2019 AC3093 Main PDF

THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALL
AC3093 ZA
BSc DEGREES AND GRADUATE DIPLOMAS IN ECONOMICS, MANAGEMENT,

FINANCE AND THE SOCIAL SCIENCES, THE DIPLOMA IN ECONOMICS AND
SOCIAL SCIENCES AND THE CERTIFICATE IN EDUCATION IN SOCIAL
SCIENCES
Auditing and Assurance
Tuesday 14 May 2019: 14:30 – 17:30
Time allowed: 3 hours
DO NOT TURN OVER UNTIL TOLD TO BEGIN
Candidates should answer FOUR of the following EIGHT questions: TWO from
Section A, ONE from Section B and ONE further question from either section. All
questions carry equal marks.
© University of London 2019
Page 1 of 6
UL19/0071
SECTION A
Answer AT LEAST TWO questions, and NO MORE THAN THREE questions from
this section.
1. Fresh PLC is a company specialising in the production of dairy products. The

company has been listed on the UK stock exchange for the past six years and
during that time has experienced significant growth and success. The company
has been audited since its listing by audit firm Gilks LLP who have always issued
unqualified audit reports. The latest audit report in respect of the year ended 31st
December 2018 was signed on 19th March 2019.
On 9th April 2019 the board of Fresh PLC issued a profit warning following
suggestions of accounting irregularities in previous years’ financial statements.
This warning caused an immediate drop in the company’s share price. A week
later it was announced that the board had suspended the Finance Director (FD)
and had accused him of fraud. It was said that he had overstated revenue by
raising fictitious invoices for sales made to Boulangerie Victor, a ‘shell’ company
that he controlled and which had no assets of any kind. He had allegedly
overstated accounts receivable by including the debt owed by Boulangerie
Victor. The former FD had also caused the inventory figure to be grossly
overstated by the double-counting of some quantities and the inclusion of other
items at selling price in excess of cost. Furthermore, a loan from a bank which
had provided funds to Fresh PLC had been concealed and omitted from the
financial statements. Finally, it was claimed that the FD had used company
assets for his personal benefit such as using a company jet for his family holiday
and arranging for the company to buy office decorations from his personal
collection of antique vases, the purchases being made at grossly inflated prices.
The media spotlight focused on Gilks LLP and it was asked ‘how was it possible
that unqualified audit reports had been issued and the fraud not uncovered
through the audit process?’. Both the shareholders of Fresh PLC and its creditors
including the bank whose loan was omitted from the financial statements are
considering a case of negligence against the auditors.
Required:
a) Discuss to what extent the shareholders and the creditors have a case
against the auditors for negligence. (You should consider arguments
against and in support of the auditors.)
(15 marks)
b) Explain the responsibilities of auditors in relation to the detection of fraud in
according to ISA240.
(10 marks)
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2. Pat and John Dosh are brothers who own and run a very popular stall selling fruit
and vegetables in a busy city-centre location. They operate from 7.00am until
9.00pm Monday-Friday. The customer base has grown dramatically in the last
five years with the opening of a number of large office blocks nearby. The Dosh
brothers have also begun to be more adventurous by expanding the range of
exotic, and more profitable, fruits and vegetables to cater for a more diverse
ethnic population.
The business model is very simple. They buy from wholesalers and other outlets
and sell to individual customers. All purchases and all sales are for cash. Rarely
does a supplier issue an invoice. The brothers can see the quantity and quality
of what they are buying. They do not see the need for unnecessary paperwork.
They employ only family members whom they feel they can trust completely to
help on the stall. The working day is divided into two shifts of 7 hours. There is
always one brother and one family member on the stall. The employees are paid
in cash at the end of the week. The brothers pay in cash for all other expenses
such as rent for the stall and fuel and repairs to the van.
Every Friday evening the brothers sell off at heavily discounted prices any
remaining produce which will not be fit for consumption if left over the weekend.
What is left unsold is either shared by the brothers for their own consumption or
put in the waste bin.
The brothers divide the end-of-week cash balance between themselves after
allowing for their estimate of the cost of new inventory on the following Monday.
The only accounting record they keep is of the weekend cash balance before
division and their estimate of the amount they need to keep in order to buy new
inventory.
Their accounting and tax affairs have been handled by an old school friend, an
unqualified accountant. Recently the tax authorities announced that they were
planning to investigate a number of his clients, including the Dosh brothers. The
accountant then fled overseas to an unknown location. The brothers now come
to your firm of qualified accountants asking for you to audit their accounts for the
current year and if possible the previous year too.
Required:
a) Outline the concerns you would have in accepting this engagement and explain
to the Dosh brothers the difficulties of conducting an audit of their business.
(15 marks)
b) Explain what other assurance services might be appropriate for a small business
and the level of assurance provided by each.
(10 marks)
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3. You are the partner in charge of five clients which all have March 31 year-ends.
Each of the audits has now been completed and you are currently reviewing the
files of audit work and need to decide on the appropriate audit opinion in each
case.
Client A: suffered a serious decline in sales after alarm in the media about the
safety of its products. It required extra short-term funding from the bank to pay
creditors. Sales continued to fall after the year-end. There is no possibility of
shareholders contributing more capital. The financial statements have been
drawn up on the going concern basis. The directors refuse to disclose anything
about the liquidity crisis.
Client B: a computer malfunction resulted in the loss of some of its accounting
records relating to one of its branches. There is no back-up or other data-
recovery method available. The area involved is considered material but not
fundamental to the financial statements.
Client C: the audit team discovered a number of minor discrepancies that
together produce an understatement of 0.5% of net income. The draft financial
statements have been sent to the printers and the chief financial officer refuses
to adjust the figures.
Client D: your firm were appointed during the year after the previous audit firm
resigned suddenly. It is not possible within the budget to audit the brought
forward figures from the previous year.
Client E: is in the process of restructuring. It needs additional loans and is
currently seeking out potential lenders. The directors consider that a lender will
be found and have drawn up the financial statements on the going concern basis;
they have made a full disclosure in the notes to the financial statements with
which you cannot find fault.
Required:
a) For each client, indicate which type of audit opinion should be given and explain
your reasoning.
(15 marks)
b) In addition to the opinion paragraph, what other information can readers expect
to see in the auditors’ report on financial statements?
(10 marks)
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4. Madestone Ltd is a company based in the South of England. The company
manufactures and sells agricultural machinery. The company has been trading for
50 years; the majority shareholder is the original founder of the company, Max
Madestone. The remaining shareholders are all family members. Max Madestone
is no longer involved in the day-to-day running of the company. His nephew
Samuel Madestone is the managing director. Max’s daughter, Daisy, is the finance
director (FD). Daisy is a qualified chartered accountant and has been FD of the
company for almost 10 years.
Madestone Ltd prepares its financial statements each year to 31 st December and
has been subject to an audit for the past 20 years. During the year ended 31 st
December 2018 the company changed its auditor to Treby and Sons, a local six-
partner firm with experience in the farming industry.
Dawn Harrow is the audit partner for the audit of Madestone Ltd and from her
meetings with the directors of Madestone Ltd she has learnt:
1) The most active overseas market is the US and Canada which has continued
to see growth during the year ended 31st December 2018 with a 6% increase
in sales compared to the previous year. The European market in contrast has
struggled during the year, resulting in a 15% fall in sales compared to the
previous year. The UK sales market has seen a 2% reduction in sales.
2) Concerns over the uncertainties around the European market have led the
company to seek to expand in other parts of the world such as Mexico and
Latin America. The directors are aware that there are some large competitors
already active in these parts of the world but think there is market share to
exploit. Daisy and Samuel have carried out extensive research on the areas
and put together a detailed business plan. They have agreed to meet with the
bank once the current audit is signed off to seek funding. Treby and Sons have
provided support to Madestone Ltd in preparing their business plan although
Dawn Harrow has not been involved.
3) During the year ended 31st December 2018 the company signed a significant
contract with a customer in Canada to manufacture and supply 100 new
agricultural machines over a 5-year period.
4) Madestone has warehouses in the UK, in the USA and in Germany.
Manufacturing takes place exclusively in the UK and the factory will shut down
completely over the period from 24th December to 2nd January.
5) Madestone Ltd owns the factory in the UK but leases all the warehouses.
Required:
a) Consider all the information above and prepare a memo detailing the potential
audit risks that Dawn Harrow should consider in planning the audit of
Madestone Ltd for the year ended 31st December 2018. You should explain
why the issue may pose an audit risk and the additional information required or
action to be taken in response to the risk.
(15 marks)
b) What factors should the auditors take into account when setting the materiality
level?
(10 marks)
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SECTION B
Answer ONE question and NO MORE THAN ONE further question from this section.
5. Discuss the role technology has to play in the future of the audit process.
6. Critically examine what is meant by the audit expectations gap and suggest
ways of narrowing the gap.
7. Competence is a vital quality for auditors to possess. What practical steps can
be taken to give auditors the necessary level of professional competence?
8. What has been done and what further might be done to enhance auditor
independence?
END OF PAPER
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UL19/0071
THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALL
AC3093 ZB
BSc DEGREES AND GRADUATE DIPLOMAS IN ECONOMICS, MANAGEMENT,

