ACCA F8 (INT) Audit & Assurance - 2010 - Study text

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Chapter 17: Other audit and assurance situations and reports

5.2 Audit approach to smaller entities

The list below summarises the main additional points for the auditor to consider

when dealing with a smaller entity:

 Acceptance of the audit appointment: The auditor should be aware of the

possible risks to independence resulting from close involvement with

management and pressure on the audit fee.

 Engagement letter: This formalises the relationship between the auditor and the

client. If necessary, it separates the accounts preparation function from the

auditing function.

 Planning and recording: This process will be similar to any audit engagement,

but is likely to be simpler. The entire audit may be conducted by a very small

audit team so co-ordination and communication should be easier. A brief

memorandumpreparedatthecompletionofthepreviousaudit,updatedinthe

currentperiodbasedondiscussionswiththeowner‐manager,maybesufficient

asthedocumentedauditstrategyforthecurrentaudit.

 Accounting systems: The systems may not be adequate for audit purposes and

the auditor may not be able to rely on the controls in place. As a result, control

risk is likely to be high.

 Substantive procedures: These are likely to form the basis of the audit work, if

controls are weak. However, it is difficult to reach a conclusion on completeness of

accounting records based only on substantive procedures.

 Audit evidence: High quality evidence may be more difficult to find than in a

larger entity.

 Materiality: A smaller entity’s profit before tax may be consistently negligible,

as the bulk of any profit may be taken out by the owner-manager as

remuneration. A benchmark such as profit before remuneration and tax might

therefore be more relevant.

 Analytical procedures: Smaller entities may not have interim or monthly

financial statements which can be used for analytical review purposes. ISA 315

suggests that the auditor may be able to use an early draft of the entity’s year-

end financial statements.

 Management representations: become more important in smaller entities.

However, the auditor must look for evidence to support the representations.

 Going concern: A smaller entity may be more able to quickly respond to

opportunities, but it may also be more vulnerable to a bank withdrawing

support. The continued financial support of the owner-manager may be vital to

the survival of the entity and the auditor will need to assess the risk of that

support failing.

 Audit report: There may be insufficient evidence as to the completeness and

accuracy of the records, which may lead to a qualified opinion.

 Review of financial statements: As for any audit but it may be that smaller

entities may be exempt from certain reporting requirements (for example, from

the application of certain requirements of International Financial Reporting

Standards).

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Paper F8 (INT)

Audit and assurance

Q&A

Practice questions

Contents

Page

The meaning of audit and assurance

1 Audit and review 380

Corporate governance and auditing

2 Corporate governance 380

The statutory audit

3 Zubrovka 380

4 Babushka 380

Professional ethics and codes of conduct

5 Keane 381

6 Dilemma and Co 381

7 Engagement letters 382

Internal audit

8 Usefulness of internal audit 382

9 Venture Videos 382

Planning and risk assessment

10 Planning 383

11 Beautiful Jewels 383

12 Woolacombe Souvenirs 383

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Introduction to audit evidence

13 Financial statement assertions 384

14 John 384

15 Blunkett Manufacturing 384

16 Internal audit questionnaire 385

Internal control: ISA 315

17 Sopot 385

18 Control activities 386

19 Ascertaining and recording accounting

systems 386

20 Grander Products 386

21 Pivo 386

Tests of controls

22 Sales cycle controls 388

23 Countrywide Sales 388

24 Faroff Supplies 388

Introduction to substantive procedures

25 Caraway Manufacturing 388

26 Opening balances 390

27 Compton Components 390

Substantive procedures: non-current assets

28 Ray Products 390

29 Invisible Industries 391

Substantive procedures: inventory

30 Plastico Products 391

31 Count instructions 391

Substantive procedures: other current assets

32 DebtCo 392

33 Cash and bank 393

Practice questions

Substantive procedures: other areas

34 Payables ledger balances 393

35 Audit of accounting estimates 393

Audit finalisation

36 Izzard Electronics 393

37 Subsequent events 394

The external audit report

38 Eden Electronics 394

39 Posh Perfumes 394

Other audit and assurance situations and reports

40 Creed Computers 394

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1 Audit and review

(a) Explain the difference between an audit and a review.

(b) Explain why an audit is necessary.

(i) A true and fair view

(ii) Materiality

2 Corporate governance

(a) Explain what is meant by corporate governance.

