Question 1

To which of the following stakeholders do the auditors of Tesco plc have a legal as opposed to a moral responsibility
A) The bank
B) The employees
C) HM Revenue and Customs
D) People intending to buy shares in the company
E) A supplier of goods to Tesco plc
F) The shareholders
G) The government of the United Kingdom
H) The council of the Stock Exchange

Accepted Answer

Auditors have a legal responsibility to the shareholders of a company, as they are appointed to provide an independent opinion on the financial statements, which are primarily for the benefit of the shareholders.

Question 2

Give three examples of where auditors' routine audit procedures involve periods after the year end date, excluding consideration of post balance sheet events.

Accepted Answer

-reviewing payments of receivables balances after the year end.
-tracing uncleared cheques and uncredited lodgements from the bank reconciliation.
-carrying out audit work on the client's cut-off procedures.

Question 3

Bludger Ltd's auditors were appointed after the end of the financial year and discovered that the company had also changed banks shortly after the year end. The directors refused permission for the auditors to contact the previous bankers for confirmation of the year end bank balance without giving any good reason. The total of net current assets was £1.2m of which the bank balance amounted to £123,000 overdrawn. Which of the following options should the auditors take when considering their audit report?

Not modified
Modified
‘Except for’ – limitation of audit scope
Except for – material disagreement
Disclaimer – pervasive limitation of audit scope
Adverse opinion – pervasive disagreement

Accepted Answer

The report should be as clear and informative as possible to assist the shareholders in understanding the reasons for the qualification and its effects.
Wherever possible it should quantify the effect of the matter being qualified upon the financial statements.
Matters of significance which have arisen during the audit can be referred to in the 'Key Audit Matters section of the audit report. However in this case the refusal of the directors to allow the auditors to contact the bank is far too significant to be ignored or simply mentioned in passing so will result in a modified audit report.
In this case, assuming this is the only issue, there is no disagreement so the 'Except for' material disagreement and the Adverse opinion options aren't available to the auditor. Consequently this is a limitation of scope qualification.
The bank letter is used for more than simply verifying the bank balance - it is also used to request additional information from the bank regarding such matters as security for borrowings, overdraft limits, other bank accounts etc.
The auditors should be able to satisfy themselves as to the bank balance from other sources - principally a bank statement - so validating the Statement of Financial Position isn't a huge problem -even if the bank balance is material at 10% of net current assets - the problem for the auditors is what is not disclosed.
Accordingly the audit report will have to be modified for an 'except for' limitation of scope with a full explanation of the effect of the modification on the financial statements and the reasons for modifying the report.

Question 4

Use the information in the following paragraphs to answer question
You are the auditor of Whizzipop plc a manufacturer of soft drinks. The draft consolidated
financial statements for the year ended 30 September 2X18 show revenue of $125 million (2X17 - $114 million), profit before taxation of $12.4 million (2X17 - $10.9 million) and total assets of $110 million (2X17 - $93 million).
It has several subsidiaries, some of which are audited by firms other than yours. The financial statements of one such subsidiary company, Twizzle, for the year ended 30 September 2X18, are audited by another firm. Profit before taxation of $0.4 million and total assets of $34.1 million have been included in the draft consolidated financial statements of Whizzipop. The notes to Twizzle's financial statements as at 30 September 2X18 disclose a contingent liability for a pending legal matter estimated at $0.2 million. In November 2X18, the courts found Twizzle to be liable for costs and damages amounting to $1.1 million. However, Twizzle's directors have refused to make a provision, for any amount, as they have lodged an appeal against the judgement.
-What evidence would you expect to see in respect of this liability?

Accepted Answer

The answer of Use the information in the following paragraphs...

Question 5

Management representations are a source of audit evidence. These representations may be oral or written, and may be obtained either on an informal or formal basis. The auditors will include information obtained in this manner in their audit working papers where it forms part of the total audit evidence.
Discuss the implications for the auditor of a small company, if the directors refuse to sign the
Letter of Representation.

Accepted Answer

The answer of Management representations are a source of audit...

Question 6

Explain in not more than 500 words why the auditors would not consider a hurricane landing on the main office building and totally destroying it after the year end to be a non adjusting event?

Accepted Answer

The answer of Explain in not more than 500 words...