FINANCE AND THE SOCIAL SCIENCES, THE DIPLOMA IN ECONOMICS AND
SOCIAL SCIENCES AND THE CERTIFICATE IN EDUCATION IN SOCIAL
SCIENCES
Auditing and Assurance
Tuesday 14 May 2019: 14:30 – 17:30
Time allowed: 3 hours
DO NOT TURN OVER UNTIL TOLD TO BEGIN
Section A, ONE from Section B and ONE further question from either section. All
questions carry equal marks.
© University of London 2019
Page 1 of 6
UL19/0072
SECTION A
Answer AT LEAST TWO questions, and NO MORE THAN THREE questions from
this section.
1. Lawsons Ltd is an IT maintenance company located in Wales. The company

has contracts with a number of schools and colleges as well as local
businesses. The company has been trading for 15 years and is run by Chris
Freeman who is also the majority shareholder. The company is exempt from
statutory audit but Chris has appointed auditors in respect of the year ended
31st March 2019 because he needs audited accounts before meeting with his
bank to discuss options for funding his growth.
Chris employs two full-time administrators and has three full-time and two part-
time IT engineers working with him. Chris is very involved in the service side of
the business, far more than the administrative side. The company is run from a
small office bought in 2007 for £300,000 which is still its value in the financial
statements. A similar property nearby sold recently for £185,000.
Chris is responsible for following up on all enquiries and quoting for work. He
visits all potential clients and offers them on the spot quotations. The quotes
are recorded in his diary and passed on verbally to the office. If the quote is
accepted then Chris either takes the job himself or allocates it to one of the
other engineers. All engineers must keep an online diary detailing their visits.
Once the work is complete a work summary is prepared by the engineer, signed
by the customer and then passed to the office administrators who will raise an
invoice. No credit checks are carried out on new customers and although the
invoices all state payment is to be made within 30 days, there is no credit control
carried out.
During the company audit in respect of the year ended 31st March 2019 the
audit junior found four work summaries for work carried out but had not been
invoiced. The estimated invoice value is £35,000. In addition the audit work
discovered that of the £150,000 trade receivables owed to the company at the
year-end, 40% had been outstanding for more than 30 days and half of these
were more than 90 days overdue.
Required:
a) Identify the internal control weaknesses in the sales system at Lawsons Ltd
and the subsequent risks to sales and trade receivables as a result of these
weaknesses. Make recommendations to rectify the weaknesses identified.
(15 marks)
b) What risks are associated with the valuation of non-current assets and what
audit work should an auditor take in response to these risks?
(10 marks)
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`2. Madestone Ltd is a company based in the South of England. The company
manufactures and sells agricultural machinery. The company has been trading for
50 years; the majority shareholder is the original founder of the company, Max
Madestone. The remaining shareholders are all family members. Max Madestone
is no longer involved in the day-to-day running of the company. His nephew
Samuel Madestone is the managing director. Max’s daughter, Daisy, is the finance
director (FD). Daisy is a qualified chartered accountant and has been FD of the
company for almost 10 years.
Madestone Ltd prepares its financial statements each year to 31st December and
has been subject to an audit for the past 20 years. During the year ended 31 st
December 2018 the company changed its auditor to Treby and Sons, a local six-
partner firm with experience in the farming industry.
Dawn Harrow is the audit partner for the audit of Madestone Ltd and from her
meetings with the directors of Madestone Ltd she has learnt:
1) The most active overseas market is the US and Canada which has continued
to see growth during the year ended 31st December 2018 with a 6% increase
in sales compared to the previous year. The European market in contrast has
struggled during the year, resulting in a 15% fall in sales compared to the
previous year. The UK sales market has seen a 2% reduction in sales.
2) Concerns over the uncertainties around the European market have led the
company to seek to expand in other parts of the world such as Mexico and
Latin America. The directors are aware that there are some large competitors
already active in these parts of the world but think there is market share to
exploit. Daisy and Samuel have carried out extensive research on the areas
and put together a detailed business plan. They have agreed to meet with the
bank once the current audit is signed off to seek funding. Treby and Sons have
provided support to Madestone Ltd in preparing their business plan although
Dawn Harrow has not been involved.
3) During the year ended 31st December 2018 the company signed a significant
contract with a customer in Canada to manufacture and supply 100 new
agricultural machines over a 5-year period.
4) Madestone has warehouses in the UK, in the USA and in Germany.
Manufacturing takes place exclusively in the UK and the factory will shut down
completely over the period from 24th December to 2nd January.
5) Madestone Ltd owns the factory in the UK but leases all the warehouses.
Required:
a) Consider all the information above and prepare a memo detailing the potential
audit risks that Dawn Harrow should consider in planning the audit of
Madestone Ltd for the year ended 31st December 2018. You should explain
why the issue may pose an audit risk and the additional information required or
action to be taken in response to the risk. (15 marks)
b) What factors should the auditors take into account when setting the materiality
level? (10 marks)
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3. You are the partner in charge of five clients which all have March 31 year-
ends. Each of the audits has now been completed and you are currently
reviewing the files of audit work and need to decide on the appropriate audit
opinion in each case.
Client A: suffered a serious decline in sales after alarm in the media
about the safety of its products. It required extra short-term funding from
the bank to pay creditors. Sales continued to fall after the year-end.
There is no possibility of shareholders contributing more capital. The
financial statements have been drawn up on the going concern basis.
The directors refuse to disclose anything about the liquidity crisis.
Client B: a computer malfunction resulted in the loss of some of its
accounting records relating to one of its branches. There is no back-up
or other data-recovery method available. The area involved is
considered material but not fundamental to the financial statements.
Client C: the audit team discovered a number of minor discrepancies
which in total produce an understatement of 0.5% of net income. The
draft financial statements have been sent to the printers and the chief
financial officer refuses to adjust the figures.
Client D: your firm were appointed during the year after the previous
audit firm resigned suddenly. It is not possible within the budget to audit
the brought forward figures from the previous year.
Client E: is in the process of restructuring. It needs additional loans and
is currently seeking out potential lenders. The directors consider that a
lender will be found and have drawn up the financial statements on the
going concern basis; they have made a full disclosure in the notes to the
financial statements with which you cannot find fault.
Required:
a) For each client, indicate which type of audit opinion should be given and
explain your reasoning.
(15 marks)
b) In addition to the opinion paragraph, what other information can
readers expect to see in the auditors’ report on financial statements?
(10 marks)
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4. You have been engaged by a firm of registered auditors, KPDE, to advise on
a number of their audit clients whose case files have been selected for
investigation by the audit regulatory authorities.
Client O: is a large listed company that engaged specialists from KPDE to
devise a valuation for intangible assets. The monetary figure that the
KPDE team calculated was included in the financial statements that the
KPDE audit team audited.
Client P: was brought to the stock market in an initial public offering in the last
12 months. As a private company, Client P was seen to be a rising
star much talked about in the offices of KPDE. A number of KPDE
staff, both audit and other departments, subscribed for and received
Client P shares when the company went public. KPDE audited Client
P’s financial statements before and after public listing.
Client Q: dismissed its chief financial officer for misconduct just before its
year-end. KPDE seconded a senior staff member and two juniors to
help Client Q with its year-end financial statement preparation. KPDE
are now planning the audit of those statements.
Client R: Patrice Ho had been the partner in charge of Client R’s audit. She
had become disappointed with KPDE’s management style and looked
for a career change. She recently resigned from KPDE and took up
the position of Client R’s Chief Finance Officer.
Client S: the KPDE audit partner has had serious disagreements with the
management of Client S over their selection of accounting policies
which she regards as optimistic. She has been told bluntly that if she
does not agree with the management of Client S, they will find another
audit firm to conduct the audit.
Required:
a) For each of the above client situations, explain what ethical issue(s)
are at stake and what KPDE might have done to reduce the threat to
their audit independence.
(15 marks)
b) What can audit firms do to try to ensure that audit staff understand the
importance of audit independence?
(10 marks)
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SECTION B
Answer ONE question and NO MORE THAN ONE further question from this section.
5. Despite the increase in audit regulation over the past 20 years, audit scandals
continue. Discuss possible reasons for this phenomenon and what further
action might be taken to reduce the risk of future scandals.
6. The dominance of the Big 4 accounting firms and the lack of competition in the
audit market is perceived by many as a barrier to improving audit quality. To
what extent do you believe that this is true, and why?
7. Explain to a non-accountant how the audit of financial statements is worth the

