ACCA AAA ^UK Syllabus F. Other Assignments - Non-Audit Engagements - Past Papers ^{2 / 2}

You are a manager at Chennai & Co, a firm of Chartered Certified Accountants. One of the partners has asked you to investigate and respond to a number of issues which have arisen with two different companies.

(a) Delhi Co, a potential new client, is a privately owned and rapidly expanding company which currently operates below the audit threshold in the country in which it is based. The company’s management is currently considering having either a full audit or a limited assurance review of their financial statements. The partner would like you to assist the management of Delhi Co by writing a response to them in which you:

(i) Explain the difference between an audit of historical financial statements and a limited assurance review. (4 marks)

(ii) Discuss the relative advantages and disadvantages to Delhi Co of having an audit of their historical financial statements as opposed to a limited assurance review. (8 marks)

Delhi Co was incorporated in 2005, with founder and chief executive Mr Nimesh Dattani as the sole shareholder. After a period of rapid growth, Delhi Co took out a ten-year bank loan facility in June 2007 to finance Mr Dattani’s ambitious expansion plans. This was supported by a further injection of financial capital in 2014 through a new issue of shares in the company. The shares were sold to Mr Robert Hyland, an ex-business partner of Mr Dattani. The sale gave Mr Hyland a 40% shareholding in Delhi Co. He has no involvement in the management of the company.

Until recently Delhi Co operated with a small accounting department, comprising one full-time member of staff and one part-time employee. Due to the expansion of the company and Mr Dattani’s plans to expand the customer base internationally, it has been necessary to increase the size of the accounting function to include two new full-time members of staff. Both of the new recruits are part-qualified accountants and Mr Dattani has committed to sponsoring them through their remaining training and ACCA examinations.

Required:
Prepare the response to the management of Delhi Co as requested by the partner.

Note: The split of the mark allocation is shown against each of the issues above.

You are an audit manager in Cedar & Co, responsible for the audit of Chestnut Co, a large company which provides information technology services to business customers. The finance director of Chestnut Co, Jack Privet, contacted you this morning, saying:

‘I was alerted yesterday to a fraud being conducted by members of our sales team. It appears that several sales representatives have been claiming reimbursement for fictitious travel and client entertaining expenses and inflating actual expenses incurred.

Specifically, it has been alleged that the sales representatives have claimed on expenses for items such as gifts for clients and office supplies which were never actually purchased, claimed for business-class airline tickets but in reality had purchased economy tickets, claimed for non-existent business mileage and used the company credit card to purchase items for personal use.

I am very worried about the scale of this fraud, as travel and client entertainment is one of our biggest expenses. All of the alleged fraudsters have been suspended pending an investigation, which I would like your firm to conduct.

We will prosecute these employees to attempt to recoup our losses if evidence shows that a fraud has indeed occurred, so your firm would need to provide an expert witness in the event of a court case. Can we meet tomorrow to discuss this potential assignment?’

Chestnut Co has a small internal audit department and in previous years the evidence obtained by Cedar & Co as part of the external audit has indicated that the control environment of the company is generally good. The audit opinion on the financial statements for the year ended 31 March 2011 was unmodified.

Required:

Evaluate the arguments for and against the prohibition of auditors providing non-audit services to audit clients. (6 marks)