1.1 The audit fee in respect of the financial statements for the year ended 31 March
2022 of Jasper plc (Jasper), an external audit client of Blake Lowe LLP (Blake
Lowe), is eight months overdue.
Explain why this matter should be considered by Blake Lowe in deciding whether
or not it is appropriate to continue to act as external auditor to Jasper. (2 marks)
1.2 Able Cole LLP (Able Cole) is the external auditor of both Ash Ltd (Ash) and Oak
Ltd (Oak). Oak is a customer of Ash. During the planning meeting for the external
audit of Oak for the year ended 31 March 2022 the engagement partner
discovered, from a conversation with the finance director, that Oak’s bank was
likely to withdraw the overdraft facility. Oak owed a substantial amount to Ash at
31 March 2022 and the whole of this amount is still outstanding. Able Cole is
finalising the audit of Ash for the year ended 31 March 2022 because the
company’s bankers require the audited financial statements by 30 June 2022 in
accordance with the terms of the overdraft facility.
Explain the professional and ethical issues facing Able Cole in respect of the
audits of Ash and Oak and outline the safeguards that should already be in place
to address these issues. (4 marks)
1.3 During the external audit of Athenza Ltd (Athenza), which operates a chain of
beauty salons, the audit senior discovered that the managing director, who owns
all the shares, regularly collects cash from customers and does not include any details relating to these transactions in the accounting records of Athenza.
Explain the audit senior’s and the audit firm’s responsibilities in respect of this matter. (4 marks)
1.4 Set out the purposes of exercising quality control procedures in the conduct of an
assurance engagement. (3 marks)
1.5 Your firm has been invited by John Vector, the managing director and majority
shareholder of Vector Ltd (Vector), to accept appointment as external auditor. The
client acceptance procedures have identified a recent newspaper article which
provides details of court proceedings relating to an alleged fraud committed by
John Vector. Explain why this matter should be considered when deciding whether
or not to accept the appointment as external auditor of Vector. (3 marks)
1.6 The ‘Independent Review into the Quality and Effectiveness of Audit’ (the
Review) conducted by Sir Donald Brydon proposed a number of recommendations
to reform the audit profession.
List three recommendations set out in the Review. (4 marks)
Total: 20 marks
2 Stabbington Ltd
Your firm has a number of offices in the UK and is the external auditor of
Stabbington Ltd (Stabbington). Stabbington is a large UK optical retailer and the
wholly-owned subsidiary of Pascal Ltd (Pascal). Your firm does not audit Pascal but
is required to communicate with Pascal’s auditor in respect of the audit of
Stabbington. You are the audit manager responsible for planning the audit of the
financial statements of Stabbington for the year ended 31 August 20X2.
Stabbington owns stores in 50 UK towns and cities. It is popular with customers due
to its well-advertised one-hour service. The service allows customers to undergo an
eye examination with a qualified optician, choose spectacle frames and have the
relevant lenses fitted into the frames, all within one hour. Stabbington is able to
deliver this one-hour service because each store holds a very large inventory of
frames and operates its own in-store optical laboratory which prepares and fits the
lenses into the customer’s chosen frames.
Recently, trading conditions have been difficult for Stabbington and to meet its
financial targets, set by Pascal, the directors of Stabbington have adopted an
acquisition strategy.
In March 20X2, Stabbington acquired the trade and assets of Rider Opticians Ltd
(Rider), an optical retailer owning five stores in the south of England. The purchase
consideration of £12.5 million was funded by a loan from Pascal. The assets
acquired included Rider’s freehold retail premises, optical and IT equipment and the
inventory of spectacle frames and lenses held in each store. In April 20X2,
Stabbington scrapped the IT equipment acquired and replaced it with its own IT
system and also undertook a programme of refurbishment of the Rider premises to
bring them into line with Stabbington’s other stores.
The directors have also implemented a programme to reduce costs across
Stabbington’s business. This included the closure of eight laboratories in the smallest
stores and sale of the related equipment. Customers at these eight stores now have
to wait 24 hours to receive their spectacles. This has attracted adverse publicity both
locally and nationally.
