Singapore Prelim 2015

Feedback and Outline Solutions

1.
Students who attempted this did reasonably well at part a being able to
pick up most if not all of the major points.
a) Factors to consider include :
Rapid growth have adequate resources been allocated to expansion of
the accounting systems and controls?
Diversified into new areas can be good and bad bad for audit risk if the
management have taken on challenges they cannot handle
Small business dominated by owner/manager so a problem might arise if
anything were to happen to this key executive
Other specific audit problems associated with small businesses such as
informal controls and lack of audit trail
Pressure on existing staff who find it difficult to cope more likely to
commit errors or cut corners
Skills and competence of new member of staff need to be assessed
Is it wise to have spent most of the time on developing a new system
rather than dealing with the pressure on the existing staff?
Is it wise to introduce the system part way through the year?
Impact of changes in key controls on the audit, timing and extent of
systems testing
Possible independence issues the firm have been providing accounting
services
Possible flotation increases risk reliance on accounts by third parties

2 marks for each point raised if and if discussed in depth

Less well done was part b) which often involved an unnecessary
reproduction of the audit risk formula and little else. Thinking about the
problems of changing systems should be able to come up with a number
of potential pitfalls leading to increased risk as indicated below.
b) Students need to demonstrate awareness of factors that could increase
audit risk. A few students seemed to think it was the auditors
For example:
Suitability of the system for the purpose of maintaining adequate
accounting records
Expertise of the client in installing the system
Need for parallel running to ensure data is not lost/is processed
completely and accurately
Adequate client staff training
Adequacy of general controls over the new system

Adequacy of application controls

Impact of changes in systems and controls on audit systems testing
implications for audit planning
Adequacy of audit trails during the transition period
Maintenance of back up files/disaster recovery procedures
2 marks for each point addressed

2.
Most students wisely avoided this question which was tricky, involving
some difficult legal issues and a fair bit of inference. The issues in the case
study which lead to particular concerns that would need to be addressed
before the report is signed off include:
a)
Custom-design suggest a niche market much more susceptible to changing
demands.
Recent dramatic change in business suggests a risk of loss of customer base
unless handled carefully.
Cutting costs may not be appropriate for such a business. What evidence is
there for cutting costs? Where has it happened does it affect quality?
New management may create as well as solve problems.
The need to produce profits to satisfy quoted holding company might suggest
an incentive to massage the figures.
The auditors need to consider and test whether the 10% growth is authentic,
especially if prices have risen and the market is competitive.
Should they have looked at the source of labour? Was there anything to alert
them to the illegal labour?
The auditors should not be pressurised into forming their opinions too early or
letting the bankers dictate the timescale of the audit.
Going concern is clearly a problem after the TV programme. What is the
evidence that the banks will continue to support the company?
What are the disclosures management have made in the financial
statements? If the matter has not been clearly discussed, then an except for
type of disclaimer or even a disagreement report should be considered. If
disclosures are adequate then an emphasis of matter may be appropriate.
Holding company audited by another firm communication is essential
between auditors and getting clear instructions from the lead auditor is a
must.
b)
There was generally less appetite for answering this part although the
points readily suggested themselves to students who were on top of legal
liability.
Auditors expect to face law suits when clients fail and money is lost,
especially by banks.

Here they may also face claims from shareholders in the parent company, see
Barings No. 5 (auditors of a subsidiary owe a duty to the holding company).
Customers may sue company and auditors as creditors if they lose money
under the savings plans.
Disclaimer on the lines of the Bannerman wording is a must.
We could use Caparo/Al-Saudi Banque as a defence. But that was different
to here where the bankers are known to want the financial statements for a
particular purpose see ADT v. BDO.
The company may also be criticised for the allegedly illegal acts of
management though suing the auditors for the alleged illegal acts of the
client may be more difficult. Unless it can be shown that the auditors knew
about the illegal acts and tolerated them before the TV programme, the case
against them is flimsy. There is no suggestion that auditors police compliance
with general laws.

