Question 1.
It has been suggested that the most important matter affecting the credibility of the auditor is that of ‘independence’.
Required
(a) Discuss, giving examples, matters other than independence, which might be relevant in relation to the credibility of the auditor and steps that the accounting profession has taken or might take in relation to them. (10marks)
(b) Discuss the following situations in the context of the independence of the auditor,
showing clearly the principles involved:
(i) The audit manager in charge of the audit assignment of Andrew Co holds 1,000 £1 ordinary shares in the company (total shares in issue – 100,000). The audit partner holds no shares. (5marks)
(ii) The audit fee receivable from Janet Co, a private company is £100,000. The total fee income of the audit firm is £700,000. (5marks)
(iii) The audit senior in charge of the audit of Margot Bank Co has a personal loan from the bank of £2,000 on which she is currently paying 13% interest. (5marks)
(iv) The audit partner is responsible for two audit assignments, Harry Co and Jean Co. Harry Co has recently tendered for a contract with Jean Co for the supply of material quantities of goods over a number of years. Jean Co has asked the audit partner to advise on the matter. (5Marks)
(c) Explain the concept of objectivity, with reference to
(i) External auditors
(ii) Internal auditors, who are members of ACCA, outlining any general
threats to objectivity that exist (8marks)
(iii) Scenario 1
Bakers Co is an audit client of Hinkley Innes, a firm of Chartered Certified Accountants. The firm has had the audit of Bakers for 17 years and the fee represents 7% of firm income. Bakers is considering a major new project and has asked the firm if it would be happy to undertake some one-off consultancy work for the firm. It is possible that the fee income for this contract would represent 10% of that year’s income for Hinkley Innes. The new business services partner, who heads up a new division of the firm, is keen to take on the work, as this would represent his best contract yet.
Scenario 2
Peter works in the purchasing department of Murphy Manufacturing Co. He has been
instrumental in setting up control systems in the purchasing department as part of a recent risk management exercise. He has a poor relationship with his immediate supervisor, the Purchasing Director. Murphy Manufacturing has just advertised the post of trainee internal auditor. Peter is interested in the work that internal audit do, having liased substantially with the department during the recent controls exercise. No formal accountancy qualifications are required for the post, because the successful candidate will be put through accountancy training. Peter has had a chat with the head of internal audit concerning the post and is seriously considering making an application.
Required
Discuss the threats and the safeguards to objectivity that could be implemented in the two situations given above. (12marks)
Question 2.
John and Jane Co (John and Jane) is a computer hardware specialist and has been trading for over five years. The company is funded partly through overdrafts and loans and also by several large shareholders; the year end is 30 April 2014. John and Jane has experienced significant growth in previous years; however, in the current year a new competitor, Drums Design Co (Drums), has entered the market and through competitive pricing has gained considerable market share from John and Jane.
One of John and Jane’s larger customers has stopped trading with them and has moved its business to Drums. In addition, a number of John and Jane’s specialist developers have left the company and joined Drums. John and Jane has found
it difficult to replace these employees due to the level of their skills and knowledge. John and Jane has just received notification that its main supplier who provides the company with specialist electrical equipment has ceased to trade.
John and Jane is looking to develop new products to differentiate itself from the rest of its competitors. It has approached its shareholders to finance this development; however, they declined to invest further in John and Jane. John and Jane’s loan is long term and it has met all repayments on time. The overdraft has increased significantly over the year and the directors have informed you that the overdraft facility is due for renewal next month, and they are confident it will be renewed.
The directors have produced a cash flow forecast which shows a significantly worsening position over the coming 12 months. They are confident with the new products being developed, and in light of their trading history of significant growth, believe it is unnecessary to make any disclosures in the financial statements regarding going concern. At the year end, John and Jane received notification from one of its customers that the hardware installed by John and Jane for the customers’ online ordering system has not been operating correctly. As a result, the customer has lost significant revenue and has informed
