UNIVERSITY OF BOLTON RAK ACADEMIC CENTRE BA (HONS) ACCOUNTANCY SEMESTER TWO EXAMINATION 2017/18 ADVANCED AUDITING PRACTICE MODULE NO: ACC6006

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1 UNIVERSITY OF BOLTON OCD056 RAK ACADEMIC CENTRE BA (HONS) ACCOUNTANCY SEMESTER TWO EXAMINATION 2017/18 ADVANCED AUDITING PRACTICE MODULE NO: ACC6006 Date: Wednesday 23 May 2018 Time: INSTRUCTIONS TO CANDIDATES: There are FIVE questions on this paper. SECTION A consists of TWO questions, answer ALL questions. SECTION B consists of THREE questions, answer ONLY TWO questions. This is a closed book exam. You must hand in the exam paper with your answer booklet.

2 Page 2 of 8 SECTION A (Answer ALL Questions) QUESTION 1 You work for Javed & Co in the audit department and are currently reviewing the audit working papers for four audit clients. All the audit assignments are near the completion stage of the audit although there is additional information which you have become aware of which may impact the audit report and/or audit opinion. All four clients have a year end of 30 September Brian Ltd (Profit before tax 160,000) Brian Ltd (Brian) received a letter from its customer on 8 October 2017 informing the company that its customer had gone bankrupt on 30 September owing a balance of 40,000 on that date. The directors of Brian are refusing to make an adjustment for the 40,000 that will no longer be received from the customer as they are arguing the letter was received post year-end. Abdul Ltd (Profit before tax 600,000) Abdul Ltd (Abdul) is a toy manufacturer and is being sued by one its customers in relation to injury caused by a defect in relation to a particular model of toy. The legal claim by the customer commenced on 15 June 2017 and eventually an out of court settlement of 20,000 was agreed prior to the year ended 30 September 2017, however this has not been accounted for. The customer who made a legal claim has now gone to the press and the reputation of the company has been tarnished and resulted in a substantial number of further claims. The lawyers of Abdul are unsure about the level of potential liability as a result of the claims, hence Abdul has simply included a disclosure note explaining that no provision has been made as it believes the claims to be immaterial. Peter Ltd (Profit before tax 775,000) The company holds an investment property, which is currently stated in the statement of financial position at 550,000, but due to a downturn in the property market, the value is now believed to be only 275,000 according to a property valuation expert. The directors are refusing to account for the impairment charge even though it is the company s policy to recognize investment property on the fair value model i.e. changes in value should be recognized in the statement of profit or loss. Question 1 continues over the page

3 Page 3 of 8 Question 1 continued Shaw Ltd (Profit before tax 250,000, Total assets: 7.5m) The company operates in the waste recycling and hazardous waste disposal sector, which has high risks of fire due to the nature of materials. In September 2017 the company suffered from a major fire and all plant and machinery and buildings (value 7m) were destroyed. This has also resulted in the auditors not being able to conduct the audit process as they cannot access any records and information which would normally be available. It should be noted that all assets and disruption to business are insured, hence there is no impact on the going concern status. Required: (a) Discuss each of the scenarios above, taking into account materiality, further information/discussion required and the potential audit reporting impact if the issues remain unresolved. (24 marks) (b) Several clients have asked Javed & co about the responsibilities of the auditor and directors in relation to fraud and error. Draft a response which can be sent to these clients explaining the responsibilities in relation to fraud and error. (6 marks) Total 30 marks Please turn the page

4 Page 4 of 8 Question 2 You currently work for Sapphire & Co Accountants as a senior audit manager, which is a large regional accountancy and audit firm with offices based in Manchester, Leeds, Liverpool and Sheffield. You have been requested by Marsh Ltd (fashion retail business) to accept appointment as the external auditor. Sapphire already conducts the audit for Bridge Ltd (fashion retail business) and hence has the required industry knowledge of the fashion retail sector. You will shortly commence the audit of Marsh Ltd as an audit manager, however there are several issues which you should consider which may impact your objectivity/independence: You own shares in Marsh Ltd (as you used to work there before commencing a career in audit). Sharon Jones is currently audit engagement partner for Bridge Ltd and as she has significant experience it has been decided that she will be engagement partner on the audit of Marsh Ltd also The audit supervisor (newly qualified ACCA member) for the Marsh Ltd audit will be Hannah Smith who is the daughter of the Financial Director at Marsh Ltd and she knows the business inside out Marsh Ltd has offered to give all Sapphire Co audit staff high end branded clothing at a significant discount if they accept the role of auditor The directors at Marsh Ltd have requested that Sapphire Co provides accountancy and taxation services as it makes sense to have the same accountants for audit and accountancy services. The company is also currently subject to a HMRC tribunal and would like Sapphire to defend it in the case. You should also consider the following in relation to your audit client Bridge Ltd: Sharon Jones has been the audit engagement partner for 15 years for Bridge Ltd as the firm believes she has most knowledge about the client and it is important for efficiency purposes Bridge Ltd is facing financial difficulties and has still not paid the audit fees in relation to last year s audit Required: (a) Explain the steps Sapphire & co should take in relation to auditing both Marsh Ltd and Bridge Ltd, given the conflict of interest threat. Question 2 continues over the page

