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(c) Maxwell Co is audited by Lead & Co, a firm of Chartered Certified Accountants. Leo Sabat has enquired as towhether your firm would be prepared to conduct a joint audit in cooperation with Lead & Co, on the futurefinancial statements of Maxwell Co if t
题目
(c) Maxwell Co is audited by Lead & Co, a firm of Chartered Certified Accountants. Leo Sabat has enquired as to
whether your firm would be prepared to conduct a joint audit in cooperation with Lead & Co, on the future
financial statements of Maxwell Co if the acquisition goes ahead. Leo Sabat thinks that this would enable your
firm to improve group audit efficiency, without losing the cumulative experience that Lead & Co has built up while
acting as auditor to Maxwell Co.
Required:
Define ‘joint audit’, and assess the advantages and disadvantages of the audit of Maxwell Co being conducted
on a ‘joint basis’. (7 marks)
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第1题：
5 You are an audit manager in Fox & Steeple, a firm of Chartered Certified Accountants, responsible for allocating staff
to the following three audits of financial statements for the year ending 31 December 2006:
(a) Blythe Co is a new audit client. This private company is a local manufacturer and distributor of sportswear. The
company’s finance director, Peter, sees little value in the audit and put it out to tender last year as a cost-cutting
exercise. In accordance with the requirements of the invitation to tender your firm indicated that there would not
be an interim audit.
(b) Huggins Co, a long-standing client, operates a national supermarket chain. Your firm provided Huggins Co with
corporate financial advice on obtaining a listing on a recognised stock exchange in 2005. Senior management
expects a thorough examination of the company’s computerised systems, and are also seeking assurance that
the annual report will not attract adverse criticism.
(c) Gray Co has been an audit client since 1999 after your firm advised management on a successful buyout. Gray
provides communication services and software solutions. Your firm provides Gray with technical advice on
financial reporting and tax services. Most recently you have been asked to conduct due diligence reviews on
potential acquisitions.
Required:
For these assignments, compare and contrast:
(i) the threats to independence;
(ii) the other professional and practical matters that arise; and
(iii) the implications for allocating staff.
(15 marks)
正确答案：
5 FOX & STEEPLE – THREE AUDIT ASSIGNMENTS
(i) Threats to independence
Self-interest
Tutorial note: This threat arises when a firm or a member of the audit team could benefit from a financial interest in, or
other self-interest conflict with, an assurance client.
■ A self-interest threat could potentially arise in respect of any (or all) of these assignments as, regardless of any fee
restrictions (e.g. per IFAC’s ‘Code of Ethics for Professional Accountants’), the auditor is remunerated by clients for
services provided.
■ This threat is likely to be greater for Huggins Co (larger/listed) and Gray Co (requires other services) than for Blythe Co
(audit a statutory necessity).
■ The self-interest threat may be greatest for Huggins Co. As a company listed on a recognised stock exchange it may
give prestige and credibility to Fox & Steeple (though this may be reciprocated). Fox & Steeple could be pressurised into
taking evasive action to avoid the loss of a listed client (e.g. concurring with an inappropriate accounting treatment).
Self-review
Tutorial note: This arises when, for example, any product or judgment of a previous engagement needs to be re-evaluated
in reaching conclusions on the audit engagement.
■ This threat is also likely to be greater for Huggins and Gray where Fox & Steeple is providing other (non-audit) services.
■ A self-review threat may be created by Fox & Steeple providing Huggins with a ‘thorough examination’ of its computerised
systems if it involves an extension of the procedures required to conduct an audit in accordance with International
Standards on Auditing (ISAs).
■ Appropriate safeguards must be put in place if Fox & Steeple assists Huggins in the performance of internal audit
activities. In particular, Fox & Steeple’s personnel must not act (or appear to act) in a capacity equivalent to a member
of Huggins’ management (e.g. reporting, in a management role, to those charged with governance).
■ Fox & Steeple may provide Gray with accounting and bookkeeping services, as Gray is not a listed entity, provided that
any self-review threat created is reduced to an acceptable level. In particular, in giving technical advice on financial
reporting, Fox & Steeple must take care not to make managerial decisions such as determining or changing journal
entries without obtaining Gray’s approval.
■ Taxation services comprise a broad range of services, including compliance, planning, provision of formal taxation
opinions and assistance in the resolution of tax disputes. Such assignments are generally not seen to create threats to
independence.
Tutorial note: It is assumed that the provision of tax services is permitted in the jurisdiction (i.e. that Fox and Steeple
are not providing such services if prohibited).
■ The due diligence reviews for Gray may create a self-review threat (e.g. on the fair valuation of net assets acquired).
However, safeguards may be available to reduce these threats to an acceptable level.
■ If staff involved in providing other services are also assigned to the audit, their work should be reviewed by more senior
staff not involved in the provision of the other services (to the extent that the other service is relevant to the audit).
■ The reporting lines of any staff involved in the audit of Huggins and the provision of other services for Huggins should
be different. (Similarly for Gray.)
Familiarity
Tutorial note: This arises when, by virtue of a close relationship with an audit client (or its management or employees) an
audit firm (or a member of the audit team) becomes too sympathetic to the client’s interests.
■ Long association of a senior member of an audit team with an audit client may create a familiarity threat. This threat
is likely to be greatest for Huggins, a long-standing client. It may also be significant for Gray as Fox & Steeple have had
dealings with this client for seven years now.
■ As Blythe is a new audit client this particular threat does not appear to be relevant.
■ Senior personnel should be rotated off the Huggins and Gray audit teams. If this is not possible (for either client), an
additional professional accountant who was not a member of the audit team should be required to independently review
the work done by the senior personnel.
■ The familiarity threat of using the same lead engagement partner on an audit over a prolonged period is particularly
relevant to Huggins, which is now a listed entity. IFAC’s ‘Code of Ethics for Professional Accountants’ requires that the
lead engagement partner should be rotated after a pre-defined period, normally no more than seven years. Although it
might be time for the lead engagement partner of Huggins to be changed, the current lead engagement partner may
continue to serve for the 2006 audit.
Tutorial note: Two additional years are permitted when an existing client becomes listed, since it may not be in the
client’s best interests to have an immediate rotation of engagement partner.
Intimidation
Tutorial note: This arises when a member of the audit team may be deterred from acting objectively and exercising
professional skepticism by threat (actual or perceived), from the audit client.
■ This threat is most likely to come from Blythe as auditors are threatened with a tendering process to keep fees down.
■ Peter may have already applied pressure to reduce inappropriately the extent of audit work performed in order to reduce
fees, by stipulating that there should not be an interim audit.
■ The audit senior allocated to Blythe will need to be experienced in standing up to client management personnel such as
Peter.
Tutorial note: ‘Correct’ classification under ‘ethical’, ‘other professional’, ‘practical’ or ‘staff implications’ is not as important
as identifying the matters.
(ii) Other professional and practical matters
Tutorial note: ‘Other professional’ includes quality control.
■ The experience of staff allocated to each assignment should be commensurate with the assessment of associated risk.
For example, there may be a risk that insufficient audit evidence is obtained within the budget for the audit of Blythe.
Huggins, as a listed client, carries a high reputational risk.
■ Sufficient appropriate staff should be allocated to each audit to ensure adequate quality control (in particular in the
direction, supervision, review of each assignment). It may be appropriate for a second partner to be assigned to carry
out a ‘hot review’ (before the auditor’s report is signed) of:
– Blythe, because it is the first audit of a new client; and
– Huggins, as it is listed.
■ Existing clients (Huggins and Gray) may already have some expectation regarding who should be assigned to their
audits. There is no reason why there should not be some continuity of staff providing appropriate safeguards are put in
place (e.g. to overcome any familiarity threat).
■ Senior staff assigned to Blythe should be alerted to the need to exercise a high degree of professional skepticism (in the
light of Peter’s attitude towards the audit).
■ New staff assigned to Huggins and Gray would perhaps be less likely to assume unquestioned honesty than staff
previously involved with these audits.
Logistics (practical)
■ All three assignments have the same financial year end, therefore there will be an element of ‘competition’ for the staff
to be assigned to the year-end visits and final audit assignments. As a listed company, Huggins is likely to have the
tightest reporting deadline and so have a ‘priority’ for staff.
■ Blythe is a local and private company. Staff involved in the year-end visit (e.g. to attend the physical inventory count)
should also be involved in the final audit. As this is a new client, staff assigned to this audit should get involved at every
stage to increase their knowledge and understanding of the business.
■ Huggins is a national operation and may require numerous staff to attend year-end procedures. It would not be expected
that all staff assigned to year-end visits should all be involved in the final audit.
Time/fee/staff budgets
■ Time budgets will need to be prepared for each assignment to determine manpower requirements (and to schedule audit
work).
(iii) Implications for allocating staff
■ Fox & Steeple should allocate staff so that those providing other services to Huggins and Gray (that may create a selfreview
threat) do not participate in the audit engagement.
Competence and due care (Qualifications/Specialisation)
■ All audit assignments will require competent staff.
■ Huggins will require staff with an in-depth knowledge of their computerised system.
■ Gray will require senior audit staff to be experienced in financial reporting matters specific to communications and
software solutions (e.g. in revenue recognition issues and accounting for internally-generated intangible assets).
■ Specialists providing tax services and undertaking the due diligence reviews for Gray may not be required to have any
involvement in the audit assignment. -
第2题：
(ii) Briefly explain the implications of Parr & Co’s audit opinion for your audit opinion on the consolidated
financial statements of Cleeves Co for the year ended 30 September 2006. (3 marks)
正确答案：
(ii) Implications for audit opinion on consolidated financial statements of Cleeves
■ If the potential adjustments to non-current asset carrying amounts and loss are not material to the consolidated
financial statements there will be no implication. However, as Howard is material to Cleeves and the modification
appears to be ‘so material’ (giving rise to adverse opinion) this seems unlikely.
Tutorial note: The question clearly states that Howard is material to Cleeves, thus there is no call for speculation
on this.
■ As Howard is wholly-owned the management of Cleeves must be able to request that Howard’s financial statements
are adjusted to reflect the impairment of the assets. The auditor’s report on Cleeves will then be unmodified
(assuming that any impairment of the investment in Howard is properly accounted for in the separate financial
statements of Cleeves).
■ If the impairment losses are not recognised in Howard’s financial statements they can nevertheless be adjusted on
consolidation of Cleeves and its subsidiaries (by writing down assets to recoverable amounts). The audit opinion
on Cleeves should then be unmodified in this respect.
■ If there is no adjustment of Howard’s asset values (either in Howard’s financial statements or on consolidation) it
is most likely that the audit opinion on Cleeves’s consolidated financial statements would be ‘except for’. (It should
not be adverse as it is doubtful whether even the opinion on Howard’s financial statements should be adverse.)
Tutorial note: There is currently no requirement in ISA 600 to disclose that components have been audited by another
auditor unless the principal auditor is permitted to base their opinion solely upon the report of another auditor. -
第3题：
(b) Explain what effect the acquisition of Di Rollo Co will have on the planning of your audit of the consolidated
financial statements of Murray Co for the year ending 31 March 2008. (10 marks)
正确答案：
(b) Effect of acquisition on planning the audit of Murray’s consolidated financial statements for the year ending 31 March
2008
Group structure
The new group structure must be ascertained to identify all entities that should be consolidated into the Murray group’s
financial statements for the year ending 31 March 2008.
Materiality assessment
Preliminary materiality for the group will be much higher, in monetary terms, than in the prior year. For example, if a % of
total assets is a determinant of the preliminary materiality, it may be increased by 10% (as the fair value of assets acquired,
including goodwill, is $2,373,000 compared with $21·5m in Murray’s consolidated financial statements for the year ended
31 March 2007).
The materiality of each subsidiary should be re-assessed, in terms of the enlarged group as at the planning stage. For
example, any subsidiary that was just material for the year ended 31 March 2007 may no longer be material to the group.
This assessment will identify, for example:
– those entities requiring an audit visit; and
– those entities for which substantive analytical procedures may suffice.
As Di Rollo’s assets are material to the group Ross should plan to inspect the South American operations. The visit may
include a meeting with Di Rollo’s previous auditors to discuss any problems that might affect the balances at acquisition and
a review of the prior year audit working papers, with their permission.
Di Rollo was acquired two months into the financial year therefore its post-acquisition results should be expected to be
material to the consolidated income statement.
Goodwill acquired
The assets and liabilities of Di Rollo at 31 March 2008 will be combined on a line-by-line basis into the consolidated financial
statements of Murray and goodwill arising on acquisition recognised.
Audit work on the fair value of the Di Rollo brand name at acquisition, $600,000, may include a review of a brand valuation
specialist’s working papers and an assessment of the reasonableness of assumptions made.
Significant items of plant are likely to have been independently valued prior to the acquisition. It may be appropriate to plan
to place reliance on the work of expert valuers. The fair value adjustment on plant and equipment is very high (441% of
carrying amount at the date of acquisition). This may suggest that Di Rollo’s depreciation policies are over-prudent (e.g. if
accelerated depreciation allowed for tax purposes is accounted for under local GAAP).
