QUESTION BANK

Section 1: Legal, ethical and

current issues

1 Short form questions

1 The IFAC has issued professional ethical guidance. The fundamental principles form part of this
guidance. What do the principles cover and at whom are they aimed? (2 marks)

2 If the regular fees from a client company or group of companies constitute a substantial proportion of
the fee income of an audit firm, a self-interest threat is likely to arise so as to impair objectivity.
Set out the safeguards a firm should use to recognise this threat and the procedures available to offset
it. (2 marks)

3 You are the auditor of Harmony Ltd of which the share capital is owned 40% each by David Dennis
and his wife, Diana, and 20% by Edward Endersby, its three directors.
David and Edward have fallen out with each other after an argument during a round of golf. You have
now been requested by Edward to provide him with details of reimbursement of expenses to David
and Diana for the last financial year. You are working on the audit and all the company’s books and
records are in your office.
State, with reasons, how you would respond to Edward’s request. (2 marks)

4 You are planning the audit of Sportsresults-a-minute.com.

You have ascertained that the company has overdue fees of CU15,000, being the previous year’s audit
fee.
Explain the threat to your firm’s independence and state the action your firm should take in respect of
this matter. (3 marks)

5 A partner in a firm of chartered accountants has been approached to accept appointments as auditor
of two separate companies.
(1) Jenkins Ltd, in which he is a 10% shareholder
(2) Davidson Ltd, to whom the auditor owes Tk40,000
State whether it would be acceptable for the partner to accept each of these appointments, and why.
(2 marks)

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Section 1: Legal, ethical and current issues

6 Your client has asked why the audit report your firm has issued on its financial statements talks about
‘true and fair’ rather than ‘correct’ given that you had spent two weeks on site reviewing all its
accounting records.
Explain why this type of opinion has been given on the financial statements. (2 marks)

7 Describe and explain the concept of assurance. (2 marks)

8 A fraud has recently been discovered, involving the chief buyer in the purchasing department of
Rodney Ltd and a purchase ledger clerk in the accounts department over a period of two years. The
managing director of Rodney Ltd has written to the company’s auditors claiming that they had a
responsibility to detect frauds during the course of their audits, and requesting an explanation as to
how they could have missed it.
What points should the auditors make in response to the managing director? (2 marks)

9 Dimension Ltd is a software company providing e-commerce solutions to business. It was

incorporated on 1 April 20W8 and revenue has doubled each year. Rapid expansion is expected to
continue for the next few years.
This growth requires heavy investment in working capital, particularly work in progress and
receivables, and the company will be seeking a substantial increase in the borrowing facility from its
bankers when the present facility is due for annual review in September 20X1.
List the benefits that the company may obtain from the statutory audit. (2 marks)

10 There is an ongoing debate surrounding the regulation of auditors and whether the profession should
regulate itself or be subject to independent regulation.
What are the main arguments in favour of independent regulation of auditors? (3 marks)

11 The ‘expectation gap’ is the possible difference between an auditor’s actual responsibilities and those
assumed by readers of an audit report.
What are the main misunderstandings in respect of the audit made by lay users of accounts?
(3 marks)

12 You have been invited to tender for the audit of Data Ltd, a company that owns and operates 35
hotels in Bangladesh. You have not previously acted for Data Ltd, but you are the current auditors of
Lodge Ltd, a company that owns and operates hotels in 30 out of the 35 towns in which Data Ltd
operates. The hotels operated by each company offer similar facilities to each other at a similar price.
Identify and explain the principal ethical issue that you may need to consider when deciding whether
or not to tender for the audit of Data Ltd, and state the procedures you may need to implement in
the event that your tender was successful. (3 marks)

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 QUESTION BANK

13 You are the auditor of Royale Limited, a manufacturer of fireworks. Following a disappointing last
three months of trading, the company has requested an extension to its overdraft facility from its
bankers. The bank has in turn asked your firm to provide a report on the company’s working capital,
focusing on the recoverability of trade receivables and inventory.
Explain the benefits and limitations to both the bank and Royale Limited of obtaining the working
capital report. (4 marks)

14 Briefly describe what you understand by the terms ‘reasonable assurance’ and ‘limited assurance’.
(2 marks)

15 State the types of pronouncement issued by the International Auditing and Assurance Standards Board
and describe in what kind of engagement each of these is relevant. (3 marks)

16 One of your clients, Selhurst Ltd, is a small company which is not legally required to have a statutory
audit.
Explain the benefits of a statutory audit for a small company such as Selhurst Ltd. (3 marks)

17 State three types of threat to an auditor’s objectivity and independence identified by the IFAC’s Ethical
Standards. For each give an example of how the threat might arise for an auditor. (3 marks)

