Explain in not more than 500 words the role and function of an audit committee
Sparkies has undergone a period of substantial growth following its establishment five
years ago by two electricians who pooled their redundancy pay. Because of a lack of
accounting expertise within the company it has traditionally looked to its auditors,
Tickit & Run, for accounting services in thepreparation of annual financial statements
as well as for the statutory audit function.
Tickit & Run have also provided advice in connection with the company’s accounting
and internal control systems.
Tickit & Run is a two partner firm of certified accountants and registered auditors
whose clients are mainly sole traders, partnerships and small limited companies.
Although Sparkies was originally atypical small company client, its growth over the last
five years has meant that it now accounts for approximately 20% of Tickit & Run’s
gross fee income and the company has indicated that it may wish to issue shares on the
stock market in the near future.
Required:
Discuss the extent to which it is acceptable and desirable that Tickit & Run have in the
past provided the three services of statutory audit, advice in connection with systems,
and accountancy services in the preparation of annual financial statements to Sparkies.
You are a member of the audit team for the audit of Learnersinnit plc , a private
provider of high quality educational services. The team have just completed the interim
audit for the current year. You performed the work on the salaries system where you
have noted the following issues:
The company currently has over three hundred teaching and office staff, organised into
several different departments. The staff are paid on a fixed scale with annual increments
agreed by the board. The Salaries Department prepares one month’s payroll from the
names on the previous payroll, adding or deleting names as instructed by the personnel
department. Details of increased pay rates resulting from promotion are also supplied
by the Personnel Department. Sometimes, however, the Personnel Department is so
busy that they forget to telephone the Salaries Department with details of staff changes
or promotions. To correct these oversights, there is sometimes an extra payroll run to
prepare additional cheques where necessary.
The payroll is prepared on a personal computer by either of the two Salaries
Department staff, depending on whoever is available. The payroll calculations are
usually checked for accuracy by the other employee in the department, unless one of
them is absent through illness or is on holiday. The Personnel Department manager
corrects any payroll errors identified on her own personal computer, which is part of the
same computer network, and then signs the payroll to indicate overall approval. She
does not have time to authorise any additional runs which are necessary, however, as
these are usually required urgently.
One or other of the payroll staff will usually run off the cheques, which are all
restrictively crossed, on the computer. A rubber-stamp signature for the cheques is kept
by the personnel manager in her drawer, but the payroll staff know where it is in case
she is not available to stamp the cheques. The cheques are then sent in the internal mail
to each departmental head for distribution to staff. Cheques for the deductions for Pay
As You Earn (PAYE), National Insurance, savings accounts, the holiday club, and
charitable donations, are similarly drawn monthly and paid by cheque.
Draft a formal Management Letter (or Letter of Weaknesses) in respect of the internal
control systems of Learnersinnit plc, as outlined above. The structure of the letter
should be as follows:
Body of management letter:
‘¢ Identification of weaknesses in the existing internal control system
‘¢ Potential implications of these weaknesses
‘¢ Recommendations for improvement
You are the auditor of an engineering firm called Thumpit & Hope Ltd. You are
planning for a physical inventory count at the company’s warehouse on 31 August
2X11. The company assembles domestic appliances, and inventory of finished
appliances, unassembled parts and sundry inventories are stored in the warehouse
which is adjacent to the company’s assembly plant. The plant will continue to produce
goods during the stock count until 5 pm on 31 August
Explain in not more than 200 words the basic principles of Agency
Theory and the role the auditor plays.
What are the preconditions for an audit?
The figures below are a summary of an analytical review of the draft financial
statements of Howdo Ltd. The review was carried out at the planning stage and the
comparison was made against the original budget for the financial year.
Based on the results of this review indicate whether or not you would investigate or
accept the reason for any differences
