REGULATORY ENVIRONMENT AND PROFESSIONAL AND ETHICAL CONSIDERATIONS: Questions 1 to 8 cover Regulatory environment and Professional and ethical considerations, the subjects of Ports A and 6 of the BPP Workbook for AAA 1 Lark (P7 June 2012) (amended) 49 mins (@) You ore a manager in Lark & Co, responsible for the audit of Heron Co, an owner-managed business which operates a chain of bars and restaurants. This is your firm's first year ‘auditing the client and the audit for the year ended 31 March 20X2 is underway, The following exhibit, available on the left-hand side of the screen, provides information, relevant to the question: 1 Audit senior’s note for your attention. This information should be used to answer the question requirements within the response ‘option provided. Exhibit "When | wos auditing revenue I noticed something strange. Heron Co's revenue, which is ‘lmost entirely cosh-bosed, is recognised at $5.5 milion inthe droft financial statements However, the accounting system shows that tll receipts for cash paid by customers ‘amount to only $3.5 milion. This seemed odd, s0 | questioned Ava Gull, the financial controller about this. She soid that Jack Heron, the company's owner, deols with cash receipts and posts journals dealing with cash and revenue. Ava asked Jack the reason for these journals but he refused to give an explanation "While auditing cash, | noticed a payment of $2 million made by electronic transfer from the company’s bank account to on overseas financial institution. The bank statement showed that the transfer was authorised by Jack Heron, but no other documentation regarding the transfer was available. “Alarmed by the size of this transaction, and the lack of evidence to support it, | questioned Jack Heron, asking him about the source of cash receipts and the reason for electronic, transfer. He would not give any answers and became quite aggressive.’ Required Using the information contained in Exhibit 1: © Discuss the implications of the circumstances described in the audit senior's note: cond (© marks) (Explain the nature of any reporting that should take place by the audit senior. (2 marks) (©) Youre olso responsible forthe ausit of Coot Co, and you are currently reviewing the working papers ofthe audit for the year ended 28 February 20X2. In the working papers dealing with payroll, the audit junior has mode several comments. The following exhibit, available on the left-hand side ofthe screen, provides information relevant to the question: 2 Audit unior’s comments in payroll working papers. This information should be ued to answer the question raqulrement within the response option provided. Exhibit 2 "Several new employees have been added to the company's payroll during the year, with combined payments of $125,000 beeing made to them. There does nat appear to be any ‘authorisation for these additions. When | questioned the payroll supervisor who made the amendments, she said thet no authorisation was needed because the new employees are only working for the company on a temporary bosis. However, when discussing staffing Questions 3© % levels with management, it was stated that no new employees have been taken on this xyeor. Other thon the tests of controls planned, no other audit work has been performed.’ Required Using the information contained in Exhibit 2: In relotion to the audit of Coot Co's payroll, explain the meoning of the term ‘professional scepticism’, and recommend any further actions that should be taken by the auditor. (6 marks) You are also the monager responsible for the cudit of the Nossau Group, which comprises ‘@ parent campany and six subsidiaries. The audit of all individual campanias' financial statements is olmost complete, and you are currently carrying out the audit of the consolidated financial statements. One of the subsidiaries, Exuma Co, is cudited by nother firm, Jalousie & Co. Your firm has fulfilled the necessary requirements of ISA 600 Special Considerations ~ Audits of Group Financial Statements (Including the Work of Component Auditors) and is satisfied os to the competence and independence of Jolousie &Co. The following exhibit, available on the left-hand side of the screen, provides information relevant to the question: 3 Extract of Jalousie & Co's draft auditor's report on Exuma Co's financial statements. This information should be used to answer the question requirement within the response option provided Exhibit 3 "Qualified Opinion (extract) “In our opinion, except for effects of the matter described in the Basis for Quelfied Opinion poragraph, the financial statements give o true and fair view of the financial position of Exuma Co as at 31 March 20X2..." An extract of Note 12 to Exuma Co's financial statements is shown below. "Basis of Qualified Opinion (extract) “The compony is focing financiol damages of $2 milion in respect of an on-going court case, more fully explained in Note 12 to the financial statements. Management has not recognised 0 provision but hos disclosed the situation as a contingent liability. Under International Financial Reporting Standards, a provision should be made if there is an obligation os 6 result of o post event, « probable outflow of economic benefit, and a reliable estimate can be made. Audit evidence concludes that these criteria have been met, Cond itis our opinion that a provision of $2 million should be recognised. Accordingly, net profit ond shareholders’ equity would have been reduced by $2 million if the provision had been recognised.’ An extract of Note 12 to Exuma Co's financial statements is shown below. ‘Note 12 (extract) The company is the subject of o court case concerning an alleged breach of plonning regulations. The plaintiff is claiming compensation of $2 milion. The management of Exuma Co, after seeking legal advice, believe that there is only a 20% chance of o successful claim being made against the company.’ Figures extracted from the draft financial statements for the year ending 31 March 20X2 are os follows. Nassau Group Exuma Co $m $m Profit before tox 20 4 Total assets 85 20 PP Advanced Audit and Assurance — International (AAA — INT) eatenRequired the information contained in Exhibit 3: Identify and explain the matters that should be considered, and actions that should be taken by the group audit engagement team, in forming on opinion on the consolidated financial statements of the Nassau Group. (@ marks) Professional marks will be awarded for the demonstration of skil in analysis ond evaluation, and professional scepticism and judgement in your answer. (6 marks) (Total = 25 marks) 2 Plant (P7 December 2012) (amended) 49 mins (0) You are an audit manager in Weller & Co, on audit firm which operates as part of an International network of firms. This morning you received @ note from a partner regarding a potential new audit client. The following exhibit, ovallable on the left: relevant to the question: 1and side of the screen, provides information 1 Audit partner’s note regarding potential new audit client. Thi opt Exhibit 1 information should be used to answer the question requirements within the response n provided. ‘have been approached by the audit committee of the Plant Group, which operates in the mobile telecommunications sector. Our firm has been invited to tender for the audit of the individuel and group financial statements for the year ending 31 March 20X3, and | would like your help in preparing the tender document. This would be o major new client for our firm's telecoms audit department. The Plant Group comprises a parent company and six subsidiaries, one of which is located ‘overseas. The audit committee is looking for a cost effective audit, and hopes that the strength of the Plant Group's governance and internal control mean that the audit can be conducted quickly, with a proposed deadline of 31 May 20X3, The Plant Group has ‘expanded ropidly in the last few years and significant finance was raised in July 20X2 through a stock exchange listing,” Required Using the information contained in Exhibit 1: Explain why a firm of auditors may decide NOT to seek re-election as auditor. (6 marks) (i) Evaluate the specific matters to be included in the tender document for the audit of the Plant Group. 7 marks) (©) Weller & Co is facing competition from other audit firms, and the partners have been considering how the firm's revenue could be increased. Two suggestions have been made: 1 Audit partners and managers can be encouraged to sell non-audit services to audit clients by including in their remuneration package a bonus for successful sales. 2 All audit monagers should suggest to their audit clients that as well as providing the external cudit service, Weller & Co can provide the internal audit service as part of on ‘extended audit’ service. Required Comment on the ethical and professional issues raised by the suggestions to increase the firm's revenue. (B marks) Professional marks will be awarded for the demonstration of skill in analysis and evaluation, professional scepticism and judgement and commercial acumen in your answer. (5 morks) (Total = 25 marks) BPP League Questions 5