ACCA AAA ^UK Syllabus B. Professional and Ethical Considerations - Threats - Past Papers ^{3 / 9}

(b) The management team of Cheetah Co has also approached Leopard & Co to ask whether representatives of the firm would be available to attend a meeting with the company’s bankers, who they are hoping will finance the acquisition of Zebra Co, to support the management team in conveying the suitability of the acquisition of Zebra Co. For the meeting the bank requires the most up-to-date interim accounts of Cheetah Co with the accompanying auditor’s independent interim review report. Your firm is due to complete the interim review shortly and the management team of Cheetah Co has requested that the interim review is completed quickly so that it does not hold up negotiations with the bank, stating that if it does, it may affect the outcome of the next audit tender, which is due to take place after the completion of this year’s audit.

Required:
Comment on the ethical and professional issues raised, and recommend any actions which should be taken in respect of the request from the management team of Cheetah Co. (8 marks)

You are a senior manager at Cobra & Co, a firm of Chartered Certified Accountants. You are responsible for reviewing quality control and ethical matters which arise with the firm’s portfolio of clients. During recent investigations you identified the following matters:

Asp Co
Asp Co currently qualifies as a small company in the jurisdiction in which it operates, with turnover of $7·5 million (2016 – $5·3 million), and as such is not required by law to have an audit. Until recently, your firm has provided a range of non-audit services to Asp Co including bookkeeping, payroll and tax computation and advice. The company recently obtained an offer for a significant amount of finance to help the company grow. The management of Asp Co has ambitious plans for growth which they believe will result in revenue doubling within one year and then continuing to grow at a similar rate for at least the next five years. In order to secure the funding, the directors have decided to have the financial statements audited and have asked if Cobra & Co will become the company’s auditors, as well as continuing to provide the existing services. This will include auditing the financial statements for the year ended 31 July 2017 at the request of the new financers.

Required:
Comment on the ethical and other professional issues raised, and recommend any actions which should be taken in respect of:
(a) Asp Co; (7 marks)

You are a senior manager at Cobra & Co, a firm of Chartered Certified Accountants. You are responsible for reviewing quality control and ethical matters which arise with the firm’s portfolio of clients. During recent investigations you identified the following matters:

Viper Co
You have been approached by Viper Co, a retail company, to provide audit and tax services. In response you have written to the outgoing auditor to ask if there are any matters which you should be made aware of which might prevent you from accepting the assignment. Despite a number of follow up phone calls, you have not been able to obtain a response from the outgoing audit firm. On discussing this with the management team of Viper Co, you are made aware that the company is suing the outgoing auditor for damages due to the detrimental effect on their reputation following the auditor issuing a modified opinion, which the directors of Viper Co felt was inappropriate. The reason for the modified opinion was the application of an accounting treatment which the outgoing auditor considered to be inappropriate and a material misstatement.

Required:
Comment on the ethical and other professional issues raised, and recommend any actions which should be taken in respect of:
(b) Viper Co; (7 marks)

You are a senior manager at Cobra & Co, a firm of Chartered Certified Accountants. You are responsible for reviewing quality control and ethical matters which arise with the firm’s portfolio of clients. During recent investigations you identified the following matters:

Adder Co

Adder Co is a listed audit client of your firm. The management team of Adder Co has asked you to perform a valuation of the shares of another audit client, Slowworm Co, with a view to buying the entire shareholding. Slowworm Co is a private company whose shares are owned entirely by the original founder, Mr Jim Slow.

Required:
Comment on the ethical and other professional issues raised, and recommend any actions which should be taken in respect of:
(c) Adder Co. (6 marks)

The audit committee of another client, Mumbai Co, has asked the partner to consider whether it would be possible for the audit team to perform a review of the company’s internal control system. A number of recent incidents have raised concerns amongst the management team that controls have deteriorated and that this has increased the risk of fraud, as well as inefficient commercial practices. The audit report for the audit of the financial statements of Mumbai Co for the year ended 31 March 2016 was signed a few weeks ago. Mumbai Co is a listed company.

Required:
In respect of the request for Chennai & Co to review Mumbai Co’s internal control systems:

Identify and discuss the relevant ethical and professional issues raised, and recommend any actions necessary. (8 marks)

You are a manager in Monet & Co, a firm of accountants which has 12 offices and 30 partners, 10 of whom are members of ACCA. As an expert in ethics and professional conduct, you have been asked to advise the partners on the following issues, which were raised at a recent meeting.

(b) The planning for the audit of Renoir Co’s financial statements for the year ending 31 March 2016 will commence shortly. In preparation the audit partner telephoned Renoir Co’s finance director, Jim Cassatt, to set up a planning meeting and to remind him that fees relating to a tax engagement from the previous year were still outstanding.

Mr Cassatt raised concerns about the conduct of the previous audit, stating numerous examples of when he and his staff had been interrupted when they were busy. He stated that he wanted guarantees that this year’s audit will be more efficient, less intrusive and cheaper, otherwise he will seek an alternative auditor. (7 marks)

Required:
Evaluate each of the issues described above, commenting on the ethical and professional issues raised and recommend any actions necessary in response to the issues identified.

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

Ordway Co is a long-standing audit client of your firm and is a listed company. Bobby Wellington has acted as audit engagement partner for seven years and understands that a new audit partner needs to be appointed to take his place. Bobby is hoping to stay in contact with the client and act as the engagement quality control reviewer in forthcoming audits of Ordway Co.

