Chapter 1 to 4

Chapter 1 Dec 2010 2 (a) Explain the concept of TRUE and FAIR presentation. (4 marks) (b) Explain the status of International Standards on Auditing. (2 marks) June 2010 2 (a) Auditors are frequently required to provide assurance for a range of non-audit engagements. Required: List and explain the elements of an assurance engagement. (5 marks) (b) ISA 320 Materiality in Planning and Performing an Audit provides guidance on the concept of materiality in planning and performing an audit. Required: Defi ne materiality and determine how the level of materiality is assessed. (5 marks) Dec 2009 4 (a) Explain the difference between the interim audit and the fi nal audit. (4 marks) June 2009 4 (a) Contrast the role of internal and external auditors. (8 marks) June 2008 2(c) After performing tests of controls, the auditor is of the opinion that audit evidence is not sufficient to support the audit opinion; in other words many control errors were found. Required: Explain THREE actions that the auditor may now take in response to this problem. (3 marks) June 05, Question 5 (c): Briefly explain the difference between positive and negative assurance, outlining the advantages to the directors of providing negative assurance on their cash flow forecast. (4 marks) June 08, Question 5 (d): In the context of the cash flow forecast, define the term negative assurance and explain how this differs from the assurance provided by an audit report on statutory financial statements.(4 marks)

Chapter 2 Dec 2008 2(b) Auditors have various duties to perform in their role as auditors, for example, to assess the truth and fairness of the financial statements. Required: Explain THREE rights that enable auditors to carry out their duties. (3 marks) Corporate governance Dec 2011 4 (a) Explain what is meant by corporate governance and why it is important. (3 marks) (b) Serena VDW Co has been trading for over 20 years and obtained a listing on a stock exchange five years ago. It provides specialist training in accounting and finance. The listing rules of the stock exchange require compliance with corporate governance principles, and the directors are fairly confident that they are following best practice in relation to this. However, they have recently received an email from a significant shareholder, who is concerned that Serena VDW Co does not comply with corporate governance principles. Serena VDW Cos board is comprised of six directors; there are four executives who originally set up the company and two non-executive directors who joined Serena VDW Co just prior to the listing. Each director has a specific area of responsibility and only the finance director reviews the financial statements and budgets. The chief executive officer, Daniel Brown, set up the audit committee and he sits on this sub-committee along with the finance director and the non-executive directors. As the board is relatively small, and to save costs, Daniel Brown has recently taken on the role of chairman of the board. It is the finance director and the chairman who make decisions on the appointment and remuneration of the external auditors. Again, to save costs, no internal audit function has been set up to monitor internal controls. The executive directors remuneration is proposed by the finance director and approved by the chairman. They are paid an annual salary as well as a generous annual revenue related bonus. Since the company listed, the directors have remained unchanged and none have been subject to re-election by shareholders. Required:

Describe SIX corporate governance weaknesses faced by Serena VDW Co and provide recommendations to address each weakness, to ensure compliance with corporate governance principles. (12 marks) (c) Explain the auditors ethical responsibilities with regard to client confidentiality and when they have an: (i) obligatory responsibility; and (ii) voluntary responsibility to disclose client information. (5 marks) (20 marks) June 2009 4 (b) Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital. The executive directors are drawn mainly from the shareholders. There are no nonexecutive directors because the company legislation in Conoy Cos jurisdiction does not require any. The executive directors are very successful in running Conoy Co, partly from their training in production and management techniques, and partly from their hands-on approach providing motivation to employees. The board are considering a significant expansion of the company. However, the companys bankers are concerned with the standard of financial reporting as the financial director (FD) has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed. Conoy Co does have an internal audit department, although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co. The board of Conoy Co concur with this view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co. The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee. The committee would consist of one executive director, the chief internal auditor as well as three new appointees. One appointee would have a non-executive seat on the board of directors. Required: Discuss the benefits to Conoy Co of forming an audit committee. (12 marks)

