Audit and Assurance
Wednesday 3 December 2008
2(a) ISA 620 Using the Work of an Expert explains how an auditor may use an expert to obtain audit evidence.
Explain THREE factors that the external auditor should consider when assessing the competence and
objectivity of the expert. (3 marks)
(b) Auditors have various duties to perform in their role as auditors, for example, to assess the truth and fairness of
the financial statements.
Explain THREE rights that enable auditors to carry out their duties. (3 marks)
(c) List FOUR assertions relevant to the audit of tangible non-current assets and state one audit procedure which
provides appropriate evidence for each assertion. (4 marks)
3 You are a manager in the audit firm of Ali & Co; and this is your first time you have worked on one of the firm’s
established clients, Stark Co. The main activity of Stark Co is providing investment advice to individuals regarding
saving for retirement, purchase of shares and securities and investing in tax efficient savings schemes. Stark is
regulated by the relevant financial services authority.
You have been asked to start the audit planning for Stark Co, by Mr Son, a partner in Ali & Co. Mr Son has been the
engagement partner for Stark Co, for the previous nine years and so has excellent knowledge of the client. Mr Son
has informed you that he would like his daughter Zoe to be part of the audit team this year; Zoe is currently studying
for her first set of fundamentals papers for her ACCA qualification. Mr Son also informs you that Mr Far, the audit
senior, received investment advice from Stark Co during the year and intends to do the same next year.
In an initial meeting with the finance director of Stark Co, you learn that the audit team will not be entertained on
Stark Co’s yacht this year as this could appear to be an attempt to influence the opinion of the audit. 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. The director also states that the fee for taxation services this year should be based on a percentage of tax
saved and trusts that your firm will accept a fixed fee for representing Stark Co in a dispute regarding the amount of
sales tax payable to the taxation authorities.
(a) (i) Explain the ethical threats which may affect the auditor of Stark Co. (6 marks)
(ii) For each ethical threat, discuss how the effect of the threat can be mitigated. (6 marks)
(b) Discuss the benefits of Stark Co establishing an internal audit department. (8 marks)
4 (a) Explain the term ‘audit risk’ and the three elements of risk that contribute to total audit risk. (4 marks)
The EuKaRe charity was established in 1960. The charity’s aim is to provide support to children from disadvantaged
backgrounds who wish to take part in sports such as tennis, badminton and football.
EuKaRe has a detailed constitution which explains how the charity’s income can be spent. The constitution also notes
that administration expenditure cannot exceed 10% of income in any year.
The charity’s income is derived wholly from voluntary donations. Sources of donations include:
(i) Cash collected by volunteers asking the public for donations in shopping areas,
(ii) Cheques sent to the charity’s head office,
(iii) Donations from generous individuals. Some of these donations have specific clauses attached to them indicating
that the initial amount donated (capital) cannot be spent and that the income (interest) from the donation must
be spent on specific activities, for example, provision of sports equipment.
The rules regarding the taxation of charities in the country EuKaRe is based are complicated, with only certain
expenditure being allowable for taxation purposes and donations of capital being treated as income in some situations.
(b) Identify areas of inherent risk in the EuKaRe charity and explain the effect of each of these risks on the audit
(c) Explain why the control environment may be weak at the charity EuKaRe. (4 marks)