cost of the audit fee that for a large client can often amount to very significant
sums of money.
8. Describe and critically evaluate how the legal duty of care owed by auditors to
third parties has changed over the years.
END OF PAPER
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Examiners’ commentaries 2019

AC3093 Auditing and assurance
Important note
This commentary reflects the examination and assessment arrangements

for this course in the academic year 2018–19. The format and structure of
the examination may change in future years, and any such changes will
be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential

reading references
Unless otherwise stated, all cross-references will be to the latest version
of the subject guide (2016). You should always attempt to use the most
recent edition of any Essential reading textbook, even if the commentary
and/or online reading list and/or subject guide refers to an earlier
edition. If different editions of Essential reading are listed, please check
the VLE for reading supplements – if none are available, please use the
contents list and index of the new edition to find the relevant section.
General remarks
Learning outcomes
At the end of the course, and having completed the Essential reading and
activities, candidates should be able to:
• explain why external audits and other types of assurance services are
conducted
• discuss the duties of auditors and other assurance providers and how
these have changed over time
• explain the meaning of concepts that are fundamental to auditing and
assurance services, such as ‘independence’, ‘audit evidence’, ‘risk’ and
‘materiality’
• describe, in general terms, the processes involved in auditing and other
assurance services
• distinguish between compliance and substantive testing and describe
various audit tests
• discuss the form, content and importance of the reports provided at the
end of the audit or assurance service
• discuss the issue of legal liability arising from audits and other assurance
services
• discuss current developments in auditing and assurance services.
1
General comments on the 2018-2019 examination

Once again, this year’s examination was attempted by a large number of
candidates, many of whom showed a good working knowledge of many
aspects of auditing and assurance services. The vast majority of candidates
made a real attempt to produce full answers to four questions. It was
noticeable that the quality of answers provided by the better prepared
candidates was very high indeed. This factor no doubt accounts for the
doubling of the rate of those achieving first class marks compared with the
previous year.
At the other end of the spectrum, there were a number of candidates
who appeared not to have read sufficiently widely or deeply to be able to
understand the issues in the case studies or to provide coherent answers to
the essay questions. This would explain why there was also a slight increase in
the proportion of candidates who failed to get above 40%.
If there were common weaknesses, it was that many candidates tended to
provide only very short answers to the part (b) section of the case studies, and
produced essays in Section B that were either too short or purely descriptive
or both. Of particular concern was a lack of awareness of what goes into the
typical auditors’ report. There is no obvious reason for this blind-spot; large
companies present their annual reports including the auditors’ report online
so examples of auditors’ reports are easy to find.
Over the years the standard of the presentation of candidates’ answers has
steadily improved, although there remains a minority who do not write in
sentences and do not break up their answers into paragraphs. Scripts written
as a large single block of text look unprofessional and disorganised and, more
importantly, are very difficult to mark. Candidates must bear in mind that the
examiners are looking for particular points. If these are hard to spot, there is a
risk that you will lose the chance to gain credit. A small number of candidates
produced essays that were no more than a list of bullet points, for which at
best they would have obtained a bare pass mark. In addition, of course, you
should remember that this is an academic examination about a professional
service. Effective communication is a vital skill that both examiners and
employers prize. Finally, may we remind all candidates not to write in the
margins of the exam booklet and to accurately complete the front cover of the
exam booklet.
What are the examiners looking for?

