1
Smith & Co
You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. You have recently been made responsible for
reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Several matters came to light during
your most recent review of client invoice files:
Norman Co, a large private company, has not paid an invoice from Smith & Co dated 5 June 2007 for work in respect of the
financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 states that Norman Co is
suffering poor cash flows and is unable to pay the balance. This is the only piece of information in the file you are reviewing
relating to the invoice. You are aware that the final audit work for the year ended 28 February 2008, which has not yet been
invoiced, is nearly complete and the audit report is due to be issued imminently.
Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all invoices relating to the
recently completed audit planning for the year ended 31 May 2008. However, in the invoice file you notice an invoice received by
your firm from Wallace Co. The invoice is addressed to Valerie Hobson, the manager responsible for the audit of Wallace Co. The
invoice relates to the rental of an area in Wallace Co’s empty warehouse, with the following comment handwritten on the invoice:
‘rental space being used for storage of Ms Hobson’s speedboat for six months – she is our auditor, so only charge a nominal sum
of $100’. When asked about the invoice, Valerie Hobson said that the invoice should have been sent to her private address. You
are aware that Wallace Co sometimes uses the empty warehouse for rental income, though this is not the main trading income of
the company.
In the ‘miscellaneous invoices raised’ file, an invoice dated last week has been raised to Software Supply Co, not a client of your
firm. The comment box on the invoice contains the note ‘referral fee for recommending Software Supply Co to several audit clients
regarding the supply of bespoke accounting software’.
Required: Identify and discuss the ethical and other professional issues raised by the invoice file review, and recommend wha t
action, if any, Smith & Co should now take in respect of: (a) Norman Co; (b) Wallace Co; and (c) Software Supply Co.
2 Plant (P7 12/12) (amended)
49 mins
(a) You are an audit manager in Weller & Co, an audit firm which operates as part of an international network of firms. This morning
you received a note from a partner regarding a potential new audit client:
'I have been approached by the audit committee of the Plant Group, which operates in the mobile telecommunications sector.
Our firm has been invited to tender for the audit of the individual and group financial statements for the year ending 31 March
20X3, and I would like your help in preparing the tender document. This would be a major new client for our firm's telecoms
audit department.
The Plant Group comprises a parent company and six subsidiaries, one of which is located overseas. The audit committee is
looking for a cost effective audit, and hopes that the strength of the Plant Group's governance and internal control mean that the
audit can be conducted quickly, with a proposed deadline of 31 May 20X3. The Plant Group has expanded rapidly in the last few
years and significant finance was raised in July 20X2 through a stock exchange listing.'
Required
(i) Explain why a firm of auditors may decide NOT to seek re-election as auditor.(6 marks)
(ii) Evaluate the specific matters to be included in the tender document for the audit of the
Plant Group. (9 marks)
(b) Weller & Co is facing competition from other audit firms, and the partners have been considering how the firm's revenue could
be increased. Two suggestions have been made:
1 Audit partners and managers can be encouraged to sell non-audit services to audit clients by including in their remuneration
package a bonus for successful sales.
2 All audit managers should suggest to their audit clients that as well as providing the external audit service, Weller & Co can
provide the internal audit service as part of an 'extended audit' service.
Required
Comment on the ethical and professional issues raised by the suggestions to increase the firm's revenue. (10 marks) (Total = 25
marks)
3 Monet (P7 Sep/Dec 16)
49 mins
You are a manager in Monet & Co, a firm of accountants which has 12 offices and 30 partners, 10 of whom are members of ACCA.
As an expert in ethics and professional conduct, you have been asked to advise the partners on the following issues, which were
raised at a recent meeting.
(a) An advertisement has been drafted as part of the firm's drive to increase the number of clients. It is suggested that it should be
placed in a number of quality national as well as local newspapers:
Have you had enough of your accountant charging you too much for poor quality services?
Does your business need a kick-start?
