ACCA AAA ^INT Syllabus C. Practice Management - Definitions for Quality Control - Past Papers ^{1 / 6}

You are a senior manager in Macau & Co, a firm of Chartered Certified Accountants. In your capacity as engagement quality control reviewer, you have been asked to review the audit files of Stanley Co and Kowloon Co, both of which have a financial year ended 31 December 2015, and the audits of both companies are nearing completion.

(a) Stanley Co is a frozen food processor, selling its products to wholesalers and supermarkets. From your review of the audit working papers, you have noted that the level of materiality was determined to be $1·5 million at the planning stage, and this materiality threshold has been used throughout the audit. There is no evidence on the audit file that this threshold has been reviewed during the course of the audit.

From your review of the audit planning, you know that a new packing machine with a cost of $1·6 million was acquired by Stanley Co in March 2015, and is recognised in the draft statement of financial position at a carrying amount of $1·4 million at 31 December 2015. The packing machine is located at the premises of Aberdeen Co, a distribution company which is used to pack and distribute a significant proportion of Stanley Co’s products.

The machine has not been physically verified by a member of the audit team. The audit working papers conclude that ‘we have obtained the purchase invoice and order in relation to the machine, and therefore can conclude that the asset is appropriately valued and that it exists. In addition, the managing director of Aberdeen Co has confirmed in writing that the machine is located at their premises and is in working order. No further work is needed in respect of this item.’

Inventory is recognised at $2 million in the draft statement of financial position. You have reviewed the results of audit procedures performed at the inventory count, where the test counts performed by the audit team indicated that the count of some items performed by the company’s staff was not correct. The working papers state that ‘the inventory count was not well organised’ and conclude that ‘however, the discrepancies were immaterial, so no further action is required’.

The audit senior spoke to you yesterday, voicing some concerns about the performance of the audit. A summary of his comments is shown below:

‘The audit manager and audit engagement partner came to review the audit working papers on the same day towards the completion of the audit fieldwork. The audit partner asked me if there had been any issues on the sections of the audit which I had worked on, and when I said there had been no problems, he signed off the working papers after a quick look through them.

When reading the company’s board minutes, I found several references to the audit engagement partner, Joe Lantau. It appears that Joe recommended that the company use the services of his brother, Mick Lantau, for advice on business development, as Mick is a management consultant. Based on that recommendation, Mick has provided a consultancy service to Stanley Co since September 2015. I mentioned this to Joe, and he told me not to record it in the audit working papers or to discuss it with anyone.’

Required:
Comment on the quality of the audit performed discussing the quality control, ethical and other professional issues raised. (13 marks)

You are an audit manager at Rockwell & Co, a firm of Chartered Certified Accountants. You are responsible for the audit of the Hopper Group, a listed audit client which supplies ingredients to the food and beverage industry worldwide.

The audit work for the year ended 30 June 2015 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. During the year the Hopper Group purchased a new subsidiary company, Seurat Sweeteners Co, which has expertise in the research and design of sugar alternatives. The draft financial statements of the Hopper Group for the year ended 30 June 2015 recognise profit before tax of $495 million (2014 – $462 million) and total assets of $4,617 million (2014: $4,751 million). An extract from the draft audit report is shown below:

Basis of modified opinion (extract)
In their calculation of goodwill on the acquisition of the new subsidiary, the directors have failed to recognise consideration which is contingent upon meeting certain development targets. The directors believe that it is unlikely that these targets will be met by the subsidiary company and, therefore, have not recorded the contingent consideration in the cost of the acquisition. They have disclosed this contingent liability fully in the notes to the financial statements. We do not feel that the directors’ treatment of the contingent consideration is correct and, therefore, do not believe that the criteria of the relevant standard have been met. If this is the case, it would be appropriate to adjust the goodwill balance in the statement of financial position.

We believe that any required adjustment may materially affect the goodwill balance in the statement of financial position. Therefore, in our opinion, the financial statements do not give a true and fair view of the financial position of the Hopper Group and of the Hopper Group’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.

