether there are any relationships that manager with other
clients and if yes then remove him/her from other services as well.
(c)
Matters to consider:
This will increase business risk because if the software quality is bad then it
would be seen that audit firm’s work quality would be bad as well and hence
leads to an impairment of audit firm’s reputation.
Actions:
1. Tell client about the referral fees.
2. Make written confirmation that client knows about referral fees.
3. Make sure that other audit staff involved in audit have no further interest in
software company because if yes then any other threats to objectivity would be
created.
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Chapter 1 DEC2008 Q4(Becker & Co)
You are a senior manager in Becker & Co, a firm of Chartered Certified
Accountants offering audit and assurance services mainly to large, privately
owned companies. The firm has suffered from increased competition, due to two
new firms of accountants setting up in the same town. Several audit clients have
moved to the new firms, leading to loss of revenue, and an over staffed audit
department. Bob McEnroe, one of the partners of Becker & Co, has asked
you to consider how the firm could react to this situation. Several possibilities
have been raised for your consideration:
1. Murray Co, a manufacturer of electronic equipment, is one of Becker & Co’s
audit clients. You are aware that the company has recently designed a new
product, which market research indicates is likely to be very successful.
The development of the product has been a huge drain on cash resources. The
managing director of Murray Co has written to the audit engagement partner to
see if Becker & Co would be interested in making an investment in the new
product. It has been suggested that Becker & Co could provide finance for the
completion of the development and the marketing of the product. The finance
would be in the form of convertible debentures.
Alternatively, a joint venture company in which control is shared between
Murray Co and Becker & Co could be established to manufacture, market and
distribute the new product.
2. Becker & Co is considering expanding the provision of non-audit services.
Ingrid Sharapova, a senior manager in Becker & Co, has suggested that the firm
could offer a recruitment advisory service to clients, specialising in the
recruitment of finance professionals. Becker & Co would charge a fee for this
service based on the salary of the employee recruited. Ingrid Sharapova worked
as a recruitment consultant for a year before deciding to train as an accountant.
3. Several audit clients are experiencing staff shortages, and it has been
suggested that temporary staff assignments could be offered. It is envisaged
that a number of audit managers or seniors could be seconded to clients for
periods not exceeding six months, after which time they would return to Becker
& Co.
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Required:
Identify and explain the ethical and practice management implications
in respect of:
(a) A business arrangement with Murray Co. (7 marks)
(b) A recruitment service offered to clients. (7 marks)
(c) Temporary staff assignments. (6 marks)
(d) I heard one of the audit managers say that our firm had lost an
audit client to a competitor because of lowballing. What is lowballing
and is it allowed?
(3 marks)(DEC2009 Q4)
(23 marks)
32 Accounting Practise Center (A.P.C) www.globalapc.com
Answer to DEC2008 Q4:
(a)
In order to make investment in the product more successful audit firm would
issue a favorable audit opinion to client’s company even though its financial
statements are wrong and this creates self interest threat.
By starting up a joint venture it may suggest audit firm and Murray Company
are close friends and hence this creates familiarity threat meaning Audit firm
would lose professional skepticism when doing the actual audit.
The finance is in the form of convertible loan meaning it can be converted
into cash or equity at the end of the life of project and an intimidation threat
exists meaning if audit firm is not going to issue a clean audit report then
Murray Company may not pay for audit firm for cash/equity.
A management threat arises as well because a joint venture is set up and
any management decision made by the audit firm may result in company
failure and hence there is a risk that audit firm may get sued and hence in
order not being sued by Murray company, audit firm would issue whatever
opinion that they want.
By investing in such a project there is a business risk that audit firm
reputation would be impaired if the project goes badly and hence there
might be less future clients go to Becker&Co.
Audit firm would have 2 choices including:
1. Accept the offer but IFAC code of ethics says “the threats to objectivity
making opinion not objective to be so significant and no safeguard would put in
place to minimize the threat and hence audit firm would be better not doing
audit services for this client.”
2. Reject the offer and continue to provide audit service to this client.
33 Accounting Practise Center (A.P.C) www.globalapc.com
(b)
By receiving more income from the audit client would creates a self interest
threat because in order to keep this interest audit firm would issue whatever
opinion that client wants.
Because Becker & Co would charge a fee for this service based on the salary
of the employee recruited so the higher salary that Becker&co argues then
higher income stream would flow into audit firm and hence greater self
interest threat.
