Question 1

A. Discuss the main types of auditing according to its objectives with giving examples for
each type. Your answer for each type should include its purpose, to whom it is provided and who
is eligible to conduct it. (10 marks)

The process of examining the financial information of a business is referred to as auditing. The
main types of auditing are:

Internal Audits: the assessment of internal components of an organization which include legal
agreements, the safety of assets, procedures, etc. the act of internal auditing is conducted by
people within a corporation. After the report has been prepared, it is presented to the
management, the board of directors, or the audit committee of a corporation. Internal audit helps
to manage risk and therefore, improve the company’s operations.
For example, conducting an assessment of service pricing, user fees, and outsourcing vs in-
business problems comes under internal auditing.

External Audits: the assessment of the same components (as mentioned in the internal audit) is
conducted by a third-party firm (CPA). As the firms are independent of the business, the report is
considered more reliable. The report is presented to shareholders and stakeholders once
completed. For example, a car manufacturing company is publicly owned. Its auditing process by
a third party will be referred to as external auditing.

Forensic audit: a conflict can occur between shareholders of an organization. The financial
inspection is called a forensic audit. Probing fraud, crime, and insurance claims is part of the
process. An individual who is an expert in financial investigation can conduct forensic auditing.
Reports of forensic audits are presented as evidence in favor of/ against an entity.
For example, Company X signs an agreement with Company Y. Company Y, on the other hand,
is unable to conduct business since its license has been revoked due to late tax payments. The
CFO of Company X was aware of this but proceeded with the transaction since the CFO received
direct remuneration from Company Y. an inspection of this type of fraud comes under forensic
auditing.
Tax audit: The tax authority belonging to the government provides an audit service known as a
tax audit. The objective of this type of audit is to check whether an entity is paying its tax returns
complying with the tax laws of a country and on time or not. This service is required mostly by
large corporations.
For example, company, X has filed its tax returns but there are some complacencies in the
numbers. To gauge that, a government agency audits it. (Page and Pennings, 2022)

B. Discuss the FOUR regulatory layers of the audit profession in the UK. Your answer should
include the role of each regulator with giving examples. (10 marks)

Association of Chartered Certified Accountants (ACCA):

ACCA is responsible for conducting and monitoring qualifications exams. The members of
ACCA are subjected to regulations by the entity. Licenses are issued by ACCA to cater to
members initiating any sort of work. ACCA also monitors whether its members are conforming
to the rules, regulations, and standards. Lastly, they, inspect any sort of complaints against their
members and take any action if required. They publish an annual report regarding their
regulatory activities.
For example, ACCA issued 261 practicing certificates to its members in the year 2020. Since
that, it is also working to reduce the time taken to issue licenses, as well as streamline the
assessment process. ACCA performs monitoring visits on a cyclical basis to the licensed firms
and inspects their conforming to the anti-money laundering conditions both in the UK and
Ireland. Lastly, ACCA has formed a disciplinary committee that overlooks the complaints
against its members and deals with them accordingly (Report on regulation | ACCA Global, 2022)

Financial Reporting Council (FRC): Audit Firms Supervision (AFS) team of the FRC is
responsible for evaluating a company’s root cause analysis, response planning, and plans for
improving quality. They strive to generate a learning and improvement culture in relation to the
quality of auditing. The team of supervisors is also in charge of overseeing Non-Financial
Sanctions issued by the enforcement team following an inquiry. annual reports are generated by
AFS which contain inspection information about firms. Lastly, they also establish rules and
guidelines in the areas of ethics, auditing, and assurance. Examples of firms getting audited by
the AFS are Tier 1 firms.

