9 Clifden (6/09) 33 mins
PRACTICE MANAGEMENT
Questions 10 to 17 cover Practice management, the subject of Part C of the BPP Study Text for Paper P7.
10 Bunk (6/15)
39 mins
You are a senior manager in Bunk & Co, a global audit firm with offices in more than 30 countries. You are responsible for monitoring audit quality and ethical situations which arise in relation to audit clients. Wire Co is an audit client whose operations involve haulage and distribution. The audit report for the financial statements of Wire Co for the year ended 31 December 20X4 was issued last week. You are conducting a review of the quality of that audit, and of any ethical issues which arose in relation to it. Relevant information obtained from a discussion with Lester Freeman, the audit engagement partner, is given below.
(a) Wire Co's audit committee refused to agree to an increase in audit fees despite the company's operations expanding into new locations. In response to this, the materiality level was increased during the audit, and some review procedures were not carried out. To reduce sample sizes used in tests of detail, the samples were selected based on judgement rather than statistical methods. In addition, only parts of the population being tested were sampled, for example, certain locations were not included in the sample of non-current assets selected for physical verification. (6 marks)
(b) Some of the audit work was performed by an overseas office of Bunk & Co in an 'off-shoring' arrangement. This practice is encouraged by Bunk & Co, whose managing partners see it as a way of improving audit efficiency. The overseas office performs the work at a lower cost, and it was largely low-risk, non-
judgemental work included in this arrangement for the audit of Wire Co, for example, numerical checks on documentation. In addition, the overseas office read the minutes of board meetings to identify issues relevant
to the audit. (5 marks)
(c) In July 20X4, Russell Bell, Wire Co's former finance director, joined Bunk & Co as an audit partner, working in the same office as Lester Freeman. Although Russell was not a member of the audit team, he did update Lester on some business developments which had taken place at the company during the period before he left. Russell held a number of equity shares in Wire Co, which he sold in January 20X5. Since joining Bunk & Co, Russell has been developing initiatives to increase the firm's income. One initiative is that audit team members should be encouraged to cross-sell non-audit services and references to targets for the cross- selling of non-audit services to audit clients is now included in partner and employee appraisal
documentation. (9 marks)
Required
Comment on the quality control, ethical and professional issues raised in respect of the audit of Wire Co and the firm-wide policies of Bunk & Co, and recommend any actions to be taken by the audit firm.
Note. The split of the mark allocation is shown against each of the issues above.
Assume it is 6th June 20X5. (Total = 20 marks)
11 Grape (12/09)
70 mins
You are a manager in Grape & Co, a firm of Chartered Certified Accountants. You have been temporarily assigned as audit manager to the audit of Banana Co, because the engagement manager has been taken ill. The final audit of Banana Co for the year ended 30 September 20X9 is nearing completion, and you are now reviewing the audit files and discussing the audit with the junior members of the audit team. Banana Co designs and manufactures equipment such as cranes and scaffolding, which are used in the construction industry. The equipment usually follows a standard design, but sometimes Banana Co designs specific items for customers according to contractually agreed specifications. The draft financial statements show revenue of $12.5 million, net profit of $400,000, and total assets of $78 million.
The following information has come to your attention during your review of the audit files.
During the year, a new range of manufacturing plant was introduced to the factories operated by Banana Co. All factory employees received training from an external training firm on how to safely operate the machinery, at a total
cost of $500,000. The training costs have been capitalised into the cost of the new machinery, as the finance director argues that the training is necessary in order for the machinery to generate an economic benefit. After the year end, Cherry Co, a major customer with whom Banana Co has several significant contracts, announced its insolvency, and that procedures to shut down the company had commenced. The administrators of Cherry Co have suggested that the company may be able to pay approximately 25% of the amounts owed to its trade payables (creditors). A trade receivable of $300,000 is recognised on Banana Co's statement of financial position in respect of this customer. In addition, one of the junior members of the audit team voiced concerns over how the audit had been managed. The junior said the following.
'I have only worked on two audits prior to being assigned the audit team of Banana Co. I was expecting to attend a meeting at the start of the audit, where the partner and other senior members of the audit team discussed the audit, but no meeting was held. In addition, the audit manager has been away on holiday for three weeks, and left a senior in charge. However, the senior was busy with other assignments, so was not always available.
'I was given the task of auditing the goodwill which arose on an acquisition made during the year. I also worked on the audit of inventory, and attended the inventory count, which was quite complicated, as Banana Co has a lot of work-in-progress. I tried to be as useful as possible during the count, and helped the client's staff count some of the raw materials. As I had been to the inventory count, I was asked by the audit senior to challenge the finance director regarding the adequacy of the provision against inventory, which the senior felt was significantly understated. 'Lastly, we found that we were running out of time to complete our audit procedures. The audit senior advised that we should reduce the sample sizes used in our tests as a way of saving time. He also suggested that if we picked an item as part of our sample for which it would be time consuming to find the relevant evidence, then we should pick a different item which would be quicker to audit.'
