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Question 1

Assume the date is 5 December 2022.

1. Alvis Ltd (Alvis) is required to be audited for the first time for the year ended 30
November 2022.

Explain to the directors of Alvis the benefits of an audit engagement letter. (3 marks)

2. Elisha Groves is the audit manager for the external audit of Ansdel plc (Ansdel), a UK
listed company. Elisha’s father has just been appointed as financial controller for
Ansdel. At a recent family meal Elisha’s father recommended that family members buy
shares in Ansdel since it plans to make an important announcement to the UK stock
exchange in March 2023.

Identify and explain the legal and ethical threats for Elisha arising from the above. (3
marks)

3. Peele LLP is the external auditor of Channing Ltd (Channing). Channing sells food and
drink at large events. Channing’s company policy states that only card payments should
be accepted from customers for food and drink. During the audit it was noted that event
staff were asking for cash payments from customers. Most event staff members are
temporary or volunteers.

Outline the possible consequences of this control deficiency and provide

recommendations to address it. (4 marks)

4. A senior partner at Stanley LLP, an audit firm, conducted a cold review of the external
audit of Milner Ltd (Milner) for the year ended 30 June 2022. Milner was a new external
audit client. The cold review identified that the basis on which the audit fee was
calculated had not been documented. The fee is 15% lower than the senior partner
expected for a new client of Milner’s size.

Explain why the issue identified has been reported as part of the cold review. State the
actions the senior partner should now take. (3 marks)

5. During the audit of Arundel Ltd (Arundel) for the year ended 30 September 2022, the
audit manager reported to the finance director that the draft revenue figure of
£8,773,000 was overstated by £93,000. The finance director agreed to reduce the draft
revenue figure by £93,000 in the final financial statements. This was the only revenue
adjustment identified by the auditors.

The engagement audit partner is performing the final review of Arundel’s financial
statements which contain a final revenue figure of £8,764,000.

Explain what you would expect the engagement partner to identify during their final
review of the revenue figure. State any actions the audit engagement team should take
as a result. (4 marks)

6. Your firm has been invited to tender for the external audit of Webz plc (Webz), a video
game developer focusing on multiplayer-online video games. Your firm has not
previously acted as auditor of Webz, but it is the current external auditor of Ballam plc,
the leading developer of multiplayer-online video games.

Identify and explain the ethical issues that your firm should consider when deciding
whether to tender for the audit of Webz. If your firm’s tender is successful, identify the
safeguards which may need to be implemented. (3 marks)

Total: 20 marks
Question 2

Assume the date is 5 December 2022.

Safe-T plc (Safe-T) manufactures and installs safety barriers which improve workplace safety
in warehouses, car parks and airports.

You are the audit manager responsible for planning the audit of Safe-T for the year ended 30
November 2022.

Deterioration in financial situation

The year ended 30 November 2022 has been difficult for Safe-T due to the expiry of a patent
in December 2021. This patent applied to 25% of product sales made by Safe-T. The expiry
of the patent resulted in cheaper alternatives being produced by competitors. As a result,
Safe-T has lost several major contracts. Two of Safe-T’s largest remaining airport customers
are due to put their contracts out to tender in February 2023.

Safe-T has been funded by a bank loan for many years. The bank requires Safe-T to
maintain a minimum interest cover of 3.0.

You have been provided with the following financial information:

Statement of profit or loss for the year ended 30 November (extract)

2022 2021
(draft) (audited)
£'000 £'000
Revenue 69,230 78,560
Gross profit 8,140 11,080
Profit before interest and tax 1,246 2,270

Statement of financial position as at 30 November (extracts)

2022 2021
(draft) (audited)
£'000 £'000
Current assets
Cash and cash equivalents – 96

Non-current liabilities
6% bank loan 10,000 10,000

Current liabilities
Bank overdraft 84 –

Legal issues

You reviewed Safe-T’s board minutes and identified the following matters for further
consideration:
• In August 2022, Safe-T received a letter from the lawyers of a customer, Fairhaven Ltd
(Fairhaven), regarding the poor quality of safety barriers supplied to it by Safe-T in March
2022. The letter claims that an accident occurred in the manufacturing facility of
Fairhaven which should have been prevented by the safety barriers. Fairhaven suffered
significant business disruption and lost revenue and is claiming damages of £350,000
from Safe-T.

