KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

ACADEMIC YEAR 2019/2020

BBFD3014 Advanced Audit and Assurance

Coursework test Date: 19 /2 /2020

Answer ALL questions Time: 2.0 hours

Question 1

Sainsbury's is the second largest chain of supermarkets in the United Kingdom, with a 16.9% share of
the supermarket sector in the United Kingdom. Founded in 1869, by John James Sainsbury, Sainsbury
that became the largest retailer of groceries in 1922, was an early adopter of self-service retailing in
the United Kingdom. In 1995, Tesco overtook Sainsbury's to become the market leader,
and ASDA became the second largest in 2003, demoting Sainsbury's to third place for most of the
subsequent period until January 2014, when Sainsbury's regained second place.

Acquisitions

Sainsbury’s has agreed to buy Walmart’s ASDA for about £7.3 billion (U.S. 10 billion) to create
Britain’s biggest supermarket group by market share, overtaking long-standing industry leader Tesco.

Bringing together Britain’s second and third largest supermarket groups could generate the savings
and buying power to help Sainsbury and ASDA better compete with fast growing German
discounters, Aldi and Lidl and growth at Tesco after its purchase of wholesaler Booker.

The cash and shares deal could also provide a potential exit route for Walmart, as ASDA, which it
bought in 1999 for £6.7 billion, has been struggling to grow over the last five years as discounters
Aldi and Lidl attract its price-conscious customers.

Sainsbury’s shares jumped as much as 21% to 327.1 pence in the 1 May 2018 trading, their highest
since July 2014, while shares in rivals Tesco and Morrison’s fell. Walmart will receive £3 billion in
cash and a 42% stake in the combined business’ equity, valuing ASDA at about £7.3 billion.

Sainsbury’s CEO Mike Coupe will retain the same position in the merged company, which will keep
the Sainsbury’s and Asda’s brands. Together, Sainsbury’s and ASDA will have about 2,800 stores.
Analysts said that the deal was a bet that recent changes in the retail industry, including the rise in
online shopping, hard discounters, Aldi and Lidl and Tesco’s purchase of Booker, a wholesaler,
recently for £4 billion would ease any opposition from competition regulators.

Sainsbury’s policies

Each supermarket or group of conveniences shops elects a group of 'representatives' from across their
shop or region to meet once a month to discuss the working life of their branch and the company. The
meetings can include communication from Head Office, the chance to organise charity or local events
and the opportunity for employee's to discuss issues and feedback or question the attending Store
Manager. The group controls a budget for donating to local charities and a budget for investing in
employee facilities.

Shops in the 'supermarket' category all have similar layouts and operations but may vary in their
offering to the customer. Most will have a convenience kiosk, produce, meat, fish, groceries and
frozen food, and manned and self-service checkouts. However depending on the size of the shop they
may also have an in-shop bakery, butcher, fishmonger, delicatessen and pizza counters, a cafe, TU
clothing, general merchandise, petrol station and online picking department. Some shops also feature

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Question 1 (Continued)

a Jessops, Specsavers, Gourmet Sushi and/or an Argos concession. Others also feature a "Centre for
Dentistry" where dental treatments are offered and/or an "Explore Learning" centre where children are
offered extra English and maths tuition. Some shops also feature a Starbucks Coffee instead of an in-
shop cafe.

Product ranges
A large shop typically stocks around 30,000 lines of which around 20% are "own-label" goods. These
own-brand lines include:
Name Description
An economy range of around 700 lines, mainly foodS but also including other areas
such as toiletries and stationery. The Basics range uses minimal packaging with simple
orange and white designs. Sainsbury's local shops sell none or very few of these lines.
Basics
Equivalent to Tesco's Everyday Value, ASDA's Smart Price and Morrisons' M Savers.
Additional product lines were added in late 2013, together with new packaging.

All own-brand food products that are not part of any of the other ranges (over 6,500
by
different lines) have been re-branded as "by Sainsbury's". This was first introduced on
Sainsbury's
frozen foods in late 2010, and the re-branding was completed in January 2013.
Premium-quality brand containing around 1100 food lines, including many processed
foods such as ready-made meals and premium bakery lines. The range consisting of
Taste The 1141 lines was re-launched in September 2010 when 75% of the range was improved
Difference or newly added.
Similar to ASDA's Extra Special, Tesco's Finest and Morrisons' The Best.

