FULL SOLUTION TO AUDITING TUTORIAL QUESTIONS (HLR)

QUESTION 1
(a) Auditors have various duties to perform in their role as auditors, for example, to assess the
truth and fairness of the financial statements. Required: Explain FOUR rights that enable
auditors to carry out their duties.
Answer
1.Right of access to the company’s books and records at any reasonable time to collect the
evidence necessary to support the audit opinion.
2.Right to require from the company’s officers the information and explanations the auditor
considers necessary to perform their duties as auditors.
3.Right to receive notice of and attend meetings of the company in the same way as any member
of the company.
4.Right to speak at general meetings on any matter affecting the auditor or previous auditor.
5.Where the company uses written resolutions, a right to receive a copy of those resolutions.
(b) Describe SEVEN additional assignments that the internal audit department of Fredies Corner
company could be asked to perform by those charged with governance
Answer
1.Testing cash controls at stores: Currently the internal audit department undertake inventory
counts at each of the stores. This role could be increased to include controls testing over cash
receipts and cash counts. As a retailer the stores will have a significant amount of cash at each
premise and will have tight controls over the cash receipts process. These controls should be
tested at each location as well as performance of a cash count to reduce the level of fraud and
error reported.
2.Mystery shopper reviews: In order to improve the customer experience in stores, internal audit
department members could undertake ‘mystery shopper’ reviews, where they enter the store as a
customer, purchase goods and rate the overall shopping experience. This is then fed back to each
shop to improve customer service and can provide the basis for further training if necessary.
3.Overall review of financial/operational controls: The department could undertake reviews of
controls at head office, as well as individual stores and make recommendations to management
over such areas as the purchasing process as well as the sales cycle.

4.Fraud investigations: It is likely that as a retailer, Greystone would have problems with theft of
inventory as well as cash. Internal audit could be asked to review the main areas of fraud risk and

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develop controls to mitigate these risks. If fraud is suspected then internal audit could be asked to
investigate these cases further.
5.IT system reviews: Greystone is likely to have a relatively complex computer system linking
all of the tills in the stores to head office. The internal audit department could be asked to
perform a review over the computer environment and controls.
6.Value for money review: The internal audit department could be asked to assess whether
Greystone are obtaining value for money in areas such as the just in time ordering system
recently introduced.
7.Regulatory compliance: Greystone operates in countries throughout the world and hence will
be subject to varying degrees of law and regulation. The internal audit department could help
ensure compliance with those regulations.

QUESTION 2
(a) Explain the concept of TRUE and FAIR presentation
Answer
A True and fair view in accounting (specifically auditing) means that a financial statement is free
from material misstatements and faithfully represents the financial performance and positioning
of an entity
(b) Auditors have various duties to perform in their role as auditors, for example, to assess the
truth and fairness of the financial statements. Required: Explain three rights that enable auditors
to carry out their duties.
Answer
1.Right of access to the company’s books and records at any reasonable time to collect the
evidence necessary to support the audit opinion.
2.Right to require from the company’s officers the information and explanations the auditor
considers necessary to perform their duties as auditors.
3. Right to receive notice of and attend meetings of the company in the same way as any member
of the company.
4.Right to speak at general meetings on any matter affecting the auditor or previous auditor.
5.Where the company uses written resolutions, a right to receive a copy of those resolutions.