Safe-T’s operations manager found that a batch of safety barriers produced in March
2022 had failed quality control checks. These safety barriers were shipped to customers,
one of which was Fairhaven, instead of being scrapped as intended.

• In June 2022, HMRC commenced an investigation into breaches by Safe-T of the UK

minimum wage legislation. HMRC has requested payroll records for the past five years.
Safe-T’s lawyers have advised that it is likely that £150,000 in wages and tax arrears and
a penalty of £20,000 will need to be paid.

No adjustments have been made to the financial statements for the year ended 30
November 2022 in respect of Fairhaven’s complaint or the HMRC investigation.

Meeting with Regina Oba, the finance director

You met with Regina, an ICAEW Chartered Accountant, who raised the following matters
with you:

(1) Safe-T’s bank has requested profit and cash flow forecasts for the next three financial
years. The bank requires this information to be examined and reported on by independent
assurance providers. The directors would like your firm to undertake this work.

(2) Safe-T’s directors would like a member of your firm to act as an expert witness during the
HMRC investigation into UK minimum wage legislation breaches.

(3) Safe-T’s directors are unlikely to recommend the reappointment of your firm as auditor if a
modified auditor’s opinion on the financial statements is issued.

(4) Regina has accepted a job offer to work for a competitor of Safe-T from February 2023.
Once the audit is completed, she would like to discuss the possibility of offering you a senior
position at her new employer.

Requirements

1. From the information provided above:

(a) Identify the key audit risks relating to the deterioration in financial situation and legal
issues. For each audit risk list the factors that have led you to identify it as an audit risk.

(b) Describe the procedures that should be included in the audit plan to address those
risks.

Present your answer using the following sub-headings:

• Deterioration in financial situation

• Legal issues (24 marks)
2. In relation to matter (1) from the meeting with Regina, describe the differences between
an assurance engagement in relation to forecast information and a statutory audit of
financial statements. (6 marks)

3. In relation to matters (2) to (4) from the meeting with Regina:

(a) Identify and explain the ethical issues arising for you.

(b) State the actions that you and your firm should take. (10 marks)

Total: 40 marks
Question 3

Assume the date is 31 July 2022.

In April 2022, your firm was appointed external auditor for Lightstyle Ltd (Lightstyle), a
manufacturer of industrial lighting products. The previous auditor did not seek reappointment.

You are the audit senior planning the final audit of Lightstyle for the year ended 30 June
2022. Lightstyle’s nominal ledger is available in your firm’s data analytics software.

Your manager has determined materiality to be £35,000.

Anonymous tip off

Your manager attended a planning meeting with Lightstyle’s finance director in June 2022.
When the manager returned to the office they received the email below from an anonymous
source.

‘I wanted to warn you that two frauds may have taken place at Lightstyle. I informed the
finance manager but nothing has been done.

In December 2021, Emily Ring, the purchase ledger clerk, was off work for a week. When
Emily returned, the finance manager asked Mark Chan, the payments clerk, to help Emily
catch up and gave him temporary access to the purchases system. I think he still has that
access.

Since then, Mark has booked a number of holidays and spent a lot of money on home
improvements. He always used to be short of money. I told the finance manager and she told
me to stop investigating colleagues’ private lives or leave my job at Lightstyle.

In April 2022, I saw inventories in the warehouse labelled ‘Scrap, damaged in an accident’.
They disappeared two days later. There is no record of an accident and no inventories have
been written off in the ledger accounts. I haven’t told anyone as I am worried that I might lose
my job.’

You have identified account code 801099 (‘purchase ledger control account’) within trade
payables as the relevant account code from Lightstyle’s accounting system which is also
reflected in your firm’s data analytics software.