(b) Explain how the following fit into the workings of corporate governance.

(i) Management

(ii) The external auditor

(iii) The internal auditor

(iv) The audit committee

3 Zubrovka

The directors of Zubrovka, a newly-formed company, have written to you with a

view to securing your services as auditor. Within their letter you note the following

comments:

‘Your duties and rights as auditor will be determined by the board of our company.

In the main, these duties are in line with the requirements of company law, but in

the event of conflict or exclusion we will indemnify you against any legal action

brought as a consequence of the position adopted. The board also retains the right to

dismiss you at any time without necessarily disclosing the reasons for their action.’

Required

(a) Describe your understanding of your duties as auditor of Zubrovka.

(b) As auditor, describe your relationship as the auditor to the directors of

Zubrovka.

(d) Consider whether or not the directors have the authority to dismiss you.

(e) Set out the steps you would take prior to accepting the appointment as auditor

to the company.

4 Babushka

John Ford is the managing director of Babushka, a private company. Babushka is

currently audited by Old and Co. John has informed you that the directors of

Babushka wish to appoint your firm, New and Co as auditors in place of Old and

Co, but they consider that Old and Co will not be willing to resign.

Practice questions

Required

(a) Assuming that Old and Co are not willing to resign, set out the statutory and

other procedures which will have to be followed by Babushka, your firm and

which may be adopted by Old and Co in connection with this proposed

appointment. You should assume that New and Co have adequate resources

to take on the audit of Babushka, and that there are no issues surrounding

independence or client integrity.

(b) Assuming that Old and Co are willing to resign part way through their term

of office, set out the procedures to be followed by Old and Co and Babushka

in order to effect the resignation.

5 Keane

It has been suggested that the most important matter affecting the credibility of the

auditor is that of ‘independence’.

Required

(a) Discuss, giving examples, matters other than independence, which might be

relevant in relation to the credibility of the auditor and steps that the

accounting profession has taken or might take in relation to them.

(b) Comment on the following situations in the context of the independence of the

auditor, showing clearly the threats involved and the safeguards required by

the ACCA Code:

(i) The audit manager in charge of the audit assignment of Keane holds

1,000 $1 ordinary shares in the company (total shares in issue – 100,000).

The audit partner holds no shares.

(ii) An audit partner of a firm of Certified Accountants is a personal friend

of the chief accountant of Scholes. The chief accountant is not a director

of the company and the partner is not responsible for the audit of

Scholes.

(iii) The audit fee receivable from Giggs, a listed company, is $100,000. The

total fee income of the audit firm is $700,000.

(iv) The audit senior in charge of the audit of Fletcher, a bank, has a personal

loan from the Fletcher Bank of $2,000 on which he is currently paying a

market rate of interest.

(v) An audit partner is responsible for two audit assignments: Ronaldo and

Neville. Ronaldo has recently tendered for a contract with Neville for a

supply of material quantities of goods over a number of years. Neville

has asked the audit partner to advise on the matter.

6 Dilemma and Co

(a) State how legislation and the ACCA Code each seek to ensure the

independence and objectivity of auditors.

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(b) The following three situations have arisen in the audit firm of Dilemma and Co:

(i) One of the partners, Mr Smith, and his wife, have been invited by the

managing director of Fancy Ceramics, an audit client, to celebrate the

company’s 20th anniversary with management over a long weekend in

France. Mr Smith has been the engagement partner since incorporation

of the company.

(ii) The firm has been approached and asked to accept appointment as

auditors of Gorgeous Potteries. One of the firm’s audit managers is

company secretary of the company, although he takes no part in the

management of the company. His parents are the directors and

shareholders of Gorgeous Potteries.

(iii) The directors of Green Goods are unhappy with the level of fees charged by

the firm. They are still refusing to agree an outstanding bill for taxation and

advisory work, and are demanding a reduction in the audit fee this year to

match a quote they have received from another firm.

Required

Comment on the situations described above, recognising any threats to

independence or objectivity, and suggesting what safeguards the firm should

put in place to deal with such threats.

7 Engagement letters

(a) Explain the objectives of the auditor in agreeing the terms of an audit

engagement and when it may be appropriate to send a new engagement letter

to an existing client.

(b) Set out the main components of an engagement letter.