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(c) Describe additional assignments that the internal audit department of Greystone Co could be
asked to perform by those charged with governance.
Answer
1.Testing cash controls at stores: Currently the internal audit department undertake inventory
counts at each of the stores. This role could be increased to include controls testing over cash
receipts and cash counts. As a retailer the stores will have a significant amount of cash at each
premise and will have tight controls over the cash receipts process. These controls should be
tested at each location as well as performance of a cash count to reduce the level of fraud and
error reported.
2.Mystery shopper reviews: In order to improve the customer experience in stores, internal audit
department members could undertake ‘mystery shopper’ reviews, where they enter the store as a
customer, purchase goods and rate the overall shopping experience. This is then fed back to each
shop to improve customer service and can provide the basis for further training if necessary.
3.Overall review of financial/operational controls: The department could undertake reviews of
controls at head office, as well as individual stores and make recommendations to management
over such areas as the purchasing process as well as the sales cycle.
4.Fraud investigations: It is likely that as a retailer, Greystone would have problems with theft of
inventory as well as cash. Internal audit could be asked to review the main areas of fraud risk and
develop controls to mitigate these risks. If fraud is suspected then internal audit could be asked to
investigate these cases further.
5.IT system reviews: Greystone is likely to have a relatively complex computer system linking
all of the tills in the stores to head office. The internal audit department could be asked to
perform a review over the computer environment and controls.
6.Value for money review: The internal audit department could be asked to assess whether
Greystone are obtaining value for money in areas such as the just in time ordering system
recently introduced.
7.Regulatory compliance: Greystone operates in countries throughout the world and hence will
be subject to varying degrees of law and regulation. The internal audit department could help
ensure compliance with those regulations.

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QUESTION 3
(a) ISA 210 Terms of Audit Engagements explains the content and use of engagement letters.
Required: Explain SIX items that could be included in an engagement letter
Answer
1.The objective and scope of the audit;
2.The responsibilities of the auditor;
3.The responsibilities of management
4.Identification of the financial reporting framework for the preparation of the financial
statements;
5.The form of any other communication of results of the audit engagement;
6.The fact that some material misstatements may not be detected;

(b) : Identify areas of inherent risk in the EuKaRe charity and explain the effect of each of these
risks on the audit approach
Area of Inherent Risk Effect on audit approach
1. Income is from voluntary donations only. it is difficult to estimate that income in the
there is a risk future will be sufficient to meet the
that donations will fall, especially where expenditure of the charity. Audit of the going
donors’ own income is limited by the ‘credit concern concept (as in ensuring that the
crunch’ etc. charity can still operate) will therefore be
quite difficult.
2. Completeness of income – where there are Audit tests are unlikely to be effective to meet
no controls to ensure income is complete for the assertion of completeness. the audit report
example sales invoices are not raised to obtain may need to be modified and qualified to
donations and donations could be stolen by explain the lack of evidence stating that
staff. completeness of income cannot be confirmed
3. funds can only be spent in accordance with careful review of expenditure will be
the aims of the charity. there is a risk that necessary to ensure that expenditure is not
funds are spent outside the aims of the charity ‘ultra vires’ the objectives of the charity. the
auditor will need to review the constitution of
the
Eukare charity carefully in this respect.
4. taxation rules relevant to charities. there is the auditor will need to ensure that staff
a risk that the rules will be broken due to lack familiar with the taxation rules affecting the
of correct analysis of income/expenditure charity are on the audit team.
5. requirement to report expenditure in the trustees may attempt to hide ‘excessive’
accordance with the constitution – expenditure on administration under other
administration expenditure can be no more expense headings. as the auditor has to report

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 than 10% of total income. risks here include
income being overstated to allow expenditure
to be overstated
6. Donations to charity for specific activities
for example provision of sports equipment.
there is a risk that donations are not spent in
accordance with donors’ instructions.
on the accuracy of income and expenditure
then audit procedures must focus on the
accuracy of recording of expenditure.
documentation for any donation will need to
be obtained and then expenditure agreed to
the terms of the documentation. any
discrepancies will have to be reported to
management.

QUESTION 4
(a) Explain FIVE steps necessary to check the accuracy of the previous year’s internal
control questionnaires.
Answer
1.Obtain the audit file from last year’s audit. Ensure that the documentation on the sales system
is complete. Review the audit file for indications of weaknesses in the sales system and note
these for investigation this year.
2.Obtain system documentation from the client. Review this to identify any changes made in the
last 12 months.
3.Interview client staff to ascertain whether systems have changed this year and to ensure that the
internal control questionnaires produced last year are correct.
4.Perform walk-through checks. Trace a few transactions through the sales system to ensure that
the internal control questionnaires on the audit file are accurate and can be relied upon to
produce the audit programmes for this year.
5.During walk-through checks, ensure that the controls documented in the system notes are
actually working, for example, verifying that documents are signed as indicated in the notes.
(b): Explain the purpose of the main sections of an audit strategy document and for each
section, provide an example relevant to B-Star.
Answer
Audit strategy document
Section of Document Purpose Example from B-Star
Understanding the entity’s Provides details of the Size of the theme park sector
environment industry area that the and expected growth over the
company is in along with next few years
specific information about the
activities and strategies of the
individual client

