Reference no: EM13486487

Question 1. For each of the following safeguards, identify whether they are: • safeguards created by the profession, by legislation or by regulation • safeguards developed by the firm • safeguards which are engagement specific • safeguards within the client's systems 1. disclosure of fees 2. competence of employees 3. using different partners and teams with separate reporting lines for the provision of non-assurance services to an assurance client 4. professional standards and pronouncements 5. timely communication of policies and procedures to all partners and professional staff 6. internal procedures to ensure objective decisions on engagements 7. professional review by other professional accountants 8. involving another firm to perform or re-perform part of the engagement 9. corporate or other governance regulations 10. firm leadership which emphasises compliance and ethics

Question 2. Classify each of the following threats as either; self-interest, self-review, advocacy, familiarity or intimidation. 1 The CEO threatens to change auditors unless an unqualified opinion is issued 2 Each member of the audit team received a holiday cruise as a gift from the client 3 The audit partner owns a significant amount of shares in the client company 4 The audit partner is the brother-in-law of the client company's director 5 The audit firm is promoting a new issue of shares from the client company 6 The audit firm is acting as an advocate on behalf of the client in a dispute with a third party 7 Management is pressuring the firm to reduce its audit hours in order to reduce the fees 8 The audit partner has been approached about becoming a board member with the client company next year 9 A member of the audit team was recently a director of the client company 10 The audit must cover an inventory valuation system which was implemented by the audit firm after last year's audit

Question 3. Read the following scenario and identify any threats to compliance with the IFAC Code. ABC firm is the auditor of Company Ltd and has been for 10 years. During this time, the audit partner responsible has always been John. The other partner in the firm, Robert, has been the review auditor for this assurance engagement. Robert has not been the lead audit partner as his wife's father is the CEO of Company Ltd. Every year Company Ltd celebrates the end of the audit by throwing an all-expenses paid weekend away for their staff that worked on the audit and for the audit firm. This has led to a good relationship between the auditors and the company that makes the audit less formal. The staff all know each other well and the company believes it is money well spent. Recently John was approached by the board of Company Ltd with an offer of employment as a director starting in two years time. The only condition was that the audit fees have to be reduced for the current and next year's audit.

Question 4. Why would the courts want to limit the ability of third parties to sue auditors who have been negligent? Are there any arguments that this liability should not be limited?

Question 5. A. Explain the impact that the Pacific Acceptance case had on existing auditing practice. B. List four of the procedures or practices that were identified in the ruling as being part of a competent audit.

Question 6. Match the case with the ruling: Cases: Rulings: Caparo Industries Pty Ltd v. Dickman Duty of Care owed to third parties in the absence of a contract where the plaintiff has suffered physical injury Kingston Cotton Mill Co. The standards for an auditor's level of skill and care are more exacting today than in 1896 Segenhoe Ltd v. Akins & Ors Third party liability for auditors under the tort of negligence AWA Ltd v. Daniels An auditor's duty of care is owed to shareholders as a group, not to individual shareholders Donoghue v. Stevenson An auditor is a watchdog, but not a bloodhound Twomax Ltd v. Dickson, McFarlane & Robinson Contributory negligence Pacific Acceptance Corporation Ltd v. Forsyth Auditors are liable for any dividends paid out of capital due to auditor negligence

Question 7. Imaginary Services Co Pty. Ltd started trading last year, and has undergone a recent surge of growth due to increased demand for their Imaginary Service. Your firm was appointed auditor for Imaginary Services Co Pty. Ltd in August 2010. As a result of this timing, you did not get the opportunity to observe the physical inventory count as of 30 June 2010 as it was done prior to your appointment. Owing to the nature of the company's records, you have not been able to satisfy yourself as to inventory quantities. The inventory balance is material, however, you have found that controls over inventory are good, and that there is a low risk of misstatement for this asset. What type of audit report would you issue, and why? If the company was Imaginary Consumables Co Pty Ltd, and the controls over inventory were not so good, would this affect the audit report, and why?

