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1) The responsible party is responsible to prepare financial statements that give a true and fair view

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1) The responsible party is responsible to prepare financial statements that give a true and fair view.

Which of the following circumstance/(s) the financial statements will NOT give a true and fair view?

I. The figures in the financial statements are materially misstated.

II. The financial statements reflect the commercial substances of the company’s underlying transactions.

III. The company failed to prevent non-compliance.

A) I only

B) II only

C) I and II

D) All of the above

2. The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement, due to inherent limitations. The following are inherent limitations of external audits, EXCEPT

A) Auditor selects samples to test transactions.

B) Financial statements include subjective areas in which significant judgement involved.

C) Evidence obtained by auditor are persuasive rather than conclusive.

D) It is impossible for external auditor to rely on the management internal control systems.

3. Which of the following is associated with a non-assurance engagement?

A) Standards used by the practitioner to evaluate the subject matter.

B) A report which provided by the practitioner.

C) Practitioner presents the factual findings based on the agreed procedures.

D) Evidence obtained by the practitioner to support the required level of assurance.

4. An auditor may be involved in the following activities, except

A) Express an opinion on whether the financial statements are true and fair.

B) Determine the materiality level for the financial statements as a whole.

C) Preparation of the resolutions or minutes for the board meetings.

D) Implement internal control systems which relate to financial reporting for a non-assurance client.

5. You are an audit senior and your manager is very keen to accept the non-audit service to perform a valuation of the land properties as proposed by the CEO of one of the audit client, Donald & Co, a listed company. Your manager expects the fee for this service will be lucrative.

What is the most appropriate safeguard to be implemented in order to maintain the Auditor’s objectivity and independence?

A) There is no safeguard and the assignment should be reject politely.

B) The firm have to ensure separate teams to perform the audit service and non-audit service.

C) Communicate with those charged with governance.

D) Conduct an engagement quality control review.

6. Advantages of statutory audits include the following, except:

A) Deficiencies can be highlighted in the management letter.

B) Evidence is persuasive not conclusive.

C) Enhances the credibility of the information.

D) Reduces the risk of management fraud and error.

7. Which of the following statement is FALSE regarding professional clearance letter?

A) There is a statutory requirement for the new auditor to send professional clearance letter to the existing auditor.

B) One of the purpose of professional clearance letter is to assess the integrity of the management.

C) If the auditor receives no reply to a professional clearance letter, the auditor may presume the appointment has low risk.

D) The new auditor shall not proceed with the appointment if no reply to a professional clearance letter for the first attempt.

8. In establishing the Preconditions for an Audit in according to [SA 210 Agreeing the Terms of Audit

Engagements, which of the following the auditor needs to perform?

I. Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable.

II. Obtain the agreement of management that the internal control is under the management’s responsibility and it is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

III. Obtain the agreement of management to provide the auditor with access to all information that is relevant to the preparation of the financial statements.

A) Statement I only

B) Statement I and II only

C) Statement III only

D) All of the above

9. What are the terms to be included in an audit engagement letter?

I. The responsibilities of the auditor

II. The objective and scope of the audit of financial statements

 

III. A positive form of opinion on the financial statements

IV. ‘The applicable financial reporting framework

A) I, II and III only

B) II, III and IV only

C) I, III and IV only

D) I, II and IV only

10. Which of the following is NOT a fundamental principle of professional ethics in JESBA code of ethics for professional accountants?

A) Confidentiality

B) Integrity

C) Professional behaviour

D) Advocacy

The following scenario relates to question 11-15

You are the audit manager of Jones & Co and you are planning the audit of LV Fones Co, a listed company, which has been an audit client for four years and specialises in manufacturing luxury mobile phones.

During the planning of the audit you have ascertained the following:

The employees of LV Fones Co are entitled to purchase mobile phone at a discount of 10%. The audit team has in previous years been offered the same level of staff discount.

During the year the financial controller of LV Fones was ill and unable to work. The company had no spare staff able to fulfil the role and a qualified audit senior of Jones & Co was seconded to the client for three months. The audit partner has recommended that the audit senior work on the audit as he has good knowledge of the client. The fee income from LV Fones Co was boosted by this engagement and, along with the audit and tax fee, now accounts for 16% of the firm’s total fees.

From a review of the correspondence files you note that the audit partner and finance director have known each other socially for many years and took a family holiday together last summer. As a result of this friendship the partner has not yet spoken to the client about the fee for last year’s audit, 20% of which is still outstanding.

