ACCA P7 Audit Questions

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<p>QUESTIONS</p> <p>KAPLAN PUBLISHING</p> <p>1</p> <p>PAPER P7 (INT) : ADVANCED AUDIT AND ASSURANCE</p> <p>PROFESSIONAL AND ETHICAL CONSIDERATIONSBIGG BIKESBigg Bikes, a privately-owned company manufactures bicycles and supplies them internationally and through a network of sales outlets throughout the country of Europia. They traditionally manufactured race bikes but have latterly moved into a broad range of bikes to take advantage of the latest trends in the marketplace. In particular, mountain bikes now make up 40% of their sales. They have expanded rapidly over the last two years and are now the major European manufacturer. You are the auditor of Bigg Bikes and have been approached by the directors for advice on corporate governance and internal controls. They are aware that with their rapid growth, their obligations as directors have increased and that they should be taking much more interest in the level of controls within the company. They are also considering establishing an audit committee and would like your advice in this area. You have recently completed the annual audit of Bigg Bikes and are aware that very little has been done to promote sound governance within the company. Required: (a) (b) (c) Explain the role of the directors in relation to corporate governance and controls. (5 marks) Describe the types of controls that should be operated by Bigg Bikes to provide sound governance. (6 marks) Explain the potential role of the audit committee and the factors that Bigg Bikes should consider in making a decision on whether to go ahead with the formation of the committee. (5 marks) Explain how, as part of the normal audit process, the external auditor may assist in the promotion of effective corporate governance within the company. Identify how the auditor would communicate any relevant recommendations. (4 marks) (Total: 20 marks)</p> <p>(d)</p> <p>2</p> <p>KAPLAN PUBLISHING</p> <p>LECTURER RESOURCE PACK QUESTIONS</p> <p>SEASUN YACHTING AND MARINA (SYM)SYM have a marina on the South Coast and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of SYM and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:</p> <p>30% of the yachts on sale by SYM are supplied through one of the major international boating companies with a special finance arrangement deal. However, SYM have also obtained separate finance on these yachts, which are therefore in effect being double financed. Ten yachts shown as assets by SYM cannot be located, with no explanation other than that they have not been sold. These yachts together are worth approximately $5m. Long delays have occurred in performing reconciliations with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken. Sales have been overstated by $10m in the current financial statements.</p> <p>The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified. Required: (a) (b) (c) Explain whether the issues referred to above should be categorised as fraud or error.(5 marks) Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (5 marks) Describe what steps you would take to further investigate and then report on the matters referred to above. (10 marks) (Total: 20 marks)</p> <p>KAPLAN PUBLISHING</p> <p>3</p> <p>PAPER P7 (INT) : ADVANCED AUDIT AND ASSURANCE</p> <p>ETHICSThe ACCAs Rulebook contains a Code of Ethics and Conduct. The Code is applicable to all members and students. If the Code is not complied with then disciplinary action may be taken, which could result in reprimand, fine or exclusion from the Association. Required: (a) (b) (c) Explain why you think the ACCAs five principles of professional conduct are so fundamental to auditing. (5 marks) Explain how a member can demonstrate that he is truly independent in carrying out the work he performs, and why it is important that he should do so. (5 marks) In what circumstances is it permissible to disclose confidential client information? (5 marks) (Total: 15 marks)</p> <p>4</p> <p>KAPLAN PUBLISHING</p> <p>LECTURER RESOURCE PACK QUESTIONS</p> <p>ETHICS AND OF PROFESSIONAL CONDUCT(a) It can be argued that integrity, objectivity and independence are important at both the individual practitioner level and also at the national professional body level. At the practitioner level, one is concerned with the conduct and attitudes of the individual accountant whilst at the national level, the image and integrity of the profession are of paramount importance. Required: Explain the role that practitioners play in the maintenance of professional integrity, objectivity and independence. (7 marks) (b) The following notes relate to the personal files of two student accountants undertaking training in an accounting firm: File Note 1 The student was asked by an audit senior whether she had taken her ACCA final stage professional examinations in June 1998. She replied that she had not taken the examinations but was planning