ACCA AAA ^INT Syllabus B. Professional and Ethical Considerations - Resolving Ethical Issues - Past Papers ^{6 / 9}

You are an audit manager in Thomasson & Co, a firm of Chartered Certified Accountants. You have recently been assigned to the audit of Clean Co for the year ended 30 September 20X8. Clean Co is an unlisted company and has been an audit client of your firm for a number of years.

Clean Co is a national distributor of cleaning products. The company buys the cleaning products from wholesalers and employs a team of approximately 750 sales staff around the country who sell the company’s products to both domestic households and small to medium-sized businesses. Around 75% of Clean Co’s sales transactions are cash-based and each of the company’s sales staff prepares a cash sales report on a monthly basis. According to Clean Co’s chief executive, Simon Blackers, and in order to foster ‘an entrepreneurial spirit’ amongst his staff, each staff member (including the senior management team) is encouraged to make cash sales and is paid on a commission basis to sell the company’s products to friends and family. Mr Blackers leads the way with this scheme and recently sold cleaning products with a value of $33,000 to a business associate of his. He has transferred these funds directly into an off-shore bank account in the company’s name on which he is the sole signatory.

Review of audit working papers
Your review of the audit working papers and an initial meeting with Mr Blackers have identified the following potential issues:

Following your review of the audit engagement letter and the working papers of the taxation section of the audit file, you have established that Thomasson & Co performed the taxation computation for Clean Co and completed the tax returns for both the company and Mr Blackers personally. All of the taxation services have been invoiced to Clean Co as part of the total fee for the audit and professional services. Mr Blackers’ personal tax return includes a significant number of transactions involving the purchase and sale of properties in various international locations. The taxation working
papers include a detailed review of a number of off-shore bank accounts in Mr Blackers’ name which identified the property transactions.

During your initial meeting with Mr Blackers, he informed you that Clean Co is planning to develop a new website in order to offer online sales to its customers. He has asked Thomasson & Co to provide assistance with the design and implementation of the website and online sales system.

As a result of your audit review visit at the client’s premises, you have learned that the audit team was invited to and subsequently attended Clean Co’s annual office party. The client provided each member of the audit team with a free voucher worth $30 which could be redeemed at the venue during the party. The audit senior, Paula Metcalfe, who has worked on the audit for the last three years has informed you that the audit team has always been encouraged to attend the party in order to develop good client relations.

Required:
(b) Comment on the ethical and professional issues arising from your review of the audit working papers and recommend any actions which should now be taken by Thomasson & Co. (15 marks)

You are a manager working in the public sector audit department of Fern & Co. You are responsible for the audit of Moosewood Hospital, for the year ended 31 March 2017. You have recently visited the audit team, who are currently on site performing the fieldwork, to review the work performed to date and to discuss their progress. During your visit the audit senior informed you of the following matter:

During a review of the valuation of medical inventories, including medicines used in a variety of treatments at the hospital, it was noted that a number of items had passed their recommended use by dates. These were recorded on an inventory spreadsheet maintained by the financial controller and were easy to spot because they were highlighted in red. One of the audit team inspected a sample of the inventories in question and confirmed that their use by dates had expired. When asked about this, the financial controller stated that the audit team must be mistaken. The audit team requested to look at the spreadsheet again but he refused. The next day the finance director confronted the audit team accusing them of extending their investigations ‘beyond their remit’. He also threatened to remove them from the premises if they continued to ask questions which were not relevant to the audit of the hospital’s financial statements. Since then the audit team have been unable to complete their audit of medical inventories. They have also noted that the room where the inventories were previously kept has been emptied.

Required:
(a) Identify and explain the ethical and professional issues raised and recommend any actions which should be taken in respect of the matter described by the audit senior. (10 marks)

You are an audit manager at Thornhill & Co responsible for the audit of Northwest Co, a subsidiary of Valerian Co. A different audit firm is responsible for the audit of Valerian Co and the Valerian Group financial statements.

The audit of the financial statements of Northwest Co for the year ended 31 July 2016 is nearing completion, but the following issues require your attention before the auditor’s report is signed and your final communication is made to the group auditor in response to their request for information. The draft financial statements of Northwest Co recognise a loss before tax of $50,000.

