Paper F8

Audit & Assurance

Section A – Kindly highlight your answers in yellow

Q1) 2 x 5 = 10 Marks; Q2) 1 x 5 = 15 Marks

Q1. You are an audit manager in Miranda & Co and you are planning the audit of Milberry Co which
manufactures luxury handbags and other fashion accessories. Milberry Co has been an audit client of your
firm for four years.
From a review of the correspondence file, you note that the audit engagement partner and the finance
director have known each other socially for many years and in fact went on holiday together last summer
with their families. As a result of this friendship, the partner has not yet spoken to the client about the fee for
last year’s audit, 20% of which is still outstanding.
The financial controller of Milberry Co was appointed two months ago. Prior to this appointment the financial
controller was an audit senior at Miranda & Co and was a member of the audit team for Milberry Co.
Employees of Milberry Co are entitled to purchase handbags at a discount of 40% and during the planning
meeting with the finance director, you and your audit team are offered the same level of staff discount.
The finance director has asked if your firm will prepare the company’s tax return and provide tax advice to
minimise the amount of tax payable.

1. Select which threat to objectivity is created by the information obtained

from the review of the correspondence file.

The partner and the finance director have known Advocacy Familiar Self-
each other socially for many years ity interest
40% of the fee for last year’s audit is still outstanding Advocacy Familiar Self-
ity interest

(2 marks)
2. Which is the MOST appropriate response to the outstanding fees from
Milberry Co?
a) The auditor should resign from the client
b) The auditor should report the client to the ACCA
c) The auditor can continue working for the client but should ensure that the audit firm’s credit control
department are informed of the outstanding fees
d) The auditor’s report for this year should not be issued until the fees have been paid
(2 marks)
3. Which of the following statements in respect of the relationship between
the new financial controller and the audit firm are TRUE?
a) The audit approach should be revised to ensure procedures and items to be tested are not predictable
b) The audit team should comprise people who know the audit senior as this will make the audit run more
smoothly and increase efficiency
c) The firm must resign as auditor as the threat to objectivity is too significant to safeguard
d) The audit senior should not be allowed to be the financial controller and should resign
(2 marks)
4. Which is the MOST appropriate response with respect to the discount
offered by Milberry Co to the audit team?
a) The discount may be accepted as it is the same as that offered to the client’s employees
b) The discount should be rejected as it is unlikely to be a trivial monetary amount
c) The discount should be rejected as gifts or hospitality are not acceptable per the ACCA
Code of Ethics and Conduct
d) Audit manager approval must be obtained before the discount is accepted
(2 marks)

5. Select the option which correctly identifies whether or not a self‐review

threat is likely to arise in relation to the tax services requested.

Tax return Tax advice

A Yes Yes
B No No
C Yes No
D No Yes

a) Option A
b) Option B
c) Option C
d) Option D

(2 marks)

Q2. Cameron Co has recently become a listed company. Cameron Co is required to comply with corporate
governance principles in order to maintain its listed status. The finance director, Lindsay Lewis has
undertaken a review of compliance with corporate governance regulations.
Board composition
Cameron Co’s board of directors comprises six members:
Name Role(s) Length of service at
Cameron Co
Ola Osbourne Chief executive and chair 5 years
Lindsay Lewis Finance director 10 years
Hayden Huq Sales director 5 years
Karie Khan Human resources director 7 years
Jules Jardine Non‐executive director 10 years
Taylor Tahir Independent non‐executive director 3 years
Directors were last subject to re‐election three years ago.

Ola Osbourne has been the chief executive of Cameron Co for five years and has recently been appointed as
board chair. Ola Osbourne is considering appointing a close friend as a non‐executive
director.

Taylor Tahir is responsible for ensuring employee interests are represented in board discussions.

Directors’ remuneration
Executive directors are paid a fixed salary which increases annually in line with inflation. There is
no performance related pay or bonus awarded to the executive directors as the company does not
want to provide incentive for financial results to be manipulated.

Audit committee
The company does not have an audit committee as the board of directors did not consider it
necessary due to the experience of Lindsay Lewis. They are aware that an audit committee is now
required and have proposed that one is established comprising the two non‐executive directors,
Lindsay Lewis and Ola Osbourne.

1 Select whether the following matters in respect of board composition

represent a corporate
governance strength or deficiency.

Ola Osbourne is the chair and chief executive Strength Deficiency

Taylor Tahir is the designated person to assist with Strength Deficiency
workforce engagement
Ola Osbourne is considering appointing a close Strength Deficiency
friend as a non‐executive director
(1 mark)

2. Which of the following can be a member of the audit committee once

established?
a) Ola Osbourne
b) Lindsay Lewis
c) Jules Jardine
d) Taylor Tahir

(1 mark)

3. Match the two issues given to the most appropriate response

Issue Response
1. The Board is not balanced A An Audit Committee should be set up
2. Executive Directors are paid a fixed immediately
salary which increases annually in line B Establish specific criteria to assess
with inflation candidates to ensure appointments
are based on merit and relevant
skills and experience
C Introduce share options to align the
remuneration of executive directors
with the long‐term success of the
company
D Appoint three more independent
non‐executive directors
E Reduce the number of executive
directors on the board

(1 mark)
4. Which of the following would NOT ensure Cameron Co is compliant with
corporate governance principles?
○ Jules Jardine should replace Ola Osbourne as chair
○ All directors should be subject to re‐election this year
○ A Nomination Committee should be established
○ Directors contracts should be reviewed to ensure notice periods are one year or less
(1 mark)

5. Select whether the following statements in relation to directors’

remuneration are true or
false.

Remuneration of directors should be set by the Nomination Committee True False

Workforce remuneration should be taken into consideration when setting the True False
remuneration of executive directors

The company should be able to withhold bonuses and share awards from directors True False
whose performance is not acceptable

(1 mark)

Section B – 25 Marks

5 questions – 5 marks each

Q3. List & explain the five elements of an assurance engagement

a- Three Party Relationship: This Involves the Assurance provider (Auditor), Intended User (Recipient).
b- Subject Matter: Subject Matter is the company’s Financial Statements.
c- Subject Criteria: It’s a standard or benchmark on which subject matter is evaluated.
d- Sufficient evidence: Assurance Provider must contain sufficient evidence to support the Subject Matter
e- Written Assurance Report

Q4. List & explain FIVE rights that enable auditors to carry out their duties

a- Access to Company books and records.

b- Enquiring the Staff and Those charge with governance
c- Professional Judgment Auditor should not be pressure by the management.
d- Confidentiality, there should be transfer of information to other parties.

Q5. Explain the role of a remuneration committee and list THREE advantages

a- Decision About Those Charge with Governance Pay Are Made by A Group Reducing the Risk of Bribery.
b- Those Charge with Governance is Not Involved to Set Their Own Pay.
c- The committee can help to identify and address potential conflicts of interest related to executive
compensation.

Q6. List and explain the FIVE fundamental principles expected of a professional accountant

Q7. State and briefly explain the preconditions of an audit

a- Determine whether the financial reporting framework is Acceptable.

b- Those charge with Governance Acknowledge its responsibility for Presentation of financial
statements.
c- Those charge with Governance Acknowledge its responsibility for Internal Control
d- Those charge with Governance Acknowledge its responsibility for Providing Auditor Access to All
information and enquiry the staff.