As the amount of goodwill is very material (approximately 50% of the cash consideration) it may be overstated if Murray has
failed to recognise any assets acquired in the purchase of Di Rollo in accordance with IFRS 3 Business Combinations. For
example, Murray may have acquired intangible assets such as customer lists or franchises that should be recognised
separately from goodwill and amortised (rather than tested for impairment).
Subsequent impairment
The audit plan should draw attention to the need to consider whether the Di Rollo brand name and goodwill arising have
suffered impairment as a result of the allegations against Di Rollo’s former chief executive.
Liabilities
Proceedings in the legal claim made by Di Rollo’s former chief executive will need to be reviewed. If the case is not resolved
at 31 March 2008, a contingent liability may require disclosure in the consolidated financial statements, depending on the
materiality of amounts involved. Legal opinion on the likelihood of Di Rollo successfully defending the claim may be sought.
Provision should be made for any actual liabilities, such as legal fees.
Group (related party) transactions and balances
A list of all the companies in the group (including any associates) should be included in group audit instructions to ensure
that intra-group transactions and balances (and any unrealised profits and losses on transactions with associates) are
identified for elimination on consolidation. Any transfer pricing policies (e.g. for clothes manufactured by Di Rollo for Murray
and sales of Di Rollo’s accessories to Murray’s retail stores) must be ascertained and any provisions for unrealised profit
eliminated on consolidation.
It should be confirmed at the planning stage that inter-company transactions are identified as such in the accounting systems
of all companies and that inter-company balances are regularly reconciled. (Problems are likely to arise if new inter-company
balances are not identified/reconciled. In particular, exchange differences are to be expected.)
Other auditors
If Ross plans to use the work of other auditors in South America (rather than send its own staff to undertake the audit of Di
Rollo), group instructions will need to be sent containing:
– proforma statements;
– a list of group and associated companies;
– a statement of group accounting policies (see below);
– the timetable for the preparation of the group accounts (see below);
– a request for copies of management letters;
– an audit work summary questionnaire or checklist;
– contact details (of senior members of Ross’s audit team).
Accounting policies
Di Rollo may have material accounting policies which do not comply with the rest of the Murray group. As auditor to Di Rollo,
Ross will be able to recalculate the effect of any non-compliance with a group accounting policy (that Murray’s management
would be adjusting on consolidation).
Timetable
The timetable for the preparation of Murray’s consolidated financial statements should be agreed with management as soon
as possible. Key dates should be planned for:
– agreement of inter-company balances and transactions;
– submission of proforma statements;
– completion of the consolidation package;
– tax review of group accounts;
– completion of audit fieldwork by other auditors;
– subsequent events review;
– final clearance on accounts of subsidiaries;
– Ross’s final clearance of consolidated financial statements.
Tutorial note: The order of dates is illustrative rather than prescriptive. -
第4题：
3 You are an audit manager in Webb & Co, a firm of Chartered Certified Accountants. Your audit client, Mulligan Co,
designs and manufactures wooden tables and chairs. The business has expanded rapidly in the last two years, since
the arrival of Patrick Tiler, an experienced sales and marketing manager.
The directors want to secure a loan of $3 million in order to expand operations, following the design of a completely
new range of wooden garden furniture. The directors have approached LCT Bank for the loan. The bank’s lending
criteria stipulate the following:
‘Loan applications must be accompanied by a detailed business plan, including an analysis of how the finance will
be used. LCT Bank need to see that the finance requested is adequate for the proposed business purpose. The
business plan must be supported by an assurance opinion on the adequacy of the requested finance.’
The $3 million finance raised will be used as follows:
$000
Construction of new factory 1,250
Purchase of new machinery 1,000
Initial supply of timber raw material 250
Advertising and marketing of new product 500
Your firm has agreed to review the business plan and to provide an assurance opinion on the completeness of the
finance request. A meeting will be held tomorrow to discuss this assignment.
Required:
(a) Identify and explain the matters relating to the assurance assignment that should be discussed at the meeting
with Mulligan Co. (8 marks)
正确答案：
3 MULLIGAN CO
(a) Matters to be discussed would include the following:
The exact content of the business plan which could include:
– Description of past business performance and key products
– Discussion of the new product
– Evidence of the marketability of the new product
– Cash flow projections
– Capital expenditure forecasts
– Key business assumptions.
The form. of the assurance report that is required – in an assurance engagement the nature and wording of the expected
opinion should be discussed. Webb & Co should clarify that an opinion of ‘negative assurance’ will be required, and whether
this will meet the bank’s lending criteria.
The intended recipient of the report – Webb & Co need to clarify the name and address of the recipient at LCT Bank. For the
limitation of professional liability, it should be clarified that LCT Bank will be the only recipient, and that the assurance opinion
is being used only as part of the bank’s overall lending decision.
Limiting liability – Webb & Co may want to receive in writing a statement that the report is for information purposes only, and
does not give rise to any responsibility, liability, duty or obligation from the firm to the lender.
Deadlines – it should be discussed when the bank need the report. This in turn will be influenced by when Mulligan Co needs
the requested $3 million finance. The bank may need a considerable period of time to assess the request, review the report,
and ensure that their lending criteria have been fully met prior to advancing the finance.
Availability of evidence – Mulligan Co should be made aware that in order to express an opinion on the finance request, they
must be prepared to provide all the necessary paperwork to assist the assurance provider. Evidence is likely to include
discussions with key management, and written representations of discussions may be required.
Professional regulation – Webb & Co should discuss the kind of procedures that will be undertaken, and confirm that they
will be complying with relevant professional guidance, for example:
– ISAE 3000 Assurance Engagements other than Audits or Reviews of Historical Financial Information
– ISAE 3400 The Examination of Prospective Financial Information
Engagement administration – any points not yet discussed in detail when deciding to take the assurance engagement should
be finalised at the meeting. These points could include the following:
– Fees – the total fee and billing arrangements must be agreed before any work is carried out
– Personnel – Webb & Co should identify the key personnel who will be involved in the assignment
– Complaints procedures – should be briefly outlined (the complaints procedures in an assurance engagement may differ
from an audit assignment)
– Engagement letter – if not already signed by both Webb & Co and Mulligan Co, the engagement letter should be
discussed and signed at the meeting before any assignment work is conducted.
Tutorial note: the scenario states that Webb & Co have already decided to take the assurance assignment for their existing
client, therefore the answer to this requirement should not focus on client or engagement acceptance procedures. -
第5题：
5 You are the audit manager for three clients of Bertie & Co, a firm of Chartered Certified Accountants. The financial
year end for each client is 30 September 2007.
You are reviewing the audit senior’s proposed audit reports for two clients, Alpha Co and Deema Co.
Alpha Co, a listed company, permanently closed several factories in May 2007, with all costs of closure finalised and
paid in August 2007. The factories all produced the same item, which contributed 10% of Alpha Co’s total revenue
for the year ended 30 September 2007 (2006 – 23%). The closure has been discussed accurately and fully in the
chairman’s statement and Directors’ Report. However, the closure is not mentioned in the notes to the financial
statements, nor separately disclosed on the financial statements.
The audit senior has proposed an unmodified audit opinion for Alpha Co as the matter has been fully addressed in
the chairman’s statement and Directors’ Report.
In October 2007 a legal claim was filed against Deema Co, a retailer of toys. The claim is from a customer who slipped
on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability
in the notes to the financial statements, and audit working papers provide sufficient evidence that no provision is
necessary as Deema Co’s lawyers have stated in writing that the likelihood of the claim succeeding is only possible.
The amount of the claim is fixed and is adequately covered by cash resources.
The audit senior proposes that the audit opinion for Deema Co should not be qualified, but that an emphasis of matter
paragraph should be included after the audit opinion to highlight the situation.
Hugh Co was incorporated in October 2006, using a bank loan for finance. Revenue for the first year of trading is
$750,000, and there are hopes of rapid growth in the next few years. The business retails luxury hand made wooden
toys, currently in a single retail outlet. The two directors (who also own all of the shares in Hugh Co) are aware that
due to the small size of the company, the financial statements do not have to be subject to annual external audit, but
they are unsure whether there would be any benefit in a voluntary audit of the first year financial statements. The
directors are also aware that a review of the financial statements could be performed as an alternative to a full audit.
Hugh Co currently employs a part-time, part-qualified accountant, Monty Parkes, who has prepared a year end
balance sheet and income statement, and who produces summary management accounts every three months.
Required:
(a) Evaluate whether the audit senior’s proposed audit report is appropriate, and where you disagree with the
proposed report, recommend the amendment necessary to the audit report of:
(i) Alpha Co; (6 marks)
正确答案：
5 BERTIE & CO
(a) (i) Alpha Co
The factory closures constitute a discontinued operation per IFRS 5 Non-Current Assets Held for Sale and Discontinued
Operations, due to the discontinuance of a separate major component of the business. It is a major component due to
the 10% contribution to revenue in the year to 30 September 2007 and 23% contribution in 2006. It is a separate
business component of the company due to the factories having made only one item, indicating a separate income
generating unit.
Under IFRS 5 there must be separate disclosure on the face of the income statement of the post tax results of the
discontinued operation, and of any profit or loss resulting from the closures. The revenue and costs of the discontinued
operation should be separately disclosed either on the face of the income statement or in the notes to the financial
statements. Cash flows relating to the discontinued operation should also be separately disclosed per IAS 7 Cash Flow
Statements.
In addition, as Alpha Co is a listed company, IFRS 8 Operating Segments requires separate segmental disclosure of
discontinued operations.
Failure to disclose the above information in the financial statements is a material breach of International Accounting
Standards. The audit opinion should therefore be qualified on the grounds of disagreement on disclosure (IFRS 5,
IAS 7 and IFRS 8). The matter is material, but not pervasive, and therefore an ‘except for’ opinion should be issued.
The opinion paragraph should clearly state the reason for the disagreement, and an indication of the financial
significance of the matter.
The audit opinion relates only to the financial statements which have been audited, and the contents of the other
information (chairman’s statement and Directors’ Report) are irrelevant when deciding if the financial statements show
a true and fair view, or are fairly presented.
Tutorial note: there is no indication in the question scenario that Alpha Co is in financial or operational difficulty
therefore no marks are awarded for irrelevant discussion of going concern issues and the resultant impact on the audit
opinion. -
第6题：
4 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)
正确答案：
4 Becker & Co
(a) Joint business arrangement
The business opportunity in respect of Murray Co could be lucrative if the market research is to be believed.
However, IFAC’s Code of Ethics for Professional Accountants states that a mutual business arrangement is likely to give rise
to self-interest and intimidation threats to independence and objectivity. The audit firm must be and be seen to be independent
of the audit client, which clearly cannot be the case if the audit firm and the client are seen to be working together for a
mutual financial gain.
In the scenario, two options are available. Firstly, Becker & Co could provide the audit client with finance to complete the
development and take the product to market. There is a general prohibition on audit firms providing finance to their audit
clients. This would create a clear financial self-interest threat as the audit firm would be receiving a return on investment from
their client. The Code states that if a firm makes a loan (or guarantees a loan) to a client, the self-interest threat created would
be so significant that no safeguard could reduce the threat to an acceptable level.
The provision of finance using convertible debentures raises a further ethical problem, because if the debentures are ultimately
converted to equity, the audit firm would then hold equity shares in their audit client. This is a severe financial self-interest,
which safeguards are unlikely to be able to reduce to an acceptable level.
The finance should not be advanced to Murray Co while the company remains an audit client of Becker & Co.
The second option is for a joint venture company to be established. This would be perceived as a significant mutual business
interest as Becker & Co and Murray Co would be investing together, sharing control and sharing a return on investment in
the form. of dividends. IFAC’s Code of Ethics states that unless the relationship between the two parties is clearly insignificant,
the financial interest is immaterial, and the audit firm is unable to exercise significant influence, then no safeguards could
reduce the threat to an acceptable level. In this case Becker & Co may not enter into the joint venture arrangement while
Murray Co is still an audit client.
The audit practice may consider that investing in the new electronic product is a commercial strategy that it wishes to pursue,
either through loan finance or using a joint venture arrangement. In this case the firm should resign as auditor with immediate
effect in order to eliminate any ethical problem with the business arrangement. The partners should carefully consider if the
potential return on investment will more than compensate for the lost audit fee from Murray Co.
The partners should also reflect on whether they want to diversify to such an extent – this investment is unlikely to be in an
area where any of the audit partners have much knowledge or expertise. A thorough commercial evaluation and business risk
analysis must be performed on the new product to ensure that it is a sound business decision for the firm to invest.
The audit partners should also consider how much time they would need to spend on this business development, if they
decided to resign as auditors and to go ahead with the investment. Such a new and important project could mean that they
take their focus off the key business i.e. the audit practice. They should consider if it would be better to spend their time trying
to compete effectively with the two new firms of accountants, trying to retain key clients, and to attract new accounting and
audit clients rather than diversify into something completely different. -
第7题：
(c) 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)
正确答案：
(c) Briefing notes
To: Audit partner
From: Audit manager
Subject: Issues to consider regarding appointment as auditor of Medix Co
Introduction
Medix Co has recently invited our firm to become appointed as auditor. These briefing notes summarise the main issues we
should consider in deciding whether to take the appointment a stage further. My comments are based on a discussion held
with Ricardo Feller, finance director of Medix Co, a discussion with the current audit partner, and information provided in the
local newspaper.
