ACCA F8 INT Interim Assessment - Ans J11 (With Marks)

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ACCA

Paper F8 (INT)

Audit & Assurance

June 2011

Interim Assessment – Answers

To gain maximum benefit, do not refer to theseanswers until you have completed the interimassessment questions and submitted them for marking.



PAPER F8 ( INT) : AUDIT & ASSURANCE

2 KAPLAN PUBLISHING

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INTERIM ASSESSMENT ANSWERS

KAPLAN PUBLISHING 3

1 Voyager

Key answer tips

It is vitally important to plan your time effectively when answering the 30 mark

question. After your reading time is over you have 1.8 minutes per mark. Mark sure

you allocate your time against each requirement and do not overrun.

Following this it is vital to plan your answer so that you structure it effectively to

answer the requirement and so that you know how many points to write.

For part (a) and (b) you are asked to list points relevant to a scenario. This requires

application skills so is worth 1 mark per item listed. Notice that you are then asked to

explain each deficiency and make a recommendation for each deficiency. You will

receive 1 mark for each explanation and 1 for each recommendation. Therefore 5

linked points are required for 3 marks each to a total of 15.

If all the elements of the question are linked a table format (like the one below) is

appropriate. Alternatively you could present your answer in normal prose. However, if

you chose this you must give one deficiency plus an appropriate explanation and one

recommendation.

(a) Sales & Receivables

Deficiency Explanation Recommendations

Orders are processed

without

authorisation or

without performinga credit check on

customers.

Goods may be supplied to

high credit risk customers.

This increases the risk of

bad debts and financiallosses for Voyager.

(NB: credit will also be

given for increased fraud

risk and risk that goods are

not available to be able to

satisfy orders in a timely

fashion).

All new customers should

undergo a credit reference check

before being accepted as new

customers.Credit limits should be set for all

customers and Mr Jones, the

executive director and the sales

rep should meet to identify

those customers close to or

exceeding their limits every

month to avoid selling goods on

credit to risky customers.

All orders over a certain limit

should be authorised by the

executive director and confirmed

with clients prior to processing.

Nobody matches the

GDN to the original

order prior to

despatch and no-one

signs the GDN to

confirm that the

correct quantity of

goods has been

despatched.

Sending too few items

could lead to a loss of

customer goodwill.

Sending too many items

could lead to incorrect

invoices and lost revenue.

Before orders are despatched by

courier, the factory supervisor

should check the quantity and

quality of goods to the despatch

note and compare this to the

original order. The supervisor

should then sign the despatch

note to confirm this check has

taken place.



PAPER F8 ( INT): AUDIT & ASSURANCE

4 KAPLAN PUBLISHING


Nobody checks that

all orders have been

despatched.

Unfulfilled orders could

lead to customer

complaints and a loss of

customers.

Mr Jones should keep a copy of

all orders and match them to

GDNs. At the end of each week

he should check unmatched

orders and enquire why a GDN

has not been raised.

There are no

procedures to

ensure the

completeness and

accuracy of sales

invoices.

The company could suffer

financial loss if invoices are

not raised or are prepared

inaccurately.

All GDNs should be matched to

the invoice and filed together. At

the end of each week Mr Jones

should perform a review of

uninvoiced GDNs to ensure all

despatches have been invoiced.

The customer order file should

be reviewed periodically by Mrs

Singh, who should confirm thatthe order, GDN and invoice

details all match.

GDNs are not

retained on file.

In the event of customer

query, there is no

documentation to confirm

the quantities of goods

despatched to support the

value of the invoice raised.

A copy of the GDN should be

retained in the warehouse

(where there is more filing

space) in numerical order.

Mr Jones should record the

despatch note number on each

invoice so that, in the event of

query, the warehouse copy canbe found.

A sales day book is

not maintained.

Invoice posting errors are

likely to go undetected and

could result in loss of

revenue (e.g. if amounts

are understated by a

transposition error or the

invoice is omitted).

Mr Jones should use the SDB

facility and post the daily total

sales to the sales ledger and

sales ledger control account.

Mrs Singh should review a

sample of daily postings in

comparison to original invoices

and a sample of daily totals in

comparison to the ledgers to

ensure that accurate entries are

being made into the system.

Lack of segregation

of duties as Mr Jones

records transactions

and handles cash.

