Block 2 - Updated Ansswer 2019

AAA- SUGGESTED DRAFTING OF SOME QUESTIONS - [KASHIFKAMRAN FCCA] 10/01/2019
BLOCK 2- SYLLABUS AREA (B & C) - PRACTICE MANAGEMENT AND EPQ ISSUES
Contents
1 December 2012- Q3 Part (a) Plant Group ....................................................................................................................... 2
2 December 2014 – Question 4(a) Weston Co .................................................................................................................. 3
3 June 2013- Question 3 Part (a) Wexford Company ........................................................................................................ 5
4 DECEMBER 2014- QUESTION 5 (A).................................................................................................................................. 7
5 JUNE 2013- Q2 Part (a) RETRIEVER GROUP (13 MARKS) ................................................................................................ 8
6 December 2013- Q4 ...................................................................................................................................................... 10
7 December 2015- Q4 ...................................................................................................................................................... 12
8 JUNE 2015- Q4 .............................................................................................................................................................. 15
9 June 2014- Q4 ............................................................................................................................................................... 16
10 Dec 2016- Q4b........................................................................................................................................................... 17
11 September 2018........................................................................................................................................................ 18
12 June 2017- Q3A ......................................................................................................................................................... 20
13 June 2016 Q2 PART A ................................................................................................................................................ 21
14 June 18- Q3- ethical and professional issues ............................................................................................................ 23
15 Dec 17- Q3b- ethical and professional issues ........................................................................................................... 25
KASHIF KAMRAN 1
1 DECEMBER 2012- Q3 PART (A) PLANT GROUP

Student guidance: It is an 8 marks requirement so a student should identify 4 matters to be included in the tender
document. The tender document (audit proposal) basically includes the four main heads, i.e. outline of the firm,
and audit firm responsibilities, client expectation and how to meet them and the fees and its basis.
Matters to be included in tender document:

1. Weller& Co profile
The audit firm, Weller & Co should include in the audit proposal the fact that it is part of an international
network of firm. Being an international firm, Weller can easily do the audit of the overseas subsidiary of
Plant group and logistics would not be an issue for the firm.
2. Specialism
Weller & Co has specialization in the telecom audit department which is an added advantage for the firm to
perform audit of Plant group, which is from the telecom industry
3. Responsibility of the auditor

Weller should mention the fact in proposal document that they are responsible for the group audit as a
whole i.e. the subsidiaries and parent company. Further Weller should also mention their basic
responsibilities towards audit of financial statements as contained within the international standards on
auditing including gathering sufficient appropriate audit evidence.
4. Client expectations
Cost effective audit:
The internal control would need to evaluated first by Weller & Co before any reliance can be put on the
strength of the Plant group governance. This is the first year audit which needs a thorough understanding
of the client system and a proper documentation. Moreover, the first year audit consume more resources
and sufficient time is spent on the audit to reduce the risk to an acceptable level. Thus a cost effective audit
is not possible rather the fees will be reasonable on basis of the above factors.
Deadline
The proposed deadline of 31 May 2013 is achievable through engaging sufficient resources which will
ensure that the audit is completed within stipulated deadlines.
5. Fees and basis of fees
Weller should clearly inform Plant group management the basis of charging fees. The basis of fees will
depend upon the size and scale of group operations which will determine the team size. Further, being the
first year audit for Weller, it will increase the need to gather and document more evidence on client system
and financial statements.
KASHIF KAMRAN 2
2 DECEMBER 2014 – QUESTION 4(A) WESTON CO

4(a) (i) - Student guidance: This is an 8 marks requirement, so a student should discuss 4 matters to be included in
tender document apart from fees as mentioned in the requirement. The requirement related to fees has been
included for 6 marks in 4(a) (ii)
1. Weston & Co – outline:

Weston is an international firm operating in many countries as well as offer diversified range of audit and
non-audit services, so has a lot of experience.
2. Responsibility
As the entity is subjected to audit for the first time, Weston & Co should clearly put in their responsibilities
for the attention of management to reduce the expectation gap / or misconceptions. It should be informed
to the management that audit is done on a test basis and the auditor expresses a reasonable assurance on
the financial statements not an absolute assurance. The audit involve looking into material transaction and
the opinion is a reflection of the auditor judgment based upon material transactions only. Auditor has
access to all information and explanation and management is responsible to prepare the FS.
3. Expectations:
Not be too disruptive:
First year audit requires a greater use of professional skepticism in obtaining the knowledge of business
and its systems. Thus there is a high level of disruptions in the first year audit as the auditor has to question
more for obtaining knowledge of business. However, disruptions can be reduced to an acceptable level by
providing management a list of information needed before the start of audit.
Deadline
Four months is a realistic deadline to complete the audit of Jones & Co considering it’s not a very large
entity and was establish just two year ago.
4(a) (ii) Issues in determining fees:
Student note: This is a 6 marks requirement, so a student needs to discuss 3 issues in relation to fees. Each
issue is worth 2 marks
The audit firm should carefully analyze the basis of fees before concluding on the fees to be set for the first
year audit of Jones Co. The audit firm should take into consideration, the size of the business (i.e. a small
company), and its control structure (i.e. one full time accountant means that controls over financial
statement would not be effective and FS would be prone to misstatements) and the use of the accounting
package (mean understanding the system and the use of CAAT in the audit) as factor to determine fees.
Further the audit firm would consider the need to verify the opening balances being the first year audit
(and finding no support from previous year’s limited assurance services as it was performed by unrelated
firms)
KASHIF KAMRAN 3
Jones want the audit fees to be quite low. The audit firm needs to justify Jones that the fees depends upon
the above said basis and the fees should be reasonable to cover the cost of the firm resources and work
including the profit margin. A low fees itself could compromise the quality of audit work.
The fees cannot be linked to Jones Co success as this would result into a contingent fees (self-interest) and
IESBA codes does not permit a contingent fees.
KASHIF KAMRAN 4
3 JUNE 2013- QUESTION 3 PART (A) WEXFORD COMPANY

