ACCA F8 - Audit and Assurance Revision Kit 2016

Ethical threat
A senior member of the audit team has been offered
a short-term loan at significantly reduced rates.
This constitutes a self-interest threat as the
decisions made by this member of the audit team
could be influenced by a wish to take advantage of
the offer.
How it might be reduced
If the loan had been made at normal commercial
rates then the senior would be able to accept
without any consequences for independence.
In this case as the terms are preferential the loan
must be declined.
(c)
Benefits of an audit committee
The benefits of having an audit committee for Orange Financials Co include the following:
The introduction of non-executive directors will provide the Orange Financials Co with a wide range of
different expertise which can be used to help the executive directors to make key decisions.
It can help to improve the internal control environment of the company as the audit committee will
have the time to devote to this issue
It will provide the auditors with an independent point of reference in the event of a disagreement
arising during the course of the audit.
The audit committee will be able to assist the finance director by reviewing the financial statements. It
will also be able to provide advice on risk management to the executive directors and reduce the
opportunity for fraud. This will lead to increased confidence in the credibility and objectivity of the
financial reports.
It will provide a channel for the external auditors to communicate through. The audit committee is
normally also responsible for the appointment of the external auditors which enhances independence.
If Orange Financials Co have an audit committee, the internal auditors will be able to report to the
audit committee rather than the main board, enhancing their objectivity.
18 Salt & Pepper
Text references. Chapters 2 and 4
Top tips. This question tests your knowledge of audit acceptance procedures, preconditions, engagement letters
and ethical threats.
Part (a) focuses on the steps which an audit firm should take prior to accepting a new audit client, and the
preconditions of audit.
Part (b) required four matters to be included in an audit engagement letter.
Part (c) requires students to identify and explain ethical risks.
Easy marks. Lots of easy marks should be available here: notably in parts (b) and (c).
Examination Team's comments. In part (a)(i), some candidates focused solely on obtaining professional clearance
from the previous auditors and it was not uncommon to see a whole page on the detailed steps to be taken. The
question requirement was steps prior to accepting an audit; it was not the process for obtaining professional
clearance. Those that focused solely on this area would not have scored enough marks to pass this part of the
question. Candidates are reminded to answer the question actually asked as opposed to the one they wish had been
asked.
Part (a)(ii) for 3 marks required the steps the firm should take to confirm whether the preconditions for the audit
were in place. Where it was answered, candidates performed unsatisfactorily on this question. Answers tended to
be in two camps, those who had studied preconditions and were able to score all three marks and those who had
not studied it and so failed to score any marks. This is a knowledge area and has been tested in a previous diet.
Candidates must practice past exam questions and ensure they study the breadth of the syllabus.
Answers 71