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Audit and Assurance Week 3 Seminar Questions

Question 1

You work for a firm of auditors which has seven offices throughout England and

Wales. The firms largest client, in terms of fee income, is Mart, a company whichhas grown steadily through a mixture of organic growth and acquisition ofcompanies in the same industry sector.

Your firm has acted for this client since its incorporation 20 years ago and, inaddition to the statutory audit, provides a range of non-audit services includingtax planning (for the company and its individual directors) and consultancy workin respect of Marts acquisition policy.

Earlier this year, the finance director of Mart retired and was succeeded by aformer member of your firms staff who had managed the audit of Mart for the

preceding four years.

Required:Identify and explain the ethical issues raised by the situation described abovewith regard to Mart, and state the measures that should be implemented by yourfirm in order to mitigate any threats to objectivity which might arise.

(9 marks)

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Question 2

You are a senior manager at Midway LLP, a busy medium-sized firm with threeoffices in the central counties of England and over 100 employees. The firm hasbeen asked to tender for the provision of statutory audit and other services to

Border Travel, a private limited, south coast based, company providing packagecoach holidays and short breaks in Scotland.

Border Travel has proven to be popular with pensioners but has also gainedsuccess in promoting group trips to stag and hen parties and corporate outwardbounds clients. As a result the company is growing fast and would, if the tenderis successful, provide a significant source of fee income for the firm. The financedirector has explained that the company would like the successful firm to providestatutory audit services and assistance with the preparation of the financialstatements. The company is also keen to improve its internal risk assessmentprocedures and would welcome an IT systems review. Your firm does not have

much experience in the travel sector.

Required:With reference to the Code of Ethics, discuss the ethical matters that should beconsidered and the possible safeguards implemented when deciding on whetheryour firm should tender for:

(i) The statutory audit of Border Travel (5 marks)(ii) The provision of other services to Border Travel. (6 marks)

Question 3

The directors of Lopit, a newly-formed company, have written to you with a viewto securing your services as auditor. Within their letter, you note the followingcomments:'Your duties and rights as auditor will be determined by the board of our

company. In the main, these duties are in line with the usual legal requirements,but in the event of conflict or exclusion we will indemnify you against any legalaction brought as a consequence of the position adopted. The board also retainsthe right to dismiss you at any time without necessarily disclosing the reasons fortheir action.'

Required:(a) List and explain the duties of an auditor. (6 marks)(b) Discuss the relationship between auditors and company directors? (2

marks)(c) State the legal rights of an auditor of a limited company. (4 marks)(d) Discuss whether directors have the authority to dismiss auditors? (2 marks)(e) Explain the steps you would take prior to accepting the appointment as

auditor to Lopit? (6 marks)

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Question 4 (exam style question)

Terrys a firm of Chartered Accountants has 20 partners and 87 audit staff. Thefirm provides a range of audit, assurance, tax and advisory services. The firmhas four offices around the country and clients ranging from sole traders to a

number of small plcs (none of which are quoted).

The quality control partner has recently resigned to take up a position in industry.He has not yet been replaced as the managing board of Terrys have not beenable to find a suitable replacement. On his departure, the quality control partnerwas in the process of implementing a system of ethical compliance for assurancestaff. Staff would be required to confirm in writing their compliance with theirProfessional Code of Ethics from their respective accounting body.Implementation of this system is incomplete.

June plc is one of the firms largest clients for whom Terry provides audit

services, preparation of tax computations and other advisory services. A newengagement partner has been assigned to the audit as the previous partner hasretired. The fee for the audit work and other services has been set at the samelevel as last year in spite of the fact that additional work will be needed toperformed, as June has introduced a new computer system. The starting date ofthe audit has been delayed due to problems with the new system. Themanagement of June were very insistent that the fee should not be increasedbecause of this.

Required:a) Discuss the quality control issues that may affect the audit of June plc. (15

Marks)b) For each issue, suggest how the effect of it can be mitigated. (5 Marks)c) Recommend the course of action that should be taken by the audit firm

regarding the audit engagement. (5 Marks)