Look no further; Monet & Co provides the most comprehensive range of finance and accountancy services in the country as
well as having the leading tax team in the country who are just waiting to save you money. We are offering free business
advice to all new audit clients.
Drop in and see us at your local office for a free consultation. Monet & Co, Chartered Certified Accountants.
(7 marks)
(b)
The planning for the audit of Renoir Co's financial statements for the year ending 31 March 20X6 will commence shortly.
In preparation the audit partner telephoned Renoir Co's finance director, Jim Cassatt, to set up a planning meeting and to
remind him that fees relating to a tax engagement from the previous year were still outstanding. Mr Cassatt raised concerns
about the conduct of the previous audit, stating numerous examples of when he and his staff had been interrupted when they
were busy. He stated that he wanted guarantees that this year's audit will be more efficient, less intrusive and cheaper,
otherwise he will seek an alternative auditor.(6 marks)
Required
Evaluate each of the issues described above, commenting on the ethical and professional issues raised and recommend any actions
necessary in response to the issues identified.
4 Peaches (P7 12/09) (amended)
49 mins
(a) Recent surveys of the quality of audits being performed have noted that auditors too often treat the requirements of the IESBA
Code of Ethics and of ISAs as though they were prescriptive (rules-based) requirements, when in fact they are intended to be
principles-based.
Required
(i) Contrast the prescriptive and the principles-based approaches to auditing; and
(ii) Outline the arguments for and against a prescriptive (rules-based) approach to auditing. (6 marks)
(b) You are a manager in the audit department of Peaches & Co, a firm of Chartered Certified Accountants. One of your
responsibilities is to act as a mentor to new recruits into the department. A new junior auditor, Glen Rambaran, has asked you
to answer some questions which relate to issues encountered in his first few weeks working at Peaches & Co. The questions are
shown below.
(i) When I was on my initial training course, there was a session on ethics in which the presenter talked about being intimidated
by a client. I assume this does not mean physical intimidation, so what is an intimidation threat?
(ii) I know that Peaches & Co is facing competition from a new audit firm, and that our firm is advertising its services in a national
newspaper. What are the rules on advertising for new clients?
(iii) I heard one of the audit managers say that our firm had lost an audit client to a competitor because of lowballing. What is
lowballing and is it allowed? (9 marks)
Required
For each of the three questions raised, provide a response to the audit junior, in which you identify and explain the ethical or
professional issue raised.
5 Cobra (P7 Sep/Dec 17)
39 mins
You are a senior manager at Cobra & Co, a firm of Chartered Certified Accountants. You are responsible for reviewing quality
control and ethical matters which arise with the firm's portfolio of clients. During recent investigations you identified the
following matters:
Asp Co
Asp Co currently qualifies as a small company in the jurisdiction in which it operates, with turnover of $7.5 million (20X6 – $5.3
million), and as such is not required by law to have an audit. Until recently, your firm has provided a range of non-audit services
to Asp Co including bookkeeping, payroll and tax computation and advice. The company recently obtained an offer for a
significant amount of finance to help the company grow. The management of Asp Co has ambitious plans for growth which they
believe will result in revenue doubling within one year and then continuing to grow at a similar rate for at least the next five
years. In order to secure the funding, the directors have decided to have the financial statements audited and have asked if Cobra
& Co will become the company's auditors, as well as continuing to provide the existing services. This will include auditing the
financial statements for the year ended 31 July 20X7 at the request of the new financers.
Viper Co
You have been approached by Viper Co, a retail company, to provide audit and tax services. In response you have written to the
outgoing auditor to ask if there are any matters which you should be made aware of which might prevent you from accepting the
assignment. Despite a number of follow up phone calls, you have not been able to obtain a response from the outgoing audit
firm. On discussing this with the management team of Viper Co, you are made aware that the company is suing the outgoing
auditor for damages due to the detrimental effect on their reputation following the auditor issuing a modified opinion, which the
directors of Viper Co felt was inappropriate. The reason for the modified opinion was the application of an accounting treatment
which the outgoing auditor considered to be inappropriate and a material misstatement.
