Exam 3: Unit 21-32

Use the information in the following paragraphs to answer question You are the auditor of Whizzipop plc a manufacturer of soft drinks. The draft consolidated financial statements for the year ended 30 September 2X18 show revenue of $125 million (2X17 - $114 million), profit before taxation of $12.4 million (2X17 - $10.9 million) and total assets of $110 million (2X17 - $93 million). It has several subsidiaries, some of which are audited by firms other than yours. The financial statements of one such subsidiary company, Twizzle, for the year ended 30 September 2X18, are audited by another firm. Profit before taxation of $0.4 million and total assets of $34.1 million have been included in the draft consolidated financial statements of Whizzipop. The notes to Twizzle's financial statements as at 30 September 2X18 disclose a contingent liability for a pending legal matter estimated at $0.2 million. In November 2X18, the courts found Twizzle to be liable for costs and damages amounting to $1.1 million. However, Twizzle's directors have refused to make a provision, for any amount, as they have lodged an appeal against the judgement. -What evidence would you expect to see in respect of this liability?

Demand for increased regulation of the audit profession has come from audit firms themselves, particularly medium sized firms that find it difficult to secure audit contracts for public limited companies (PLCs) given the predominance of the 'Big Four' firms. One medium sized firm has written to the House of Lords inquiry asking for a cap on the number of big audit contracts any one firm can have. Set out in not more than 500 words the effect of increased regulation to compel Big 4 audit firms to give up large multinational audits.

Bludger Ltd's auditors were appointed after the end of the financial year and discovered that the company had also changed banks shortly after the year end. The directors refused permission for the auditors to contact the previous bankers for confirmation of the year end bank balance without giving any good reason. The total of net current assets was £1.2m of which the bank balance amounted to £123,000 overdrawn. Which of the following options should the auditors take when considering their audit report?

Not modified
Modified
‘Except for’ – limitation of audit scope
Except for – material disagreement
Disclaimer – pervasive limitation of audit scope
Adverse opinion – pervasive disagreement

State whether the following are true or false Emphasis of matter reports are not a modification of opinion but merely draw attention to some disclosure in the financial statements Negative assurance is given in all non audit engagements Failure of auditors to obtain sufficient, appropriate evidence will result in an adverse audit opinion Compilation assignments require no audit opinion at all

The audit team at Harmonium Ltd, a manufacturer of toys and games, have noted several points which they have brought to the attention of you, the audit partner. These include -Harmonium's product range hasn't changed in five years and newer products are appearing in the market in direct competition -The management of Harmonium have not replaced their Head of Marketing who has left the company to join a competitor -The bank has refused to increase Harmonium's overdraft and turned down an application for as loan for new equipment -Orders from two key customers have declined steadily over the year and turnover volume is dropping. The directors point out that revenues are equivalent to those of the previous year but the auditors point out that this is due to price rises not to volumes of goods sold -The audit team reviewed the future budgets and cash flows of Harmonium prepared by the directors and stated that, whilst some of the assumptions were optimistic the projections were not completely unreasonable There are no other points which give any indication that the financial statements are incorrectly stated and the audit process was satisfactory. You have to decide whether any of these issues affect your audit opinion for the year and which course of action is the most appropriate a) The company is likely to be in trouble so issue a qualified auditors' report on the financial statements on the basis that it is not a going concern b) None of these points are of significance to the financial report for the current year and it is not for the auditors to tell the directors what to do so no action is required c) None of these points are of significance to the financial report for the current financial year. However they indicate a worrying trend which it might be appropriate to discuss with the directors after the audit is finalised. d) The audit team should go back to the company and try to discover further evidence that the company is not a going concern so the audit report can be modified

You are reviewing the audit files of Monty Ltd with a view to finalising the audit. From your review of the files you identify the following factors. Identify whether or not they can be a) Ignored b) Whether the financial statements might have to be amended c) Whether or not the financial statements should include a reference by way of a note without any adjustment to the figures In the table below tick the response you feel is the most appropriate

	Ignore	Amend financial statements	Refer by way of note
A Receivable amounting to £15,000 has gone into liquidation after the year end and no amounts will be recovered. Total Receivables amount to £1.2m and the pre tax profit for the year is £750,000
Since the year end the company closed four out of its eight branches
Audit investigations have indicated that the latest position on one of the long term contracts in progress is that it is likely to make a loss of £200,000. The value of Long term work in progress is £5.0m and the pre tax profit for the year is £750,000
Since the year end the company acquired one of its smaller competitors for £1.25 m. They financed this acquisition by means of an issue of shares amounting to £1m.
The bank financing arrangements were revised and renewed shortly after the year end. There were no changes to previous arrangements except an increase in the overdraft limit of £250,000
The Chief Executive left one month after the year end. The Chairman is currently carrying out her duties whilst a replacement is being sough
After the year end the Head Office was flooded and the ground floor meeting rooms and staff kitchens were badly damaged. The accounting function and IT facilities were not affected. The costs of repair are covered by insurance.

Decide whether or not these statements are true or false a. Auditors owe a duty of care to potential investors in their client b. Auditors may reduce the consequences of a negligence claim against them by operating as a limited liability partnership c. In order to prove a successful claim for negligence the client only has to suffer a loss which is the fault of the auditors

Bludger Ltd's auditors were appointed after the end of the financial year and discovered that the company had also changed banks shortly after the year end. The directors refused permission for the auditors to contact the previous bankers for confirmation of the year end bank balance without giving any good reason. The total of net current assets was £1.2m of which the bank balance amounted to £123,000 overdrawn. Which of the following options should the auditors take when considering their audit report?