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 Understand the accounting
and internal control systems
Risk and Materiality
Consequent nature, timing
and extent of audit
procedures
Co-ordination, Supervision
and review of audit work
Details of accounting policies
of the client and previous
assessments of internal
control systems indicating the
expected extent of reliance on
those systems
The assessment of risk for the
client and risk of fraud and
error and the identification of
significant areas
Details of the focus on audit
work on specific areas, detail
on the extent of use of audit
software and possible
reliance on internal audit
Details the extent of
involvement of experts, client
locations and staffing
requirements for the audit
Accounting policy for sales-
sales are stated net of sales
taxes
Materiality of sales to be 5%
of turn over
B-star receives cash sales-
audit work required to
determine the completeness
of sales
Audit software could be used
to provide analytical
procedures on the sales of B-
star
B-Star has only one location-
audit staff will be required to
work there for weeks

QUESTION 5.
Explain three purposes of, and two procedures for, obtaining written representations
Answer
Written representations are necessary information that the auditor requires in connection with the
audit of the entity’s financial statements. Accordingly, similar to responses to inquiries, written
representations are audit evidence.
3 Purpose of written representations
1.The auditor needs to obtain written representations from management and, where appropriate,
those charged with governance that they believe they have fulfilled their responsibility for the
preparation of the financial statements and for the completeness of the information provided to
the auditor.
2.Written representations are needed to support other audit evidence relevant to the financial
statements or specific assertions in the financial statements, if determined necessary by the
auditor or required by other International Standards on Auditing.
3.Written representations can be used to confirm that management have communicated to the
auditor all deficiencies in internal controls of which management are aware.

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2 Procedures for obtaining written representations
1. Written representations are normally in the form of a letter, written by the company’s
management and addressed to the auditor. The letter is usually requested from management but
can also be requested from the chief operating officer or chief financial officer. Throughout the
fieldwork, the audit team will note any areas where representations may be required.
2. During the final review stage, the auditors will produce a draft representation letter. The
directors will review this and then produce it on their letterhead. It will be signed by the directors
and dated as at the date the audit report is signed, but not after.
(bi) What ethical and statutory matters would you consider before your firm could accept
appointment and be appointed as auditors of Evanna Plc?
Answer
Ethical Matters
whether any conflict of interest or confidentiality issues could arise, and if so, whether
appropriate safeguards can be put in place, the firm’s competence to perform the potential work
should be evaluated, especially if the potential client operates in a specialized industry, or if the
client has a complex structure. A self-interest threat to professional competence and due care is
created if the engagement team does not possess, or cannot acquire, the competencies necessary
to properly carry out the engagement. Practical matters such as the resources needed to perform
the work, the deadline for completion, and logistics like locations and geographical spread will
have to be looked into as well.

Statutory Matters
The Auditor should request Evanna Plc’s permission to communicate with the previous
auditors, to avail all the information to enable me decide whether to accept the engagement,
Evanna Plc should be a holder of a practicing certificate issued in accordance with required Acts,
also ensure that the legal requirements in relation to the removal of the previous auditors and the
appointment of the firm have been met and Perform a pre acceptance evaluation of Evanna Plc.
Communicate with any predecessor auditor (both to comply with generally accepted auditing
standards and as a professional courtesy to the predecessor auditor)
(ii) What investigations would you undertake before your firm could accept appointment and be
appointed as auditors of Evanna Plc?
Answer
1. Assess the integrity of the Evanna Plc’s directors
2. Ensure that Evanna Plc is a desirable client (e.g., right industry, suitable profit margin etc)
3. Assess whether this work is suitably low risk