Legal actions and investigations
There are several indications that Medix Co has a history of non compliance with law and regulations. The former finance
director is claiming unfair dismissal, and in the past the local authority has successfully taken legal action against the
company and has a current case pending. In addition, there have been two tax investigations in recent years hinting at noncompliance
with relevant tax regulations.
There are two problems for us in taking on a client with a propensity for legal actions and investigations. Firstly, the reputation
of the company must be considered. If we become associated with the company through being appointed as auditor, we could
be ‘tarred with the same brush’ and our own reputation also tarnished.
Secondly, we could become quickly exposed to an advocacy independence threat, which clearly should be avoided. Our
ethical status should not be compromised for the sake of gaining a new audit client. Mick Evans only ‘believes’ that the tax
matter has been resolved by the directors, and we should avoid taking on a new client which is involved in an on-going
investigation.
Public interest
The problems noted above are compounded by the bad publicity which the company is currently receiving. The local press
contained a recent article discussing Medix Co’s past and current breach of planning regulations. Given the current level of
public interest in environmental issues, and emphasis on corporate responsibility, it would seem that Medix Co has a poor
public perception, which we would not want to be associated with.
Potential liability to lender
The company is currently negotiating a significant bank loan, and the lender will be using the audited financial statements to
make a decision on whether to advance a loan, and the terms of any finance that might be advanced to Medix Co. This means
that our audit opinion for the forthcoming year end will be scrutinised by the lender, and our firm is exposed to a relatively
high risk of liability to a third party. Given that this will be our first audit, and the limited time we have available (discussed
below) our firm may feel that the risk of this audit engagement is too high. Should the appointment be accepted, disclaimers
should be put in place to ensure that we could not be sued in the event of the bank suffering a financial loss as a result of
their lending decision.
Timeframe. and resources
It is currently the last month of the financial year. If we are appointed as auditor we need to work quickly to develop a thorough
understanding of the business, and to begin to plan the assignment. We need to consider whether our firm has sufficient
resources to put together an audit team so quickly without detracting from other client work currently being conducted.
To make this matter worse, Mick Evans states that Medix Co likes ‘a quick audit’, and we need to consider how to manage
this expectation, as first year audit procedures such as systems documentation, and developing business understanding tend
to take a long time. We must be careful that the client does not pressure us into a ‘quick audit’, which could compromise
quality.
Medix Co operates in a reasonably specialist and highly regulated industry, so our firm should take care to ensure we have
expertise in this industry.
Potentially aggressive management style
There are several indicators that the management may take a confrontational approach, such as the unfair dismissal claim
brought against the company by the ex-finance director. In addition, the auditors prior to Mick Evans resigned following a
disagreement with management. This history shows that we may find it difficult to establish a good working relationship with
the management. As the company is owner managed the presence of a dominant managing director exacerbates this problem.
Management bias
There is incentive for the financial statements to be manipulated in order to secure bank finance. There is considerable risk
of material misstatement which our firm may consider to be unacceptably high.
Internal systems and controls
The current auditors have found systems and controls to be poor, and management has not acted upon recommendations
made by the auditors. Of course this does not mean that we should not take on the assignment – many companies have
weak controls. However, if we did take on the appointment, we would not be able to rely on controls or use a controls based
approach for the audit. We would need to take a substantive approach to the audit. One practical issue here is availability of
staff to conduct the audit testing, as substantive procedures tend to be more time consuming than if we could have taken a
systems based approach.
Opening balances
In all new audit assignments, work must be conducted to verify the opening balances. Given the possible fraud and poor
controls described above, we would need to perform. detailed testing on the opening balances as there is a high risk of fraud
and/or error in previous accounting periods. We may also wish to consider the competence of the previous auditors, who
appeared to disregard potential fraud indicator (two cash books) and had only one audit client.
Fees
Mick Evans has made it clear that Medix Co’s management likes to keep a tight control on costs, and it may put pressure on
us to charge a low audit fee. We need to bear in mind the risks associated with this engagement, as discussed above, and
only take on this high risk audit if the audit fee is high enough to compensate.
We should also consider the cash flow problems being experienced by the company. As a business we need to ensure that
we only take on clients with a good credit rating, and it seems that Medix Co, operating with an overdraft, may not be able
to pay our invoices.
Indication of fraud or money laundering
Surely the most serious issue to consider is that Jon Tate, the managing director, has kept two cash books. We need further
detail on this, but it clearly could indicate a fraud being perpetrated at the highest level of management. The fact that he has
maintained two cash books could indicate money laundering activites taking place, especially when considered in the context
of an owner-managed business with overseas operations. If this were the ONLY problem discovered it could be deemed
serious enough to bring to an end our appointment process. It would be reckless for our firm to take on a client where the
managing director is a fraudster.
Conclusion
Further information is needed in many areas before a final decision is made. However, from the information we have gathered
so far, it appears that Medix Co would represent a high risk client, and our firm must therefore be very careful to assess each
problem noted above before deciding whether to proceed with the appointment. -
第8题：
You are an audit manager responsible for providing hot reviews on selected audit clients within your firm of Chartered
Certified Accountants. You are currently reviewing the audit working papers for Pulp Co, a long standing audit client,
for the year ended 31 January 2008. The draft statement of financial position (balance sheet) of Pulp Co shows total
assets of $12 million (2007 – $11·5 million).The audit senior has made the following comment in a summary of
issues for your review:
‘Pulp Co’s statement of financial position (balance sheet) shows a receivable classified as a current asset with a value
of $25,000. The only audit evidence we have requested and obtained is a management representation stating the
following:
(1) that the amount is owed to Pulp Co from Jarvis Co,
(2) that Jarvis Co is controlled by Pulp Co’s chairman, Peter Sheffield, and
(3) that the balance is likely to be received six months after Pulp Co’s year end.
The receivable was also outstanding at the last year end when an identical management representation was provided,
and our working papers noted that because the balance was immaterial no further work was considered necessary.
No disclosure has been made in the financial statements regarding the balance. Jarvis Co is not audited by our firm
and we have verified that Pulp Co does not own any shares in Jarvis Co.’
Required:
(b) In relation to the receivable recognised on the statement of financial position (balance sheet) of Pulp Co as
at 31 January 2008:
(i) Comment on the matters you should consider. (5 marks)
正确答案：
(b) (i) Matters to consider
Materiality
The receivable represents only 0·2% (25,000/12 million x 100) of total assets so is immaterial in monetary terms.
However, the details of the transaction could make it material by nature.
The amount is outstanding from a company under the control of Pulp Co’s chairman. Readers of the financial statements
would be interested to know the details of this transaction, which currently is not disclosed. Elements of the transaction
could be subject to bias, specifically the repayment terms, which appear to be beyond normal commercial credit terms.
Paul Sheffield may have used his influence over the two companies to ‘engineer’ the transaction. Disclosure is necessary
due to the nature of the transaction, the monetary value is irrelevant.
A further matter to consider is whether this is a one-off transaction, or indicative of further transactions between the two
companies.
Relevant accounting standard
The definitions in IAS 24 must be carefully considered to establish whether this actually constitutes a related party
transaction. The standard specifically states that two entities are not necessarily related parties just because they have
a director or other member of key management in common. The audit senior states that Jarvis Co is controlled by Peter
Sheffield, who is also the chairman of Pulp Co. It seems that Peter Sheffield is in a position of control/significant influence
over the two companies (though this would have to be clarified through further audit procedures), and thus the two
companies are likely to be perceived as related.
IAS 24 requires full disclosure of the following in respect of related party transactions:
– the nature of the related party relationship,
– the amount of the transaction,
– the amount of any balances outstanding including terms and conditions, details of security offered, and the nature
of consideration to be provided in settlement,
– any allowances for receivables and associated expense.
There is currently a breach of IAS 24 as no disclosure has been made in the notes to the financial statements. If not
amended, the audit opinion on the financial statements should be qualified with an ‘except for’ disagreement. In
addition, if practicable, the auditor’s report should include the information that would have been included in the financial
statements had the requirements of IAS 24 been adhered to.
Valuation and classification of the receivable
A receivable should only be recognised if it will give rise to future economic benefit, i.e. a future cash inflow. It appears
that the receivable is long outstanding – if the amount is unlikely to be recovered then it should be written off as a bad
debt and the associated expense recognised. It is possible that assets and profits are overstated.
Although a representation has been received indicating that the amount will be paid to Pulp Co, the auditor should be
sceptical of this claim given that the same representation was given last year, and the amount was not subsequently
recovered. The $25,000 could be recoverable in the long term, in which case the receivable should be reclassified as
a non-current asset. The amount advanced to Jarvis Co could effectively be an investment rather than a short term
receivable. Correct classification on the statement of financial position (balance sheet) is crucial for the financial
statements to properly show the liquidity position of the company at the year end.
Tutorial note: Digressions into management imposing a limitation in scope by withholding evidence are irrelevant in this
case, as the scenario states that the only evidence that the auditors have asked for is a management representation.
There is no indication in the scenario that the auditors have asked for, and been refused any evidence. -
第9题：
The finance director of Blod Co, Uma Thorton, has requested that your firm type the financial statements in the form
to be presented to shareholders at the forthcoming company general meeting. Uma has also commented that the
previous auditors did not use a liability disclaimer in their audit report, and would like more information about the use
of liability disclaimer paragraphs.
Required:
(b) Discuss the ethical issues raised by the request for your firm to type the financial statements of Blod Co.
(3 marks)
正确答案：
(b) It is not uncommon for audit firms to word process and typeset the financial statements of their clients, especially where the
client is a relatively small entity, which may lack the resources and skills to perform. this task. It is not prohibited by ethical
standards.
However, there could be a perceived threat to independence, with risk magnified in the case of Blod Co, which is a listed
company. The auditors could be perceived to be involved with the preparation of the financial statements of a listed client
company, which is prohibited by ethical standards. IFAC’s Code of Ethics for Professional Accountants states that for a listed
client, the audit firm should not be involved with the preparation of financial statements, which would create a self-review
threat so severe that safeguards could not reduce the threat to an acceptable level. Although the typing of financial statements
itself is not prohibited by ethical guidance, the risk is that providing such a service could be perceived to be an element of
the preparation of the financial statements.
It is possible that during the process of typing the financial statements, decisions and judgments would be made. This could
be perceived as making management decisions in relation to the financial statements, a clear breach of independence.
Therefore to eliminate any risk exposure, the prudent decision would be not to type the financial statements, ensuring that
Blod Co appreciates the ethical problems that this would cause.
Tutorial note: This is an area not specifically covered by ethical guides, where different audit firms may have different views
on whether it is acceptable to provide a typing service for the financial statements of their clients. Credit will be awarded for
sensible discussion of the issues raised bearing in mind other options for the audit firm, for example, it could be argued that
it is acceptable to offer the typing service provided that it is performed by people independent of the audit team, and that
the matter has been discussed with the audit committee/those charged with governance -
第10题：
Following a competitive tender, your audit firm Cal & Co has just gained a new audit client Tirrol Co. You are the manager in charge of planning the audit work. Tirrol Co’s year end is 30 June 2009 with a scheduled date to complete the audit of 15 August 2009. The date now is 3 June 2009.
Tirrol Co provides repair services to motor vehicles from 25 different locations. All inventory, sales and purchasing systems are computerised, with each location maintaining its own computer system. The software in each location is
the same because the programs were written specifically for Tirrol Co by a reputable software house. Data from each location is amalgamated on a monthly basis at Tirrol Co’s head office to produce management and financial accounts.
You are currently planning your audit approach for Tirrol Co. One option being considered is to re-write Cal & Co’s audit software to interrogate the computerised inventory systems in each location of Tirrol Co (except for head office)
as part of inventory valuation testing. However, you have also been informed that any computer testing will have to be on a live basis and you are aware that July is a major holiday period for your audit firm.
Required:
(a) (i) Explain the benefits of using audit software in the audit of Tirrol Co; (4 marks)
(ii) Explain the problems that may be encountered in the audit of Tirrol Co and for each problem, explain
how that problem could be overcome. (10 marks)
(b) Following a discussion with the management at Tirrol Co you now understand that the internal audit department are prepared to assist with the statutory audit. Specifically, the chief internal auditor is prepared to provide you with documentation on the computerised inventory systems at Tirrol Co. The documentation provides details of the software and shows diagrammatically how transactions are processed through the inventory system. This documentation can be used to significantly decrease the time needed to understand the computer systems and enable audit software to be written for this year’s audit.
