CAF 08: Audit and Assurance

Suggested Solution –Test # 4

Answer # 1

1. Obtain written permission from client to reply to incoming auditor (due to confidentiality
principle).
2. If permission is given by client, write as soon as possible to proposed auditor honestly stating the
relevant facts.
3. If client does not give permission, inform proposed auditor about non-permission. This will be
scope limitation before acceptance. Incoming auditor should not accept the engagement.
[01 mark for each action]

Answer # 2

Impact on Integrity Justification

 There are significant related party transactions which indicate risk
of fraud.
1. Negative
 Managing these related parties to minimize tax shows poor
integrity.
 A president uses intimidation and sudden firings over missed profit
goals indicates lack of respect for employees and poor leadership
2. Negative
ethics.
 There is a pressure on management to achieve financial goals.
 This indicates that president is not always complying with laws
and regulations.
3. Negative
 Accusation of illegal activities, and failing to meet regulatory
requirements creates doubt on integrity.
 This creates doubt on management’s integrity only if living
4. Neutral
standard of CFO does not match with its earnings level.

Answer # 3

Threats to the fundamental principles at time of acceptance of client:

1. Self-Interest Threat to Integrity or Professional behavior

2. Self-Interest Threat to Professional competence and due care

How firm would evaluate these threats:

1. Evaluating Threat to Integrity or Professional behavior

 Knowledge and understanding of client, its owners, management and TCWG.
 Client’s commitment to address the questionable issues e.g. through improving corporate governance
practices or internal controls.

2. Evaluating Threat to Professional competence and due care

 Understand nature of client business, complexity of operations, purpose and scope of engagement.
 Knowledge of relevant industries or subject matter.
 Experience with relevant regulatory or reporting requirements.
 Existence of firm’s quality control policies and procedures designed to provide reasonable assurance
that specific engagements are accepted only when they can be performed competently.

Page 1 of 2
 CAF 08: Audit and Assurance
Suggested Solution –Test # 4

Safeguards available to your firm to address the threats:

1. Safeguarding Threat to Integrity or Professional behavior

 Obtain information from different sources regarding Management, TCWG and Shareholders of
Client.

2. Safeguarding Threat to Professional competence and due care

 Agree realistic timeframe for performance of the engagement.
 Assign sufficient staff with necessary skills.
 Using experts where necessary.

[01 mark for each valid point]

(THE END)

Page 2 of 2