Presentation may seem to you to be a small point of detail but it does make
a very significant difference to the marking process. If you can lay out your
answers in a neat and methodical fashion, you stand more chance of making
a good impression on the examiners and, therefore, of securing a good mark.
This is not to say that good presentation is a substitute for content. A good
answer must contain the relevant technical points but should also be easy to
read and coherently argued.
Presentation involves breaking answers into paragraphs – a separate
paragraph for each point and starting a new question on a new page. Some
candidates feel duty-bound to include an introduction but where this simply
repeats or paraphrases the question itself, it is a waste of time. Introductions
should be short and should do no more than set the scene on which you
immediately build the technical content of the answer. Similarly with
conclusions: if you feel you must end with a conclusion, make sure that it adds
something to your argument. Simply repeating what you have said previously
cannot gain you additional marks.
2
It is worth repeating that there are several general style points to bear in mind.
A number of candidates included diagrams in answers to essay questions.
Such representations are designed to help communicate complex ideas to
people approaching the problem for the first time. You may assume that the
examiners marking your papers are already experts in the field – your diagram
will not help them assess whether you really understand the problem. So
avoid reproducing diagrams.
Similarly, simply reproducing the audit risk model as a formula, complete with
mathematical proof, will not add anything to your answer. If the question
asks for factors that impact on the auditors’ assessment of inherent risk,
then look at the case study and consider which aspects of the company, its
industry or its products might be more likely to lead to misstatements. If the
question refers to control risk, then think about possible weaknesses in control
procedures that might allow the financial statements to be misstated.
The examiners always encourage candidates to think of ways of answering
questions more efficiently and one way of dealing with some (but not all)
Section A case study questions is to adopt a columnar approach. The problem
is that some candidates do not take the time to think whether the columnar
approach is appropriate but use it mechanistically in every case – this clearly
helps neither the candidate nor the examiners.
One common failing of a number of candidates was an apparent inability to
attempt part (b) of one or more of the case studies they had selected. Given
that the marks available for part (a) are limited to 15, failure to write anything
at all for the related part (b) seriously limits the candidate’s chances of getting
more than a lower second classification at best. The lesson to draw from this is
that you need to be careful in choosing the case study (Section A) questions.
Make sure that you can answer or at least attempt both parts and, having
made your selection, make sure you write something in answer to both
parts. The two parts of the case study questions are related either directly or
indirectly so it should be very unlikely that candidates will be able to answer
only one part. On the plus side, fewer candidates this year than in the past
were guilty of this.
In Section B, the main reason for low marks was that candidates either wrote
too little or failed to focus on answering the question that was set. Too many
candidates still believe that a good answer consists of writing three or four
sides of material based on what has been memorised from lecture notes,
textbooks or the subject guide. What they fail to realise is that the examiners
want to see both knowledge of the technical subject and the ability to address
the particular question set.
A final few points on general writing style: as time is limited you should not
waste precious seconds with unnecessary words (for example, ‘last but not
least’ remains a common start to a final paragraph and sometimes is used
more than once in the final few paragraphs, suggesting that the candidate
was not clear as to which was the last point). You should be precise wherever
possible; for example, if asked to recommend audit procedures, you should
say ‘the auditor should attend the inventory count’ rather than ‘the auditor
might want to think about attending. . . ’. Wherever possible try to use
technical terms; for example, it is much better to say ‘segregation of duties’
than ‘dividing up the work’. The word ‘ensure’ was often used inappropriately
– for example, ‘the auditors must ensure that every item of stock is counted’.
A moment’s thought should remind you that auditors are not responsible for
counting stock and use a sample basis for their tests on the stock figure, so the
auditor cannot possibly ‘ensure’ that every item is counted. Auditors should
ensure that they have assessed the risks and reviewed the procedures and
3
systems put in place to deal with those risks but they cannot ensure that other
people have carried out their duties properly.
Lastly, to rectify a common and annual misconception: a walk-through test
is not a test of controls designed to provide compliance evidence; a walk-
through test is performed on a sample of one. A transaction is followed
through the system from start to finish so that the auditors can reassure
themselves that they understand the system. (See Porter, B., J. Simon and D.
Hatherly Principles of external auditing (Chichester: John Wiley & Sons, 2014)
4th edition [ISBN 9780470974452] p.406.)
Writing quality
Generally the quality of the writing, including spelling and grammar, was
quite high. However, some words were so often misused that it is worth
pointing them out for future reference. Many candidates wrote of the auditor
‘unqualifying’ the auditor’s report if there was nothing to which attention
should be drawn – auditors do not ‘unqualify’ their reports, rather they issue
unqualified audit reports (although a more modern expression is ‘unmodified
reports’). Also, the examiners were told that auditors qualify the audit opinion
on the grounds of ‘expect for’ limitation of the scope of the audit – the correct
term is ‘except for’. Equally often, candidates wrote of the auditor having the
right to ‘assess’ the company’s books and records whereas the correct term is
‘access’.
Too many colloquial expressions appeared in the essays. To use our earlier
example, ‘last but not least’ was often used to conclude a list of points. This
expression adds nothing, takes more time to write than just ‘last’ and looks
unprofessional. Similarly, using ‘next’ to start every paragraph becomes
tedious and is unimaginative. The expression ‘the auditor might want to
consider’ (for example, circulating suppliers), reappeared this year. This is far
too woolly an expression; if the candidate thought that auditors should or
could circulate suppliers, then one of those words should have been used.
‘Might want to consider’ is just too tame.
Examination revision strategy
Many candidates are disappointed to find that their examination

performance is poorer than they expected. This can be due to
a number of different reasons and the Examiners’ commentaries
suggest ways of addressing common problems and improving your
performance. We want to draw your attention to one particular failing
– ‘question spotting’, that is, confining your examination preparation
to a few question topics which have come up in past papers for the
course. This can have very serious consequences.
We recognise that candidates may not cover all topics in the syllabus
in the same depth, but you need to be aware that examiners are free
to set questions on any aspect of the syllabus. This means that you
need to study enough of the syllabus to enable you to answer the
required number of examination questions.
The syllabus can be found in the Course information sheet in the
section of the VLE dedicated to this course. You should read the
syllabus very carefully and ensure that you cover sufficient material in
preparation for the examination.
4
Examiners will vary the topics and questions from year to year and
may well set questions that have not appeared in past papers – every
topic on the syllabus is a legitimate examination target. So although
past papers can be helpful in revision, you cannot assume that topics
or specific questions that have come up in past examinations will
occur again.
If you rely on a question spotting strategy, it is likely you will find
yourself in difficulties when you sit the examination paper. We
strongly advise you not to adopt this strategy.
5