Identify the ethical and professional issues in deciding whether to accept the appointment as auditor of Wexford
Company? 10 marks
1.5 marks for each issue discussed (i.e. maximum 7 issues)
[Note: Recent past papers the marking scheme for ethical and professional issues has changed to 1 mark per issue,
however this is very old question when the marking scheme was 1.5 marks]
Student note: Please ensure that you are not classifying the issues into professional and ethical categories rather
simply identifying an issue and explaining it. Ethical issues would automatically reflect when you use threats to
objectivity in your answers or terms like conflict of interest or confidentiality issues. Moreover heading used in the
answer will be extracted from the case rather generalized headings like ethical issues, professional issues etc.
1. Nature of the business

Wexford is a book shop selling stationary items. This is a simple nature of business and for the audit firm it will be
easy to take on the audit of book shop as it does not requires any greater expertise and specialization.
2. Small business
Being a small business setup, audit firm would not expect a much larger fee income to flow from the client and the
extent of the work and use of resources would be very minimal in the audit due to simplified nature of business.
3. First year audit
In adherence to ISA-510 opening balances, the audit firm will need to verify the opening balances in Wexford’s
financial statements as this is the first year audit and the company was previously exempt from audit due to its
small size.
4. Owner managed audit
The controls at Wexford could be weaker due to the fact it is an owner managed business which could increase the
risk of misstatements in the financial statements. The weaker controls are demonstrated by the fact that the owner
rarely and quickly conducts review of the financial information which is only confined to sales figures only.
Part qualified accountant
The financial statements and book keeping are performed by the part qualified accountant which increases risk of
misstatement in financial statements as the accountant is not technically competent and there could possibly be
some non-adherence to accounting standards.
5. Preparing accounts
Wexford has requested the audit firm to prepare the accounts and do the audit at the same time. This would result
in a self-review threat which will compromise the firm objectivity. However Wexford being a small company, it is
permissible to provide both services with use of separate teams for both the engagements as safeguards. Moreover,
preparing financial statements give rise to management threat as this is one of the pre-condition of audit and falls
under management responsibility
KASHIF KAMRAN 5
6. No cash flow statement

Cash flow statements are an integral part of financial statements. It would be a non-compliance with IAS-7 if cash
flow statements are not prepared as part of the financial statements. It is the auditor responsibility to ensure
compliance with applicable standards. Further it is yet another pre-condition of audit that FS are prepared in
accordance with applicable laws and regulations.
7. Conflict of interest
Wexford is acquiring one of its competitors which is an existing audit client of the audit firm, thus creating a
conflict of interest and confidentiality issues. However, this could be safeguarded by having different teams for
both the clients to reduce the threat of misuse of information or the risk of breach of confidentiality.
8. No reading of the minute
Management refusal to read minutes of the meetings would result into insufficient and inappropriate audit
evidence for the audit firm and would limit the scope of the auditor. Auditor has access to all information and
explanation as part of the audit pre-conditions and the audit firm should discuss this with client before taking on
the engagement.
KASHIF KAMRAN 6
4 DECEMBER 2014- QUESTION 5 (A)

NOTE: recent changes in marking scheme now means that each ethical, professional and quality control issue is
worth 1 mark and if the examiner ask for recommend action, then each action is worth 1 mark. You need to follow
this marking scheme for Dec 2019 exams.
Student guidance: three points have been drafted for guidance purpose which will help you in drafting the rest.
1. Quick look
The senior had a quick look at the final version of financial statements. This must had resulted into
ignorance of any misstatements within the financial statements because a quick look means the review was
carried in a rush.
2. No detailed review
The manager has given a wrong instruction to the senior instructing him not to perform a detailed review
of financial statements. This is a breach of relevant audit framework under which performing detailed
review of FS at completion stage is mandatory and in this case it was much important being a new audit
client.
3. Low risk
The manager exercised a wrong judgment as he considered the audit to be low risk despite the fact it was
the first year audit of Bradley’s financial statements. First year audit can’t be low risk as auditor has less
knowledge of business making first year audit high risky engagement.
KASHIF KAMRAN 7
5 JUNE 2013- Q2 PART (A) RETRIEVER GROUP (13 MARKS)