Mr Jones could make

errors in the recording of

transactions (either

fraudulent or accidental)

including failure to record

transactions. Errors and

omissions could go

undetected (and therefore

uncorrected).Understatement of sales

A receivables ledger and a

receivables ledger control

account should be maintained by

Mr Jones. These should be

reconciled monthly by Mrs

Singh.

Mrs Singh should open all post

and list remittances received

from customers before they areprocessed.




KAPLAN PUBLISHING 5


invoices and/or cash

receipts could result in

financial loss to the

company.

The executive director should

perform a monthly review of the

control account reconciliation,

the cash book and the aged

receivables ledger.

No hard copies of

receivables ledger

accounts are

produced. They are

therefore not

reviewed by

management.

Management does not

have the information

necessary to facilitate

credit control decisions.

This deficiency could lead

to ineffective credit control

and an increase in bad

debt.

An aged receivables ledger

should be scrutinised monthly by

Mr Jones, the executive director

and the sales rep.

Discussions regarding overdue

payments and chasing overdue

amounts should be supported by

sending monthly statements of

account to customers.

Marking Guide

General approach: 1 mark per deficiency, 1 mark per implication and 1 mark per

recommendation.

Only 1 explanation and 1 recommendation mark to be awarded per deficiency

discussed. Therefore a maximum of 3 to be awarded per deficiency addressed.

Maximum of 15 to be awarded for answer.

(b) Purchases & Wages


Mrs Singh can

amend the payables

master file.

There is a significant risk of

unauthorised amendment

to the master file. This

could lead to fraud, e.g.

the setting up of a fake

supplier.

Amendments to supporting

master files should only be

performed by the director. All

such files should have restricted

access, e.g. password protection.

Alternatively (although this is a

weaker control) amendments

should be recorded on an official

form and authorised by the

director. Copies of all authorised

forms should be retained.

Prints of changes/

updated files are not

made or reviewed.

There is a risk that errors in

updating the system will

not be identified.

A current printout of the master

file should be kept by the

director and should be

compared to the underlying

system data periodically to

ensure that it has not been

amended without authorisation.

Supplier statement

reconciliations are

not scrutinised by

the director.

Mrs Singh could simply not

perform this vital control

or could manipulate the

reconciliation to cover up a

Ultimately the reconciliation

should not be performed by the

individual responsible for

preparing the purchase/payables

ledger. This should be performed




6 KAPLAN PUBLISHING


fraud.

This could lead to

unrecorded liabilities and

delayed payments to

suppliers.

by Mr Jones.

At the very least the

reconciliations should be

scrutinised by the director and a

sample of reconciling items

checked to source documents.

Supplier statements

(and the consequent

reconciliations) are

not retained on file.

There is no audit trail to

confirm the completeness

and accuracy of payables

balances at the year-end.

All reconciliations should be

retained on file to assist with the

preparation of year-end accruals

and in times of disputed

payments.

The director does

not review the

destination or nature

of cheques before

signing them.

Payments could be made

to false suppliers or for

incorrect amounts. Adco

may also have negotiated

extended terms with

certain suppliers that the

Mrs Singh is not aware of.

The director should be presented

with the cheques and a copy of

the aged payables ledger to

scrutinise.

The director should check the

payables back to the authorised

list of suppliers on the master

file.

Mr Jones should prepare month

end cheques to improve

segregation of duties.

Expense claims are

not always

supported by

receipts.

Fraudulent claims could be

processed.

Recovery of VAT would be

jeopardised without

supporting documentation.

Expense claims without

supporting evidence for all

amounts should be rejected.

All claims should be authorised

by the director, who would

check that the receipts are

sufficient evidence and that

claims are relevant to the

business.

Marking Guide

General approach: 1 mark per deficiency, 1 mark per implication and 1 mark per

recommendation.Only 1 explanation and 1 recommendation mark to be awarded per deficiency

discussed. Therefore a maximum of 3 to be awarded per deficiency addressed.

Maximum of 15 to be awarded for answer.




KAPLAN PUBLISHING 7

2 ISA 500 & ISA 240

Key answer tips

Question 2 always requires repetition of knowledge, usually with regard to an

International Standard of Auditing or other fundamental auditing principle.

