2Pear’s directors are considering establishing an internal audit department next year, and the finance director has asked
about the differences between internal audit and external audit and what impact, if any, establishing an internal audit
department would have on future external audits performed by Apple & Co.
Required:
(d) Distinguish between internal audit and external audit. (4 marks)
(e) Explain the potential impact on the work performed by Apple & Co during the interim and final audits, if Pear
International Co was to establish an internal audit department. (4 marks)
(30 marks)
3 [P.T.O.2 (a) HKSA 300 Planning an Audit of Financial Statements provides guidance to assist auditors in planning an audit.
Required:
Explain the benefits of audit planning. (4 marks)
(b) HKSA 530 Audit Sampling provides guidance on methods for selecting a sample of items for testing.
Required:
Identify and explain THREE methods of selecting a sample. (3 marks)
(c) Describe the three types of modified audit opinions. (3 marks)
(10 marks)
3 (a) Explain the external auditors’ responsibilities in relation to the prevention and detection of fraud and error.
(4 marks)
You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who
specialise in the provision of loans and financial advice to individuals and companies. Currant & Co has audited
Orange for many years.
The directors are planning to list Orange on a stock exchange within the next few months and have asked if the
engagement partner can attend the meetings with potential investors. In addition, as the finance director of Orange is
likely to be quite busy with the listing, he has asked if Currant & Co can produce the financial statements for the
current year.
During the year, the assistant finance director of Orange left and joined Currant & Co as a partner. It has been
suggested that due to his familiarity with Orange, he should be appointed to provide an independent partner review
for the audit.
Once Orange obtains its stock exchange listing it will require several assignments to be undertaken, for example,
obtaining advice about corporate governance best practice. Currant & Co is very keen to be appointed to these
engagements, however, Orange has implied that in order to gain this work Currant & Co needs to complete the external
audit quickly and with minimal questions/issues.
The finance director has informed you that once the stock exchange listing has been completed, he would like the
engagement team to attend a weekend away at a luxury hotel with his team, as a thank you for all their hard work.
In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced
interest rate.
Required:
(b) (i) Explain SIX ethical threats which may affect the independence of Currant & Co’s audit of Orange
Financials Co; and
(ii) For each threat explain how it might be reduced to an acceptable level. (12 marks)
(c) Orange is aware that subsequent to the stock exchange listing it will need to establish an audit committee and
has asked for some advice in relation to this.
Required:
Explain the benefits to Orange of establishing an audit committee. (4 marks)
(20 marks)