Required:
Explain how you will evaluate the computer systems documentation produced by the internal audit
department in order to place reliance on it during your audit. (6 marks)
正确答案：
(a)(i)BenefitsofusingauditsoftwareStandardsystemsatclientThesamecomputerisedsystemsandprogramsasusedinall25branchesofTirrolCo.Thismeansthatthesameauditsoftwarecanbeusedineachlocationprovidingsignificanttimesavingscomparedtothesituationwhereclientsystemsaredifferentineachlocation.UseactualcomputerfilesnotcopiesorprintoutsUseofauditsoftwaremeansthattheTirrolCo’sactualinventoryfilescanbetestedratherthanhavingtorelyonprintoutsorscreenimages.Thelattercouldbeincorrect,byaccidentorbydeliberatemistake.Theauditfirmwillhavemoreconfidencethatthe‘real’fileshavebeentested.TestmoreitemsUseofsoftwarewillmeanthatmoreinventoryrecordscanbetested–itispossiblethatallproductlinescouldbetestedforobsolescenceratherthanasampleusingmanualtechniques.Theauditorwillthereforegainmoreevidenceandhavegreaterconfidencethatinventoryisvaluedcorrectly.CostTherelativecostofusingauditsoftwaredecreasesthemoreyearsthatsoftwareisused.Anycostoverrunsthisyearcouldbeoffsetagainsttheauditfeesinfutureyearswhentheactualexpensewillbeless.(ii)ProblemsontheauditofTirrolTimescale–sixweekreportingdeadline–auditplanningTheauditreportisduetobesignedsixweeksaftertheyearend.Thismeansthattherewillbeconsiderablepressureontheauditortocompleteauditworkwithoutcompromisingstandardsbyrushingprocedures.Thisproblemcanbeovercomebycarefulplanningoftheaudit,useofexperiencedstaffandensuringotherstaffsuchassecondpartnerreviewsarebookedwellinadvance.Timescale–sixweekreportingdeadline–softwareissuesTheauditreportisduetobesignedaboutsixweeksaftertheyearend.Thismeansthatthereislittletimetowriteandtestauditsoftware,letaloneusethesoftwareandevaluatetheresultsoftesting.Thisproblemcanbealleviatedbycarefulplanning.AccesstoTirrolCo’ssoftwareanddatafilesmustbeobtainedassoonaspossibleandworkcommencedontailoringCal&Co’ssoftwarefollowingthis.Specialistcomputerauditstaffshouldbebookedassoonaspossibletoperform.thiswork.FirstyearauditcostsTherelativecostsofanauditinthefirstyearataclienttendtobegreaterduetotheadditionalworkofascertainingclientsystems.ThismeansthatCal&Comayhavealimitedbudgettodocumentsystemsincludingcomputersystems.Thisproblemcanbealleviatedtosomeextentagainbygoodauditplanning.Themanagermustalsomonitortheauditprocesscarefully,ensuringthatanyadditionalworkcausedbytheclientnotprovidingaccesstosystemsinformationincludingcomputersystemsisidentifiedandaddedtothetotalbillingcostoftheaudit.StaffholidaysMostoftheauditworkwillbecarriedoutinJuly,whichisalsothemonthwhenmanyofCal&Costafftaketheirannualholiday.Thismeansthattherewillbeashortageofauditstaff,particularlyasauditworkforTirrolCoisbeingbookedwithlittlenotice.Theproblemcanbealleviatedbybookingstaffassoonaspossibleandthenidentifyinganyshortages.Wherenecessary,staffmaybeborrowedfromotherofficesorevendifferentcountriesonasecondmentbasiswhereshortagesareacute.Non-standardsystemsTirrolCo’scomputersoftwareisnon-standard,havingbeenwrittenspecificallyfortheorganisation.Thismeansthatmoretimewillbenecessarytounderstandthesystemthanifstandardsystemswereused.Thisproblemcanbealleviatedeitherbyobtainingdocumentationfromtheclientorbyapproachingthesoftwarehouse(withTirrolCo’spermission)toseeiftheycanassistwithprovisionofinformationondatastructuresfortheinventorysystems.ProvisionofthisinformationwilldecreasethetimetakentotailorauditsoftwareforuseinTirrolCo.IssuesoflivetestingCal&Cohasbeeninformedthatinventorysystemsmustbetestedonalivebasis.Thisincreasestheriskofaccidentalamendmentordeletionofclientdatasystemscomparedtotestingcopyfiles.Tolimitthepossibilityofdamagetoclientsystems,Cal&CocanconsiderperforminginventorytestingondayswhenTirrolCoisnotoperatinge.g.weekends.Attheworst,backupsofdatafilestakenfromthepreviousdaycanbere-installedwhenCal&Co’stestingiscomplete.ComputersystemsTheclienthas25locations,witheachlocationmaintainingitsowncomputersystem.Itispossiblethatcomputersystemsarenotcommonacrosstheclientduetoamendmentsmadeatthebranchlevel.Thisproblemcanbeovercometosomeextentbyaskingstaffateachbranchwhethersystemshavebeenamendedandfocusingauditworkonmaterialbranches.UsefulnessofauditsoftwareTheuseofauditsoftwareatTirrolCodoesappeartohavesignificantproblemsthisyear.Thismeansthateveniftheauditsoftwareisready,theremaystillbesomeriskofincorrectconclusionsbeingderivedduetolackoftesting,etc.Thisproblemcanbealleviatedbyseriouslyconsideringthepossibilityofusingamanualauditthisyear.Themanagermayneedtoinvestigatewhetheramanualauditisfeasibleandifsowhetheritcouldbecompletedwithinthenecessarytimescalewithminimalauditrisk.(b)RelianceoninternalauditdocumentationTherearetwoissuestoconsider;theabilityofinternalaudittoproducethedocumentationandtheactualaccuracyofthedocumentationitself.Theabilityoftheinternalauditdepartmenttoproducethedocumentationcanbedeterminedby:–Ensuringthatthedepartmenthasstaffwhohaveappropriatequalifications.Provisionofarelevantqualificatione.g.membershipofacomputerrelatedinstitutewouldbeappropriate.–Ensuringthatthisandsimilardocumentationisproducedusingarecognisedplanandthatthedocumentationistestedpriortouse.Theuseofdifferentstaffintheinternalauditdepartmenttoproduceandtestdocumentationwillincreaseconfidenceinitsaccuracy.–Ensuringthatthedocumentationisactuallyusedduringinternalauditworkandthatproblemswithdocumentationarenotedandinvestigatedaspartofthatwork.Beinggivenaccesstointernalauditreportsontheinventorysoftwarewillprovideappropriateevidence.Regardingtheactualdocumentation:–Reviewingthedocumentationtoensurethatitappearslogicalandthattermsandsymbolsareusedconsistentlythroughout.Thiswillprovideevidencethattheflowcharts,etcshouldbeaccurate.–Comparingthedocumentationagainstthe‘live’inventorysystemtoensureitcorrectlyreflectstheinventorysystem.Thiscomparisonwillincludetracingindividualtransactionsthroughtheinventorysystems.–UsingpartofthedocumentationtoamendCal&Co’sauditsoftware,andthenensuringthatthesoftwareprocessesinventorysystemdataaccurately.However,thisstagemaybelimitedduetotheneedtouselivefilesatTirrolCo. -
第11题：
One of your audit clients is Tye Co a company providing petrol, aviation fuel and similar oil based products to the government of the country it is based in. Although the company is not listed on any stock exchange, it does follow best practice regarding corporate governance regulations. The audit work for this year is complete, apart from the matter referred to below.
As part of Tye Co’s service contract with the government, it is required to hold an emergency inventory reserve of 6,000 barrels of aviation fuel. The inventory is to be used if the supply of aviation fuel is interrupted due to unforeseen events such as natural disaster or terrorist activity.
This fuel has in the past been valued at its cost price of $15 a barrel. The current value of aviation fuel is $120 a barrel. Although the audit work is complete, as noted above, the directors of Tye Co have now decided to show the ‘real’ value of this closing inventory in the financial statements by valuing closing inventory of fuel at market value, which does not comply with relevant accounting standards. The draft financial statements of Tye Co currently show a profit of approximately $500,000 with net assets of $170 million.
Required:
(a) List the audit procedures and actions that you should now take in respect of the above matter. (6 marks)
(b) For the purposes of this section assume from part (a) that the directors have agreed to value inventory at
$15/barrel.
Having investigated the matter in part (a) above, the directors present you with an amended set of financial
statements showing the emergency reserve stated not at 6,000 barrels, but reported as 60,000 barrels. The final financial statements now show a profit following the inclusion of another 54,000 barrels of oil in inventory. When queried about the change from 6,000 to 60,000 barrels of inventory, the finance director stated that this change was made to meet expected amendments to emergency reserve requirements to be published in about six months time. The inventory will be purchased this year, and no liability will be shown in the financial statements for this future purchase. The finance director also pointed out that part of Tye Co’s contract with the government requires Tye Co to disclose an annual profit and that a review of bank loans is due in three months. Finally the finance director stated that if your audit firm qualifies the financial statements in respect of the increase in inventory, they will not be recommended for re-appointment at the annual general meeting. The finance director refuses to amend the financial statements to remove this ‘fictitious’ inventory.
Required:
(i) State the external auditor’s responsibilities regarding the detection of fraud; (4 marks)
(ii) Discuss to which groups the auditors of Tye Co could report the ‘fictitious’ aviation fuel inventory;
(6 marks)
(iii) Discuss the safeguards that the auditors of Tye Co can use in an attempt to overcome the intimidation
threat from the directors of Tye Co. (4 marks)
正确答案：
(a)Valuationofaviationinventory–ReviewGAAPtoensurethattherearenoexceptionsforaviationfuelorinventoryheldforemergencypurposeswhichwouldsuggestamarketvaluationshouldbeused.–Calculatethedifferenceinvaluation.Theerrorininventoryvaluationis$105*6,000barrelsor$630k,whichisamaterialamountcomparedtoprofit.–Reviewprioryearworkingpaperstodeterminewhetherasimilarsituationoccurredlastyearandascertaintheoutcomeatthatstage.–Discussthematterwiththedirectorstoobtainreasonswhytheybelievethatmarketvalueshouldbeusedfortheinventorythisyear.–Warnthedirectorsthatinyouropinion,aviationfuelshouldbevaluedatthelowerofcostornetrealisablevalue(thatis$15/barrel)andthatusingmarketvaluewillresultinamodificationtotheauditreport.–Ifthedirectorsnowamendthefinancialstatementstoshowinventoryvaluedatcost,thenconsidermentioningtheissueintheweaknessletteranddonotmodifytheauditreportinrespectofthismatter.–Ifthedirectorswillnotamendthefinancialstatements,quantifytheeffectofthedisagreementinthevaluationmethod–thesumof$630,000ismaterialtothefinancialstatementsasTyeCo’sincomestatementfigureisdecreasedfromasmalllosstoalossof$130,000althoughnetassetsdecreasebyonlyabout0·3%.–ObtainamanagementrepresentationletterfromthedirectorsofTyeCoconfirmingthatmarketvalueistobeusedfortheemergencyinventoryofaviationfuel.–Ifthedirectorswillnotamendthefinancialstatements,drafttherelevantsectionsoftheauditreport,showingaqualificationonthegroundsofdisagreementwiththeaccountingpolicyforvaluationofinventory.(b)(i)ExternalauditorresponsibilitiesregardingdetectionoffraudOverallresponsibilityofauditorTheexternalauditorisprimarilyresponsiblefortheauditopiniononthefinancialstatementsfollowingtheinternationalauditingstandards(ISAs).ISA240(Redrafted)TheAuditor’sResponsibilitiesRelatingtoFraudinanAuditofFinancialStatementsisrelevanttoauditworkregardingfraud.Themainfocusofauditworkisthereforetoensurethatthefinancialstatementsshowatrueandfairview.Thedetectionoffraudisthereforenotthemainfocusoftheexternalauditor’swork.Anauditorisresponsibleforobtainingreasonableassurancethatthefinancialstatementsasawholearefreefrommaterialmisstatement,whethercausedbyfraudorerror.Theauditorisresponsibleformaintaininganattitudeofprofessionalscepticismthroughouttheaudit,consideringthepotentialformanagementoverrideofcontrolsandrecognisingthefactthatauditproceduresthatareeffectivefordetectingerrormaynotbeeffectivefordetectingfraud.MaterialityISA240statesthattheauditorshouldreduceauditrisktoanacceptablylowlevel.Therefore,inreachingtheauditopinionandperformingauditwork,theexternalauditortakesintoaccounttheconceptofmateriality.Inotherwords,theexternalauditorisnotresponsibleforcheckingallthetransactions.Auditproceduresareplannedtohaveareasonablelikelihoodofidentifyingmaterialfraud.DiscussionamongtheauditteamAdiscussionisrequiredamongtheengagementteamplacingparticularemphasisonhowandwheretheentity’sfinancialstatementsmaybesusceptibletomaterialmisstatementduetofaud,includinghowfraudmightoccur.IdentificationoffraudInsituationswheretheexternalauditordoesdetectfraud,thentheauditorwillneedtoconsidertheimplicationsfortheentireaudit.Inotherwords,theexternalauditorhasaresponsibilitytoextendtestingintootherareasbecausetheriskofprovidinganincorrectauditopinionwillhaveincreased.(ii)GroupstoreportfraudtoReporttoauditcommitteeDisclosethesituationtotheauditcommitteeastheyarechargedwithmaintainingahighstandardofgovernanceinthecompany.Thecommitteeshouldbeabletodiscussthesituationwiththedirectorsandrecommendthattheytakeappropriateactione.g.amendthefinancialstatements.ReporttogovernmentAsTyeCoisactingunderagovernmentcontract,andtheover-statementofinventorywillmeanTyeCobreachesthatcontract(thereportedprofitbecomingaloss),thentheauditormayhavetoreportthesituationdirectlytothegovernment.TheauditorofTyeConeedstoreviewthecontracttoconfirmthereportingrequiredunderthatcontract.ReporttomembersIfthefinancialstatementsdonotshowatrueandfairviewthentheauditorneedstoreportthisfacttothemembersofTyeCo.Theauditreportwillbequalifiedwithanexceptfororadverseopinion(dependingonmateriality)andinformationconcerningthereasonforthedisagreementgiven.Inthiscasetheauditorislikelytostatefactuallytheproblemofinventoryquantitiesbeingincorrect,ratherthanstatingorimplyingthatthedirectorsareinvolvedinfraud.ReporttoprofessionalbodyIftheauditorisuncertainastothecorrectcourseofaction,advicemaybeobtainedfromtheauditor’sprofessionalbody.Dependingontheadvicereceived,theauditormaysimplyreporttothemembersintheauditreport,althoughresignationandtheconveningofageneralmeetingisanotherreportingoption.(iii)Intimidationthreat–safeguardsInresponsetotheimpliedthreatofdismissaliftheauditreportismodifiedregardingthepotentialfraud/error,thefollowingsafeguardsareavailabletotheauditor.DiscusswithauditcommitteeThesituationcanbediscussedwiththeauditcommittee.Astheauditcommitteeshouldcomprisenon-executivedirectors,theywillbeabletodiscussthesituationwiththefinancedirectorandpointoutclearlytheauditor’sopinion.Theycanalsoremindthedirectorsasawholethattheappointmentoftheauditorrestswiththemembersontherecommendationoftheauditcommittee.Iftherecommendationoftheauditcommitteeisrejectedbytheboard,goodcorporategovernancerequiresdisclosureofthereasonforrejection.ObtainsecondpartnerreviewTheengagementpartnercanaskasecondpartnertoreviewtheworkingpapersandotherevidencerelatingtotheissueofpossiblefraud.Whilethisactiondoesnotresolvetheissue,itdoesprovideadditionalassurancethatthefindingsandactionsoftheengagementpartnerarevalid.ResignationIfthematterisserious,thentheauditorcanconsiderresignationratherthannotbeingre-appointed.Resignationhastheadditionalsafeguardthattheauditorcannormallyrequirethedirectorstoconveneageneralmeetingtoconsiderthecircumstancesoftheresignation. -
第12题：
You are the audit manager of Chestnut & Co and are reviewing the key issues identified in the files of two audit clients.