3. The common error here was failure to structure the answer as a report
to/from, title and date. Also a tendency by some students to want to talk
about independence generally before answering the question was an
unprofitable use of time.
The examples were intended to match fairly closely some of the clear cut
rules in the IESBA and/or various versions of that adopted in national rules.
Students generally showed good appreciation of the threats to independence
but poor awareness of the safeguards/recommended treatments for detailed
instruction on the legal position in Singapore see Singapore Statutes Online,
Code Of Professional Conduct And Ethics For Public Accountants And
Accounting Entities at statutes.agc.gov.sg
Alexis & Co
a)
Client A
Self-interest threat the IFAC Code states that auditors should not hold
shares in an audit client. They cannot appear independent even if they are
actually objective and it is unlikely that they will actually be independent if they
have an interest in the companys success. It does not matter that the shares
held are a small proportion of the total their value may be significant to the
partner but outsiders cannot assess whether this may sway the auditors
judgement. Students who said that the partner/shareholder should not be
allowed to audit that client had missed the point.
Client B
The provision of other services to audit clients is a contentious area. Some
argue that no other services should be provided others that it is inefficient to
prevent the provision of non-audit services. The IFAC Code makes some fine
distinctions between those other services which can be carried out for public
interest companies and those that cannot. For example, accounting and

book-keeping cannot whereas tax planning and valuation services may be

offered, provided safeguards are in place. As a minimum, notes to the
financials should indicate the split of the total fee, a description of the services
and possibly an explanation of why they were necessary. NAS fees in excess
of audit fees may cause others to question the independence of the audit (and
are strongly resisted in Singapore).
Client C
Employment of an ex-partner. The IFAC Code expects a delay of at least two
years between a partner leaving the firm and his/her taking up a senior
position in a client company with responsibility for the financial statements.
Familiarity and intimidation threats. Strictly the firm should have resigned the
audit and not been re-appointed for two years.
Client D
The Code says that hospitality may impair objectivity familiarity and selfinterest threats. Auditors may be reluctant to find fault if they think their perks
may be cut. Hospitality if accepted at all should be of insignificant value. The
cruise seems to be overly generous and is unlikely to be of a trivial value.
Strictly those concerned should refund the cost to the client though this
unlikely to be practical.
Client E
Self-interest threat the Code says that auditors should not have a financial
interest in their clients such as lending them money, which is what happens
effectively when fees are not collected on time. Auditors may not be objective
if they stand to lose money. Fees should be collected promptly in
Singapore the suggestion is that the fees must have been received before the
audit report is signed for the current year, though whether this is realistic is
debatable..
b)
Again too often part b was unattempted or only poorly attempted
despite a reasonable effort being made of part a). Students must have more
confidence in their ability and though they may not know enough to get perfect
marks, some commentary will earn some credit. Students who have read
ACRA reports will have received plenty of hints and material which could have
been used in answer to this part of the question
(https://www.acra.gov.sg/uploadedFiles/Content/Publications/Audit_Practice_
Bulletin/2012/AUDITPRACTICEBULLETINNO2OF2012final18Sept.pdf)

Training and education on the need for ethical standards

1. Adopt and implement IFAC Code
2. Circulate a list of all clients and instruct staff that they must not hold
shares in these clients
3. Instruct staff to inform a partner if they or their immediate family do
come into possession of shares in clients
4. Instruct those in charge of fees to collect them promptly
5. Instruct staff to be on guard against undue hospitality

6. Have policies in place to ensure that NAS are pursued only to an

acceptable level and to communicate with the audit committee about
the level of NAS.
7. Audit fee earners should not be rewarded for selling NAS
8. Ensure that NAS fees for services which are acceptable are discussed
with the audit committee and are properly disclosed in the clients
accounts

4. Part a of this question was well done and part b as with others
surprisingly poorly answered.
a)
Leaving the business to others is fraught with risk so controls need to be
instituted and ideally Billy should be prepared to either get more involved,
establish tighter controls at a cost or be prepared to suffer losses.
Recommending small clients to take on more staff just so that we can have
the segregation of duties one might expect in a large business is usually
impractical/infeasible.
CCTV is a good protective device against employees and customers theft,
relatively inexpensive and practical
The owner making unannounced visits is a good on an irregular basis and
doing spot checks are measures he should consider in order to check
employees exist and stock is physically there
Regular reports on detailed turnover figures should be produced and sent to
Billy to monitor and enquire on unusual items/patterns. There is a risk that
takings might be pocketed.
Stock checks before re-ordering and on a regular basis and tally with sales
figures. We need regular estimates of stock losses to see when in particular
they occur.
Reports of orders to suppliers this might reduce the scope for staff ordering
goods that never make it to the shelves.
Regular dipping of tanks of petrol not just stock counts of confectionery items
to reduce the risk of unrecorded sales.
Take readings from pumps and tally with sales of petrol through the till
Checks on till takings and tally with bankings it could be that the manager is
syphoning off funds on the way to the bank
More secure banking arrangements must reduce the risk of theft by third
parties
Limits must be put on managers discretion overdraft limit is not an effective
control. Maximum payments above which the owner needs to authorise.
Setting the maximum overdraft is inviting trouble.
Regular reports on purchase price and sale price of cars is the manager
skimming? Overstating purchase price, understating selling price? Some
reference to independent market guide to car prices might reduce scope for
this sort of fraud.

