F8 Audit & Assurance[INT]
Sample Note
For Exams in June2015
1
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Content
CORPORATE GOVERNANCE: ............................................................................................. 9
AUDIT COMMITTEE: ........................................................................................................... 9
Corporate governance ........................................................................................................................ 9
ISA 260 ............................................................................................................................................. 12
PILOT PAPER Q3 CG and audit committee: ....................................................................................... 13
Answer to PILOT PAPER Q3[CG and audit committee:]: .................................................................... 14
AUDIT PROCESS: STAGE 1 .............................................................................................. 16
1,Ethics ............................................................................................................................................ 16
5 principles by ACCA Code of Ethics ................................................................................................... 16
Ethical threat to objectivity ................................................................................................................ 17
Safeguards to ethical threats .............................................................................................................. 18
DEC2007 Q2(a) [Ethics]:.................................................................................................................... 19
Answer to DEC2007 Q2(a) [Ethics]: ................................................................................................... 19
DEC2008Q3(a) Ethical Threats .......................................................................................................... 20
Answer to DEC2008Q3(a) Ethical Threats ......................................................................................... 21
June2009 Q5(b) Safeguards .............................................................................................................. 22
Answer to June2009 Q5(b) Safeguards ............................................................................................. 23
2. Precondition: ............................................................................................................................... 24
DEC2010 Q3 Precondition: ............................................................................................................... 25
Answer to DEC2010 Q3 Precondition: .............................................................................................. 25
3. Engagement letter: ....................................................................................................................... 26
June2011 Q2 Engagement Letter ...................................................................................................... 27
Answer to June2011 Q2 Engagement Letter ..................................................................................... 27
4. Rights and duties of auditors: ....................................................................................................... 28
2
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
DEC2008 Q2 rights and duties: ......................................................................................................... 29
Answer to DEC2008 Q2 rights and duties: ........................................................................................ 29
5. Audit documentation: .................................................................................................................. 30
Current audit file ................................................................................................................................ 30
Permanent audit file ........................................................................................................................... 31
Standardised working papers ............................................................................................................. 31
Example of audit working paper: ....................................................................................................... 32
DEC2010 Q2 audit documentation ................................................................................................... 33
Answer to DEC2010 Q2 audit documentation .................................................................................. 33
STAGE2 PLANNING THE AUDIT ................................................................................... 34
Audit strategy: ................................................................................................................................. 34
ISA 315 ................................................................................................................................................ 34
Ways that auditors use to understand client’s business: [AEIOU] ...................................................... 36
Audit Plan: ....................................................................................................................................... 37
Risk equation: ..................................................................................................................................... 37
DEC2009 Q3(a) Understand the environment of Client:.................................................................... 38
Answer to DEC2009 Q3(a) Understand the environment of Client: ................................................... 38
June2010 Q2(b) Materiality: ............................................................................................................ 39
Answer to June2010 Q2(b) Materiality:............................................................................................ 39
June2009 Q1(a+b) Audit Strategy Document.................................................................................... 40
Answer to June2009 Q1(a+b) Audit Strategy Document ................................................................... 42
DEC2009 Q1 Audit plan: ................................................................................................................... 44
Answer to DEC2009 Q1 Audit plan: .................................................................................................. 44
June2010:Q1: Audit risks.................................................................................................................. 46
Answer to June2010:Q1: Audit risks ................................................................................................. 48
DEC2011 Q3 Risk assessment ........................................................................................................... 51
Answer to DEC2011 Q3 Risk assessment .......................................................................................... 53
3
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
STAGE 3:ASSESS THE INTERNAL CONTROL SYSTEM OF CLIENT’S ENTITY: .. 57
Three important concepts: ............................................................................................................... 57
Sales cycle:.......................................................................................................................................... 58
Purchase cycle: ................................................................................................................................... 61
Payroll Cycle: ...................................................................................................................................... 64