Adder Co
Adder Co is a listed audit client of your firm. The management team of Adder Co has asked you to perform a valuation of the
shares of another audit client, Slowworm Co, with a view to buying the entire shareholding. Slowworm Co is a private company
whose shares are owned entirely by the original founder, Mr Jim Slow.
Required
Comment on the ethical and other professional issues raised, and recommend any actions which should be taken in respect of:
(a)
Asp Co (7 marks)
(b)
Viper Co
(7 marks)
(c)
Adder Co
(6 marks)
(Total = 20 marks)
7 Vizsla (P7 Mar/Jun 18)
49 mins
(a) You are an audit manager in Pointer & Co, a firm of Chartered Certified Accountants which offers a range of assurance services.
You are responsible for the audit of Vizsla Co, a company which provides approximately 10% of your firm's practice income each
year. The finance director of Vizsla Co has recently contacted you to provide information about another company, Setter Co,
which is looking to appoint a provider of assurance services. An extract from the email which the finance director of Vizsla Co
has sent to you is shown below:
'One of my friends, Gordon Potts, is the managing director of Setter Co, a small company which is looking to expand in the next
few years. I know that Gordon has approached the company's bank for finance of $6 million to fund the expansion. To support
this loan application, Gordon needs to appoint a firm to provide a limited assurance review on the company's financial
statements. He would also want the appointed firm to provide tax planning advice and to prepare both the company's and his
personal tax computations for submission to the tax authorities. I have asked Gordon to contact you, and I hope that Pointer &
Co will be able to provide these services to Setter Co for a low fee. If the fee you suggest is too high, and unacceptable to
Gordon, then I will recommend that Gordon approaches Griffon & Co instead, and I would also consider appointing Griffon & Co
to provide the audit of Vizsla Co.'
Griffon & Co is a firm of Chartered Certified Accountants which has an office in the same town as Pointer & Co.
You have done some research on both Setter Co and Gordon Potts and have confirmed that the company is small enough to be
exempt from audit. The company is owner-managed, with the Potts family owning 90% of the share capital. Gordon Potts is a
director and majority shareholder of three other companies. An article in a newspaper from several years ago about Gordon
Potts indicated that one of his companies was once fined for breach of employment law and that he had used money from one
of the company's pension plans to set up a business abroad, appointing his son as the managing director of that business.
Required
In relation to Pointer &Co's potential acceptance of Setter Co as a client of the firm:
(i) Explain the ethical issues and other matters which should be considered; and
(ii) Explain the importance of obtaining customer due diligence and recommend the information which should be obtained. (16
marks)
8 Chennai (P7 Mar/Jun 16) (amended)
39 mins
You are a manager at Chennai & Co, a firm of Chartered Certified Accountants. One of the partners has asked you to investigate and
respond to a number of issues which have arisen with two different companies.
(a)
Delhi Co, a potential new client, is a privately owned and rapidly expanding company which currently operates below the audit
threshold in the country in which it is based. The company's management is currently considering having either a full audit or a
limited assurance review of their financial statements. The partner would like you to assist the management of Delhi Co by writing
a response to them in which you:
(i) Explain the difference between an audit of historical financial statements and a limited assurance review; and
(ii) Discuss the relative advantages and disadvantages to Delhi Co of having an audit of their historical financial statements as
opposed to a limited assurance review. (12 marks)
Delhi Co was incorporated in 20X5, with founder and chief executive MrNimeshDattani as the sole shareholder. After a period of
rapid growth, Delhi Co took out a ten-year bank loan facility in June 20X7 to finance MrDattani's ambitious expansion plans. This
was supported by a further injection of financial capital in 20X4 through a new issue of shares in the company. The shares were
sold to Mr Robert Hyland, an ex-business partner of MrDattani.
The sale gave Mr Hyland a 40% shareholding in Delhi Co. He has no involvement in the management of the company.
