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ADVANCED AUDIT & ASSURANCE SCHEME
QUESTION ONE
(a) (i) Examples of the possible type of information that might have come to the
auditors’ attention that might indicate non-compliance with the Factories Act include:
Physical observation of the flooding by the Senior Partners on their visit to the
factory.
Tip-off from residents of the area, likely.
Investigation by a regulatory organisation or government department such as the
Environmental Protection Agency (EPA).
Payment of fines or penalties, if any.
Adverse media comments, likely. (5 Marks)
(ii) The auditors should consider the following, when evaluating the possible effect on
the financial statements for non-compliance with the law:
Going Concern applicability
The potential financial consequences, such as fines, damages, penalties, litigation,
threat of expropriation of assets and enforced discontinuation of operations.
Whether the potential financial consequences require disclosure like enforced
discontinuation of operations.
Whether the potential financial consequences are so serious as to call into
question the fair presentation given by the financial statements, or otherwise
make the financial statements misleading.
Provisions to be made in the accounts and contingencies. (5 Marks)
(b) (i) As the audit firm receives about 20% of its income from just one audit client, there
is a self-interest or intimidation threat. This is because the firm will be concerned about
losing the client.
The self-interest and intimidation threats are significant considering the nature and
duration of the breach – that is the high percentage of income from a single client
received for some time now; and the knowledge of the audit firm of such interest.
Secondly, the valuation services provided by the audit firm. If an audit firm performs a
valuation which will be included in financial statements audited by that firm, a self-
review threat arises. This threat is significant as the valuation of Land and Buildings of
all branches of the bank including the head office is material to the financial statement
to be audited. (4 Marks)
(ii) The possible safeguards for the self-interest or intimidation threats include:
Reducing the dependence on the client
Implementing external quality control reviews; or
Consulting a third party, such as a professional regulatory body or a professional
accountant, on key audit judgments.