Question 8. Clements & Partners are the audit firm of Manufacturing Co. and have been for 3 years. The audit firm is considering if there are any ethical or legal requirements that would prevent them from accepting the audit engagement of Manufacturing Co. again this year. The audit partner has noted the following information which may be relevant to this decision. I. One of the junior staff members of the audit firm is related to a supervisor at Manufacturing Co. II. One of the audit partners owns 100 shares in Manufacturing Co. III. Clements & Partners provided taxation services to Manufacturing Co. in the last financial year. IV. Frank Thomas, one of the audit partners at the firm, is the Uncle of one of the new directors of Manufacturing Co. V. The audit partner on this engagement for the last 3 years has been James Underwood. Identify if any of the above would prevent the audit firm from accepting the engagement.

Question 9. For each of the following combinations of audit evidence, rank the items in terms of their reliability: 1 A Bank statement from the entity's records B Bank statement sent directly to the auditor C Cash at bank ledger 2 D Audit firm conducts the physical count of inventory E Internal audit reports on the physical count of inventory F Auditor supervises internal audit conducting the physical count of inventory 3 G Management provides a representation letter on the accuracy of valuations H The auditor receives a letter from the agent who conducted the valuation confirming its accuracy I The auditor hires an independent agent to confirm the valuation 4 J The auditor conducted an inventory count two months before reporting date K Internal audit conducted an inventory count 3 days before reporting date L Internal audit conducted a supervised inventory count on reporting date 5 M Management assured the auditor of the probable outcome of a pending court case N The entity's lawyers assured the auditor of the probable outcome of a pending court case O The auditor received a representation from the entity's lawyers regarding the probable outcome of a pending court case

Question 10. From the following descriptions, determine what type of auditing procedure is being conducted: 1 the auditor watched two employees open the safe with their respective codes. 2 the amount of depreciation on the company vehicles was recalculated. 3 the auditor confirmed the journal and ledger entries for a purchases receipt were correctly made. 4 The auditor went to the entity's warehouse to examine the existence and condition of inventory. 5 The auditor took a stocktake of inventory on the shelf. 6 The auditor used the computer to randomly select a sample of accounts receivable for confirmation. 7 The auditor receives a letter from the entity's lawyers regarding the total legal fees charged for the period. 8 The auditor sent a letter to the entity's bank asking about the entity's debt covenants. 9 The auditor found the sales invoice and then sales order for an entry made in the accounts receivable ledger. 10 Expected wages expense was determined by proportionately adjusting the previous year's wages upwards by the increase in sales and then this was confirmed with the current period's figure for wages expense.

Question 11. Answer each of the following: 1 Control risk has been assessed as high and detection risk is low. What is the timing of the substantive procedures likely to be? 2 The auditor has decided that they will use a larger sample for confirmations at year end. What is the level of detection risk? 3 Control risk has been assessed as low and detection risk is high. What type of substantive procedures are the auditors more likely to use? 4 Control risk has been assessed as low and detection risk is high. What size sample are the auditors more likely to use? 5 The auditor has decided that they will do more tests of details of balances and use larger samples. What is the likely level of control risk? 6 The auditor has been comparing the customer closing balances with the balance in the control account for a large sample of customers at year end. What is the level of control risk and detection risk?

Question 12. For each of the following situations, indicate whether there would be an increase, decrease, or no effect on sample size: 1 The auditor has assessed control risk as low. 2 The auditor has discovered that the number of sampling units in the population has increased from 2380 to 5640. 3 The auditor has used stratification. 4 The auditor has increased the total error that they are willing to accept. 5 The auditor has assessed the risk of material misstatement as high. 6 The auditor now expects to find more errors than originally anticipated. 7 The risk that the auditor will conclude that a material error does not exist when in fact it does has increased.