Until recently Delhi Co operated with a small accounting department, comprising one full-time member of staff and one part-time
employee. Due to the expansion of the company and MrDattani's plans to expand the customer base internationally, it has been
necessary to increase the size of the accounting function to include two new full-time members of staff. Both of the new recruits are
part-qualified accountants and MrDattani has committed to sponsoring them through their remaining training and ACCA examinations.
Required
Prepare the response to the management of Delhi Co as requested by the partner.
(b) The audit committee of another client, Mumbai Co, has asked the partner to consider whether it would be possible for
the audit team to perform a review of the company's internal control system. A number of recent incidents have raised
concerns amongst the management team that controls have deteriorated and that this has increased the risk of fraud, as well
as inefficient commercial practices. The auditor's report for the audit of the financial statements of Mumbai Co for the year
ended 31 March 20X6 was signed a few weeks ago. Mumbai Co is a listed company.
Required
In respect of the request for Chennai & Co to review Mumbai Co's internal control systems:
Identify and discuss the relevant ethical and professional issues raised, and recommend any actions necessary. (8
(Total = 20 marks)
9 Bunk (P7 6/15)
marks)
39 mins
You are a senior manager in Bunk & Co, a global audit firm with offices in more than 30 countries. You are responsible for
monitoring audit quality and ethical situations which arise in relation to audit clients. Wire Co is an audit client whose operations
involve haulage and distribution. The auditor's report for the financial statements of Wire Co for the year ended 31 December
20X4 was issued last week. You are conducting a review of the quality of that audit, and of any ethical issues which arose in
relation to it. Relevant information obtained from a discussion with Lester Freeman, the audit engagement partner, is given
below.
(a) Wire Co's audit committee refused to agree to an increase in audit fees despite the company's operations expanding into new
locations. In response to this, the materiality level was increased during the audit, and some review procedures were not
carried out. To reduce sample sizes used in tests of detail, the samples were selected based on judgement rather than statistical
methods. In addition, only parts of the population being tested were sampled, for example, certain locations were not included
in the sample of non-current assets selected for physical verification. (6 marks)
(b) Some of the audit work was performed by an overseas office of Bunk & Co in an 'off-shoring' arrangement. This practice is
encouraged by Bunk &Co, whose managing partners see it as a way of improving audit efficiency. The overseas office performs
the work at a lower cost, and it was largely low-risk, non-judgemental work included in this arrangement for the audit of Wire
Co, for example, numerical checks on documentation. In addition, the overseas office read the minutes of board meetings to
identify issues relevant to the audit. (5 marks)
(c) In July 20X4, Russell Bell, Wire Co's former finance director, joined Bunk & Co as an audit partner, working in the same office as
Lester Freeman. Although Russell was not a member of the audit team, he did update Lester on some business developments
which had taken place at the company during the period before he left. Russell held a number of equity shares in Wire Co,
which he sold in January 20X5. Since joining Bunk & Co, Russell has been developing initiatives to increase the firm's income.
One initiative is that audit team members should be encouraged to cross-sell non-audit services and references to targets for
the cross-selling of non-audit services to audit clients is now included in partner and employee appraisal documentation. (9
marks)
Required
Comment on the quality control, ethical and professional issues raised in respect of the audit of Wire Co and the firm-wide policies
of Bunk & Co, and recommend any actions to be taken by the audit firm.
Notes
1
The split of the mark allocation is shown against each of the issues above.
2
Assume it is 6 June 20X5. (Total = 20 marks)
12 Sepia & Co
39 mins
(a) Explain what the term 'lowballing' means and discuss current guidance in this area. (5 marks)
(b) You are an audit manager in Sepia & Co ('Sepia'), a firm of Chartered Certified Accountants. Your specific responsibilities include
advising the senior audit partner on the acceptance of new assignments. The following matters have arisen in connection with
three prospective client companies.
