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MA611 Auditing

Question:

Sample examination

You have just joined a new firm “Jones and Co”, a partnership of Mr Jones and Mr Smith. Mr Jones is the Audit partner, having been involved in auditing for some 40 years. Initially you are assigned to customer development, and in this role are expected to actively seek new audit clients

Mr Jones asks you to prepare a report on the legal problems faced by auditors in the modern world so that this can be presented to an in-house training seminar.

Possible questions:

  1. Prepare a report discussing the effect of the following law cases surrounding auditor liability; London General Bank, Kingston Cotton Mills, Hedley Byrne, Caparo, Columbia Coffee, Esanda, and AWA.
  2. Discuss the legislative requirements surrounding auditors, covering both the APES and the requirements in the standards.

You then receive an invitation to audit Delta Company Ltd. You note that Mr Smith maintains the books and records of accounts for Delta Company Ltd, and shares a house with the Chief Financial Officer of Delta Company Ltd.  

Set out a memo to Mr Jones advising of the difficulties these two situations may create how you may be able to surmount these difficulties. Cover each ethical difficulty in turn using the APES model.

You have been approached by Mr Speedy to audit Speedy Tools Ltd, a new company established by Mr Speedy following the collapse of Speedy Enterprises Ltd. Speedy enterprises collapsed following a petition by its major creditor when it was discovered that most of the assets of Speedy enterprises had simply disappeared. It is rumoured that several assets of Speedy Tools Ltd appeared to resemble assets of Speedy Enterprises Ltd, but with similar but longer serial numbers.

Should you accept the client – give reasons?

You commence your planning of the audit.

In designing your plan, you have to gather initial evidence what would that initial evidence be?

Describe how the audit risk model can be used as a planning tool.

You obtain some preliminary analytical information:

   

Company

Industry Average

Current Ratio

1:1

1:1.5

Quick Ratio

0.9

0.8

Debt to Equity

0.5

2

Gross Profit/sales

0.3

0.5

Net Profit/Sales

0.05

0.2

Given the analytical information what areas of the company operations are worthy of audit attention.

The client is a highly respected brand in the industry, and as such has enjoyed sound sales at highly profitable mark ups. This last year you note that a new entrant has arrived who has guaranteed its product for seven years. The client has only ever guaranteed its product for two years. Industry reports indicate that the new entrant’s product is quality wise highly competitive, and may be making significant inroads into the market.

Given the above information, how may you adjust the audit program?

On visiting part of the client’s operation you find that half way through the year the Internal Audit department manager resigned, no replacement has been appointed to date. Discuss how you should overcome these problems.

When entering the client’s building you note that the Sales Manager is wearing a professionally tailored fashion outfit that your audit junior advises would have cost about two month’s salary for the average sales manager.

Discuss how this may alter your audit plan.

You are given the task of proving current assets, set out the management assertions you have to prove and describe the tests you might use to prove these assertions.

You are given the task of proving sales, set out the management assertions you have to prove and describe the tests you might use to prove these assertions.

You are finalising the audit, who would you write to and what letters would you request.

You have a post balance date event, eg an employee has destroyed the company truck which was a material asset of the business two weeks after annual balance. Identify the type of event and how you would deal with it.

From an outside source you obtain information about the client that suggests the client has recorded a series of major fictitious assets, select the type of audit report you might choose as a result. (After this you have finished your first audit with your new employer! YAY!)

MA611 Auditing

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