September 2019 exam short form Qs

Question 1

Minel Ltd (Minel), an external audit client of your firm, suffered a fire in its factory during the
year ended 30 June 20X9. Minel’s directors have prepared an insurance claim for losses
relating to inventory, equipment and loss of profits for the period of disruption caused by the
fire. Minel’s directors have requested that your firm accepts an assurance engagement to
review the insurance claim and provide a report which will be submitted to Minel’s insurers in
support of the claim.
Requirements
Identify and explain the threats to your firm’s independence and objectivity if it accepts this
engagement.
(3 marks)

Answer 1

Threats to independence and objectivity
Management threat
* Views too closely aligned with management
* If decisions/judgements about what is included in the claim
Self-review threat
* Amounts relating to the claim may be reflected in the financial statements
* Over-reliance on assurance work and reluctant to criticise it
Advocacy threat
* Adopt a position to support management

Question 2

List the main advantages of Auditing Standards for external auditors.
(3 marks)

Answer 2

Advantages of Auditing Standards for external auditors
Provide a framework and guidance on audit approach
Standardise the approach taken by auditors
Promote audit quality
Compliance with standards protects auditors in the event of legal claims
Close the expectation gap
Help auditors to justify the nature and scope of their work to the management of the audited
entity
Assist the auditor in issuing an appropriate report/opinion

Question 3

Your firm has been the external auditor of Ghost Ltd (Ghost) since its incorporation in
September 20X6. You are the manager responsible for the audit. The audit engagement
partner asked you to select the members of staff to be included in the audit team for the year
ended 31 August 20X9.
Ghost is a tech start-up which has experienced rapid growth. Ghost’s primary activity is
research and development of its technology platform. It is seeking external finance to allow it
to continue this.
Requirement
Identify and explain the factors that you should consider when selecting the members of the
audit team for the year ended 31 August 20X9.
(4 marks)

Answer 3

Factors to consider when selecting the members of the audit team
Whether staff who worked on the audit last year are available
* Benefit from their cumulative audit knowledge and experience
Experience of staff
* Ghost is high risk
* Tech industry
* Start-up/rapid growth means controls may not be adequate
* R&D requires judgements/estimates
* Industry expert may be required
Seniority of staff
* Ghost needs finance which increases the risk of management bias
* Going concern risk
Ethical issues
* Independence
* Conflicts of interest if staff work on audits of competitors

Question 4

Your firm is the external auditor of Fett Fitness Ltd (FF) which operates a network of personal
fitness trainers across the UK. Trainers are employed by FF on part-time contracts. Customers
use the FF website to register their details, including medical history, and to book and pay for
personal training sessions.
Requirement
Identify the key areas of law and regulation that FF is likely to be subject to and explain why
these are relevant to the audit of FF.
(3 marks)

Answer 4

Laws/regulations
* Employment laws
* Health and safety laws
* Data protection laws/GDPR
* Taxation/payroll/social security
Relevance to the audit
Breaches of laws and regulations may:
* result in penalties, fines or legal claims
* these impact provisions and disclosure of liabilities
* could result in suspension of licences and poor reputation of FF
* going concern issues/cash flow issues

Question 5

You are the audit senior on the audit of Manhattan Ltd (Manhattan) for the year ended 31
August 20X9. You are reviewing the work undertaken by the audit junior on trade receivables.
The audit junior has noted that an amount of £65,000, due from Cody Ltd (Cody), is included
in trade receivables. However, the response from Cody to your firm’s trade receivables
confirmation states that there are no outstanding balances due to Manhattan.
Requirements
List the matters you would expect to see documented by the audit junior in respect of this
issue.
(4 marks)

Answer 5

Matters documented by the audit junior
Details of:
* any follow up and explanation
* post year-end receipts or credit notes/reconciling items/cut-off
* invoices/despatch records/orders relating to outstanding amount
* correspondence between Cody and Manhattan
Whether an error has been identified, and if so:
* consideration of whether £65,000 is material
* error added to list of uncorrected misstatements
* details of additional testing
* whether the error was due to internal control deficiencies/noted for reporting to
management

Question 6

List the matters on which an external auditor is required to form an opinion for an unlisted
company, as required by the Companies Act 2006.
(3 marks)

Answer 6

Matters on which an external auditor is required to form an opinion
Whether the FS are:
* true and fair/free from material misstatement
* properly prepared in accordance with relevant financial reporting framework
* prepared in accordance with requirements of CA06
Whether the directors’ report and strategic report are:
* consistent with FS
* prepared in accordance with applicable legal requirements
Required to report by exception on whether:
* misstatements have been identified in directors’ report/strategic report
* adequate accounting records kept
* returns adequate for the audit have been received from branches not visited
* the FS agree with accounting records
* disclosures re directors’ remuneration have been made
* all information and explanations have been received