Emphasis of Matter Paragraph
We draw attention to the note to the financial statements which describes the uncertainty relating to the contingent consideration described above. The note provides further information necessary to understand the potential implications of the contingency.

Required:
(b) The audit of the new subsidiary, Seurat Sweeteners Co, was performed by a different firm of auditors, Fish Associates. During your review of the communication from Fish Associates, you note that they were unable to obtain sufficient appropriate evidence with regard to the breakdown of research expenses. The total of research costs expensed by Seurat Sweeteners Co during the year was $1·2 million. Fish Associates has issued a qualified audit opinion on the financial statements of Seurat Sweeteners Co due to this inability to obtain sufficient appropriate evidence.

You are a senior manager in Bunk & Co, a global audit firm with offices in more than 30 countries. You are responsible for monitoring audit quality and ethical situations which arise in relation to audit clients. Wire Co is an audit client whose operations involve haulage and distribution. The audit report for the financial statements of Wire Co for the year ended 31 December 2014 was issued last week. You are conducting a review of the quality of that audit, and of any ethical issues which arose in relation to it. Relevant information obtained from a discussion with Lester Freeman, the audit engagement partner, is given below.

(a) Wire Co’s audit committee refused to agree to an increase in audit fees despite the company’s operations expanding into new locations. In response to this, the materiality level was increased during the audit, and some review procedures were not carried out. To reduce sample sizes used in tests of detail, the samples were selected based on judgement rather than statistical methods. In addition, only parts of the population being tested were sampled, for example, certain locations were not included in the sample of non-current assets selected for physical verification. (6 marks)

Required:
Comment on the quality control, ethical and professional issues raised in respect of the audit of Wire Co and the firm-wide policies of Bunk & Co, and recommend any actions to be taken by the audit firm.

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

You are a senior manager in Bunk & Co, a global audit firm with offices in more than 30 countries. You are responsible for monitoring audit quality and ethical situations which arise in relation to audit clients. Wire Co is an audit client whose operations involve haulage and distribution. The audit report for the financial statements of Wire Co for the year ended 31 December 2014 was issued last week. You are conducting a review of the quality of that audit, and of any ethical issues which arose in relation to it. Relevant information obtained from a discussion with Lester Freeman, the audit engagement partner, is given below.

(b) Some of the audit work was performed by an overseas office of Bunk & Co in an ‘off-shoring’ arrangement. This practice is encouraged by Bunk & Co, whose managing partners see it as a way of improving audit efficiency. The overseas office performs the work at a lower cost, and it was largely low-risk, non-judgemental work included in this arrangement for the audit of Wire Co, for example, numerical checks on documentation. In addition, the overseas office read the minutes of board meetings to identify issues relevant to the audit. (5 marks)

Required:
Comment on the quality control, ethical and professional issues raised in respect of the audit of Wire Co and the firm-wide policies of Bunk & Co, and recommend any actions to be taken by the audit firm.

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

You are a senior manager in Bunk & Co, a global audit firm with offices in more than 30 countries. You are responsible for monitoring audit quality and ethical situations which arise in relation to audit clients. Wire Co is an audit client whose operations involve haulage and distribution. The audit report for the financial statements of Wire Co for the year ended 31 December 2014 was issued last week. You are conducting a review of the quality of that audit, and of any ethical issues which arose in relation to it. Relevant information obtained from a discussion with Lester Freeman, the audit engagement partner, is given below.

(c) In July 2014, Russell Bell, Wire Co’s former finance director, joined Bunk & Co as an audit partner, working in the same office as Lester Freeman. Although Russell was not a member of the audit team, he did update Lester on some business developments which had taken place at the company during the period before he left. Russell held a number of equity shares in Wire Co, which he sold in January 2015. Since joining Bunk & Co, Russell has been developing initiatives to increase the firm’s income. One initiative is that audit team members should be encouraged to cross-sell non-audit services and references to targets for the cross-selling of non-audit services to audit clients is now included in partner and employee appraisal documentation. (9 marks)

Required:
Comment on the quality control, ethical and professional issues raised in respect of the audit of Wire Co and the firm-wide policies of Bunk & Co, and recommend any actions to be taken by the audit firm.

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