Required
In respect of the specific information provided:
(a) Comment on the matters to be considered, and explain the audit evidence you should expect to find during your file review in respect of:
(i) The training costs that have been capitalised into the cost of the new machinery; and
(ii) The trade receivable recognised in relation to Cherry Co. (12 marks)
(b) Evaluate the audit junior's concerns regarding the management of the audit of Banana Co. (10 marks)
(c) There are specific regulatory obligations imposed on accountants and auditors in relation to detecting and reporting money laundering activities. You have been asked to provide a training session to the new audit juniors on auditors' responsibilities in relation to money laundering.
Required
Prepare briefing notes to be used at your training session in which you:
(i) Explain the term 'money laundering'. Illustrate your explanation with examples of money laundering offences, including those which could be committed by the accountant
(ii) Explain the policies and procedures that a firm of Chartered Certified Accountants should establish in order to meet its responsibilities in relation to money laundering (10 marks)
Professional marks will be awarded in part (c) for the format of the answer, and the quality of the
explanations provided. (4 marks)
Note. Assume it is 6th December 20X9. (Total = 36 marks)
12 Retriever (6/13)
49 mins
(a) Kennel & Co, a firm of Chartered Certified Accountants, is the external audit provider for the Retriever Group (the Group), a manufacturer of mobile phones and laptop computers. The Group obtained a stock exchange listing in July 20X2. The audit of the consolidated financial statements for the year ended 28 February 20X3 is nearing completion.
You are a manager in the audit department of Kennel & Co, responsible for conducting engagement quality control reviews on listed audit clients. You have discussed the Group audit with some of the junior members of the audit team, one of whom made the following comments about how it was planned and carried out: 'The audit has been quite time-pressured. The audit manager told the juniors not to perform some of the planned audit procedures on items such as directors' emoluments and share capital as they are considered to below risk. He also instructed us not to use the firm's statistical sampling methods in selecting trade
receivables balances for testing, as it would be quicker to pick the sample based on our own judgement. 'Two of the juniors were given the tasks of auditing trade payables and going concern. The audit manager asked us to review each other's work as it would be good training for us, and he didn't have time to review everything.
'I was discussing the Group's tax position with the financial controller, when she said that she was struggling to calculate the deferred tax asset that should be recognised. The deferred tax asset has arisen because several of the Group's subsidiaries have been loss-making this year, creating unutilised tax losses. As I had just studied deferred tax at college I did the calculation of the Group's deferred tax position for her. The audit manager said this saved time as we now would not have to audit the deferred tax figure.
'The financial controller also asked for my advice as to how the tax losses could be utilised by the Group in the future. I provided her with some tax planning recommendations, for which she was very grateful.'
Required
In relation to the audit of the Retriever Group, evaluate the quality control, ethical and other professional matters arising in respect of the planning and performance of the Group audit. (13 marks)
(b) The audit committee of the Group has contacted Kennel & Co to discuss an incident that took place on 1 June 20X3. On that date, there was a burglary at the Group's warehouse where inventory is stored prior to despatch to customers. CCTV filmed the thieves loading a lorry belonging to the Group with boxes containing finished goods. The last inventory count took place on 30 April 20X3.
The Group has insurance cover in place and Kennel & Co's forensic accounting department has been asked to provide a forensic accounting service to determine the amount to be claimed in respect of the burglary. The insurance covers the cost of assets lost as a result of thefts.
It is thought that the amount of the claim will be immaterial to the Group's financial statements, and there is no ethical threat in Kennel & Co's forensic accounting department providing the forensic accounting service.
Required
In respect of the theft and the associated insurance claim:
(i) Identify and explain the matters to be considered, and the steps to be taken in planning the forensic accounting service; and
(ii) Recommend the procedures to be performed in determining the amount of the claim.
Note. The total marks will be split equally between each part.
Assume it is 10th June 20X3. (12 marks)
(Total = 25 marks)
13 Nate & Co (12/07)
39 mins
You are an audit manager in Nate & Co, a firm of Chartered Certified Accountants. You are reviewing three situations, which were recently discussed at the monthly audit managers' meeting:
1 Nate & Co has recently been approached by a potential new audit client, Fisher Co. Your firm is keen to take the appointment and is currently carrying out client acceptance procedures. Fisher Co was recently
incorporated by Marcellus Fisher, with its main trade being the retailing of wooden storage boxes.
audit team, the directors of CF Co have requested that your firm carry out a review of the financial information technology systems. It has come to your attention that while working on the audit planning of CF Co, Jin Sayed, one of the juniors on the audit team, who is a recent information technology graduate, spent three hours providing advice to the internal audit team about how to improve the system. As far as you know, this advice has not been used by the internal audit team.
3 LA Shots Co is a manufacturer of bottled drinks, and has been an audit client of Nate & Co for five years. Two audit juniors attended the annual inventory count last Monday. They reported that Brenda Mangle, the new production manager of LA Shots Co, wanted the inventory count and audit procedures performed as quickly as possible. As an incentive she offered the two juniors ten free bottles of 'Super Juice' from the end of the production line. Brenda also invited them to join the LA Shots Co office party, which commenced at the end of the inventory count. The inventory count and audit procedures were completed within two hours (the previous year's procedures lasted a full day), and the juniors then spent four hours at the office party.
