1.

LARK (6/12)
Discuss the implications of the circumstances described in the
audit senior's note; and

The implication of the circumstances

described is that there may be money
laundering going on at Heron Co,
involving its owner-manager Jack Heron.

Money laundering is a process by which

criminals may attempt to conceal the
origins of the proceeds of criminal activity.
The aim is to transform 'dirty' money,
which can be tied to its criminal origin,
into 'clean' money which can be spent.

The fact that Heron Co's revenue is almost

entirely cash makes it an ideal 'front'
business for a money laundering regime.
The aim here would be to transform the
'dirty' money into revenue from the
legitimate business. What appears to be
happening here is that the legitimate cash
receipts of $3.5m are being topped up with
$2m 'dirty' money. This is the placement
stage of the money laundering regime. The
idea is that the $5.5m revenue will
eventually appear legitimate if it can be
said to all come from a legitimate business
(Heron Co).

The $2m electronic transfer is then part of

the layering process, which aims to
maximize the distance between the
placement of the 'dirty' money and its
eventual 'integration' into the financial
system as 'clean' money. The fact that this
is an overseas transfer only heightens its
suspiciousness, as money launderers often
move money across national boundaries to
make it harder to trace.

The fact that Jack Heron has sole

responsibility for cash receipts and
postings gives him the opportunity to
launder money in this way. The fact that
no documentation was available to support
the transfer means it is possible that it was
done to launder money. The fact that Jack
did not answer
The senior's questions and became
aggressive seems to confirm his desire for
secrecy here.

There is a risk that the senior has 'tipped

off' Jack Heron by questioning him about
the transfer. This is itself an offence,
although it may be argued here that the
senior was not aware that the disclosure
could prejudice any future money
laundering investigation.

From the point of view of the audit, the

amount is clearly highly material. It is
possible that Lark & Co may seek to
withdraw from the engagement; however,
there is a risk that this could be construed
as 'tipping off' if Jack Heron thinks it is
because the audit firm has suspicions over
money laundering. The firm should obtain
advice from its legal counsel.
Explain the nature of any reporting that should take place by
the audit senior.
The audit senior should report the situation
to Lark & Co's Money Laundering
Reporting Officer (MLRO). The MLRO is
the internal person responsible for
receiving and evaluating reports of
suspected money laundering, and for
making any reports to external bodies.
The report would typically include the
name of the suspect, the amounts involved,
the reasons for suspicion and the
whereabouts of any laundered cash.
The report must be made as soon as
possible, as it is an offence to not report
suspicions as soon as practicable. The
senior would be allowed to discuss his
suspicions with the audit manager – in
order to assure himself that his suspicions
were reasonable – but should alert the
MLRO himself.
In relation to the audit of Coot Co's payroll, explain the meaning
of the term 'professional skepticism', and recommend any further
actions that should be taken by the auditor.

Professional skepticism is an attitude that

includes a questioning mind, being alert to
conditions which may indicate possible
misstatement due to error or fraud, and a
critical assessment of audit evidence (ISA
200: Para. 13).
FURTHER ACTIONS

The evidence obtained already may not be

reliable. The payroll supervisor's assertion
that no authorization is needed for
temporary workers must be corroborated.
Evidence should also be gathered about
the claim that the employees are
temporary.
If the supervisor is correct that no
authorization is required for new
employees, then this is a major deficiency
of internal controls that should have been
identified as part of controls testing. It may
be a point to include in the report to
management.
There is a contradiction between the
supervisor's claim that there was new
temporary staff, and management's claim
that there is no new staff. It should be
clarified that when management said there
were no new employees, this included
temporary staff.
It is possible that there is a fraud taking
place here, possibly by the payroll
supervisor. The new employees could be
'ghost employees' to whom money is paid
via payroll but who do not exist. The
money is then taken criminally, ex. by the
payroll supervisor or an associate of hers.
The audit junior should be made aware that
when he comes across issues like this, he
must raise them with his supervisor.

2. Plant (12/12)
Identify and explain the specific matters to be included in the
tender document for the audit of the Plant Group.

Overview of Weller & Co

A brief overview of the firm's structure.
This should state that the firm is part of an
international network of firms, and that it
therefore has access to a considerable
depth of audit expertise. This could be
particularly relevant to the audit of the
Plant Group's overseas subsidiary.

Areas of expertise
The firm has a telecoms audit department,
and therefore already has staff with
expertise in the Plant Group's specific
industry. This may make it particularly
well placed to audit the Plant Group.

Assessment of Plant Group's needs

The Plant Group is composed of a parent
and six subsidiaries, and it should be
clarified that the tender includes the audit
of each of the subsidiaries as single
companies, together with the parent
company and the group as a whole.

Audit approach
A brief description of Weller & Co's audit
approach. In the case of the Plant Group,
this is likely to include reliance on the
internal controls, which are described as
strong. The tender document should point
out that
Controls would be tested before they were
relied upon, but that if they did prove
reliable then the audit should indeed be
cost-effective.

Deadline
The proposed deadline is just two months
after the year end. It would be very
difficult to meet such a deadline while still
maintaining audit quality. It might make it
difficult to obtain evidence in specific
areas, such as receivables recoverability or
going concern. There is also a risk of
putting significant pressure on the audit
team to do work quickly rather than
thoroughly, which could result in things
being missed. The tender should therefore
propose a later deadline for audit
completion.

Fees
The tender should state the proposed audit
fee, together with a breakdown of the fee.
The fee proposed should be sufficient to
ensure that a high quality audit could be
conducted.
Non-audit services
The firm may wish to outline any relevant
non-audit services that it could provide to
the Plant Group. These will be curtailed by
the fact that the Plant Group is now listed
and thus a public interest entity, but there
may still be some areas in which Weller &
Co could provide help.
Weller & Co is facing competition from other audit firms, and the
partners have been considering how the firm's revenue could be
increased. Two suggestions have been made:

1 Audit partners and managers can be encouraged to sell non-audit

services to audit clients by including in their remuneration
package a bonus for successful sales.

2 All audit managers should suggest to their audit clients that as

well as providing the external audit service, Weller & Co can
provide the internal audit service as part of an 'extended audit'
service.

Required: Comment on the ethical and professional issues

raised by the suggestions to increase the firm's revenue.