Inventory System ............................................................................................................................. 66
Revenue and capital expenditure system ......................................................................................... 67
June2008 Q1:(only (a&b)) (sales system) ......................................................................................... 68
Answer to June2008 Q1:(only (a&b)) (sales system) ......................................................................... 70
June2011 Q1(Tests of controls (sales system) (a&c) .......................................................................... 71
Answer to June2011 Q1 (a&c) .......................................................................................................... 73
DEC2010 Q1:purchase system (a&b) ................................................................................................ 75
Answer to DEC2010 Q1 .................................................................................................................... 77
DEC2008 Q1(only a&b) Wages system .............................................................................................. 80
Answer to DEC2008 Q1(only a&b) Wages system ............................................................................. 82
June2012 Q1(a) purchase system ..................................................................................................... 84
Answer to June2012 Q1(a) ............................................................................................................... 85
DEC2011:Q1Payroll system (a&c&e) ................................................................................................. 87
Answer to DEC2011 Q1 (a&c&e) ...................................................................................................... 89
DEC2012 Q1(a) inventory system ..................................................................................................... 92
Answer to DEC2012 Q1(a) ................................................................................................................ 94
STAGE 4: PERFORM ACTUAL TESTING ...................................................................... 95
Basic Accounting knowledge recaps ................................................................................................. 97
How to prepare financial statements? ............................................................................................... 97
Format of Financial Statements ......................................................................................................... 97
Double Bookkeeping (6 steps) .......................................................................................................... 100
Controlling the bookkeeping systems .............................................................................................. 119
Control account reconciliations ........................................................................................................ 120
4
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Bank reconciliations ......................................................................................................................... 122
Q June2008 Q3 Analytical Procedures ............................................................................................ 126
Answer to June2008 Q3 ................................................................................................................. 128
Q:DEC2009 Q3(c) non-current assets .............................................................................................. 131
Answer to DEC2009 Q3(c) .............................................................................................................. 131
Q:DEC2010:Q4(c) PPEs (amended) ................................................................................................. 132
Answer to DEC2010:Q4(c) .............................................................................................................. 133
Inventory: (subsequent measurement: cost & NRV) ....................................................................... 135
Q:DEC2009 Q1(e) Inventory ........................................................................................................... 136
Answer to Q:DEC2009 Q1(e) Inventory .......................................................................................... 137
Q: June2010 Q1:
(c&d) inventory ................................................................................................ 138
Answer to June2010 Q1:
(c&d) .................................................................................................... 139
Q:DEC2011 Q3(c) inventory: ........................................................................................................... 141
Answer to DEC2011 Q3(c): ............................................................................................................. 141
Q: June2009 Q1(d) Receivable: ...................................................................................................... 142
Answer to June2009 Q1(d): ............................................................................................................ 142
Q: June2010 Q3(a): sales and receivables ....................................................................................... 143
Answer to June2010 Q3(a) ............................................................................................................. 143
Q: June2011 Q1(b+d) receivable .................................................................................................... 144
Answer to June2011 Q1(b+d) ......................................................................................................... 144
Cash Cycle ...................................................................................................................................... 146
Bank confirmation letter: ................................................................................................................. 147
Bank reconciliation ........................................................................................................................... 148
Q: Recon ........................................................................................................................................... 149
Cash audit: ........................................................................................................................................ 152
June2010 Q3(c) Cash and cash at bank: .......................................................................................... 153
5
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Answer to June2010 Q3(c) ............................................................................................................. 153
June2010 Q1(d(ii)) provisions:........................................................................................................ 154
Answer to June2010 Q1(d(ii)) ......................................................................................................... 154
DEC2009 Q5(a) payables: ............................................................................................................... 155
Answer to DEC2009 Q5(a) .............................................................................................................. 155
Q: Intangible assets: ....................................................................................................................... 156
Answer for intangible assets: ......................................................................................................... 156
STAGE5: REVIEW/ COMPLETION STAGE................................................................. 157
