ACCA AA Syllabus A. Audit Framework And Regulation - Safeguards - Past Papers ^{6 / 8}

You are an audit supervisor of Halley & Co and you are reviewing the documentation describing Comet Publishing Co’s purchases and payables system in preparation for the interim and final audit for the year ending 30 September 20X7. The company is a retailer of books and has ten stores and a central warehouse, which holds the majority of the company’s inventory.

Your firm has audited Comet Publishing Co for a number of years and as such, audit documentation is available from the previous year’s file, including internal control flowcharts and detailed purchases and payables system notes. As far as you are aware, Comet Publishing Co’s system of internal control has not changed in the last year. The audit manager is keen for the team to utilise existing systems documentation in order to ensure audit efficiency. An extract from the existing systems notes is provided below.

Extract of purchases and payables system
Store managers are responsible for ordering books for their shop. It is not currently possible for store managers to request books from any of the other nine stores. Customers who wish to order books, which are not in stock at the branch visited, are told to contact the other stores directly or visit the company website. As the inventory levels fall in a store, the store manager raises a purchase requisition form, which is sent to the central warehouse. If there is insufficient inventory held, a supplier requisition form is completed and sent to the purchase order clerk, Oliver Dancer, for processing. He sends any orders above $1,000 for authorisation from the purchasing director.

Receipts of goods from suppliers are processed by the warehouse team, who agree the delivery to the purchase order, checking quantity and quality of goods and complete a sequentially numbered goods received note (GRN). The GRNs are sent to the accounts department every two weeks for processing.

On receipt of the purchase invoice from the supplier, an accounts clerk matches it to the GRN. The invoice is then sent to the purchase ordering clerk, Oliver, who processes it for payment. The finance director is given the total amount of the payments list, which she authorises and then processes the bank payments. Due to staff shortages in the accounts department, supplier statement reconciliations are no longer performed.

Other information – conflict of interest
Halley & Co has recently accepted the audit engagement of a new client, Edmond Co, who is the main competitor of Comet Publishing Co. The finance director of Comet Publishing Co has enquired how Halley & Co will keep information obtained during the audit confidential.

Required:
(a) Explain the safeguards which Halley & Co should implement to ensure that the identified conflict of interest is properly managed. (5 marks)

Sycamore & Co is the auditor of Fir Co, a listed computer software company. The audit team comprises an engagement partner, a recently appointed audit manager, an audit senior and a number of audit assistants. The audit engagement partner has only been appointed this year due to the rotation of the previous partner who had been involved in the audit for seven years. Only the audit senior has experience of auditing a company in this specialised industry. The previous audit manager, who is a close friend of the new audit manager, left the firm before the completion of the prior year audit and is now the finance director of Fir Co.

The board of Fir Co has asked if Sycamore & Co can take on some additional work and have asked if the following additional non-audit services can be provided:

(1) Routine maintenance of payroll records
(2) Assistance with the selection of a new financial controller including the checking of references
(3) Tax services whereby Sycamore & Co would liaise with the tax authority on Fir Co’s behalf

Sycamore & Co has identified that the current year fees to be received from Fir Co for audit and other services will represent 16% of the firm’s total fee income and totalled 15·5% in the prior year. The audit engagement partner has asked you to consider what can be done in relation to this self-interest threat.

In relation to the composition of the current audit team, which of the following correctly identifies the fundamental principle which is at risk and provides an appropriate safeguard?

Sycamore & Co is the auditor of Fir Co, a listed computer software company. The audit team comprises an engagement partner, a recently appointed audit manager, an audit senior and a number of audit assistants. The audit engagement partner has only been appointed this year due to the rotation of the previous partner who had been involved in the audit for seven years. Only the audit senior has experience of auditing a company in this specialised industry. The previous audit manager, who is a close friend of the new audit manager, left the firm before the completion of the prior year audit and is now the finance director of Fir Co.

The board of Fir Co has asked if Sycamore & Co can take on some additional work and have asked if the following additional non-audit services can be provided:

(1) Routine maintenance of payroll records
(2) Assistance with the selection of a new financial controller including the checking of references
(3) Tax services whereby Sycamore & Co would liaise with the tax authority on Fir Co’s behalf

Sycamore & Co has identified that the current year fees to be received from Fir Co for audit and other services will represent 16% of the firm’s total fee income and totalled 15·5% in the prior year. The audit engagement partner has asked you to consider what can be done in relation to this self-interest threat.

Which of the following safeguards would NOT be relevant in mitigating the threat identified in relation to fees?

A. Disclosure to those charged with governance that fees from Fir Co represent more than 15% of Sycamore & Co’s total fee income
B. A pre-issuance review to be conducted by an external accountant
C. The use of separate teams to provide the audit and non-audit services
D. A post-issuance review to be conducted by an external accountant or regulatory body

Recorder Communications Co (Recorder) is a large mobile phone company which operates a network of stores in countries across Europe. The company’s year end is 30 June 2014. You are the audit senior of Piano & Co. Record Is a new client and you are currently planning the audit with the audit manager. You have been provided with the following planning notes from the audit partner following his meeting with the finance director.

Recorder purchases goods from a supplier in South Asia and these goods are shipped to the company’s central warehouse. The goods are usually in transit for two weeks and the company correctly records the goods when received. Recorder does not undertake a year-end inventory count, but carries out monthly continuous (perpetual) inventory counts and any errors identified are adjusted in the inventory system for that month.

During the year the company introduced a bonus based on sales for its sales persons. The bonus target was based on increasing the number of customers signing up for 24-month phone line contracts. This has been successful and revenue has increased by 15%, especially in the last few months of the year. The level of receivables is considerable higher than last year and there are concerns about the creditworthiness of some customers.

Recorder has a policy of revaluing its land and buildings and this year has updated the valuations of all land and buildings.

During the year the directors have each been paid a significant bonus, and they have included this within wages and salaries. Separate disclosure of the bonus is required by local legislation.

Required:

The finance director of Recorder informed the audit partner that the reason for appointing Piano & Co as auditors was because they audit other mobile phone companies, including Recorder’s main competitor. The finance director has asked how Piano & Co keeps information obtained during the audit confidential.

(d) Explain the safeguards which your firm should implement to ensure that this conflict of interest is properly  managed. (4 marks)

You are an audit manager in NAB & Co, a large audit firm which specialises in the audit of retailers. The firm currently audits Goofy Co, a food retailer, but Goofy Co’s main competitor, Mickey Co, has approached the audit firm to act as auditors. Both companies are highly competitive and Goofy Co is concerned that if NAB & Co audits both companies then confidential information could pass across to Mickey Co.

Required:

Explain the safeguards that your firm should implement to ensure that this conflict of interest is properly managed. (4 marks)