NOTE: recent changes in marking scheme now means that each ethical, professional and quality control issue is
The audit of Retriever group, has several quality control issues in the way it was planned and performed. The
issues compromising the quality of the audit are discussed below:
Time pressured audit:
Generally time pressure audits are due to lack of planning and inadequate supervision. If audit is time pressured it
must had been conducted with a rush of things which must have compromised the sufficiency and appropriateness
of evidence gathered. Audits should be properly planned and executed with adequate supervision to avoid any
time pressure. (1)
Planned audit procedures
The manger can’t deviate from the planned procedures unless he has consulted the engagement partner.
Procedures planned should be performed and it seems that such an instruction from the manager was basically to
save time because already the audit is time pressured and the manager just want to get rush over things ignoring
evidence on director emoluments and share capital. Thus the audit lacked the appropriate supervision from the
audit manager. (1)
Sampling method
The manager instruction of not using the firm statistical method of sample selection is a breach of firm policies.
Moreover, picking a sample on judgmental basis normally increases the sampling risk and the sample could not be
representative of the trade receivable population. Junior has a lesser element of professional behavior and due care
and would not exercise an appropriate judgment for selecting samples. Again the wrong instruction demonstrate
inappropriate supervision by the audit manager. (1)
Task allocation
The task should be allocated carefully to the engagement team considering the task nature/ risk and the team
competence. Going concern is a risky area as it involves subjectivity/ management assumptions about future and
can’t be given to the junior staff. Junior must not have been skeptical while gathering evidence on going concern
and must not have evaluated things to an extent needed. Human resources is an element of engagement quality
control as wrong team allocation or task allocation may compromise the quality of audit. (1)
Review of work performed
Working papers should be reviewed by the manager particularly of the risky areas like going concern. Juniors can’t
review their own work as they don’t have enough professional competence to identify mistakes in their work and
this would result in mistakes or issues in work to go undetected. Review of working papers by manager is an
element of the engagement quality control as improper review of working paper will not only increase detection
risk for engagement but will also compromise the quality of audit(1)
KASHIF KAMRAN 8
Deferred tax calculation