18 In the past few years the cash flow position of your firm has altered considerably.
After a relatively stable period your firm found itself in a bad financial position. One of your fellow
partners discussed this problem with a major client during a golfing weekend. As a result the client
offered your firm a low interest loan. Fortunately, the position changed and your firm never took up
the client’s offer. Now your firm is financially sound and would be in a position to make a reciprocal
offer to the client, should he need it.
Why are practice loans to/from clients prohibited under the IFAC’s Ethical Standards? (1 mark)

19 Mrs Wallace is the audit partner in her firm for Racdale Ltd. She has just been appointed a trustee of
the Racdale Family Trust, which owns 20% of the shares in Racdale Ltd. She replaces the family
solicitor who has just retired.
In addition, Mr Netwater, the audit manager for Racdale Ltd, has given one month’s notice that he will
be leaving the firm to become finance director of the company.
State the threats to independence that these situations pose, and the safeguards that the firm should
employ to maintain objectivity. (3 marks)

20 State what you should do if you identify money-laundering activities during the course of an audit.
(1 mark)

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Section 1: Legal, ethical and current issues

21 The following is an extract from an independent accountant's unmodified report on a profit forecast:
‘Based on our examination of the evidence supporting the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for the
forecast.’
Describe the level of assurance provided by this statement and explain how and why it differs from the
level of assurance provided by an audit report on annual historical financial statements. (4 marks)

22 Your firm acts as auditor to Columbus Ltd, a retail car dealer. During the course of your audit for the
year ended 30 June 20X5, you discover that the company’s sales manager, assisted by the accounts
clerk, has deliberately falsified details of the value of vehicles sold in order to increase his monthly
bonus payments.
Set out your responsibilities in respect of the above matter and contrast these with the responsibilities
of the management of Columbus. (3 marks)

23 BSA 250 Consideration of Laws and Regulations in an Audit of Financial Statements sets out procedures
that the auditor must follow in order to help him identify those instances of non-compliance which
should be considered when auditing financial statements.
What additional procedures should be performed in respect of when instances of non-compliance
must be communicated to management without delay? (2 marks)

24 The auditors of Trigger Ltd have become aware during the course of their audit that the company has
been guilty of a serious breach of the law. This non-compliance has no direct effect on the financial
statements.
List the steps the auditors might have to take in these circumstances. (2 marks)

2 Mac
Your firm acts as external auditor for Mac, a partnership whose principal business activity is the
manufacture and export of high quality raincoats. Mac is not required by law to have an audit of its financial
statements for the year ended 28 February 20X5.
The partners of Mac have asked you to explain why your firm is trying to persuade them to continue to
have an audit even though it is not required by law. They believe that it would be more useful if your firm
provided a report on the profit and cash flow forecasts prepared by the partners.
Requirements
(a) List the advantages to the partners of Mac of continuing to have a full audit under the Companies Act
when exempt from the statutory audit. (6 marks)
(b) In respect of a report on profit and cash flow forecasts, set out the nature and the level of the
assurance which may be given in such a report and explain how and why it differs from the level of
assurance provided by an audit report. (9 marks)
(15 marks)

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 QUESTION BANK

3 Criticisms of auditors
Following high profile corporate failures, auditors have been criticised by various interested parties in
connection with
(1) Their responsibility for the detection of fraud
(2) The provision of non-audit services to their audit clients
(3) The period of time for which they can act as auditors for a client.
Requirement
Outline the current regulatory and professional requirements in respect of the matters identified in (1) to
(3) above and state how they might be further changed by the regulatory bodies. Set out the case for and
against changes to the current regulatory and professional requirements. (15 marks)

4 Alpha Ltd
Alpha Ltd, a listed company, operates a policy of putting its audit and related services out to tender every
five years. Following submissions from a number of firms of accountants, the audit committee of Alpha Ltd
recommended that your firm be appointed to provide the following services.
 The statutory audit of the annual financial statements.
 An independent review of the interim financial information which will be circulated to shareholders
together with your firm’s independent review report. The independent review will be restricted to
making enquiries of management, applying analytical procedures to the financial information and
assessing whether the accounting policies and presentation have been consistently applied unless
otherwise disclosed.
 Consultancy services in respect of the implementation of a new financial information technology
system.
Your firm has not previously acted for Alpha Ltd but does act as auditor for one of its major competitors.
Requirements
(a) Identify and explain the professional and ethical issues that should have been identified by your firm in
relation to the provision of the services, outlined above, to Alpha Ltd and outline the safeguards that
should be in place in order to address these issues. (14 marks)
(b) Comment on the level of assurance provided by the report on the interim financial information, and
explain how and why it differs from the level of assurance provided by the statutory audit report on
the annual financial statements. (6 marks)
(20 marks)

5 Mart Ltd
You work for a firm of auditors which has seven offices throughout Bangladesh. The firm’s largest client in
terms of fee income is Mart Ltd, a company which has grown steadily through a mixture of organic growth
and acquisition of companies in the same industry sector.
Your firm has acted for this client since its incorporation 20 years ago and, in addition to the statutory
audit, provides a range of non-audit services, including tax planning (for the company and its individual
directors) and consultancy work in respect of Mart Ltd’s acquisition policy.
Earlier this year the finance director of Mart Ltd retired and was succeeded by a former member of your
firm’s staff who had managed the audit of Mart Ltd for the preceding four years.

