【正确答案】Fraud responsibility Maple & Co must conduct an audit in accordance with ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements and are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. In order to fulfil this responsibility, Maple & Co is required to identify and assess the risks of material misstatement of the financial statements due to fraud. They need to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud,through designing and implementing appropriate responses. In addition, Maple & Co must respond appropriately to fraud or suspected fraud identified during the audit. When obtaining reasonable assurance, Maple & Co is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures which are effective in detecting error may not be effective in detecting fraud. To ensure that the whole engagement team is aware of the risks and responsibilities for fraud and error, ISAs require that a discussion is held within the team. For members not present at the meeting, Sycamore’s audit engagement partner should determine which matters are to be communicated to them.

【正确答案】Audit risks and auditors’ responses Audit risks Sycamore’s previous finance director left in December after it was discovered that he had been committing fraud with regards to expenses claimed. There is a risk that he may have undertaken other fraudulent transactions; these would need to be written off in the statement of profit or loss. If these have not been uncovered,the financial statements could include errors. The new finance director was appointed in January 2015 and was previously a financial controller of a bank. Sycamore is a pharmaceutical company which is very different to a bank; there is a risk that the new finance director is not sufficiently competent to prepare the financial statements,leading to errors. During the year, Sycamore has spent $1·8 million on developing new products; these are at different stages and the total amount has been capitalised as an intangible asset. However, in order to be capitalised it must meet all of the criteria under IAS 38 Intangible Assets. There is a risk that some projects may not reach final development stage and hence should be expensed rather than capitalised. Intangible assets and profit could be overstated. Sycamore has borrowed $2·0 million from the bank via a ten-year loan. This loan needs to be correctly split between current and non-current liabilities in order to ensure correct disclosure. Also as the level of debt has increased, there should be additional finance costs. There is a risk that this has been omitted from the statement of profit or loss, leading to understated finance costs and overstated profit. The loan has a minimum profit target covenant. If this is breached, the loan would be instantly repayable and would be classified as a current liability. If the company does not have sufficient cash flow to meet this loan repayment, then there could be going concern implications. In addition, there is a risk of manipulation of profit to ensure that covenants are met. There have been a significant number of sales returns made subsequent to the year end. As these relate to pre year-end sales, they should be removed from revenue in the draft financial statements and the inventory reinstated. If the sales returns have not been correctly recorded, then revenue will be overstated and inventory understated. During Sycamore’s year-end inventory count there were movements of goods in and out. If these goods in transit were not carefully controlled, then goods could have been omitted or counted twice. This would result in inventory being under or overstated. Surplus plant and equipment was sold during the year,resulting in a profit on disposal of $210,000. As there is a minimum profit loan covenant, there is a risk that this profit on disposal may not have been correctly calculated, resulting in overstated profits. In addition, significant profits or losses on disposal are an indication that the depreciation policy of plant and equipment may not be appropriate. Therefore depreciation may be overstated. Auditors’ responses Discuss with the new finance director what procedures they have adopted to identify any further frauds by the previous finance director. In addition, the team should maintain their professional scepticism and be alert to the risk of further fraud and errors. During the audit, careful attention should be applied to any changes in accounting policies and in particular any key judgemental decisions made by the finance director. A breakdown of the development expenditure should be reviewed and tested in detail to ensure that only projects which meet the capitalisation criteria are included as an intangible asset, with the balance being expensed. During the audit, the team would need to confirm that the $2·0 million loan finance was received. In addition, the split between current and non-current liabilities and the disclosures for this loan should be reviewed in detail to ensure compliance with relevant accounting standards. The finance costs should be recalculated and any increase agreed to the loan documentation for confirmation of interest rates and cashbook and bank statements to confirm the amount was paid and is not therefore a year-end payable. Review the covenant calculations prepared by Sycamore and identify whether any defaults have occurred; if so, determine the effect on the company The team should maintain their professional scepticism and be alert to the risk that profit has been overstated to ensure compliance with the covenant. Review a sample of the post year-end sales returns and confirm if they relate to pre year-end sales, that the revenue has been reversed and the inventory included in the year-end ledgers. In addition, the reason for the increased level of returns should be discussed with management. This will help to assess if there are underlying issues with the net realisable value of inventory. During the final audit, the goods received notes and goods despatched notes received during the inventory count should be reviewed and followed through into the inventory count records as correctly included or not. Recalculate the profit and loss on disposal calculations and agree all items to supporting documentation. Discuss the depreciation policy for plant and equipment with the finance director to assess its reasonableness.

【正确答案】(i) Review engagements Review engagements are often undertaken as an alternative to an audit, and involve a practitioner reviewing financial data, such as six-monthly figures. This would involve the practitioner undertaking procedures to state whether anything has come to their attention which causes the practitioner to believe that the financial data is not in accordance with the financial reporting framework. A review engagement differs to an external audit in that the procedures undertaken are not nearly as comprehensive as those in an audit, with procedures such as analytical review and enquiry used extensively. In addition, the practitioner does not need to comply with ISAs as these only relate to external audits. (ii) Levels of assurance The level of assurance provided by audit and review engagements is as follows: External audit – A high but not absolute level of assurance is provided, this is known as reasonable assurance. This provides comfort that the financial statements present fairly in all material respects (or are true and fair) and are free of material misstatements. Review engagements – where an opinion is being provided, the practitioner gathers sufficient evidence to be satisfied that the subject matter is plausible; in this case negative assurance is given whereby the practitioner confirms that nothing has come to their attention which indicates that the subject matter contains material misstatements.