Deferred tax calculation is an area which require an adequate use of professional competence and due care. If the
deferred tax was calculated by the junior there are chances it may be prone to mistakes (misstatements) due to
lack of technical competence on the subject matter. It’s not like studying a subject at a college would make the
junior capable of determining group deferred tax in realistic scenario and obviously requires good amount of
practical experience to do so. (1)
Moreover, determination of deferred tax figure must had resulted in a self-review threat as the figure itself was
part of financial statements which was subjected to audit and the manager instructed the junior not to audit the
figure for same reason. The junior should not had determined the deferred tax figure had it been material to
financial statements but no such assessment was carried out during audit which results in breach of IESBA code of
ethics. (1)
Tax planning recommendation
Again as discussed in previous point, the junior is not technically competent to discuss or advice the financial
controller on such matter which are technical and needs a careful analysis or reasoning. The junior could have
given him some wrong recommendation considering he is not an expert in this particular area. (1)
Further advice on tax planning gave rise to advocacy threat as the junior by providing advice had promoted the
company’s business interest i.e. tax planning. Advocacy is prohibited to listed clients especially when the subject
matter is material to the financial statements. Thus the situation gave rise to the ethical dilemma which was
compromised during audit. (1)
KASHIF KAMRAN 9
6 DECEMBER 2013- Q4
NOTE1: recent changes in marking scheme now means that each ethical, professional and quality control issue is
Note 2: There are lots of similarities in TetBury scenario with that of Wexford above (June 2011- Q3).
Tetbury- 8 MARKS
Industry competence
Chester & Co need to consider whether the audit firm has specialization in auditing financial service industry
before accepting the invitation from Juan (1.0).
Previous auditor
Chester & Co should also correspond with previous auditor by seeking Juan permission. If the permission is given,
the firm would directly seek from the previous auditor the reasons for resignation (1.0). If permission is not
granted, the firm should assess client integrity and should decline the invitation to perform audit (1.0)
Opening balances
The audit firm need to verify the opening balances if the engagement is accepted due to change of the auditor in
adherence with requirements of applicable standards on opening balances (1.0 M)
Client integrity issues
The disagreement on accounting treatment demonstrate Juan’s inappropriate behavior towards auditor and
disagreement itself increase the risk of misstatements in the financial statements (1.0M)
The investigation by financial service authority creates a negative client image or profile thereby bringing doubts
over client integrity (1.0). It would be difficult for Chester to take on a client with negative profile and recent
investigation makes TetBury a risky client. (1.0)
Advocacy threat
Giving business development advice to TetBury would result into advocacy threat as the firm would be promoting
client business interest .However; the business development advice is permissible in this case as the company is
small and owner managed with the use of separate engagement partners for advice and audit (1+1)
Fees
The firm should also assess the commercial attractiveness of the client in terms of fees income likely to be
generated from accepting engagement. The fee would not be very significant from TetBury considering the small
size of the business and being owner managed. (1.0)
Note: You need to score 8 marks. This is a tutorial guidance so the all points are solved for guidance.
KASHIF KAMRAN 10
Stratford – 6 marks
Advocacy threat
The request by the managing director Colin creates an advocacy threat because if the partner accompanies him to
meeting it will be seen as promoting client business interest. Further there could possibly be a legal consequence
to audit firm if the engagement partner is perceived as guarantying the company’s future prospects and Stratford
later default on loan repayment (1.0+1.0)
A partner other than the engagement partner can possibly attend the meeting with bank, considering the amount
of loan to be negotiated, its severity etc. (1.0)
Intimidation threat
Further, an intimidation threat is created as Colin has hinted to put the audit out to tender if the partner fails to
accompany him to meeting. The engagement partner should discuss the intimidation with those charged with
governance, as it brings doubts on client integrity and may even effect future of auditor client relationship.
(1.0+1.0)
Self-interest threat
Invoice relating to audit work is outstanding; create a self-interest threat as it is seen as a loan to client. The
engagement partner should discuss recovery plan or prospects of the outstanding fees before the start of the next
year audit engagement. In considering the recovery plan, the engagement partner should take into account the
amount of significance of the fees unpaid. (1.0+1.0)
Bunbury – 6 MARKS
Self-review threat
Performing an actuarial valuation service will give rise to self-review threat as the valuation will become a
component of the financial statement on which the auditor has to later express an opinion (1).
Self interest
Further the income generated by performing the actuarial valuation will give rise to self-interest threat. Income
will depend upon the complexity of service provided. (1).
Competence
The audit firm has necessary skills to perform actuarial valuation service as one of the partner is a qualified
actuary so the valuation can be performed with highest quality (1).
Materiality
The pension liability last year was 0.3% of the total assets of Bunbury Company therefore its immaterial
component of the financial statements (1.0) and the audit firm can provide actuarial valuation services to Bunbury.
However separate teams should be in place for both audit and actuarial valuation (1.0)
Note: The max marks gain as per new marking scheme of 1, is 5 marks. The question in Dec 13 had a 1.5 marks
marking scheme per issue and 1 mark per action.
KASHIF KAMRAN 11
7 DECEMBER 2015- Q4
Student note: NOTE1: recent changes in marking scheme now means that each ethical, professional and quality
control issue is worth 1 mark and if the examiner ask for recommend action, then each action is worth 1 mark. You
need to follow this marking scheme for Dec 2019 exams.
Part a) – 7 marks
Advertisement
Discredit the service offered by others
An audit firm can place an advertisement in a quality national newspaper as part of increasing the firm clientele or
the firm income. However the advertisement should not bring discredit to the services provided by other firms. In
this advertisement the use of terms like, your accountant charging you too much for poor quality service, most
comprehensive range of service and leading tax team is evidence that such discredit exist.
Guarantee
Moreover, the audit firm cannot guarantee anything as audit firms only exist to provide assurance to their client.
Guarantee to be cheaper than your existing auditor means that the firm will indulge into the low balling practices
in order to win client. Low balling practices are not allowed as it compromise the audit quality
Business advice
Offering business advice is an advocacy threat as by providing the business advice the audit firm will be promoting
the client business interest. Advocacy is allowed for non-listed client with separate teams; however in case of listed
client advocacy is are generally prohibited.
Free of cost
Audit firm cannot provide any professional service free of cost as it just not justify the quality of work performed
and the cost of resources used in that particular service. Moreover, free consultation is allowed as it is not a service
rather just an interaction to gather information about the service provider.
Chartered certified accountant
Lastly, in order for the firm to be a chartered certified accountant at least half the partners should be members of
ACCA which is not the case with Monet. Thus the audit firm is having a false claim of being an ACCA registered firm
KASHIF KAMRAN 12
Part b) - 7 marks
Renoir Company
Outstanding tax fees
Outstanding tax fees is a self-interest that as the outstanding fees is perceived as a loan to client. The fees should be
recovered before the start of the upcoming audit engagement and the engagement partner telephonic reminder is
an adequate safeguard in this regard.
Interruptions
Jim has criticized the previous conduct of audit by informing partner of interruptions faced during the last year
audit. These interruptions could be mitigated if a schedule of information is provided to the client before the start
of the current year audit.
Guarantee
Jim wants guarantee that this year audit will be less intrusive, more efficient and cheaper. The EP should discuss
with Jim that by providing schedule of information the audit firm can ensure that audit is less intrusive and more
efficient. However, in terms of providing a cheaper audit as from the last year the EP should carefully discuss the
basis of fees with Jim and justify Jim that the audit fees can only reduce if the basis of the fees so support.
Moreover, cheaper should be looked skeptically in terms of compromising the quality of audit engagement
EP should also justify Jim and that an audit firm can only provide assurance on the conditions set rather than giving
a guarantee.
Intimidation threat
Jim will seek an alternative auditor if the three condition set above are not guaranteed by the EP. This is an
intimidation threat as the FD is trying to influence the EP. The above actions initiated by EP would reduce the
intimidation threat as the partner has already agreed to most of the conditions set.
KASHIF KAMRAN 13
Part C)-6 marks