5 Page 5 of 8 Question 2 continued (b) Explain the ethical threats which may impact independence and impair objectivity in relation to the audit of Marsh Ltd and/or Bridge Ltd. You should also suggest potential safeguards to mitigate the threats or reduce them to an acceptable level (15 marks) (c) You have been told by the newly appointed managing partner of Sapphire & Co Accountants that he is not satisfied that employees are taking quality control seriously. Explain why quality control is necessary and the policies and procedures you would expect to see in a firm of accountants in order to maintain and improve quality. (10 marks) Total 30 marks End of question 2 END OF SECTION A Questions continue over the page

6 Page 6 of 8 SECTION B: TWO Questions ONLY to be attempted Question 3 (a) Explain the importance of big data and data analytics together with the benefits and risks associated with data analytics. Also briefly explain the impact that data analytics will have on the audit profession. (15 marks) (b) Briefly explain with examples how Computer assisted audit techniques can help the auditor during the audit process Total 20 marks Question 4 End of question 3 You work for Honey & Co as an audit manager and have been approached by the directors of Lemon Furnishings Ltd for advice on Corporate Governance and Internal Control as the company is potentially seeking to become listed on the Stock Exchange and they have been informed that corporate governance is given importance. The directors have also been told that they should consider forming an audit committee. As audit manager for the statutory audit of Lemon Furnishings Ltd, you have an awareness that due to company culture there is poor governance in the organization. Lemon Furnishing Ltd is a manufacturer and retailer of furniture and homeware products and supplies other companies as well as having its own stores throughout the UK. The company has diversified its product range and expanded into Europe as well as having a major online presence which now makes up 35% of total sales revenue which is 425m. It has been suggested that the directors also consider setting up a remuneration committee as certain employees in the organization feel some directors are paid excessively. Required: (a) Explain the role of the directors in relation to corporate governance and controls (b) Describe the types of control that should be operated by Lemon Furnishings Ltd to provide sound governance Question 4 continues over the page

7 Page 7 of 8 Question 4 continued Question 5 (c) Explain the potential role of the audit committee and the factors that Lemon Furnishings Ltd should consider when making a decision about the formation of the audit committee. (d) Explain the purpose of a remuneration committee and the importance especially if the company seeks to become a listed company on the stock exchange. Total 20 marks The Cotton Group Ltd has its head office in Manchester and is an international business with 4 subsidiaries. You work for Smith & Co Accountants who are responsible for the group audit, but there are separate auditors for the subsidiaries located in Pakistan, India, Bangladesh and China. You should assume that all companies have a year end of 31 December 2017 with the exception of the Indian subsidiary. There is the following additional information which you should take into account: (i) (ii) (iii) The Pakistani subsidiary is making significant losses both in the current year and in prior years. Furthermore there are lack of internal controls, very high staff turnover at 30% and moreover high levels of bad debts. The local audit firm has explained that the above issues together with other issues has led them to potentially give a qualified opinion. The Indian subsidiary has a year end of 30 September 2017, where as all other companies including the parent have a year end of 31 December 2017 In January 2018 the Cotton Group Ltd announced that it is selling the Bangladeshi subsidiary and the sale completion is ongoing. (iv) The Cotton group acts a guarantor in relation to loans with a value of 120m for all of its overseas subsidiaries. The overall revenue of the Cotton Group Ltd was 800m for the year ended 31 December Question 5 continues over the page

8 Page 8 of 8 Question 5 continued Required: (a) The Cotton Group Ltd will be subject to a group audit. Explain what the audit approach should be and especially how as group auditor Smith & Co should plan and control the audit (b) The above issues (i) to (iv) are relevant to the group audit. Explain if any further work needs to be done and if any further information is required and also the correct manner in which the issues should be reflected in the financial statements. (10 marks) (c) Explain the nature of the relationship between Smith & Co and the auditors of the individual subsidiaries and explain the extent to which Smith & Co should rely on the work of the auditors of the subsidiaries and any other matters which should be considered. Total 20 marks END OF QUESTIONS