Palm Industries Co (Palm)
Palm’s year end was 31 March 2015 and the draft financial statements show revenue of $28·2 million, receivables of $5·6 million and profit before tax of $4·8 million. The fieldwork stage for this audit has been completed.
A customer of Palm owed an amount of $350,000 at the year end. Testing of receivables in April highlighted that no amounts had been paid to Palm from this customer as they were disputing the quality of certain goods received from Palm. The finance director is confident the issue will be resolved and no allowance for receivables was made with regards to this balance.
Ash Trading Co (Ash)
Ash is a new client of Chestnut & Co, its year end was 31 January 2015 and the firm was only appointed auditors in February 2015, as the previous auditors were suddenly unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.
The inventory count at Ash’s warehouse was undertaken on 31 January 2015 and was overseen by the company’s internal audit department. Neither Chestnut & Co nor the previous auditors attended the count. Detailed inventory records were maintained but it was not possible to undertake another full inventory count subsequent to the year end.
The draft financial statements show a profit before tax of $2·4 million, revenue of $10·1 million and inventory of $510,000.
Required:
For each of the two issues:
(i) Discuss the issue, including an assessment of whether it is material;
(ii) Recommend ONE procedure the audit team should undertake to try to resolve the issue; and
(iii) Describe the impact on the audit report if the issue remains UNRESOLVED.
Notes:
1 The total marks will be split equally between each of the two issues.
2 Audit report extracts are NOT required.
正确答案：Audit reports
Palm Industries Co (Palm)
(i) A customer of Palm’s owing $350,000 at the year end has not made any post year-end payments as they are disputing the quality of goods received. No allowance for receivables has been made against this balance. As the balance is being disputed, there is a risk of incorrect valuation as some or all of the receivable balance is overstated, as it may not be paid.
This $350,000 receivables balance represents 1·2% (0·35/28·2m) of revenue, 6·3% (0·35/5·6m) of receivables and 7·3% (0·35/4·8m) of profit before tax; hence this is a material issue.
(ii) A procedure to adopt includes:
– Review whether any payments have subsequently been made by this customer since the audit fieldwork was completed.
– Discuss with management whether the issue of quality of goods sold to the customer has been resolved, or whether it is still in dispute.
– Review the latest customer correspondence with regards to an assessment of the likelihood of the customer making payment.
(iii) If management refuses to provide against this receivable, the audit report will need to be modified. As receivables are overstated and the error is material but not pervasive a qualified opinion would be necessary.
A basis for qualified opinion paragraph would be needed and would include an explanation of the material misstatement in relation to the valuation of receivables and the effect on the financial statements. The opinion paragraph would be qualified ‘except for’.
Ash Trading Co (Ash)
(i) Chestnut & Co was only appointed as auditors subsequent to Ash’s year end and hence did not attend the year-end inventory count. Therefore, they have not been able to gather sufficient and appropriate audit evidence with regards to the completeness and existence of inventory.
Inventory is a material amount as it represents 21·3% (0·51/2·4m) of profit before tax and 5% (0·51/10·1m) of revenue; hence this is a material issue.
(ii) A procedure to adopt includes:
– Review the internal audit reports of the inventory count to identify the level of adjustments to the records to assess the reasonableness of relying on the inventory records.
– Undertake a sample check of inventory in the warehouse and compare to the inventory records and then from inventory records to the warehouse, to assess the reasonableness of the inventory records maintained by Ash.
(iii) The auditors will need to modify the audit report as they are unable to obtain sufficient appropriate evidence in relation to inventory which is a material but not pervasive balance. Therefore a qualified opinion will be required.
A basis for qualified opinion paragraph will be required to explain the limitation in relation to the lack of evidence over inventory. The opinion paragraph will be qualified ‘except for’.
-
第13题：
(b) You are an audit manager in a firm of Chartered Certified Accountants currently assigned to the audit of Cleeves
Co for the year ended 30 September 2006. During the year Cleeves acquired a 100% interest in Howard Co.
Howard is material to Cleeves and audited by another firm, Parr & Co. You have just received Parr’s draft
auditor’s report for the year ended 30 September 2006. The wording is that of an unmodified report except for
the opinion paragraph which is as follows:
Audit opinion
As more fully explained in notes 11 and 15 impairment losses on non-current assets have not been
recognised in profit or loss as the directors are unable to quantify the amounts.
In our opinion, provision should be made for these as required by International Accounting Standard 36
(Impairment). If the provision had been so recognised the effect would have been to increase the loss before
and after tax for the year and to reduce the value of tangible and intangible non-current assets. However,
as the directors are unable to quantify the amounts we are unable to indicate the financial effect of such
omissions.
In view of the failure to provide for the impairments referred to above, in our opinion the financial statements
do not present fairly in all material respects the financial position of Howard Co as of 30 September 2006
and of its loss and its cash flows for the year then ended in accordance with International Financial Reporting
Standards.
Your review of the prior year auditor’s report shows that the 2005 audit opinion was worded identically.
Required:
(i) Critically appraise the appropriateness of the audit opinion given by Parr & Co on the financial
statements of Howard Co, for the years ended 30 September 2006 and 2005. (7 marks)
正确答案：(b) (i) Appropriateness of audit opinion given
Tutorial note: The answer points suggested by the marking scheme are listed in roughly the order in which they might
be extracted from the information presented in the question. The suggested answer groups together some of these
points under headings to give the analysis of the situation a possible structure.
Heading
■ The opinion paragraph is not properly headed. It does not state the form. of the opinion that has been given nor
the grounds for qualification.
■ The opinion ‘the financial statements do not give a true and fair view’ is an ‘adverse’ opinion.
■ That ‘provision should be made’, but has not, is a matter of disagreement that should be clearly stated as noncompliance
with IAS 36. The title of IAS 36 Impairment of Assets should be given in full.
■ The opinion should be headed ‘Disagreement on Accounting Policies – Inappropriate Accounting Method – Adverse
Opinion’.
1 ISA 250 does not specify with whom agreement should be reached but presumably with those charged with corporate governance (e.g audit committee or
2 other supervisory board).
20
6D–INTBA
Paper 3.1INT
Content
■ It is appropriate that the opinion paragraph should refer to the note(s) in the financial statements where the matter
giving rise to the modification is more fully explained. However, this is not an excuse for the audit opinion being
‘light’ on detail. For example, the reason for impairment could be summarised in the auditor’s report.
■ The effects have not been quantified, but they should be quantifiable. The maximum possible loss would be the
carrying amount of the non-current assets identified as impaired.
■ It is not clear why the directors have been ‘unable to quantify the amounts’. Since impairments should be
quantifiable any ‘inability’ suggest a limitation in scope of the audit, in which case the opinion should be disclaimed
(or ‘except for’) on grounds of lack of evidence rather than disagreement.
■ The wording is confusing. ‘Failure to provide’ suggests disagreement. However, there must be sufficient evidence
to support any disagreement. Although the directors cannot quantify the amounts it seems the auditors must have
been able to (estimate at least) in order to form. an opinion that the amounts involved are sufficiently material to
warrant a qualification.
■ The first paragraph refers to ‘non-current assets’. The second paragraph specifies ‘tangible and intangible assets’.
There is no explanation why or how both tangible and intangible assets are impaired.
■ The first paragraph refers to ‘profit or loss’ and the second and third paragraphs to ‘loss’. It may be clearer if the
first paragraph were to refer to recognition in the income statement.
■ It is not clear why the failure to recognise impairment warrants an adverse opinion rather than ‘except for’. The
effects of non-compliance with IAS 36 are to overstate the carrying amount(s) of non-current assets (that can be
specified) and to understate the loss. The matter does not appear to be pervasive and so an adverse opinion looks
unsuitable as the financial statements as a whole are not incomplete or misleading. A loss is already being reported
so it is not that a reported profit would be turned into a loss (which is sometimes judged to be ‘pervasive’).
Prior year
■ As the 2005 auditor’s report, as previously issued, included an adverse opinion and the matter that gave rise to
the modification:
– is unresolved; and
– results in a modification of the 2006 auditor’s report,
the 2006 auditor’s report should also be modified regarding the corresponding figures (ISA 710 Comparatives).
■ The 2006 auditor’s report does not refer to the prior period modification nor highlight that the matter resulting in
the current period modification is not new. For example, the report could say ‘As previously reported and as more
fully explained in notes ….’ and state ‘increase the loss by $x (2005 – $y)’. -
第14题：
(b) As a newly-qualified Chartered Certified Accountant in Boleyn & 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 & Co’s intranet:
(i) What Information Technology services can we offer to audit clients? (5 marks)
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.
正确答案：
(b) FAQs
(i) Information Technology (IT) services
The greatest threats to independence arise from the provision of any service which involves auditors in:
■ auditing their own work;
■ the decision-making process;
■ undertaking management functions of the client.
IT services potentially pose all these threats:
■ self-interest threat – on-going services that provide a large proportion of Boleyn’s annual fees will contribute to a
threat to objectivity;
■ self-review threat – e.g. when IT services provided involve (i) the supervision of the audit client’s employees in the
performance of their normal duties; or (ii) the origination of electronic data evidencing the occurrence of
transactions;
■ management threat – e.g. when the IT services involve making judgments and taking decisions that are properly
the responsibility of management.
Thus, services that involve the design and implementation of financial IT systems that are used to generate information
forming a significant part of a client’s accounting system or financial statements is likely to create significant ethical
threats.
Possible safeguards include:
■ disclosing and discussing fees with the client’s audit committees (or others charged with corporate governance);
■ the audit client providing a written acknowledgment (e.g. in an engagement letter) of its responsibility for:
– establishing and monitoring a system of internal controls;
– the operation of the system (hardware or software); and
– the data used or generated by the system;
■ the designation by the audit client of a competent employee (preferably within senior management) with
responsibility to make all management decisions regarding the design and implementation of the hardware or
software system;
■ evaluation of the adequacy and results of the design and implementation of the system by the audit client;
■ suitable allocation of work within the firm (i.e. staff providing the IT services not being involved in the audit
engagement and having different reporting lines); and
■ review of the audit opinion by an audit partner who is not involved in the audit engagement.
Services in connection with the assessment, design and implementation of internal accounting controls and risk
management controls are not considered to create a threat to independence provided that the firm’s personnel do not
perform. management functions.
