Statutory Duties of RBK and Auditing Accounts Payable

Prohibition on Providing Both Audit and Non-Audit Services

Four Chimps has recently appointed a new non-executive director, Laura Januzzi. She is concerned that Four Chimps do not have an internal audit department 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 the sector 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 with food 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.

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.

Your review of the reconciliations has highlighted the following inconsistences:

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 book for (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.

Benefits of Setting up an Internal Audit Department

The Financial Controller explains that the difference in the Arcelor Mittal account is the result of a payment of £15,239 made on 31.12.20X0 not 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 expense and operating expenses have been tested for overstatement. Explain how this should affect your audit tests on accounts payable.

Section B

11. Audit Committees, Internal Controls over Cash and Audit in the Not-for-Profit Sector.

It is 14 August 20X3. You have been appointed as auditor of the charity WelcomeWatchers. The charity, established and operating in London, was set up in January 20X2 following a tragic fire. A report into the tragedy recommended that ‘fire watchers’ were appointed to be on duty from 10pm – 7am to raise an alarm and help evacuate vulnerable residents in the event of a fire.

Welcome Watchers aims, stated on its website, are:  to promote the importance of fire-watchers in blocks of residential high-rise flats; to organise and train volunteer fire-watchers; and, to raise cash from the public to provide support to volunteers.

In your discussion with Julie, she explains that prior to her appointment WelcomeWatchers had been unprepared for the success of its fundraising. The initial success came after Annie was featured on a national TV programme reporting on the aftermath of the tragedy. She was shown collecting cash in a bucket outside a railway station and explained how she intended the cash to be used.

Volunteers started contacting WelcomeWatchers, asking if they could start collections in other towns and cities across the UK. If there were no volunteers already in that area they were sent a sheet of A4 paper to Sellotape to a bucket, along with a paying in slip for the bank including the charity’s sort code and account number. Julie has found it difficult to identify which volunteers have been depositing cash; the statements can show a reference of up to 20 characters but the deposit slips either have not included a reference or used a name or location that can’t be uniquely identified.

Auditing Accounts Payable - Completeness

Julie has commissioned a design for some cash collection tins. These are to be in the shape of a block of flats. The manufacturer has said it will be possible to stamp each tin with a unique serial number.

a)Prepare a report for Annie explaining the objectives of an audit committee for WelcomeWatchers, how it should be formed and the benefits they and the charity would obtain.  

b)Prepare a report for Julie Wong and Annie Gibson suggesting improvements to the controls over the charity’s cash collection. The report should be in two columns headed

c)Describe the audit work you would perform on the Restricted Funds of £447,750.

a)Recommendation

The draft accounts show profit before tax of £132,000 and total assets of £1.28m. You have been given responsibility for auditing trade debtors. Fratelli and Black have a standard procedure of seeking confirmation of trade debtors through a positive debtors circularisation.

The Chief Operating Officer or Ritzy, who is responsible for preparing its accounts, has told you that the firm is closing one of its distribution centres and will be making some members of the workforce redundant. A provision of £11,800 is included in the draft financial statements.

(a) Describe the steps you auditor should perform in undertaking a positive receivables circularisation for Ritzy Ltd. (You can assume debtors are a material balance)

(b) Describe other substantive procedures, apart from a debtors circularisation, that could be performed to confirm each of the following assertions in relation to Ritzy’s trade debtors:

a)Accuracy, valuation and allocation; b)Completeness; and c) Rights and obligations.

(c) Describe substantive procedures you auditor should perform to confirm the redundancy provision at the year end.

You are an audit senior in the firm Hamilton, Blantyre and Wishaw (HBW). You are involved in planning the statutory audit of Clock and Blackbull Ltd.(CBL), a firm that organise corporate entertainment events.

The credit controller of HBW asks you, at your first opportunity, to request payment for two outstanding invoices due by CBL. The first is for last year’s audit and the second is for taxation advice. Both are overdue by more than three months.

During the audit planning meeting with the finance director of CBL you learn that Asil Wadwhani – who until last year worked for HBW - has been appointed as financial controller at CBL and will be responsible for preparing the draft accounts. In recent years CBL have arranged for a race day at Shawfield Horse Racing for all staff working for HBW. The package included course entry, lunch, afternoon tea and unlimited refreshments and the package was worth £75 per employee. This year the package will only be provided to the partners of HBW and yourself.

The finance director proposes that the HBW’s audit fee this year is based on 75% of last year’s audit fee plus 10% of CBLs profits before tax, with a cap of £50,000 on the profit-related component.

He also has asked that the audit be completed 3 weeks earlier than normal as CBL would like to use the unqualified, audited accounts to help raise finance from external invesotrs to help fund an expansion project.

You are required to answer using a table with two columns.

Under the first column heading “Ethical Threat” you should explain the ethical threats which may affect Hamilton, Blantyre and Wishaw in their audit of Clock and Blackbull Ltd.

Under the second column heading “Suggested Mitigation” you should suggest steps thorough which the threat might be mitigated.

(a) Describe the adjustments that would be expected to a set draft of financial statements prepared using the going concern assumption if that assumption is not valid.

GoodMarket’s Finance Director explains that the loss was due to extremely difficult conditions in the UK market however he is confident can continue to trade as it has the long-term support of its German parent company

(b) Describe audit procedures the auditor should perform in assessing whether or not GoodMarket is a going concern.

During the final review stages of the audit you receive a letter of support from the Board of GutMarkt. You also receive confirmation from the auditors of GutMarkt that they consider the parent entity to be a going concern.

The audit engagement partner is satisfied that the use of the going concern basis is appropriate. The directors have agreed to include some brief going concern disclosures in the draft financial statements but you have not yet reviewed the proposed disclosure note. the adequacy of these disclosures.

(c) Describe the potential impact on the auditor’s report of GoodMarket Ltd. of adequate AND inadequate going concern disclosure.