Cerberus Bank UK (CBU) is an investment bank based in Birmingham.

You are an audit senior working for Roger, Alex and Co. (RAC), a firm of ICAEW Chartered Accountants. RAC has been the external auditor of CBU for almost nine years with Alan Bill is the engagement partner.

You are assigned to the audit of CBU for the year ended 30 June 2020. You are focusing on the audit of client assets in accordance with the Financial Conduct Authority (FCA)'s Client Assets (CASS) rules.

CBU holds client assets in the form of client money, safe custody assets e.g. shares held on behalf of a customer, and collateral as security for customers' derivative positions. Its clients do not designate this collateral as customer deposits to be held on CBU's statement of financial position.

The Financial Reporting Council (FRC) under the CASS framework requires that external auditors provide a reasonable assurance report that the firm had adequate internal control systems to comply with CASS and that the firm was in compliance at the end of the period. The CASS auditor must also make breaches schedule for the report to record all breaches identified through the auditor's work and to collate breaches reported by the firm and third parties.

You have received the following email from Sara Reese, the CBU's Finance Director (FD):

To:Audit Senior, RAC

From:Sara Reese

Date:1 August 2020

Subject:Client Assets of CBU

In February 2020, CBU acquired 100% shareholding in Hannick, a stockbroking firm based in London. Details have been provided in theExhibit 2.1.

I am concerned about the CASS audit and wish to avoid any problems which would negatively impact CBU's reputation. I believe that the clean CASS return will reassure CBU's customers and investors.

As you know, we are under pressure to retender the audit on a regular basis which we have so far resisted given the long-standing relationship between CBU and RAC. We would need to review this if there are any problems with the financial statements audit or the CASS audit report because this will cause reputational and investor problems.

Exhibit 2.1: Details on Hannick's acquisition

Hannick holds client assets and has permission from the FCA to do so. Hannick has reported some breaches of CASS in that, client money has not been clearly identified as client assets within the accounting system and therefore it was incorrectly included in Hannick's own balances for management reporting purposes.

The integration of Hannick's business within CBU group is taking longer than anticipated. The group policies and procedures for the enlarged group are yet to be implemented. There is some uncertainty regarding reporting lines and duplication of roles.

CBU plans to integrate the accounting systems of CBU and Hannick to enable the group to operate effectively and efficiently. This process began in early June 2020.

Hannick uses a third-party administrator to perform clearing and settlement functions for its stockbroking. Sara Reese has informed us that, therefore Hannick has passed on some of its CASS responsibilities.

REQUIREMENTS

A)Identify and explain the key audit risks surrounding internal controls in the CBU group for the year ended 30 June 2020. For each audit risk, explain the relevant audit procedures necessary to gain assurance over CBU group's client assets.(21 marks)