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