8 Usefulness of internal audit

Explain the usefulness of the internal audit function to the management of a

business. Illustrate your answer with practical examples.

9 Venture Videos

You are the internal auditor of Venture Videos, which runs a chain of video rental

stores.

The company guarantees that if a video is not available for rental, the customer will

get free rental when that video comes back into inventory. It is not possible for

customers to pre-book videos.

The company purchases a number of copies of each video, taking the above policy

into account, but has no way of monitoring whether their procurement strategy is

effective. Procurement decisions are made and actioned locally and no central

budgets are produced.

Practice questions

You have been asked by the directors to review the above procurement and other

strategies.

Required

Identify and explain the potential business risks arising from the above

procurement and other strategies. Suggest controls and strategies that management

could instigate to mitigate those business risks.

10 Planning

ISA 300 Planning an audit of financial statements requires the auditor to plan his audit

work so that the audit will be performed in an effective manner.

Required

(a) Explain why the need for planning exists and what benefits are to be derived

from adopting such an approach.

(b) Set out the steps you would take prior to the commencement of an audit of a

limited company which has been a client for a number of years.

the internal auditor’s planning differs to that of the external auditor.

11 Beautiful Jewels

Beautiful Jewels designs, manufactures and retails expensive jewellery. Inventory is

held at the design warehouse and at three shops. Inventory is also sometimes sent to

customers for approval prior to a sale being made. Your firm has been re-appointed

as auditors for the year ended 31st December 20X4.

Beautiful Jewels has had a difficult year. A recession has caused a fall in sales and

the future is uncertain. A fourth shop was closed during the year and the premises

are still up for sale. The financial director was dismissed half way through the year

and is pursuing a claim for unfair dismissal. A replacement has not yet been found.

The managing director is due to retire next year and is likely to require loans he has

made to the business to be repaid. Negotiations with the bank in respect of loans to

cover these repayments have started.

Required

(a) State what you understand by audit risk and why it is important to the

auditor.

(b) Identify the risks arising from the above that will need to be taken into

account when planning the audit of Beautiful Jewels. Explain why these risks

need to be taken into account.

12 Woolacombe Souvenirs

The directors of your client, Woolacombe Souvenirs, have telephoned to tell you

that one of their junior employees has been caught stealing petty cash and has

admitted to several previous thefts. The total amount of lost cash has been estimated

Paper F8: Audit and assurance (International)

by the directors to be $300. The thefts took place in the year in respect of which you

have just completed the audit. The materiality level on the audit was set at $100,000.

The directors are demanding to know why this was not picked up during the audit

work, and when the audit report will be reissued as the audit report and accounts

have now been signed.

Required

(a) Set out the points you would include in a response to the directors of

Woolacombe Souvenirs.

(b) Explain why the auditor, when planning and performing his audit, should

consider whether his client has complied with law and regulations. Set out the

actions which may be appropriate if the auditor identifies material instances

of non-compliance.

13 Financial statement assertions

ISA 500 Audit evidence requires the auditor to obtain sufficient, appropriate evidence

to be able to draw reasonable conclusions on which to base the audit opinion. That

evidence should be relevant to the so-called ‘financial statement assertions’.

Required

(a) Set out the main assertions about account balances (including relevant

presentation and disclosure assertions) and provide an example of each one

by reference to the audit of trade receivables.

(b) Set out the seven main audit testing procedures and give an example of how

each might be used in the audit of plant and machinery.

14 John

Your office has recently taken on a new student, John. You have been asked to

explain to John what information is recorded in the audit process and where.

Required

Set out a brief explanation for John.

15 Blunkett Manufacturing

You are planning the audit of the sales system and year end trade receivables of

Blunkett Manufacturing.

The company has revenue of approximately $15 million and all of its sales are made

on credit. The year end value of trade receivables is approximately $3 million, and

there are about 1,000 customers on the sales ledger.

You have been asked by the partner in charge of the audit to consider whether it

would be appropriate to use statistical or judgmental sampling in your audit work.

You have also been asked to consider the advantages and disadvantages of using

these techniques.

ACCA F8 (INT) Audit &amp; Assurance - 2010 - Study text - Emile Woolf Publishing

Подождите немного. Документ загружается.

ACCA F8 (INT) Audit & Assurance - 2010 - Study text - Emile Woolf Publishing