2006 3 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. (ii) You have been asked to continue to prepare the companys financial statements as in previous years. (iii) As the companys auditors, NorthCee would like you and the audit partner to attend an evening reception in a hotel, where NorthCee will present their listing arrangements to banks and existing major shareholders. (iv) NorthCee has indicated that the fee for taxation services rendered in the year to 31 December 2005 will be paid as soon as the taxation authorities have agreed the companys taxation liability. You have been advising NorthCee regarding the legality of certain items as allowable for taxation purposes and the taxation authority is disputing these items. Finally, you have just inherited about 5% of NorthCees share capital as an inheritance on the death of a distant relative. Required: (a) Identify, and explain the relevance of, any factors which may threaten the independence of Dark & Cos audit of NorthCee Cos financial statements for the year ending 31 December 2007. Briefly explain how each threat should be managed. (10 Marks) (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 Cos audit committee for this and future audits. (4 Marks) (20 Marks) Ethics

June 2011 Q2 (b) ISA 210 Agreeing the Terms of Audit Engagements provides guidance on the content of engagement letters and deals with the auditors responsibilities in agreeing the terms of the audit engagement with management. Required: (i) State the purpose of an engagement letter. (1 mark) (ii) List SIX matters that should be included within an audit engagement letter. (3 marks) (10 marks) Q4 You are an audit manager in NAB & Co, a large audit firm which specialises in the audit of retailers. The firm currently audits Goofy Co, a food retailer, but Goofy Cos main competitor, Mickey Co, has approached the audit firm to act as auditors. Both companies are highly competitive and Goofy Co is concerned that if NAB & Co audits both companies then confidential information could pass across to Mickey Co. Required: (a) Explain the safeguards that your firm should implement to ensure that this conflict of interest is properly managed. (4 marks) (c) The audit engagement partner for Goofy Co has been in place for approximately six years and her son has just accepted a job offer from Goofy Co as a sales manager; this role would entitle him to shares in Goofy Co as part of his remuneration package. If NAB & Co is appointed as internal as well as external auditors, then Goofy Co has suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the profit after tax of the company as they feel that this will align the interests of NAB & Co and Goofy Co. Required: From the information in (c) explain the ethical threats which may affect the independence of NAB & Co in respect of the audit of Goofy Co, and for each threat explain how it may be reduced. (6 marks)

Dec 2010 3(a) In agreeing the terms of an audit engagement, the auditor is required to agree the basis on which the audit is to

be carried out. This involves establishing whether the preconditions for an audit are present and confirming that there is a common understanding between the auditor and management of the terms of the engagement. Required: Describe the process the auditor should undertake to assess whether the PRECONDITIONS for an audit are present. (3 marks)

June 2010 4 (a) State the FIVE threats contained within ACCAs Code of Ethics and Conduct and for each threat list ONE example of a circumstance that may create the threat. (5 marks) (b) You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co, which has been an audit client for four years and specialises in manufacturing luxury mobile phones. During the planning stage of the audit you have obtained the following information. The employees of LV Fones Co are entitled to purchase mobile phones at a discount of 10%. The audit team has in previous years been offered the same level of staff discount. During the year the fi nancial controller of LV Fones was ill and hence unable to work. The company had no spare staff able to fulfi l the role and hence a qualifi ed audit senior of Jones & Co was seconded to the client for three months. The audit partner has recommended that the audit senior work on the audit as he has good knowledge of the client. The fee income derived from LV Fones was boosted by this engagement and along with the audit and tax fee, now accounts for 16% of the fi rms total fees. From a review of the correspondence fi les you note that the partner and the fi nance director have known each other socially for many years and in fact went on holiday together last summer with their families. As a result of this friendship the partner has not yet spoken to the client about the fee for last years audit, 20% of which is still outstanding. Required: (i) Explain the ethical threats which may affect the independence of Jones & Cos audit of LV Fones Co; and (5 marks) (ii) For each threat explain how it might be avoided. (5 marks) (c) Describe the steps an audit fi rm should perform prior to accepting a new audit engagement. (5 marks)

(20 marks)

Dec 2008 3 You are a manager in the audit firm of Ali & Co; and this is your first time you have worked on one of the firms 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 Cos 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: (a) (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) (b) Discuss the benefits of Stark Co establishing an internal audit department. (8 marks) (20 marks) Dec 2007 2 (a) Explain each of the FIVE fundamental principles of ACCAs Code of Ethics and Conduct. (5 marks) Pilot Paper 2 (a) ISA 210 Terms of Audit Engagements explains the content and use of engagement letters. Required:

State SIX items that could be included in an engagement letter. (3 marks)