AC3093 Auditing and assurance – Zone A
Important note

reading references
Comments on specific questions

Section A, ONE from Section B and ONE further question from either section.
All questions carry equal marks.
Section A
Answer AT LEAST TWO questions, and NO MORE THAN THREE questions
from this section.
Question 1
Fresh PLC is a company specialising in the production of dairy products. The
company has been listed on the UK stock exchange for the past six years
and during that time has experienced significant growth and success. The
company has been audited since its listing by audit firm Gilks LLP who have
always issued unqualified audit reports. The latest audit report in respect of
the year ended 31st December 2018 was signed on 19th March 2019.
On 9th April 2019 the board of Fresh PLC issued a profit warning following
suggestions of accounting irregularities in previous years’ financial
statements. This warning caused an immediate drop in the company’s
share price. A week later it was announced that the board had suspended
the Finance Director (FD) and had accused him of fraud. It was said that
he had overstated revenue by raising fictitious invoices for sales made to
Boulangerie Victor, a ‘shell’ company that he controlled and which had no
assets of any kind. He had allegedly overstated accounts receivable by
including the debt owed by Boulangerie Victor. The former FD had also
caused the inventory figure to be grossly overstated by the double-counting
of some quantities and the inclusion of other items at selling price in excess
of cost. Furthermore, a loan from a bank which had provided funds to Fresh
PLC had been concealed and omitted from the financial statements. Finally,
6
it was claimed that the FD had used company assets for his personal benefit
such as using a company jet for his family holiday and arranging for the
company to buy office decorations from his personal collection of antique
vases, the purchases being made at grossly inflated prices.
The media spotlight focused on Gilks LLP and it was asked ‘how was it
possible that unqualified audit reports had been issued and the fraud not
uncovered through the audit process?’. Both the shareholders of Fresh
PLC and its creditors including the bank whose loan was omitted from
the financial statements are considering a case of negligence against the
auditors.
Required:
a. Discuss to what extent the shareholders and the creditors have a case
against the auditors for negligence. (You should consider arguments
against and in support of the auditors.) (15 marks)
b. Explain the responsibilities of auditors in relation to the detection of
fraud in according to ISA240. (10 marks)
Reading for this question
• Porter, Simon & Hatherly (2014): Chapters 6 and 15.
• Gray, Manson & Crawford (2015): Chapters 17 and 20.
• Subject guide: Chapter 8.
Approaching the question
Few candidates attempted this question as has been the case in the past
when the topic of legal liability comes up. This is understandable since there
are many cases potentially to draw upon. The well-prepared student however
realises that this is a subject of vital importance to the profession and also
knows that the examiners will not be expecting students to reproduce masses
of detail from the case law. Candidates who are less confident are probably
best advised to avoid this topic and the under-prepared candidate tended to
be able to produce answers which were short on specific cases and to show
a lack of understanding of the legal principles. For part (a), good answer
could have been framed around the various elements which have been held
relevant to deciding liability viz:
• Whether a duty of care exists between the auditor and the claimant.
• Whether there is proximity between the parties.
• Whether there was a breach of this duty of care which caused harm or
damage.
• Whether the damage was foreseeable.
• Whether it is fair, just and reasonable for the court to impose a liability on
the auditors.
In relation to the shareholders of course there is no need for the plaintiffs to
establish a duty of care since there is a contract between the company and the
auditors. Nevertheless successfully to sue the auditors the shareholders would
have to demonstrate that the auditors had not been careful.
In answer to part (b), a surprisingly small proportion of candidates produced
coherent arguments on the basic question of auditors’ responsibility for
fraud detection and prevention. This is a little concerning since the question
of auditors and fraud has been at the heart of public and professional
debate for many years. The fact that a specific ISA was referenced in the
question may have intimidated those who felt that they had thoroughly
to know the international standard before they could attempt an answer.
7
It is worth remembering that the examiners do not expect candidates to

have memorised the vast quantity of audit regulations. What we sought in
answers to this part of the question was a general discussion of the respective
responsibilities of management and auditors. Such an explanation has long
been a routine part of communications between auditors and shareholders,
either in the auditors’ report itself or elsewhere in the annual report.
Question 2
Pat and John Dosh are brothers who own and run a very popular stall selling
fruit and vegetables in a busy city-centre location. They operate from 7.00am
until 9.00pm Monday-Friday. The customer base has grown dramatically
in the last five years with the opening of a number of large office blocks
nearby. The Dosh brothers have also begun to be more adventurous by
expanding the range of exotic, and more profitable, fruits and vegetables to
cater for a more diverse ethnic population.
The business model is very simple. They buy from wholesalers and other
outlets and sell to individual customers. All purchases and all sales are
for cash. Rarely does a supplier issue an invoice. The brothers can see the
quantity and quality of what they are buying. They do not see the need for
unnecessary paperwork.
They employ only family members whom they feel they can trust completely
to help on the stall. The working day is divided into two shifts of 7 hours.
There is always one brother and one family member on the stall. The
employees are paid in cash at the end of the week. The brothers pay in cash
for all other expenses such as rent for the stall and fuel and repairs to the
van.
Every Friday evening the brothers sell off at heavily discounted prices any
remaining produce which will not be fit for consumption if left over the
weekend. What is left unsold is either shared by the brothers for their own
consumption or put in the waste bin.
The brothers divide the end-of-week cash balance between themselves after
allowing for their estimate of the cost of new inventory on the following
Monday. The only accounting record they keep is of the weekend cash
balance before division and their estimate of the amount they need to keep
in order to buy new inventory.
Their accounting and tax affairs have been handled by an old school friend,
an unqualified accountant. Recently the tax authorities announced that they
were planning to investigate a number of his clients, including the Dosh
brothers. The accountant then fled overseas to an unknown location. The
brothers now come to your firm of qualified accountants asking for you to
audit their accounts for the current year and if possible the previous year
too.
Required:
a. Outline the concerns you would have in accepting this engagement and
explain to the Dosh brothers the difficulties of conducting an audit of
their business. (15 marks)
b. Explain what other assurance services might be appropriate for a small
business and the level of assurance provided by each. (10 marks)
• Porter, Simon & Hatherly (2014): Chapters 8 and 9, and Chapter 17 for part
(b).
• Gray, Manson & Crawford (2015): Chapters 5 and 6, and Chapter 15 for part
(b).
8

This question was attempted by a large number of candidates. For part (a)
many made light work of the material, being able to identify most if not all of
the problems in a small, mainly cash-based business. Equally well done was
the explanation of the difficulties for auditors to obtain sufficient appropriate
evidence when the systems of control are informal and undocumented and
there is a lack of a proper audit trail.
Part (b) answers, however, showed a general lack of awareness of any of the
other assurance services possible such as review, agreed-upon procedures
or compilation. This is a concern given that ‘Assurance’ makes up half the
title of the module. Candidates need to refer to the relevant chapters noted
in the reading below. The examiners were looking for discussions of limited
assurance engagements and other services that practitioners can offer to
smaller clients even if those result in no assurance being expressed such as
in a compilation engagement where the practitioner produces the financial
statements based on the information made available by the client.
Question 3
You are the partner in charge of five clients which all have March 31 year-
reviewing the files of audit work and need to decide on the appropriate
audit opinion in each case.
Client A: suffered a serious decline in sales after alarm in the media about
the safety of its products. It required extra short-term funding from the
bank to pay creditors. Sales continued to fall after the year-end. There
is no possibility of shareholders contributing more capital. The financial
statements have been drawn up on the going concern basis. The directors
refuse to disclose anything about the liquidity crisis.
accounting records relating to one of its branches. There is no back-up or
other data-recovery method available. The area involved is considered
material but not fundamental to the financial statements.
Client C: the audit team discovered a number of minor discrepancies that
together produce an understatement of 0.5% of net income. The draft
financial statements have been sent to the printers and the chief financial
officer refuses to adjust the figures.
Client D: your firm were appointed during the year after the previous audit
firm resigned suddenly. It is not possible within the budget to audit the
brought forward figures from the previous year.
currently seeking out potential lenders. The directors consider that a lender
will be found and have drawn up the financial statements on the going
concern basis; they have made a full disclosure in the notes to the financial
statements with which you cannot find fault.
Required:
a. For each client, indicate which type of audit opinion should be given and
explain your reasoning. (15 marks)
b. In addition to the opinion paragraph, what other information can readers
expect to see in the auditors’ report on financial statements? (10 marks)
• Porter, Simon & Hatherly (2014): Chapter 14.
9
• Gray, Manson & Crawford (2015): Chapter 16.