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Section 1: Legal, ethical and current issues

Requirements
(a) Discuss the ethical and professional issues raised by the situation described above and identify the
measures which should be implemented by your firm in order to mitigate any threats to objectivity
which might arise. (10 marks)
(b) Set out the implications for audit firms and their clients if the provision of all non-audit services to
audit clients is banned and mandatory periodic rotation of audit firms is introduced. (6 marks)
(16 marks)

6 Gardenvale Ltd
Gardenvale Ltd is a company which operates a chain of garden centres specialising in the retailing of high
quality garden products and the provision of landscaping services. Following information from one of the
employees, it was discovered that the financial controller had used company cheques and bank transfers to
pay for goods and services for his own use. Although the amounts involved were immaterial in the context
of the financial statements, it transpired that this had been going on for several years.
The managing director is considering whether the company’s auditors were negligent. He has requested
that your firm undertakes a detailed independent review of Gardenvale Ltd’s purchase and payments system
in order to establish any shortcomings in its policies and procedures, so that they can be rectified.
Requirements
(a) Distinguish between the responsibilities of the management and the statutory auditor of a limited
company for the prevention and the detection of fraud and outline how these responsibilities are
discharged. (6 marks)
(b) Prepare a list of questions in respect of internal control procedures, answers to which would establish
whether there are any shortcomings in Gardenvale Ltd’s purchase and payments system. (11 marks)
(17 marks)

7 Beeches Technologies Ltd

You are currently planning the audit of Beeches Technologies Ltd and its subsidiaries for the year ending 30
September 20X7. Beeches Technologies Ltd heads an international group which sells computer software
and related services. Software is developed in Bangladesh and sold throughout the world by the group’s
numerous overseas subsidiaries. These subsidiaries act as agents for the parent company, selling software
and providing support on its behalf. They receive a commission equal to their costs plus a 5% margin.
The costs incurred by the subsidiaries typically comprise:
 Payroll costs and associated expenses for sales, technical and administrative staff
 Sales commissions
 Establishment costs for the local office
 Depreciation
 Miscellaneous expenses
At 30 September 20X6, Beeches Technologies Ltd had 24 overseas subsidiaries, at which audit work was
performed as follows:
Number
Full audit by your firm 8
Limited review by your firm 5
No work 11
24
No new subsidiaries are expected to be established before 30 September 20X7.
With the exception of the two largest subsidiaries (at which your firm performs a full audit), all of the
subsidiaries are of similar size. The costs of each smaller subsidiary represent approximately 0.5% of the

8 © The Institute of Chartered Accountants in England and Wales, March 2009

 QUESTION BANK

group’s total cost base. Where a full local audit is not required, the subsidiaries are visited on a rotational
basis, each subsidiary being visited at least once every three years.
You called the group financial controller of Beeches Technologies Ltd in order to arrange a planning
meeting. She informed you that she has just returned from investigating a fraud at the group subsidiary in
Madrid, a location where your firm performed limited review procedures two years ago and no work in the
prior year.
The financial controller in Madrid misappropriated the equivalent of CU150,000 over a three-year period by
using company cheques and bank transfers to pay his own personal expenses. These were reported as
company expenses in the profit and loss account submitted to Beeches Technologies Ltd. Whilst the
amount involved is not material to the group as a whole, it is very significant to the local subsidiary.
The group financial controller told you that the group finance director has expressed concern that the audit
work performed did not uncover the fraud and has asked for a meeting with the audit partner to discuss
this. You have arranged a meeting for this Friday.
Requirements
(a) Prepare the following schedules to assist the audit partner in his preparations for Friday’s meeting:
(i) A list of questions you believe the audit partner should ask in order to ensure that he has
significant information about the fraud to assess its impact on the audit for the year ending
30 September 20X7. (8 marks)
(ii) A summary of the most important controls you would expect the group to have in place to
prevent and detect the misappropriation of funds by subsidiary employees. (10 marks)
(b) Using the Beeches Technologies fraud as an example, compare and contrast the responsibility of the
auditor in respect of fraud with the expectation of company directors and the general public in this
area. Your answer should refer to any duty the auditor has to report fraud. (14 marks)
(32 marks)

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 Section 1: Legal, ethical and current issues

10 © The Institute of Chartered Accountants in England and Wales, March 2009