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ACCA P7 ADVANCED AUDIT & ASSURANCE

Sample Note

For exams in June2015


© Lesco Group Limited, April 2015

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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


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


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


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.


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）


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.


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.


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


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)


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.


(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.


(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.


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.


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.’


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)


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.


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.


Conclusion:

So from the above analysis it would be better for us not to be as an auditor for

Medixcompany.


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)


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.


(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.


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.


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.


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’.


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)


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.


(b)


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)


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.


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.


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)


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.


(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.


(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.


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.


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)


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.


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.

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