Selling Bonus
The first suggestion would be a
'compensation and evaluation policy', in
the terms of the IESBA Code of ethics.
This creates a self-interest threat. If the
partner or manager receives a bonus from
selling services to the client, then they
might be less willing to disagree with the
client during the audit.
The Code specifically states that a key
audit partner shall not be given a bonus
based on selling non-audit services to audit
clients. Therefore this bonus should not be
offered to key audit partners.
The suggestion is to offer the bonus to
audit managers too. This may be ethically
acceptable if adequate safeguards were put
in place: the manager's work should be
reviewed by another professional
accountant. If this is not done, then the
bonus cannot be offered. It may also be
that if the manager is a particularly senior
manager, then their role will be so
significant in the audit team that no
safeguard would be sufficient. They
should not receive the bonus.

Internal audit

Self-review threat:
If Weller & Co seeks to rely on work
performed by internal audit as part of its
external audit, then there will be a self-
review threat if it has itself performed the
internal audit. The risk is that the internal
audit work relied upon is not treated with
enough professional skepticism. It may be
possible to surmount this problem by using
a team or department that is separate from
the external audit team, to perform the
internal audit.

Management responsibility: If firm

personnel assume a management
responsibility as part of the internal audit,
then this threat would be so significant that
either the internal audit service must not be
provided, or the firm must withdraw from
the external audit.
A management responsibility would be
assumed where, for example, the auditor
performs internal control procedures, or
takes responsibility for designing,
implementing and maintaining internal
controls.

Public interest entities

If the audit client is a public interest entity
(ex a listed company), then internal audit
services relating to the following areas
cannot be provided:
 A significant part of controls over
financial reporting
 Accounting systems that generate
information significant to the client's
accounting records or financial
statements
 Amounts or disclosures that are
material to the financial statements
(IESBA Code of ethics)

3. Becker(12/08)
Identify and explain the ethical and practice management
implications in respect of: (a) A business arrangement with
Murray Co

Threat to independence and objectivity: If

the investment in Murray Co were to go
ahead, Becker & Co would create self-
interest and intimidation threats to their
objectivity and independence. The
IESBA's Code of ethics for professional
accountants states that the audit firm must
be seen to be independent of the client. If
Becker & Co and Murray Co are working
together on the new product, the audit firm
will not be seen to be independent.
Loan to audit client: Under the first option,
Becker & Co would provide finance in the
form of convertible debentures. This is a
loan between the audit firm and its client
and creates a self interest threat to
independence. The Code specifically
states that audit firms should not enter into
any loan arrangement with a client that is
not a bank or similar institution and no
safeguard would reduce the self-interest
threat to an acceptable level. Becker & Co
should therefore not provide finance to
Murray Co unless they resign as auditors.

Equity shares in audit client: The

convertible debentures will eventually be
converted to equity resulting in Becker &
Co holding shares in Murray. This presents
a self-interest threat to independence as
Becker & Co will hold a financial interest
in an audit client. The Code states that an
audit firm is not allowed to own a direct
financial interest in a client. Disposing of
the equity or resigning from the audit will
be the only applicable safeguards in this
instance.

Joint venture: Under the second option,

Becker & Co would form a joint venture
with Murray Co. This would create a self-
interest threat to independence as the audit
firm and audit client would have an
inappropriately close business
relationship. Under the Code, an assurance
provider should not participate in such a
venture with an assurance client unless the
interest is clearly insignificant. In this case
the interest would be significant. Becker &
Co should therefore not enter into the joint
venture unless they resign as auditors of
Murray Co.

Diversification: Entering into a business

arrangement with Murray Co would be a
new area of business for Becker & Co. The
firm should consider whether it wants to
diversify into an area in which it has little
expertise or knowledge. It would be
necessary to carry out a full commercial
evaluation and business risk analysis
before deciding if this is a growth strategy
the firm would like to pursue.
Additionally, the firm needs to consider
whether it has the time and resources to
devote to this new area without the audit
business suffering. Time may be better
spent attracting and retaining audit clients,
rather than pursuing new areas of
business.
Business opportunity: If the firm does
decide (after research and careful
consideration) that this is a business
opportunity it would be lucrative to
pursue, then they should immediately
resign as auditors of Murray Co.

Recruitment service
Providing a recruitment service to a client
is not specifically prohibited by the
IESBA Code of ethics. However, the Code
does say certain threats to independence
could be created.
Self-interest threat: Becker & Co are
considering the provision of recruitment
services to audit clients, earning fees based
on a percentage of the salary of the person
recruited. This creates a financial self-
interest threat to independence. The firm
may be tempted to recommend an
individual to a client in order to earn a fee,
and not consider whether that individual is
suited to the role.
Familiarity threat: The provision of
recruitment services will create a
familiarity threat. During audits, Becker &
Co will have to assess the work of
individuals they helped recruit. The firm
may be or may be perceived to be less
likely to criticise or challenge such
individuals because this could discredit
their recruitment services.
Self-review threat: A self-review threat
occurs where an audit firm makes
management decisions for an audit client.
Becker & Co could be seen to be making
such decisions by providing recruitment
services to audit clients. The firm could
review candidates' CVs and recommend
individuals to interview but the final
decision of who to recruit should always
rest with the client.
This threat is increased with the seniority
of the individual being recruited, for
example if Becker & Co were to advise on
a new finance director. The threat could be
reduced by only providing services for the
recruitment of junior staff members.
Demand for services: Becker & Co would
need to carry out market research to
ensure that there is a demand for
recruitment services before embarking on
any new business venture.
Training costs: The firm should also
consider whether it has the time and
resources to enter into a new area of
business. Ingrid Sharapova only worked in
recruitment for a year and seems to be the
only employee with any experience. She
may require further training in order to
recruit finance professionals and update
her skills.
An additional member of staff at Becker
& Co will also require some training so the
recruitment business can be kept running
whilst Ingrid is away or on sick leave.
If successful, the recruitment business
may prove too much for Ingrid to handle
alone and the firm will have to either train
or hire additional staff to assist her.
Damage to reputation: Becker & Co's
reputation could be damaged if the quality
of recruitment services is low. This risk
can be reduced by setting up the
recruitment services as a separate
company.

