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HERIOT-WATT MANAGEMENT PROGRAMME

Audit and CIFA


For official use only
JUNE 2010

No Marks
A1
A2
A3
B1
B2

Section A (50 Marks)


Question A1
The shareholders of DEF plc have confirmed your reappointment as auditor for the fourth successive year. You are
confident that you know the companys strengths and weaknesses and the audit this year should be a routine matter.
However the company has recently appointed a new non-executive Chairman to the Board of Directors. He has asked
to meet you so that he can understand more about the audit of the company.
Yesterday you met him for the first time. He put four questions to you, as follows:
I have been reading a great deal in the newspapers recently about auditors who have apparently not shown sufficient
independence from the Board of Directors. I can understand the concern but at the same time Id like to think that we
are both on the same side when it comes to serving the needs of shareholders. Id like to hear your views on audit
independence and how you can demonstrate independence while working effectively with the directors, especially the
finance director.
I have also seen some letters from your audit firm to my predecessor as chairman, expressing some concerns about
the risk of weak internal controls and the need to carry out additional tests to give you assurance about these risks.
Your letter mentioned trade debtors in particular. Could you please explain to me what kind of internal controls you
might expect in relation to trade debtors, and what audit risks you face if our systems are insufficient?
A friend of mine who is a director elsewhere has told me that his company received a qualified audit report based on
limitation of scope. Id like to know what that means. Could you give me an example based on the records relating to
trade debtors?
Finally, my friend also tells me that the auditors do not have to dig in every corner of the companys business. He says
that auditors use materiality limits to allow them to focus on what really matters. Can you give me an explanation of
how you approach the question of materiality?
Our next Board meeting is in three weeks so I would appreciate having your explanations in writing, ahead of that
meeting. I have enjoyed talking to you!
Required:
Write answers to the four questions from the Chairman to the Board of Directors.
(Total 25 marks)

Question A2
Either
(a) Explain and describe the issues related to Auditors liability in detail.
OR
(b) Explain and describe in detail the recent developments in Corporate Governance and Environmental Audit.
(Total 15 marks)

Question A3
You are an audit manager with the firm Watt and Co. and have just been informed by one of the partners that that you
are responsible for the audit of PROGRESSIVE Ltd., a newly acquired client. PROGRESSIVE has just incorporated as
a limited company after trading for many years as an unincorporated business.
It is expected that PROGRESSIVE will have a turnover of about 20m in its first year as a limited company and, as
such, will be one of your largest clients. The managing director, Mrs Elaine Smith, has written to you about the current
year audit and has made a number of proposals. In particular, she has indicated to you that she expects the audit fee to
be in the region of 10 000 and the audit to be completed within a single visit of one week during the employees
annual trade holiday when the business closes down. She will then be able to devote her full attention to answering all
your questions.
Required
Explain why there is a need for an audit and the effects that the audit requirement will have on his company.
(10 marks)

Section B (50 Marks)


Question B1

(25 marks)

Question -2
Home plc is an establish trading company based in the United Kingdom. Home plc acquired 80% of the share
capital of Overseas Inc. a number of years ago when oversees Inc, had a nil balance on reserves. Overseas
Inc. is incorporated Overland, a county where the unit of currency is the $.

(20 marks for [a] and 5 marks for [b])