PAA 1

The following scenario relates to question 1 – 5

You are an audit senior of ABC & Co and have worked on the external audit of FND Co (FND), an unlisted company, since your firm was appointed external auditor two years ago.

FND owns a chain of nine restaurants and is a successful company. FND has always been subject to national hygiene regulations, especially in relation to the food preparation process. Noncompliance can result in a large fine or closure of the restaurant concerned.

The board of FND has recently notified you that the national hygiene regulations have been updated and are now much more stringent and onerous than before.

With this in mind, the board has asked your firm to conduct a review of FND’s compliance with hygiene regulations, in order to allow the board to assess whether the appropriate processes have been implemented at each of the nine restaurants. The review is not expected to include the provision of accounting advice or the preparation of figures in the financial statements.

The work is likely to be very lucrative. Your firm has sufficient experience to undertake the above review engagement.

1. Despite running a successful company, FND’s board has often needed to be reminded of some fundamental principles and you often have to explain key concepts.

Which of the following statements best defines the external audit?

2. The board has also struggled to differentiate between its responsibilities and those of the external auditor in circumstances such as the prevention and detection of fraud and error, and compliance with regulations.

Which of the following statements best describes ABC & Co’s responsibility regarding FND’s compliance with hygiene regulations, in line with ISA 250 (Revised) Consideration of Laws and Regulations in an Audit of Financial Statements?

3. The partner responsible for the review of hygiene compliance has informed you that the engagement is an assurance engagement.

Which of the following would NOT have been relevant to the partner in forming this opinion?

4. The partner responsible for the review engagement has asked you to tell him what level of assurance you believe ABC & Co should provide, and also what type of opinion the firm should give.

What is the level of assurance and type of opinion that can be provided on this review engagement?

5. The audit engagement partner has told you that the independence threats arising from ABC & Co performing the review engagement should be monitored carefully.

Which of the following is likely to cause the audit engagement partner most concern?

The following scenario relates to question 6 – 10

The board of directors of BrotherCo are concerned that they are not currently applying best practice in terms of corporate governance and are seeking to make improvements.

The company currently has three non‐executive directors (NEDs) on the board, who are paid a fee which changes annually depending on company performance. The NEDs all sit on the audit, nomination and remuneration committees. There is currently no reference to the work of these committees in the annual report.

At present, BrotherCo does not have an internal audit function but the directors are establishing a team which will be responsible for a range of internal audit assignments.

The following is the current proposed structure for the internal audit (IA) department

The only role still to be filled is the Head of internal audit. There are two potential candidates: Seal

Wong a consultant who helped design and implement the company’s current control system, and

Michael Steve who is currently an audit manager at Sesh & Bell, an audit firm which has never been used by BrotherCo.

Out of the other three members of the proposed IA department, two of them have moved from other departments in BrotherCo and one of the audit assistants has audit experience.

6. Which of the following should be included in the annual report regarding the work of the audit committee?

7. Which of the following options correctly describes the deficiency relating to NEDs’ remuneration and makes a valid recommendation for improvement?

8. The board is in the final stages of establishing the IA department.

Select one option from each column which provides appropriate recommendations to improve the effectiveness and independence of the IA department.

A. Reports to

B. Head of IA

C. Remaining staff members

9. The board has started to compile a list of tasks for the IA department to carry out once it is up and running. It has been agreed that the first assignment to be completed will be for IA to review BrotherCo’s processes over capital expenditure to verify if the right items are purchased at an appropriate time and competitive price.

What type of internal audit assignment does this represent?

10. When deciding on the role of the IA department in undertaking operational audits, which TWO of the following should the team NOT be involved in?

The following scenario relates to questions 11 – 15

Izzy designs and manufactures luxury motor vehicles. It is not a listed company, but its board has recently decided that it would like to improve its corporate governance in order to apply best practice. Izzy’s shares are held equally by six shareholders, four of whom are also executive directors. The remaining two shareholders are not involved with Izzy, other than as shareholders.

Izzy has an internal audit department which is managed by Katty John, the chief internal auditor. Katty frequently comments that Izzy’s board does not understand her reports, and does not provide sufficient support for her department and for the company’s internal control systems. SDS & Co, Izzy’s external auditors, have also expressed concern in this area.

Katty has submitted a proposal to the board to establish an audit committee, and this is currently under consideration. The proposed membership of the audit committee is:

Katty John (chief internal auditor)

Shawn David (existing executive director with some financial expertise)

Lexi Mathew (proposed new non-executive director)

Daniel Wilson (proposed new non-executive director)

The board is also considering a significant expansion of the company. However, the company’s bank is concerned by the standard of financial reporting as Izzy’s finance director recently left the company. The board is delaying providing the bank with financial information until a new finance director has been appointed.