Temporary staff assignments

Self-review threat: Becker & Co are
proposing audit managers and seniors to
be seconded to audit clients. This creates a
selfreview threat as there is the risk that the
manager or senior will be auditing their
own work on return to the audit firm. Even
if the seconded individual is not on the
audit team, there is a risk that the audit
firm over relies on work carried out by
their own employee.
Safeguards would need to be in place to
ensure that staff are not assigned to audit
teams for clients where they have
completed a secondment. This safeguard
could cause some internal difficulties at
Becker & Co as clients are likely to
request staff who are familiar with their
business and have been part of the audit
team. Becker & Co may find that they can
no longer allocate the staff with the most
experience to clients where there has
been a secondment. This difficulty could
be overcome somewhat if staff are
seconded to areas outside of the finance
department.
Management involvement: By seconding
an audit manager or senior, Becker & Co
could be or could be perceived to be
making management decisions for audit
clients. This poses a problem as it creates
a self-review threat to independence. The
threat is greater when a more senior staff
member is seconded as there is an
increased likelihood the individual will
be making important decisions.
Familiarity threat: An individual from
Becker & Co could be seconded to a client
for a time period covering the audit. A
familiarity threat to independence arises as
the audit team may be over familiar with
the seconded individual and not apply
professional scepticism.
Reputation risk: Becker & Co's reputation
could be adversely affected if seconded
staff do not have the correct level of
expertise for the role in question. The firm
should make sure that any seconded
employees are suitably competent and
qualified for the seconded role.
Loss of staff: There is a risk that key staff
may leave Becker & Co if clients offer
them a permanent position. The situation
could be exacerbated by staff being
concerned about redundancy as the audit
department is over staffed. Signed
agreements where clients agree not to offer
seconded staff permanent roles would
reduce this risk.
Benefits: The main benefit of this
suggestion is that it will ease the problems
with over staffing in the audit department
in the short term. In the long term, Becker
& Co will still need to find new business
or consider where they could reassign
excess staff.
Individuals seconded to clients may learn
and gain new perspectives from working
in a finance department rather than in an
accountancy firm. These new skills will
benefit Becker & Co on their return.

4. Peaches(12/09)
(a) (i) Rules-based (prescriptive)
auditing is where the auditor follows
prescribed rules on how to audit a
particular area, but does not use any
judgement about how to apply the rules.
Principles-based auditing is where no
detailed rules are prescribed, but where
the auditor must apply more general,
guiding principles to the particular area
being audited.

(ii) Advantages
Improved clarity and understandability.
Prescriptive auditing standards leave the
auditor in no doubt as to what he needs to
do to audit a particular area. He just needs
to follow the rules precisely and to the
letter. As long as he has done this, he will
be able to say that he has auditing in
accordance with the standards.
It can be argued that prescriptive standards
lead to an improvement in the quality of
audits because they leave less scope for
the auditor to choose how to audit each
area, which reduces the risk that the
auditor might make the wrong choice or
might make a poor judgement. This also
makes it much easier for the regulatory
authorities to monitor audit quality, as it is
much clearer what the auditor needs to do
in accordance with the standards.
Disadvantages
The key disadvantage is that it reduces the
auditor's ability to take into account the
individual circumstances of the entity that
is actually being audited. There is a danger
of just applying the rules irrespective of
whether the audit procedures are
appropriate in this particular case. Worse
than this, there may not even be a rule for
the particular situation being audited,
leaving the auditor in a very difficult
position. This would lead to audit
procedures being done that may not be
adequate to gather sufficient appropriate
audit evidence.
Prescriptive approaches diminish the
extent to which auditors need to use their
own judgement. This may not be too much
of a problem in the case of a simple entity
that is straightforward to audit, but it can
be problematic in the case of a complex
entity that is difficult to audit.
There is therefore a danger that a
prescriptive approach might actually
reduce the quality of audits.
(b) (i) An intimidation threat is a threat to
compliance with the fundamental
principle of an auditor's objectivity, which
is a crucial part of his independence.
An example of an intimidation threat
would be a client threatening to replace
the auditor if the auditor intends to qualify
the audit opinion (IESBA Code of ethics).
When an auditor identifies that there is a
threat to his independence, he should
apply safeguards to reduce the threat to an
acceptably low level. There may, for
instance, be a specific mode of recourse
available through the individual
regulatory framework that the auditor is
operating in.

(ii) The ACCA's general rule on

advertising is that the medium used should
not reflect adversely on the member,
ACCA or the accountancy profession
(ACCA Rulebook).
In particular, adverts should not discredit
the services offered by others, whether by
claiming superiority for the member's or
firm's own services or otherwise. They
should also not be misleading, either
directly or by implication – they must not
make false claims.
It is important that short adverts do not
include information about fees. It is
possible to mention fees in longer adverts,
but these must include information about
the basis on which fees would be
calculated, such as hourly rates, etc.
(iii) Lowballing is tendering for an audit
for a very low fee, with the hope of
under-cutting competitors and winning
the audit tender. It is associated with
audit firms recovering any losses they
incur from the low fee, by just raising the
fees significantly in future years.
The short answer is that lowballing is
allowed, but that the fact that a firm is
charging a low fee does not mean that it
can cut costs by doing less audit work. It
must do the same amount of work as on
any other audit, ie the amount required to
provide reasonable assurance that the
financial statements are not materially
misstated. The danger is that the firm tries
to cut back on the audit work done in order
to lessen any loss it is making on the audit
– which is a serious risk to its
independence.
The ACCA's Code of ethics and conduct
emphasises that where a firm obtains an
appointment with a significantly lower fee
than competitors, it must be able to
demonstrate that the audit has been
conducted in accordance with auditing
standards.