Homer Winslow
Conflict of interest
Due to acquisition of Maar Associate by Monet, Homer and Pissarro both of which are competitors to one another
will now be audited the same firm, i.e. Monet giving rise to conflict of interest
It is permissible for a firm to have two client whose interest are in conflict so Monet can continue to provide
service to both competitor provided there are adequate safeguards.
Confidentiality
Moreover, the situation give rise to risk of confidentiality whereby information can be shared or misused by audit
firm between the two competitors.
The audit firm should take appropriate actions to reduce the risk of confidentiality to acceptable level by ensuring:
- Use of separate engagement teams for both Homer and Pissarro
- Proper instructions should be given to both teams on confidentiality of information
- Confidentiality agreement should be signed among team members
KASHIF KAMRAN 14
8 JUNE 2015- Q4
Note: You need to do Part a/c yourself. For guidance Part b has been solved as it was on, offshoring and as students
you should have knowledge of what offshoring is and its permissibility.
Off shoring arrangement – 5 marks

Offshoring arrangement
Off-sharing is a permissible arrangement as per the IESBA code of ethics. This arrangement is encouraged for firms
as it allow firms to improve their overall efficiency and profitability. Thus the view point of managing partner is
correct.
Work allocation
The off shoring arrangement with overseas office has been perfectly put in place as the work allocated to the
overseas office is non-judgmental and low risk considering the office works at cheap cost. However the only issue
within this arrangement was that the overseas office read the minute which is a judgmental task to determine
issues relevant to audit as the overseas office does not have knowledge of business.
Actions
Bunk and company should ensure that their off-shoring policies are revised for not allocating such judgmental task
to overseas office and proper monitoring of off-sharing arrangement is carried out in future.
KASHIF KAMRAN 15
9 JUNE 2014- Q4
You need to do Part (a) / (b) as yourself. For guidance part C and part D has been solved, on outsourcing and its
impact on audit and business relationship
Q4 (c) (d)
(c)
Crow Company- 5 marks
The request to provide advice on business tender to Crow Company will give rise to an advocacy threat as the audit
firm will be promoting the Crow company business interest i.e. to supply Hatfield. Further the advice will result
into income generated from the service which will give rise to self-interest threat.
Crow and Hatfield are both clients of Ryder Company which can further bring the conflict of interest and
confidentiality issues among Crow and Hatfield as they will be prospective supplier and customer to one another.
Assuming Crow as non-listed, if the advice is provided to the company, the audit firm should ensure separate teams
are maintained for both companies to mitigate the conflict of interest issue.
(d)
Campbell – 7 marks
The potential business opportunity gives rise to close business friendship which is a familiarity threat. The
investment of cash as part of business opportunity will give rise to self-interest threat as it would be like the firm is
giving a loan to client.
Further, the firm does have competence to supply speakers for financial reporting, tax and audit as these are core
knowledge areas of the audit firm. The request to market the event would give rise to advocacy threat as the audit
firm would be promoting the business interest knowing the fact that the promotion would lead to better profits out
of the arrangement.
The share of profit equally gives rise to a self-interest threat as the audit firm would be significantly dependent on
the audit client for income generation.
The sharing of profit on an equal basis and investing cash in client business are severe ethical threats which will
compromise the audit firm objectivity. Further a business relationship give rise to severe ethical issues which can’t
be properly mitigated through safeguards. Thus it would be better to refuse the request to enter the business
relationship due to its severity.
KASHIF KAMRAN 16
10 DEC 2016- Q4B