Institute of Chartered Accountants in England and Wales (ICAEW): ICAEW businesses,

members, and associates are authorized by ICAEW to do work that is controlled by law.
Their Practice Assurance scheme promotes the highest standards of professionalism in
accounting activities. They ensure effective anti-money laundering oversight and monitoring.
They constantly monitor ICAEW firms to ensure their compliance with high-level standards. If a
firm fails to conform to the standards, and complaints are received, they probe into the act and
ensure accountability. Lastly, they share their views on suggested legislative and regulatory
changes. Limited and Alton & Co are some examples of the member firms of ICAEW that are
monitored actively by the entity (ICAEW’s role as an improvement regulator, 2022)

Institute of Chartered Accountants of Scotland (ICAS): ICAS authorizes local firms for audit in
the UK. The main objective is to keep the auditing process on the correct path by improving the
quality of audits each time they are monitored. An audit monitoring visit is conducted by a team
of chartered accountants according to a detailed visit methodology given to them. These are
conducted once every six years. The process consists of the opening meeting, the fieldwork, and
the closing meeting, with a probe into the auditing activities and their compliance with the
international standards. For example, practice monitoring of a member firm is conducted with
Anti-Money Laundering Regulations, Client Money Regulations, Data protection, etc being the
areas covered (Audit monitoring, 2022)
C. Discuss three types of opinions that auditors can express in their audit reports with giving an
example of when each type should be used. (10 marks) Total 30 marks

The main job of auditors is to offer an opinion while forming the audit report. Their opinion is
quite a significant part of the report. Auditors express an unmodified opinion if a financial
statement does not contain any misstatement. (TUOVILA, 2022). However, if that is not the
case, and if an adequate amount of evidence was not found, they issue a modified form of an
opinion. Their application is dependent on the nature and complexity of the condition at hand.
There are three types:

Qualified opinion: if a financial statement does not conform to the Generally Accepted
Accounting Principles (GAAP), a qualified opinion is issued. In the report, it is pointed out how
the financial statements are distinctive from the GAAP, in a paragraph that states other
information regarding the matter too. The phrasing of a qualified opinion is quite alike to an
unqualified opinion. If there are limitations in the authenticity of the audit, a qualified opinion is
given. A qualified opinion is given when the matter is material and not pervasive. This means
that some components of the financial statements can be used to arrive at a decision. The whole
financial statement is not unreliable, and hence, a qualified opinion is generated.

Adverse Opinion: When financial statements of a business do not even slightly comply with the
GAAP principles, an adverse opinion is given on their reports. This is the most critical form of
opinion. The financial statements may constitute gross material and misstatements which render
the whole report unreliable. An adverse opinion in an audit report might point towards a
potentially fraudulent activity. Banks, investors, and other types of lenders do not prefer reports
with adverse opinions as a part of their agreements.

Disclaimer of Opinion: This type of opinion is not an opinion per se. There can be a case where
there is inadequate collaboration by the management of a firm, or certain financial records are
missing. In that case, the auditor cannot complete the audit report. Hence, the auditor releases a
Disclaimer of Opinion. This shows that the scope of the financial report is limited and therefore,
an opinion on the report was unable to be issued.
Question 2

A. Discuss Five ethical principles that auditors should comply with according to the UK
ethical standards (10 marks)

The profession of accountancy requires complex and various tasks to be done. It needs to be
made sure that decisions taken by auditors are trusted and reliable. Their acts must adhere to the
greatest standard of professionalism. There are five key principles that guide the entire ethical
conduct for accounting professionals (in the UK specifically):

Integrity: Being truthful and honest is key in any profession. Developing and maintaining
integrity in the accounting profession requires being forthright and law-abiding in all
professional matters. Being related to deceiving information knowingly is an example of not
maintaining integrity.

Objectivity: The difference of opinions can result in a conflict of interest. And it is certain that
some people carry biases against some elements in a profession. Moreover, there is quite a high
chance that one’s decision can be influenced by someone who holds greater power. Not
succumbing to any of these while making professional judgments comes under objectivity.
Entities must be and look independent when participating in an assurance contract.