5. Chester(12/13)

Tetbury Co
Professional competence
Tetbury operates in the highly-regulated,
complex environment of financial
services. There is therefore a threat to
Chester & Co's ability to conduct an audit
in this area in line with the principle of
professional competence and due care.
This is a self-interest threat as a result of
the prospective audit fee.
Customer due diligence
Given the complex and therefore risky
nature of Tetbury's business environment,
it is of paramount importance that Chester
& Co conducts customer due diligence
procedures before accepting such a client.
The risk of Tetbury being involved in
laundering money should be weighed
carefully.
Previous auditors
The fact that the previous auditors
resigned suggests that Tetbury's
management may lack integrity. There is
a risk that the problems which led to the
previous auditors resigning may persist
during the tenure of Chester & Co.
Chester & Co should ask Tetbury for
permission to contact the previous
auditors regarding the reasons for their
resignation. They should be asked whether
there are any matters of which Chester &
Co should be made aware of in deciding
whether to take on the audit. This is a self-
interest threat to professional competence
and due care, because Chester & Co may
fail to exercise due care in order to secure
the audit fee.
If Tetbury refuses permission to contact
the previous auditors, then Chester & Co
should withdraw from the tender process.
Controls
The fact that the reason given for the
previous auditors' resignation points to a
poor control environment at Tetbury. This
is particularly worrisome given that it is an
owner-managed business, in which the
risk of management override of controls is
perennially present. Bearing in mind also
the increased need for robust internal
controls in as highly-regulated an area as
financial services, the Tetbury audit would
surely be considered high-risk.
As a high-risk audit, Chester & Co would
likely need to perform more audit
procedures in order to reduce audit risk to
an appropriate level. This would be costly,
and would need to be reflected in a high
audit fee. The threat to Chester & Co's
professional competence is in this light
particularly acute. Chester & Co would
need to consider carefully whether the
Tetbury audit would be worth such a high
risk.
Financial services authority
investigation
The investigation suggests either a lack of
integrity or a poor control environment, or
both. In any event Chester & Co ought to
find out more about this, for example by
contacting the authority for further details.
Business development advice
There is a self-interest threat here in
relation to the fee. There is a self-review
threat as it is possible that the advice may
need to be audited, for example as part of
the assessment of the going concern
assumption.
The self-review threat can be mitigated by
using separate engagement teams,
separated by information barriers, or by an
independent review of the audit work by a
professional accountant.
It is important that Chester & Co avoids
taking on management responsibilities,
because were they to do so then the tender
must be declined. It can avoid doing so by
obtaining written confirmation from
Tetbury that it acknowledges
responsibility for any decisions taken.
Stratford
Meeting
The request to attend the meeting with the
bank suggests an advocacy threat, as the
audit partner may be put in the position of
supporting the view that the client will
continue as a going concern, and that the
bank should therefore offer it a loan.
Legally, there is a risk of creating
proximity between Chester & Co and
Stratford which could result in the bank
taking legal action against the auditor in
the event of Stratford defaulting on its
loan.
In addition, the financial statements being
presented at the meeting are only draft
versions and have not been audited. It is
crucial that Chester & Co does not allow
Stratford to give the bank the impression
that these financial statements come with
any assurance.
It would probably not be possible to
mitigate the advocacy threat with the audit
engagement partner attending the
meeting. It may be possible for another
partner to attend, however, if it was made
clear that they were not the audit partner
and that no assurance was provided in
respect of the draft financial statements.
Threat
The managing director's threat to put the
audit out to tender is an intimidation
threat, since if the audit partner were to
attend the meeting, this may give the bank
the false impression that assurance has
been provided on the draft financial
statements.
This places a question mark over the
managing director's integrity. Chester &
Co should communicate with those
charged with governance on this matter,
for example with any other board
members or with the audit committee.
Chester & Co should consider resigning
from the audit if the threat does not abate.
Fees
Overdue fees represent a self-interest
threat, as Chester & Co may not obtain
sufficient appropriate evidence in relation
to the audit opinion it expresses in order to
receive the fees owing. There is a risk that
this may be perceived to be a loan made to
Stratford.
In this case the fee relates to a debt that is
only four months old. The severity of the
threat would depend on the significance of
the amount outstanding.
Chester & Co should request that the audit
fee be paid, and should communicate the
matter to those charged with governance.
It may also wish to review the efficacy of
its own system for credit control.
Banbury Co
Threats
There is a self-interest threat here in
respect of the fee for the non-assurance
service.
A self-review threat is present because the
partner's actuarial valuation may need to
be audited, in which case Chester & Co
would be reviewing its own work. It is not
clear whether the audit partner in question
is an audit engagement partner for the
Banbury audit. If this is the case then the
service cannot be performed unless the
engagement partner is changed.
Assuming that the partner involved is not
the engagement partner, and subject to the
further considerations below, relevant
safeguards here could include:
• Using separate teams to work on the
actuarial valuation and on the audit,
separated by information barriers
• Independent review of the audit
and/or the valuation by an independent
professional Valuation
In assessing the significance of the self-
review threat, a number of factors must be
considered. Chief among these are:
• The materiality of the valuation to
the audited financial statements
• The degree of subjectivity involved
in the valuation
• The extent to which the client is
involved in making any judgements
necessary to the valuation
(IESBA Code of ethics)