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4. Should not accept the appointment, where it is known that a limitation will be placed on the
scope of the audit.
5. Knowing whether the appointment is competitive (and if possible, the names of other firms
under consideration), and whether a formal engagement proposal is desired
(c)Evanna Plc is seeking to get listed on the stock market and is aware that subsequent to the
stock market listing, it will need to establish an audit committee and has asked you for some
advice in relation to this.
Explain five benefits to Evanna Plc for establishing an audit committee.
Answer
1. Provide actionable insights to oversee and improve financial practices and reporting: In high-
performing organizations, audit committees provide oversight. Audit committees meet with the
CEO and financial officers to review and maintain effectiveness of organizational controls and
external financial reporting. They often work in partnership with the finance committee, which is
typically focused on internal reports, operational issues and financial strategy.
2. Create and maintain effective anti-fraud programs: With their insights and expertise in
financial, legal, management and operational issues, audit committee members can play a
proactive role working with auditors in creating and periodically reviewing an organization-wide
fraud prevention and detection program and ensuring that investigations are undertaken if fraud
is uncovered. They can also encourage the organization’s leadership team to establish a
comprehensive ethics and compliance program.
3. Enhance the internal audit function: An organizational structure that has the internal audit
team reporting directly to the audit committee contributes to the overall integrity of the internal
audit function. Under this structure, the internal audit team can serve as the audit committee’s
“eyes and ears” regarding the organization’s ability to meet its financial and compliance
responsibilities and ensure that the organization adjusts practices and internal controls as needed
4. Strengthen credibility with stakeholders: An Organization’s reputation is its greatest asset. An
audit committee communicates a message of independence, reliability and trust. It also builds
confidence among present and potential constituents, donors, creditors, and other stakeholders.
Organizations and their audit committees can maintain and further build on this positive message
by disclosing the audit committee’s role and composition, achieving transparency in financial
disclosures, and communicating the organization’s compliance and ethics policy.
5. Oversee the organization’s external audit: An audit committee meets with external auditors to
monitor their services and activities to ensure that independence is maintained between the
external auditor and the organization’s management team. An audit committee also meets with
external auditors to discuss their independent observations on management’s ability to maintain
strong internal controls, appropriate financial reporting and sound business practices

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QUESTION 6
(i)Identify and explain FOUR STRENGTHS within Bluesberry’s operating environment
(ii) For each strength identified, describe how Bluesberry might make further improvements to
provide best value for money
Answer
1.Bluesberry has an internal audit department to monitor the internal control environment. This
will help to provide advice over value for money.
Improvement
This could be further improved in that, the internal audit department could provide advice to
departments on initial implementation of procedures rather than just reviewing them
afterwards.
However, care must be taken to ensure that the quality of the goods purchased is considered
as well as the cost.

2. The centralised buying department purchases all medical supplies after researching for the
lowest costs. This ensures that the hospital is being economical as the least amount of resources
is being used.
Improvement
To improve the process the buying department could consider establishing an approved supplier
listing. In order to be placed on the list both the cost and quality of goods has to be of an
adequate level, hence improving the efficiency of the goods purchased.

3. All orders are authorised by a purchasing director. This will ensure that only valid expenditure
is incurred.
Improvement
The purchasing director is a senior individual and it is not necessarily an efficient use of his time
for him to authorize every purchase order, especially as there is a considerable number of them.
The buying team receive in excess of 200 forms a day.
Instead a purchasing supervisor should be designated to authorise orders up to a pre-set level
with only orders above this level going to the director for authorisation. This should free the
director to focus on other areas where costs can be reduced within the hospital.

