P7 Workbook

80 Pages·2013·0.32 MB·English

P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
ACCA P7 - Advanced Audit
& Assurance
Workbook
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
Lecture 1 - Regulation
2
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
Illustration 1
Sam Mesentery was appointed a director of Ding Company in October this year taking on
the role of financial controller. He had moved himself and his family to a new country to
take up the post and was looking forward to the new challenges. When he arrived he
learned that he was on the ‘operating board’ of Ding Company and that there was a
‘corporate board’ above the operating board that was senior to it. This surprised him as in
the companies he had worked for in his own country, all directors in the company were
equal. The corporate board at Ding was small, with five directors in total, while the
operating board was larger, with ten members.
After a few days in the job he received an e-mail requiring him to report to Annette Hora,
the managing director. She said that she had regretfully received two complaints from
another senior colleague about Sam’s behaviour. First, Sam had apparently made a highly
inappropriate remark to a young female colleague and second, his office was laid out in
the wrong way. Not only was his desk positioned in breach of fire regulations but also, he
was told that it was normal to have the desk facing towards the door so that colleagues felt
more welcomed when they went in. ‘It’s company policy’ she said abruptly. Sam
remembered the conversation with the young female colleague but was unaware of
anything inappropriate in what he had said to her. He said that he positioned his desk so
he could get the best view out of the window when he was working.
The following day he arrived at work to find that the corporate board was in an emergency
meeting. There had been a sudden and dramatic change in the circumstances of one of
Ding’s major suppliers and the corporate board later said that they needed to meet to
agree a way forward and a strategy to cope with the change. Annette said that because of
the competitive nature of its resource markets, Ding had to act fast and preferably before
its competitors. Hence the necessity of a two-tier board structure. She said there was no
time for lengthy discussions which was why the operating board was excluded. Sam was
told that Ding operated in a ‘complex and turbulent’ environment and when strategic
factors in the environment changed, the company often had to respond quickly and
decisively.
It was a month later that Sam first met with Arif Zaman, Ding’s non-executive chairman.
After Arif asked Sam how he was settling in, Sam asked Arif why he preferred a two-tier
board structure and Arif replied that actually it was Annette’s idea. He said that she prefers
it that way and because he is a non-executive member doesn’t feel able to challenge her
opinion on it. Because ‘it seems to work’ he had no plans to discuss it with her. He went on
to say that he was an old friend of Annette’s and was only in post to satisfy the corporate
governance requirements to have a non-executive chairman. He said that he saw his role
as mainly ceremonial and saw no need to take any direct interest in the company’s
activities. He said that he chaired some board meetings when he was available and he
sometimes wrote the chairman’s statement in the annual report.
Using information from the case, critically evaluate Annette’s belief that two-tier
boards are preferable in complex and turbulent environments such as at Ding
Company.
3
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
Solution
Countries differ in their employment of various types of board structure. Companies in the
UK and US have tended towards unitary structures while Japanese companies and some
European countries have preferred two–tier or even multi-tier boards.
The distinction refers to the ways in which decision-making and responsibility is divided
between directors. In a unitary structure, all of the directors have a nominally equal role in
board discussions but they also jointly share responsibility (including legal responsibility)
for the outcome of those discussions.
On a two tier board, the senior board acts as a ‘kitchen cabinet’ in which decisions are
concentrated whilst other directors, typically departmental managers, will be on the
‘operating board’ and brought into board discussions where the senior (upper tier) board
deem it appropriate.
There are some arguments in favour of the adoption of a two-tier structure in turbulent
environments. As the case implies, turbulent and dynamic environments change often and
strategic leadership is partly about continually adjusting strategy to optimise the company’s
fit with its environment.
A smaller board can act quick and decisively in a way that larger and more cumbersome
boards cannot. This is because meetings of larger numbers of people require excessive
consultation, discussion and debate before a decision can be reached.
When a decision needs to be taken quickly, this can be inconvenient. The meeting of a
small number of people is therefore easier, cheaper and quicker to arrange because there
are fewer diaries to match.
As these arguments focus on both the efficiency and effectiveness of strategic decision-
making, Annette has a strong case for supporting two-tier boards.
The arguments against two-tier boards are as follows. In any complex situation where
finely balanced judgments are made, such as making strategic decisions in turbulent
environmental conditions, input from more people is likely to provide more views upon
which to make the decision.
Where, say, technical, detailed financial or operational details would be of benefit to the
decision then a larger board would be likely to provide more feedback into the decision
making process.
The second reason is that decisions taken by a corporate board with little or no
consultation with the operating board may not enjoy the full support of those key
departmental directors who will be required to implement the decision.