If, for instance, the valuation involves a
high degree of subjectivity, and cannot be
performed according to an established
methodology then the self-review threat
might be considered severe.
Materiality
Banbury is a listed – and therefore public
interest – entity, so its auditor must not
provide valuation services which
materially affect the financial statements.
The pension liability was 0.3% of total
assets last year and was thus immaterial. If
the figures this year are similar, then
materiality would not be a barrier to
providing the service.
6. Smith & Co(6/08)
Norman Co
Credit control: The fees for the 20X7 audit
have been outstanding for over twelve
months and it seems that little has been
done to collect them. Since the file note
states that Norman Co is suffering poor
cash flows, the balance may no longer be
recoverable. Credit control has been
poorly managed at Smith & Co with
regards this client and the debt should not
have remained outstanding for so long.
Action: Credit control procedures at the
firm need to be reviewed to prevent this
situation reoccurring. It appears that some
improvements have already been made
with the audit manager now being
responsible for reviewing client invoices
raised and monitoring credit control
procedures.
Independence: The overdue fees for the
20X7 audit may make it appear the audit
has been performed for free or could
effectively be seen as a loan from Smith &
Co to Norman Co. The IESBA Code of
ethics for professional accountants
specifically states that an audit firm should
not enter into a loan arrangement with a
client that is not a bank or similar
institution. It highlights overdue fees as an
area where a self-interest threat could arise
and independence is threatened. Smith &
Co should not have allowed outstanding
fees to build up as their independence is
now compromised.
Action: Smith and Co should discuss the
recoverability of the 20X7 audit fee with
the audit committee (if one exists) or those
charged with governance. A payment plan
should be put into place.
If the overdue fees are not paid, the firm
should consider resigning as auditors. In
this case a valid commercial reason
appears to exist as to why the fees remain
unpaid. Smith & Co can remain as
auditors provided that adequate
safeguards are in place and the amount
outstanding is not significant. If the
overdue fees are significant, it may be that
no safeguards could eliminate the threats
to objectivity and independence or reduce
them to an acceptable level.
The ethics partner at Smith & Co should
be informed of the situation. The ethics
partner should evaluate the ethical threat
and document the conclusions including
the significance of the overdue fees.
20X8 audit: The 20X7 audit fee and
arrangements for payment should have
been agreed before Smith & Co formally
accepted appointment as auditor for the
20X8 audit. Since the 20X8 audit has now
almost been completed, it appears this
could not have happened.
Action: The ethics partner at Smith & Co
should take steps to ensure that there are
no outstanding audit fees before
commencing new client work. This could
involve a new firm-wide policy that audit
managers check payment of previous
invoices.
Self-interest in 20X8 report: The 20X8
auditor's report has not yet been signed.
This creates a self-interest threat to Smith
& Co's objectivity and independence
because the issue of an unmodified
auditor's report may enhance their
prospects of securing payment of the
overdue 20X7 audit fees.
Action: The working papers for the 20X8
audit of Norman Co should undergo an
independent review by the engagement
quality control reviewer.
Going concern: Norman Co is known to
be having cash flow problems and so there
is an issue of whether the company is a
going concern for the 20X8 auditor's
report.
Action: Smith & Co should carry out a
review of the 20X8 audit working papers
on going concern. It may be necessary to
carry out further audit procedures to
ensure that sufficient evidence has been
gathered to support the audit opinion.
Wallace Co
Business relationship: Under the IESBA's
Code of ethics, persons in a position to
influence the conduct and outcome of the
audit should not enter into business
relationships with a client, except where
they involve the purchase of goods and
services from the client in the ordinary
course of business, are on an arm's length
basis and are clearly inconsequential to
each party.
As audit manager of Wallace Co, Valerie
Hobson has influence over the outcome of
the audit and should only rent the
warehouse space if the conditions
prescribed by the Code are met. Since the
warehouse space is already known to be
used for rental income, this transaction is
in the ordinary course of business.
However, the note on the invoice about
only charging a nominal sum indicates
that the transaction is not on an arm's
length basis. The criteria in the Code have
therefore been breached. It is also worth
noting that the transaction may represent a
material discount for Valerie Hobson.
Action: Valerie Hobson should not retain
the position of audit manager at Wallace
Co and a new manager should be assigned.
All planning work for the 20X8 audit
should be independently reviewed as
planning decisions may have been
influenced by the transaction. The
situation should be disclosed to those
charged with governance at Wallace Co
and the audit committee, if one exists.
Self-interest threat: Valerie Hobson has
created a self-interest threat, by renting the
warehouse space at a reduced rate.
Valerie's objectivity could be biased by her
desire to please Wallace Co so that she can
benefit financially.
Action: Valerie Hobson may need to be
disciplined for her actions by Smith & Co
who could also send her for ethics training.
Smith & Co should investigate for
evidence of bias in other audits where
Valerie Hobson has had influence.
Software Supply Co
Self-interest threat: Smith & Co may have
entered into an inappropriate close
business relationship by accepting a fee for
recommending Software Supply Co to
audit clients. This could be seen as a self-
interest threat and compromise the
independence and objectivity of Smith &
Co. The business relationship can be
allowed to continue provided that Smith &
Co put safeguards in place.
Action: Smith & Co should ensure that
where Software Supply Co has been used
by a client the following safeguards exist.
• Audit staff have no financial or
personal interest in Software Supply Co.
• The arrangement between Smith &
Co and Software Supply Co has been fully
disclosed.
• Smith & Co should obtain written
confirmation that the client is aware of the
referral fee.
Additionally, Smith & Co should monitor
the quality of the products supplied to
ensure they are not associated with
inferior goods.