4. Bluesberry has heavily invested in new surgical equipment, which has improved patient
recovery rates and will lead to more operations being performed. With improving recovery rates
and utilisation of equipment the overall effectiveness of the hospital will improve.
Improvement
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This equipment is not being utilised efficiently as there is a shortage of trained medical staff. In
order to maximise the efficiency and effectiveness of this equipment it would be advisable to
look at ways to address these staff shortages.
For example, there may be medical staff at other hospitals who wish to be seconded to
Bluesberry to gain experience on this new type of surgical equipment.
5. A capital expenditure committee has been established to plan and authorise the purchase of
significant capital items.
This should ensure that significant cash flow expenditure is budgeted for, and that the
expenditure will be for valid items only
Improvement
The committee is made up of senior managers, however, due to some capital expenditure being
very significant in value, it would be improved further if board approval was required for any
orders above a designated level. The board would have an overriding requirement to consider
whether this expenditure would deliver value for money for the hospital.

QUESTION 7.
(a) Explain the term “corporate governance” as used in contemporary business environment
Answer
Corporate governance is the system by which companies are governed by the board and
management in the interest of stakeholders
(b i) Explain five ethical threats which may affect the independence of Kissi & Co’s audit of
Boafo.
(ii) For each threat, explain how it might be mitigated.
Answer
ETHICAL THREAT MITIGATION
1. Advocacy Threat: Boafo Financial Services 1.This is a significant threat to independence;
has asked the engagement partner of Kissi & therefore, the request should be politely
Co. to attend meetings with potential declined
investors which is an advocacy threat, as the
firm may be perceived as promoting
investment in Boafo Financial Service and
threatens objectivity
2. Self Review Threat: Kissi & Co. are asked 2. If Kissi & Co. choose to prepare the
to produce the financial statements of Boafo financial statement, it should ensure that there
Financial Service. This represents a self are two separate teams, one which prepares

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 review threat as Kissi & Co. would be both
preparing and auditing the same information
3. Intimidation Threat: Boafo Financial
Service has indicated that the other work will
only be awarded to Kissi & Co. if it
completes the audit with minimal issues, this
gives rise to intimidation threat as the audit
team may feel under pressure not to perform a
thorough audit in order to secure the other job
4.Self Interest Threat: The audit team has
been offered a luxury weekend away once the
stock exchange listing has been completed,
this represents a self-interest threat as the
independence of the audit team may be
affected by their wish to go on a holiday
5.Familiarity Threat: Kissi & Co. has audited
Boafo Financial Service for so many years,
this signifies a familiarity threat as there is a
risk that the individual will become too
familiar with the audit client and its
management
the financial statements and one which
performs the audit
3.The audit partner should explain to the
finance director that all relevant issues and
questions will have to investigated thoroughly
in order to obtain sufficient appropriate
evidence to form the audit opinion and that
the length of time this will take cannot be
guaranteed, if the finance director is not
willing to accept this, then the audit partner
shall consider resigning from the agreement
4. As it is unlikely that a weekend at a luxury
hotel for the whole has an insignificant value,
then this offer should be politely declined
5.The audit firm (Kissi & Co) needs to change
the audit team that will be auditing Boafo
Financial Service.

QUESTION 8.
(a) State Maple & Co’s responsibilities in relation to the prevention and detection of fraud and
error.

Answer
1. Maple & Co must conduct an audit in accordance with ISA 240 The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements and are
responsible for obtaining reasonable assurance that the financial statements taken as a
whole are free from material misstatement, whether caused by fraud or error.
2. In order to fulfil this responsibility, Maple & Co is required to identify and assess the
risks of material misstatement of the financial statements due to fraud.
3. They need to obtain sufficient appropriate audit evidence regarding the assessed risks of
material misstatement due to fraud, through designing and implementing appropriate
responses. In addition, Maple & Co must respond appropriately to fraud or suspected
fraud identified during the audit.
4. When obtaining reasonable assurance, Maple & Co is responsible for maintaining
professional scepticism throughout the audit, considering the potential for management

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 override of controls and recognising the fact that audit procedures which are effective in
detecting error may not be effective in detecting fraud.
5. To ensure that the whole engagement team is aware of the risks and responsibilities for
fraud and error, ISAs require that a discussion is held within the team. For members not
present at the meeting, Sycamore’s audit engagement partner should determine which
matters are to be communicated to them.
(b) Describe SIX audit risks, and explain the auditor’s response to each risk, in planning the audit
of Sycamore Science Co
Answer