As there is no application to scenarios the general marking principle is ½ mark for

listing of points of knowledge and ½ for consequent explanations of those points. You

can use a similar rough marking guide when tackling ‘discussion’ based question 2’s.

Therefore, for 5 marks, in both (a) and (b) you are looking for 5 identified and

explained points.

Remember: you only have 18 minutes on question 2!

(a) Sufficient Appropriate Evidence

'Sufficient' means having enough documentary evidence on file to support a

reasonable audit opinion. There is no threshold as to how much evidence is

sufficient; this is simply a matter of professional judgement.

When deciding the quantity of evidence to gather the auditor must consider

audit risk: the greater the risk the greater the need for evidence to be able to

reach satisfactory conclusions.

Materiality also affects the design of audit tests: the higher the materiality

threshold the greater the requirement to gather evidence to be able to

conclude upon whether material misstatement (either individually or in

aggregate) has occurred.

'Appropriate' breaks down into two qualities: reliable and relevant.

To be relevant evidence must fulfil the particular objective of the audit

procedure. This includes testing balances to confirm a specific assertion, such as

completeness or accuracy, but also testing for overstatement or

understatement of particular balances. In order to be sufficient evidence must

be gathered to support the whole range of financial statements assertions.

Auditors should always try and gather the most reliable evidence available. In

the worst case scenario, if reliable evidence is not available then the auditor

may have to disclaim their opinion. Reliable evidence is considered to have the

following characteristics:

• Independent external evidence

• Evidence obtained directly by the auditor

• Documentary evidence

• Original evidence.

Marking Guide

General approach: ½ mark to be awarded for basic points of knowledge listed. A

further ½ mark should be awarded for explanations of those points. Therefore a

maximum of 1 mark available per point discussed.

A maximum of 5 to be awarded for the answer.




8 KAPLAN PUBLISHING

(b) Responsibilities Re. Fraud

The primary responsibility for the prevention and detection of fraud rests with

those charged with governance and management.

They must place a strong emphasis on fraud prevention and reduce the

opportunities for this to take place. This involves a commitment to creating a

culture of honesty and ethical behaviour and the implementation and

maintenance of strong internal controls.

An auditor has a responsibility to obtain reasonable assurance that the financial

statements taken as a whole are free from material misstatement, whether

caused by fraud or error.

In order to satisfy this responsibility an auditor must carefully consider the risk

of fraud when planning an audit. This includes assessing and testing systems of

internal control to identify opportunities for fraud to take place. In response to

this risk assessment the auditor then designs appropriate audit procedures to

gather evidence to be able to conclude upon the financial statements.

Auditors must always remain professionally sceptical throughout the audit,considering the potential for management override of controls and recognising

the fact that audit procedures that are effective for detecting error may not be

effective for detecting fraud.

Overall the risk of non-detection of fraud is higher than that of detecting error

because of the likelihood of sophisticated fraud mechanisms and the inherent

limitations of audit procedures. To this end the auditor is considered to have

only a secondary responsibility when it comes to detecting fraud.

Marking Guide

General approach: ½ mark to be awarded for basic points of knowledge listed. A

further ½ mark should be awarded for explanations of those points. Therefore a

maximum of 1 mark available per point discussed.


3. Collins Cosmetics

Key answer tips

This question is typical of the exam style: there are some marks for simple repetition

of knowledge and some for application of knowledge to a scenario.

NB!! The marks for simple repetition are never sufficient to pass the question. You

must practice applying basic principles to specific, and often unique, circumstances.

For part (a) to get a full mark per definition you must fully explain your points.

Lightweight responses (such as brief bullet-pointed lists) will pick up a maximum of ½

mark.

Part (b) asks you to apply your knowledge of audit risks to a scenario. Remember what

the definition of an audit risk is. You must identify possible sources of misstatement in

the financial statements. You then have to consider how this affects the audit

approach. To assist with this revisit your notes with regard to audit strategy. On this

question you will score 1 mark for each relevant audit risk and 1 mark for the impacton the audit approach.




KAPLAN PUBLISHING 9

Part (c) requires two well explained points that address the basic concept of the audit

risk model.

(a) Meanings

Audit risk is the risk of forming the wrong conclusion from audit procedures.

This means giving an unmodified opinion when a modified opinion would bemost appropriate (or vice versa).

