Section A – BOTH questions are compulsory and MUST be attempted
1、You are an audit manager in Montreal & Co, a firm of Chartered Certified Accountants, and you are responsible for the audit of the Vancouver Group (the Group). The Group operates in the supply chain management sector, offering distribution, warehousing and container handling services.
The Group comprises a parent company, Vancouver Co, and two subsidiaries, Toronto Co and Calgary Co. Both of the subsidiaries were acquired as wholly owned subsidiaries many years ago. Montreal & Co audits all of the individual company financial statements as well as the Group consolidated financial statements.
You are beginning to plan the Group audit for the financial year ending 31 July 2016, and the audit engagement partner has sent you the following email:
Notes from meeting with the Group finance director and audit committee representative
The Group has not changed its operations significantly this year. However, it has completed a modernisation programme of its warehousing facilities at a cost of $25 million. The programme was financed with cash raised from two sources: $5 million was raised from a debenture issue, and $20 million from the sale of 5% of the share capital of Calgary Co, with the shares being purchased by an institutional investor.
An investigation into the Group’s tax affairs started in January 2016. The tax authorities are investigating the possible underpayment of taxes by each of the companies in the Group, claiming that tax laws have been breached. The Group’s tax planning was performed by another firm of accountants, Victoria & Co, but the Group’s audit committee has asked if our firm will support the Group by looking into its tax position and liaising with the tax authorities in respect of the tax investigation on its behalf. Victoria & Co has resigned from their engagement to provide tax advice to the Group. The matter is to be resolved by a tribunal which is scheduled to take place in September 2016.
The Group audit committee has also asked whether one of Montreal & Co’s audit partners can be appointed as a non-executive director and serve on the audit committee. The audit committee lacks a financial reporting expert, and the appointment of an audit partner would bring much needed knowledge and experience.
Financial information provided by the Group finance director
Consolidated statement of financial position
Consolidated statement of profit or loss for the year to 31 July
Briefing notes
To: Albert Franks, audit engagement partner
From: Audit manager
Subject: Vancouver Group audit planning
Introduction
These briefing notes are prepared for use in the audit team briefing for the Vancouver Group (the Group). Following a meeting between the audit partner and the Group finance director and a member of the Group audit committee, and using information provided, audit risks have been identified and explained. Analytical procedures have been used to identify several audit risks, and the briefing notes also explain why analytical procedures are required as part of risk assessment. Finally, the briefing notes discuss the ethical implications of suggestions made by the Group audit committee.
(a) Analytical procedures and risk assessment
According to ISA 520 Analytical Procedures, analytical procedures are the evaluation of financial information through analysis of plausible relationships between both financial and non-financial data. Analytical procedures can involve comparisons of financial data including trend analysis and the calculation and comparison of ratios. Analytical procedures include comparisons of the Group’s financial information with, for example:
Comparable information for prior periods;
Anticipated results of the Group, such as budgets or forecasts;
Expectations of the auditor; or
Comparable information from competitors.
Analytical procedures performed at the planning stage help the auditor to identify and respond appropriately to risk, and to assist the auditor in obtaining an understanding of the audited companies within the Group.
ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment requires the auditor to perform analytical procedures as part of risk assessment procedures at the planning stage of the audit to provide a basis for the identification and assessment of risks of material misstatement at the financial statement and assertion levels.
An example of how analytical procedures assist the auditor is that performing analytical procedures may alert the auditor to a transaction or event of which they were previously unaware, therefore prompting the auditor to investigate the matter, obtain understanding of the matter and plan appropriate audit procedures to obtain sufficient appropriate audit evidence. Therefore analytical procedures are an essential part of developing the audit strategy and audit plan.
Analytical procedures may also help the auditor to identify the existence of unusual transactions or events, such as significant one-off events. Unusual amounts, ratios, and trends might also indicate matters which indicate risk. Unusual or unexpected relationships which are identified by these procedures may assist the auditor in identifying risks of material misstatement, especially risks of material misstatement due to fraud.
Without performing analytical procedures, the auditor would be unable to identify risks of material misstatement and respond accordingly. This would increase detection risk, making it more likely that an inappropriate audit opinion could be issued.
(b) Audit risk evaluation including analytical procedures
Selected analytical procedures and associated audit risk evaluation
