AA-Ch-9 (Internal Audit)

You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who specialise in the provision of loans and financial advice to individuals and companies. Currant & Co has audited Orange for many years.

The directors are planning to list Orange on a stock exchange within the next few months and have asked if the engagement partner can attend the meetings with potential investors. In addition, as the finance director of Orange is likely to be quite busy with the listing, he has asked if Currant & Co can produce the financial statements for the current year.

During the year, the assistant finance director of Orange left and joined Currant & Co as a partner. It has been suggested that due to his familiarity with Orange, he should be appointed to provide an independent partner review for the audit.

Once Orange obtains its stock exchange listing it will require several assignments to be undertaken, for example, obtaining advice about corporate governance best practice. Currant & Co is very keen to be appointed to these engagements, however, Orange has implied that in order to gain this work Currant & Co needs to complete the external audit quickly and with minimal questions/issues.

The finance director has informed you that once the stock exchange listing has been completed, he would like the engagement team to attend a weekend away at a luxury hotel with his team, as a thank you for all their hard work. In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced interest rate.

Orange is aware that subsequent to the stock exchange listing it will need to establish an audit committee, and has asked for some advice in relation to this.

Orange Financials has been offered work by Orange Financials. This is dependent on the audit being completed with minimal issues.

Which TWO of the following threats does this situation create?

1. Intimidation

2. Self-interest

3. Familiarity

4. Advocacy

• 1 & 2

• 2 & 3

• 1 & 4

• 2 & 4

You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who specialise in the provision of loans and financial advice to individuals and companies. Currant & Co has audited Orange for many years.

The directors are planning to list Orange on a stock exchange within the next few months and have asked if the engagement partner can attend the meetings with potential investors. In addition, as the finance director of Orange is likely to be quite busy with the listing, he has asked if Currant & Co can produce the financial statements for the current year.

During the year, the assistant finance director of Orange left and joined Currant & Co as a partner. It has been suggested that due to his familiarity with Orange, he should be appointed to provide an independent partner review for the audit.

Once Orange obtains its stock exchange listing it will require several assignments to be undertaken, for example, obtaining advice about corporate governance best practice. Currant & Co is very keen to be appointed to these engagements, however, Orange has implied that in order to gain this work Currant & Co needs to complete the external audit quickly and with minimal questions/issues.

The finance director has informed you that once the stock exchange listing has been completed, he would like the engagement team to attend a weekend away at a luxury hotel with his team, as a thank you for all their hard work. In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced interest rate.

Orange is aware that subsequent to the stock exchange listing it will need to establish an audit committee, and has asked for some advice in relation to this.

The finance director has made two offers to members of the audit team:

(1) Weekend away

(2) Loan at reduced rates

Which of the following correctly summarises which of the offers, if any can be accepted?

• (1) Accepted (2) Accepted

• (1) Accepted (2) Not accepted

• (1) Not accepted (2) Accepted

• (1) Not accepted (2) Not accepted

One of the shareholders, who is not an executive director, has heard about Conoy's plans to establish an audit committee. He has drawn up a list of statements which he feels the Board should review before making any decisions: Which TWO of the statements made by the shareholder are TRUE in relation to the establishment of the audit committee?

• Those remaining shareholders who are not already executive directors should be appointed as nonexecutive directors and should be part of the audit committee

• The chief internal auditor should not be part of the audit committee

• Establishing an audit committee will mean that there is a specialist group of individuals which is responsible for monitoring high quality internal controls

• Establishing an audit committee will mean that the external audit fee will be reduced

Once established, the audit committee will have many objectives. Which of the following does NOT form part of the audit committee's objectives?

• Safeguarding the privacy of whistleblowers

• Appointing the external auditor

• Monitoring the independence of the external auditor

• Implementing a policy on the supply of non-audit services by the external auditor

Conoy's internal audit department is currently not well understood or supported by the Board. Which TWO of the following statements describe the main advantages of establishing an audit committee?

• The position of the internal audit department will be strengthened within the organisation

• Corporate governance will be enhanced as the board of directors will report to the audit committee

• The effectiveness of the internal audit department will be improved as the audit committee will monitor and review its performance on a regular basis

• The workload of the internal audit department will be better managed as the audit committee will be able to minimise the extent to which the external auditors rely on the work of the internal auditors

Which of the following statements best describes why having an audit committee could help Conoy raise additional finance by addressing the concerns of the bank?

• The independent non-executive members of the audit committee can provide guarantees to the bank concerning Conoy's financial viability.

• The audit committee will have at least one member who has relevant financial experience. This person will be able to stand in for as Conoy's finance director before a new finance director is appointed.

• The audit committee will have at least one member who has relevant financial experience, so that they can monitor the integrity of the financial statements

• The audit committee will review all the available evidence to substantiate information in financial reporting, thus improving the credibility of the financial statements

RWG & Co, Conoy's external auditor, believes that Conoy establishing an audit committee would bring the external auditor additional benefits. Which of the following is NOT an advantage to RWG & Co of Conoy establishing an audit committee?

• h of the following is NOT an advantage to RWG & Co of Conoy establishing an audit committee? RWG & Co would be able to report its audit findings and recommendations to an independent subcommittee

• RWG & Co would have a sub-committee with which it could raise issues of concern

• The audit committee will support RWG & Co's viewpoint in the event of any disputes with the management of Conoy

• The audit committee would have more time to examine RWG & Co's reports and recommendations and so providecomfort that recommendations and other matters are being considered and reviewed (Total = 10 marks)

From a review of the information above, your audit assistant has highlighted some weaknesses in SGCC's corporate governance especially concerning the composition of the Board. Which of the following actions are appropriate to improve SGCC's corporate governance compliance?

• SGCC should appoint an external consultant to review board policies

• SGCC should appoint a new Chief Executive Officer or board Chairman

• SGCC should create a Remuneration Committee to oversee the appointment of new directors

• SGCC should implement a formal and rigorous evaluation of its directors' performance once every two years

Which ONE of the following statements is correct with regards to the composition of the board at SGCC?

• SGCC should appoint three new non-executive directors to the board

• SGCC should re-appoint two of its executive directors as non-executive directors

• SGCC should appoint three new executive directors to the board

• SGCC should re-appoint three of its executive directors as non-executive directors

Your audit assistant does not feel that SGCC's approach to internal controls is sufficiently robust to comply with corporate governance principles and has drawn up a list of recommendations. Which TWO of the following recommendations are valid?

• SGCC should establish an audit committee with at least four directors as is required for all listed companies

• SGCC must establish an internal audit department as is required for all listed companies

• Once SGCC has an audit committee and an internal audit department, the head of the internal audit department should report to the audit committee

• SGCC should not rely on the external audit to inform them of deficiencies in internal controls