ISA 560 Subsequent events[auditors’ job] ...................................................................................... 157
Going Concern ............................................................................................................................... 159
Indications of going concern problems ............................................................................................ 159
Ways to see whether company is still a going concern entity: ......................................................... 160
Written Representation: ................................................................................................................ 161
Contents: Mnemonics: “Briefl”: ....................................................................................................... 161
Accounting policy and estimate: ...................................................................................................... 161
Stage6: Audit Report: ..................................................................................................................... 163
Content: [TAIRBOS] ........................................................................................................................... 163
Types: ............................................................................................................................................... 163
DEC2011 Q5 subsequent events ..................................................................................................... 164
Answer to DEC2011 Q5 .................................................................................................................. 166
June2010 Q5[Going concern] ......................................................................................................... 169
Answer to June2010 Q5 Going concern .......................................................................................... 171
DEC2010 Q5[written representation]: ............................................................................................ 173
Answer to DEC2010 Q5 .................................................................................................................. 175
CHAPTER3 EXTRAS: ...................................................................................................... 177
1. non audit engagement: .............................................................................................................. 177
Q: DEC2009 Q4: [non audit engagement]: ...................................................................................... 178
6
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Answer to DEC2009 Q4: [non audit engagement]: ......................................................................... 179
2. Non profit making organization: ................................................................................................. 181
Value for Money (VFM) Audit: .......................................................................................................... 181
Difference between internal and external auditors: ........................................................................ 181
Whether internal audit department is needed? .............................................................................. 181
DEC2010 Q4[value for money audit]: ............................................................................................. 183
Answer to DEC2010 Q4 .................................................................................................................. 184
BASIC REVISIONS FOR F8: ........................................................................................... 186
DEC2008 EuKaRe Q4....................................................................................................................... 186
Answer to DEC2008 EuKaRe Q4 ...................................................................................................... 187
Dec2007 Q1 Dinzee ........................................................................................................................ 189
Answer to Dec2007 Q1 Dinzee ....................................................................................................... 192
Q: JUNE 2011 Q5 ............................................................................................................................ 195
Answer to JUNE 2011 Q5 ................................................................................................................ 196
© Lesco Group Limited, April 2016
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise,
without the prior written permission of Lesco Group Limited.
7
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
How to study and pass ACCA F8 Audit&Assurance:
You should print this study note out in front of you before watching
any videos.
You should also have 50 blank pages in front of you to copy note from
tutors as well.
You should also be able to answer all questions from the study note.
After completing the tuition study please go to the revision phase and
practise all recommended questions.
Good luck!
8
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Corporate governance:
Audit committee:
Corporate governance
This means to make directors work in the best interest of the company rather
than of their own.
This is based on agency theory, ie, separation of duties between owner and
manager. And in order to make directors work in the best interest of the
company, company has to incur agency costs, ie, salary, corporate governance,
audit fees etc.
Best practices:
1. The board of directors
An effective board of directors should:
● Lead company strategy, with prudent controls and risk management, to
maximise sustainable long term success of company.
● Should meet regularly, with a formal agenda.
● Should detail its membership (including Chairman, CEO, Senior Independent
Director, Committee members) and work in the Annual Report.
● Should ensure Chairman and Non Executive Directors (NEDs) meet without
the Executives, to consider their performance.
● Should ensure NEDs meet without Chairman annually, to consider the
performance of the Chairman.
2. Chairman and Chief Executive Officer
Issues that relate to the Chairman and CEO:
● Should not be the same person.
● Chairman leads Board, and sets agenda for Board Meetings ensuring there is
enough time for important matters and all directors contribute.
● Chairman is key contact for shareholders.
● CEO runs the company.
9
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
3. Board composition
● No one person, or group, should be able to dominate the Board.
● Should be an appropriate size, and right balance of skills and experience.
This includes diversity, including by gender.
4. Appointments to the board
● Have objective merit-based criteria for selection of new Board members.
● Oversee induction and training for all directors (likely to be organised by
Chairman, assisted by Company Secretary).
5. Annual performance review
● Board, its committees, and individual directors should have performance
appraised at least annually.
6. Re-election of board members
● At 1st AGM after appointment to Board, and at least every 3 years afterwards,
by shareholders (note, for FTSE 350 companies, all directors are up for
reelection
every year).
● If not annual re-election for all directors, sensible to “retire by rotation” and
avoid potentially losing all the Board in one go.
7. Remuneration of directors
● Significant proportion should be performance-related.
● Should consider industry pay levels.
● Enough to attract, retain and motivate.
● Notice periods no longer than 1 year.
8. Internal control
● Board should ensure a sound system of Controls.
10
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
● Annual review of effectiveness of Controls, and report this in Annual Report.
