QUESTION 1

Part A

Many shareholders and investors think that an audit provides a certification of the financial health of a company. This misunderstanding can result in serious consequences.

Required:

1. Explain why shareholders and investors often view an audit as guaranteeing the companys results or as providing assurance that

their investment is of high quality. (3 marks)

2. Identify two (2) ways in which the audit profession tries to manage

the expectations of users of audited financial reports. (2 marks)

Part B

Consider the following independent situations:

1. Archie Andrews, public accountant, performs the audit as well as prepares the tax returns and performs various management services for Mercury Ltd. One management service involved the assessment of the computer needs and identification of equipment to meet those needs. Andrews recommended a product sold by Mars Ltd, which has agreed to pay Andrews a 10% commission if Mercury Ltd buys its product.
2. Betty Cooper, public accountant, was scheduled to be extremely busy for the next few months. When a prospective client asked if Cooper would do its next years audit, she declined but referred them to Veronica Lodge, another public accountant. Lodge paid Cooper $200 for the referral.
3. Reggie Mantle, public accountant, has served Jupiter Ltd as auditor for several years. In addition, Mantle has performed other services for it. This year, the chief financial officer (CFO) has asked Mantle to perform a major computer system evaluation.

Required:

For each of the above independent situations (i) to (iii), state whether APES110 has been breached, and justify your answer. (9 marks)