Question 7

Chugalug Ltd has three subsidiary companies and is engaged in a joint venture with an Italian company called Intervole. It has an agreement with one of its major suppliers whereby they share information so they can arrange for materials deliveries on a 'just-in-time' basis.
The wife of the managing director , who runs her own furnishings business, won a tender to supply and fit tables and chairs to the conference area in the head office. Chugalug is also part of a business consortium which shares good practice and lobbies the local Member of Parliament to make representations to the government on their behalf. This is operated through the local Chamber of Commerce. Chugalug owns shares in a rival company, Gluggit plc which it shows as an investment in its Statement of Financial position.
a) What is meant by a 'related party'
b) Which of the involvements of Chugalug shown above a not involvements with related party

Accepted Answer

The answer of Chugalug Ltd has three subsidiary companies and...

Question 8

List the basic assumptions under which an entity would be considered to be a going concern

Accepted Answer

The answer of List the basic assumptions under which an...

Question 9

Bludger Ltd's auditors were appointed after the end of the financial year and discovered that the company had also changed banks shortly after the year end. The directors refused permission for the auditors to contact the previous bankers for confirmation of the year end bank balance without giving any good reason. The total of net current assets was £1.2m of which the bank balance amounted to £123,000 overdrawn. Which of the following options should the auditors take when considering their audit report?

Not modified
Modified
‘Except for’ – limitation of audit scope
Except for – material disagreement
Disclaimer – pervasive limitation of audit scope
Adverse opinion – pervasive disagreement

Accepted Answer

The answer of Bludger Ltd's auditors were appointed after the...

Question 10

At the completion stage of an audit there are a number of final review procedures which must be carried out prior to signing the audit report. In not more than 500 words explain these procedures and the reasons for them.

Accepted Answer

The answer of At the completion stage of an audit...

Question 11

Use the information in the following paragraphs to answer question
You are the auditor of Whizzipop plc a manufacturer of soft drinks. The draft consolidated
financial statements for the year ended 30 September 2X18 show revenue of $125 million (2X17 - $114 million), profit before taxation of $12.4 million (2X17 - $10.9 million) and total assets of $110 million (2X17 - $93 million).
It has several subsidiaries, some of which are audited by firms other than yours. The financial statements of one such subsidiary company, Twizzle, for the year ended 30 September 2X18, are audited by another firm. Profit before taxation of $0.4 million and total assets of $34.1 million have been included in the draft consolidated financial statements of Whizzipop. The notes to Twizzle's financial statements as at 30 September 2X18 disclose a contingent liability for a pending legal matter estimated at $0.2 million. In November 2X18, the courts found Twizzle to be liable for costs and damages amounting to $1.1 million. However, Twizzle's directors have refused to make a provision, for any amount, as they have lodged an appeal against the judgement.
-What action would you, as group auditor, take in respect of this liability?

Accepted Answer

The answer of Use the information in the following paragraphs...

Question 12

List three advantages and three disadvantages to firms' outsourcing

Accepted Answer

The answer of List three advantages and three disadvantages to...

Question 13

Decide whether or not these statements are true or false
a. Auditors owe a duty of care to potential investors in their client
b. Auditors may reduce the consequences of a negligence claim against them by operating as a limited liability partnership
c. In order to prove a successful claim for negligence the client only has to suffer a loss which is the fault of the auditors

Accepted Answer

The answer of Decide whether or not these statements are...

Question 14

An external auditor is required to carry out a final review to ensure their conclusions are supported by sufficient reliable evidence Select whether each of the statements below is true or false in connection with the final audit review

Not modified
Modified
‘Except for’ – limitation of audit scope
Except for – material disagreement
Disclaimer – pervasive limitation of audit scope
Adverse opinion – pervasive disagreement

Accepted Answer

The answer of An external auditor is required to carry...

Question 15

Discuss the difference between a review engagement and a statutory year-end audit.

Accepted Answer

The answer of Discuss the difference between a review engagement...

Question 16

The audit of your client Sprightly plc revealed a major control weakness in the management of investments. The company recently recruited a financial analyst, as an employee, to manage the investment of surplus funds. Company policy is to invest in the shares of large quoted companies. The audit discovered a number of situations where the financial analyst had made substantial profits for the company by speculating in risky investments such as derivatives. Such investments could result in massive losses. The matter was reported in writing to the chief financial officer four months ago but no action has yet been taken.
What action should the auditors take in respect of this discovery?