Mumbai Company
Self-review
The request by the audit committee to provide a review of ICS give rise to a self-review threat as the audit firm
would be reluctant to perform test of controls later in the audit knowing their firm has already reviewed the
systems.
Self-interest
Further, a self-interest threat could be created from the income generated by providing further services to the firm
existing audit client.
Management responsibility
It is the management responsibility to design, implement and monitor the internal control system and is of the pre-
condition of audit. Thus by reviewing internal control system it may been seen that the auditor is stepping into the
responsibilities of the management
Conduct of previous audit
The audit firm has already signed the report, but it raises some question marks on the conduct of the previous
audit as to whether the audit firm has thoroughly reviewed client internal controls or not, or whether the
deficiencies were communicated or not.
Action
The audit firm cannot provide review of internal controls system if they relate to financial reporting as the
company is listed, however it would be permissible to review them, if it relate to non-financial reporting with use
of separate teams.
KASHIF KAMRAN 17
11 SEPTEMBER 2018
Sept 18- Q3 b
Team composition
The audit team assigned to the audit of Watson a second tier listed company seems inadequate as it just have two
staff members, the part qualified audit supervisor and an assistant which seems too less considering the client is a
public interest entity (1)
Part qualified supervisor
The supervisor is part qualified, means he has inadequate skills and expertise needed to perform audit of a listed
company and this is evident from the inappropriate decision he took on cash settled shared based payment plan
accounting treatment and its materiality. (1)
Temporary assigned audit manager
The temporary audit management assignment has come too late when Rodney the previous manager has felt ill at
the very start of audit. This demonstrate that the entire audit had been without a clear set of direction and
supervision needed. (1)
Wrong instruction
Rodney the previous manager has provided a clear lack of direction at the start of audit when he instructed to use
the prior year working papers if the audit team is in any doubts. Prior year audit working papers will not be
appropriate in giving guidance to any new issue or areas for current year audit like cash settled share based
payment. (1)
Share based payment scheme
There are multiple issues related to share based payment scheme as follow:
The share based payment scheme was not identified as a risky year at the planning stage brings into doubt the
overall quality of audit planning and direction at the start of audit. New events and transactions are considered as
risky areas at planning stage and thus the audit of Watson lack adequate planning. (1)
The audit supervisor has taken a wrong judgment on the materiality of the share based scheme by concluding its
immaterial taking into account the quantitative materiality i.e. $195,000 which is 0.36% of the profit and 0.84% of
the total assets. However the share appreciation rights were given to directors which makes them material by
nature (qualitative) irrespective of their amount. (1 for calculation of % of materiality and 1 for qualitative
materiality)
KASHIF KAMRAN 18
Another issue with share based payment scheme was that the audit supervisor demonstrate inappropriate
professional behavior as he failed to identify that the accounting treatment adopted by the management for a cash
settled share based payment scheme is wrong, as the credit effect has been taken in equity when it should had been
taken in liability, thus liability is understated and equity is overstated. (1)
Moreover, the fair value of the share options to recognize the expense and liability should be taken at each year
end rather the fair value taken at the grant date was another issue where the supervisor went wrong with his
decision making. (1)
Work of expert
There are multiple issues with the approach taken by the audit supervisor to rely on the work of an expert:
- Firstly, the supervisor just filed the expert report without carrying out any audit procedures on the expert
report or in going through the assumption used by expert. (1)
- Secondly, the professional looking website itself cannot justify the competence and experience of the valuer,
as this must had been verified through the valuer certification in relevant field and his experience in the
relevant work (1)
- Thus inadequate evidence was gathered on the work of expert. (1)
KASHIF KAMRAN 19
12 JUNE 2017- Q3A

Valuation of medical inventory

The expired medical inventory must be valued at the lower of cost or net realizable value, and the net realizable
value of the expired inventory ideally will be zero, thus the inventory should be written off. There is a risk that
inventory is inappropriately valued leading to overstatement of inventory in the financial statements.
Expired medicine
The expired medicine identified by the auditor during the course of audit fieldwork give rise to multiple issues:
- The auditor has a responsibility of disclosing this fact to those charged with governance and ask them to take
correcting actions, such as adjusting the financial statements and stop its usage in the hospital.
- Secondly, if the management fails to address the issue internally, the auditor has an obligatory responsibility
to disclose the matter to regulator (as hospitals are subject to laws and regulations)
- Further, the auditor can decide upon disclosure in public interest as part of his voluntary responsibility by
seeking a legal advice so the matter to be brought to public attention.
Behavior of financial controller
The behavior of FC brings in doubt the credibility and integrity of the management as it seems that the FC is trying
to conceal or hide something from the auditor. Auditor needs to be skeptical when management demonstrate
suspicious behavior during audit
FD confronted
The confrontation of FD with audit team further increases the risk that the client integrity is doubtful and there is
some suspicious activity taking place at Moosewood hospital. Challenging the auditor remit and threating the
auditor should make the audit team alert that the management is up to some fraudulent financial reporting.
Intimidation threat
The threatening behavior and tone of the FD, to put the audit team out of premises in an intimidation threat as the
FD is trying to influence the audit team and to pressurize them to bring the situation in his favor by stopping the
work of audit and further investigation into work on inventory.
Emptied room
The emptied room where inventory was stored earlier indicate the fraudulent act in which management could be
involved and escalate the management suspicious behavior. The auditor need to consider the future of their
relationship with client at the end of audit as continuation of this client relationship is not possible.
KASHIF KAMRAN 20
13 JUNE 2016 Q2 PART A