On 20 August 20X2 the directors publicly announced the closure of four further
laboratories and notified a number of staff that they would be made redundant on 1
October 20X2. A provision for closure and redundancy costs has been included in
the financial statements at 31 August 20X2.
During the planning meeting the engagement partner informed you of the following:
The directors employed an external valuer to value Stabbington’s properties
as at 31 August 20X2. These properties are to be included at their revalued amounts
in the financial statements for the year ended 31 August 20X2. In previous financial
statements properties were included at historical cost.
On 4 September 20X2 the directors were notified of a legal action against
Stabbington by Max Fitzherbert, a customer, in relation to an injury caused to his eye
during a routine examination on 14 July 20X2.
The directors are currently considering the acquisition of the shares of Gothel
Ltd (Gothel), an optical retailer based in the north of England, and require help in
determining the appropriateness of Gothel as an acquisition target and the potential
consideration to be paid for the shares. Consequently, the directors have requested
that your firm accepts an engagement to undertake a review of, and prepare a report
on, the most recent audited financial statements of Gothel. Your firm is currently the
external auditor of Gothel.
The engagement partner has also provided you with the following extracts from the
financial statements of Stabbington for the years ended 31 August:
20X2 20X1
(draft) (audited)
£’000 £’000
Statement of profit or loss
Revenue 90,213 90,175
(Loss)/profit before taxation (544) 5,410
Statement of financial position
Current assets
Cash 5 102
Current liabilities
Provision for closure and redundancy costs 1,800 –
Bank overdraft 3,650 –
Non–current liabilities
Loan from Pascal 12,500 –
The engagement partner has asked you to consider the following key areas of audit
risk:
(1) Going concern
(2) Property, plant and equipment
(3) Provision for closure and redundancy costs
Requirements
2.1 Explain the conflict of interest and self-review threat arising from the provision
of the service by your firm to review, and report on, the financial statements of
Gothel. Outline how your firm should respond to the conflict of interest and self-
review threat. (7 marks)
2.2 Justify why the items listed by the engagement partner have been identified
as key areas of audit risk and, for each item, describe the procedures that should be
included in the audit plan in order to address those risks. You should present your
answer using the following three subheadings:
(a) Going concern
(b) Property, plant and equipment
(c) Provision for closure and redundancy costs (21 marks)
2.3 Explain why the legal claim by Max Fitzherbert should be considered by your
firm in respect of the audit of the financial statements for the year ended 31 August
20X2 and describe the audit procedures to be undertaken in respect of this matter.
(8 marks)
2.4 State the matters, in respect of your firm’s audit of the financial statements of
Stabbington, that should be communicated to the external auditors of Pascal. (4
marks)
Total: 40 marks
3 Dingwall LLP and Harris LLP
On 1 September 20X3, Dingwall LLP (Dingwall) and Harris LLP (Harris), two audit
and assurance firms, merged to form D&H LLP (D&H). Both firms moved to a single
location and staff were integrated. Each firm’s clients have confirmed that they wish
D&H to continue providing the same audit and assurance services. The following
situations have arisen:
(1) As a result of the merger, D&H is now the external auditor of both Wisp Ltd
(Wisp), a UK furniture maker, and Tapestry Ltd (Tapestry). Tapestry earns
80% of its revenue from a contract to supply sofa covers to Wisp and the
two companies are currently negotiating the renewal of this contract which
is due to expire. D&H is due to commence planning both audit
engagements, for the year ending 31 August 20X3, but does not expect
the contract negotiation to be finalised before the financial statements are
signed.
(2) Crow plc (Crow), a listed company, owns 100% of Mordu Ltd (Mordu).