Accepted Answer

The answer of The audit of your client Sprightly plc...

Question 17

You are reviewing the audit files of Monty Ltd with a view to finalising the audit. From your review of the files you identify the following factors. Identify whether or not they can be a) Ignored b) Whether the financial statements might have to be amended c) Whether or not the financial statements should include a reference by way of a note without any adjustment to the figures In the table below tick the response you feel is the most appropriate

Not modified
Modified
‘Except for’ – limitation of audit scope
Except for – material disagreement
Disclaimer – pervasive limitation of audit scope
Adverse opinion – pervasive disagreement

Accepted Answer

The answer of You are reviewing the audit files of...

Question 18

In order to prove a successful claim for negligence against an audit firm there has to be a duty of care which was breached by the audit firm with the result that a loss was incurred. Auditors Woody & Co were amazed to receive a negligence claim from one of their client's bankers Gurney plc who had lent money to their client, Megabuild, after the year end and subsequently lost their money when a construction project Megabuild had been involved in went badly wrong and bankrupted them. The claim said that the auditors had significantly failed to estimate the losses on the project with the result that the bank, had they known the true position, would not have lent money to Megabuild.
Gurney plc is claiming its losses from Woody & Co. What advice would you give to Woody & Co in this situation?

Accepted Answer

The answer of In order to prove a successful claim...

Question 19

State whether each of these statements are true or false
a. Auditors have no responsibility for validating comparative figures providing the audit report for the previous financial period has not been modified
b. Auditors must check that the opening balances have been brought forward correctly into the new accounting period
c. Where the financial statements for the previous accounting period were audited by another firm the incoming auditors must get confirmation from the outgoing auditors that their auditor's report is unchanged

Accepted Answer

The answer of State whether each of these statements are...

Question 20

You are an audit manager with Spottit & Hope. One of your clients, Bolington Limited, has recently asked your firm to perform a limited review of the financial statements.
During your review, you discovered a cash payment of $50,000. You have asked the company for details of this payment, and the directors have told you that it was an agency
fee, and they cannot tell you any more details as the company would lose its competitive
advantage. Profit before tax is $2m.
Your audit supervisor is happy with this explanation, and has proposed a draft review
report with the following opinion paragraph:
'Based on our review nothing has come to our attention which indicates that the financial
statements do not give a true and fair view'.
Discuss the validity or otherwise of the suggested opinion, and discuss the appropriateness of alternative opinions and suggest suitable wording for the opinion you consider to be most appropriate.

Accepted Answer

The answer of You are an audit manager with Spottit...

	True	False
a) Auditors should carry out analytical review procedures on the financial statements
b) The audit report should include a disclaimer to the effect that the auditor’s report is purely for the shareholders
c) Where audits are particularly complex or large the files should be subject to a hot review by a second audit partner before being signed off
d) All weaknesses in internal controls should be reported to management in a letter of weakness even if they have been reported in previous years

	Ignore	Amend financial statements	Refer by way of note
A Receivable amounting to £15,000 has gone into liquidation after the year end and no amounts will be recovered. Total Receivables amount to £1.2m and the pre tax profit for the year is £750,000
Since the year end the company closed four out of its eight branches
Audit investigations have indicated that the latest position on one of the long term contracts in progress is that it is likely to make a loss of £200,000. The value of Long term work in progress is £5.0m and the pre tax profit for the year is £750,000
Since the year end the company acquired one of its smaller competitors for £1.25 m. They financed this acquisition by means of an issue of shares amounting to £1m.
The bank financing arrangements were revised and renewed shortly after the year end. There were no changes to previous arrangements except an increase in the overdraft limit of £250,000
The Chief Executive left one month after the year end. The Chairman is currently carrying out her duties whilst a replacement is being sough
After the year end the Head Office was flooded and the ground floor meeting rooms and staff kitchens were badly damaged. The accounting function and IT facilities were not affected. The costs of repair are covered by insurance.

Quiz 3: Unit 21-32

To which of the following stakeholders do the auditors of Tesco plc have a legal as opposed to a moral responsibility