March 2016 exam short form Qs Flashcards
During a recent external audit performed by your firm, a trainee ICAEW Chartered Accountant
altered the sample of trade receivable balances initially selected for testing, at the request of
the audited entity’s financial controller, an ICAEW Chartered Accountant. The financial
controller threatened the trainee that he would tell the audit engagement partner that the
trainee was incompetent if he did not comply with the request. Therefore, the trainee replaced
trade receivable balances for which no cash was received after the year end with balances for
which cash had been received.
Requirement
Identify and explain the ethical issues arising in this situation.
(4 marks)
Ethical issues
Raises doubts over integrity of FC
* May impact other areas of the financial statements/audit
Trainee has not acted with integrity
* Outcome of audit sample is likely to be misleading
* Adjusting sample to produce a ‘better outcome’ is not truthful
Objectivity compromised
Intimidation threat
* FC has pressurised trainee/exerted influence
Self-interest threat
* Fear of consequences if FC tells audit partner trainee is incompetent
Professional competence and due care compromised
* Trainee has not performed audit procedure correctly
* Trainee did not exercise sound judgement
Professional behaviour of trainee/FC compromised
The directors of your firm’s external audit client Gruber Ltd (Gruber), an accounting software
company, have approached your firm with a proposal to sell Gruber’s software to your firm’s
other external audit clients. Under the proposal Gruber would supply the software and your
firm would be responsible for its implementation at each client. The directors of Gruber expect
to increase software sales by 50% as a result of this arrangement.
Requirement
State, with reasons, whether it is appropriate for your firm to accept the directors’ proposal.
(4 marks)
Appropriateness of arrangement with audit client
Not appropriate/should decline offer
ES S2 states firms should not enter into business relationships with an audited entity unless
clearly inconsequential
As Gruber expects to increase sales by 50% it does not appear inconsequential
Self-interest threat to firm’s independence/objectivity as firm may:
* be reluctant to modify opinion/take actions during the audit of Gruber that adversely
impact the commercial arrangement
* recommend software to clients, where it is not appropriate, to earn additional fees
Padding LLP (Padding) has tendered for the external audit of Clyde plc. Padding has proposed
a fee which is less than the market rate in the hope that the firm will subsequently be awarded
the more lucrative tax and advisory work for Clyde plc.
Requirements
Identify and explain the ethical issues posed by Padding’s proposal.
(4 marks)
Ethical issues
Proposal represents ‘lowballing’
Threat to the fundamental principle of professional competence and due care
* Risk that audit quality is adversely affected
If non-audit services obtained objectivity/independence may be impaired:
* Self-interest threat
– Fee dependency/fear of losing fee/extra work
– May cause reluctance to report unfavourably/modify opinion
* Self-review threat
– Over reliance on colleagues’ work
– Reluctance to notify firm’s errors to client’s management
* Management threat
– May be expected to make decisions
– Views too closely aligned with management
ES S4 states that audit fee must not be influenced by the provision of other services
State what is meant by ‘performance materiality’ and outline why this is set by external
auditors.
(2 marks)
4 Performance materiality
* An amount set at less than level(s) for the FS as a whole or particular classes of transactions, account balances or disclosures
* To reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the FS as whole
Reasons set by external auditors
* Individually immaterial misstatements which are material in aggregate have a greater
chance of being detected
* Auditor will perform more audit work
* Provides a margin of safety
* Reduces detection risk
* Reduces risk of inappropriate audit opinion
During the external audit of Bushat Ltd it was discovered that, on a number of occasions,
adjustments were made, by the payroll clerk, to standing data relating to employees on the
payroll system on the oral authority of the human resources manager.
Requirements
Outline the possible consequences of this internal control deficiency and provide
recommendations to remedy the deficiency.
(3 marks)
Consequences
* Oral instructions may be misunderstood
* Unauthorised/fraudulent changes
* Resulting in errors in changes/inaccurate standing data
* Fictitious employees could be recorded on system
* Incorrect payments made to employees
* Adverse impact on profit and cash flow
* Adverse impact on employee goodwill
* Cost/time spent to correct errors
Recommendations
* All changes must be made on written authority
* Signed by HR manager
* Periodic one-for-one checking of all standing data
* Regular exception reports of changes made
– Checked back to written authority
– Signature evidencing check
* Password protection on system
* Amendments processed independently of payroll staff
List the differences between a report prepared by a practitioner for an engagement to review
financial statements and the report prepared by auditors for an external audit engagement.
(3 marks)
Review report
* Addressee determined by the engagement
* Conducted in accordance with ISRE 2400
* Work consists mainly of inquiries of management and analytical procedures
* Would state ‘have not performed an audit’/less in scope than audit
* Moderate/limited assurance
* Negative opinion
– ‘Nothing has come to our attention’
* Signed by reporting accountant
External auditor’s report
* Addressee is shareholders/members
* Conducted in accordance with relevant laws/CA06/ISAs
* Reasonable assurance
* Positive opinion
– ‘True and fair view’
* Signed by statutory auditor