Fees earned from the provision of services, in the 12 months to 31 August
20X3, were as follows:
Fees earned by
Dingwall from
Crow
Fees earned by
Harris from Mordu
£’000 £’000
External audit 289 176
Annual tax services 137 82
Annual report on regulatory return 42 –
Report on forecast information
(one–off engagement) – 18
Total fee income earned by Dingwall in the 12 months to 31 August 20X3
was £8.2 million. Harris earned £4.7 million in the same period. Annual fee
income is not expected to be significantly affected by the merger.
(3) On 31 March 20X3, Elinor Macintosh was appointed as an audit partner by
Dingwall. Immediately before this Elinor had been finance director at
Menhir Ltd (Menhir), a company which has been audited by Harris for a
number of years. Menhir prepares financial statements to 30 June each
year.
(4) Before 1 September 20X3, Dingwall was the external auditor of Castle Ltd
(Castle) and Harris had been providing outsourced tax compliance work to
Castle for two years. There were no threats to Harris’s independence or
objectivity when it accepted the tax engagement. Combined fees for these
engagements amount to less than 10% of D&H’s total expected fee
income.
Requirements
3.1 Identify and explain the principal professional and ethical issues presented by
each of the situations above and state the steps D&H should take to address them.
(16 marks)
3.2 The ICAEW Code of Ethics identifies circumstances where an auditor is or
may be required to disclose confidential information obtained during the course of an
external audit. Outline the circumstances in which the disclosure of confidential
information is or may be required.(4 marks)
Total: 20 marks
4 Efron & Co
Described below are two situations that have arisen concerning unrelated clients of
Efron & Co, an audit and assurance firm. Zac Hudgen has worked at Efron & Co for
six months and is involved in work for both clients. The year end in each case is 30
June 20X9.
(1) Mckessie plc
Mckessie plc (Mckessie) is considering acquiring all of the shares in Wild Ltd (Wild).
The directors of Mckessie have appointed Efron & Co to undertake a review
engagement. The terms of the engagement require Efron & Co to review Wild’s
financial statements, for the year ended 30 June 20X9, for any material
misstatements and provide a report, to the directors of Mckessie, expressing the
firm’s conclusion.
Wild is a small company and is not required to have a statutory audit. In performing
the review, Efron & Co’s procedures were limited to inquiries of company personnel
and analytical procedures. Zac has discovered that Wild failed to perform a physical
inventory count at 30 June 20X9. Wild’s inventory records were last updated three
weeks before the year end. The inventory figure in Wild’s financial statements was
estimated by the warehouse manager using the delivery notes and despatch notes
he had kept since the last count, however he has not retained these. Efron & Co has
been unable to verify the quantity of inventory through any other means. The
carrying amount of inventory is material to Wild’s financial statements.
(2) Danfurth Ltd
During Efron & Co’s external audit of Danfurth Ltd (Danfurth) Zac discovered that a
significant number of temporary employees are paid each day in cash. These cash
payments are recorded in the accounting records under ‘cleaning costs’ but the
employees in question do not undertake cleaning. None of the legally required
income taxes or other mandatory taxes have been paid to the authorities in respect
of these employees. The factory manager told Zac that this has been standard
practice for a number of years and, as a result, Efron & Co has calculated that
Danfurth’s tax liability in respect of these employees is material to the financial
statements. The directors are reluctant to recognise any liability in the financial
statements, as they are concerned it will mean the tax authorities will ask them to
pay the taxes due.
Requirements
4.1 Explain how and why the levels of assurance provided by an audit and
assurance firm might differ for different types of assurance engagement. (3 marks)
4.2 Discuss the implications for the report on the review of Wild’s financial
statements as requested by the directors of Mckessie. Clearly explain the nature of
the report conclusion that you consider Efron & Co should provide. (6 marks)
4.3 Discuss the implications for the auditor’s report on the financial statements of
Danfurth and describe any modifications you consider Efron & Co should make to its
auditor’s report.
(8 marks)
4.4 Identify Zac Hudgen’s responsibilities and the responsibilities of Efron & Co in
relation to the issues arising at Danfurth. (3 marks)
Total: 20 marks