Professional Competence: While providing professional service, it should be made sure that the
person possesses and maintains the right professional knowledge and skills so that the clients are
catered to in the best possible manner. Their services should reflect contemporary technical and
expert level standards and appropriate legislation.

Confidentiality: The information acquired as a result of any business activity must not be
exhibited to the general public outside the reaches of an organization. An exception is when the
information is in the interest of the public or the disclosure is permitted by law.
Professional Behavior: certain rules and regulations have been formulated related to the
accounting profession. They must be followed and implemented in order to maintain
professional behavior. Moreover, any act by an accountant which might dishonor the profession
must be avoided at all costs (The five fundamental principles of ethical behaviour - John McCarthy
Consulting, 2022)

B. You have been given the information below for one of your audit clients:

“In the next year, the company intends to undertake a stock exchange listing. The company
has spent $2m on the development of new product lines which is included within intangible
assets. Additionally, it purchased and installed a new manufacturing line. All costs,
incurred in the purchase and installation of that asset, have been included within property,
plant and equipment. In order to finance the new manufacturing line, the company issued
$3m of irredeemable preference shares.

The company offered extended credit terms to its customers. In addition, it provided a
‘price promise’: that it would match the prices of any competitor for similar products
purchased within one month of the date of purchase.

During the year, a product recall has been initiated for one product as a result of faults in
the production process.

Required

Using the information provided, describe Five situations where audit risks are existed and
explain the auditor’s response to each risk in planning the audit process. Note: Prepare your
answer using three columns headed The Issue, Audit risk and Auditor’s response
respectively.
(25 marks)
Total 35 marks
Situation The Issue Audit Risk Auditor’s Response

1 Getting listed on the Because the company Greater amount of

stock exchange next wants to get listed on audit procedures are
year the stock exchange, required and an
there is a high enhanced effort by
amount of inherent the auditor to ensure
risk. There is also a the detection risk is
detection risk as the mitigated while
company’s audit auditing this client.
procedures will be
complex and long.
2 $2 million has been The possible risk of The auditor must
spent by the company not organizing ensure that property,
to form new product property, plant, and plant, and equipment
lines. Moreover, the equipment in the is well organized in a
company has bought financial statements standardized manner
and set up a new properly while along with related
manufacturing line. auditing. information being
The total cost provided.
incurred during the
process is allocated to
property, plant, and
equipment.
3 For the funding of the The preferred shares The auditor should
new manufacturing worth $3 million will make sure that the $3
line, the company be a part of the million shares are
decides to issue $3 balance sheet of the properly organized.
million in non- financial statements In the equity section
convertible preferred of the company. Due of the balance sheets.
shares. to the complexity of Related discoveries
the amount, they can regarding the shares
get disorganized. must also be
provided.
4 The company is When an entity offers The auditor must
offering extended credit terms to its conduct a thorough
credit terms to its customers, some of appraisal of the
customers the default on it. anticipation of bad
hence, a bad debt debts.
expense is incurred.
While auditing, there
is a potential risk of
 misjudging the
anticipation of bad
debts.
5 A product being Customers might Thoroughly review
recalled from the have paid for the the cash flows of the
market due to faults products that have company to render
in its production been recalled from judgment about its
process. the market. so they ability to pay refunds
must be refunded. A to its customers.
risk arises when the Moreover, the auditor
company is not able must ask for a legal
to pay back the representation letter
refunds. from the authorities
in a situation such as
this.

Question 3

A. Auditors need to assess the effectiveness of the internal control system of their clients as
part of the audit procedures that need to be conducted before setting the audit plan. Discuss
FIVE main characteristics of the good internal control system and how they can be used in the
auditors’ assessment with giving examples (10 marks)

An internal control system is a system that is present to gauge the financial activities of a
company. Other than that, it helps a business run smoothly by making sure the policies are
adhered to. Moreover, it helps in securing a company’s assets and ensures the comprehensive
development and reliability of company records. There are five main characteristics of a good
internal control system:

Control environment: this includes the whole environment of the company which is set by the
executives, such as ethics, rules and regulations, management style, etc. the assigning of
authority and responsibility in the organization also comes under internal control. Moreover, the
actions of the management and their attitude towards the betterment of the organization, along
with their communication and implementation of integrity, are a key part of the control
environment. These features are important from an auditor’s perspective. For example, when an
auditor is forming an audit report, during his activities, he will be able to assess in a better
manner if he understands the company’s control environment. If the management is motivated,
competent, and strong in terms of maintaining integrity, it will be easy for him/her to issue an
opinion.