Not modified
Modified
‘Except for’ – limitation of audit scope
Except for – material disagreement
Disclaimer – pervasive limitation of audit scope
Adverse opinion – pervasive disagreement

State whether each of these statements are true or false a. Auditors have no responsibility for validating comparative figures providing the audit report for the previous financial period has not been modified b. Auditors must check that the opening balances have been brought forward correctly into the new accounting period c. Where the financial statements for the previous accounting period were audited by another firm the incoming auditors must get confirmation from the outgoing auditors that their auditor's report is unchanged

At the completion stage of an audit there are a number of final review procedures which must be carried out prior to signing the audit report. In not more than 500 words explain these procedures and the reasons for them.

The audit of your client Sprightly plc revealed a major control weakness in the management of investments. The company recently recruited a financial analyst, as an employee, to manage the investment of surplus funds. Company policy is to invest in the shares of large quoted companies. The audit discovered a number of situations where the financial analyst had made substantial profits for the company by speculating in risky investments such as derivatives. Such investments could result in massive losses. The matter was reported in writing to the chief financial officer four months ago but no action has yet been taken. What action should the auditors take in respect of this discovery?

The auditing profession is facing unique technical challenges. These can be summarised briefly as: -The rise of Internet based retailers and service providers with diversified international operations. -The siting of key aspects of Internet based retailing operations in low tax jurisdictions using transfer pricing to move funds out of high tax areas into low tax jurisdictions or by carrying out actual trade in one country and invoicing from another, low tax, one - thus claiming that they are actually trading from the low tax jurisdiction even though all they have there is an office and computer invoicing system. -The increasing use of blockchain and cryptocurrencies, principally Bitcoin. -The question of going concern relating to high technology businesses developing specialised software applications. Required: a) How are these types of development likely to affect the auditing profession of the future? b) How will this affect the skills required of individual auditors?

State whether the following are true or false The purpose of a management letter is to provide good audit evidence about the state of the company's finances A significant deficiency in internal control is one which must be reported to the management or those charged with governance A Type 2 report is useful when evaluating service providers where a company has outsourced services but it is does not replace independent audit evidence Auditors may rely on representations made by the directors in identifying related parties as they are often very difficult to identify

List the basic assumptions under which an entity would be considered to be a going concern

List three advantages and three disadvantages to firms' outsourcing

In order to prove a successful claim for negligence against an audit firm there has to be a duty of care which was breached by the audit firm with the result that a loss was incurred. Auditors Woody & Co were amazed to receive a negligence claim from one of their client's bankers Gurney plc who had lent money to their client, Megabuild, after the year end and subsequently lost their money when a construction project Megabuild had been involved in went badly wrong and bankrupted them. The claim said that the auditors had significantly failed to estimate the losses on the project with the result that the bank, had they known the true position, would not have lent money to Megabuild. Gurney plc is claiming its losses from Woody & Co. What advice would you give to Woody & Co in this situation?

Use the information in the following paragraph to answer question You are a member of the audit team for the audit of Learnersinnit plc, a private provider of high quality educational services. The team have just completed the interim audit for the current year. You performed the work on the salaries system where you have noted the following issues: The company currently has over three hundred teaching and office staff, organised into several different departments. The staff are paid on a fixed scale with annual increments agreed by the board. The Salaries Department prepares one month's payroll from the names on the previous payroll, adding or deleting names as instructed by the personnel department. Details of increased pay rates resulting from promotion are also supplied by the Personnel Department. Sometimes, however, the Personnel Department is so busy that they forget to telephone the Salaries Department with details of staff changes or promotions. To correct these oversights, there is sometimes an extra payroll run to prepare additional payments where necessary. The payroll is prepared by either of the two Salaries Department staff, depending on whoever is available. The payroll calculations are usually checked for accuracy by the other employee in the department, unless one of them is absent through illness or is on holiday. The Personnel Department manager corrects any payroll errors identified on her own computer, which is part of the same computer network, and then signs the payroll electronically to indicate overall approval. She does not have time to authorise any additional runs which are necessary, however, as these are usually required urgently. Payments are made to staff by credit transfer directly to their bank accounts. Payments to statutory authorities, pension funds etc of the amounts deducted from employees plus the employers contributions are also paid by credit transfer within the required timescales. -Draft a formal Management Letter (or Letter of Weaknesses) in respect of the internal control systems of Learnersinnit plc, as outlined above. The structure of the letter should be as follows: Body of management letter: -Identification of weaknesses in the existing internal control system -Potential implications of these weaknesses -Recommendations for improvement

Use the information in the following paragraphs to answer question You are the auditor of Whizzipop plc a manufacturer of soft drinks. The draft consolidated financial statements for the year ended 30 September 2X18 show revenue of $125 million (2X17 - $114 million), profit before taxation of $12.4 million (2X17 - $10.9 million) and total assets of $110 million (2X17 - $93 million). It has several subsidiaries, some of which are audited by firms other than yours. The financial statements of one such subsidiary company, Twizzle, for the year ended 30 September 2X18, are audited by another firm. Profit before taxation of $0.4 million and total assets of $34.1 million have been included in the draft consolidated financial statements of Whizzipop. The notes to Twizzle's financial statements as at 30 September 2X18 disclose a contingent liability for a pending legal matter estimated at $0.2 million. In November 2X18, the courts found Twizzle to be liable for costs and damages amounting to $1.1 million. However, Twizzle's directors have refused to make a provision, for any amount, as they have lodged an appeal against the judgement. -What action would you, as group auditor, take in respect of this liability?

Give three examples of where auditors' routine audit procedures involve periods after the year end date, excluding consideration of post balance sheet events.

To which of the following stakeholders do the auditors of Tesco plc have a legal as opposed to a moral responsibility