AUDIT RISK AUDITORS RESPONSE

1. Sycamore’s previous finance director
left in December after it was
discovered that he had been
committing fraud with regards to
expenses claimed, there is a risk that
he may have undertaken other
fraudulent transactions; these would
need to be written off in the statement
of profit or loss, else the financial
statement could include errors
2. During the year, Sycamore has spent
$1.8 million on developing new
products, these are at different stages
and the total amount has been
capitalized as an intangible asset
3. Significant profits or losses on disposal are
an indication that the depreciation policy of
plant and equipment may not be appropriate,
therefore depreciation may be overstated
4. During Sycamore’s year-end inventory
count there were movements of goods in and
out, if these goods in transit were not
carefully controlled , then goods could have
been omitted or counted twice, This would
result in inventory being under or overstated
5.Surplus plant and equipment sold during the
year, resulting in a profit on disposal of
$210,000, as there is a minimum profit loan
covenant, there is a risk that this profit on
1. Discuss with the new finance director
what procedures they have adopted to
identify any further frauds by the
previous finance director, in addition
the team should maintain their
professional scepticism and be alert to
the risk of further frauds and errors
2. A breakdown of the development
expenditure should be reviewed and
tested in detail to ensure that only
projects which meets the capitalization
criteria are included as an intangible
asset, with the balance being
expensed.
3. Discuss the depreciation policy of plant and
equipment with the finance director to assess
its reasonableness
4.During the Final audit, the goods received
notes and goods dispatched notes received
during the inventory count should be
reviewed and followed through into the
inventory count records as correctly included
or not
5. Recalculate the profit and loss on disposal
calculations and agree all items to supporting
documentations

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 disposal may not have been correctly
calculated, resulting in overstated profits
6. There has been a significant number of
sales returns made subsequent to the year end,
as these relate to pre year end sales, they
should be removed from revenue in the draft
financial statements and inventory reinstated
6. Review a sample of the post year end sales
returns and confirm if they relate to pre year
end sales, that the revenue has been reversed
and they inventory included in the year end
ledgers, in addition, the reason for the
increased levels of returns should be
discussed with management, this will help to
assess if there are underlying issues with the
net realisable value of inventory

(C) i Explain the purpose of review engagements and how these differ from external audits;
Answer
Review engagements are often undertaken as an alternative to an audit, and involve a practitioner
reviewing financial data, such as six-monthly figures. This would involve the practitioner
undertaking procedures to state whether anything has come to their attention which causes the
practitioner to believe that the financial data is not in accordance with the financial reporting
framework.
A review engagement differs to an external audit in that the procedures undertaken are not nearly
as comprehensive as those in an audit, with procedures such as analytical review and enquiry used
extensively. In addition, the practitioner does not need to comply with ISAs as these only relate to
external audits.
(ii) Describe the level of assurance provided by external audits and review engagements.

Answer

The level of assurance provided by audit and review engagements is as follows:

External audit – A high but not absolute level of assurance is provided; this is known as reasonable
assurance. This provides comfort that the financial statements present fairly in all material respects
(or are true and fair) and are free of material misstatements.
Review engagements – where an opinion is being provided, the practitioner gathers sufficient
evidence to be satisfied that the subject matter is plausible; in this case negative assurance is given
whereby the practitioner confirms that nothing has come to their attention which indicates that the
subject matter contains material misstatements.

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QUESTION 9.
Explain what is meant by ‘professional scepticism’ and why it is so important that the auditor
maintains professional scepticism throughout the audit.

