Exam Audit

Question 5
In recent years regulatory bodies including the International Auditing and Assurance
Standards Board (IAASB) and the UK Financial Reporting Council (FRC) have issued
documents highlighting the importance of professional scepticism in the audit of financial
statements.
(a) Describe, according to ISA 200 Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with International Standards on Auditing what
is “professional scepticism” AND give examples of how an auditor can apply
professional scepticism. (10 marks)
(b)
Frank has been the engagement partner in the audit of Chrysler Ltd for the last 10 years. His
wife, Mary is the finance director in Chrysler Ltd and this allows for a faster audit.
The same audit team are also used for this audit and their loyalty is rewarded with a luxury
weekend away. The audit team enjoy this trip every year.
Chrysler Ltd wishes to expand into the emerging markets and is in the process of selling
shares to raise finance for this project. Your audit firm is actively promoting these shares to
other clients. The audit team already hold shares in Chrysler Ltd and intend purchasing
additional shares as they believe Chrysler Ltd is a good investment.
Your audit firm has also provided Chrysler Ltd with a short term loan until the finance is
raised.
Required:
For Chrysler Ltd identify and explain FIVE ethical threats and discuss how the threats can be
mitigated in the audit of Chrysler Ltd. (15 marks)
Total 25 marks
SOLUTION PART A
Professional Scepticism is : ‘An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to fraud or error, and a critical
assessment of audit evidence’. ISA 200 Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with International Standards on Auditing
Clearly this requires the audit team to have a good knowledge of how the client’s activities
are likely to affect its financial statements, and the audit
team should discuss these matters in a planning meeting before deciding
on the detailed approach and audit work to be used.
Professional scepticism requires the auditor to be alert to:
• Audit evidence that contradicts other audit evidence.
• Information that brings into question the reliability of documents and responses to
enquiries to be used as audit evidence.
• Conditions that may indicate possible fraud.
• Circumstances that suggest the need for audit procedures in addition to those required by
ISAs.
10 marks
SOLUTION PART B
Threat Mitigate
Advocacy Threat Don’t promote any sale of shares.
Chrysler Ltd is wishes to expand into the
emerging markets and is in the process of
selling shares to raise finance for this
project. Your audit firm is actively
promoting these shares to other clients. .
Familiarity Threat Auditor loses independence as have become

Frank has been the engagement partner in too friendly/familiar with the client. Audit
the audit of Chrysler Ltd for the last 10 partner should be rotated every 5 to 7 years.
years.
In 2014 the EU voted in favour of
compulsory tendering of large listed
companies every 10 years.
Familiarity Threat The auditor may be biased to support that
His wife, Mary is the finance director in family member by not reporting errors made
Chrysler Ltd and this allows for a faster by the person.
audit. Auditors cannot audit clients where close
family members work.
Self interest threat Don’t hold any financial interest.
The audit team already hold shares in
Chrysler Ltd and intend purchasing
additional shares as they believe Chrysler
Ltd is a good investment.
Familiarity threat Don’t accept gift unless negligible value.
The same audit team are also used for this And investigate why this gift was accepted
audit and their loyalty is rewarded with a
luxury weekend away. The audit team in the past.
enjoy this trip every year.
Self interest threat Don’t make or receive any loans.

Your audit firm has also provided Chrysler
Ltd with a short term loan until the finance
is raised.
5 x 3 marks for each

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Question 5

Familiarity Threat Auditor loses independence as have become

Self interest threat Don’t make or receive any loans.

5 x 3 marks for each

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