As part of its commitment to the effectiveness of the external audit process, the chair of Izzy’s audit committee, Leslie Schiff, is keen to ensure that the external audit makes use of the latest auditing techniques. She has heard about data analytics routines, but is unsure exactly what they entail.

11. Izzy’s internal audit department is currently not well understood or supported by the board.

Which TWO of the following statements describe the main advantages of establishing an audit committee?

12. Once established, the audit committee will have many objectives. Which of the following does NOT form part of the audit committee’s objectives?

13. In relation to the proposed membership of the audit committee, state whether each proposed member should be included or not.

A. Katty John

B. Shawn David

C. Lexi Mathew

D. Daniel Wilson

14. Which of the following statements best describes why having an audit committee could help Izzy raise additional finance by addressing the concerns of the bank?

15. The following statements concern the auditor’s use of data analytics routines is true. Indicate whether each statement is false?

A. Data analytics routines enable auditors to examine complex data using simple visualization techniques

B. Although powerful, data analytics routines must be applied to strictly limited quantities of data so as to extrapolate correctly from a sample

C. A key drawback of data analytics software is that it is difficult to tailor to each particular audit client

The following scenario relates to questions 16 – 20

You are an audit manager in Light & Co and have been assigned to the audit of Silver Co for the first time this year. Silver Co is a listed company which specializes in manufacturing musical instruments. You will be taking over from Jimmy Fernando, the audit manager who has been in charge of the audit for the last three years. Jimmy has just announced that he is leaving Light & Co to join Silver Co as the financial controller. Jimmy has recently completed the planning for the current year audit in preparation for the final audit which is due to commence next month.

Coney Wager has been the audit engagement partner since Silver Co became an audit client almost eight years ago. As she has completed seven years as the audit engagement partner, Coney has recently been rotated off the audit engagement. The new audit engagement partner, Wang Chan, has suggested that in order to maintain a close relationship with Silver Co, Coney Wager should undertake the role of Engagement Quality Control Reviewer this year.

The total fees received by Light & Co from Silver Co in respect of all services provided in the last year amounted to 16% of the firm’s total fee income. The current year’s total fee income for audit, tax and other audit‐related services is expected to be greater than last year.

16. What is the most appropriate response to the suggestion that Coney Wager takes on the role of Engagement Quality Control Reviewer?

17. Which of the following is the LEAST appropriate response in relation to fee income received by Light & Co from Silver Co?

18. What action should Jimmy Fernando have taken when the possibility of employment with Silver Co arose?

19. Which ethical threat will be created when Jimmy Fernando commences employment with the client and what action should be taken to manage the threat?

20. Select whether the following statements describe a rulebook approach or a conceptual framework approach to ethics.

A. Clearly defined laws for the auditor to follow

B. Easy to know what is allowed and not allowed

C. A set of guidelines with which the auditor uses judgment to apply to specific circumstances

D. Useful in a dynamic profession

The following scenario relates to questions 21–25

You are an audit manager of Bali & Co and have just been assigned the audit of Shark Co (Shark).

Shark, a listed company, provides investment advice to individuals, and is regulated by the relevant financial conduct authority.

Mr. David, a partner in Bali & Co, has been the audit engagement partner for Shark for the previous nine years and has excellent knowledge of the client. Mr. David has informed you that he would like his daughter Cray to be part of the audit team this year; Cray is currently studying for her first set of exams for her ACCA qualification.

In an initial meeting with the finance director of Stark, you learn that the audit team will not be entertained on Shark’s yacht this year; instead, he has arranged a balloon flight costing less than one-tenth of the expense of using the yacht and hopes this will be acceptable.

Bali & Co has always carried out tax advisory work for Shark. The tax advisory services do not have an impact on the figures reported in the financial statements. The finance director has stated that he feels strongly that the firm that offers taxation services this year should charge a fee which is based on a percentage of tax saved. He also trusts that your firm will accept a fixed fee for representing Shark in a dispute regarding the amount of sales tax payable to the taxation authorities.

21. From a review of the information above, your audit assistant has highlighted some of the potential risks to independence in respect of the audit of Shark.

(1) Mr. David would like his daughter Cray to be part of the audit team

(2) Audit team to be offered a balloon flight

(3) Tax fee to be based on a percentage of tax saved

(4) Firm to represent Shark in a dispute with the tax authorities

Which of the following options best identifies the valid threats to independence and allocates the threat to the most appropriate category?