Risk assessment: A business can be a risk-taker or risk-averse. Risk-averse businesses also face
some amount of risk in their operations. It is important to recognize and analyze the business
risks such as changes in operations, new employees, incorporation of new technology, etc. risk
assessments must be performed regularly to keep a check on any adversities occurring. From an
auditor’s point of view, analyzing the risk profile of a business is important as it is reflected in its
performance and helps to gauge the authenticity and reliability of its performance. For example,
an auditor sees that there has been a sharp growth in a company’s revenues. He might be
intrigued by the case and wants to know the reason for that. Let’s say the reason for the sharp
growth was the incorporation of new technology in the company which helped make its
operations more efficient. Hence, the auditor becomes aware that no fraudulent activity has
occurred.

Control activities: these activities include forming new policies, rules, and methods of practice in
an organization. Duties assigned to different employees, and top-level appraisals also come
under control activities. These are basically the activities to ensure that management tasks are
efficiently implemented in an organization. For an auditor, having an insight into control
activities is important as it provides information about the working procedures, operations, as
well as the hierarchy of the company. This will help them understand which task is assigned to
whom in an organization so that if there is negligence, it will be evident whom to hold
responsible.

Information and communication: this is the activity of information being exchanged in a business
environment. Smooth communication from managers to employees, as well as employees to
managers, is a part of effective information and communication system. Information from the
external environment of the business is also a part of information and communication. It must be
recognized, analyzed, and communicated to those inside the organization. People working inside
the organization need to be aware of what is happening outside the organization. Information
plans of an organization are important from an auditor’s point of view as it helps them gain
information about who knows what and to what extent reliable information is being
communicated to the members of the organization.

Monitoring: Conducting an analysis of a company’s internal control process is known as

monitoring. It is key for a company to develop and maintain its internal controls. For example,
examining the completion of bank reconciliation statements, for auditors, it is essential to inspect
the personnel of an organization and whether they are complying with the policies or not.
Moreover, it can help them review the changes that were made in the regulatory process.
(Larson, 2022)

B. Apple & Co has been an audit client of your audit firm ANWAR & Co for the last Eight
years. The audit staff of ANWAR & Co and the client staff of Apple & Co have always
celebrated a meal together at the beginning of the final audit process. The finance
director of Apple & Co has suggested this year that both staff can go away for the
weekend – instead of the meal – to a luxury hotel at Apple & Co expense. The finance
director has also suggested that the current year audit fees is negotiated to be a
percentage of Apple & Co net profit for the year.
This year, for the first time, Apple & Co has approached your audit firm to help in
promoting the process of issuing shares – of Apple & Co – in the stock market.
Discussions now are at the early stage and no actions has been taken yet. The total fees of
the audit and other work would fall within acceptable levels in line with applicable code
of ethics.
The financial manager of Apple & Co requires this year that their audit to be completed
within 15 days; however, this is a very busy time for your audit firm and so it is intended
to use more junior staff as they are available. Additionally, in order to save time and
cost, ANWAR & Co have not contacted Apple & Co’s previous auditors.
Required:

Identify and explain FIVE situations where ethical threats which arise from the
above action are existed; and for each ethical threat explain the steps which ANWAR &
Co should adopt to reduce the threats arising. Note: Prepare your answer using three
columns headed The Issue, Ethical threats and Auditor’s response
respectively. (25 marks)
Total 35 marks
Situation The Issue Ethical Threats Auditors Response

