Audit of Four Chimp's Compliance with Hygiene Regulations and Financial Statements of Fairweather Lt

Statutory Duties of RBK as External Auditor of Four Chimps

The following scenario relates to questions 1 –5

You work for Reeve, Bigland and Khan (RBK) as an audit senior. RBK is a UK firm of a registered auditors regulated by the ACCA. One of RBK’s external audit clients is Four Chimps Café Ltd.(Four Chimps) which owns and operates a chain of 12 cafes and restaurants across the East Midlands of the UK.

Four Chimps has recently appointed a new non-executive director, Laura Januzzi. She is concerned that Four Chimps do not have an internal auditdepartment and is further concerned that the executive directors of Four Chimps are unable to demonstrate to her satisfaction that the national food hygiene regulations governing thesector are being fully complied with in all twelve trading locations.

The Board of Four Chimps have asked RBK to undertake a review of Four Chimp’s compliance with hygiene regulations. The review is to consider both Four Chimps current compliance and its ability to maintain compliance with relevant regulations which are updated frequently. Laura Januzzi has questioned whether RBK will be permitted to provide both audit and non-audit services.

RBK does have expertise in the lucrative field of food hygiene regulation and has sufficient resources to be able to accept this non-audit assurance engagement.

1.Explain the statutory duties of RBK as external auditor of Four Chimps

2.You are required to explain to Laura Januzzi any legal or professional reason prohibiting RBK from providing both audit and non-audit services.

3.The Quality Control partner of RBK requires that audit staff are not involved in non-audit engagements to minimise self-review threats. Describe why Four Chimp’s compliance withfood hygiene regulations would be relevant to the financial statement audit.

4.Define materiality and describe whether materiality is relevant in the context of compliance with food hygiene regulations.

5.Briefly describe three benefits Four Chimps might obtain from setting up an internal audit department.

 

The following scenario relates to questions 6 –10

It is April 20X1 and you have been assigned the team working on the audit of the financial statements of Fairweather Ltd for the year to 31 December 20X0. You have been tasked with reviewing Accounts Payable.

Fairweather Ltd is a manufacturing company producing cages for use in livestock production. Their main suppliers provide statements and Fairweather perform monthly reconciliations of the statements to the supplier balance in the purchase ledger.

Fairweather have notified their suppliers that they require suppliers to provide 60 days credit. Where firms do not offer 60 days credit Fairweather delay entering the invoice into their purchase day bookfor (60 –supplier credit period) days. A review of the purchase day book show invoices of £45,322 and £102,338 from Finlay’s being posted on 12 and 14 January in accordance with Fairweathers credit policy. These invoices state that payment is due in 45 days.

The Financial Controller explains that the difference in the Arcelor Mittal account is the result of a payment of £15,239 made on 31.12.20X0not being recorded by Arcelor Mittal.

6.Describe three audit tests you would perform to verify the completeness of Accounts Payable.

7.During your review of the Purchases Day Book you notice that an Invoice for £88,929 has been wrongly posted as a Credit Note. Explain with reasons which of three supplier account differences above could have been caused by this error?

8.Describe the evidence that you would look for to verify the Financial Controller’s explanation of the Arcelor Mittal difference.

9.Describe the audit work you would perform on the Finlay’s balance and suggest any adjustments to the draft accounts that might be necessary.

10.The audit senior informs you that the purchase expenses and operating expenses have been tested for overstatement. Explain how this should affect your audit tests on accounts payable.