Inherent risk is the risk that material errors may arise from the nature of the

business, its transactions, or its industry, irrespective of the control system in

place.

Control risk is the risk that the client’s internal control system may fail to

prevent and/or detect errors and omissions in financial reporting systems that

could then pass into the financial statements.

Detection risk is the risk that the auditor’s substantive procedures fail to detect

material misstatement in the financial statements. Detection risk is likely to

increase as sample sizes are reduced. Also, detection risk can be reduced by

increasing the experience and general quality of the audit team.

Marking Guide

General approach: 1 mark per thorough definition. ½ marks may be awarded for

incomplete or weaker definitions.


(b) Factors to consider

Audit Risk Audit Approach

Going concernDeclining profits suggest the

company’s future may be in doubt.

The company have also lost a

significant member of staff, which

could have implications for the long-

term health of the business.

If the company is not a going concern

the accounts should be prepared on

an alternative basis (i.e. break-up

basis).

The audit team should compromise

at least one individual with extensive

experience of the cosmetics industry

who is able to scrutinise the forecasts

of the business in light of known

economic and industry specific

changes.

Given the downturn in performance

it will be vital to assess the financial

resources available to the client.

Poor Performance

Declining profits, combined with a

desire to achieve a listing and the new

performance based incentive scheme,

will increase the pressure to overstate

the profits of the company.

This could lead to fraudulent

misstatement in the financial

statements.

The audit will need to be conducted

with a high level of professional

scepticism. The ability to scrutinise

uncertainties and misstatements with

necessary scepticism usually requires

reasonable levels of experience.

Therefore it appears appropriate to

use reasonably senior audit staff for

this engagement. Such staff will also

have the confidence to challengemanagement over such issues.




10 KAPLAN PUBLISHING


Inventory

The incentive scheme may lead to

over-production, which may lead to

inventory that cannot be sold which istherefore overvalued in the statement

of financial position.

The poor performance of the business

also indicates that Collins are finding it

difficult to compete, which may

further indicate that inventories

cannot be sold and are therefore

overvalued.

Experienced staff should be allocated

to the audit of inventory balances.

Importantly, provisions requiresignificant management estimates

and judgements. It is difficult to

gather reliable evidence when such

judgement exists so it will be

necessary to understand the system

that management adopts and to test

any controls that are implemented.

The audit team will also need to plan

to obtain written representations

from management regarding the

completeness of the provision.

Products are made for specific

customers. If Collins loses any

customers the items produced for

them may be unsaleable to anyone

else, again suggesting that inventory is

at high risk of overvaluation.

The audit team will need to sample

test year-end inventories to ensure

that they are selling after the year-

end (at a price greater than cost).

Given the risk surrounding this area a

non-statistical approach, focussing on

the most significant, material

inventories may be appropriate.

Multiple Manufacturing Sites

Multiple locations make internal

controls more complex and difficult to

implement effectively. In particular,

given their manufacturing status,

there is increased risk of poor controls

over stock quantification and, hence,

valuation.

This is particularly the case when

there are significant changes at

boardroom level.

It will be vital (this year in particular)

for the audit team to visit all five of

the manufacturing sites to observe

counting procedures and perform

test counts.

If this is successful there will be a

significantly reduced need for

extensive substantive procedures on

inventory balances at the final audit.

If attendance at all five is not possible

then a greater substantive approach

will be necessary.

Control risk

Recent board changes are likely to

result in the control systems being, at

least, temporarily weakened.

This will be heightened by the FD’s

move to part time status.

The weakening of internal controls has

perhaps been reflected by the

worsening profitability of Collins.

The audit team will need to revisit all

their systems notes and update them

to reflect any changes in internal

controls.

These systems (and the controls) will

then need to be tested to help design

further audit procedures. It is

therefore likely that a significant

interim audit is appropriate this year.

This is particularly important given




KAPLAN PUBLISHING 11


the increased fraud risk due to poor

performance, performance targets

and desire to float the company.

In all likelihood risks are going to be

perceived as high and for that reason

a fully substantive approach appears

likely this year.

Family Owned Status

In a privately-owned family company,

directors may be treating personal

expenditure as business expenditure,

leading to an understatement of

directors’ emoluments.