1 The staff of Apple A potential Do not attend any

and Co and Anwar familiarity threat get-togethers at the
and Co have always arises in which the start of the final
celebrated a meal auditor is involved at auditing process.
together at the a much personal level Make Apple and Co
beginning of the final with the client aware of their ethical
audit process company’s responsibility as an
employees. This auditor. Can suggest
activity at the going for a meal
beginning of the final AFTER the final
auditing process may audit process has
result in a favorable been completed.
audit report hence
compromising the
independence of an
auditor.
2 The Finance Director A familiarity threat Reject the offer for a
of Apple and Co has arises as the auditor is weekend trip. Let the
suggested that this getting too personally client know that it
year both staff can go involved with the will be
away for the client staff. This may unprofessional to do
weekend, to a luxury result in the auditor so, compromising the
hotel, expenses paid Sugarcoating some ethics of auditing.
by Apple and Co elements of the report
in order to increase
the value of the
company.
(Threats to Auditor
Independence, 2022)
3 This year, for the first An advocacy threat Reject the offer.
time, Apple and Co arises when the Remind them of their
want you to assist auditor is involved to duty and tasks as an
them in issuing promote the client at auditor and which
shares a level where its own cannot be extended.
objectivity is
confronted. The
auditor might release
a promising report to
elevate the sale price
of Apple and Co
4 The financial The risk of the As it is a busy time
manager wants the auditor not being able and senior staff is
 audit report to be to complete the audit unavailable, use
completed in just 15 process effectively junior staff to
days and efficiently. complete the audit
Moreover, lack of process. This will
staff available to provide them with
work in the limited quality skills and
time provided experience
5 The finance director The risk of Apple and Communicate to the
suggests that this Co not paying the fee client that accepting
year’s fee be adjusted Anwar and Co has this offer puts them at
as a portion of Apple provided services for a risk and has a
and Co’s net profit due to a net loss that chance of being left
can occur unrewarded. Suggest
adhering to the
previous payment
methods.
References:

Accaglobal.com. 2022. Report on regulation | ACCA Global. [online] Available at:

<https://www.accaglobal.com/hk/en/about-us/regulation/regulatory-board/regulation.html>
[Accessed 20 April 2022].

Corporate Finance Institute. 2022. Threats to Auditor Independence. [online] Available at:

<https://corporatefinanceinstitute.com/resources/knowledge/accounting/threats-to-auditor-
independence/> [Accessed 22 April 2022].

Icaew.com. 2022. ICAEW’s role as an improvement regulator. [online] Available at:

<https://www.icaew.com/regulation/icaews-role-as-an-improvement-regulator> [Accessed 20
April 2022].

icas.com. 2022. Audit monitoring. [online] Available at:

<https://www.icas.com/regulation/regulatory-monitoring/audit-monitoring> [Accessed 20 April
2022].

John McCarthy Consulting. 2022. The five fundamental principles of ethical behaviour - John
McCarthy Consulting. [online] Available at: <https://jmcc.ie/the-five-fundamental-principles-of-
ethical-behaviour/> [Accessed 21 April 2022].

Larson, E., 2022. 5 Key Elements of Good Internal Controls - Beene Garter, A Doeren Mayhew
Firm. [online] Beene Garter, A Doeren Mayhew Firm. Available at: <https://beenegarter.com/5-
key-elements-of-good-internal-controls/> [Accessed 22 April 2022].

Page, R. and Pennings, D., 2022. 11 Different Types of Audits That Can Help Your Business.
[online] Beene Garter, A Doeren Mayhew Firm. Available at: <https://beenegarter.com/different-
types-of-audits/> [Accessed 20 April 2022].

TUOVILA, A., 2022. Auditor's Opinion Definition. [online] Investopedia. Available at:

<https://www.investopedia.com/terms/a/auditors-opinion.asp> [Accessed 21 April 2022].