It would be acceptable to provide IT services to an audit client where the systems are not important to any significant
part of the accounting system or the production of financial statements and do not have significant reliance placed on
them by the auditors, provided that:
■ a member of the client’s management has been designated to receive and take responsibility for the results of the
IT work undertaken; and
■ appropriate safeguards are put in place (e.g. using separate partners and staff for each role and review by a partner
not involved in the audit engagement).
It would also generally be acceptable to provide and install off-the-shelf accounting packages to an audit client. -
第15题：
1 Your client, Island Co, is a manufacturer of machinery used in the coal extraction industry. You are currently planning
the audit of the financial statements for the year ended 30 November 2007. The draft financial statements show
revenue of $125 million (2006 – $103 million), profit before tax of $5·6 million (2006 – $5·1 million) and total
assets of $95 million (2006 – $90 million). Your firm was appointed as auditor to Island Co for the first time in June
2007.
Island Co designs, constructs and installs machinery for five key customers. Payment is due in three instalments: 50%
is due when the order is confirmed (stage one), 25% on delivery of the machinery (stage two), and 25% on successful
installation in the customer’s coal mine (stage three). Generally it takes six months from the order being finalised until
the final installation.
At 30 November, there is an amount outstanding of $2·85 million from Jacks Mine Co. The amount is a disputed
stage three payment. Jacks Mine Co is refusing to pay until the machinery, which was installed in August 2007, is
running at 100% efficiency.
One customer, Sawyer Co, communicated in November 2007, via its lawyers with Island Co, claiming damages for
injuries suffered by a drilling machine operator whose arm was severely injured when a machine malfunctioned. Kate
Shannon, the chief executive officer of Island Co, has told you that the claim is being ignored as it is generally known
that Sawyer Co has a poor health and safety record, and thus the accident was their fault. Two orders which were
placed by Sawyer Co in October 2007 have been cancelled.
Work in progress is valued at $8·5 million at 30 November 2007. A physical inventory count was held on
17 November 2007. The chief engineer estimated the stage of completion of each machine at that date. One of the
major components included in the coal extracting machinery is now being sourced from overseas. The new supplier,
Locke Co, is located in Spain and invoices Island Co in euros. There is a trade payable of $1·5 million owing to Locke
Co recorded within current liabilities.
All machines are supplied carrying a one year warranty. A warranty provision is recognised on the balance sheet at
$2·5 million (2006 – $2·4 million). Kate Shannon estimates the cost of repairing defective machinery reported by
customers, and this estimate forms the basis of the provision.
Kate Shannon owns 60% of the shares in Island Co. She also owns 55% of Pacific Co, which leases a head office to
Island Co. Kate is considering selling some of her shares in Island Co in late January 2008, and would like the audit
to be finished by that time.
Required:
(a) Using the information provided, identify and explain the principal audit risks, and any other matters to be
considered when planning the final audit for Island Co for the year ended 30 November 2007.
Note: your answer should be presented in the format of briefing notes to be used at a planning meeting.
Requirement (a) includes 2 professional marks. (13 marks)
正确答案：
1 ISLAND CO
(a) Briefing Notes
Subject: Principal Audit Risks – Island Co
Revenue Recognition – timing
Island Co raises sales invoices in three stages. There is potential for breach of IAS 18 Revenue, which states that revenue
should only be recognised once the seller has the right to receive it, in other words the seller has performed its contractual
obligations. This right does not necessarily correspond to amounts falling due for payment in accordance with an invoice
schedule agreed with a customer as part of a contract. Island Co appears to receive payment from its customers in advance
of performing any obligation, as the stage one invoice is raised when an order is confirmed i.e. before any work has actually
taken place. This creates the potential for revenue to be recognised too early, in advance of any performance of contractual
obligation. When a payment is received in advance of performance, a liability should be recognised equal to the amount
received, representing the obligation under the contract. Therefore a significant risk is that revenue is overstated and liabilities
understated.
Tutorial note: Equivalent guidance is also provided in IAS 11 Construction Contracts and credit will be awarded where
candidates discuss revenue recognition under IAS 11 as Island Co is providing a single substantial asset for a customer
under the terms of a contract.
Disputed receivable
The amount owed from Jacks Mine Co is highly material as it represents 50·9% of profit before tax, 2·3% of revenue, and
3% of total assets. The risk is that the receivable is overstated if no impairment of the disputed receivable is recognised.
Legal claim
The claim should be investigated seriously by Island Co. The chief executive officer’s (CEO) opinion that the claim will not
result in any financial consequence for Island Co is na?ve and flippant. Damages could be awarded against Island Co if it is
found that the machinery is faulty. The recurring high level of warranty provision implies that machinery faults are fairly
common and therefore the accident could be the result of a defective machine being supplied to Sawyer Co. The risk is that
no provision is created for the potential damages under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if the
likelihood of paying damages is considered probable. Alternatively, if the likelihood of damages being paid to Sawyer Co is
considered a possibility then a disclosure note should be made in the financial statements describing the nature and possible
financial effect of the contingent liability. As discussed below, the CEO, Kate Shannon, has an incentive not to make a
provision or disclose a contingent liability due to the planned share sale post year end.
A further risk is that any legal fees associated with the claim have not been accrued within the financial statements. As the
claim has arisen during the year, the expense must be included in this year’s income statement, even if the claim is still ongoing
at the year end.
The fact that the legal claim is effectively being ignored may cast doubts on the overall integrity of senior management, and
on the integrity of the financial statements. Management representations should be approached with a degree of professional
scepticism during the audit.
Sawyer Co has cancelled two orders. If the amounts are still outstanding at the year end then it is highly likely that Sawyer
Co will not pay the invoiced amounts, and thus receivables are overstated. If the stage one payments have already been made,
then Sawyer Co may claim a refund, in which case a provision should be made to repay the amount, or a contingent liability
disclosed in a note to the financial statements.
Sawyer Co is one of only five major customers, and losing this customer could have future going concern implications for
Island Co if a new source of revenue cannot be found to replace the lost income stream from Sawyer Co. If the legal claim
becomes public knowledge, and if Island Co is found to have supplied faulty machinery, then it will be difficult to attract new
customers.
A case of this nature could bring bad publicity to Island Co, a potential going concern issue if it results in any of the five key
customers terminating orders with Island Co. The auditors should plan to extend the going concern work programme to
incorporate the issues noted above.
Inventories
Work in progress is material to the financial statements, representing 8·9% of total assets. The inventory count was held two
weeks prior to the year end. There is an inherent risk that the valuation has not been correctly rolled forward to a year end
position.
The key risk is the estimation of the stage of completion of work in progress. This is subjective, and knowledge appears to
be confined to the chief engineer. Inventory could be overvalued if the machines are assessed to be more complete than they
actually are at the year end. Absorption of labour costs and overheads into each machine is a complex calculation and must
be done consistently with previous years.
It will also be important that consumable inventories not yet utilised on a machine, e.g. screws, nuts and bolts, are correctly
valued and included as inventories of raw materials within current assets.
Overseas supplier
As the supplier is new, controls may not yet have been established over the recording of foreign currency transactions.
Inherent risk is high as the trade payable should be retranslated using the year end exchange rate per IAS 21 The Effects of
Changes in Foreign Exchange Rates. If the retranslation is not performed at the year end, the trade payable could be
significantly over or under valued, depending on the movement of the dollar to euro exchange rate between the purchase date
and the year end. The components should remain at historic cost within inventory valuation and should not be retranslated
at the year end.
Warranty provision
The warranty provision is material at 2·6% of total assets (2006 – 2·7%). The provision has increased by only $100,000,
an increase of 4·2%, compared to a revenue increase of 21·4%. This could indicate an underprovision as the percentage
change in revenue would be expected to be in line with the percentage change in the warranty provision, unless significant
improvements had been made to the quality of machines installed for customers during the year. This appears unlikely given
the legal claim by Sawyer Co, and the machines installed at Jacks Mine Co operating inefficiently. The basis of the estimate
could be understated to avoid charging the increase in the provision as an expense through the income statement. This is of
special concern given that it is the CEO and majority shareholder who estimates the warranty provision.
Majority shareholder
Kate Shannon exerts control over Island Co via a majority shareholding, and by holding the position of CEO. This greatly
increases the inherent risk that the financial statements could be deliberately misstated, i.e. overvaluation of assets,
undervaluation of liabilities, and thus overstatement of profits. The risk is severe at this year end as Kate Shannon is hoping
to sell some Island Co shares post year end. As the price that she receives for these shares will be to a large extent influenced
by the balance sheet position of the company at 30 November 2007, she has a definite interest in manipulating the financial
statements for her own personal benefit. For example:
– Not recognising a provision or contingent liability for the legal claim from Sawyer Co
– Not providing for the potentially irrecoverable receivable from Jacks Mines Co
– Not increasing the warranty provision
– Recognising revenue earlier than permitted by IAS 18 Revenue.
Related party transactions
Kate Shannon controls Island Co and also controls Pacific Co. Transactions between the two companies should be disclosed
per IAS 24 Related Party Disclosures. There is risk that not all transactions have been disclosed, or that a transaction has
been disclosed at an inappropriate value. Details of the lease contract between the two companies should be disclosed within
a note to the financial statements, in particular, any amounts owed from Island Co to Pacific Co at 30 November 2007 should
be disclosed.
Other issues
– Kate Shannon wants the audit to be completed as soon as possible, which brings forward the deadline for completion
of the audit. The audit team may not have time to complete all necessary procedures, or there may not be time for
adequate reviews to be carried out on the work performed. Detection risk, and thus audit risk is increased, and the
overall quality of the audit could be jeopardised.
– This is especially important given that this is the first year audit and therefore the audit team will be working with a
steep learning curve. Audit procedures may take longer than originally planned, yet there is little time to extend
procedures where necessary.
– Kate Shannon may also exert considerable influence on the members of the audit team to ensure that the financial
statements show the best possible position of Island Co in view of her share sale. It is crucial that the audit team
members adhere strictly to ethical guidelines and that independence is beyond question.
– Due to the seriousness of the matters noted above, a final matter to be considered at the planning stage is that a second
partner review (Engagement Quality Control Review) should be considered for the audit this year end. A suitable
independent reviewer should be indentified, and time planned and budgeted for at the end of the assignment.
Conclusion
From the range of issues discussed in these briefing notes, it can be seen that the audit of Island Co will be a relatively high
risk engagement. -
第16题：
4 You are an audit manager in Nate & Co, a firm of Chartered Certified Accountants. You are reviewing three situations,
which were recently discussed at the monthly audit managers’ meeting:
(1) Nate & Co has recently been approached by a potential new audit client, Fisher Co. Your firm is keen to take the
appointment and is currently carrying out client acceptance procedures. Fisher Co was recently incorporated by
Marcellus Fisher, with its main trade being the retailing of wooden storage boxes.
(2) Nate & Co provides the audit service to CF Co, a national financial services organisation. Due to a number of
errors in the recording of cash deposits from new customers that have been discovered by CF Co’s internal audit
team, the directors of CF Co have requested that your firm carry out a review of the financial information
technology systems. It has come to your attention that while working on the audit planning of CF Co, Jin Sayed,
one of the juniors on the audit team, who is a recent information technology graduate, spent three hours
providing advice to the internal audit team about how to improve the system. As far as you know, this advice has
not been used by the internal audit team.
(3) LA Shots Co is a manufacturer of bottled drinks, and has been an audit client of Nate & Co for five years. Two
audit juniors attended the annual inventory count last Monday. They reported that Brenda Mangle, the new
production manager of LA Shots Co, wanted the inventory count and audit procedures performed as quickly as
possible. As an incentive she offered the two juniors ten free bottles of ‘Super Juice’ from the end of the
production line. Brenda also invited them to join the LA Shots Co office party, which commenced at the end of
the inventory count. The inventory count and audit procedures were completed within two hours (the previous
year’s procedures lasted a full day), and the juniors then spent four hours at the office party.
Required:
(a) Define ‘money laundering’ and state the procedures specific to money laundering that should be considered
before, and on the acceptance of, the audit appointment of Fisher Co. (5 marks)
正确答案：
4 NATE & CO
(a) – Money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds
of criminal activity, allowing them to maintain control over the proceeds, and ultimately providing a legitimate cover for
their sources of income. The objective of money laundering is to break the connection between the money, and the crime
that it resulted from.
– It is widely defined, to include possession of, or concealment of, the proceeds of any crime.
– Examples include proceeds of fraud, tax evasion and benefits of bribery and corruption.
Client procedures should include the following:
– Client identification:
? Establish the identity of the entity and its business activity e.g. by obtaining a certificate of incorporation
? If the client is an individual, obtain official documentation including a name and address, e.g. by looking at
photographic identification such as passports and driving licences
? Consider whether the commercial activity makes business sense (i.e. it is not just a ‘front’ for illegal activities)
? Obtain evidence of the company’s registered address e.g. by obtaining headed letter paper
? Establish the current list of principal shareholders and directors.
– Client understanding:
? Pre-engagement communication may be considered, to explain to Marcellus Fisher and the other directors the
nature and reason for client acceptance procedures.
