ACCA AA Syllabus A. Audit Framework And Regulation - Independence & Confidentiality - Past Papers ^{7 / 8}

Sycamore & Co is the auditor of Fir Co, a listed computer software company. The audit team comprises an engagement partner, a recently appointed audit manager, an audit senior and a number of audit assistants. The audit engagement partner has only been appointed this year due to the rotation of the previous partner who had been involved in the audit for seven years. Only the audit senior has experience of auditing a company in this specialised industry. The previous audit manager, who is a close friend of the new audit manager, left the firm before the completion of the prior year audit and is now the finance director of Fir Co.

The board of Fir Co has asked if Sycamore & Co can take on some additional work and have asked if the following additional non-audit services can be provided:

(1) Routine maintenance of payroll records
(2) Assistance with the selection of a new financial controller including the checking of references
(3) Tax services whereby Sycamore & Co would liaise with the tax authority on Fir Co’s behalf

Sycamore & Co has identified that the current year fees to be received from Fir Co for audit and other services will represent 16% of the firm’s total fee income and totalled 15·5% in the prior year. The audit engagement partner has asked you to consider what can be done in relation to this self-interest threat.

During the course of the audit of Fir Co, a suspicious cash transfer has been identified. The audit team has reported this to the relevant firm representative as a potential money-laundering transaction.

Which of the following statements is true regarding the confidentiality of this information?

A. Details of the transaction can only be disclosed with the permission of Fir Co
B. If there is a legal requirement to report money-laundering, this overrides the principle of confidentiality
C. Sycamore & Co is not permitted to disclose details of the suspicious transaction as the information has been obtained during the course of the audit
D. In order to maintain confidentiality, Sycamore & Co should report their concerns anonymously

Compliance with the fundamental principles in ACCA’s Code of Ethics and Conduct can be threatened in a number of ways.

Required:

List the FIVE ethical threats to independence and objectivity and for EACH threat identify ONE example of a circumstance that may create the threat. (5 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.

Required:

(i) Explain SIX ethical threats which may affect the independence of Currant & Co’s audit of Orange
Financials Co; and

(ii) For each threat explain how it might be reduced to an acceptable level. (12 marks)

Explain the auditor’s ethical responsibilities with regard to client confidentiality and when they have an:

(i) obligatory responsibility; and

(ii) voluntary responsibility to disclose client information. (5 marks)

The audit engagement partner for Goofy Co has been in place for approximately six years and her son has just accepted a job offer from Goofy Co as a sales manager; this role would entitle him to shares in Goofy Co as part of his remuneration package.

If NAB & Co is appointed as internal as well as external auditors, then Goofy Co has suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the profit after tax of the company as they feel that this will align the interests of NAB & Co and Goofy Co.

Required:

From the information in (c) explain the ethical threats which may affect the independence of NAB & Co in respect of the audit of Goofy Co, and for each threat explain how it may be reduced. (6 marks)

You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co, which has been an audit client for four years and specialises in manufacturing luxury mobile phones.

During the planning stage of the audit you have obtained the following information. The employees of LV Fones Co are entitled to purchase mobile phones at a discount of 10%. The audit team has in previous years been offered the same level of staff discount.

During the year the financial controller of LV Fones was ill and hence unable to work. The company had no spare staff able to fulfil the role and hence a qualified audit senior of Jones & Co was seconded to the client for three months.

The audit partner has recommended that the audit senior work on the audit as he has good knowledge of the client. The fee income derived from LV Fones was boosted by this engagement and along with the audit and tax fee, now accounts for 16% of the firm’s total fees.

From a review of the correspondence fi les you note that the partner and the fi nance director have known each other socially for many years and in fact went on holiday together last summer with their families. As a result of this friendship the partner has not yet spoken to the client about the fee for last year’s audit, 20% of which is still outstanding.

Required:

(i) Explain the ethical threats which may affect the independence of Jones & Co’s audit of LV Fones Co; and (5 marks)

(ii) For each threat explain how it might be avoided. (5 marks)

You are the audit manager in the audit firm of Dark & Co. One of your audit clients is NorthCee Co, a company specialising in the manufacture and supply of sporting equipment. NorthCee have been an audit client for five years and you have been audit manager for the past three years while the audit partner has remained unchanged.

You are now planning the audit for the year ending 31 December 2007. Following an initial meeting with the directors of NorthCee, you have obtained the following information.

(i) NorthCee is attempting to obtain a listing on a recognised stock exchange. The directors have established an audit committee, as required by corporate governance regulations, although no further action has been taken in this respect. Information on the listing is not yet public knowledge.

(ii) You have been asked to continue to prepare the company’s financial statements as in previous years.

(iii) As the company’s auditors, NorthCee would like you and the audit partner to attend an evening reception in a hotel, where NorthCee will present their listing arrangements to banks and existing major shareholders.

(iv) NorthCee has indicated that the fee for taxation services rendered in the year to 31 December 2005 will be paid as soon as the taxation authorities have agreed the company’s taxation liability. You have been advising NorthCee 
regarding the legality of certain items as ‘allowable’ for taxation purposes and the taxation authority is disputing these items.

Finally, you have just inherited about 5% of NorthCee’s share capital as an inheritance on the death of a distant relative.

Required:

a)Identify, and explain the relevance of, any factors which may threaten the independence of Dark & Co’s audit of NorthCee Co’s financial statements for the year ending 31 December 2007. Briefly explain how each threat should be managed. (10 Marks)

b)Explain why your audit firm will need to communicate with NorthCee Co’s audit committee for this and future audits. (4 Marks)