It is essential that all directors and

related party transactions are

disclosed fully in the financial

statements. A careful review of the

cash book for unusual payments, or

payments to directors, will be

required.

Marking Guide

General approach: 1 mark per audit risk factor/indicator identified relevant to the

scenario. An additional 1 mark to be awarded for relevant and linked discussion of the

impact on the audit approach.

A maximum of 1 to be awarded for approach implications linked to an audit risk

indicator (i.e. can’t have 1 mark for risk and 2 marks for audit approach implication).


(c) High Inherent Risk

If inherent risk is high the auditor has to consider how effectively the client’s

systems of internal control prevent and detect misstatement. If the control

systems are considered strong there is a lower risk of material misstatement in

the financial statements and the auditor may be able to reduce substantive

testing.

However, if the control environment is considered insufficient to prevent and

detect material misstatement then detection risk will need to be lowered using

a combination of the following strategies:

• Increased volume of substantive testing at the final audit stage (e.g. by

selecting larger samples);

• Less biased sample selection (i.e. by using statistical sampling);

• Using a more experienced audit team; and

• Increasing the frequency of senior management review procedures and

by using a second partner to review working papers.

Marking Guide

1 mark for discussing link between inherent, control and detection risk.

½ mark for each strategy suggestion if risk assessed as high to a maximum of 1.

Maximum of 2 to be awarded for the answer.





4. Mart & Border Travel

Key answer tips

Ethics is a fundamental element of modern auditing and will feature regularly in the

F8 exam (as well as all of the professional level papers).

In questions it is vital that candidates can explain the five elements of the code of

conduct. It is also vital that these concepts can be applied to scenarios. In particular,

candidates must be able to identify threats to a firm’s ethical position and recommend

appropriate safeguards.

As question 4 (a) is scenario based candidates will receive 1 mark for each ethical

threat/issue identified, 1 mark for the consequent explanation of the threat and 1

mark for each appropriate safeguard recommended.

In part (b) students should aim to obtain 1 mark for each ethical matter discussed

relevant to the scenario and 1 mark for each recommended safeguard. Note that themarks are split (and this allocation is fixed/capped) between two different issues.

These issues should be discussed in turn and not together as part of a longer answer.

(a) Ethics

Ethical Issue Explanation Safeguard

Being the largest fee

generating client there

is a risk of fee

dependency, which is a

self-interest threat to

objectivity.

The auditor may act

with bias for fear of

losing such a lucrative

client. This could lead to

the signing of inappropriate assurance

reports.

Total fees from Mart

should be regularly

reviewed to ensure

recurring fees remain

below acceptable

thresholds (10-15% of

total practice income). If

fees from Mart exceed

these limits one, or

more, engagements

should be declined.

Acting for a client for 20

years increases the risk

of familiarity threat to

objectivity.

If, at any point, the

relationship between

auditor and client

crosses professional

boundaries then theobjectivity of the auditor

must be questioned.

The auditor may

become too trusting of,

and reliant upon,

management

representations rather

than more reliable forms

of evidence.

Senior staff should be

periodically rotated to

bring in new,

independent staff.

If listed, audit partners

should be rotated after

five to seven years,

depending on local

customs/regulations.





Ethical Issue Explanation Safeguard

Providing additional

services increases the

risk of self-review threat

to objectivity.

This occurs when staff of

the same firm are

reluctant to challenge

the outcome of a

previous engagement

because it could impact

adversely on a colleague

(e.g. tax planning and

audit staff)

Separate teams should

be used with separate

reporting lines and

separate engagement

partners.

If there is particular

concern a second

partner review should

be performed.

The provision of

multiple services may

also create a self

interest-threat to

objectivity.

Low-balling (i.e. low

audit fees charged to

retain other more

lucrative consultancy

work) detracts from

audit quality and

therefore auditor

neutrality.

Independent partner

reviews can be

conducted when there

are concerns over

engagement quality.

Self-interest threat to

objectivity due to tax

planning for both

directors and company.

The auditor may be

tempted to favour one

party at the expense of

the other to try and

boost consultancy fee

income.

Separate teams with

different partners

should be used to

conduct corporate and

private tax planning

engagements.

Former employee

joining client gives riseto a familiarity threat.

Audit staff will know the

new FD too informally

and may place too much

reliance on their

representations.

The audit may need to

be handed over toanother department

who are unfamiliar with

the ex-staff member.