7. Monet(Sep/Dec 15)
Advertisement
Accountants are permitted to advertise
subject to the requirements in the ACCA
Code of ethics and conduct that the advert
should 'not reflect adversely on the
professional accountant, ACCA or the
accounting profession' (ACCA Code of
ethics: para. 250A). The advert does not
appear to be in keeping with this principle;
it suggests that other firms of accountants
charge inappropriately high fees and that
the quality of their services is
questionable. This discredits the services
offered by other professional accountants
as well as implying that the services
offered by Monet & Co are far superior.
The advert states that the firm offers 'the
most comprehensive range of finance and
accountancy services in the country'. This
is misleading; with 12 offices and only 30
partners Monet & Co is unlikely to be one
of the largest accountancy firms in the
country and is therefore unlikely to offer
the most comprehensive range of services.
If it is misleading, this statement must be
withdrawn from the advertisement.
The advert also implies that they have the
country's leading tax team; it is not
possible to substantiate this claim as it is
not possible to measure the effectiveness
of tax teams and even if it were, no such
measure currently exists. This is,
therefore, also potentially misleading and
should be withdrawn from the advert.
The suggestion that the tax experts are
waiting to save the client money is
inappropriate; no such guarantees can be
made because tax professionals must
apply relevant tax legislation in an
objective manner. This may lead to a
reduction in a client's current tax expense
or it may not. Any failure to apply these
regulations appropriately could raise
questions about the professional behavior
of the practitioner.
Guaranteeing to be cheaper than other
service providers is often referred to as
'lowballing'. This could create a potential
self-interest threat to objectivity and could
also threaten professional competence and
due care if the practitioner is unable to
apply the appropriate professional
standards for that level of fee.
Offering business advice to audit clients
creates a potential self-review threat to
objectivity. It depends on the sort of
advice offered but it is possible that the
auditor in consequent years may have to
audit aspects of the business affected by
the advice given. This would be
particularly relevant if the practitioner
provided advice with regard to systems
design. It would be possible to offer both
services if Monet & Co can use different
teams to provide each service. Given that
they have 12 offices, it may be possible to
keep these services completely separate
and they may be able to offer both.
Offering services for free as part of a
promotion is not prohibited but, similar to
lowballing, this increases the threat to
competence and due care if sufficient time
and resources are not allocated to the task.
This may also devalue the services offered
by Monet & Co as they may be perceived
as being a promotional tool as opposed to
a professional service.
Firms of accountants are permitted to offer
free consultations, so this does not create
any specific threats. The phrase 'drop in
and see us' may cause a problem with
potential clients though as it may not
always be possible to expect to see senior
staff members without an appointment. To
avoid damaging the professional profile of
the firm, Monet & Co would need to make
sure they had a dedicated member of staff
available to meet potential customers who
is available without prior notice.
Finally, Monet & Co is not permitted to
use the term 'Chartered Certified
Accountants' because less than 50% of the
partners of the firm are ACCA members
(ACCA Code of ethics: B4. Para. 15). This
reference should be removed.
Renoir Co
Mr Cassatt's threat that he will seek an
alternative auditor unless the audit is
cheaper and less intrusive than the prior
year constitutes an intimidation threat to
objectivity. This has arisen because Mr
Cassatt is trying to unduly influence the
conduct of the audit of Renoir Co.
The audit manager or partner should
arrange a meeting with the senior
management of Renoir Co and the audit
committee, if one exists, and they should
explain how the audit has to be performed
and how the fee is calculated. They should
take care to explain the professional
standards which they have to comply with
and the terms of the engagement which the
client agreed to, specifically that
management should provide all necessary
documents and explanations deemed
necessary by the auditor to collect
sufficient appropriate evidence. It should
be explained that due to the need to
comply with these standards, they cannot
guarantee to reduce either the volume of
procedures or the audit fee.
Monet & Co should also consider the
integrity of Mr Cassatt. If the audit firm
considers any threat created too
significant, then they may wish to resign
from the engagement. If not, it may be
necessary to use more senior, experienced
staff on the assignment who are less likely
to be intimidated by Mr Cassatt while
performing audit fieldwork.
If the audit proceeds, it should be ensured
that the planning is performed by an
appropriately experienced member of the
audit team. This should be reviewed
thoroughly by the audit manager and the
partner to ensure that the procedures
recommended are appropriate to the risk
assessment performed. In this way Monet
& Co can ensure that any unnecessary, and
potential time wasting, procedures are
avoided.
The audit manager should then make sure
that Mr Cassatt is given adequate notice of
the timing of the audit and provide him
with a list of documentation which will be
required during the course of the audit so
that Renoir Co may prepare for the visit by
the audit team. The manager could also
recommend that Mr Cassatt and his team
make specific time available to meet with
the audit team and then request that the
audit team use that time to ask all the
necessary enquiries of the client. This
should minimise any disruption
experienced by the client during
fieldwork.
The overdue fees create a self-interest
threat. IESBA's Code of ethics for
professional accountants states that a self-
interest threat may be created if fees due
from an audit client remain unpaid for a
long time, especially if not paid before the
issue of the auditor's report for the
following year. The audit firm should
determine the amount of fee which is
unpaid, and whether it could be perceived
to be a loan made to the client. It may be a
relatively insignificant amount, and it may
not be long overdue, in which case the
threat to objectivity is not significant.
If the self-interest threat is significant,
then no audit work should be performed
until the fees are paid. This decision, and
the reason for it, should be communicated
to the management of Renoir Co or their
audit committee, if possible.
Homer Winslow Co
The acquisition of the accountancy firm
by Monet & Co creates a potential conflict
of interest because Monet & Co will
become the auditor of both Homer
Winslow Co and their competitor Pissarro
Co.
There is nothing ethically inappropriate
having clients in the same industry; this is
actually normal practice and allows firms
of accountants to develop industry
specialisms which allow them to offer
high quality, expert services. It is therefore
likely that firms will have clients which
compete in the same industry.
Acting for two competing companies may
give rise to ethical threats though. It may
be perceived that the auditor cannot offer
objective services and advice to a
company where it also audits a
competitor. The clients may also be
concerned that commercially sensitive
information may be inadvertently, or
intentionally, passed on to the competitor
via the auditor.
The main safeguard available is to
disclose the potential conflict to all parties
involved. If both Homer Winslow Co and
Pissarro Co accept the situation, it is
appropriate for Monet & Co to continue in
its capacity as auditor to both as long as
appropriate safeguards are put in place.
These include:
• The use of separate engagement
teams
• Issuing clear guidelines to the teams
on issues of security and confidentiality
• The use of confidentiality
agreements by audit team members
• Regular review of the safeguards by
an independent partner. (IESBA Code
of ethics)
Monet & Co must also evaluate whether
there are sufficient resources available to
conduct the audits of both companies
using separate teams. If not, the audit firm
will not be able to accept the additional
work into the department.
If either Pissarro Co or Homer Winslow
Co do not give their consent, then Monet
& Co must resign as the auditor of one of
the companies.