22. In relation to the audit team being offered a balloon ride:

Which of the following actions should be taken to ensure the firm complies with ACCA’s Code of Ethics and Conduct?

23. In relation to the audit engagement partner holding the role for nine years:

Which of the following safeguards should be implemented in order to comply with ACCA’s Code of Ethics and Conduct?

24. David’s daughter, Cray, is currently learning about International Standards on Auditing (ISAs) in her studies. She has asked you for clarification of the following.

Which is the correct order of the following stages involved in the development of an ISA?

(1) Distribution of exposure draft for public comment

(2) Consideration of comments received from the public

(3) Approval by IAASB members

(4) Establishment of task force to develop draft standard

(5) Discussion of proposed standard at a public meeting

25. Cray is also concerned that Bali & Co might breach confidentiality were the audit firm to represent Shark in its dispute with the tax authorities.

Which of the following statements best reflects the auditor’s duty of confidentiality?

The following scenario relates to questions 26 – 30.

You are an audit manager of Garden & Co and have been assigned to the audit of Apple Tech Co (Apple), a company which is planning to list on a stock exchange within six months. The listing rules of the stock exchange require compliance with corporate governance principles, and the directors are unsure whether they are following best practice in relation to this. They have asked the audit engagement partner for their view on this matter.

Apple’s board is comprised of six executive directors, a non-executive chairman and three other non-executive directors (NEDs). The chairman and one of the NEDs are former directors of Apple and on reaching retirement age were asked to take on non-executive roles. The company has established an audit committee, and all NEDs are members including the chairman who chairs the committee. All four members of the audit committee were previously involved in sales or production related roles.

All of the directors have been members of the board for at least four years. As the chairman does not have an executive role, he has sole responsibility for liaising with the shareholders and answering their questions. The company has not established an internal audit function to monitor internal controls.

26. Which of the following features are corporate governance weaknesses which Apple Co would need to address prior to their listing?

(1) The chairman has sole responsibility for liaising with shareholders.

(2) The company has not established an internal audit function.

(3) The chairman and one of the NEDs are former executive directors of Apple Co.

27. The audit engagement partner’s review has identified the following additional corporate governance weaknesses:

(1) All the directors have been members of the board for at least four years.

(2) The board is comprised of six executive and four non-executive directors.

Which of the following would the audit engagement partner recommend to address these weaknesses to ensure compliance with corporate governance principles?

28. The audit engagement partner has assessed the make-up of the audit committee.

Which of the following would be valid conclusions from this assessment?

(1) It is acceptable for the chairman to chair the audit committee.

(2) A new member of the audit committee with relevant financial experience must be recruited.

29. The directors are aware that in accordance with corporate governance provisions they have responsibilities for internal control but are unclear as to the extent of these responsibilities.

Which of the following correctly describes their responsibilities?

30. The board of Apple is considering establishing an internal audit function.

Which of the following factors would be relevant in making this decision?

(1) It would help the audit committee to discharge its responsibilities for monitoring internal control.

(2) The board would no longer need to take responsibility for the prevention and detection of fraud and error.

(3) The costs of establishing an internal audit function should be considered against the benefits gained.

The following scenario relates to questions 31 – 36

You are an audit manager in Pops & Co and you are planning the audit of Blueberry Co which manufactures luxury handbags and other fashion accessories. Blueberry Co has been an audit client of your firm for four years.

From a review of the correspondence file you note that the audit engagement partner and the finance director have known each other socially for many years and in fact went on holiday together last summer with their families. As a result of this friendship the partner has not yet spoken to the client about the fee for last year’s audit, 20% of which is still outstanding.

The financial controller of Blueberry Co was appointed two months ago. Prior to this appointment the financial controller was an audit senior at Pops & Co and was a member of the audit team for Blueberry Co.

Employees of Blueberry Co are entitled to purchase handbags at a discount of 40% and during the planning meeting with the finance director he offers you and your audit team the same level of staff discount.

The finance director has asked if your firm will prepare the company’s tax return and provide tax advice to minimize the amount of tax payable.

31. Select which threat to objectivity is created by the information obtained from the review of the correspondence file.

A. The partner and the finance director have known each other socially for many years

B. 20% of the fee for last year’s audit is still outstanding

32. Which is the MOST appropriate response to the outstanding fees from Blueberry Co?

33. Which of the following statements in respect of the relationship between the new financial controller and the audit firm are TRUE?

34. Which is the MOST appropriate response with respect to the discount offered by Blueberry Co to the audit team?

35. Select the option which correctly identifies whether or not a self‐review threat is likely to arise in relation to the tax services requested.

