Question 1 You are an audit manager in Princewill & Co, a firm of Chartered Accountants which offers a range of assuranc
Posted: Wed May 18, 2022 9:40 pm
Question 1 You are an audit manager in Princewill & Co, a
firm of Chartered Accountants which offers a range of assurance
services. You are responsible for the audit of Vestry Ltd, a
company which provides approximately 10% of your firm’s practice
income each year. The finance director of Vestry Ltd has recently
contacted you to provide information about another company, Soludo
Ltd, which is looking to appoint a provider of assurance services.
An extract from the email which the finance director of Vestry Ltd
has sent to you is shown below: ‘One of my friends, Gabriel Papa is
the managing director of Soludo Ltd, a small company, with annual
revenue of around £8 million, which is looking to expand in the
next few years. I know that Gabriel Papa has approached the
company’s bank for finance of £6 million to fund the expansion. To
support this loan application, Gabriel Papa needs to appoint a firm
to provide a limited assurance review on the company’s financial
statements. He would also want the appointed firm to provide tax
planning advice and to prepare both the company’s and his personal
tax computations for submission to Inland Revenue. I have asked
Gabriel Papa to contact you, and I hope that Princewill & Co
will be able to provide these services to Soludo Ltd for a low fee.
If the fee you suggest is too high, and unacceptable to Gabriel
Papa, then I will recommend that Gabriel Papa approaches Gullible
& Co instead, and I would also consider appointing Gullible
& Co to provide the audit of Vestry Ltd.’ Gullible & Co is
a firm of Chartered Accountants which has an office in the same
town as Princewill & Co. You have done some research on both
Soludo Ltd and Gabriel Papa and have confirmed that the company is
owner-managed, with the Gabriel Papa family owning 90% of the share
capital. Gabriel Papa is a director and majority shareholder of
three other companies. An article in a newspaper from several years
ago about Gabriel Papa indicated that one of his companies was once
fined for breach of employment law and that he had used money from
one of the company’s pension plans to set up a business abroad,
appointing his son as the managing director of that business.
Required: In relation to Princewill & Co’s potential
acceptance of Soludo Ltd as a client of the firm;
i. Explain the importance of performing know your client
procedures. [5 Marks]
ii. State FIVE specific actions the auditor should take in
performing know your client procedures. [5 Marks]
iii. Explain FIVE information the auditor should obtained in the
course of performing know your client procedures. [10 Marks]
iv. In relation to Princewill & Co’s potential acceptance of
Soludo Ltd as a client of the firm, explain FIVE ethical issues
that should be considered [10 Marks]
v. In relation to Princewill & Co’s potential acceptance of
Soludo Ltd as a client of the firm, explain FIVE other matters
(other than ethical) which should be considered. [10 Marks]
vi. Princewill & Co has agreed to perform an assurance
engagement for Vestry Ltd; the engagement will be a review of
prospective financial information which is needed to support the
company’s overdraft facilities. Vestry Ltd had a financial year
ended 30 September 2017, and an unmodified opinion was issued on
these financial statements last month. Princewill & Co’s
partner responsible for ethics has agreed that any threats to
objectivity will be reduced to an acceptable level through the use
of a team separate from the audit team to perform the work. The
operating profit forecast for the two years to 31 March 2020
prepared by a member of the accounting team of Vestry Ltd is shown
below, along with some accompanying notes.
Notes Six months to
Six months to Six months to
Six months to
30 September 31 March
30 September
31 March
2018
3019
2019
2020
£'000
£'000
£'000
£'000
Revenue 1
12,800
16900
13700
18900
Gross profit %
34%
45%
36%
46%
Operating costs:
Staff costs
-2800
-2900
-2800
-2900
Design costs
2
-1200
-1200
-1250
-1250
Marketing
-900
-1000
-1100
-1100
Interest on overdraft 3
-25
-10
0
0
Other expenses
4
-3840
-5070
-4110
-5670
Operating profit
4035
6720
4440
7980
Notes:
1. Vestry Ltd is a producer of greetings cards and giftware; the
demand for which is seasonal in nature.
2. Design costs are mostly payroll costs of the staff working in
the company’s design team, and the costs relate to the design and
development of new product ranges.
3. Vestry Ltd has agreed with its bank to clear its overdraft by
1 September 2019, and the management team is confident that after
that point the company will not need an overdraft facility.
4. The total ‘Other expenses’ is calculated based on 30% of the
projected revenue for the six-month period.