For part (a) many candidates were generally good at identifying the most
appropriate outcome for three of the five clients. As in the past, there was a
good deal of confusion about the terms ‘modify’/’qualify’ with a number of
candidates saying that if the auditors had doubts or disagreements about the
financial statements they should issue an unmodified/unqualified opinion.
There was also a tendency to opt for an Emphasis of Matter (EOM) paragraph
when the candidate was in doubt. This is a little surprising given the very
specific purpose for which the EOM is appropriate. There were also large
numbers of candidates who were prepared to qualify/modify the opinion even
though they correctly identified that in one case the issue was immaterial.
Part (b) appeared to be particularly poorly done. This is a little disappointing
since the one thing that outsiders can observe of the audit process is the audit
report and with so many auditors’ reports freely available online there is no
excuse for candidates not to have a good knowledge of the sort of matters
revealed in the typical auditors’ report today. A number of matters could have
been discussed such as the relatively recently introduced Key Audit Matters
and an indication of the measure of materiality which the auditors applied in
doing their work. Other references could have been made to the accounting
framework and the auditing framework applied. A discussion of directors’
responsibilities and auditors’ responsibilities would also have been acceptable
as would coverage of the other matters on which auditors have to form an
opinion. Weaker answers tended to mention only one or two of these issues
and in very little depth. The better prepared candidates would probably have
struggled to limit their answer to the 18 minutes which this 10 mark question
warranted.
Question 4
Madestone Ltd is a company based in the South of England. The company
manufactures and sells agricultural machinery. The company has been
trading for 50 years; the majority shareholder is the original founder of
the company, Max Madestone. The remaining shareholders are all family
members. Max Madestone is no longer involved in the day-to-day running
of the company. His nephew Samuel Madestone is the managing director.
Max’s daughter, Daisy, is the finance director (FD). Daisy is a qualified
chartered accountant and has been FD of the company for almost 10 years.
Madestone Ltd prepares its financial statements each year to 31st December
and has been subject to an audit for the past 20 years. During the year ended
31st December 2018 the company changed its auditor to Treby and Sons, a
local six-partner firm with experience in the farming industry.
Dawn Harrow is the audit partner for the audit of Madestone Ltd and from
her meetings with the directors of Madestone Ltd she has learnt:
1. The most active overseas market is the US and Canada which has
continued to see growth during the year ended 31st December 2018
with a 6% increase in sales compared to the previous year. The European
market in contrast has struggled during the year, resulting in a 15% fall in
sales compared to the previous year. The UK sales market has seen a 2%
reduction in sales.
2. Concerns over the uncertainties around the European market have led
the company to seek to expand in other parts of the world such as Mexico
and Latin America. The directors are aware that there are some large
10
competitors already active in these parts of the world but think there is
market share to exploit. Daisy and Samuel have carried out extensive
research on the areas and put together a detailed business plan. They
have agreed to meet with the bank once the current audit is signed off
to seek funding. Treby and Sons have provided support to Madestone
Ltd in preparing their business plan although Dawn Harrow has not been
involved.
3. During the year ended 31st December 2018 the company signed a
significant contract with a customer in Canada to manufacture and supply
100 new agricultural machines over a 5-year period.
4. Madestone has warehouses in the UK, in the USA and in Germany.
Manufacturing takes place exclusively in the UK and the factory will shut
down completely over the period from 24th December to 2nd January.
5. Madestone Ltd owns the factory in the UK but leases all the warehouses.
Required:
a. Consider all the information above and prepare a memo detailing the
potential audit risks that Dawn Harrow should consider in planning the
audit of Madestone Ltd for the year ended 31st December 2018. You
should explain why the issue may pose an audit risk and the additional
information required or action to be taken in response to the risk.
(15 marks)
b. What factors should the auditors take into account when setting the
materiality level? (10 marks)
• Subject guide, Chapter 7.
Part (a) of this question was reasonably well attempted in terms of identifying
the problems which the factors in this case would pose for auditors. If there
was a weakness it tended to be a lack of suggestions for additional work or
information which auditors could call for.
Part (b) was surprisingly poorly done in most cases with few candidates able to
suggest what factors would influence the materiality decision. Good answers
naturally began with reference to quantitative measures such as a percentage of
profit before tax. In practice auditors also consider the effect of an item on the
trend of figures over a period of time or its effect on key performance indicators
or ratios. Other factors include past experience, the amount of judgement
involved in calculating a particular figure and the nature of the relevant item.
Section B
Answer ONE question and NO MORE THAN ONE further question from this
section.
Question 5
Discuss the role technology has to play in the future of the audit process.
11

Markers were prepared to take whatever students could come up with and
quite a few made reference to advances in artificial intelligence, analytics
and big data. Most, however, wrote on CAATs and IT risks. Generally, the
best advice for candidate faced with a highly technical question is to opt for
another more general question unless you are really confident about your
knowledge of the subject.
Question 6
Critically examine what is meant by the audit expectations gap and suggest
ways of narrowing the gap.
• Subject guide :Chapter 2.
This should have been a gift for the able candidate but few really made as
much of this as they should have. Some merely defined the gap without
explaining what major aspects are involved, for example, fraud detection and
going concern. Many candidates failed totally to address the second part of
the question so naturally reduced their potential mark.
Question 7
Competence is a vital quality for auditors to possess. What practical
steps can be taken to give auditors the necessary level of professional
competence?
Again the legal aspects of auditors’ duties were avoided by most candidates
and those few who felt themselves able to tackle this question were mostly
unable to mention more than one or two of the many cases which have
helped shape the extent of professional negligence involving auditors. While,
as has been said earlier, no one could expect candidates to remember every
one of the cases, it would not be unreasonable to anticipate that candidates
would have mentioned the cases of Ultramares, Candler, Hedley Byrne, Jeb
Fasteners, Caparo and Bannerman and to have been able to discuss the
relevance of each in some coherent way.
Question 8
What has been done and what further might be done to enhance auditor
independence?
12

