ACCA AAA ^UK Syllabus B. Professional and Ethical Considerations - Safeguards - Past Papers ^{5 / 9}

You are a manager in Neeson & Co, a firm of Chartered Certified Accountants, with three offices and 12 partners.

About one third of the firm’s clients are audit clients, the remainder are clients for whom Neeson & Co performs tax, accounting and business advisory services.

The firm is considering how to generate more revenue, and you have been asked to evaluate two suggestions made by the firm’s business development manager.

A new partner with experience in the banking sector has joined Neeson & Co. It has been suggested that the partner could specialise in offering a corporate finance service to clients.

In particular, the partner could advise clients on raising debt finance, and would negotiate with the client’s bank or other provider of finance on behalf of the client.

The fee charged for this service would be contingent on the client obtaining the finance with a borrowing cost below market rate. (5 marks)

Required:

Evaluate the suggestion made above, commenting on the ethical and professional issue raised.

You are the manager responsible for the audit of Juliet Co, and you are planning the final audit of the financial statements for the year ending 30 June 2010. Juliet Co is a supplier of components used in the manufacture of vehicle engines.

Due to a downturn in the economy, and in the automotive industry particularly, the company has suffered a decline in sales and profitability over the last two years, mainly due to the loss of several key customer contracts. Many of Juliet Co’s non-current assets are impaired in value, and a significant number of receivables balances have been written off in the last six months.

In response to the deteriorating market conditions, the management of Juliet Co decided to restructure the business. The main manufacturing facility will be reduced in size by two-thirds, and investment will be made in new technology to make the remaining operations more efficient, and to enable the manufacture of a wider variety of components for use in different types of engines and machinery.

In order to fund this restructuring, the management of Juliet Co approached the company’s bank with a request for a significant loan. You are aware that without the loan, Juliet Co is unlikely to be able to restructure successfully, which will raise significant doubt over its ability to continue as a going concern.

Your firm has been asked to advise on the necessary forecasts and projections that the bank will need to see in order to make a decision regarding the finance requested. Management has also requested that your firm attend a meeting with the bank at which the forecasts will be discussed.

Required:

(i) Identify and explain the matters that should be considered, and the principal audit procedures to be performed, in respect of the additional funding being sought. (6 marks)

(ii) Comment on the ethical and other implications of the request for your firm to provide advice on the forecasts and projections, and to attend the meeting with the bank. (6 marks)