Reference no: EM132592038 , Length: word count:2000

ACF 307 Issues in Auditing Assignment - Lancaster University, UK

ACCOUNTING AND FINANCE Questions -

Answer any TWO questions. For all questions, marks will be awarded for content, structure, coherence and clarity.

Question 1 -

a) By making reference to the three economics-based theories such as those presented in Wanda A. Wallace's "The Economic Role of the Audit in Free and Regulated Markets" (1980), discuss whether and how each theory justifies the need for the audit of a limited liability company.

b) Explain why the theories that you have used in part a) may be appropriate in justifying the audit of a large company but not so for a small company. Consider as part of your answer why the definition of 'small' matters in this context.

Question 2 -

a) Analyse the different types of modified audit opinion available to a U.K. auditor and discuss the circumstances in which each type of report is appropriate.

b) Explain how the form and content of audit reports for the financial statements of U.K. companies generally have changed in the past thirty years since the early 1990s, mentioning particularly changes in the most recent years, since 2010. Suggest reasons why all these changes have occurred and discuss their implications for the successful communication of the auditor's opinion of the truth and fairness of financial statements.

Question 3 -

(For parts a) and b), assume that no regulatory or other constraints on auditor behaviour exist.) Carrie Davidson is a junior partner in Victor & Co, a small firm of auditors. This is Carrie's first year as a partner in charge of the audit of Edmund and Henderson p.l.c. (E&H), a large manufacturer of military weapons that sells mainly to the governments of developing nations. E&H is a long-established and very important client for Victor & Co and Carrie is very pleased to have been entrusted with the audit.

Carrie has also been delighted to discover that the CFO of E&H is her old university friend, Bradley Simmons. In recent months, Bradley has helped Carrie get to know E&H by inviting her on a number of occasions to discussions over lunch. Recently, Bradley has invited Carrie to a party to celebrate the bonus he is due to receive this year (based on the profit shown in the draft of the accounts currently being audited).

A further positive development as far as Carrie is concerned is the recent agreement with Bradley that Victor & Co will provide advice on improving E&H's internal controls: this should prove to be quite lucrative for Victor & Co.

As this year's audit work has progressed, the audit team has drawn Carrie's attention to a number of issues:

i. An aspect of the system of internal control that permits Bradley to make journal entries without the involvement or authorisation of any other person;

ii. The existence of various payments, unsupported by any appropriate documentation, that have been posted to a 'Miscellaneous Sales Commission Expenses' account;

iii. Various unusual entries in the accounting records of E&H, each of which has the effect of increasing the reported profit.

Required: a) Discuss the situation facing Carrie on the E&H audit through a detailed analysis of each of the above issues.

b) Help Carrie by providing advice on how she should deal with each of the issues.

c) Specify which regulatory and other constraints, in the U.K., would be relevant to the scenario outlined above and could help avoid the problems evident in the audit of E&H.

Question 4 -

a) Analyse the current state of the U.K. market for audit services. In addition to including facts and (approximate) figures about the market, your answer should include discussion of the following:

The nature and types of information necessary as a basis for describing and analysing the market;

The particular techniques that may be used to analyse the market information used; and

A clear description of the actual state of the current market and some comments on how the market has developed over time.

b) Identify concerns that various commentators have regarding the structure of the audit market (as you have described in part a), and evaluate some of the suggestions made for changing the audit structure.

c) Specify what steps have actually been taken by the regulators to change the operations of the market. Give your opinion on whether these actions were appropriate.

Note - Required to choose 2 out of 4 questions. Each answer has a 1000-word limit (max 2000 words altogether). We do not require bibliography nor reference lists at the end of your answers. However, we expect in-text references if you cite some sources while answering the questions.