Question 1

Which of these is not the function of a Recognised Supervisory Body?

Accepted Answer

A)   Admission of members
B)   Disciplining members
C)   Setting ethical standards
D)   Investigating complaints
E)   Reviewing audits of public limited companies to maintain auditing standards E

Question 2

Explain in not more than 500 words the role and function of an audit committee

Accepted Answer

-to review the company's internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors or by the board itself, the company's internal control and risk management systems;
-to monitor and review the effectiveness of the company's internal audit function;
-to make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment of the external auditor and to approve the remuneration and terms of engagement of
-the external auditors;
-to review and monitor the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK professional and regulatory requirements;
-to develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and
-to report to the board, identifying any matters in respect of which it considers that action or improvement is needed, and making recommendations as to the steps to be taken.

Question 3

Sparkies has undergone a period of substantial growth following its establishment five years ago by two electricians who pooled their redundancy pay. Because of a lack of accounting expertise within the company it has traditionally looked to its auditors, Sudden Haddock & Co, for accounting services in the preparation of annual financial statements as well as for the statutory audit function.
Sudden Haddock & Co have also provided advice in connection with the company's accounting and internal control systems.
Sudden Haddock & Co is a two partner firm of certified accountants and registered auditors whose clients are mainly sole traders, partnerships and small limited companies. Although Sparkies was originally atypical small company client, its growth over the last five years has meant that it now accounts for approximately 20% of Sudden Haddock & Co's gross fee income and the company has indicated that it may
wish to issue shares on the stock market in the near future.
Required:
Discuss the extent to which it is acceptable and desirable that Sudden Haddock & Co have in the past provided the three services of statutory audit, advice in connection with systems, and accountancy services in the preparation of annual financial statements to Sparkies.

Accepted Answer

The duties to be undertaken by a professional firm on behalf of its clients should be clearly set out in a letter of engagement. This serves as written confirmation of the agreement between the parties and serves to avoid misunderstanding.
If it is agreed between an auditor and his client that the auditor will provide services in addition to the statutory audit function then this is generally acceptable. The auditors must, nevertheless, take care not to perform executive functions or to take executive decisions. These are duties of management and Tickit & Run must take care not to drift across the borderline of what is proper.
In the case of privately owned or unlisted companies it is frequently necessary to provide a much fuller service than would be appropriate for a publicly owned or listed company and this may include participation in the preparation of accounting records. Sudden Haddock & Co must, however, take particular care to ensure that the client accepts full responsibility for such records and that objectivity in carrying out the audit is not impaired.
One way in which Sudden Haddock & Co may attempt to retain their objectivity is by employing the idea known as the 'Chinese Wall' whereby different staff are used on each type of work so that information on accountancy work is not given to audit staff. In practice this is likely to prove difficult to implement for the small audit firm and small clients.
The area of systems and control advice is particularly fraught with difficulties. An auditor should regularly point out weaknesses in his clients' systems and recommend improvements in their internal control by sending an annual memorandum on internal control in which weaknesses and strengths in the system would be discussed. The implementation of new systems is, however, very much an executive function and as such falls outside the scope of services which should normally be undertaken. The auditor firm may act in a consultative
capacity in reviewing systems, both computer based and manual, especially with regard to internal control aspects. As far as computer systems are concerned the introduction of proper controls is so important that auditors may wish to give advice at the development stage, but, on the whole, auditors should avoid going beyond the giving of advice.
The overall theme of this discussion is the need for Sudden Haddock & Co to retain their independence and objectivity. Their prime function is to undertake an independent examination of their client's financial statements and to report thereon. In order to fulfil this role in a satisfactory manner they must be, and be seen to be, independent. An undue involvement with accountancy or systems work may impair their ability to take a truly objective view.

Question 4

Mautz and Sharaf set out a series of postulates and assumptions on which their theory of auditing was based. Set out in not more than 500words the basis of their approach and the problems which subsequent commentators have indicated with their approach. Note it is not necessary for you to set out the postulates in detail merely use them to indicate points in your answer where necessary.

Accepted Answer

The answer of Mautz and Sharaf set out a series...