Purchases ordering system

You have been asked by your manager to review the purchases ordering system. Your
testing identified the following internal control deficiencies:

(1) Approved suppliers are recorded on a spreadsheet held on a shared drive accessed by all
members of the finance team. The spreadsheet is not password protected.

(2) Supplier statements are requested at the year end only. Emily has not followed up any
missing supplier statements or differences.

Requirements
1. In relation to fraud:

(a) Explain the responsibilities of those charged with governance and external auditors
in relation to the prevention and detection of fraud.

(b) Identify the fraud risk factors from the anonymous tip off which increase the risk of
material misstatement. Explain why the factors are a concern for your firm. (8 marks)

2. Use the ‘Explore’ module in your firm’s data analytics software to identify transactions in
account code 801099 (‘purchase ledger control account’) which may be fraudulent.
Justify why those transactions may be fraudulent. (10 marks)

Note: No marks will be awarded for points identified by using other modules in your
firm’s data analytics software.

3. Outline how the internal control deficiencies identified in the purchases ordering system
may result in potentially fraudulent transactions. Provide recommendations to address
the internal control deficiencies identified in the purchases ordering system. (6 marks)

Total: 24 marks
Question 4

Assume the date is 5 December 2022.

Described below are situations which have arisen at two unrelated companies for which
Willows LLP (Willows) provides external audit services. You are the audit senior assigned to
both audits.

Edenfield plc (Edenfield)

You are finalising the audit of Edenfield, a UK listed glass bottle manufacturer, for the year
ended 30 September 2022. The four directors of Edenfield share a bonus of 10% of profit
before tax, if the profit before tax for the year exceeds £4 million. No bonus is paid if profits
are below this threshold. Edenfield’s draft financial statements for the year ended 30
September 2022 show profit before tax of £4.1 million.

Your review of customer correspondence identified that Westbank Ltd (Westbank) went into
liquidation on 10 October 2022 owing Edenfield £263,000. This amount remains outstanding
on the year-end receivables listing.

Edenfield adopts the cost model for its land and buildings. The directors commissioned an
independent specialist to value land and buildings as a result of deterioration of a building
during the year. The report from the independent specialist was received on 5 November
2022 and showed that the building was impaired by £306,000. All other properties had a
value higher than their carrying amounts.

The directors of Edenfield argue that the liquidation of Westbank and the building valuation
relate to the year ended 30 September 2023. They have not adjusted the financial
statements for the year ended 30 September 2022.

The directors have offered you free use of a villa in the Bahamas for a fortnight if the reported
profit in Edenfield’s audited financial statements meets its target of £4 million and have asked
you to keep this offer confidential.

Woodville plc (Woodville)

You are finalising the audit of Woodville, a UK listed clothing retailer, for the year ended 31
August 2022. The draft sustainability report states ‘Profits continue to rise each year and it is
unlikely that climate change will cause any future deterioration in profit’. The draft financial
statements show the following:

Statement of profit or loss for the year ended 31 August (extract)

2022 2021
£'000 £'000
Profit for the year 173,704 186,660

You are satisfied that the error is in the sustainability report and not in the financial
statements.

Requirements
1. In respect of Edenfield:

(a) Explain what is meant by inherent risk factors and how the auditor determines the
position of inherent risks on the ‘spectrum of inherent risk’ as required by ISA (UK) 315,
Identifying and Assessing the Risks of Material Misstatement.

(b) Identify inherent risks relating to Edenfield and explain how the information in the
scenario may affect where the identified inherent risks are placed on the ‘spectrum of
inherent risk’.

(c) State, with reasons, the implications of the liquidation of Westbank and the building
valuation for the auditor’s opinion.

(d) Explain the professional and ethical issues arising for you and state the actions that
you should take to address those issues. (12 marks)

2. In respect of Woodville state, with reasons, the implications of the error in the
sustainability report for the auditor’s report. (4 marks)

Total: 16 marks