This, in turn, may cause friction, discord and resentment that will hinder good relations and
thus impede the implementation of the strategy. Additionally, without a full understanding of
operations, an inappropriate decision may be taken by the corporate board and
unworkable procedures implemented.
4
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
Finally, Annette is quite an autocratic personality and the two-tier board may be little more
than a device to grant her excessive powers over company strategies and activities.
5
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
Lecture 3 - Ethics
6
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
Illustration 1
You are a senior manager in the audit department of Raven & Co. You are reviewing two
situations which have arisen in respect of audit clients, which were recently discussed at
the monthly audit managers’ meeting:
Grouse Co is a significant audit client which develops software packages. Its managing
director, Max Partridge, has contacted one of your firm’s partners regarding a potential
business opportunity. The proposal is that Grouse Co and Raven & Co could jointly
develop accounting and tax calculation software, and that revenue from sales of the
software would be equally split between the two firms. Max thinks that Raven & Co’s audit
clients would be a good customer base for the product.
Plover Co is a private hospital which provides elective medical services, such as laser eye
surgery to improve eyesight. The audit of its financial statements for the year ended 31
March 2012 is currently taking place. The audit senior overheard one of the surgeons who
performs laser surgery saying to his colleague that he is hoping to finish his medical
qualification soon, and that he was glad that Plover Co did not check his references before
employing him. While completing the subsequent events audit procedures, the audit senior
found a letter from a patient’s solicitor claiming compensation from Plover Co in relation to
alleged medical negligence resulting in injury to the patient.
Required:
Identify and discuss the ethical, commercial and other professional issues raised,
and recommend any actions that should be taken in respect of:
(a)  Grouse Co; and " " " " " " " " (8 marks)
(b)  Plover Co. " " " " " " " " " (7 marks)
7
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
Solution
(a)
Ethical Considerations
This is a threat to objectivity and a self interest threat as it is a joint venture which is an
example of a close business arrangement given in IFAC’s Code of Ethics for Professional
Accountants.
If there is a close business relationship between the client or it’s management the Auditor
may also create an intimidation threat and although it may be potentially lucrative, the fact
that these threats arise make it difficult to safeguard against.
The audit firm must maintain independence, and the perception of independence will be
affected where the audit firm and client are seen to be working together for mutual
financial gain.
Unless the financial interest is immaterial and the business relationship is insignificant to
the firm and the client or its management, the threat would be so significant that no
safeguards could reduce the threat to objectivity to an acceptable level and should not be
undertaken.
A self interest threat would also arise if the software were sold to clients and as such the
financial gain from the software must be disclosed to the client if such a transaction takes
place.
A self review threat would also arise from the auditor auditing the software during the
subsequent audits. It is difficult to see how this threat could be reduced to an acceptable
level as the accounting and tax software would be fundamental to the preparation of the
financial statements.
Commercial & Professional Issues
If Raven & Co still wishes to pursue the business arrangement, they must cease to act as
Grouse Co’s auditors with immediate effect. The lost income from the audit fee of Grouse
Co should also be taken into account, as it is a ‘significant’ client of the firm.
The potential commercial benefits of the business venture should be considered carefully,
as there may be little demand for the suggested product, especially as many software
packages of this type are already on the market.
The quality of the software developed should be looked into, as if Raven & Co
recommends inferior products they will lose customers and could face bad publicity.
Finally, if Raven & Co decides to go ahead with the joint venture, the partners would need
to consider if such a diversification away from the firm’s core activity would be advisable.
The partners may have little experience in such a business, and it may be better for the
firm to concentrate on providing audit and assurance services.
8
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
(b)
Professional Issues
This concerns application of ISA 250 Consideration of Laws and Regulations in an Audit of
Financial Statements which we will look at later in the course.
Ethical Issues
ACCA’s Code of Ethics and Conduct provides additional guidance, stating that a member
may disclose information which would otherwise be confidential if disclosure can be
justified in the public interest.
Although the Public Interest is not defined, consideration must be given to materiality,
legislation, likely-hood of repetition and perhaps after taking legal advice.
The fact that a legal claim has been filed against Plover Co means that the audit work on
provisions and contingent liabilities should be extended.
Further evidence should be obtained regarding the legal correspondence, in particular the
amount of the compensation claim.
The audit firm may wish to consider the integrity of the audit client. If the management of
Plover Co knowingly allowed an unqualified person to carry out medical procedures then
its integrity is questionable
If so Raven & Co may wish to resign from the audit appointment. This is especially
important given the legal claim recently filed against the client, which could result in bad
publicity for Plover Co, and possibly by association for Raven & Co.
9
P7 ACCA Full Course Workbook Q & A! www.mapitaccountancy.com
Lecture 5 - Quality Control
(ISA 220)
10