March 2018 exam short form Qs Flashcards
Your firm has recently undertaken monitoring (ie, a ‘cold’ review) of the external audit
completed on the financial statements of JK Ltd. This identified that your firm’s policies in
respect of audit sampling had not been complied with.
Requirement
State the steps that your firm should take in respect of this matter.
(3 marks)
Steps
Evaluate whether the finding indicates:
* non-compliance with professional standards
* inappropriate audit opinion issued and if so seek legal advice
* systematic non-compliance with firm’s policies
* firm’s sampling policy is unclear
Communicate the finding to the engagement partner
Provide recommendations, such as:
* informing the training department
* making changes to quality control procedures
* taking disciplinary actions
Fantastic Ltd (Fantastic) is a global retailer. It has stores in many countries and an online retail
website. Fantastic has invited your firm to tender for its external audit.
Requirements
List the key factors you believe Fantastic will consider when evaluating your firm’s tender and
explain why each factor will be important to Fantastic.
(4 marks)
Key factors and why important
Firm’s experience in retail sector and online systems
Audit strategy, including reliance on controls/internal audit and use of data analytics
* would impact audit quality
Proposed approach regarding global stores
Whether the firm has overseas offices or would use a local auditor
* may impact cost/expenses
Proposed audit fee
* aim to get best value for money
Proposed personnel on the audit team
* whether Fantastic can work with senior team members
* experience/seniority of team will impact efficiency of audit
Proposed timetable
* whether firm can meet deadlines
* whether it will be disruptive/fall in busy periods
References
* assurance as to firm’s reputation
Whether firm can offer any other services
* services may be more efficient and better quality if provided by same firm
Confidentiality arrangements
* conflicts of interest may arise/firm may act for competitors
List the points specific to the examination of a profit forecast that should be included in an
engagement letter for such an examination. Give the reason for including each point.
(4 marks)
Points for engagement letter and reason for inclusion
To whom the report is made available
Intended use
* avoid reliance by unforeseen third parties
* limit liability
Period covered by the forecast information
Nature of the assumptions (best-estimate/hypothetical)
* clarity on what is subject to review
* accountant reports on reasonableness of assumptions
Statement that management is responsible for assumptions, providing information and
preparing forecasts
Performed in accordance with ISAE 3400
* not an audit
* avoid any misunderstandings/expectation gap
Caveat warning that forecast could be different to actual performance
* avoid over-reliance on forecast
Limitation of liability/liability cap
* evidence of agreement
Nature of assurance provided/limited assurance
Form of reports to be provided
Your firm has accepted an engagement to examine the profit forecast prepared by Beast Ltd
(Beast) for the two years ending 31 March 20Y0. Beast owns 45 hotels throughout Europe.
Beast’s business is seasonal with higher occupancy of its hotel rooms during May to
September. During the year ending 31 March 20X9, Beast plans to close 12 of its least
profitable hotels and sell the properties to developers. Employees at these hotels will be
offered the choice of transferring to another hotel or redundancy.
Requirement
List the key variables which should be subjected to sensitivity analysis in the examination of
Beast’s profit forecast for the two years ending 31 March 20Y0.
(3 marks)
Key variables
* Occupancy rates
* Rate of inflation/prices of rooms
* Variations in seasonality
* Sales price of properties
* Property selling costs
* Time to achieve sale of properties
* Number of employees taking redundancy vs transfer
* Redundancy costs per employee
* Exchange rates
You are responsible for planning the external audit of Tofind Ltd (Tofind), a mobile phone
service provider. You see a news report that Tofind has suffered a cyber-attack resulting in the
theft of some of its customers’ personal data.
Requirement
Outline the audit procedures you would plan to perform in relation to this cyber-attack.
(3 marks)
Procedures in relation to cyber attack
Discuss with the directors/review board minutes for:
* reasons for/extent/nature of data lost
* plans to rectify situation/recover data
Review media for adverse commentary/reputational damage
Inspect correspondence with:
* regulators re: fines
* customers re: legal action
* lawyers re: outcome of legal action
Post year-end management accounts and revised cash flow forecasts:
* to ascertain impact on business performance and risk to going concern status
Inspect financial statements to ascertain if provisions/contingent liabilities are adequately
provided/disclosed
Inspect after date payments for evidence of damages/fines
Your firm has been the external auditor of Scamander Ltd (Scamander) for several years. You
are responsible for planning the audit for the year ended 28 February 20X8. The engagement
partner has identified payroll as a key area of audit risk. Scamander’s employees work in eight
different offices across the UK and the total workforce has grown by 6% during the year ended
28 February 20X8. On 1 March 20X7, Scamander awarded a company-wide pay increase of
2%.
Requirement
List the analytical procedures, relevant to payroll, to be included in your audit plan.
(3 marks)
Analytical procedures
20X7 salary costs adjusted for:
* 2% pay rise
* 6% growth in employees
Average pay per employee compared:
* with prior year
* with budget
* by each office
Calculate expected PAYE/NI based on expected gross salaries
Average monthly wage bill per office to identify outliers