The following scenario relates to questions 36 – 40

You are the audit manager of James & Co and you are planning the audit of K N Stones Co, a listed company, which has been an audit client for four years and specializes in manufacturing luxury mobile phones.

During the planning stage of the audit you have obtained the following information. The employees of K N Stones Co are entitled to purchase smartphones at a discount of 10%. The audit team has in previous years been offered the same level of staff discount.

During the year the financial controller of K N Stones was ill and hence unable to work. The company had no spare staff able to fulfil the role and hence a qualified audit senior of James & Co was seconded to the client for three months to cover the work of the financial controller. The audit engagement partner has recommended that the audit senior work on the audit as he has good knowledge of the client. The fee income derived from K N Stones was boosted by this engagement and, along with the audit and tax fee, now accounts for 16% of the firm’s total fees

(15.7% last year).

From a review of the correspondence files you note 20% of last year’s audit fee is still outstanding.

Based on the information above you have summarized some of the potential risks to independence in the audit of K N Stones as follows.

(1) The audit team has been offered a discount on luxury phones.

(2) The audit senior was seconded to K N to cover for the financial controller.

(3) Total fees from K N is over 15% of the total fees of the firm for the second consecutive year.

(4) Fees are overdue in respect of last year’s audit

36. Which of the following options best identifies the valid potential threats to independence in the audit of K N Stones and allocates the threat to the most appropriate category?

37. You have also discovered that the audit engagement partner and the finance director have known each other socially for many years, and in fact went on holiday together last summer with their families to the finance director’s villa.

Which TWO threats to independence are raised by this relationship and what safeguards should be applied?

38. In relation to the audit team being offered a 10% discount on mobile phones:

Indicate whether the following statements are true or false, in accordance with ACCA’s Code of Ethics and Conduct.

A. The audit team can accept the discount as it is on the same terms as that offered to staff

B. Junior members of the audit team are allowed to accept the discount, but the audit manager and audit engagement partner should not

C. Unless the value of the discount is trivial and inconsequential to the audit team members, the offer should be declined

D. The audit team is only allowed to accept a discount of up to 5%

39. Which of the following steps must James & Co take, as the fees from K N have exceeded 15% for the last two years?

(1) Resign from the audit

(2) Disclose the matter to those charged with governance

(3) Arrange for a pre- or post-issuance review

40. The finance director of K N has made some enquiries about the other services that James & Co may be able to assist with.

In the table below indicate whether James & Co would or would not be able to provide the other services.

A. Design and implementation of IT systems over financial reporting

B. Assistance with preparation of tax return

C. Accounting services

D. Recruiting service for the position of credit controller

The following scenario relates to questions 41 – 45

You are an audit manager in Lionel & Co, a large audit firm which specializes in the car manufacturing industry. Details of three companies operating in this industry are given below.

Snowy Co

Lionel & Co has audited Snowy Co for many years. The audit engagement partner for Snowy Co has been responsible for the audit for six years. The board of directors has asked if Lionel & Co will provide payroll and bookkeeping services, including providing advice on appropriate accounting policies, in addition to the external audit this year. They have also suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the company’s profit after tax as they feel that this will align the interests of Lionel & Co and Snowy Co.

Slack Co

Slack Co is a subsidiary of a major global car manufacturer. During the current year audit, the audit team discovered that Slack Co had developed and used a device which gave false readings during government tests which are required for all cars. The false readings enabled cars to meet government restrictions on carbon emissions which would otherwise have failed and therefore could not have been sold. The audit engagement partner has discussed the matter with senior management of Slack Co and advised them to report the matter to the industry regulator. Senior management has refused and reminded the engagement partner that the audit firm has a duty of confidentiality towards the company.

Pigeon Co

Pigeon Co has recently approached Lionel & Co to act as auditor due to the firm’s expertise in the car manufacturing industry. Pigeon Co is the main competitor of Snowy Co.

41. Which TWO of the following statements are TRUE in respect of the conflict of interest between Snowy Co and Pigeon Co?

42. Which of the following is NOT an action that your firm should take to manage the conflict of interest between Snowy Co and Pigeon Co?

43. Which of the following statements is TRUE in respect of the audit of Snowy Co?

44. In relation to the proposal that 20% of the audit fee is based on the profit after tax of the company, which of the following statements is TRUE?

