ACCA Audit & Assurance (AA)
Case Question Practice A (5 questions)
2 marks for each question;
All questions should be attempted;
Once an answer is selected, you cannot go back or correct it;
Correct answer and explanation will be shown after an answer is chosen.
You are an audit manager in MCD & Co, a large audit firm which specialises in the audit of retailers. The firm currently audits GF Co (GF), a food retailer, but GF’s main competitor, MK Co (MK), has approached the audit firm to act as auditors. Both GF and MK are listed companies. GF is concerned that if MCD & Co audits both companies then confidential information could pass across to MK.
The audit engagement partner for GF has been in place for approximately six years and her daughter, Emma, has just accepted a job offer from GF as a warehouse manager. Emma’s employment contract states that if a bonus is to be paid it will be awarded as shares in GF rather than in cash. GF is offering MCD & Co a 5% bonus on top of the audit fee if this year’s audit can be completed three weeks earlier than last year. This is to reduce the demands on the finance director’s time as he is busy working on other projects.
A. The ACCA Code of Ethics and Conduct requires that an external auditor implement appropriate safeguards to ensure that a conflict of interest is properly managed.
B. 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 GF.
(1) Audit engagement partner has been in the position for six years
(2) Audit engagement partner’s daughter works for GF
(3) Audit engagement partner’s daughter’s bonus would be in the form of shares
(4) 5% bonus offered if audit is completed three weeks earlier than last year
C. MCD & Co have decided that they would like to accept nomination as MK’s auditors and MK’s existing auditors have agreed to resign rather than be removed from office. The audit manager in charge of the tender has set out a list of procedures that the firm must undertake before MK can be approved as an audit client.
Ensure that the existing auditor’s resignation has been properly conducted
Communicate with MK’s existing auditors
Submit an engagement letter to MK’s management
Perform client screening procedures, including an assessment of MK’s risk profile
D. Before MCD & Co can accept appointment as MK’s auditors they must determine whether the preconditions for an audit are met and obtain management’s agreement that it acknowledges and understands its responsibilities.