11. From a review of the information above, your audit assistant has highlighted some of the potential risks to independence in respect of the audit of LV Fones Co.

I. The audit team in previous years was offered a staff discount of 10% on luxury mobile phones.

II. An audit senior of Jones & Co has been on secondment as the financial controller of LV Fones Co and is part of the current audit team.

III. Total fee income from LV Fones is 16% of the total fees for the audit firm.

IV. The partner and finance director know each other socially and have holidayed together.

Which of the following options correctly identifies the valid threats to independence and allocates the threat to the appropriate category?

       Familiarity                                         Self-interest                                   Self-review

  A) I and II                                                     III only                                          IV only

  B) I, II & IV                                                   I and III                                         II only

C)  l and III,                                                    I, III and IV                                  IV only

D) IV only                                                      I and III                                        II and IV

12. In relation to the audit senior’s work on secondment and his current position as an audit senior, which of the following safeguards should be implemented in order to comply with ACCA ’s Code of Ethics and Conduct?

A) Jones & Co should determine what areas the audit senior assisted the client on and make sure that the senior does not audit those areas.

B) An independent review partner should be appointed to oversee the work of the audit senior

C) The audit senior should be removed from the engagement.

D) No safeguards are necessary as the audit senior was only secondment to LV Fones for three months.

13. In relation to the unpaid fee still outstanding for last year’s audit, what safeguard should Jones & Co implement in order to comply with ACCA’s Code of Ethics and Conduct?

A) Resign from the current year audit

B) Regard the outstanding fee to be a loan to the client and continue with the current year audit.

C) Cease work on the current year audit until the fee is paid in full.

D) Agree a payment schedule with LV Fones that results in the fees being paid before much more work is done on the current year audit.

14. The finance director of LV Fones Co has asked the partner if Jones & Co can take on a consultancy project to evaluate several possible new sales systems, advise on which system should be selected, and oversee the installation of the new system.

Which of the following threats would arise, if the consultancy project 1s accepted by Jones & Co?

A) Advocacy

B) Familiarity

C) Self-review

D) Intimidation

15. Jones & Co has been asked to consider taking on two new statutory audits:

I. Titania Co, a listed company, will also require Jones & Co to prepare the financial statements

II. The finance director of Puck Co, an unlisted company, is the brother of one of the partners of Jones

& Co.

In line with ACCA’s Code of Ethics and Conduct, which companies should be accepted as audit clients?

A) Both companies

B) Neither companies

C) With safeguards, Titania Co only

D) With safeguards, Puck Co only

Section B — ALL THREE questions are compulsory and MUST be attempted

Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.

Question 1

You are an audit manager of Satsuma & Co and have been assigned to the audit of Tangerine Tech Co (Tangerine), a company which is planning to list on a stock exchange within six months. The listing rules of the stock exchange require compliance with corporate governance principles, and the directors are unsure whether they are following best practice in relation to this. They have asked the audit engagement partner for their view on this matter.

Tangerine’s board is comprised of six executive directors, a non-executive chairman and three other non- executive directors (NEDs). The chairman and one of the NEDs are former executive directors of Tangerine and on reaching retirement age were asked to take on non-executive roles. The company has established an audit committee, and all NEDs are members including the chairman who chairs the committee. All four members of the audit committee were previously involved in sales or production related roles.

All of the directors have been members of the board for at least four years. As the chairman does not have an executive role, he has sole responsibility for liaising with the shareholders and answering any of their questions. The company has not established an internal audit function to monitor internal controls.

Required:

a) Using the information above:

Describe FIVE corporate governance weaknesses faced by Tangerine Tech Co and provide a recommendation to address each weakness to ensure compliance with corporate governance principles.

Corporate governance weakness	Recommendation

 

Corporate governance weakness	Recommendation

 

Tangerine’s main competitor, Mickey Co has approached Satsuma & Co to act as auditor. Both companies are highly competitive and Tangerine is concerned that if Satsuma & Co audits both companies then confidential information could pass across to Mickey Co.

Required:

b) Explain the safeguards that your firm should implement to ensure that this conflict of interest 1s properly managed.

 

Question 2

Auditor needs to take consideration upon acceptance of an assurance engagement.

a) Required: Describe the factors to be considered prior to an acceptance of a new assurance client.

 

b) Explain the concept of materiality level in the context of auditing.