Answer

Professional scepticism is an attitude that includes having questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and subjecting audit
evidence to a critical assessment rather than just taking it at face value

Importance: It is important that professional scepticism is maintained throughout the audit to

reduce the risks of overlooking unusual transactions, of over-generalizing when drawing
conclusions, and of using inappropriate assumptions in determining the nature, timing and extent
of audit procedures and evaluating the rest of them

(ii) Define ‘professional judgement’ and describe two areas where professional judgement is
applied when planning an audit of financial statements

Answer

Professional judgement is the application of relevant training, knowledge and experience in

making informed decisions about the appropriate courses of action in the circumstances of the
audit engagement, the auditor must exercise professional judgement when planning an audit of
financial statements.

Professional judgement will be required in many areas when planning, for example the
determination of materiality for the financial statements as a whole and performance materiality
levels will require professional judgement

Professional judgement will also be required when deciding on the nature, timing extent of audit
procedures.

(b) Mills and Co Case study

Identify and explain EIGHT audit risks in respect of the financial statements of Sleeptight for the
year ending 31 March 20X0. For each risk suggest a suitable audit response.

Answer

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(ii) Describe Mill & Co’s responsibilities in relation to the physical inventory count that will take
place at the year end
Answers
1. They must observe the performance of the count procedures to assess whether they are
properly carried out
2. Mills & Co will need to evaluate managements instructions and procedures for recording
and controlling the result of the physical inventory count
3. They should inspect the inventory to verify that it exists and look for evidence of
damaged or obsolete inventory, they will also perform test counts to assess the accuracy
of the counts carried out by the company
4. Mills & Co are also required by ISA 501 to perform audit procedures over the entity’s
final inventory records to determine whether they accurately reflect the count results

QUESTION 10.
(a) Describe FIVE steps an audit firm should perform prior to accepting a new audit
engagement.
answer
1. Prior to accepting an audit engagement, the firm should consider any issues which might
arise which could treaten compliance with ACCA’s code of Ethics and conduct or any
local legislation, if issues arise then their significance must be considered
2. The firm should consider whether they are competent to perform the work and whether
they would have appropriate resources available, as well as any specialist skills or
knowledge
3. The prospective firm must communicate with the outgoing auditor to asses if there are
any ethical or professional reasons why they should not accept appointment
4. The prospective firm must obtain permission from the client to contact the existing
auditor, if this is not given then the engagement should be refused
5. The existing auditor must obtain permission from the client to respond, if not given then
the prospective auditor should refuse the engagement
(b) ISA 210 Terms of Audit Engagements explains the content and use of engagement letters.
(a) Required: Explain SIX items that could be included in an engagement letter
Answer
1. Objective of the audit of the financial statements
2. Managements responsibility for the financial statements
3. Arrangements for planning the audit
4. Basis of fee calculation and billing arrangements
5. The scope of the audit with reference to appropriate legislation

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(c) State FOUR external auditor’s responsibilities regarding the detection of fraud
1. Fraud will need to be reported to shareholders, management (unless they are involved),
any regulatory body and potential and legal authorities
2. The auditor must perform the audit with professional scepticism and if fraud is
discovered then the audit may be seen as higher risk and more testing required
3. The auditor is responsible for discovering material misstatements whether through fraud
or error , so if a material fraud exists they are responsible for finding it. If an immaterial
fraud exists, they need to inform management of it.
4. The auditor has to discuss any fraud or misstatements to the engagement team and
document the discussion
(d) Auditors have a responsibility under ISA 265 Communicating Deficiencies in Internal
Control to those Charged with Governance and Management, to communicate deficiencies in
internal controls. In particular SIGNIFICANT deficiencies in internal controls must be
communicated in writing to those charged with governance.
Required: Explain examples of matters the auditor should consider in determining whether a
deficiency in internal controls is significant.
Answer
1. The likelihood of the deficiencies leading to material misstatements in the financial
statements in the future.
2. The susceptibility to loss or fraud of the related asset or liability.
3. The subjectivity and complexity of determining estimated amounts.
4. The financial statement amounts exposed to the deficiencies.
5. The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
6. The importance of the controls to the financial reporting process.
7. The cause and frequency of the exceptions detected as a result of the deficiencies in the
controls.
8. The interaction of the deficiency with other deficiencies in internal control.

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