If this is the case, a number of ethical and
commercial considerations should be
made before deciding which client should
be rejected. Monet & Co will need to
consider the risk profile of both clients and
should conduct appropriate
acceptance/continuance procedures for
both clients prior to making any final
decision. From a commercial perspective,
Monet
& Co may also consider which of the two
clients provides the highest audit revenue.
Homer Winslow Co appears to be the
larger company currently but Pissarro Co
is a rapidly expanding business which
could be a more lucrative audit client in
the future. In this case Monet & Co should
also consider if they will be able to offer
the range of services required by the
rapidly expanding Pissarro Co without
creating any self-interest or self-review
threats to independence.
Monet & Co should also consider if any
non-audit services are currently offered to
the clients and whether additional services
could be offered to either of them in the
future. As a rapidly expanding business, it
is possible that Pissarro Co will require
more services than the established Homer
Winslow Co.
8. Ryder(6/14)
(a) Explanation of risks
Business risk is the risk inherent to the
company in its operations, and can be
considered in three aspects: operational
risk, financial risk and compliance risk.
Business risk considers the company in its
operational aspect only.
The risk of material misstatement
(RoMM) can be thought of as part of audit
risk, comprising inherent risk and control
risk but excluding detection risk. Like
audit risk, RoMM is concerned with
whether or not the financial statements are
materially misstated; the difference is that
RoMM excludes the work done by the
auditor to detect those misstatements.
Relation between risks
In general terms, business risk can affect
RoMM because almost everything that the
business does has a financial effect which
must be reported. For instance, a company
might launch a new revenue stream. This
business activity results in revenue which
must be reported in line with IFRS 15
Revenue from contracts with customers.
There is a risk of this being done
incorrectly, which is a RoMM.
A business risk might affect inherent risk
(part of RoMM). For example, a company
might have high levels of debt with
covenants attached. There is a business
risk of these covenants being breached;
there is also an inherent risk of the
financial statements being manipulated in
order prevent this from happening.
A business risk could affect control risk
(also part of RoMM). For example, a
company may be subject to a business risk
as a result of losing key members of staff
from the accounting department. This
could also increase control risk because it
could mean that fewer staff are available
to operate controls.
Relation between risks
In general terms, business risk can affect
RoMM because almost everything that the
business does has a financial effect which
must be reported. For instance, a company
might launch a new revenue stream. This
business activity results in revenue which
must be reported in line with IFRS 15
Revenue from contracts with customers.
There is a risk of this being done
incorrectly, which is a RoMM.
A business risk might affect inherent risk
(part of RoMM). For example, a company
might have high levels of debt with
covenants attached. There is a business
risk of these covenants being breached;
there is also an inherent risk of the
financial statements being manipulated in
order prevent this from happening.
A business risk could affect control risk
(also part of RoMM). For example, a
company may be subject to a business risk
as a result of losing key members of staff
from the accounting department. This
could also increase control risk because it
could mean that fewer staff are available
to operate controls.
(b) Outsourcing is covered in ISA 402
Audit considerations relating to an entity
using a service organisation. The effect at
the planning stage is that the auditor must
consider what risks might arise from the
outsourcing (ie from using a service
organisation) and plan how to respond to
them. ISA 402 requires consideration of:
• The nature and significance of the
services provided to the audited entity (eg
the effect on internal control);
• The nature and materiality of the
transactions processed by the service
organisation;
• The degree of interaction between
the activities of the service organisation
and the audited entity;
• The nature of the relationship,
including contractual terms. (ISA 402)
Crow Co should also have its own internal
controls over the outsourced payroll. The
auditor should evaluate them and obtain
an understanding of the control risk in this
area. If the outsourced payroll is not
subject to checks by Crow Co then control
risk is higher.
The starting point is information available
from Crow Co about the service
organisation, but it may be necessary to
obtain a report on the controls at the
service organisation. A Type 1 report here
focuses on the description and design of
controls; a Type 2 report also considers
whether they are effective (ISA 402).
The auditor may also contact the service
organisation, and may plan to visit them to
perform tests of controls. This requires
client permission and can be time-
consuming (and therefore costly).
Once an understanding of Crow Co's use
of the service organisation has been
obtained, control risk can be properly
assessed and thus the procedures the
auditor plans to perform.
(c) This is a potential conflict of
interests, with the auditor being asked to
provide advice to Crow Co in its tender to
another audit client.
The key threat here is confidentiality, as
either party could benefit from
information obtained from the audit firm
about the other party.
The IESBA Code of Ethics requires the
significance of any threats to be evaluated,
and safeguards to be applied when
necessary to eliminate the threats or
reduce them to an acceptable level.
The chief safeguard here is disclosure of
the situation to both of the audit clients.
Ryder & Co should not accept the
engagement until both clients have given
their consent.
Other possible safeguards could include:
• Using separate engagement teams;
• Information barriers between the
teams (eg, strict physical separation of the
teams, confidential and secure data filing);
• Clear guidelines for members of the
engagement team on security and
confidentiality;
• Confidentiality agreements signed
by employees and partners of the firm; and
• Regular review of the application of
safeguards by a senior individual not
involved with relevant client
engagements. (IESBA Code of ethics)
It is possible that the threat cannot be
reduced to an acceptable level, in which
case Ryder & Co should decline to give
advice in relation to the tender.
(d) This arrangement could be
considered a close business relationship,
in the terms of the IESBA Code of ethics,
resulting from a commercial relationship
or common financial interest. Ryder & Co
would be investing money in the
relationship and therefore stands to gain or
lose financially from it; its fate is in this
respect tied up with that of Campbell Co.
There is a self-interest threat here, because
Ryder & Co may be inclined to treat
Campbell Co more favourably in order to
protect its own interest in this joint
business arrangement.
Ryder & Co must evaluate the
significance of these threats, and whether
there are safeguards available to reduce
them to an acceptable level. If the
financial interest is material or the
business relationship significant, then no
safeguards would be able to reduce the
threat to an acceptable level, and Ryder &
Co should not take part in the
arrangement. The fact that the events are
nationwide implies that it is a reasonably
large operation and could therefore be
assessed as significant.
Further, Ryder & Co must be independent
not only in substance but in appearance
too. Even if the interest were immaterial
and the business relationship insignificant,
the appearance of closeness that might be
suggested would be enough to
compromise Ryder & Co. For this reason
the invitation should be declined.
There may be practical and commercial
problems here too. Ryder & Co may not
have staff with the requisite technical
expertise to deliver the technical updates,
in which case to deliver them would
violate the principle of professional
competence and due care. There could
also be resourcing issues if staff need to be
diverted away from audit engagements in
order to deliver lectures.
Even if these ethical problems did not
exist, a commercial judgement would
need to be made. Ryder & Co may not
have sufficient cash to invest, and needs to
consider what return it might expect to
receive for its investment.