● Audit Committee of at least 3 Independent NEDs.
● Main role is liaison with the internal and external auditors on all matters.
9. Relations with shareholders
● Regular dialogue with shareholders.
● Chairman to ensure shareholder views communicated to Board.
● Communicate with investors and encourage debate through AGM.
● Separate resolutions on each issue.
10. Institutional shareholders
● Should themselves ensure dialogue with directors.
● Should make considered use of their considerable voting power.
11
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
ISA 260
ISA 260 Communication with Those Charged with Governance includes issues
such as:
●
●
●
●
●
●
●
The auditor’s responsibilities in relation to the financial statement audit
The scope and timing of the audit
Significant findings arising on the audit
Any independence issues
Possible modifications necessary to the audit report
Any management representation points requested
Any suspected or actual cases of fraud.
12
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
PILOT PAPER Q3 CG and audit committee:
You are the audit manager in the audit firm of Dark & Co. One of your audit clients
is NorthCee Co, a company specialising in the manufacture and supply of sporting
equipment. NorthCee have been an audit client for five years and you have been
audit manager for the past three years while the audit partner has remained
unchanged.
You are now planning the audit for the year ending 31 December 2007. Following an
initial meeting with the directors of NorthCee, you have obtained the following
information.
(i)
NorthCee is attempting to obtain a listing on a recognised stock exchange.
The directors have established an audit committee, as required by corporate
governance regulations, although no further action has been taken in this
respect. Information on the listing is not yet public knowledge.
(b) Explain the actions that the board of directors of NorthCee Co must
take in order to meet corporate governance requirements for the listing
of NorthCee Co. (6 Marks)
(c) Explain why your audit firm will need to communicate with NorthCee
Co’s audit committee for this and future audits. (4 Marks)
13
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Answer to PILOT PAPER Q3[CG and audit committee:]:
(b)
1, audit committee
The management must finish the process of forming an audit committee.
2,CEO&chairman
Most stock exchanges require the separation of these two key roles.
3,intenal audit
Stock exchanges often require that companies have an internal audit department to
review the internal control systems and report to audit committee.
4,non-executive directors
Most stock exchanges require that the main board of directors include
non-executive directors.
5, other information
Some stock exchanges require that annual financial report contains information on
corporate governance.
6, meetings
Establishing procedures to maintain contact with institutional shareholders and any
other major shareholders. The evening reception for shareholders could become a
regular event in this respect.
14
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
(c)
1 Objectivity
The audit committee consists of non-executive directors (NEDs), who by definition
are independent of the company and can therefore take an objective view of the
audit report.
2 recommendations
The audit committee can ensure that any recommendations from the auditor are
implemented. The audit committee has independent NEDs who can pressure the
board to taking action on auditor recommendations
3 review reports
The audit committee will have more time to review the audit report and other
communications to the company from the auditor (eg management letters) than the
board. The auditor should therefore benefit from their reports being reviewed
carefully.
4 review work done by auditors
The audit committee also has more time to review the effectiveness and efficiency
of the work of the external auditor than the board. The committee can therefore
make recommendations on the re-appointment of the auditor, or recommend a
different firm if this would be appropriate.
15
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Audit Process: Stage 1
1,Ethics
5 principles by ACCA Code of Ethics
1. Professional behavior
Accountants must comply with all relevant laws and regulations.
There is also a test whereby actions suggested by a third party which would
bring discredit to the profession should also be avoided.
An accountant is required to treat all people contacted in a professional capacity
with courtesy and consideration. Similarly, any marketing activities should not
bring the profession into disrepute.
2. Integrity
Integrity implies fair dealing and truthfulness.
Members can’t lie to others by preparing a material misstated statement or
mislead others by window dress the financial statement.
3. Competence and due care
Pass exams + accumulate experience + stick to standards when doing the work.
4. Confidentiality
Accountants can’t disclose confidential information of client to 3rd party without
approval.
If client is involved in illegal activities like money laundering then accountant is
able to disclose this to 3rd party.
5. Objectivity
When preparing the financial statement, accountant should only focus on
standards not other factors like personal bias, conflict of interest, or the undue
influence of others.
