DECEMBER 2012- Q3 PART (A) PLANT GROUP

Student guidance: It is an 8 marks requirement so a student should identify 4 matters to be included in the tender
document.
Matters to be included in tender document:
1. Weller& Co profile/outline:
Weller is a part of an international network of firm. The firm specializes in the audit of the telecom industry
and have a separate department dedicated for this industry. Being an international firm, Weller can easily
do the audit of the overseas subsidiary of Plant group.

2. Responsibility of the auditor

Weller is responsible for the audit of the plant group which comprises of a parent company and six
subsidiaries. Weller will be responsible for the individual audit of each company financial statement and
would issue a separate opinion. Further Weller would be responsible to review the consolidation process
and issue a consolidated opinion (reasonable assurance).

3. Client expectations
Cost effective audit:
The internal control would need to evaluated first before any reliance can be put on the strength of the
Plant group governance. This is the first year audit which needs a thorough understanding of the client
system and a proper documentation. Moreover, the first year audit consume more resources and sufficient
time is spent on the audit to reduce the risk to an acceptable level. Thus a cost effective audit is not
possible.
Deadline
The proposed deadline of 31 May 2013 is achievable through engaging sufficient resources and spending
reasonable time in the audit.
4. Fees and basis of fees
Fees depends upon lots of factors. Weller & Co should inform the basis of fees to the Plant group
management. Being the first year audit ( as already discussed above), fees would be on the higher side due
to more use of resources, more time spend, high risk , more documentation, more sample size( evidence)
etc. Further the basis of fees will include the amount of work (considering the size of the entity which is a
parent company and six subsidiaries).

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DECEMBER 2014 – QUESTION 4(A) WESTON CO
4(a) (i) - Student guidance: This is 8 marks requirement, so a student should discuss 4 matters to be included in
tender document apart from fees as mentioned in the requirement.
1. Weston & Co – outline:
Para 1 – same as Weller above in terms of drafting the answer (to be taken from case para 1)
2. Responsibility
As the entity is subjected to audit for the first time, Weston & Co should clearly put in their responsibilities
for the attention of management to reduce the expectation gap / or misconceptions. It should be informed
to the management that audit is done on a test basis and the auditor expresses a reasonable assurance on
the financial statements not an absolute assurance. The audit involve looking into material transaction and
the opinion is a reflection of the auditor judgment based upon material transactions only. Auditor has
access to all information and explanation and management is responsible to prepare theFS.
3. Expectations:
Not be too disruptive:
First year audit requires a greater use of professional skepticism in obtaining the knowledge of business
and its systems. Thus there is a high level of disruptions in the first year audit as the auditor has to put
several questions to management for their prompt replies. However, disruptions can be reduced to an
acceptable level by providing management a list of information needed before the start of audit.
Deadline
Four months is a realistic deadline to complete the audit of Jones & Co considering it’s not a very large
entity and was establish just two year ago.
4(a) (ii) Issues in determining fees:
Student note: This is a 6 marks requirement, so a student needs to discuss 3 issues in relation to fees. Each
issue is worth 2 marks

The audit firm should carefully analyze the basis of fees before concluding on the fees to be set for the first
year audit of Jones Co. The audit firm should take into consideration, the size of the business (i.e. a small
company), and its control structure (i.e. one full time accountant means that controls over financial
statement would not be effective and FS would be prone to misstatements) and the use of the accounting
package (mean understanding the system and the use of CAAT in the audit).
Further the audit firm would consider the need to verify the opening balances being the first year audit
(and finding no support from previous year’s limited assurance services as it was performed by unrelated
firms)
Jones want the audit fees to be quite low. The audit firm needs to justify Jones that the fees depends upon
the above said basis and the fees should be reasonable to cover the cost of the firm resources and work
including the profit margin.
The fees cannot be linked to Jones Co success as this would result into a contingent fees (self-interest) and
IESBA codes does not permit a contingent fees.

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JUNE 2016 – QUESTION 2
Comment on the quality of the audit performed discussing the quality control, ethical and other professional issues
raised? 13 marks
Student note: Partial answer has been drafted to guide the track on which rest of the answer has to be completed.
Quality control, ethical and professional issues
1. Materiality level
The materiality level was kept static throughout the audit at $1.5 million and was not reviewed during the
course of audit. The materiality level should be reviewed during the audit process to reflect any change in
circumstance which could positively or negatively impact on the materiality level as the audit progress. The
static materiality level must had resulted in insufficient and inappropriate audit evidence during the audit.

2. No physical verification of PPE

The new packing line with a cost of $ 1.6 million which is material to the financial statement in the context
of the materiality level set at the planning stage was not physically verified. Thus no evidence was gathered
on one of the key assertion of the tangible fixed assets, i.e. the existence.

3. Reliance on Aberdeen Co representation

The auditor has placed reliance on Aberdeen Co representation that the packing line exist at their premises
and is in working condition as a substitute of physical verification of packing line. Evidence gather by
auditor himself is more appropriate that evidence obtained directly by management. Thus the confirmation
by Aberdeen Co in this case is alone is not a reliable evidence.

4. Mick Lantau
Joe recommended Stanley Company to take management consultancy services of his brother Mick results in
familiarity and self-interest threat to objectivity which comprise the independence of the engagement
partner. Joe has shown concern in promoting business of his brother during the course of the audit
engagement and it seems he is referring his brother business to his audit clients thus creating the self-
interest threat.

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MARCH / JUNE 2017 – QUESTION 2 – Illustrative answer
Marking scheme:
PART (A) HYACINTH CO- Internal controls and results of control testing
Quality control and professional issues
1. Test of control – performed
It is inappropriate to perform test of control when it has been concluded by the auditor that controls are
ineffective at the first place. Testing controls despite concluding controls are ineffective initially is a waste
of time and cause inefficiency in audit process rather the audit firm would have directly started audit
testing from substantive procedures.
2. Audit manager- wrong conclusion
The audit manager concluded that no work is need on intra group balances as they are cancelled on
consolidated is an inappropriate judgment as it is the responsibility of the group audit manager to perform
procedures on consolidation schedule and intra group balances even though they have no impact on group
financial statements.
3. Effective controls – across the group
The assumption that control are effective across the group over capital expenditure just on the basis of
testing control effectiveness on capital expenditure at Hyacinth Co is not an appropriate / sound conclusion
used by the audit manager. The subsidiary results of control testing can’t be extrapolated at the group level.
Each component in the group should be tested for its control separately.
4. Reduced substantive procedures
The overall substantive procedures on capital expenditure for the group level has been reduced in
response to effective controls over capital expenditure at Hyacinth Co itself is another wrong conclusion.
The substantive testing could only had been reduced at Hyacinth Co not at other components of the group.
Further actions / procedures
1. Discuss with Group TCWG as to why intra-group balances are not separately identified by the accounting
system ( seek group rationale / basis )
2. Discuss with Group TCWG why no reconciliations are performed of amount owed between subsidiaries.
3. Discuss, how consolidation schedules are prepared in absence of limitation of accounting system as above
4. Cast the consolidation schedule
5. Agree intra group balances to subsidiary financial statements
6. Seek management representation on accuracy of consolidation considering limitation of accounting system
7. Review a sample of capital expenditure , for its physical verification
8. Recalculate depreciation charge to confirm accuracy of depreciation charged.

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