9. Chennai(Mar/Jun16)
(a) (i) Difference between an audit and
a limited assurance review
An audit is a mandatory requirement in
most countries, although some small
companies below a certain threshold may
be exempted. Limited assurance reviews
are not usually required by law.
The scope of and procedures performed
during an audit are determined by the
audit firm in accordance with the auditing
standards adopted by the professional
regulatory body. The scope of a limited
review is agreed by the firm providing the
services and the client, although this must
be in accordance with any relevant
standards on assurance and related
services adopted by professional
regulators.
In particular, an audit involves a wide
range of procedures used to obtain
evidence, including both tests of controls
and substantive procedures. The latter
include inspection of documents,
recalculation, observation, enquiry and
analytical procedures, amongst others.
Limited reviews use a narrower range of
procedures, focusing primarily on enquiry
and analytical procedures.
Overall, the level of assurance provided
by an audit is much higher than that
provided by a limited review. In an audit
the practitioner gives a reasonable level of
assurance, whereas in a review
engagement the practitioner gives a
moderate level of assurance.
This has a significant impact on the
wording of the respective reports. In an
auditor's report the practitioner expresses
an opinion as to the fair presentation of the
financial statements. An example of this
would be:
'In our opinion the financial statements
present fairly, in all material respects, the
financial position of the company, its
financial performance and its cash flows
for the year ended in accordance with
International Financial Reporting
Standards (IFRSs).' (ISA 700)
A review engagement report does not
express any opinion on the fair
presentation of the financial statements
reviewed, instead the report expresses a
conclusion based only upon the work
performed. For example:
'Based on the review performed, nothing
has come to our attention which causes us
to believe that the financial statements do
not present fairly, in all material respects,
… in accordance with
International Financial Reporting
Standards.' (ISRE 2400)
The review engagement report is often
referred to as a negative form of opinion,
whereas the auditor's report is referred to
as a positive statement regarding the fair
presentation of the financial statements.
(ii) Advantages and disadvantages to
Delhi Co of having an audit
Advantages
One of the key differences between an
audit and a review engagement is that an
audit provides a reasonable level of
assurance, whereas a review only provides
limited assurance. This means that an
audit provides stronger assurances to users
of the financial statements regarding their
accuracy and credibility.
This would be significant for Delhi Co for
a number of reasons. The first is that the
company now has an external shareholder,
Robert Hyland, who is not part of the
executive management team. With this
separation of ownership and control
comes an increased need to hold the
management of the company accountable
to the external shareholders and having a
full audit will provide a much stronger
form of accountability.
Second, Delhi Co has a bank loan facility
which is due to expire in 20X7. Given the
ambitious expansion plans of Delhi Co, it
is likely that the company will want to
renew this facility and they may even seek
to obtain more loan finance.
If this is the case, it is very likely that the
bank will seek a reasonable level of
assurance over the financial statements.
By electing to have an annual audit now,
it may avoid delays in 20X7 when the
company comes to renegotiate terms with
the bank.
Finally, the internal management team
needs good quality information on which
to base their operational and strategic
decisions. As the business grows and the
significance of those decisions increases,
it becomes more important that the
management team has information that
they can rely on. Having fully audited
financial statements, as opposed to a
limited review, will increase the
confidence of management in the
accuracy of the information used.
Another benefit of having a full audit now
is that, whilst the business is currently
under the audit exemption threshold, it is
rapidly expanding and may soon exceed
the threshold and be subject to mandatory
audit. One of the key problems of auditing
a business for the first time is that there is
no existing assurance over the opening
balances and comparative figures. In this
case the first audit is much more time
consuming, and therefore expensive, as
the audit team has to invest more time
investigating prior year figures. The
requirement to review the prior year
would be much less onerous if the
company began to have their financial
statements audited now while they were
still relatively small and this would lead to
a more efficient audit in the future.
Delhi Co also plans to expand its customer
base. Trading internationally usually adds
extra complications due to the added
complexity in the supply chain, foreign
exchange and simple lack of familiarity
with the company. Customers may want
assurances that any company they sign a
trading agreement with has the resources
to satisfy their contractual obligations. For
this reason, having fully audited accounts,
as opposed to accounts which have had a
limited review, may give potential
customers increased confidence in the
financial position of Delhi Co and may
improve their chances of forming new
trade partnerships.
There has also been a recent change in the
accounting department of Delhi Co. This
is normal in a rapidly expanding business
but it creates new challenges. Often the
accounting systems of small companies
are unsophisticated but as the company
grows the systems soon become outdated
and less effective. An audit incorporates a
review of effectiveness of the internal
control systems relevant to the production
of the financial statements and any
deficiencies identified by the auditor
would be reported to management. Given
the changes Delhi Co has experienced, a
full audit may help them assess the
effectiveness of their internal systems and
make changes where necessary. The
systems would not be assessed with a
limited review.
The change in staff in the accounts
department also increases the risk of
misstatement of the financial statements
due to their lack of familiarity with the
company and the accounting systems. The
fact that the new recruits are both part
qualified further increases the risk of
misstatement of the financial statements
because the trainees may not be fully able
to process all of the transactions and
events relevant to the business. An audit is
a more thorough investigation of the
financial statements than a review and
would be much more likely to identify
misstatements, providing management
with more reliable figures upon which to
base their decisions.
Disadvantages
While an audit is a more thorough
investigation, it is also more expensive
than a review. For a small company an
audit may be prohibitively expensive,
whereas a review may be more affordable.
If the company is exempt, an audit may
also be an unnecessary cost. Delhi Co
already managed to raise a loan without
the need for audited accounts. The
external shareholder is also an ex-business
partner of Mr Dattani and it is likely that
they have a good working relationship. If
Mr Hyland needs assurances, it is possible
that Mr Dattani could satisfy this on an
informal basis without the need to incur
the costs of an audit. Mr Hyland also
decided to invest knowing that the
company was not subject to audit, so it
may not be a concern of his.
An audit is also more invasive than a
limited review and would require the staff
of Delhi Co to provide more information
to the auditor and give up more of their
time than would be the case with a limited
review. Given the relative inexperience of
the accounts team, Mr Dattani may prefer
to choose the less invasive limited review
now and perform a full audit in the future
when the team is more knowledgeable of
the business.
(b) Mumbai Co
Review of internal controls
Reviewing the internal controls of an audit
client which are relevant to the financial
reporting system would create a self-
review threat as the auditor would
consequently assess the effectiveness of
the control system during the external
audit.
The design, implementation and
maintenance of internal controls are also
management responsibilities. If the
auditor were to assist in this process, it
may be considered that they were
assuming these management
responsibilities. The IESBA Code of
ethics for professional accountants ('the
Code') identifies this as a potential self-
review, self-interest and familiarity threat.
The latter arises because the audit firm
could be considered to be aligning their
views and interests to those of
management.
The Code states that the threats caused by
adopting management responsibilities are
so significant that there are no safeguards
which could reduce the threats to an
acceptable level.
The only effective measures which could
be adopted would be those which ensured
the audit firm did not adopt a management
responsibility, such as ensuring that the
client has assigned competent personnel to
be responsible at all times for reviewing
internal control review reports and for
determining which of the
recommendations from the report are to be
implemented.
Furthermore, the Code stipulates that if
the client is listed and also an audit client,
then the audit firm shall not provide
internal audit services which relate to a
significant part of the internal controls
relevant to financial reporting. Given that
this is the main expertise of the audit firm,
it is likely that they will be required to
perform some work in this area and this
service would therefore not be
appropriate.
If Mumbai Co would like the firm to
perform a review of internal controls not
related to the financial reporting system,
Chennai Co would need to consider
whether they have the professional
competencies to complete the engagement
to the necessary standard of quality.
Concerns regarding deterioration in
controls
One of the responsibilities of the auditor is
to evaluate the design and implementation
of the client's controls relevant to the audit
in order to assist with the identification of
risks of material misstatement. This
includes the specific requirement to
consider the risk of material misstatement
due to fraud.
If deficiencies in internal controls are
identified, the auditor has to assess the
potential impact on the financial
statements and design a suitable response
in order to reduce audit risk to an
acceptable level. The auditor is also
responsible for communicating significant
deficiencies in internal control to those
charged with governance on a timely
basis.
The audit committee has suggested that a
number of internal control deficiencies
have recently been identified which they
were not previously aware of. This
suggests that these were not issues
identified or reported to those charged
with governance by the auditor.
If these internal control deficiencies relate
to systems relevant to the audit, it may
suggest that the audit firm's consideration
of the internal control system failed to
detect these potential problems, which
may indicate ineffective audit planning. If
so, this increases the risk that the audit
procedures designed were inappropriate
and that there is a heightened risk that the
audit team failed to detect material
misstatements during the audit. In the
worst case scenario this could mean that
Chennai & Co issued an inappropriate
audit opinion.
The circumstances are not clear though;
the audit committee of Mumbai Co has not
specified which controls appear to have
deteriorated and whether these are related
to the audit or not. There is also no
indication of the potential scale of any
fraud or inefficient commercial practice. It
is possible that the risks resulting from the
deficiencies are so small that they did not
lead to a risk of material misstatement. In
these circumstances, the audit team may
have identified the deficiencies as not
being significant and reported them to an
appropriate level of operating
management.
In order to assess this further, the manager
should examine the audit file and review
the documentation in relation to the
evaluation of the internal controls of
Mumbai Co and assess any subsequent
communications to management and
those charged with governance. The
concerns raised by the audit committee
should be noted as points to take forward
into next year's audit, when they should be
reviewed and evaluated as part of planning
the audit for the 20X7 year end.
Additionally, Chennai & Co should
contact the audit committee of Mumbai Co
to seek further clarification on the nature
and extent of the deficiencies identified
and whether this has resulted in any actual
or suspected acts of fraud.
Co