? Best practice recommends that the engagement letter should also include a paragraph outlining the auditor’s
responsibilities in relation to money laundering. -
第17题：
A new internal auditor, Daisy Rosepetal, has recently joined Bluebell Co. She has been asked by management to
establish and to monitor a variety of social and environmental Key Performance Indicators (KPIs). Daisy has no
experience in this area, and has asked you for some advice. It has been agreed with Bluebell Co’s audit committee
that you are to provide guidance to Daisy to help her in this part of her role, and that this does not impair the
objectivity of the audit.
(c) Recommend EIGHT KPIs which could be used to monitor Bluebell Co’s social and environmental
performance, and outline the nature of evidence that should be available to provide assurance on the
accuracy of the KPIs recommended. Your answer should be in the form. of briefing notes to be used at a
meeting with Daisy Rosepetal. (10 marks)
Note: requirement (c) includes 2 professional marks.
正确答案：
-
第18题：
You are the manager responsible for performing hot reviews on audit files where there is a potential disagreement
between your firm and the client regarding a material issue. You are reviewing the going concern section of the audit
file of Dexter Co, a client with considerable cash flow difficulties, and other, less significant operational indicators of
going concern problems. The working papers indicate that Dexter Co is currently trying to raise finance to fund
operating cash flows, and state that if the finance is not received, there is significant doubt over the going concern
status of the company. The working papers conclude that the going concern assumption is appropriate, but it is
recommended that the financial statements should contain a note explaining the cash flow problems faced by the
company, along with a description of the finance being sought, and an evaluation of the going concern status of the
company. The directors do not wish to include the note in the financial statements.
Required:
(b) Consider and comment on the possible reasons why the directors of Dexter Co are reluctant to provide the
note to the financial statements. (5 marks)
正确答案：
(b) Directors reluctance to disclose
The directors are likely to have several reasons behind their reluctance to disclose the note as recommended by the audit
manager. The first is that the disclosure of Dexter Co’s poor cash flow position and perilous going concern status may reflect
badly on the directors themselves. The company’s shareholders and other stakeholders will be displeased to see the company
in such a poor position, and the directors will be held accountable for the problems. Of course it may not be the case that
the directors have exercised poor management of the company – the problems could be caused by external influences outside
the control of the directors. However, it is natural that the directors will not want to highlight the situation in order to protect
their own position.
Secondly, the note could itself trigger further financial distress for the company. Dexter Co is trying to raise finance, and it is
probable that the availability of further finance will be detrimentally affected by the disclosure of the company’s financial
problems. In particular, if the cash flow difficulties are highlighted, providers of finance will consider the company too risky
an investment, and are not likely to make funds available for fear of non-repayment. Existing lenders may seek repayment of
their funds in fear that the company may be unable in the future to meet repayments.
In addition, the disclosures could cause operational problems, for example, suppliers may curtail trading relationships as they
become concerned that they will not be paid, or customers may be deterred from purchasing from the company if they feel
that there is no long-term future for the business. Unfortunately the mere disclosure of financial problems can be self-fulfilling,
and cause such further problems for the company that it is pushed into non-going concern status.
The directors may also be concerned that if staff were to hear of this they may worry about the future of the company and
seek alternative employment, which could lead in turn to the loss of key members of staff. This would be detrimental to the
business and trigger further operational problems.
Finally, the reluctance to disclose may be caused by an entirely different reason. The directors could genuinely feel that the
cash flow and operational problems faced by the company do not constitute factors affecting the going concern status. They
may be confident that although a final decision has not been made regarding financing, the finance is likely to be forthcoming,
and therefore there is no long-term material uncertainty over the future of the company. However audit working papers
conclude that there is a significant level of doubt over the going concern status of Dexter Co, and therefore it seems that the
directors may be over optimistic if they feel that there is no significant doubt to be disclosed in the financial statements. -
第19题：
(b) (i) Explain the matters you should consider, and the evidence you would expect to find in respect of the
carrying value of the cost of investment of Dylan Co in the financial statements of Rosie Co; and
(7 marks)
正确答案：
(b) (i) Cost of investment on acquisition of Dylan Co
Matters to consider
According to the schedule provided by the client, the cost of investment comprises three elements. One matter to
consider is whether the cost of investment is complete.
It appears that no legal or professional fees have been included in the cost of investment (unless included within the
heading ‘cash consideration’). Directly attributable costs should be included per IFRS 3 Business Combinations, and
there is a risk that these costs may be expensed in error, leading to understatement of the investment.
The cash consideration of $2·5 million is the least problematical component. The only matter to consider is whether the
cash has actually been paid. Given that Dylan Co was acquired in the last month of the financial year it is possible that
the amount had not been paid before the year end, in which case the amount should be recognised as a current liability
on the statement of financial position (balance sheet). However, this seems unlikely given that normally control of an
acquired company only passes to the acquirer on cash payment.
IFRS 3 states that the cost of investment should be recognised at fair value, which means that deferred consideration
should be discounted to present value at the date of acquisition. If the consideration payable on 31 January 2009 has
not been discounted, the cost of investment, and the corresponding liability, will be overstated. It is possible that the
impact of discounting the $1·5 million payable one year after acquisition would be immaterial to the financial
statements, in which case it would be acceptable to leave the consideration at face value within the cost of investment.
Contingent consideration should be accrued if it is probable to be paid. Here the amount is payable if revenue growth
targets are achieved over the next four years. The auditor must therefore assess the probability of the targets being
achieved, using forecasts and projections of Maxwell Co’s revenue. Such information is inherently subjective, and could
have been manipulated, if prepared by the vendor of Maxwell Co, in order to secure the deal and maximise
consideration. Here it will be crucial to be sceptical when reviewing the forecasts, and the assumptions underlying the
data. The management of Rosie Co should have reached their own opinion on the probability of paying the contingent
consideration, but they may have relied heavily on information provided at the time of the acquisition.
Audit evidence
– Agreement of the monetary value and payment dates of the consideration per the client schedule to legal
documentation signed by vendor and acquirer.
– Agreement of $2·5 million paid to Rosie Co’s bank statement and cash book prior to year end. If payment occurs
after year end confirm that a current liability is recognised on the individual company and consolidated statement
of financial position (balance sheet).
– Board minutes approving the payment.
– Recomputation of discounting calculations applied to deferred and contingent consideration.
– Agreement that the discount rate used is pre-tax, and reflects current market assessment of the time value of money
(e.g. by comparison to Rosie Co’s weighted average cost of capital).
– Revenue and profit projections for the period until January 2012, checked for arithmetic accuracy.
– A review of assumptions used in the projections, and agreement that the assumptions are comparable with the
auditor’s understanding of Dylan Co’s business.
Tutorial note: As the scenario states that Chien & Co has audited Dylan Co for several years, it is reasonable to rely on
their cumulative knowledge and understanding of the business in auditing the revenue projections. -
第20题：
4 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)
正确答案：
4 Smith & Co
(a) Norman Co
The invoice is 12 months old and it appears doubtful whether the amount outstanding is recoverable. The fact that such an
old debt is unsettled indicates poor credit control by Smith & Co. Part of good practice management is to run a profitable,
cash generating audit function. The debt should not have been left outstanding for such a long period. It seems that little has
been done to secure payment since the file note was attached to the invoice in November 2007.
There is also a significant ethical issue raised. Overdue fees are a threat to objectivity and independence. Due to Norman Co
not yet paying for the 2007 year end audit, it could be perceived that the audit has been performed for free. Alternatively the
amount outstanding could be perceived as a loan to the client, creating a self-interest threat to independence.
The audit work for the year ended 28 February 2008 should not have been carried out without some investigation into the
unpaid invoice relating to the prior year audit. This also represents a self-interest threat – if fees are not collected before the
audit report is issued, an unmodified report could be seen as enhancing the prospect of securing payment. It seems that a
check has not been made to see if the prior year fee has been paid prior to the audit commencing.
It is also concerning that the audit report for the 2008 year end is about to be issued, but no invoice has been raised relating
to the work performed. To maximise cash inflow, the audit firm should invoice the client as soon as possible for work
performed.
Norman Co appears to be suffering financial distress. In this case there is a valid commercial reason why payment has not
been made – the client simply lacks cash. While this fact does not eliminate the problems noted above, it means that the
auditors can continue so long as adequate ethical safeguards are put in place, and after the monetary significance of the
amount outstanding has been evaluated.
It should also be considered whether Norman Co’s financial situation casts any doubt over the going concern of the company.
Continued cash flow problems are certainly a financial indicator of going concern problems, and if the company does not
resolve the cash flow problem then it may be unable to continue in operational existence.
Action to be taken:
– Discuss with the audit committee (if any) or those charged with governance of Norman Co:
The ethical problems raised by the non-payment of invoices, and a payment programme to secure cash payment in
stages if necessary, rather than demanding the total amount outstanding immediately.
– Notify the ethics partner of Smith & Co of the situation – the ethics partner should evaluate the ethical threat posed by
the situation and document the decision to continue to act for Norman Co.
– The documentation should include an evaluation of the monetary significance of the amount outstanding, as it will be
more difficult to justify the continuance of the audit appointment if the amount is significant.
– The ethics partner should ensure that a firm-wide policy is communicated to all audit managers requiring them to check
the payment of previous invoices before commencing new client work. This check should be documented.
– Consider an independent partner review of the working papers prepared for the 28 February 2008 audit.
– The audit working papers on going concern should be reviewed to ensure that sufficient evidence has been gathered to
support the audit opinion. Further procedures may be found to be necessary given the continued cash flow problems.
– Smith & Co have already acted to improve credit control by making a manager responsible for reviewing invoices and
monitoring subsequent cash collection. It is important that credit control procedures are quickly put into place to prevent
similar situations arising. -
第21题：
Your firm has been recommended to us by DINOSOUR TOY CO,LTD()we have done business for many fears.A、which
B、with whom
C、whom
D、with which
参考答案：B
-
第22题：
(a) Contrast the role of internal and external auditors. (8 marks)
(b) Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital.
The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Conoy Co’s jurisdiction does not require any. The executive directors are very successful in running Conoy Co, partly from their training in production and management techniques, and partly from their ‘hands-on’ approach providing motivation to employees.
The board are considering a significant expansion of the company. However, the company’s bankers are
concerned with the standard of financial reporting as the financial director (FD) has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed.
Conoy Co does have an internal audit department, although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co. The board of Conoy Co concur with this view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co.
The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee.
The committee would consist of one executive director, the chief internal auditor as well as three new appointees.
One appointee would have a non-executive seat on the board of directors.