Note: Selected answer has been given, complete any other point not addressed in answer below
Answer:
Materiality level
The materiality level should be reviewed during the course of audit , to conclude whether there is an need to
change / or no need to change the materiality level initially assigned at the planning stage of audit and this should
be documented in the working papers. However, as materiality was not reviewed, it must had resulted in
performing inadequate work (either more or less).
Physical verification
The most important assertion for a tangible asset is its existence which is only verified by having a physical
inspection of the asset. However, as no physical inspection has been carried out by the auditor, there is no evidence
that whether the packing machine exist or not and can even be fictitious
Purchase invoice / order
Purchase invoice can only verify the cost of the machine not its valuation as the valuation includes the depreciation
of the machine as well. Further, the order cannot verify the existence of the machine, thus the conclusion in the
working paper is wrong (1).
It seems that there had been no supervision of the audit work during the course of audit resulting in this wrong
conclusion. Supervision is an important element of quality control system and this the quality must had been
compromised. (1)
No further work needed
The audit team has perform inappropriate work on the packing machine, as the machine was not physically
verified nor the deprecation was calculated. Thus no further work is needed is a wrong conclusion as the
representation from the management cannot be a substitute of the evidence obtained directly by the auditor (1)
Same day review
Performing review of the working papers by the manager and the partner on the same day, must had resulted in a
haphazard approach or reviewing the working papers, as must had resulted in overlooking the important areas of
working papers as the process of conducted together. Review of working paper is an important element of the
engagement quality control, and thus the improper review must had compromised the quality of the review
process.
Quick look
Quick look by the partner on the working papers of the senior could have resulted in overlooking important issues
pertaining to audit. The partner is responsible for conducted the review of working papers pertaining to risky
areas of the audit and this itself is an important elements of quality control system as this give the partner the
KASHIF KAMRAN 21
assurance to sign off the audit report. Thus the quick look must had compromised the quality an even increased the
overall audit risk
Mick Lantau
Joe recommended Stanley Company to take management consultancy services of his brother Mick results in
familiarity and self-interest threat to objectivity which comprise the independence of the engagement partner. Joe
has shown concern in promoting business of his brother during the course of the audit engagement and it seems he
is referring his brother business to his audit clients thus creating the self-interest threat.
KASHIF KAMRAN 22
14 JUNE 18- Q3- ETHICAL AND PROFESSIONAL ISSUES

Evaluation of quality control issues, implications for audit completion and further actions
(i) Controls testing on payables
The absence of evidence of authorization by the procurement manager in relation to the three purchase orders
represents an exception to the effective operation of an internal control on which the auditor intends to place
reliance. The review of the supporting documentation and the conclusion that the items were legitimate business
expenditure do not resolve the exception in the effective operation of the control. There is a risk that other
exceptions and further unauthorized purchases may have occurred which may not have been for legitimate
business purposes. The audit procedures therefore appear to have been inadequate.
The audit assistant should have reported the matter to the manager and partner for them to decide if further work
or risk analysis was required and who it should be reported to, i.e. those charged with governance, etc. This should
have also been picked up during the review of the working papers.
Prior to finalizing the audit, the audit team needs to assess the extent and significance of the internal control
deficiency and should consider increasing the original sample size and extending the audit testing. If the extended
testing identifies further exceptions in the effective operation of the control, the auditor should review whether a
controls based approach is appropriate and consider whether more substantive testing on the payables component
is required. The auditor should also consider including the matter in the report to management.
The auditor is required to communicate significant findings from the audit to those charged with governance.
These include significant difficulties encountered during the audit and any extensive unexpected effort required to
obtain sufficient appropriate audit evidence. The absence of authorization by the procurement manager in relation
to the three purchase orders requires extended audit testing and represents a potentially significant deficiency in
the operation of internal controls. It therefore represents a potentially significant audit finding which should be
communicated to those charged with governance.
(ii) Petty cash fraud
The personal taxi fares represent a fraudulent transaction by the petty cashier and should be reviewed in the light
of the auditor’s and management’s respective responsibilities in relation to the prevention and detection of fraud.
The existence of the fraud may also be further indication of a weak control environment. The auditor is responsible
for obtaining reasonable assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error.
The amount of $175 is clearly immaterial to the financial statements and therefore does not represent a potential
source of material error caused by fraud. The auditor should review the petty cash records for evidence of any
further irregularities and discuss the matters identified with management. However, if the auditor concludes that
the matter increases the overall assessment of fraud and control risk, management should be informed.
In spite of the immateriality of the amounts involved, however, the relationship of the audit assistant to the petty
cashier represents a familiarity threat. The failure of the audit assistant to highlight the matter prior to the
discussion with the engagement quality control reviewer may indicate a lack of professional integrity on the part of
the audit assistant. Primarily the audit engagement partner, has responsibility to monitor ethical requirements
KASHIF KAMRAN 23
throughout the audit process. The firm’s procedures for assigning staff to audit teams and for reporting personal
relationships with client staff should be reviewed in light of this responsibility.
(iii) Cut-off testing on revenue
An entity recognizes revenue when or as the entity satisfies a performance obligation by transferring a promised
good or service (i.e. an asset) to a customer. An asset is transferred when or as the customer obtains control of that
asset. On this basis therefore, revenue has been recognized too early and as a result revenues, receivables and
profits are overstated.
The error identified is in isolation immaterial to the financial statements at 0·2% of revenue (17,880/8·7 million).
The error should be extrapolated based on the incidence of errors identified and the level of sales to this particular
customer in order to assess the potential for a material misstatement.
Based on this assessment, the auditor should extend cut-off testing in order to assess further the potential for a
material error. The auditor should also confirm with management that the invoicing procedure is isolated to this
particular customer and consider extending their assessment and testing to any other customers as necessary.
All misstatements identified should be communicated to management and the auditor should request that they are
corrected. The non-compliance with the recognition criteria of IFRS 15 represents a significant finding from the
audit and should be communicated to those charged with governance according to ISA 260.
(iv) Tax advice