If this is not possible a

second partner review

would be advised.

There may have been a

self-interest threat to

objectivity in previous

years due to the auditmanager manufacturing

a career move.

It is possible the audit

manager has used the

audit as a springboard to

a more lucrative positionwith a client and for that

reason may have not

acted objectively.

The firm should review

previous working files

and current planning

files affected by the oldaudit manager’s

judgements.

Marking Guide

General approach: 1 mark to be awarded for identification of ethical threat. Up to 1

further mark to be awarded for explanation of the threat and a further 1 mark for

recommending a safeguard. Therefore a maximum of 3 to be awarded for each threat

discussed.






(b) (i) The statutory audit

Ethical Matters

Before tendering for the audit Midway LLP must consider if they have

appropriate professional competence to perform the audit. With little

experience in the travel sector it is unlikely the firm will understand the

industry specific risk factors.

In addition to considering knowledge of the industry Midway must also

consider whether they have adequate resources to conduct the

engagement with appropriate standards of due care. Most significantly

they must identify if they have the staff available in their ‘busy’ firm to

adequately plan, perform and review the audit given their current client

commitments.

Midway must also consider that they have no resources on the South

coast and would therefore incur significant travel and subsistence costs

performing the audit; a cost that would be passed on to the client.

The scenario states that Border Travel would provide a ‘significant sourceof fee income.’ This increases the risk of self-interest threat; i.e. Midway

becoming over-dependent on one client and thus conducting their audit

without the necessary objectivity.

Safeguards

Although Midway have no industry specific knowledge this does not

mean they have to turn down the engagement. They could send a

member of staff (most likely a partner or senior manager) on an external

training course. Alternatively, someone with industry specific knowledge

could be recruited.

Generally, for non-public interest clients, recurring fee income from oneclient should not exceed 15% of the total practice income. A budgeting

exercise should be performed, where forecasts of future fees from

Border Travel are compared to total forecast practice income. At the

point that the threshold is exceeded Midway will have to resign from one,

or more, of the services.

(ii) The provision of other services

Preparation of Financial Statements

Ethical Issues

Whilst audit firms routinely assist with the preparation of financial

statements this does create a significant ethical threat when performedfor an audit client: mainly self-review and making management decisions.

Both of these are significant threats to objectivity.

Self-review arises because the audit firm will effectively be auditing

financial statements that they have prepared. The auditor may also be

required to make late adjustments to the accounts and/or the notes,

which increases the risk that they are taking decisions on behalf of the

client.

Safeguards

An engagement letter must be prepared and signed by the client

confirming that they are responsible for the preparation of the financial





statements, including all post-audit adjustments, and the maintenance of

all underlying records.

Separate teams, with separate reporting channels, should be used to

prepare the accounts and perform the audit to reduce any self-review

risk.

Systems review

Ethical Matters

Once again this poses a self-review risk to Midway LLP. As auditor they

will review internal systems and controls, including IT systems that form

part of the financial reporting system. If they have previously performed

a review of IT systems – and helped to update those systems – on a

separate engagement then they would be reviewing their own work. This

would create a significant threat to objectivity.

Midway must also consider if they have the technical competence to

advise on the IT systems of Border Travel. Such engagements require

significant technical IT expertise, which is not a prerequisite of an auditfirm.

Safeguards

If Midway have no IT specialists they should politely decline the offer to

perform IT systems reviews.

If they do have the expertise then those experts must be separate from

the audit team and have separate reporting channels.

Marking Guide

General approach: 1 mark to be awarded for discussion of the ethical matters relevant

to each scenario. 1 mark may also be awarded for each relevant safeguard suggested

in response to the matters identified.

A maximum of 5 to be awarded for the answer to part b(i) and a maximum of 6 to be

awarded for the answer to part b(ii).

5. Lopit

Key answer tips

Parts (a) to (d) require the repetition of basic points of knowledge concerning auditor

rights, responsibilities and objectives. As there is no application students should again

work on the principle of receiving ½ marks for simple lists of knowledge. To turn these

into full marks students must explain their points fully.

Part (e) requires application of knowledge to the scenario given. As a result each point

of explanation will be awarded 1 mark.