to take the examinations in December 1998. The student in fact did take the examinations in June 1998 but did not wish to disclose the fact in case she failed the examinations and lost her reputation as having passed the examinations at the first attempt. The audit senior has formally complained about the conduct of the student. The student subsequently passed the June examinations. (7 marks) File Note 2 The student has consistently completed his assigned tasks below the budgeted hours allocated to those audit tasks. The audit senior has no tangible proof that the tasks have not been carried out but suspects that this may be the case or alternatively time spent on the audit work is not being recorded. The audit senior has reported his suspicions to the audit partner. (6 marks) Required: Discuss the implications of the above file notes and how each of the matters should be dealt with by the audit partner. Please note that the mark allocation is shown after File Notes 1 and 2 above. (Total: 20 marks)</p> <p>KAPLAN PUBLISHING</p> <p>5</p> <p>PAPER P7 (INT) : ADVANCED AUDIT AND ASSURANCE</p> <p>POLITICAL COMMENTATORSPolitical commentators have pointed out in recent years instances of where the auditor may appear not to be independent. An example of this lack of independence could be deemed to be the situation where the accounting firm provides audit services and other services such as consultancy advice to a client. In these circumstances objectivity may be threatened by undue dependence on a client. However, an issue which may well gain in prominence is that of the hiring by audit clients of personnel who were formerly employed by their independent auditors. Where an audit partner or other senior audit staff member is employed by a client on leaving the audit firm, there is an element of risk that the objectivity of future audits may be impaired. There may be a public perception that the auditor of a company cannot be independent, where former employees of the audit firm are employed in senior positions. Required: (a) (b) (c) Discuss the advantages to a client of their auditor moving to undertake employment as a senior executive in their company. (6 marks) Discuss the ethical problems associated with a former audit partner becoming the financial director of the audit firms principal client. (6 marks) Describe the current ethical guidance designed to deal with the problems associated with the auditor accepting a senior position with the firms principal client, discussing any additional safeguards which could be introduced. (8 marks) (Total: 20 marks)</p> <p>6</p> <p>KAPLAN PUBLISHING</p> <p>LECTURER RESOURCE PACK QUESTIONS</p> <p>STYLUSStylus is a medium-sized engineering company with sales revenues of $12 million and a workforce of 150 employees. Frazer and Company have been the auditors of Stylus for four years. Stylus is one of a number of clients that have been referred to Frazer and Company by Coultard bank. The bank receives a commission from Frazer and Company of 10% of the first year's audit fees for these referrals. During the early stages of the final audit for the year ended 30 September 1999 the following issues arose: Taylor, a publicly listed company, is a major customer of Stylus. At 30th September 1999 the work-in-progress and trade receivables of Stylus contain $1.2 million and $800,000 respectively relating to contracts with Taylor. Frazer and company are also the auditors of Taylor and, acting in this capacity, they are aware that Taylor is in severe financial difficulties and will be unable to carry on trading much longer. As a consequence it is likely that Taylor will not be able to pay the amount it owes Stylus nor be able to accept the work that it has on order and currently in progress with them. The materiality of the above amounts is such that the losses that Stylus would sustain may put its going concern status in doubt. Until very recently Stylus had not paid the audit fee and expenses for the year ended 30th September 1998. An associated company to the practice, Frazer Consulting, provides most of the staff of the internal audit department at Stylus in a consultancy capacity. Again a considerable amount of fees for this work were unpaid. In view of the possibility that Stylus may itself soon be in financial difficulties, the partners of Frazer and Company had insisted that before any further work was taken all amounts due to the practice must be paid together with a payment on account for the current year. A similar action was taken by the directors of Frazer Consulting. Bankers drafts were obtained from the directors of Stylus and these were presented to the bank for special clearance. Due to its special knowledge, Frazer and Company have a number of clients in the property letting sector. The fee income from one particular client is a significant proportion of the local practice income. Frazer and Company is in exploratory merger talks with