16
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Ethical threat to objectivity
Self interest threat:
The threat that a financial or other interest (eg concern about job security) will
inappropriately influence the professional accountant’s judgement or behaviour.
In other words, this relates to the threat of a conflict of interest.
Self review threat:
The threat that a professional accountant will not appropriately evaluate the
results of a previous judgement made by themselves, or by another individual
within their organisation, but will rely on that judgement as part of a service
they are currently providing.
Advocacy threat:
It occurs if a professional accountant is promoting a client or employer’s position
or opinion to the extent that the accountant’s subsequent objectivity is
compromised.
Familiarity threat:
If the accountant develops too close a relationship with a client or employer (for
example, through length of service) the accountant could become too
sympathetic to the interestsof the client or employer such that their professional
judgement becomes compromised.
Intimidation threat:
When an accountant is deterred from acting objectively by actual or perceived
threats, including attempts to exercise undue influence over the accountant.
17
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Safeguards to ethical threats
Safeguards are actions of other measures designed to eliminate threats or
reduce them to an acceptable level.
There are two broad categories of safeguard:
(a) Safeguards created by the profession, legislation or regulation:






Education, training and experience requirements for entry into the profession
Requirements for continuing professional development
Corporate governance regulation
Professional standards
Professional monitoring and disciplinary procedures
External review by a legally empowered third party (eg an auditor) of the
reports, returns and information produced by a professional accountant
(b) Safeguards in the work environment:
These include complaint systems within employing organisations which enable
staff to draw attention to unprofessional or unethical behaviour. For example,
whistleblowing procedures to help protect employees against threats.
18
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
DEC2007 Q2(a) [Ethics]:
2 (a) Explain each of the FIVE fundamental principles of ACCA’s Code of
Ethics and Conduct. (5 marks)
Answer to DEC2007 Q2(a) [Ethics]:
Professional behavior
A professional accountant should Should respect laws and regulations and not do
anything that could discredit the accountancy profession.
Integrity
A professional accountant should be honest in all business and professional
relationships.
Competence and due care
When performing professional services, a professional accountant should show
competence(eg, passing exams and gaining qualifications) and keep up-to-date
with developments in related regulations as well as putting diligence into the work.
Confidentiality
A professional accountant should not use or disclose confidential information of the
client’s entity to the 3rd party without obtaining client permission,eg, to
competitors.
But if there is a legal or professional obligation to do so, eg, when client is involved
in money laundering issues, then the confidential information can be disclosed to
the 3rd party, ie, court.
Objectivity
A professional accountant should be fair and not allow personal bias, conflict of
interest or influence of others to override objectivity.
19
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
DEC2008Q3(a) Ethical Threats
You are a manager in the audit firm of Ali & Co; and this is your first time you have
worked on one of the firm’s established clients, Stark Co. The main activity of Stark
Co is providing investment advice to individuals regarding saving for retirement,
purchase of shares and securities and investing in tax efficient savings schemes.
Stark is regulated by the relevant financial services authority.
You have been asked to start the audit planning for Stark Co, by Mr Son, a partner
in Ali & Co. Mr Son has been the engagement partner for Stark Co, for the previous
nine years and so has excellent knowledge of the client. Mr Son has informed you
that he would like his daughter Zoe to be part of the audit team this year; Zoe is
currently studying for her first set of fundamentals papers for her ACCA qualification.
Mr Son also informs you that Mr Far, the audit senior, received investment advice
from Stark Co during the year and intends to do the same next year.
In an initial meeting with the finance director of Stark Co, you learn that the audit
team will not be entertained on Stark Co’s yacht this year as this could appear to be
an attempt to influence the opinion of the audit. Instead, he has arranged a balloon
flight costing less than one-tenth of the expense of using the yacht and hopes this
will be acceptable. The director also states that the fee for taxation services this
year should be based on a percentage of tax saved and trusts that your firm will
accept a fixed fee for representing Stark Co in a dispute regarding the amount of
sales tax payable to the taxation authorities.
Required:
(i) Explain the ethical threats which may affect the auditor of Stark Co.
(6 marks)
(ii) For each ethical threat, discuss how the effect of the threat can be
mitigated.