Required: State TWENTY procedures you would recommend should be
used in the review of the profit forecast.
firm of Chartered Accountants which offers a range of assurance
services. You are responsible for the audit of Vestry Ltd, a
company which provides approximately 10% of your firm’s practice
income each year. The finance director of Vestry Ltd has recently
contacted you to provide information about another company, Soludo
Ltd, which is looking to appoint a provider of assurance services.
An extract from the email which the finance director of Vestry Ltd
has sent to you is shown below: ‘One of my friends, Gabriel Papa is
the managing director of Soludo Ltd, a small company, with annual
revenue of around £8 million, which is looking to expand in the
next few years. I know that Gabriel Papa has approached the
company’s bank for finance of £6 million to fund the expansion. To
support this loan application, Gabriel Papa needs to appoint a firm
to provide a limited assurance review on the company’s financial
statements. He would also want the appointed firm to provide tax
planning advice and to prepare both the company’s and his personal
tax computations for submission to Inland Revenue. I have asked
Gabriel Papa to contact you, and I hope that Princewill & Co
will be able to provide these services to Soludo Ltd for a low fee.
If the fee you suggest is too high, and unacceptable to Gabriel
Papa, then I will recommend that Gabriel Papa approaches Gullible
& Co instead, and I would also consider appointing Gullible
& Co to provide the audit of Vestry Ltd.’ Gullible & Co is
a firm of Chartered Accountants which has an office in the same
town as Princewill & Co. You have done some research on both
Soludo Ltd and Gabriel Papa and have confirmed that the company is
owner-managed, with the Gabriel Papa family owning 90% of the share
capital. Gabriel Papa is a director and majority shareholder of
three other companies. An article in a newspaper from several years
ago about Gabriel Papa indicated that one of his companies was once
fined for breach of employment law and that he had used money from
one of the company’s pension plans to set up a business abroad,
appointing his son as the managing director of that business.
Required: In relation to Princewill & Co’s potential
acceptance of Soludo Ltd as a client of the firm;
i. Explain the importance of performing know your client
procedures. [5 Marks]
ii. State FIVE specific actions the auditor should take in
performing know your client procedures. [5 Marks]
iii. Explain FIVE information the auditor should obtained in the
course of performing know your client procedures. [10 Marks]
iv. In relation to Princewill & Co’s potential acceptance of
Soludo Ltd as a client of the firm, explain FIVE ethical issues
that should be considered [10 Marks]
v. In relation to Princewill & Co’s potential acceptance of
Soludo Ltd as a client of the firm, explain FIVE other matters
(other than ethical) which should be considered. [10 Marks]
vi. Princewill & Co has agreed to perform an assurance
engagement for Vestry Ltd; the engagement will be a review of
prospective financial information which is needed to support the
company’s overdraft facilities. Vestry Ltd had a financial year
ended 30 September 2017, and an unmodified opinion was issued on
these financial statements last month. Princewill & Co’s
partner responsible for ethics has agreed that any threats to
objectivity will be reduced to an acceptable level through the use
of a team separate from the audit team to perform the work. The
operating profit forecast for the two years to 31 March 2020
prepared by a member of the accounting team of Vestry Ltd is shown
below, along with some accompanying notes.
Notes Six months to
Six months to Six months to
Six months to
30 September 31 March
30 September
31 March
2018
3019
2019
2020
£'000
£'000
£'000
£'000
Revenue 1
12,800
16900
13700
18900
Gross profit %
34%
45%
36%
46%
Operating costs:
Staff costs
-2800
-2900
-2800
-2900
Design costs
2
-1200
-1200
-1250
-1250
Marketing
-900
-1000
-1100
-1100
Interest on overdraft 3
-25
-10
0
0
Other expenses
4
-3840
-5070
-4110
-5670
Operating profit
4035
6720
4440
7980
Notes:
1. Vestry Ltd is a producer of greetings cards and giftware; the
demand for which is seasonal in nature.
2. Design costs are mostly payroll costs of the staff working in
the company’s design team, and the costs relate to the design and
development of new product ranges.
3. Vestry Ltd has agreed with its bank to clear its overdraft by
1 September 2019, and the management team is confident that after
that point the company will not need an overdraft facility.
4. The total ‘Other expenses’ is calculated based on 30% of the
projected revenue for the six-month period.
Required: State TWENTY procedures you would recommend should be
used in the review of the profit forecast.