(i) Your firm has been nominated to act as external auditor to Squid, a private limited company. You have been waiting for a
response to your letter of 'professional enquiry' to Squid's auditor, Krill & Co, for several weeks. Your recent attempts to call
the current engagement partner, Anton Fargues, in Krill & Co have been met with the response from Anton's personal
assistant that 'MrFargues is not available'.
(ii) Sepia has been approached by the management of Hatchet, a company listed on a recognised stock exchange, to advise on a
take-over bid which they propose to make. The target company, Vitronella, is an audit client of your firm. However, Hatchet
is not.
(iii) A former colleague at Sepia, Edwin Stenuit, is now employed by another firm, Keratin & Co. Sepia and Keratin & Co and three
other firms have recently tendered for the audit of Benthos, a limited liability company. Benthos is expected to announce the
successful firm next week. Yesterday, at a social gathering, Edwin confided to you that Keratin & Co 'lowballed' on their
tender for the audit as they expect to be able to provide Benthos with lucrative other services. (15 marks)
Required
Comment on the professional issues raised by each of the above matters and the steps, if any, that Sepia should now take.
(Total = 20 marks)
14 Raven (P7 6/12) (amended)
49 mins
You are a senior manager in the audit department of Raven & Co. You are reviewing two situations which have arisen in respect
of audit clients, which were recently discussed at the monthly audit managers' meeting:
1 Grouse Co is a significant audit client which develops software packages. Its managing director, Max Partridge, has contacted one
of your firm's partners regarding a potential business opportunity. The proposal is that Grouse Co and Raven & Co could jointly
develop accounting and tax calculation software, and that revenue from sales of the software would be equally split between the
two firms. Max thinks that Raven &Co's audit clients would be a good customer base for the product.
2 Plover Co is a private hospital which provides elective medical services, such as laser eye surgery to improve eyesight. The audit of
its financial statements for the year ended 30 September 20X2 is currently taking place. The audit senior overheard one of the
surgeons who performs laser surgery saying to his colleague that he is hoping to finish his medical qualification soon, and that he
was glad that Plover Co did not check his references before employing him. While completing the subsequent events audit
procedures, the audit senior found a letter from a patient's solicitor claiming compensation from Plover Co in relation to alleged
medical negligence resulting in injury to the patient.
Required
Evaluate the ethical, commercial and other professional issues raised, and recommend any actions that should be taken in respect
of:
(a)
Grouse Co
(8 marks)
(b)
Plover Co
(7 marks)
15 Dragon Group (P7 6/09) (amended)
49 mins
The Dragon Group is a large group of companies operating in the furniture retail trade. The group has expanded rapidly in the last
three years, by acquiring several subsidiaries each year. The management of the parent company, Dragon Co, a listed company,
has decided to put the audit of the group and all subsidiaries out to tender, as the current audit firm is not seeking re-election.
The financial year end of the Dragon Group is 30 September 20X9.
You are a senior manager in Unicorn & Co, a global firm of Chartered Certified Accountants, with offices in over 150 countries
across the world. Unicorn & Co has been invited to tender for the Dragon Group audit (including the audit of all subsidiaries). You
manage a department within the firm which specialises in the audit of retail companies, and you have been assigned the task of
drafting the tender document. You recently held a meeting with Edmund Jalousie, the group finance director, in which you
discussed the current group structure, recent acquisitions, and the group's plans for future expansion.
Meeting notes – Dragon Group
Group structure
The parent company owns 20 subsidiaries, all of which are wholly owned. Half of the subsidiaries are located in this country, and
half overseas. Most of the foreign subsidiaries report under the same financial reporting framework as Dragon Co, but several
prepare financial statements using local accounting rules.
Acquisitions during the year
Two companies were purchased in March 20X9, both located in this country:
•
Mermaid Co, a company which operates 20 furniture retail outlets. The audit opinion expressed by the incumbent auditor
on the financial statements for the year ended 30 September 20X8 was modified by a material misstatement over the nondisclosure of a contingent liability. The contingent liability relates to a court case which is still ongoing.
