ACCA AA Syllabus A. Audit Framework And Regulation - Audit Committees - Past Papers ^{4 / 7}

Bluebird Enterprises Co (Bluebird) is a retail company planning to list on a stock exchange within the next six months, and management has been advised by the company’s auditors about the need for compliance with corporate governance provisions. In particular, the finance director is looking to recruit non-executive directors as he understands that Bluebird will need to establish an audit committee.

The finance director has two potential non-executive directors whom he is considering approaching to join the board of Bluebird. Antony Goldfinch is currently an executive sales director of a listed multi-national banking company; he sits on an audit committee of another company as a non-executive director and is agreeable to being paid a fixed fee which is not related to profits. Jacob Mallard is currently a finance director of a small retail company, which does not compete with Bluebird; he has expressed an interest in a fixed seven year contract and he is the brother of Bluebird’s chief executive.

Required
(a) Explain the benefits to Bluebird Enterprises Co of establishing an audit committee. (4 marks)

Bluebird Enterprises Co (Bluebird) is a retail company planning to list on a stock exchange within the next six months, and management has been advised by the company’s auditors about the need for compliance with corporate governance provisions. In particular, the finance director is looking to recruit non-executive directors as he understands that Bluebird will need to establish an audit committee.

The finance director has two potential non-executive directors whom he is considering approaching to join the board of Bluebird. Antony Goldfinch is currently an executive sales director of a listed multi-national banking company; he sits on an audit committee of another company as a non-executive director and is agreeable to being paid a fixed fee which is not related to profits. Jacob Mallard is currently a finance director of a small retail company, which does not compete with Bluebird; he has expressed an interest in a fixed seven year contract and he is the brother of Bluebird’s chief executive.

Required

as non-executive directors of Bluebird Enterprises Co.

Note: The total marks will be split equally between each part. (6 marks)

You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who specialise in the provision of loans and financial advice to individuals and companies. Currant & Co has audited Orange for many years.

The directors are planning to list Orange on a stock exchange within the next few months and have asked if the engagement partner can attend the meetings with potential investors. In addition, as the finance director of Orange is likely to be quite busy with the listing, he has asked if Currant & Co can produce the financial statements for the current year.

During the year, the assistant finance director of Orange left and joined Currant & Co as a partner. It has been suggested that due to his familiarity with Orange, he should be appointed to provide an independent partner review for the audit.

Once Orange obtains its stock exchange listing it will require several assignments to be undertaken, for example, obtaining advice about corporate governance best practice. Currant & Co is very keen to be appointed to these engagements, however, Orange has implied that in order to gain this work Currant & Co needs to complete the external audit quickly and with minimal questions/issues.

The finance director has informed you that once the stock exchange listing has been completed, he would like the engagement team to attend a weekend away at a luxury hotel with his team, as a thank you for all their hard work.

In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced interest rate.

Orange is aware that subsequent to the stock exchange listing it will need to establish an audit committee and has asked for some advice in relation to this.

Required:

Explain the benefits to Orange of establishing an audit committee. (4 marks)

Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital.

The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Conoy Co’s jurisdiction does not require any. The executive directors are very successful in running Conoy Co, partly from their training in production and management techniques, and partly from their ‘hands-on’ approach providing motivation to employees.

The board are considering a significant expansion of the company. However, the company’s bankers are concerned with the standard of financial reporting as the financial director (FD) has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed.

Conoy Co does have an internal audit department, although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co.

The board of Conoy Co concur with this view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co.

The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee.

The committee would consist of one executive director, the chief internal auditor as well as three new appointees.

One appointee would have a non-executive seat on the board of directors.

Required:

Discuss the benefits to Conoy Co of forming an audit committee. (12 marks)