Be Good To Products with reduced calorific and/or fat content. The BGTY range was relaunched in
Yourself January 2010.
Launched in 2002, it has over 75 product lines. These products are all grouped together
in one aisle of the shop (except fresh and frozen lines). These products are suitable for
Deliciously
those allergic to dairy, wheat and gluten (although some are free from wheat/gluten but
FreeFrom
contain dairy). The range was relaunched in September 2016 as Deliciously FreeFrom,
the range has also doubled in offer with now over 150 lines.
Around 500 lines of food and drink which are derived from sources free from fertiliser
SO Organic
or pesticides.
TU The own-brand clothing range, which had a full re-brand in 2013.
A range of home products, such as lighting, rugs, and kitchen products. This range has
now been rolled out to most shops stocking non-food ranges. After the success of its
Sainsbury's
own brand range, Sainsbury's will rebrand this range into the 'by Sainsbury's' range in
HOME
August 2013. In 2017, Sainsbury's started to re-brand all its non-food offering,
excluding clothing as 'Sainsbury's HOME'.
Home A range of quality home products, such as cutlery, crockery, kitchenware and bed
Collection linen.
A new range of sandwiches, salads and snacks launched in September 2016. This new
range replaced all of the existing sandwiches and replaced with improved and new
On The Go
fillings. Burritos, Pasta Pots and Sushi are included in the range as well as a selection
of snacks.

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Trends

In November 2007, Sainsbury's became the first major British employer to introduce an "internet
only" staff recruitment system. At the time, it was estimated that the move would save the company
£4 million a year in administration costs. This move came at a time when approximately half of the
British adult population was estimated to have access to the internet at home, though by 2010 it was
estimated that more than 80% of the adult population had internet access.
Staffing
In 2013, Sainsbury's won the Employer of the Year at the Oracle Retail Week Awards.
In 2010, Sainsbury's opened seven food colleges that teach fishmongery, butchery, breadmaking and
confectioning. 21,000 colleagues have been trained at these venues so far. Qualifications can be
gained through in house training, and so far 15,400 colleagues have been awarded City and
Guild qualifications.
Sainsbury's has a social and information website for colleagues to use to access colleague benefits and
information, and to interact with other colleagues.
Sainsbury's graduate scheme called '2020 Leaders' aims to recruit and develop potential leaders for the
most senior roles of the company.
Sainsbury’s Online
Sainsbury's operates an internet shopping service branded as "Sainsbury's Online". To use this service
customers choose their groceries online, or by phone (which includes a "phone order"
fee). Sainsbury's also provide the Sainsbury's Gift Cards and Sainsbury's Business Direct transactional
websites that sell gift cards, gift vouchers and food tokens with credit or value that can be spent at any
Sainsbury shop. Both products are not valid for buying certain products or services. The Gift Card
website promotes the card as an ideal gift due to the large range of products and the number of shops
available to spend them in. The Business Direct website, operated by MBL Solutions Ltd, promotes
the cards as ideal for rewarding and motivating employees.

Controversies

Price fixing
In 2007 Sainsbury’s was fined for its involvement in a dairy price-fixing cartel along with other large
retailers and processors. The supermarket was among nine companies that the watchdog judged to
have colluded to rig the price of cheese and milk in 2002 and 2003. The scandal is thought to have
cost consumers about £270m. The Office of Fair Trading (OFT) had intended to fine the guilty parties
more than £116m, but reduced the penalties after a period of consultation.
The OFT began investigating price-fixing after being alerted to the practice by Arla, which was
subsequently given complete immunity from any fines. It found that between 2002 and 2003,
supermarkets and dairies exchanged information regarding the pricing with intentions to co-ordinate
increases felt by the consumer. As a result, shoppers were made to pay more for cheese and milk
products than they should have been, the watchdog found.

