Audit & Assurance Practice Questions

1. The following are real précis hearings held and decisions made and published by the ACCA
Disciplinary Committee.

Discuss the scenarios and identify which of the fundamental principles has been
breached in each circumstance?

a. A member was found guilty of misconduct because they signed the audit report of
a company without conducting any audit work.

b. A member was found guilty of misconduct because they failed to advise a client to
have an audit when an audit was required by law.

c. A member was found guilty of misconduct because they “failed to reply to

d. A member was found guilty of misconduct because they “lost possession of a

e. A member was found guilty of misconduct because they “carried out an audit of a
company” in which they owned shares.
(5 marks)

2. You are a partner in Messrs. Krays & Co., Certified Accountants. You are approached by Mr
Jason Nadal, the managing director of Skylodge Enterprises Plc, who asks your firm to
become auditors of his company. In return for giving you this appointment, Mr Nadal says
that he will expect your firm to waive 50 percent of your normal fee for first year’s audit. The
existing auditors, Messrs. Agile & Co., have not resigned but Mr Nadal informs you that they
will not be re-appointed in the future.

Required:
a. What action would Messrs. Krays & Co. take in response to the request from the
Mr Nadal to reduce the first year’s fees by 50 percent? (5 marks)

b. Is Messrs. Agile & Co. within their rights in not resigning when they know Mr
Nadal wishes to replace them? Provide reasons and explain your answer.
(5 marks)
(10 marks)
 Audit & Assurance Practice Questions

3. a. Explain the situations where an auditor may disclose confidential information

b. You are an audit manager in McKay & Co, a firm of Chartered Certified Accountants.
You are preparing the engagement letter for the audit of Ancients, a public limited
liability company, for the year ending 30 June 2019. Ancients has grown rapidly over
the past few years and is now one of your firm’s most important client. Ancients has
been an audit client for eight years and McKay & Co has provided audit, taxation and
management consultancy advice during this time. The client has been satisfied with the
services provided, although the taxation fee for the period to 31 December 2018 remains
unpaid.

Audit personnel available for this year’s audit are most of the staff from last year,
including Mr Grace, an audit partner and Mr Jones, an audit senior. Mr Grace has been
the audit partner since Ancients became an audit client. You are aware that Allyson
Grace, the daughter of Mr Grace, has recently been appointed the financial director at
Ancients.

To celebrate her new appointment, Allyson has suggested taking all of the audit staff
out to an expensive restaurant prior to the start of the audit work for this year.

Required:
Identify and explain the risks to independence arising in carrying out your audit
of Ancients for the year ending 30 June 2019 and suggest ways of mitigating each
of the risks you identify. (15 marks)
(20 marks)

4. Meridin & Co (Meridin) is a firm of Chartered Certified Accountants which has seen its
revenue decline steadily over the past few years. The firm is looking to increase its revenue
and client base and so has developed a new advertising strategy where it has guaranteed that
its audits will minimise disruption to companies as they will not last longer than two weeks.
In addition, Meridin has offered all new audit clients a free accounts preparation service for
the first year of the engagement, as it is believed that time spent on the audit will be reduced
if the firm has produced the financial statements.

The firm is seeking to reduce audit costs and has therefore decided not to update the
engagement letters of existing clients, on the basis that these letters do not tend to change
much on a yearly basis. One of Meridin’s existing clients has proposed that this year’s audit
fee should be based on a percentage of their final pre-tax profit. The partners are excited about
this option as they believe it will increase the overall audit fee.

Meridin has recently obtained a new audit client, Daffy Brothers Co (Daffy), whose year-end
is 31 December. Daffy requires their audit to be completed by the end of February; however,
this is a very busy time for Meridin & Co and so it is intended to use more junior staff as they
are available. Additionally, in order to save time and cost, Meridin & Co have not contacted
Daffy ’s previous auditors.
2
 Audit & Assurance Practice Questions

Required:
a. Describe the steps that Meridin should take in relation to Daffy:
(i) Prior to accepting the audit; and (5 marks)

(ii) To confirm whether the preconditions for the audit are in place. (3 marks)

b. State FOUR matters that should be included within an audit engagement letter.
(2 marks)

c. (i) Identify and explain FIVE ethical risks which arise from the above actions
of Meridin & Co.; and

(ii) For each ethical risk explain the steps which Meridin & Co should adopt to
reduce the risks arising.

Note: The total marks will be split equally between each part. (10 marks)
(20 marks)

5. 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. (5 marks)

(ii) For each ethical threat, discuss how the effect of the threat can be mitigated.
(5 marks)
(10 marks)
3