When producing an audit report, auditors may face different circumstances which may mean a True and Fair audit opinion is not appropriate.

Required:

Explain the potential effect on the final audit report of each of the following scenarios: (for outlining the effect on report and rationale. Three or four marks for each of the three scenarios to maximum of ten.)

1. Audit tests on purchases indicate a weakness in the internal control system, with a potential overstatement of cost of sales of HK$5 million. Total purchases amount to HK$100 million.
2. Just before the audit report is to be signed, a client which supplies fresh food to a major supermarket hears that it is being sued due to customer complaints of severe illness having bought and eaten the food supplied by the client. The client fears that this may lead to other lawsuits from many other people. The position has been fully explained in a note to be added to the notes to the accounts.
3. During testing of non-current assets, a substantial amount of equipment was found to be located at the home of one of the directors. Enquiries relating to the equipment indicate that the director makes personal use of it. The equipment is included in the non-current assets balance in the financial statements.

Auditors are required to comply with the fundamental ethical principles which can be put at risk in a variety of circumstances.

Required:

1. List five threats to independence and objectivity and for EACH threat identify ONE example of a situation that may cause the threat to occur. (for each threat identified and half mark for each example.)

During the planning of audits, auditors perform tests of controls. Below are examples of typical controls found in many businesses: (for valid tests of control tailored to the controls provided in the question.)

1. Bank reconciliation document showing bank balance and accounting balance with adjustments for timing differences.
2. Authorisation of payments made to suppliers by signature of senior manager on payment instructions raised by payments clerk
3. Organisational chart showing directors and staff reporting lines.

Required:

Write down tests of controls which would give some assurance as to the effectiveness of the three controls noted above. You should write at least one procedure for each control.