(a) Auditor Duties

The duties of the auditor of Lopit are defined by auditing standards (such as

ISAs) and by local statute (such as the Companies Act 2006). An audit is an

independent, professional examination of, and expression of an opinion on, the

financial statements of the company.





The opinion is given as to whether a true and fair view is presented of the

company’s affairs as at the end of its financial year, and of the company’s profit

or loss for its financial year, and whether the financial statements have been

properly prepared in accordance with an identified financial reporting

framework (e.g. IFRS/IASs)

The auditor is also typically required to report on other specific matters; forexample, when:

(i) Proper returns have not been received from branches not visited.

(ii) The financial statements are not in agreement with the underlying

accounting records and returns.

(iii) Proper accounting records have not been kept.

(iv) All necessary information and explanations have not been obtained.

(v) Information disclosed in the directors’ report is inconsistent with that

given in the financial statements.

Certain information may also be required to be disclosed in the audit report if

the company fails to disclose it in the financial statements, e.g. details of the

directors’ emoluments and particulars of loans to officers.

In addition to local statutory requirements, it will also be necessary for the

auditor to ensure that the audit is performed according to the auditing

standards in force (i.e. International Standards of Auditing).

The directors may extend the scope of the audit beyond the statutory

requirements if the auditor is agreeable, but they cannot limit the scope of the

audit or indemnify the auditor against any legal action arising from the non-

performance of duties at the directors’ request.

(b) Relationship Between Auditor and Directors

As Lopit is a newly-formed company, the directors may typically appoint thefirst auditor to hold office until the conclusion of the first AGM. The auditor has

no relationship with the directors other than as the practical means by which

the company enters into a contract with the auditor.

The directors are responsible for the preparation of financial statements, and

the auditor for the formation and expression of an opinion on those statements

to the members of Lopit for a fee.

(c) Legal Rights of an Auditor

As an auditor of a limited liability company, the following rights are typically

given by legislation:

(i) To receive notice to attend and be heard at all general meetings.

(ii) To obtain access at all times to all accounting records.

(iii) To be informed of any proposal for dismissal, and to take certain actions

in that event.

(iv) To obtain all necessary information and explanations, as required, from a

subsidiary and its auditor and, in any other case, to require information

to be provided by the parent company.

(d) Director’s Authority

The directors do not generally have the authority in their capacity as directors

to dismiss the auditor.





An auditor is removed from office by the passing of a resolution by the

members in a general meeting.

Marking Guide

General approach: ½ mark to be awarded for simple listing of points and brief/weak

answers. A full mark may be awarded for thoroughly explained points. A maximum: of 6 to be awarded for (a); 2 for (b); 4 for (c) and 2 for (d).

(e) Acceptance Procedures

Practical matters to be considered:

It would be impossible to accept the appointment as specified by the directors.

The scope of an audit cannot be limited at the request of directors.

If, however, the firm still wishes to pursue the appointment it will be necessary

to discuss the matter with the directors and eliminate the misunderstanding

regarding the duties of the auditor.The auditor must consider whether the audit makes commercial sense. A

cost/benefit analysis should be performed to identify whether the auditor has

the relevant expertise/resources to perform the audit efficiently and whether

the perceived income outweighs the costs.

The above analysis should consider the risk of performing the audit. Whilst Lopit

is not listed (and therefore low reputational risk for the auditor) the first year of

audit may be difficult if Lopit have not previously been audited.

As Lopit is a newly-formed company there will be no requirement to contact

existing/previous auditors for professional clearance.

Ethical matters to be considered: Is the practice sufficiently large to satisfactorily perform the audit with

appropriate standards of competence and due care, or is the audit during a

particularly busy period for the practice?

The recurring fees from this appointment should not exceed 15% of total

practice income, given that Lopit is newly formed and unlikely to be listed.

The audit firm should perform an independence review before accepting the

engagement. This would consider any personal relationships between senior

audit staff and the officers/employees of Lopit. Such personnel should be

excluded from the audit team.

Such a review would also consider any financial involvement with the company,

including audit staff shareholdings or loan to or from the company.

Marking Guide

General approach: 1 mark to be awarded for explanation of points relevant to the

consideration of accepting appointment as auditor to Lopit.

A maximum of 6 to be awarded for the answer to (e)

Documents

ACCA F8 INT Interim Assessment - Ans J11 (With Marks)