BS 325 Full Time (2022.06.24)

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AUDIT FRAMEWORK AND REGULATION

ALL questions in this section are based on the two scenarios that follow. Read them carefully and then answer the questions that follow.

SCENARION ONE

You are an audit senior of YHT & Co and have worked on the external audit of BJM Co (BJM), an unlisted company, since your firm was appointed external auditor two years ago. BJM owns a chain of nine restaurants and is a successful company. BJM has always been subject to national hygiene regulations, especially in relation to the food preparation process. Non-compliance can result in a large fine or closure of the restaurant concerned.

SCENARION TWO

You are an audit manager of Ali & Co and have just been assigned the audit of Stark Co (Stark). Stark, a listed company, provides investment advice to individuals, and is regulated by the relevant financial conduct authority. Mr Day, a partner in Ali & Co, has been the audit engagement partner for Stark for the previous nine years and has excellent knowledge of the client. Mr Day has informed you that he would like his daughter Zoe to be part of team this year; Zoe is currently studying for her first set of fundamentals papers for her ACCA qualification. In an initial meeting with the finance director of Stark, you learn that the audit team will not be entertained on Stark's yacht this year, instead, he has arranged a balloon flight costing less than one-tenth of the expense of using the yacht and hopes this will be acceptable. Ali & Co has always carried out tax advisory work for Stark. The tax advisory services do not have an impact on reported in the financial statements. The finance director has stated that he feels strongly that the firm that offers taxation services this year should charge a fee which is based on a percentage of tax saved. He also trusts that your firm will accept a fixed fee for representing Stark in a dispute regarding the amount of sales tax payable to the taxation authorities.

The Board has also struggled to differentiate between their responsibilities and those of the external auditor in circumstances such as the prevention and detection of fraud and error, and compliance with regulations. Which of the following statements best describes YHT & Cos responsibility regarding BJMs compliance with hygiene regulations, in line with ISA 250 Consideration of laws and regulations in an audit of financial statements?*

A YHT & Co should actively prevent and detect non-compliance with the regulations.

B YHT & Co should perform specific audit procedures to identify possible non-compliance.

C YHT & Co should obtain sufficient appropriate audit evidence about BJM's compliance with the regulations as they have a direct effect on the financial statements.

D YHT & Co does not have any responsibility as the hygiene regulations do not have a direct effect on the financial statements.

In relation to the audit team being offered a balloon ride: Which of the following actions should be taken to ensure the firm complies with IFACs and ZICA's Code of Ethics and Conduct?*

A The gift may be accepted as Stark has taken appropriate measures to reduce the value of the gift compared to previous years.

B The value of the gift should be assessed to determine whether it is of material value to the financial statements.

C The gift should only be accepted if its value is trivial and inconsequential to the recipients.

D Only the audit partner and audit manager should accept the gift.

The partner responsible for this review engagement has asked you to tell him what level of assurance you believe YHT & Co should provide, and also what type of opinion the firm should give. What is the level of assurance and type of opinion that can be provided on this review engagement?*

Level of assurance (Reasonable), Report wording (positive)

Level of assurance (Reasonable), Report wording (negative)

Level of assurance (Limited), Report wording (positive)

Level of assurance (Limited), Report wording (Negative)

Despite running a successful company, BJMs Board have often needed to be reminded of some fundamental principles and you often have to explain key concepts. Which of the following statements best defines the external audit?*

A The external audit is an exercise carried out by auditors in order to give an opinion on whether the financial statements of a company are fairly presented.

B The external audit is an exercise carried out in order to give an opinion on the effectiveness of a company's internal control system.

C The external audit is performed by management to identify areas of deficiency within a company and to make recommendations to mitigate those deficiencies.

D The external audit provides negative assurance on the truth and fairness of a company's financial statements.

14 Mr Days daughter, Zoe, is currently learning about International Standards on Auditing (ISAs) in her studies. She has asked you for clarification of the following list: (1) Distribution of exposure draft for public comment (2) Consideration of comments received from the public (3) Approval by IAASB members(4) Establishment of task force to develop draft standard (5) Discussion of proposed standard at a public meeting. Which is the correct order of the following stages involved in the development of an ISA?*

A 1, 5, 4, 3, 2

B 2, 4, 1, 3, 5

C 4, 5, 1, 2, 3

D 5, 4, 2, 1, 3

15 Zoe is also concerned that Ali & Co might breach confidentiality were the audit firm to represent Stark in its dispute with the tax authorities. Which of the following statements best reflects the auditor's duty of confidentiality?*

A Auditors must never, under any circumstances, disclose any matters of which they become aware during the course of the audit to third parties, without the permission of the client.

B Auditors may disclose any matters in relation to criminal activities to the police or taxation authorities, if requested to do so by the police or a tax inspector.

C Auditors may disclose matters to third parties without their client's consent if it is in the public interest, and they must do so if there is a statutory duty to do so.

D Auditors may only disclose matters to third parties without their client's consent if the public interest or national security is involved.

The Board of BJM have recently notified you that the national hygiene regulations have been updated and are now much more stringent and onerous than before. With this in mind, the Board have asked your firm to conduct a review of BJMs compliance with hygiene regulations, in order to allow the Board to assess whether the appropriate processes have been implemented at each of the nine restaurants. The review is not expected to include the provision of accounting advice or the preparation of figures in the financial statements. This work is likely to be very lucrative. Your firm has sufficient experience to undertake the above review engagement. The partner responsible for this review has informed you that the engagement is an assurance engagement. Which of the following would NOT have been relevant to the partner in forming this opinion?*

A The existence of a three-party relationship

B The existence of suitable criteria

C The determination of materiality

D The subject matter

The audit partner has told you that the independence threats arising from YHT & Co performing the review engagement should be monitored carefully. Which of the following is likely to cause the audit partner most concern?*

A According to the ZICA and IFAC Code of Ethics, YHT & Co is prohibited from providing other assurance services to an audit client.

B The review engagement is likely to give rise to a self-review threat, as the outcomes of the review could form the basis of the financial statements which the audit team will audit.

C The lucrative nature of the review engagement may make the external audit team less inclined to require management to make adjustments or to issue a modified audit opinion, for fear of losing the review engagement.

D If the new review engagement causes YHT & Cos fee income from BJM to exceed 15% of the firms total fees, the IFAC Code of Ethics states that the new engagement must be turned down.

In relation to the audit engagement partner holding the role for nine years: Which of the following safeguards should be implemented in order to comply with IFACs Code of Ethics and Conduct?*

A An independent review partner should be appointed to the audit.

B The audit engagement partner should be removed from the audit team but may serve as a quality control reviewer.

C Ali & Co should not audit Stark for a two year period.

D The audit engagement partner should be removed from the audit team.