b) This part amazingly threw so many students. If it had been asked as a

standard expectation gap question no doubt the result would have been
different. This shows that students must be flexible and be prepared to adapt
to an unfamiliar question. Many answers became with a simple statement
that the audit IS a safeguard against fraud with no caveat or reservation.
Nothing could be worse!
Auditors cannot be complete safeguard against fraud
They attend periodically but not constantly
Check some but not all items
They can only check what is there so if invoices are suppressed may not be
detected
Management and owners (Billy) have to take care to reduce risk of fraud
they do so by having controls in place and by taking a direct interest and
involvement
Auditors plan and perform audit with a view to having a reasonable chance of
detecting material misstatements
Their aim is to form an opinion on the view given by the accounts.
5. The most common error here was to talk about types of evidence rather
than methods of obtaining.
Inquiry of knowledgeable persons inside or outside the entity, based on
interviews concerning effectiveness of controls
Observation as a test of controls e.g. check on stock count by seeing
instructions followed
Inspection examination of documents, records or tangible assets.
Reperformance as a test of controls by performing the task done by an
employee to verify the result of the transaction e.g. trace sales prices
on invoices to price list
Reliability will often depend on the skill of the auditor
General points include:
Documentary EVIDENCE more reliable than oral EVIDENCE
auditors should record their E or take copies
Original documents more reliable than photocopies or faxes to avoid
risk of EVIDENCE manipulation
Audit EVIDENCE from accounting records more reliable when
accounting and internal controls are effective
EVIDENCE from external sources more reliable than that obtained
from the client
EVIDENCE obtained directly by the auditor is more reliable than E
obtained by or from the entity
Consistent EVIDENCE is more persuasive than contradictory pieces of
E
EVIDENCE generated by auditor more reliable than EVIDENCE
generated by third parties or the client
6. A number of issues could be raised:
LSE/Corporate Governance Code delegates authority to the audit
committee

ACs job to ensure reporting and internal control OK

Maintain relations with external auditors
Governance Code suggests role and responsibilities:
o Integrity of financial accounting policies, estimates, judgment, unusual
items
o Internal controls
o Recommendations re. external auditors incl. independence
o Objectivity and effectiveness and policies re. non-audit services
o Risk management systems
o Meet regularly / commencement of audit, interim and preliminary
results
o External audit process
o Report for shareholders
Problems:
Potential burden on AC of heavy responsibilities
Pressure may cultivate caution and inhibit managers in taking risks
Compliance mentality
Responsibilities and scrutiny lead to difficulties in making appointments
Considerable time and effort required
Risk to individual reputation

7. This question was probably the worst attempted because too often students
simply presented a list of items contained in the auditors report rather
than discussing the impact of that key phrase TFV.
T & FV is a term of art it means a particular thing to accounting
specialists which the everyday meanings of the words do not fully
convey.
Generally we expect the most appropriate accounting policies have
been used, the have been consistently applied and are adequately
disclosed. We assume also that IFRSs, GAAP etc have been followed.
Policies not subject to GAAP should accord with industry norms
generally.
Other ideas behind T&FV include:
Not materially misleading
Substance over form
No intention to deceive
Accurate figures used or reasonable estimates otherwise
Implications for auditors are more difficult to assess but generally the
notion that there might be more than one T&FV comes as a surprise so
that the idea that the auditors report is only an opinion not a certificate
might be met with disbelief or cynicism. Some attempt is made to
describe the audit approach in the audit report (eg regarding
accounting policies) but this is not explicitly linked to T&FV.
There might be some discussion of alternative audit reporting
7

strategies which have been suggested over the years eg just reporting
in terms of fairness or reasonableness or not mentioning fairness at all.

8.

There are so many points that could have been raised in this basic
question but few students even tried to answer it.
Firms produce guidance to set standards for performance
If not followed professional reputation damaged
Fundamental principles: basic advice on professional behaviour
Expectations in various circumstances
Expected to follow spirit

Values expressed:
Integrity: honesty, fair dealing and truthfulness
Objectivity: together with integrity essential for auditor
Due skill, care, diligence
Technical and professional standards expected
Objectivity and independence varies with each assignment
Professional Competence
Firm achieves and maintains competence by:
Recruitment procedure
Training
Supervision
Work experience
Maintain competence through:
Technical knowledge
Analytical and judgemental skills
Communication skills
Leadership skills
Business relationships
Qualifications
Personal qualities
Details in firms manual.
Competence levels reviewed annually for each individual on the audit
staff.