Bradley and Company, a similarsized audit firm. Unfortunately another of Frazer and Company's clients, Toddy's Property Management, recently went into receivership after speculative investments made by the directors, using clients' money, resulted in huge losses. The receiver of Toddys Property Management has appointed Bradley and Company to investigate the collapse, and in particular the role of the auditor, Frazer and Company. Required: (a) Describe the ethical issues and problems in relation to: (i) (ii) (b) the audit of Stylus; and the proposed merger of Frazer and Company with Bradley and Company (8 marks) (5 marks)</p> <p>As auditor of Stylus, describe the work you would perform and the action you would take in regard to the work-in-progress and accounts receivable of Stylus which relate to Taylor. (7 marks) (Total: 20 marks)</p> <p>KAPLAN PUBLISHING</p> <p>7</p> <p>PAPER P7 (INT) : ADVANCED AUDIT AND ASSURANCE</p> <p>BOLEYN &amp; CO(a) IFACs Code of Ethics for Professional Accountants is divided into three parts: Part A Applicable to All Professional Accountants Part B Applicable to Professional Accountants in Public Practice Part C Applicable to Employed Professional Accountants Required: Distinguish between Professional Accountants, Professional Accountants in Public Practice and Employed Professional Accountants. (3 marks) (b) As a newly-qualified Chartered Certified Accountant in Boleyn &amp; Co, you have been assigned to assist the ethics partner in developing ethical guidance for the firm. In particular, you have been asked to draft guidance on the following frequently asked questions (FAQs) that will be circulated to all staff through Boleyn &amp; Cos intranet: (i) (ii) (iii) Required: For EACH of the three FAQs, explain the threats to objectivity that may arise and the safeguards that should be available to manage them to an acceptable level. Note: The mark allocation is shown against each of the three questions. (Total: 15 marks) What Information Technology services can we offer to audit clients? (5 marks) Can we entertain our clients as a gesture of goodwill or is corporate hospitality ruled out? (3 marks) Can audit teams cross sell services to their clients? (4 marks)</p> <p>8</p> <p>KAPLAN PUBLISHING</p> <p>LECTURER RESOURCE PACK QUESTIONS</p> <p>PRACTICE MANAGEMENTTOWER ACCOUNTANTS AND PARTNERSYou have just joined the partnership of a small firm of Certified Accountants Tower Accountants and Partners, and have been asked to prepare a communication brief for distribution to all staff which will then be followed by a presentation with a question and answer session. The communication brief required is regarding quality control procedures and audit working papers. Together ISQC 1 and ISA 220 requires that quality control policies and procedures are to be implemented at the level of the audit firm, and on individual audits. The partners are concerned that the firms quality control procedures may not be satisfactory, as they have never been reviewed since they were first implemented five years ago. In addition, although staff are able to read the policies and procedures in the staff manual, there are currently no other ways in which the information is communicated to them. Required: (a) Prepare a communication brief for distribution to all staff which states: (i) (ii) (iii) (b) why quality control policies and procedures are necessary the areas that should be covered by quality control policies outline procedures that would be required to ensure that the policies are met. (10 marks) Answer the following queries that were asked at the question and answer session held with the firms staff. (i) (ii) (iii) What is the difference between a hot review and a cold review and why are both necessary? Why is it so important that all audit reasons and justifications are documented in the working papers when it should be obvious from test results what the key issues are? Why do audit working papers have to be standardised; surely this inhibits auditors exercising their skills and experience in the most effective way? (10 marks) (Total: 20 marks)</p> <p>KAPLAN PUBLISHING</p> <p>9</p> <p>PAPER P7 (INT) : ADVANCED AUDIT AND ASSURANCE</p> <p>LANCASTERYou are the Senior Audit Manager for a medium-sized firm of accountants which has just lost two clients which have gone into receivership and has now been invited to tender for the audit of a company called Lancaster. The audit fees have been initially estimated at $20k. Lancaster is a medium-sized manufacturing organisation which has existed for 45 years and has generally made consistent profits since then; however, in the last two years profits have fallen by approximately 10% in each year although the market sector in which Lancaster operates is expanding. They have also stated that they would like some consultancy support regarding business strategy and planning...</p>


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