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.

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.

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.

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.

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.

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.

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.

The following scenario relates to questions 35 – 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

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.

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.

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.