The provision of assistance in calculating the company’s income tax payable for the year represents a self-review
threat as the tax calculation forms the basis of the tax payable in the statement of financial position and the tax
charge in the statement of profit or loss for the year.
This risk is increased by the listed status of Davis Co and the auditor should not prepare tax calculations for listed
clients. Davis Co is a listed client and therefore, as auditors, the firm should not undertake any tax services
The auditor should therefore report the lack of skill and up to date knowledge of the finance director and the
implications of this for the recruitment and training procedures at the client. The auditor should also report the
independence issues identified above in relation to the finance director’s request for the auditor to calculate the tax
payable.
KASHIF KAMRAN 24
15 DEC 17- Q3B- ETHICAL AND PROFESSIONAL ISSUES

Advocacy threat
Accompanying the client to a meeting with their bankers will create an advocacy threat to objectivity as Leopard &
Co may be perceived to be representatives of Cheetah Co.
This is particularly relevant as the bank may wish to establish a number of facts relating to the suitability of
providing finance to Cheetah Co. As Cheetah Co’s auditor, these questions may be directed at the firm’s
representatives and the bank may take any response provided to their questions as assurance over these matters.
Management responsibility
Leopard & Co must also be careful that in providing services relating to the potential acquisition of Zebra Co and
the associated financing arrangements that the firm is not assuming a management responsibility.
The firm shall not assume a management responsibility for an audit client as the threats created would be so
significant that no safeguards could reduce the threats to an acceptable level.
Self-review threat – loan transaction
A self-review threat arises where the outcome or consequences of a corporate finance service provided by the
audit firm may be material to the financial statements under review.
This is a particular problem as the transaction will directly affect the financial statements, which the audit team
will be responsible for auditing in consequent financial periods and therefore the audit team is likely to be more
accepting of information provided or may not investigate issues as thoroughly, as the team may feel that much of
this has been done via the due diligence.
Intimidation threat
The request by Cheetah Co to ensure that the interim review does not impede the application for a loan may be
perceived as intimidation by the client. It appears as though they are putting pressure on Leopard & Co to finish
the work based on the deadlines imposed by the bank.
This appears to be supported by a further threat relating to the upcoming tender for the audit. The management
team of Cheetah Co appears to be suggesting that failing to ensure the interim review is completed on time for the
loan decision may have an adverse impact on any consequent tender bid.
Actions
The firm should ascertain the purpose of attending the meeting with the bank; if there is any expectation that it
will provide assurances to the bank, then the request should be declined,
In order to reduce the risk of Leopard & Co assuming a management responsibility, the representation should also
state that Cheetah Co has assigned responsibility for the final decisions relating to the acquisition and financing to
a suitably experienced individual within the company.
KASHIF KAMRAN 25

Block 2 - Updated Ansswer 2019

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AAA- SUGGESTED DRAFTING OF SOME QUESTIONS - [KASHIFKAMRAN FCCA] 10/01/2019

BLOCK 2- SYLLABUS AREA (B & C) - PRACTICE MANAGEMENT AND EPQ ISSUES

1 DECEMBER 2012- Q3 PART (A) PLANT GROUP

Matters to be included in tender document:

3. Responsibility of the auditor

2 DECEMBER 2014 – QUESTION 4(A) WESTON CO

1. Weston & Co – outline:

3 JUNE 2013- QUESTION 3 PART (A) WEXFORD COMPANY

1. Nature of the business

6. No cash flow statement

4 DECEMBER 2014- QUESTION 5 (A)

5 JUNE 2013- Q2 PART (A) RETRIEVER GROUP (13 MARKS)

Deferred tax calculation

Part C)-6 marks

Off shoring arrangement – 5 marks

10 DEC 2016- Q4B

12 JUNE 2017- Q3A

Valuation of medical inventory

13 JUNE 2016 Q2 PART A

14 JUNE 18- Q3- ETHICAL AND PROFESSIONAL ISSUES

(i) Controls testing on payables

(ii) Petty cash fraud

(iii) Cut-off testing on revenue

(iv) Tax advice

15 DEC 17- Q3B- ETHICAL AND PROFESSIONAL ISSUES

Self-review threat – loan transaction

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