Skip to content

Case Study Audit Team I

The first article in this series of two on Paper P7 case study questions discussed question style, what to look for in the requirements, how higher-level skills are tested, and the meaning of professional marks within a question requirement. This second article goes through part of a typical Section A case study question, applying the recommended approach described in the previous article. This approach comprises four stages.

STAGE 1 – UNDERSTANDING THE REQUIREMENT

The first thing to do is to read and fully understand the question requirement. Here is the requirement we will be looking at in this article:

‘Prepare a report, to be used by a partner in your firm, in which you identify and evaluate the professional, ethical, and other issues raised in deciding whether to accept the appointment as provider of an assurance opinion as requested by Petsupply Co.’ (12 marks)

Note: this requirement includes two professional marks.

Having read the requirement, break it down. You are asked to do two things:

  • identify, ie state from the information provided
  • evaluate, ie discuss from a critical point of view.


The requirement asks you to consider ‘professional, ethical, and other issues’. This could cover a wide range of considerations, such as:

  • ethics: independence, competence, conflicts of interest, confidentiality, assessing integrity
  • professional issues: the risk profile of the work requested, the fee – and whether it is sufficient to compensate for high risk, availability of staff, managing client expectations, logistical matters such as timing, legal and regulatory matters – such as money laundering, and (in some cases) obtaining professional clearance
  • other issues: whether the work ‘fits’ with the commercial strategy of the audit firm, the potential knock-on effect of taking on the work – such as the impact on other clients, or on other work performed for this client.


You are asked to produce a report, so remember that the professional marks available will be awarded for using the correct format, the use of professional business language, and for presenting your comments as a logical flow culminating in a conclusion.

From reading the requirement, you know that the question scenario will be based on a potential assurance assignment and will be broadly based around acceptance issues.

STAGE 2 – READING THE SCENARIO

When reading through the detail of the scenario, you should now be alert to information relevant to this requirement. Highlight important points that you think are relevant to the scenario and remember to focus on issues that could affect your acceptance of a potential assurance assignment.

Now read the following extract from the scenario and highlight the salient points – remember to look out for any factors relevant to the ethical, professional, and other issues described above.

Extract: You are a senior manager in Dyke & Co, a small firm of Chartered Certified Accountants, which specialises in providing audits and financial statement reviews for small to medium-sized companies. You are responsible for evaluating potential assurance engagements, and for producing a brief report on each prospective piece of work to be used by the partners in your firm when deciding whether to accept or decline the engagement. Dyke & Co is keen to expand the assurance services offered, as a replacement for revenue lost from the many small‑company clients choosing not to have a statutory audit in recent years. It is currently May 2007.

Petsupply Co has been an audit client of Dyke & Co for the past three years. The company owns and operates a chain of retail outlets selling pet supplies. The finance director of Petsupply Co recently communicated with your firm to enquire about the provision of an assurance report on data provided in the Environmental Report published on the company’s website. The following is an extract from the e-mail sent to your firm from the finance director of Petsupply Co:

‘At the last board meeting, my fellow directors discussed the content of the Environmental Report. They are keen to ensure that the data contained in the report is credible, and they have asked whether your firm would be willing to provide some kind of opinion verifying the disclosures made. Petsupply Co is strongly committed to disclosing environmental data, and information gathered from our website indicates that our customers are very interested in environmental matters. It is therefore important to us that Petsupply Co reports positive information which should help to retain existing customers, and to attract new customers. I am keen to hear your views on this matter at your earliest convenience. We would like verification of the data as soon as possible.’

You have looked at Petsupply Co’s Environmental Report on the company website, and found a great deal of numerical data provided, some of which is shown below in Table 1.

How Roffe Swayne Helped MR Solutions with their first audit

Background

Guildford-based MR Solutions (MRS) is an independent world leader in MRI technology. Developing and manufacturing the world’s first range of commercial, superconducting, cryogen-free (dry magnet), preclinical benchtop MRI systems.

Finance Director Ben Withinshaw was brought in nearly two years ago to help manage the company’s ongoing expansion into other imaging modalities. They took the decision to initiate an audit of the 2015 financial statements to support the growth programme. An audit was not required by law, but given the company’s forecast growth and international customer base, MRS felt it would be beneficial for stakeholders and demonstrate a robust financial position and enhance corporate credibility.

 

Our Approach

As this was MRS’s first audit, it was a new process for their accounts and management team. They were keen to appoint an auditor who would work well with the teams, and would fit in with their ethos and values. As an independent advisory firm, we understood their entrepreneurial nature and need for proactive advice and knowledge-sharing across management and accounting functions.

Our audit team worked both on and off-site with MRS. We provided a full service audit, including advice on their accounting policies, accounts production and internal systems.

Furthermore, MRS was applying for the Queens Award for Innovation at the time. So we were able to provide bespoke assurance regarding their turnover and employee numbers which formed part of the award process. MRS went on to win the award for 2016. For 2017 they have applied for the Queens Award for Enterprise.

 

How we helped

With a ‘first year’ audit, the prior year balance sheet must also be audited. This was challenging for MRS as they hold stock and a rigorous stocktake had not been undertaken at the previous year-end. As a result, we worked together to ensure that, as auditors, we could be comfortable with the opening balance sheet position and give an unmodified audit opinion. This meant an in depth review of stock movements over a 12 month period. A valuable exercise as it meant there was a clear view of stock in the business.

 

The result

As a result the company could confidently send a clean audit report to existing and potential customers. In addition MRS had clear and concise working schedules they could use throughout the year to prepare their management accounts.

Following the investment made by both sides for the first year audit, MRS was fully prepared for the 2016 audit. Consequently, this led to a highly efficient audit sign-off within 3 months of the year-end. Meaning the Management and Accounts teams were able to get on with other business management activities in plenty of time.

Want to know more?

You can find out more about our audit and assurance service or call 01483 416232.