By recruiting members to do the financial work the employees and audit firm
would become friends and hence familiarity threats is created because by
subsequently checking work done by those staff auditor would lose
professional skepticism.
Intimidation threat would be created because if the quality of recruited staff
is poor then client would sue us or require a clean audit report even though
the financial statements are not true and fair.
If the staff recruited is poor quality then there would be an impairment on
audit firm’s reputation and hence future client may not go to Becker&Co for
those services including audit service any more.
(c)
Audit firm would have an incentive to send higher level staff to the company
and hence earn more fees and this creates a higher self interest threat.
After auditor working on this company they may have a good relationship
with staff there and hence a familiarity threat is created meaning auditor
would lose professional skepticism when doing the actual audit or ignore the
mistakes staff have made as well.
If quality of auditor sent to client’s company is poor then an intimidation
threat would create meaning client would choose to sue us for negligence or
we give a clean audit report in order not get sued.
Audit manager or partner sent would be so senior and hence they would
have a big impact on the audit work so this needs to be carefully checked.
34 Accounting Practise Center (A.P.C) www.globalapc.com
(d)
Low balling means audit firm would charge a low fee to attract audit service
from client in the hope to win the tender contact and provide future services
to client.
This is not banned by ACCA as long as audit firm can demonstrate they
would complete the work with competence and due care.
But as the fees is cut back then auditor may not spend enough time doing
the work and stick to auditing standards and hence quality of the audit work
would be lowered down.
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Chapter 1 Engagement Letter Q:
State 6 items that could be included in an engagement letter.(3marks)
Fee cover note: how the fees are calculated.
Address to directors.
Responsibilities of auditors and directors.
Scope of audit.
Extra services provided to client
Signature and date.
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Chapter 1 Money Laundering (DEC2009 Q2(c))
There are specific regulatory obligations imposed on accountants and auditors
in relation to detecting and reporting money laundering activities. You have
been asked to provide a training session to the new audit juniors on auditors’
responsibilities in relation to money laundering.
Required:
Prepare briefing notes to be used at your training session in which you:
(i)Explain the term ‘money laundering’. Illustrate your explanation with
examples of money laundering offences, including those which could be
committed by the accountant; and
(ii)Explain the policies and procedures that a firm of Chartered Certified
Accountants should establish in order to meet its responsibilities in relation to
money laundering.
(10 marks)
Professional marks will be awarded in part (c) for the format of the answer, and
the quality of the explanations provided.
(2 marks)
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Answer to DEC2009 Q2(c):
(i)
Definition:
Money laundering is to convert crime money into a legitimate form.
3 stages:
Placing
It seems that Heron co receives cash from customer and this is placing and cash
may be illegal from customers.
Layering
$2m of electronic bank transfer to an overseas financial institution would be a
layering, ie, creating transactions to cover the true source of money.
Integration
Then getting money out from the financial institution of $2m then the source of
money would become legitimate.
Offences:
Auditor committee money laundering activities.
Auditor helps client to establish money laundering system.
Doing tipping off meaning auditors would inform client about the potential
investigation of money laundering activities by other departments and
hence interrupt the investigation process.
(ii)
Train all relevant staff to money laundering issues.
Appoint a money laundering reporting officer to deal with money laundering
activities and this will often be a senior audit partner.
Due diligence review of client’s company including their address, directors
register etc.
Review procedures would be put in place to review working papers of client’s
company to see if they are involved in money laundering activities.
Quality control procedures would be put in place like pre appoint check of the
client’s company whether it would involve in money laundering activities.
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Chapter 1 ISA250
The purpose of ISA250 Consideration of Laws and regulations in an audit of
financial statements is to establish standards and provide guidance on the
auditor’s responsibility to consider laws and regulations in an audit of financial
statements.
Required:
Explain the auditor’s responsibilities for reporting non-compliance that comes to
the auditor’s attention during the conduct of an audit. (5marks)
Answer to ISA250:
Auditors are not responsible for the non-compliance with laws by client.
But if the non-compliance with laws would result in a material misstatement
in the client’s financial statements then auditors should modify its audit
report.
Before that auditors should raise this issue to audit committee.
If this is not applicable then auditor should seek legal advice first.
If Client Company is involved in money laundering issues then auditor
should report this to relevant authority.