Required
(a) Define 'money laundering' and state the procedures specific to money laundering that should be considered before, and on the acceptance of, the audit appointment of Fisher Co. (5 marks)
(b) With reference to CF Co, explain the ethical and other professional issues raised. (9 marks)
(c) Identify and discuss the ethical and professional matters raised at the inventory count of LA Shots Co.
(6 marks) (Total = 20 marks)
14 Weston (12/14)
39 mins
(a) You are an audit manager in Weston & Co which is an international firm of Chartered Certified Accountants with branches in many countries and which offers a range of audit and assurance services to its clients. Your responsibilities include reviewing ethical matters which arise with audit clients, and dealing with approaches from prospective audit clients.
The management of Jones Co has invited Weston & Co to submit an audit proposal (tender document) for their consideration. Jones Co was established only two years ago, but has grown rapidly, and this will be the first year that an audit is required. In previous years a limited assurance review was performed on its financial statements by an unrelated audit firm. The company specialises in the recruitment of medical personnel and some of its start-up funding was raised from a venture capital company. There are plans for the company to open branches overseas to help recruit personnel from foreign countries.
Jones Co has one full-time accountant who uses an off-the-shelf accounting package to record transactions and to prepare financial information. The company has a financial year ending 31 March 20X5.
The following comment was made by Bentley Jones, the company's founder and owner-manager, in relation to the audit proposal and potential audit fee:
'I am looking for a firm of auditors who will give me a competitive audit fee. I am hoping that the fee will be quite low, as I am willing to pay more for services that I consider more beneficial to the business, such as strategic advice. I would like the audit fee to be linked to Jones Co's success in expanding overseas as a result of the audit firm's advice. Hopefully the audit will not be too disruptive and I would like it completed within four months of the year end.'
Required
(i) Explain the specific matters to be included in the audit proposal (tender document), other than those relating to the audit fee; and (8 marks)
(ii) Assuming that Weston & Co is appointed to provide the audit service to Jones Co, discuss the issues to be considered by the audit firm in determining a fee for the audit including any ethical matters
(b) Ordway Co is a long-standing audit client of your firm and is a listed company. Bobby Wellington has acted as audit engagement partner for seven years and understands that a new audit partner needs to be appointed to take his place. Bobby is hoping to stay in contact with the client and act as the engagement quality control reviewer in forthcoming audits of Ordway Co.
Required
Explain the ethical threats raised by the long association of senior audit personnel with an audit client and the relevant safeguards to be applied, and discuss whether Bobby Wellington can act as engagement quality control reviewer in the future audits of Ordway Co. (6 marks)
(Total = 20 marks)
15 Spaniel & Bulldog (6/13)
39 mins
You are a manager in Groom & Co, a firm of Chartered Certified Accountants. You have just attended a monthly meeting of audit partners and managers at which client-related matters were discussed. Information in relation to two clients, which were discussed at the meeting, is given below:
(a) Spaniel Co
The audit report on the financial statements of Spaniel Co, a long-standing audit client, for the year ended 31 December 20X2 was issued in April 20X3, and was unmodified. In May 20X3, Spaniel Co's audit committee contacted the audit engagement partner to discuss a fraud that had been discovered. The company's internal auditors estimate that $4.5 million has been stolen in a payroll fraud, which has been operating since May 20X2.
The audit engagement partner commented that neither tests of controls nor substantive audit procedures were conducted on payroll in the audit of the latest financial statements as in previous years' audits there were no deficiencies found in controls over payroll. The total assets recognised in Spaniel Co's financial statements at 31 December 20X2 were $80 million. Spaniel Co is considering suing Groom & Co for the total amount of cash stolen from the company, claiming that the audit firm was negligent in conducting the audit.
Required
Explain the matters that should be considered in determining whether Groom & Co is liable to Spaniel Co in
respect of the fraud. (12 marks)
(b) Bulldog Co
Bulldog Co is a clothing manufacturer, which has recently expanded its operations overseas. To manage exposure to cash flows denominated in foreign currencies, the company has set up a treasury management function, which is responsible for entering into hedge transactions such as forward exchange contracts. These transactions are likely to be material to the financial statements. The audit partner is about to commence planning the audit for the year ending 31 July 20X3.
Required:
Discuss why the audit of financial instruments is particularly challenging, and explain the matters to be considered in planning the audit of Bulldog Co's forward exchange contracts. (8 marks)
(Total = 20 marks)
16 Raven (6/12)
29 mins
You are a senior manager in the audit department of Raven & Co. You are reviewing two situations which have arisen in respect of audit clients, which were recently discussed at the monthly audit managers' meeting:
1 Grouse Co is a significant audit client which develops software packages. Its managing director, Max Partridge, has contacted one of your firm's partners regarding a potential business opportunity. The proposal is that Grouse Co and Raven & Co could jointly develop accounting and tax calculation software, and that revenue from sales of the software would be equally split between the two firms. Max thinks that Raven &