Question 5

Which one of the following best describes the role of the International Auditing and Assurance Board (IAASB)?
The IAASB is responsible for:

Accepted Answer

A)   Setting auditing standards which are compulsory throughout the world
B)   Monitoring auditors to ensure that they comply with auditing standards
C)   Investigating and disciplining auditors who fail to comply with auditing standards
D)   Setting auditing standards which facilitate the convergence of national and international auditing standards

Question 6

You have been asked to prepare a presentation on materiality which will provide guidance to members of staff in conducting limited company audits.
Include in your presentation
A definition of materiality and performance materiality
The alternative measures that could be employed to determine a materiality limit for an audit.

Accepted Answer

The answer of You have been asked to prepare a...

Question 7

What is meant by 'substance over form'?

Accepted Answer

The answer of What is meant by 'substance over form'?...

Question 8

Outline the relationship between audit risk, materiality limits and audit planning

Accepted Answer

The answer of Outline the relationship between audit risk, materiality...

Question 9

Explain the purpose of a 'hot' review and distinguish it from a 'cold' review

Accepted Answer

The answer of Explain the purpose of a 'hot' review...

Question 10

Set out the rights and duties of auditors under the Companies Act 2006

Accepted Answer

The answer of Set out the rights and duties of...

Question 11

State the advantages and disadvantages of a framework approach to corporate governance as opposed to a legislative approach

Accepted Answer

The answer of State the advantages and disadvantages of a...

Question 12

Briefly describe three audit strategies

Accepted Answer

The answer of Briefly describe three audit strategies...

Question 13

Which of these statements is true?
An audit benefits a company because

Accepted Answer

A)   It reassures the shareholders that the accounts are accurate
B)   Makes the management accountable to the shareholders
C)   Guarantees that the accounts are free from fraud or error
D)   Guarantees that the financial information shown is true and fair

Question 14

List two ways in which analytical procedures can help the auditor in the planning stage of the audit

Accepted Answer

The answer of List two ways in which analytical procedures...

Question 15

State whether the following statements are true or false in respect of the rules governing audit activity
a-The work of the auditing profession is governed solely by the Companies Act 2006
b-The Financial Reporting Council has the power to discipline auditors who perform their work poorly

Accepted Answer

The answer of State whether the following statements are true...

Question 16

List five threats to auditor independence and provide an example of each

Accepted Answer

The answer of List five threats to auditor independence and...

Question 17

Explain the responsibilities of
-the directors
-the auditors
in connection with the preparation and publication of a company's financial statements

Accepted Answer

The answer of Explain the responsibilities of
-the directors
-the auditors
in connection...

Question 18

What are the preconditions for an audit?

Accepted Answer

The answer of What are the preconditions for an audit?...

Question 19

An entity uses internal control procedures in order to mitigate the risks to which the entity is exposed. Listed below are two internal control procedures which are applicable to an entity's sales and receivables system.
Match each internal control procedure with the risk mitigated from the list below:
-Sales are made to customers who cannot pay
-Sales are not made to existing customers
-Deliveries are not made to bona fide customers
-Customer refuses to pay for goods allegedly not received
-Customer orders not being fulfilled

Accepted Answer

The answer of An entity uses internal control procedures in...

Question 20

Which course of action should you follow?
a) You have to decline as it is a definite conflict and is effectively ruled out by the ethical guidelines of your RSB.
b) It is a conflict of interest and there is a danger of being involved in management decision making which is prohibited specifically by the ethical rules. Providing separate teams were used and the internal audit was overseen by another partner it would be possible to take on the work. The external audit team must remain independent of the internal audit team and there must be no communication between them except at arm's length during the course of the audit.
c) It will help the audit by giving you a better insight into the company so could be looked at as an extension of the external audit. You could use the same team and simply amend the external audit programs accordingly.
d) If this was the USA it would be illegal and cases such as Enron demonstrate the dangers of being seen to go soft on the company because of all the lucrative non audit work - best to avoid the whole thing even if it means a rival firm becomes involved with your client.

Accepted Answer

The answer of Which course of action should you follow?
a)...

Exam 1: Unit 1-10