PRACTICE EXAM CHAPTERS 1-10

PRACTICE EXAM – CHAPTERS 1-10

• Which of these statements is true?

An audit benefits a company because

a) It reassures the shareholders that the accounts are accurate

b) Makes the management accountable to the shareholders

c) Guarantees that the accounts are free from fraud or error

d) Guarantees that the financial information shown is true and fair

• Explain the responsibilities of

• the directors • the auditors in connection with the preparation and publication of a company’s financial statements

• Explain in no more than 200 words The Theory of Rational Expectations

developed by Professor Limperg

• State whether the following statements are true or false in respect of external

auditors’ responsibilities • Auditors are responsible for the financial content of the annual accounts (true/false) • Auditors do not have to have absolute assurance that the figures they audit are correct (true/false)

• Mautz and Sharaf set out a series of postulates and assumptions on which

their theory of auditing was based. Set out in not more than 500words the basis of their approach and the problems which subsequent commentators have indicated with their approach. Note it is not necessary for you to set out the postulates in detail merely use them to indicate points in your answer where necessary.

AUDITING

(Auditing, 11e Alan Millichamp, John Taylor) (Solution Manual Latest Edition 2023-24, Grade A+, 100% Verified) 1 / 4

• Which one of the following best describes the role of the International

Auditing and Assurance Board (IAASB)?

The IAASB is responsible for:

a) Setting auditing standards which are compulsory throughout the world

b) Monitoring auditors to ensure that they comply with auditing standards

c) Investigating and disciplining auditors who fail to comply with auditing

standards

d) Setting auditing standards which facilitate the convergence of national and

international auditing standards

• Explain in not more than 200 words the basic principles of Agency Theory and

the role the auditor plays

• State the advantages and disadvantages of a framework approach to

corporate governance as opposed to a legislative approach

• You are the audit partner for BiglyBuilders plc a large UK construction

company.The financial director of BiglyBuilders has approached you and asked you if your firm would carry out the role of internal auditors as well as continuing to act as external auditors. The fee for this work would be very lucrative but the total fees from BiglyBuilders would not contravene the 10% rule so there would be no difficulty in accepting the appointment on that basis.You are a little concerned as the financial director has indicated that if your firm won’t do the work he would invite a rival firm to do so.You are aware that acting as both internal and external audit might pose other problems.Which course of action should you follow?

a) You have to decline as it is a definite conflict and is effectively ruled out

by the ethical guidelines of your RSB.

b) It is a conflict of interest and there is a danger of being involved in

management decision making which is prohibited specifically by the ethical rules. Providing separate teams were used and the internal audit was overseen by another partner it would be possible to take on the work.The external audit team must remain independent of the internal audit team and there must be no communication between them except at arm’s length during the course of the audit.

c) It will help the audit by giving you a better insight into the company so

could be looked at as an extension of the external audit. You could use 2 / 4

the same team and simply amend the external audit programs accordingly.

d) If this was the USA it would be illegal and cases such as Enron

demonstrate the dangers of being seen to go soft on the company because of all the lucrative non audit work – best to avoid the whole thing even if it means a rival firm becomes involved with your client.

• State whether the following statements are true or false in respect of the

rules governing audit activity • The work of the auditing profession is governed solely by the Companies Act 2006 True/false • The Financial Reporting Council has the power to discipline auditors who perform their work poorly True/false

• Set out the rights and duties of auditors under the Companies Act 2006
• Which of these is not the function of a Recognised Supervisory Body?

a) Admission of members

b) Disciplining members

c) Setting ethical standards

d) Investigating complaints

e) Reviewing audits of public limited companies to maintain auditing

standards

13 Which of the following statements are true?True False Auditors perform their work objectively and with integrity. Integrity means truthfulness and openness.

The fact that the senior partner of Tickett & Wrunne’s brother in law is the sales director of Floggit Ltd would not prevent them being appointed auditors

The audit manager on the audit of Megablast Ltd has been left some shares by his auntie. He must sell them as soon as possible.

Auditors have a duty of confidentiality to their client which can only be breached with the client’s permission

14 List five threats to auditor independence and provide an example of each

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15 Explain in not more than 500 words the role and function of an audit committee

16 What is meant by ‘substance over form’?

17 List the five fundamental ethical principles all auditors must abide by

Use the information in this scenario to answer questions 18 and 19:

Bogle McRum is a firm of Chartered Certified Accountants is currently engaged in finalising the audit of Bugle plc, a publicly quoted company. The audit partner Hugo Sponge is reviewing the audit file for the year ended 31 October 201X. At the front of the file is a memo from the audit manager recommending the issue of a qualified audit opinion.

Bugle plc’s major customer is known to be in financial difficulties yet no provision has been made against the material debt owed to Bugle. Bugle’s financial director is arguing that their customer has nearly completed development of a new product, sales of which will enable them to repay all their debts. He claims to have consulted another firm of accountants who have indicated that a provision might not be necessary.

Hugo is unhappy with the situation for the following reasons:

(a) He is reasonably certain that, if she issues a qualified opinion, the directors of Bugle will recommend appointment of the other firm as auditors.

(b) His firm supplies many other non-audit services to Bugle such as tax and consultancy which bring in twice as much revenue as the audit and are more profitable. It is highly unlikely the firm would continue to be asked to provide these services if the audit is lost. In total, fees paid by Bugle for the audit and these other services amount to 9% of the audit firm’s revenues.

(c) He has been the engagement partner for ten years and has no reason to doubt the integrity of the finance director with whom he has worked closely over that period of time. He is prepared to believe his assertion that the debt will be repaid. However, he also accepts that evidence in the audit file is equally persuasive that the customer is, currently, in financial difficulty.

He calls the finance director to advise him that he will have no option but to issue a qualified opinion if the financial statements do not contain a provision against the debt.

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