（a) Explain the external auditors’ responsibilitie...

(a) Explain the external auditors’ responsibilities in relation to the prevention and detection of fraud and error. (4 marks)

You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who specialise in the provision of loans and financial advice to individuals and companies. Currant & Co has audited Orange for many years.

The directors are planning to list Orange on a stock exchange within the next few months and have asked if the engagement partner can attend the meetings with potential investors. In addition, as the finance director of Orange is likely to be quite busy with the listing, he has asked if Currant & Co can produce the financial statements for the current year.

During the year, the assistant finance director of Orange left and joined Currant & Co as a partner. It has been suggested that due to his familiarity with Orange, he should be appointed to provide an independent partner review for the audit.

Once Orange obtains its stock exchange listing it will require several assignments to be undertaken, for example, obtaining advice about corporate governance best practice. Currant & Co is very keen to be appointed to these engagements, however, Orange has implied that in order to gain this work Currant & Co needs to complete the external audit quickly and with minimal questions/issues.

The finance director has informed you that once the stock exchange listing has been completed, he would like the engagement team to attend a weekend away at a luxury hotel with his team, as a thank you for all their hard work. In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced interest rate.

Required:

(b) (i) Explain SIX ethical threats which may affect the independence of Currant & Co’s audit of Orange Financials Co; and

(ii) For each threat explain how it might be reduced to an acceptable level. (12 marks)

(c) Orange is aware that subsequent to the stock exchange listing it will need to establish an audit committee and has asked for some advice in relation to this.

Required:

Explain the benefits to Orange of establishing an audit committee. (4 marks)

The external auditor has identified a deficiency in the internal controls of S Co. Which of the following factors would indicate that the deficiency is a significant deficiency in accordance with ISA 265 Communicating Deficiencies in Internal Control to those Charged with Governance and Management? (1) The likelihood of the deficiency leading to material misstatement is low (2) There is a risk of fraud (3) The number of transactions affected by the deficiency is low (4) The deficiency interacts with other deficiencies identified

A、(1) and (2)

B、(1) and (3)

C、(2) and (4)

D、(3) and (4)

(a) Contrast the role of internal and external auditors. (8 marks)

(b) Conoy Co designs and manufactures luxury motor vehicles. The company employs 2,500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed; its shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15% of the share capital.

The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Conoy Co’s jurisdiction does not require any. The executive directors are very successful in running Conoy Co, partly from their training in production and management techniques, and partly from their ‘hands-on’ approach providing motivation to employees.

The board are considering a significant expansion of the company. However, the company’s bankers are

concerned with the standard of financial reporting as the financial director (FD) has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed.

Conoy Co does have an internal audit department, although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co. The board of Conoy Co concur with this view. Anders & Co, the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems, not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co.

The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee.

The committee would consist of one executive director, the chief internal auditor as well as three new appointees.

One appointee would have a non-executive seat on the board of directors.

Required:

Discuss the benefits to Conoy Co of forming an audit committee. (12 marks)

audit function does not apply a systematic and disciplined approach to its work. How does this affect the extent to which the external auditor can rely on the work of the internal audit function?

A、The external auditor must not use the work of the internal audit function.

B、The external auditor can use the work of the internal audit function provided the individuals have been assessed as competent .

C、The external auditor can use the work of the internal audit function provided the organisational status of the function supports its objectivity.

D、The external auditor can use work performed by the internal audit function which relates to low risk areas of the external audit only.

A、A. Directors

B、B. Shareholders

C、C. Audit committee

D、D. Senior management

The external flotation bladder on an immersion suit should be inflated ______.

A.before you enter the water

B.after you enter the water

C.after one hour in the water

D.after you notice that your suit is losing buoyancy

A、To obtain sufficient appropriate evidence regarding compliance with laws and regulations that have both a direct and indirect effect on the financial statements

B、To obtain sufficient appropriate evidence regarding compliance with laws and regulations that have a direct effect on the financial statements only

C、To obtain sufficient appropriate evidence regarding compliance with laws and regulations that have an indirect effect on the financial statements only

D、To prevent and detect all non-compliance with laws and regulations which affect the business

(a) Explain the purpose of, and procedures for, obtaining written representations. (5 marks)

(b) The directors of a company have provided the external audit firm with an oral representation confirming that the bank overdraft balances included within current liabilities are complete.

Required:

Describe the relevance and reliability of this oral representation as a source of evidence to confirm the completeness of the bank overdraft balances. (3 marks)

(c) You are the audit manager of Violet & Co and you are currently reviewing the audit files for several of your clients for which the audit fieldwork is complete. The audit seniors have raised the following issues:

Daisy Designs Co (Daisy)

Daisy’s year end is 30 September, however, subsequent to the year end the company’s sales ledger has been corrupted by a computer virus. Daisy’s finance director was able to produce the financial statements prior to this occurring; however, the audit team has been unable to access the sales ledger to undertake detailed testing of revenue or year-end receivables. All other accounting records are unaffected and there are no backups available for the sales ledger. Daisy’s revenue is $15·6m, its receivables are $3·4m and profit before tax is $2m.

Fuchsia Enterprises Co (Fuchsia)

Fuchsia has experienced difficult trading conditions and as a result it has lost significant market share. The cash flow forecast has been reviewed during the audit fieldwork and it shows a significant net cash outflow. Management are confident that further funding can be obtained and so have prepared the financial statements on a going concern basis with no additional disclosures; the audit senior is highly sceptical about this. The prior year financial statements showed a profit before tax of $1·2m; however, the current year loss before tax is $4·4m and the forecast net cash outflow for the next 12 months is $3·2m.

Required:

For each of the two issues:

(i) Discuss the issue, including an assessment of whether it is material;

(ii) Recommend procedures the audit team should undertake at the completion stage to try to resolve the issue; and

(iii) Describe the impact on the audit report if the issue remains unresolved.

Notes: 1 The total marks will be split equally between each issue.

2 Audit report extracts are NOT required. (12 marks)

Acustomerisreadytoplaceanorderforap5-570Express.Theexternalstorageproposedforthissolutionisa1TBFAStT600storageserver.ThecustomernowwishestoattachaSCSILTO-2tapedrivetotheservertoenablethemtobackuptheirdata.WhichofthefollowingshouldthepSeriestechnicalspecialistrecommendforthetapedrive？（）

A.AddaPCI-XDualChannelUltra320SCSIAdapter（FC5712）.

B.AddaPCI-XFibreChannelAdapter（FC5716）.

C.AddtheoptionalExternalSCSIPortEnablementCable（FC4273）.

D.UsetheintegratedexternalSCSIportonthep5-570Expressserver.