Required:
Explain the ethical threats raised by the long association of senior audit personnel with an audit client and the relevant safeguards to be applied, and discuss whether Bobby Wellington can act as engagement quality control reviewer in the future audits of Ordway Co. (6 marks)

You are a manager in Ryder & Co, a firm of Chartered Certified Accountants, and you have taken on the responsibility for providing support and guidance to new members of the firm. Ryder & Co has recently recruited a new audit junior, Sam Tyler, who has come across several issues in his first few months at the firm which he would like your guidance on. Sam’s comments and questions are shown below:

I also worked on the audit of Campbell Co, where I heard the managing director, Ting Campbell, discussing a potential new business opportunity with the audit engagement partner. Campbell Co is an events organiser, and is planning to run a programme of nationwide events for accountants, at which speakers will discuss technical updates to financial reporting, tax and audit regulations. Ting proposed that our firm could invest some cash is the business opportunity, supply the speakers, market the events to our audit clients, and that any profit made would be shared between Ryder & Co and Campbell Co. What would be the implications of our firm considering this business opportunity? (7 marks)

Required:

For each of the issues raised, respond to the audit junior, explaining the ethical and professional matters arising from the audit junior’s comments.

You are an audit manager in Hound & Co, responsible for the audit of Parker Co, a new audit client of your firm. You are planning the audit of Parker Co’s financial statements for the year ending 30 June 2013, and you have just attended a meeting with Ruth Collie, the finance director of Parker Co, where she gave you the projected results for the year. Parker Co designs and manufactures health and beauty products including cosmetics.

You have just received an email from Harry Shepherd, the audit engagement partner:

To: Audit manager
From: Harry Shepherd, Partner
Subject: Parker Co

Hello

I understand you met with Ruth Collie at Parker Co recently and that you are planning the forthcoming audit. To bring me up to date on this new client, I would like you to use the information obtained in your meeting to prepare briefing notes for my use in which you:

Discuss any ethical issues raised and recommend the relevant actions to be taken by our firm. (7 marks)

Thank you.

Parker Co – Statement of profit or loss and other comprehensive income

Note 1: Cost of sales includes $250,000 relating to a provision for a potential fine payable. The advertising regulatory authority has issued a notice of a $450,000 fine payable by Parker Co due to alleged inappropriate claims made in an advertising campaign. The fine is being disputed and the matter should be resolved in August 2013.

Parker Co – Statement of financial position

Note 2: The development costs relate to a new range of organic cosmetics.

Note 3: All of the company’s properties were revalued on 1 January 2013 by an independent, professionally qualified expert.

Notes from your meeting with Ruth Collie

Business review

Parker Co is facing difficult trading conditions. Consumer spending is depressed due to recession in the economy. The health and beauty market remains very competitive and a major competitor launched a very successful new cosmetics range during the year, which led to a significant decline in sales of one of Parker Co’s most successful brands.

It has been necessary to cut prices on some of the company’s product ranges in an attempt to maintain market share. However, a new brand using organic ingredients is being developed and is due to launch in September 2013.

Financial matters

Cash flow has been a problem this year, largely due to the cash spent on developing the new product range. Cash was also needed to pay dividends to both equity and preference shareholders. To help to reduce cash outflows, some new assets were acquired under finance leases and an extension to the company’s bank loan was negotiated in December 2012.

Human resources

In December 2012 Parker Co’s internal audit team performed a review of the operation of controls over the processing of overtime payments in the human resources department. The review found that the company’s specified internal controls procedures in relation to the processing of overtime payments and associated tax payments were not always being followed.

Until December 2012 this processing was split between the human resources and finance departments. Since then, the processing has been entirely carried out by the finance department.

Expansion plans

Management is planning to expand Parker Co’s operations into a new market relating to beauty salons. This is a growing market, and there is synergy because Parker Co’s products can be sold and used in the salons.

Expansion would be through the acquisition of an existing company which operates beauty salons. A potential target, Beauty Boost Co, has been identified and preliminary discussions have taken place between the management of the two companies.

Parker Co’s managing director has asked for our firm’s advice about the potential acquisition, and specifically regarding the financing of the transaction. Beauty Boost Co is an audit client of our firm, so we have considerable knowledge of its business.

Required:

Respond to the email from the audit partner.

You are a senior manager in the audit department of Raven & Co. You are reviewing two situations which have arisen in respect of audit clients, which were recently discussed at the monthly audit managers’ meeting:

Grouse Co is a significant audit client which develops software packages. Its managing director, Max Partridge, has contacted one of your firm’s partners regarding a potential business opportunity. The proposal is that Grouse Co and Raven & Co could jointly develop accounting and tax calculation software, and that revenue from sales of the software would be equally split between the two firms. Max thinks that Raven & Co’s audit clients would be a good customer base for the product.

Required:

Identify and discuss the ethical, commercial and other professional issues raised, and recommend any actions that should be taken in respect of
Grouse Co; and (8 marks)

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.

You have set up an internal discussion board, on which current issues are debated by employees and partners of Neeson & Co. One posting to the board concerned the compulsory rotation of audit firms, whereby it has been suggested in the press that after a pre-determined period, an audit firm must resign from office, to be replaced by a new audit provider.

Required:

(i) Explain the ethical threats created by a long association with an audit client. (3 marks)

(ii) Evaluate the advantages and disadvantages of compulsory audit firm rotation. (4 marks)