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Chapter 7
Case Study
How should Angela convince her fellow partners this is a good idea
and will not just be a costly waste of time?
Consider:
xThe ‘Big 4’ firm will set a benchmark of standards so local firms will
have to demonstrate that their quality of service is at least as good
What procedures should Angela introduce
– in the short term
– over a longer period
Examination questions
1. Quality control procedures
Quality controls are the policies and procedures adopted by a firm to provide
reasonable assurance that all audits done by a firm are being carried out in
accordance with the objective and general principles governing an audit (ISA
220)
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Assistants should be professionally competent to perform the work delegated
to them with due care
Direction (i.e. informing assistants about their responsibilities and the nature,
timing and extent of audit procedures they are to perform) may be
communicated through
The work of assistants must be reviewed to assess whether
xit is in accordance with the audit program
xit is adequately documented
xsignificant matters have been resolved
xobjectives have been achieved
xconclusions are appropriate i.e. consistent with results
An independent review i.e. by personnel not otherwise involved in the audit
to asses the quality of the audit (before the issue of the audit report) should
be undertaken for listed and other public interest or high risk clients
Additional point – quality control procedures reduce the risk of litigation
claims and thus PII costs
2Almond – ethical and professional issues
(a) Audit team
ŶThere are many factors to be taken into account when allocating staff to an
assignment, for example:
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ŶAs a matter of practice management, a client should not dictate who staffs
their audit. If the Finance Director’s requests are based solely on the premise
that to have staff other than as requested would cause disruption then he
should be assured that anyone assigned to the audit will be:
ŶTickitt & Run may have other (more complex) assignments on which Xavier
(and other staff previously involved in the audit of Almond) could be better
utilised.
Conclusion
The Finance Director’s requests should be granted only if:
(1) it is in the interests of Almond’s shareholders (primarily);
(2) meets the needs of Tickitt & Run’s staff; and
(3) Almond agrees to the commensurate audit fee.
(b) ‘Phantom ticking’
ŶTickitt & Run’s quality control procedures should be such that:
– the work delegated to Alex was within his capability;
– Alex was supervised in its execution; and
– the work performed by Alex was reviewed by appropriate personnel (i.e.
someone of at least equal competence).
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Conclusion
As Kurt is already aware of the potential problem, it may be appropriate that
he be assigned as AIC to audits on which Alex undertook audit work, as he
will be alert to any ramifications. It is possible that Tickitt & Run should not
want to make the situation known to its staff generally.
Tutorial note: Marks will be awarded for any sensible conclusion drawn on a
reasoned discussion. For example, it may be appropriate to assign a more
experienced AIC to Phantom than the audit would usually warrant.
(c) Prior year audit failure
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ŶThe financial statements for the year ended 31 December 2X09 contained a
material error in that they disclosed a contingent liability (of unspecified
amount) when a provision should have been made (for a known liability).
ŶThe reasons for the error/oversight should be ascertained. For example:
owho was responsible for signing off on the post statement of
financial position event review?
Tickitt & Run may need to review and improve on its procedures for the audit
of provisions, contingent liabilities and post statement of financial position
events.
ŶIf the AIC (or other staff) involved in the prior year audit of Magenta were
not as thorough as they should have been, with respect to the post
statement of financial position event review, then other audit clients may be
similarly affected.
© Cengage Learning 2012
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settlement should be attributed to the prior period and not the current year’s
net profit or loss.
ŶThe most obvious implication for the current year audit of Magenta is that a
more thorough post statement of financial position event review will be
required than the previous year. This may have a consequent effect on the
time/fee/staff budgets of Magenta for the year ended 31 December 2X10.
ŶAs the matter is material, it needs to be brought to the attention of
Magenta’s management, so that a prior year adjustment is made. In the
absence of which a qualified auditor’s report ‘except for’ should be required.
Conclusion