Tax avoidance
A number of companies including Sainsbury's used a scheme to avoid VAT by forcing customers
paying by card to unknowingly pay a 2.5% 'card transaction fee', though the total charged to the
customer remained the same. Such schemes came to light after HMRC litigated
against Debenhams over the scheme during 2005.
Treatment of overseas workers

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In a 2006 report, the British anti-poverty charity War on Want criticised the conditions faced by
Kenyan workers on supplying Sainsbury's with cut flowers.
Food safety prosecutions
Sainsbury's supermarkets have been prosecuted, on more than one occasion, for selling food past
its expiry date. Evidence also showed that some staff were not correctly trained to carry out their
duties involving food safety.
Removal of kosher products
In 2014, a photograph surfaced on Twitter showing that the Holborn Sainsbury's franchise responded
to anti-Semitic threats by removing kosher products from its shelves. Complaints began appearing on
social media that removing food that is consistent with Jewish dietary restrictions and is produced all
over the world was an act of discrimination against Jews. In response to the negative publicity, the
kosher products were restored to the shelves and the staffer who removed them was reprimanded
Environmental/Ethical issues
In May 2017 Sainsbury's was criticised, including by organisations such as Oxfam for dropping its
Fairtrade label from tea. Oxfam said it was very unclear as to how Sainsbury's own standards would
be higher than those of Marque's. The MD of Divine Chocolate, an ethical trading company part-
owned by tens of thousands of cocoa farmers in Ghana said that this move was tipping the balance
back in favour of the retailers.
In January 2018 customers questioned the need to cover coconuts with a plastic film forcing CEO
Mike Coupe to state that he would be investigating the issue.
Inequality in pricing
In January 2018, Sainsbury's were found to be charging 50p more for a Valentine's Day card for
husbands than for wives.
(Adapted and modified from StarBiz, Articles: “Sainsbury’s ASDA swoop will create top UK
supermarket, May 2018,” “Sainsbury’s price fixing and controversies”, Wikipedia.)

Required:

(a) Evaluate the business risks faced by Sainsbury. (15 marks)

(b) Identify and explain the risks of material misstatement to be considered in planning the audit.
(15 marks)
[Total: 30marks]

Question 2

You are a manager in Pavia & Co. (Pavia), a firm which offers a range of services to audit and non-
audit clients. One of your audit client is YaleYates Bhd. (Yale). Yale operates a chain of cinemas
across the country. Currently its cinemas are outdated and use projectors which cannot show films
made using new technology, which are becoming more popular. Management is planning to invest in
all of its cinemas in order to attract more customers. The company has sufficient cash to fund half of
the necessary capital expenditure, but has approached its bank with a loan application of RM10
million for the remainder of the funds required. Most of the cash will be used to invest in equipment
and fittings, such as new projectors and larger screens, enabling new technology films to be shown in
all cinemas. The remaining cash will be used for refurbishment of the cinemas.

The audit strategy relevant to the audit of YaleYates Bhd concludes that the company has a relatively
high risk associated with money laundering, largely due to the cash-based nature of its activities. The

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majority of customers purchase their cinema tickets and refreshments in cash, and the company
transfers its cash to overseas bank accounts on a regular basis.

Required:

(a) Explain the stages used in laundering money, commenting on why YaleYates Bhd has been
identified as high risk. (6 marks)

(b) Recommend FOUR elements of an anti-money laundering programme which audit firms such
as Pavia & Co should have in place. (4 marks)
[Total: 10marks]

Question 3

MC Pinder (MCP) is a firm of Chartered Certified Accountants. MCP had recently and successfully
tendered for the audit of Zrates Bhd. (Zrates). The tender exercise was very competitive, so price was
a determining factor in the tender. MCP’s tender was preferred to that of the existing auditor and two
other high profile large audit firms. The existing audit firm is PuraSat.

Zrates and its finance director had a severe disagreement and the finance director resigned from the
company in anger and bitterness. The directors of Zrates have asked the audit engagement partner of
MCP, Mr. Hassim, whether it would be possible for MCP to second a member of MCP’s staff to
cover the role of finance director while a replacement is being recruited. The company is also
interested in seeking Mr. Hassim’s assistance in the recruitment process.

Mr. Hassim has informally suggested that you as an audit senior with the firm might be the right
person to undertake the secondment to Zrates. He said MCP could make Zrates pay through the nose
to make up for the appallingly low audit fees. Mr. Hassim commented that as Zrates is a large
company, there would be opportunity to offer some non-audit services other than recruitment advisory
services.

Mr. Hassim has delegated to you the task of obtaining all the relevant information possible from
PuraSat. The existing audit firm and your firm have already completed all other professional
formalities on the change-over of the engagement. However, initial indications from PuraSat are that
they are unhappy to grant MCP any access to their audit files.

Required:

Discuss the ethical and professional issues raised in the above scenario. [Total: 10marks]