A. Define the Internal Control System and discuss three of its main characteristics (10
B. Discuss the main rights and duties of the UK registered auditors (10 marks)
(Total of 20 marks)

Question 2
A. Explain the main types of audit based on its objectives. (10 marks)
B. You are an audit senior of OLA & Co, planning the final audit of a new client,
EAHO Construction Co, for the year ending 30 September 2019.
The company specialises in property construction and providing ongoing annual
maintenance services for properties previously constructed. Forecast profit before
tax is £12m. The audit manager has met with EAHO Co’s finance director and has
provided you with the following notes.
In line with industry practice, EAHO Co offers its customers a five-year building
warranty, which covers any construction defects. Customers are not required to pay
any additional fees to obtain the warranty. The finance director anticipates this
provision will be lower than last year as the company has improved its building
practices and therefore the quality of the finished properties.
A full year-end inventory count will be undertaken on 30 September and there is no
enough audit team resource to attend all inventory counts.
A review of the management accounts shows the payables period was 56 days for
August 2019, compared to 87 days for September 2018. The finance director
anticipates that the September 2019 payables days will be even lower than those in
August 2019.
Information from management accounts EAHO Co’s prior year financial statements
and August 2019 management accounts contain a material overdraft balance.
Using the information provided, describe Five audit risks and explain the auditor’s
response to each risk. Note: Prepare your answer using three columns headed The
Issue, Audit risk and Auditor’s response respectively.
(30 marks)
(Total 40 marks)

Question 3
A. Discuss the audit expectation gap. Your answer should include the following: the
main causes of the expectation gap; its main components; and procedures that can
be taken to reduce the expectation gap. (10 marks)
B. Your audit firm has an advertising policy that any audit process will not take more
than 20 days for any client. You start reviewing the audit files of your client ALB
plc which you audit for eight years and you find the following notes.
• The audit team included a manager who owns 1% of the ALB’s shares. The
executive partner believes that the 1% is too small and it will not affect the
manager experience.
• Your firm offered this client a bookkeeping service for this year.
• One of the audit team received a high salary offer to be appointed in the client’s
internal audit department as a head of department.
• The finance director was recently working as an auditor in your audit firm.
• ALB plc intends to increase its capital by issuing more shares in the stock market
and the financial manager is asking your firm to manage this process.
Identify and explain FIVE ethical threats which arise from the above actions and for
each ethical threat explain the steps which your audit firm should adopt to reduce the
threats arising. Note: Prepare your answer using three columns headed The Issue,
Ethical threats and Auditor’s response respectively
(30 marks)
(Total 40 marks)

Accounting and Finance – AUDITING