(6 marks)
Please note: It’s very common for your F8 examiner to use Colum to answer
questions so we use that as well.
20
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Answer to DEC2008Q3(a) Ethical Threats
(i)Ethical threat
(ii)Mitigation of threat
Mr Son, the engagement partner has been
involved with the client for the last nine
years.
Mr Son should be rotated from being
engagement partner.
This might create familiarity threat to
objectivity due to this long association.
He can still contact the client but should not
be in the position of signing the audit
report.
There may be the impression of lack of
independence as Zoe is related to the
engagement partner, a daughter of Mr son
and Zoe could be tempted not to identify
errors in case this prejudiced her father’s
relationship with the client.
To show complete independence,
should not be part of the audit team.
However, continued use of client services
could impair its objectivity especially if Mr
Far is not paying a
full fee and therefore receiving a benefit
from the client.
To show independence from the client, Mr
Far could be asked not to use the services of
Stark Co again unless this
is first agreed with the engagement
partner.
The audit team has been offered a balloon
flight at the end of the audit.
The balloon flight should not be accepted.
Acceptance of gifts from a client, unless of
an insignificant amount, would create a self
interest threat to impair objectivity.
Zoe
However, if Mr Son is no longer the
engagement partner then this removes the
ethical threat and Zoe could be included in
the audit team.
Investigation would also be needed to find
out why hospitality was
accepted in previous years.
The firm may try to gain the highest tax
refund for the client and this could tempt the
audit firm to suggest illegal
tax avoidance schemes and this may create
a self interest threat to objectivity.
The audit firm must confirm that assistance
with taxation work is acceptable by law,
and the fee must be based on time and
experience for the job, not the future
outcome(ie, contingent fee)
Representing Stark Co in court could be seen
as an advocacy threat – that is the audit firm
is promoting the position of the client and
this could damage the objectivity of the firm.
To remain independent, the audit firm
should decline to represent the client in
court.
21
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
June2009 Q5(b) Safeguards
(b) For the purposes of this section assume from part (a) that the directors have
agreed to value inventory at $15/barrel.
Having investigated the matter in part (a) above, the directors present you with an
amended set of financial statements showing the emergency reserve stated not at
6,000 barrels, but reported as 60,000 barrels. The final financial statements now
show a profit following the inclusion of another 54,000 barrels of oil in inventory.
When queried about the change from 6,000 to 60,000 barrels of inventory, the
finance director stated that this change was made to meet expected amendments to
emergency reserve requirements to be published in about six months time. The
inventory will be purchased this year, and no liability will be shown in the financial
statements for this future purchase. The finance director also pointed out that part
of Tye Co’s contract with the government requires Tye Co to disclose an annual
profit and that a review of bank loans is due in three months. Finally the finance
director stated that if your audit firm qualifies the financial statements in respect of
the increase in inventory, they will not be recommended for re-appointment at the
annual general meeting. The finance director refuses to amend the financial
statements to remove this ‘fictitious’ inventory.
(iii) Discuss the safeguards that the auditors of Tye Co can use in an
attempt to overcome the intimidation threat from the directors of Tye Co.
(4 marks)
22
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com
Answer to June2009 Q5(b) Safeguards
1 Discuss with audit committee
 The situation can be discussed with the audit committee. non-executive
directors who are within the audit committee will be able to discuss the
situation with the finance director and point out clearly the auditor’s
opinion.

They can also remind the directors as a whole that the appointment of
the auditor rests with the members on the recommendation of the audit
committee.

If the recommendation of the audit committee is rejected by the board,
good corporate governance requires disclosure of the reason for
rejection.
2 Obtain second partner review
 The engagement partner can ask a second partner to review the working
papers and other evidence relating to the issue of possible fraud.

If this action does not resolve the issue, it does provide additional
assurance that the findings and actions of the engagement partner are
valid.
3 Resignation
 If the matter is serious, then the auditor can consider resignation rather
than not being re-appointed.

If the auditors consider to resign then they can normally require the
directors to hold a general meeting to consider the circumstances of the
resignation.
23
F8 Audit & Assurance(INT)
Accounting Practise Center(A.P.C) www.globalapc.com