Northwest Co has been loss making for several years and it generates insufficient cash to meet its significant debt obligations. The company relies on support from Valerian Co in order to continue trading. The management of Valerian Co has confirmed verbally that it will continue to support Northwest Co, but has not provided a formal letter of support despite a number of requests.

You are aware that Valerian Co is the subject of a major lawsuit following an industrial accident which resulted in significant pollution of local agricultural land and, most seriously, loss of life. You attempted to discuss the matter with the directors of Valerian Co but they refused, saying that it had already been investigated by the group auditor. The group auditor informed you that the case is ongoing and that they have obtained satisfactory representations from both management and legal advisers stating that they were confident of successfully defending the claim. When you asked for copies of the representations, the group auditor refused saying it was a matter relevant to the parent company and that it was not relevant to the audit of Northwest Co.

Shortly after making your enquiries, you received a phone call from the group engagement partner who said that the board of Valerian Co was concerned that you might modify the auditor’s report of Northwest Co. He also said that, as the only person with full oversight of audit matters relating to the Valerian Group, he did not think that it would be necessary to modify the auditor’s report of Northwest Co and that he would oppose any attempt to do so. He suggested that if the debt in the financial statements of Northwest Co was the reason for seeking parental support that he would transfer it to the Group and the letter of support would no longer be necessary.

Required:
(b) Comment on the ethical and professional issues raised, considering any implications for completion of the audit, in respect of:
(i) The evidence obtained in relation to the support offered by Valerian Co.
(ii) The request not to modify the auditor’s report of Northwest Co.

Note: The total marks will be split equally between each part. (14 marks)

You are an audit manager working for Raven & Co, a firm of Chartered Certified Accountants. You specialise in the audits of companies in the information technology industry. Issues have recently arisen in relation to two different clients which require your attention.

(a) Gull Co is a large, private company which is currently owned by the Brenner family, who own the majority of the company’s shares. Following the completion of the audit this year, the finance director, Jim Brenner, contacted you and told you that the family is considering listing the company on the stock exchange. They would like to recruit one of your audit partners for a six-month period to help prepare for the listing. As the board is concerned that the necessary skills and personnel to support the listing are not currently present within the company, Jim Brenner has also requested that your firm assist them in identifying and recruiting new members to the board.

Currently, most of the executive director roles are performed by family members, except for the directors of operations and human resources, who are both long-serving employees. The board operates no audit committee and there is only one non-executive director, who works elsewhere as an IT consultant. Other than the recruitment of new board members, Gull Co is not planning on making any changes to its governance structure prior to or subsequent to listing.

Gull Co has a financial year ending 31 March 2017, and audit planning is scheduled to take place in January 2017.

Required:
In relation to the information provided for Gull Co, comment on:

(ii) The implications the governance structure and proposed listing may have on the audit process.
Note: The total marks will be split equally between each part. (10 marks)

You are an audit manager in Chester & Co, and you are reviewing three situations which have recently arisen with respect to potential and existing audit clients of your firm.

Tetbury Co’s managing director, Juan Stanton, has approached Chester & Co to invite the firm to tender for its audit.  Tetbury Co is a small, owner-managed company providing financial services such as arranging mortgages and advising on pension plans. The company’s previous auditors recently resigned.

Juan Stanton states that this was due to ‘a disagreement on the accounting treatment of commission earned, and because they thought our controls were not very good.’ You are aware that Tetbury Co has been investigated by the financial services authority for alleged non-compliance with its regulations. As well as performing the audit, Juan would like Chester & Co to give business development advice.

The audit of Stratford Co’s financial statements for the year ended 30 November 2013 will commence shortly. You are aware that the company is in financial difficulties. Stratford Co’s managing director, Colin Charlecote, has requested that the audit engagement partner accompanies him to a meeting with the bank where a new loan will be discussed, and the draft financial statements reviewed.

Colin has hinted that if the partner does not accompany him to the meeting, he will put the audit out to tender. In addition, an invoice relating to interim audit work performed in August 2013 has not yet been paid.