Most candidates who answered this question went on at length about the
various threats and safeguards contained in the ethical standards. A few
referred to audit tendering and audit firm rotation. Generally, however, little
attempt was made to consider what else has been done e.g. Companies Act
2006 provisions and what else might be done e.g. split the Big 4 into audit and
non-audit, joint audits and even appointment of auditors by government or
other regulatory body. The topic of auditor independence has made headline
news since the global financial crisis. The well-read student would have
supplemented his reading of the textbooks with a perusal of the professional
press on-line and would thus have sufficient knowledge to have made short
work of this question.
13

AC3093 Auditing and assurance – Zone B
Important note

reading references
Comments on specific questions

Section A, ONE from Section B and ONE further question from either section.
All questions carry equal marks.
Section A
Question 1
Lawsons Ltd is an IT maintenance company located in Wales. The company
has contracts with a number of schools and colleges as well as local
businesses. The company has been trading for 15 years and is run by Chris
Freeman who is also the majority shareholder. The company is exempt from
statutory audit but Chris has appointed auditors in respect of the year ended
31st March 2019 because he needs audited accounts before meeting with his
bank to discuss options for funding his growth.
Chris employs two full-time administrators and has three full-time and two
part-time IT engineers working with him. Chris is very involved in the service
side of the business, far more than the administrative side. The company is
run from a small office bought in 2007 for £300,000 which is still its value
in the financial statements. A similar property nearby sold recently for
£185,000.
Chris is responsible for following up on all enquiries and quoting for work.
He visits all potential clients and offers them on the spot quotations. The
quotes are recorded in his diary and passed on verbally to the office. If
the quote is accepted then Chris either takes the job himself or allocates
it to one of the other engineers. All engineers must keep an online diary
detailing their visits. Once the work is complete a work summary is prepared
by the engineer, signed by the customer and then passed to the office
administrators who will raise an invoice. No credit checks are carried out on
14
new customers and although the invoices all state payment is to be made
within 30 days, there is no credit control carried out.
During the company audit in respect of the year ended 31st March 2019
the audit junior found four work summaries for work carried out but had
not been invoiced. The estimated invoice value is £35,000. In addition the
audit work discovered that of the £150,000 trade receivables owed to the
company at the year-end, 40% had been outstanding for more than 30 days
and half of these were more than 90 days overdue.
Required:
a. Identify the internal control weaknesses in the sales system at Lawsons
Ltd and the subsequent risks to sales and trade receivables as a result
of these weaknesses. Make recommendations to rectify the weaknesses
identified. (15 marks)
b. What risks are associated with the valuation of non-current assets and
what audit work should an auditor take in response to these risks?
(10 marks)
Part (a) of this question was reasonably well attempted in terms of identifying
the problems. A common weakness shared by a number of candidates was the
tendency to stray beyond sales and receivables and to discuss the problems
of non-current assets. This demonstrates that it is absolutely vital to read both
part (a) and (b) BEFORE attempting part (a).
Answers to part (b) were surprisingly thin given the scope for discussing
the management assertion and typical audit tests such as review of local
conditions and assessment of the adequacy of the depreciation policy.
Question 2
Madestone Ltd is a company based in the South of England. The company
manufactures and sells agricultural machinery. The company has been
trading for 50 years; the majority shareholder is the original founder of
the company, Max Madestone. The remaining shareholders are all family
members. Max Madestone is no longer involved in the day-to-day running
of the company. His nephew Samuel Madestone is the managing director.
Max’s daughter, Daisy, is the finance director (FD). Daisy is a qualified
chartered accountant and has been FD of the company for almost 10 years.
Madestone Ltd prepares its financial statements each year to 31st December
and has been subject to an audit for the past 20 years. During the year ended
31st December 2018 the company changed its auditor to Treby and Sons, a
local six-partner firm with experience in the farming industry.
Dawn Harrow is the audit partner for the audit of Madestone Ltd and from
her meetings with the directors of Madestone Ltd she has learnt:
1. The most active overseas market is the US and Canada which has
continued to see growth during the year ended 31st December 2018
with a 6% increase in sales compared to the previous year. The European
market in contrast has struggled during the year, resulting in a 15% fall in
sales compared to the previous year. The UK sales market has seen a 2%
reduction in sales.
15
2. Concerns over the uncertainties around the European market have led
the company to seek to expand in other parts of the world such as Mexico
and Latin America. The directors are aware that there are some large
competitors already active in these parts of the world but think there is
market share to exploit. Daisy and Samuel have carried out extensive
research on the areas and put together a detailed business plan. They
have agreed to meet with the bank once the current audit is signed off
to seek funding. Treby and Sons have provided support to Madestone
Ltd in preparing their business plan although Dawn Harrow has not been
involved.
3. During the year ended 31st December 2018 the company signed a
significant contract with a customer in Canada to manufacture and
supply 100 new agricultural machines over a 5-year period.
4. Madestone has warehouses in the UK, in the USA and in Germany.
Manufacturing takes place exclusively in the UK and the factory will shut
down completely over the period from 24th December to 2nd January.
5. Madestone Ltd owns the factory in the UK but leases all the warehouses.
Required:
a. Consider all the information above and prepare a memo detailing the
potential audit risks that Dawn Harrow should consider in planning the
audit of Madestone Ltd for the year ended 31st December 2018. You
should explain why the issue may pose an audit risk and the additional
information required or action to be taken in response to the risk.
(15 marks)
b. What factors should the auditors take into account when setting the
materiality level? (10 marks)
Part (a) was reasonably well attempted in terms of identifying the problems
which the factors in this case would pose for auditors. If there was a weakness
it tended to be a lack of suggestions for additional work or information which
auditors could call for.
Part (b) was surprisingly poorly done in most cases with few answers able to
suggest what factors would influence the materiality decision. Good answers
naturally began with reference to quantitative measures such as a percentage
of profit before tax. In practice auditors also consider the effect of an item
on the trend of figures over a period of time or its effect on key performance
indicators or ratios. Other factors include past experience, the amount of
judgement involved in calculating a particular figure and the nature of the
relevant item.
Question 3
You are the partner in charge of five clients which all have March 31 year-
reviewing the files of audit work and need to decide on the appropriate
audit opinion in each case.
Client A: suffered a serious decline in sales after alarm in the media about
the safety of its products. It required extra short-term funding from the
16
bank to pay creditors. Sales continued to fall after the year-end. There
is no possibility of shareholders contributing more capital. The financial
statements have been drawn up on the going concern basis. The directors
refuse to disclose anything about the liquidity crisis.
accounting records relating to one of its branches. There is no back-up or
other data-recovery method available. The area involved is considered
material but not fundamental to the financial statements.
Client C: the audit team discovered a number of minor discrepancies
which in total produce an understatement of 0.5% of net income. The draft
financial statements have been sent to the printers and the chief financial
officer refuses to adjust the figures.
Client D: your firm were appointed during the year after the previous audit
firm resigned suddenly. It is not possible within the budget to audit the
brought forward figures from the previous year.
currently seeking out potential lenders. The directors consider that a lender
will be found and have drawn up the financial statements on the going
concern basis; they have made a full disclosure in the notes to the financial
statements with which you cannot find fault.
Required:
a. For each client, indicate which type of audit opinion should be given and
explain your reasoning. (15 marks)
b. In addition to the opinion paragraph, what other information can readers
expect to see in the auditors’ report on financial statements? (10 marks)
For part (a) many candidates were generally good at identifying the most
appropriate outcome for three of the five clients. As in the past, there was a
good deal of confusion about the terms ‘modify’/’qualify’ with a number of
answers saying that if the auditors had doubts or disagreements about the
financial statements they should issue an unmodified/unqualified opinion.
There was also a tendency to opt for an Emphasis of Matter (EOM) paragraph
when the candidate was in doubt. This is a little surprising given the very
specific purpose for which the EOM is appropriate. There were also large
numbers of candidates who were prepared to qualify/modify the opinion even
though they correctly identified that in one case the issue was immaterial.
Part (b) appeared to be particularly poorly done. This is a little disappointing
since the one thing that outsiders can observe of the audit process is the
audit report and with so many auditors’ reports freely available online there is
no excuse for students not to have a good knowledge of the sort of matters
revealed in the typical auditors’ report today. A number of matters could have
been discussed such as the relatively recently introduced Key Audit Matters
and an indication of the measure of materiality which the auditors applied in
doing their work. Other references could have been made to the accounting
framework and the auditing framework applied. A discussion of directors’
responsibilities and auditors’ responsibilities would also have been acceptable
as would coverage of the other matters on which auditors have to form an
opinion. Weaker answers tended to mention only one or two of these issues
17
and in very little depth. The better prepared candidate would probably have
struggled to limit their answer to the 18 minutes which this 10 mark question
warranted.
Question 4
You have been engaged by a firm of registered auditors, KPDE, to advise
on a number of their audit clients whose case files have been selected for
investigation by the audit regulatory authorities.
Client O: is a large listed company that engaged specialists from KPDE to
devise a valuation for intangible assets. The monetary figure that the KPDE
team calculated was included in the financial statements that the KPDE audit
team audited.
Client P: was brought to the stock market in an initial public offering in the
last 12 months. As a private company, Client P was seen to be a rising star
much talked about in the offices of KPDE. A number of KPDE staff, both
audit and other departments, subscribed for and received Client P shares
when the company went public. KPDE audited Client P’s financial statements
before and after public listing.
Client Q: dismissed its chief financial officer for misconduct just before its
year-end. KPDE seconded a senior staff member and two juniors to help
Client Q with its year-end financial statement preparation. KPDE are now
planning the audit of those statements.
Client R: Patrice Ho had been the partner in charge of Client R’s audit. She
had become disappointed with KPDE’s management style and looked for a
career change. She recently resigned from KPDE and took up the position of
Client R’s Chief Finance Officer.
Client S: the KPDE audit partner has had serious disagreements with the
management of Client S over their selection of accounting policies which
she regards as optimistic. She has been told bluntly that if she does not
agree with the management of Client S, they will find another audit firm to
conduct the audit.
Required:
a. For each of the above client situations, explain what ethical issue(s) are at
stake and what KPDE might have done to reduce the threat to their audit
independence. (15 marks)
b. What can audit firms do to try to ensure that audit staff understand the
importance of audit independence? (10 marks)
Overall part (a) of this question was reasonably well done, although often
candidates were unable to link the particular scenario to a specific threat. In
addition, there were some frequent and odd comments about the auditors of
Client Q needing to investigate the case for unfair dismissal and the ex-auditor
of Client R being at risk of self-review.
Rather more surprising was the lack of much substance in answer to part (b)
with many answers even failing to mention the need for training.
18
Section B
Answer ONE question and NO MORE THAN ONE further question from this
section.
Question 5
Despite the increase in audit regulation over the past 20 years, audit
scandals continue. Discuss possible reasons for this phenomenon and what
further action might be taken to reduce the risk of future scandals.
• Subject guide: Chapters 2 and 8.
Sadly a number of entries attempting this question simply failed to answer
the question. This was more than just an expectations gap essay. Candidates
could have talked about the subjectivity of the audit process, the pressures on
audit partners to deliver results while keeping the client happy, independence
issues and the fact that ‘at the coal face’ much of the work is done by
inexperienced juniors.
Question 6
The dominance of the Big 4 accounting firms and the lack of competition
in the audit market is perceived by many as a barrier to improving audit
quality. To what extent do you believe that this is true, and why?
The few who attempted this question did a fair job of explaining the
dominance of the Big 4 and the difficulty of smaller firms in providing
adequate resources to handle very large clients. They also talked of the fact
that the Big 4 are often at the cutting edge of technology and more efficient
audit strategies. However, the concerns about the too big to fail phenomenon
and the apparent complacency of the Big 4 also needed to be addressed.
Question 7
Explain to a non-accountant how the audit of financial statements is worth
the cost of the audit fee that for a large client can often amount to very
significant sums of money.
A significant number of candidates attempted this question but few went
beyond the usual arguments surrounding the standard list of users of
financial statements. While this list could have formed the framework for a
substantial answer, many failed to link the users with their reliance on credible
information. The better answers got to the heart of the purpose of an audit
and the need to add assurance to important information being made available
to the market and other users of financial statements.
19
Question 8
Describe and critically evaluate how the legal duty of care owed by auditors
to third parties has changed over the years.
This was a wide-ranging question that we expected few candidates to attempt
and so it proved. Few of those who had a go at this could actually name cases
other than Ultramares and Caparo.
20