Required:
Discuss the benefits to Conoy Co of forming an audit committee. (12 marks)
正确答案：
(a)Roleofinternalandexternalauditors–differencesObjectivesThemainobjectiveofinternalauditistoimproveacompany’soperations,primarilyintermsofvalidatingtheefficiencyandeffectivenessoftheinternalcontrolsystemsofacompany.Themainobjectiveoftheexternalauditoristoexpressanopiniononthetruthandfairnessofthefinancialstatements,andotherjurisdictionspecificrequirementssuchasconfirmingthatthefinancialstatementscomplywiththereportingrequirementsincludedinlegislation.ReportingInternalauditreportsarenormallyaddressedtotheboardofdirectors,orotherpeoplechargedwithgovernancesuchastheauditcommittee.Thosereportsarenotpubliclyavailable,beingconfidentialbetweentheinternalauditorandtherecipient.Externalauditreportsareprovidedtotheshareholdersofacompany.Thereportisattachedtotheannualfinancialstatementsofthecompanyandisthereforepubliclyavailabletotheshareholdersandanyreaderofthefinancialstatements.ScopeofworkTheworkoftheinternalauditornormallyrelatestotheoperationsoftheorganisation,includingthetransactionprocessingsystemsandthesystemstoproducetheannualfinancialstatements.Theinternalauditormayalsoprovideotherreportstomanagement,suchasvalueformoneyauditswhichexternalauditorsrarelybecomeinvolvedwith.Theworkoftheexternalauditorrelatesonlytothefinancialstatementsoftheorganisation.However,theinternalcontrolsystemsoftheorganisationwillbetestedastheseprovideevidenceonthecompletenessandaccuracyofthefinancialstatements.RelationshipwithcompanyInmostorganisations,theinternalauditorisanemployeeoftheorganisation,whichmayhaveanimpactontheauditor’sindependence.However,insomeorganisationstheinternalauditfunctionisoutsourced.Theexternalauditorisappointedbytheshareholdersofanorganisation,providingsomedegreeofindependencefromthecompanyandmanagement.(b)BenefitsofauditcommitteeinConoyCoAssistancewithfinancialreporting(nofinanceexpertise)TheexecutivedirectorsofConoyCodonotappeartohaveanyspecificfinancialskills–asthefinancialdirectorhasrecentlyleftthecompanyandhasnotyetbeenreplaced.ThismaymeanthatfinancialreportinginConoyCoislimitedorthattheothernon-financialdirectorsspendasignificantamountoftimekeepinguptodateonfinancialreportingissues.AnauditcommitteewillassistConoyCobyprovidingspecialistknowledgeoffinancialreportingonatemporarybasis–atleastoneofthenewappointeesshouldhaverelevantandrecentfinancialreportingexperienceundercodesofcorporategovernance.ThiswillallowtheexecutivedirectorstofocusonrunningConoyCo.EnhanceinternalcontrolsystemsTheboardofConoyCodonotnecessarilyunderstandtheworkoftheinternalauditor,ortheneedforcontrolsystems.ThismeansthatinternalcontrolwithinConoyComaybeinadequateorthatemployeesmaynotrecognisetheimportanceofinternalcontrolsystemswithinanorganisation.TheauditcommitteecanraiseawarenessoftheneedforgoodinternalcontrolsystemssimplybybeingpresentinConoyCoandbyeducatingtheboardontheneedforsoundcontrols.Improvingtheinternalcontrol‘climate’willensuretheneedforinternalcontrolsisunderstoodandreducecontrolerrors.RelianceonexternalauditorsConoyCo’sinternalauditorscurrentlyreporttotheboardofConoyCo.Aspreviouslynoted,thelackoffinancialandcontrolexpertiseontheboardwillmeanthatexternalauditorreportsandadvicewillnotnecessarilybeunderstood–andtheboardmayrelytoomuchonexternalauditorsIfConoyCoreporttoanauditcommitteethiswilldecreasethedependenceoftheboardontheexternalauditors.Theauditcommitteecantaketimetounderstandtheexternalauditor’scomments,andthenviathenon-executivedirector,ensurethattheboardtakeactiononthosecomments.AppointmentofexternalauditorsAtpresent,theboardofConoyCoappointtheexternalauditors.Thisraisesissuesofindependenceastheboardmaybecometoofamiliarwiththeexternalauditorsandsoappointonthisfriendshipratherthanmerit.Ifanauditcommitteeisestablished,thenthiscommitteecanrecommendtheappointmentoftheexternalauditors.Thecommitteewillhavethetimeandexpertisetoreviewthequalityofserviceprovidedbytheexternalauditors,removingtheindependenceissue.Corporategovernancerequirements–bestpracticeConoyCodonotneedtofollowcorporategovernancerequirements(thecompanyisnotlisted).However,notfollowingthoserequirementsmaystarttohaveadverseeffectsonConoy.Forexample,ConoyCo’sbankisalreadyconcernedaboutthelackoftransparencyinreporting.EstablishinganauditcommitteewillshowthattheboardofConoyCoarecommittedtomaintainingappropriateinternalsystemsinthecompanyandprovidingthestandardofreportingexpectedbylargecompanies.Obtainingthenewbankloanshouldalsobeeasierasthebankwillbesatisfiedwithfinancialreportingstandards.Givennonon-executives–independentadvicetoboardCurrentlyConoyCodoesnothaveanynon-executivedirectors.Thismeansthatthedecisionsoftheexecutivedirectorsarenotbeingchallengedbyotherdirectorsindependentofthecompanyandwithlittleornofinancialinterestinthecompany.Theappointmentofanauditcommitteewithonenon-executivedirectorontheboardofConoyCowillstarttoprovidesomenon-executiveinputtoboardmeetings.Whilenotsufficientintermsofcorporategovernancerequirements(aboutequalnumbersofexecutiveandnon-executivedirectorsareexpected)itdoesshowtheboardofConoyCoareattemptingtoestablishappropriategovernancesystems.AdviceonriskmanagementFinally,thereareothergeneralareaswhereConoyCowouldbenefitfromanauditcommittee.Forexample,lackofcorporategovernancestructuresprobablymeansConoyCodoesnothaveariskmanagementcommittee.Theauditcommitteecanalsoprovideadviceonriskmanagement,helpingtodecreasetheriskexposureofthecompany. 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第23题：
You are an audit manager at Rockwell & Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.
The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:
Basis of modified opinion (extract)
In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.
We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.
Emphasis of Matter Paragraph
We draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.
Required:
(a) Critically appraise the draft audit report of the Hopper Group for the year ended 30 June 2015, prepared by the audit senior.
Note: You are NOT required to re-draft the extracts from the audit report. (10 marks)
(b) The audit of the new subsidiary, Seurat Sweeteners Co, was performed by a different firm of auditors, Fish Associates. During your review of the communication from Fish Associates, you note that they were unable to obtain sufficient appropriate evidence with regard to the breakdown of research expenses. The total of research costs expensed by Seurat Sweeteners Co during the year was $1·2 million. Fish Associates has issued a qualified audit opinion on the financial statements of Seurat Sweeteners Co due to this inability to obtain sufficient appropriate evidence.
Required:
Comment on the actions which Rockwell & Co should take as the auditor of the Hopper Group, and the implications for the auditor’s report on the Hopper Group financial statements. (6 marks)
(c) Discuss the quality control procedures which should be carried out by Rockwell & Co prior to the audit report on the Hopper Group being issued. (4 marks)
正确答案：(a) Critical appraisal of the draft audit report
Type of opinion
When an auditor issues an opinion expressing that the financial statements ‘do not give a true and fair view’, this represents an adverse opinion. The paragraph explaining the modification should, therefore, be titled ‘Basis of Adverse Opinion’ rather than simply ‘Basis of Modified Opinion’.
An adverse opinion means that the auditor considers the misstatement to be material and pervasive to the financial statements of the Hopper Group. According to ISA 705 Modifications to Opinions in the Independent Auditor’s Report, pervasive matters are those which affect a substantial proportion of the financial statements or fundamentally affect the users’ understanding of the financial statements. It is unlikely that the failure to recognise contingent consideration is pervasive; the main effect would be to understate goodwill and liabilities. This would not be considered a substantial proportion of the financial statements, neither would it be fundamental to understanding the Hopper Group’s performance and position.
However, there is also some uncertainty as to whether the matter is even material. If the matter is determined to be material but not pervasive, then a qualified opinion would be appropriate on the basis of a material misstatement. If the matter is not material, then no modification would be necessary to the audit opinion.
Wording of opinion/report
The auditor’s reference to ‘the acquisition of the new subsidiary’ is too vague; the Hopper Group may have purchased a number of subsidiaries which this phrase could relate to. It is important that the auditor provides adequate description of the event and in these circumstances it would be appropriate to name the subsidiary referred to.
The auditor has not quantified the amount of the contingent element of the consideration. For the users to understand the potential implications of any necessary adjustments, they need to know how much the contingent consideration will be if it becomes payable. It is a requirement of ISA 705 that the auditor quantifies the financial effects of any misstatements, unless it is impracticable to do so.
In addition to the above point, the auditor should provide more description of the financial effects of the misstatement, including full quantification of the effect of the required adjustment to the assets, liabilities, incomes, revenues and equity of the Hopper Group.
The auditor should identify the note to the financial statements relevant to the contingent liability disclosure rather than just stating ‘in the note’. This will improve the understandability and usefulness of the contents of the audit report.
The use of the term ‘we do not feel that the treatment is correct’ is too vague and not professional. While there may be some interpretation necessary when trying to apply financial reporting standards to unique circumstances, the expression used is ambiguous and may be interpreted as some form. of disclaimer by the auditor with regard to the correct accounting treatment. The auditor should clearly explain how the treatment applied in the financial statements has departed from the requirements of the relevant standard.
Tutorial note: As an illustration to the above point, an appropriate wording would be: ‘Management has not recognised the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree, which constitutes a departure from International Financial Reporting Standards.’
The ambiguity is compounded by the use of the phrase ‘if this is the case, it would be appropriate to adjust the goodwill’. This once again suggests that the correct treatment is uncertain and perhaps open to interpretation.
If the auditor wishes to refer to a specific accounting standard they should refer to its full title. Therefore instead of referring to ‘the relevant standard’ they should refer to International Financial Reporting Standard 3 Business Combinations.
The opinion paragraph requires an appropriate heading. In this case the auditors have issued an adverse opinion and the paragraph should be headed ‘Adverse Opinion’.
As with the basis paragraph, the opinion paragraph lacks authority; suggesting that the required adjustments ‘may’ materially affect the financial statements implies that there is a degree of uncertainty. This is not the case; the amount of the contingent consideration will be disclosed in the relevant purchase agreement, so the auditor should be able to determine whether the required adjustments are material or not. Regardless, the sentence discussing whether the balance is material or not is not required in the audit report as to warrant inclusion in the report the matter must be considered material. The disclosure of the nature and financial effect of the misstatement in the basis paragraph is sufficient.
Finally, the emphasis of matter paragraph should not be included in the audit report. An emphasis of matter paragraph is only used to draw attention to an uncertainty/matter of fundamental importance which is correctly accounted for and disclosed in the financial statements. An emphasis of matter is not required in this case for the following reasons:
– Emphasis of matter is only required to highlight matters which the auditor believes are fundamental to the users’ understanding of the business. An example may be where a contingent liability exists which is so significant it could lead to the closure of the reporting entity. That is not the case with the Hopper Group; the contingent liability does not appear to be fundamental.
– Emphasis of matter is only used for matters where the auditor has obtained sufficient appropriate evidence that the matter is not materially misstated in the financial statements. If the financial statements are materially misstated, in this regard the matter would be fully disclosed by the auditor in the basis of qualified/adverse opinion paragraph and no emphasis of matter is necessary.
(b) Communication from the component auditor
The qualified opinion due to insufficient evidence may be a significant matter for the Hopper Group audit. While the possible adjustments relating to the current year may not be material to the Hopper Group, the inability to obtain sufficient appropriate evidence with regard to a material matter in Seurat Sweeteners Co’s financial statements may indicate a control deficiency which the auditor was not aware of at the planning stage and it could indicate potential problems with regard to the integrity of management, which could also indicate a potential fraud. It could also indicate an unwillingness of management to provide information, which could create problems for future audits, particularly if research and development costs increase in future years. If the group auditor suspects that any of these possibilities are true, they may need to reconsider their risk assessment and whether the audit procedures performed are still appropriate.
If the detail provided in the communication from the component auditor is insufficient, the group auditor should first discuss the matter with the component auditor to see whether any further information can be provided. The group auditor can request further working papers from the component auditor if this is necessary. However, if Seurat Sweeteners has not been able to provide sufficient appropriate evidence, it is unlikely that this will be effective.
If the discussions with the component auditor do not provide satisfactory responses to evaluate the potential impact on the Hopper Group, the group auditor may need to communicate with either the management of Seurat Sweeteners or the Hopper Group to obtain necessary clarification with regard to the matter.
Following these procedures, the group auditor needs to determine whether they have sufficient appropriate evidence to draw reasonable conclusions on the Hopper Group’s financial statements. If they believe the lack of information presents a risk of material misstatement in the group financial statements, they can request that further audit procedures be performed, either by the component auditor or by themselves.
Ultimately the group engagement partner has to evaluate the effect of the inability to obtain sufficient appropriate evidence on the audit opinion of the Hopper Group. The matter relates to research expenses totalling $1·2 million, which represents 0·2% of the profit for the year and 0·03% of the total assets of the Hopper Group. It is therefore not material to the Hopper Group’s financial statements. For this reason no modification to the audit report of the Hopper Group would be required as this does not represent a lack of sufficient appropriate evidence with regard to a matter which is material to the Group financial statements.
Although this may not have an impact on the Hopper Group audit opinion, this may be something the group auditor wishes to bring to the attention of those charged with governance. This would be particularly likely if the group auditor believed that this could indicate some form. of fraud in Seurat Sweeteners Co, a serious deficiency in financial reporting controls or if this could create problems for accepting future audits due to management’s unwillingness to provide access to accounting records.
(c) Quality control procedures prior to issuing the audit report
ISA 220 Quality Control for an Audit of Financial Statements and ISQC 1 Quality Control for Firms that Perform. Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Agreements require that an engagement quality control reviewer shall be appointed for audits of financial statements of listed entities. The audit engagement partner then discusses significant matters arising during the audit engagement with the engagement quality control reviewer.
The engagement quality control reviewer and the engagement partner should discuss the failure to recognise the contingent consideration and its impact on the auditor’s report. The engagement quality control reviewer must review the financial statements and the proposed auditor’s report, in particular focusing on the conclusions reached in formulating the auditor’s report and consideration of whether the proposed auditor’s opinion is appropriate. The audit documentation relating to the acquisition of Seurat Sweeteners Co will be carefully reviewed, and the reviewer is likely to consider whether procedures performed in relation to these balances were appropriate.
Given the listed status of the Hopper Group, any modification to the auditor’s report will be scrutinised, and the firm must be sure of any decision to modify the report, and the type of modification made. Once the engagement quality control reviewer has considered the necessity of a modification, they should consider whether a qualified or an adverse opinion is appropriate in the circumstances. This is an important issue, given that it requires judgement as to whether the matters would be material or pervasive to the financial statements.
The engagement quality control reviewer should ensure that there is adequate documentation regarding the judgements used in forming the final audit opinion, and that all necessary matters have been brought to the attention of those charged with governance.
The auditor’s report must not be signed and dated until the completion of the engagement quality control review.
Tutorial note: In the case of the Hopper Group’s audit, the lack of evidence in respect of research costs is unlikely to be discussed unless the audit engagement partner believes that the matter could be significant, for example, if they suspected the lack of evidence is being used to cover up a financial statements fraud.