•
Minotaur Co, a large company, whose operations are distribution and warehousing. This represents a diversification away
from retail, and it is hoped that the Dragon Group will benefit from significant economies of scale as a result of the
acquisition.
Other matters
The acquisitive strategy of the group over the last few years has led to significant growth. Group revenue has increased by 25% in
the last three years, and is predicted to increase by a further 35% in the next four years as the acquisition of more subsidiaries is
planned. The Dragon Group has raised finance for the acquisitions in the past by becoming listed on the stock exchanges of three
different countries. A new listing on a foreign stock exchange is planned for January 20Y0. For this reason, management would like
the group audit completed by 31 December 20X9.
Required
(a)
Recommend and describe the principal matters to be included in your firm's tender document to provide the audit service to
the Dragon Group; (10 marks)
(b)
Evaluate the matters that should be considered before accepting the audit engagement, in the event of your firm being
successful in the tender; and (8 marks)
(c) Define 'transnational audit', and discuss the features of a transnational audit that may contribute to a high level of audit risk
in such an engagement. Explain the relevance of the term to the audit of the Dragon Group. (7 marks)
(Total = 25
marks)
16 Thomasoon
You are an audit manager in Thomasson & Co, a firm of Chartered Certified Accountants. You have recently been assigned to the
audit of Clean Co for the year ended 31 March 20X5. Clean Co is an unlisted company and has been an audit client of your firm for a
number of years.
Clean Co is a national distributor of cleaning products. The company buys the cleaning products from wholesalers and employs a
team of approximately 750 sales staff around the country who sell the company's products to both domestic households and small
to medium-sized businesses. Around 75% of Clean Co's sales transactions are cash-based and each of the company's sales staff
prepares a cash sales report on a monthly basis. According to Clean Co's chief executive, Simon Blackers, and in order to foster 'an
entrepreneurial spirit' amongst his staff, each staff member (including the senior management team) is encouraged to make cash
sales and is paid on a commission basis to sell the company's products to friends and family. MrBlackers leads the way with this
scheme and recently sold cleaning products with a value of $33,000 to a business associate of his. He has transferred these funds
directly into an off-shore bank account in the company's name on which he is the sole signatory.
Review of audit working papers
Your review of the audit working papers and an initial meeting with MrBlackers have identified the following potential issues:
Following your review of the audit engagement letter and the working papers of the taxation section of the audit file, you have
established that Thomasson & Co performed the taxation computation for Clean Co and completed the tax returns for both the
company and MrBlackers personally. All of the taxation services have been invoiced to Clean Co as part of the total fee for the
audit and professional services. MrBlackers' personal tax return includes a significant number of transactions involving the
purchase and sale of properties in various international locations. The taxation working papers include a detailed review of a
number of off-shore bank accounts in MrBlackers' name which identified the property transactions.
During your initial meeting with MrBlackers, he informed you that Clean Co is planning to develop a new website in order to offer
online sales to its customers. He has asked Thomasson & Co to provide assistance with the design and implementation of the
website and online sales system.
As a result of your audit review visit at the client's premises, you have learned that the audit team was invited to and subsequently
attended Clean Co's annual office party. The client provided each member of the audit team with a free voucher worth $30 which
could be redeemed at the venue during the party. The audit senior, Paula Metcalfe, who has worked on the audit for the last three
years has informed you that the audit team has always been encouraged to attend the party in order to develop good client
relations.
Required
(a)
(i) Discuss the policies and procedures which Thomasson & Co should have in place in relation to an anti‑money laundering
programme; and (4 marks)
(ii) Evaluate whether there are any indicators of money laundering activities by either
Clean Co or its staff. (6 marks)
Comment on the ethical and professional issues arising from your review of the audit working papers and recommend any actions
which should now be taken by Thomasson & Co. (15 marks) (Total = 25 marks)