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THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALL

BSc DEGREES AND GRADUATE DIPLOMAS IN ECONOMICS, MANAGEMENT,

Auditing and Assurance

Tuesday 14 May 2019: 14:30 – 17:30

Time allowed: 3 hours

DO NOT TURN OVER UNTIL TOLD TO BEGIN

© University of London 2019

1. Fresh PLC is a company specialising in the production of dairy products. The

BSc DEGREES AND GRADUATE DIPLOMAS IN ECONOMICS, MANAGEMENT,

Auditing and Assurance

Tuesday 14 May 2019: 14:30 – 17:30

Time allowed: 3 hours

DO NOT TURN OVER UNTIL TOLD TO BEGIN

© University of London 2019

1. Lawsons Ltd is an IT maintenance company located in Wales. The company

7. Explain to a non-accountant how the audit of financial statements is worth the

Examiners’ commentaries 2019

This commentary reflects the examination and assessment arrangements

Information about the subject guide and the Essential

General comments on the 2018-2019 examination

What are the examiners looking for?

Examination revision strategy

Many candidates are disappointed to find that their examination

Examiners’ commentaries 2019

Information about the subject guide and the Essential

Comments on specific questions

It is worth remembering that the examiners do not expect candidates to

• Subject guide: Chapter 7.

• Gray, Manson & Crawford (2015): Chapter 16.

Approaching the question

Approaching the question

Examiners’ commentaries 2019

Information about the subject guide and the Essential

Comments on specific questions

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