45. Select whether the following statements are true or false in respect of the issue with Slack Co?

A. Lionel & Co must report the breach of laws and regulations to the appropriate authority if the client refuses

B. Lionel & Co must report the matter to the parent company and the audit firm responsible for the parent company audit

C.  Senior management is correct that reporting the company will constitute a breach of confidentiality

D. Lionel & Co must report the breach of laws and regulations as it is a public interest matter

The following scenario relates to questions 46–50

You are the audit manager of Cast & Co and you are planning the audit of Crust Financials

Co (Crust), which specializes in the provision of loans and financial advice to individuals and companies. Cast & Co has audited Crust for many years.

The directors are planning to list Crust on a stock exchange within the next few months and have asked if the audit engagement partner can attend the meetings with potential investors. In addition, as the finance director of Crust is likely to be quite busy with the listing, he has asked if Cast & Co can produce the financial statements for the current year.

During the year, the assistant finance director of Crust left and joined Cast & Co as a partner. It has been suggested that due to his familiarity with Orange, he should be appointed to provide an independent partner review for the audit.

Once Crust obtains its stock exchange listing it will require several assignments to be undertaken; for example, obtaining advice about corporate governance best practice. Cast & Co is very keen to be appointed to these engagements, however, Crust has implied that in order to gain this work Cast & Co needs to complete the external audit quickly and with minimal questions/issues.

The finance director has informed you that once the stock exchange listing has been completed, he would like the engagement team to attend a weekend away at a luxury hotel with his team, as a thank you for all their hard work. In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced interest rate.

Crust is aware that subsequent to the stock exchange listing it will need to establish an audit committee, and has asked for some advice in relation to this.

46. As part of your planning work you have identified a number of potential risks to independence.

Indicate whether each of the following potential risks could give rise to an advocacy threat.

A. The audit engagement partner has been asked to attend meetings with potential investors.

B. Cast & Co has been offered the opportunity to provide other services to Crust Financials.

C. Cast & Co has been asked to produce the financial statements of Crust Financials.

D. There is a suggestion that a partner who previously worked for Crust Financials should be the review partner.

47. Cast & Co has been offered work by Crust Financials. This is dependent on the audit being completed with minimal issues.

Which TWO of the following threats does this situation create?

48. The finance director has made two offers to members of the audit team:

(1) Weekend away

(2) Loan at reduced rates

Which of the following correctly summarizes which of the offers, if any, can be accepted?

49. In accordance with ACCA’s Code of Ethics and Conduct you have concluded that if you win the additional work you will need to disclose the proportion of fees obtained from Crust Financials to those charged with governance and conduct a post-issuance review.

Which of the following explains the basis for your conclusion?

50. The board has noted down a number of statements relating to the audit committee and has asked you to confirm whether their understanding is correct.

Indicate whether the following statements are true or false.

A. The audit committee normally appoints the external auditors at the AGM

The following scenario relates to questions 51 – 55

Brooke & Co is the auditor of Water Co, a listed company operating in the computer software industry. The audit team comprises an engagement partner, a recently appointed audit manager, an audit senior and a number of audit assistants. The audit engagement partner has only been appointed this year due to the rotation of the previous partner who had been involved in the audit for seven years. Only the audit senior has experience of auditing a company in this specialized industry. The previous audit manager left the firm before the completion of the prior year audit and is now the finance director of Water Co. The finance director and new audit manager are good friends.

The board of Water Co has asked if Brooke & Co can take on some additional work and have asked if the following additional non‐audit services can be provided:

(1) Routine maintenance of payroll records

(2) Assistance with the selection of a new non‐executive director

(3) Tax services whereby Brooke & Co would liaise with the tax authority on Water Co’s behalf.

Brooke & Co has identified that the current year fees to be received from Water Co for audit and other services will represent 16% of the firm’s total fee income and totaled 15.5% in the prior year.

The audit engagement partner has asked you to consider what can be done in relation to this self-interest threat.

51. In relation to the composition of the current audit team, select which of the fundamental principles is at risk and select an appropriate safeguard.

A. Fundamental Principal

B. Safeguard

52. Select the type of threat which could arise as a result of the finance director’s relationship with the audit manager and select an appropriate safeguard.

A. Type of Threat

B. Safeguard

53. Ignoring the potential effect on total fee levels, identify the threats to independence from providing the non‐audit services.

A. Routine maintenance of payroll records

B. Assistance with the selection of a new non-executive director

C. Tax services whereby Brooke & Co would liaise with the tax authority on Water Co’s behalf

54. Which of the following safeguards would NOT be relevant in mitigating the threat identified in relation to fees?

55. During the course of the audit of Water Co, a suspicious cash transfer has been identified. The audit team has reported this to the relevant firm representative as a potential money laundering transaction.

Which of the following statements is TRUE regarding the confidentiality of this information?