Banbury Co is a listed entity, and its audit committee has asked Chester & Co to perform an actuarial valuation on the company’s defined benefit pension plan. One of the audit partners is a qualified actuary and has the necessary skills and expertise to perform the service. Banbury Co has a year ending 28 February 2014, and the audit planning is due to commence next week. Its financial statements for the year ended 28 February 2013, in respect of which the audit report was unmodified, included total assets of $35 million and a pension liability of $105,000.

Required:

Identify and discuss the ethical and other professional issues raised, and recommend any actions that should be taken in respect of:

Tetbury Co (8 marks)

You are an audit manager in Chester & Co, and you are reviewing three situations which have recently arisen with respect to potential and existing audit clients of your firm.

Tetbury Co’s managing director, Juan Stanton, has approached Chester & Co to invite the firm to tender for its audit.  Tetbury Co is a small, owner-managed company providing financial services such as arranging mortgages and advising on pension plans. The company’s previous auditors recently resigned.

Juan Stanton states that this was due to ‘a disagreement on the accounting treatment of commission earned, and because they thought our controls were not very good.’ You are aware that Tetbury Co has been investigated by the financial services authority for alleged non-compliance with its regulations. As well as performing the audit, Juan would like Chester & Co to give business development advice.

The audit of Stratford Co’s financial statements for the year ended 30 November 2013 will commence shortly. You are aware that the company is in financial difficulties. Stratford Co’s managing director, Colin Charlecote, has requested that the audit engagement partner accompanies him to a meeting with the bank where a new loan will be discussed, and the draft financial statements reviewed.

Colin has hinted that if the partner does not accompany him to the meeting, he will put the audit out to tender. In addition, an invoice relating to interim audit work performed in August 2013 has not yet been paid.

Banbury Co is a listed entity, and its audit committee has asked Chester & Co to perform an actuarial valuation on the company’s defined benefit pension plan. One of the audit partners is a qualified actuary and has the necessary skills and expertise to perform the service. Banbury Co has a year ending 28 February 2014, and the audit planning is due to commence next week. Its financial statements for the year ended 28 February 2013, in respect of which the audit report was unmodified, included total assets of $35 million and a pension liability of $105,000.

Required:

Identify and discuss the ethical and other professional issues raised, and recommend any actions that should be taken in respect of:

Stratford Co (6 marks)

You are an audit manager in Chester & Co, and you are reviewing three situations which have recently arisen with respect to potential and existing audit clients of your firm.

Tetbury Co’s managing director, Juan Stanton, has approached Chester & Co to invite the firm to tender for its audit.  Tetbury Co is a small, owner-managed company providing financial services such as arranging mortgages and advising on pension plans. The company’s previous auditors recently resigned.

Juan Stanton states that this was due to ‘a disagreement on the accounting treatment of commission earned, and because they thought our controls were not very good.’ You are aware that Tetbury Co has been investigated by the financial services authority for alleged non-compliance with its regulations. As well as performing the audit, Juan would like Chester & Co to give business development advice.

The audit of Stratford Co’s financial statements for the year ended 30 November 2013 will commence shortly. You are aware that the company is in financial difficulties. Stratford Co’s managing director, Colin Charlecote, has requested that the audit engagement partner accompanies him to a meeting with the bank where a new loan will be discussed, and the draft financial statements reviewed.

Colin has hinted that if the partner does not accompany him to the meeting, he will put the audit out to tender. In addition, an invoice relating to interim audit work performed in August 2013 has not yet been paid.

Banbury Co is a listed entity, and its audit committee has asked Chester & Co to perform an actuarial valuation on the company’s defined benefit pension plan. One of the audit partners is a qualified actuary and has the necessary skills and expertise to perform the service. Banbury Co has a year ending 28 February 2014, and the audit planning is due to commence next week. Its financial statements for the year ended 28 February 2013, in respect of which the audit report was unmodified, included total assets of $35 million and a pension liability of $105,000.

Required:

Identify and discuss the ethical and other professional issues raised, and recommend any actions that should be taken in respect of:

Banbury Co. (6 marks)