Part A

KAPLAN
Chapter 1
TYU 1
- List and explain the elements of an assurance engagement.
Three Party Relationship between the practitioner, who will review the subject matter and provide the assurance,
the intended user, who is the person that requires the assurance report and the responsible party, which is the
person or organisation that prepares the subject matter to be reviewed.
A subject matter, which is the data that the responsible party has prepared and which requires verification.
Suitable criteria. The subject matter is compared to the criteria in order for it to be assessed and an opinion
provided.
Sufficient appropriate evidence has to be obtained by the practitioner in order to give the required level of
assurance.
An assurance report contains the opinion/conclusion that is given by the practitioner to the intended user.
TYU 2
- Explain the term ‘limited assurance’ in the context of an examination of a company's cash flow forecast and
explain how this differs from the assurance provided by an external audit.
A limited assurance is a moderate level of assurance. The objective of a limited assurance in the context of the cash
flow forecast is to obtain sufficient appropriate evidence that the forecast is plausible in the circumstances. A limited
assurance report produces a negative conclusion. The practitioner will state that nothing has come to their attention
which indicates that the assumptions used to prepare the cash flow forecast are not reasonable. The assurance is
therefore given on the absence of any indication of the contrary. Limited procedures are performed. In the context
of a forecast, procedures will be limited as the transactions haven’t occurred yet. Forecasts relate to the future,
which is inherently uncertain, and would not be therefore possible to obtain assurance that it is free from material
misstatement. Less reliance can therefore be placed
An external audit provides a reasonable amount of assurance. The objective of an external audit is to obtain
sufficient appropriate evidence that the financial statements conform in all material respects with the relevant
financial reporting framework. The auditor’s report will provide a positive opinion as to whether the financial
statements give a true and fair view. A positive opinion means the auditor is confident about the statement they are
making, ie, confident that the financial statements give a true and fair view or confident that they do not give a fair
view. More evidence will be obtained to provide reasonable assurance, and a wider range of procedures performed,
including tests of control. Financial statements relate to the past, so the auditor should be able to obtain sufficient
appropriate evidence
TYU 3
1-B, 2-C, 3-D, 4-C, 5-A

Chapter 2
TYU 1
- Explain THREE rights that enable auditors to carry out their duties.
The right to access to all books and records. The right to attend general meetings. The right to be heard at meetings
on matters concerning the auditor. The right to receive information and explanations necessary for the audit. The
right to receive copies of written resolutions.
TYU 2
1-A, 2-C, 3-A, 4-D, 5-B
TYU 3
1-D, 2-C, 3-B, 4-A&E, 5-D

Chapter 3
TYU 1
The directors of Murray Co are interested in being able to report that they comply with best practice corporate governance
principles and have asked for your thoughts.
The finance director has provided you with the following information:
The board consists of the chief executive officer, finance director, HR director, production director and sales director. In
addition, there are two non-executive directors who were appointed last year by the chief executive as they are his aunt and
uncle. Previously they ran their own small cafe and used a firm of accountants for all financial matters due to their own lack
of expertise in that area.
The contracts signed by the non-executive directors state that they are in place until they decide to leave or unless they are
found guilty of misconduct. They receive an annual fee and a number of share options in Murray Co as their remuneration.
Since appointment, the two non-executives have formed an audit committee consisting of themselves and the human
resources director as it was felt that the finance director would not be an independent member of the committee.
They have also formed a remuneration committee with the finance director and are currently in the process of proposing and
approving the salaries for all of the directors for the coming year
(a) Explain whether Murray Co is required to comply with a code of corporate governance
As Murray is not listed on the stock exchange, it is not necessary for them to comply with the corporate governance
code. They may wish to voluntarily comply, as this sends a good message to stakeholders about how the company is
managed and governed. Once the company is listed on the stock exchange, it will have to comply with the corporate
governance codes
(b) Explain the strengths of Murray Co’s current governance arrangements
The company has some NEDs on the board, which will provide some independence when it comes to decision
making, and have the power to balance the views of the executive directors. The company has a remuneration
committee set up. This will bring independence and fairness when it comes to director salaries and bonuses. The
company also has an audit committee set up. This means there is a group of people focused on all accounting,
financial reporting and auditing matters within the company
(c) Identify and explain the weaknesses in Murray Co’s current governance arrangements and for each weakness
recommend an action the company should take to remedy the weakness.
Weaknesses Recommended Action

There are only 2 NEDs on the board. Corporate At least 3 more NEDs need to be appointed to ensure a
Governance principles require the board to consist of balanced board
50% NEDs, not including the CEO, and currently, the
number of executive directors outweigh the number of
NEDs. This means that all executives could ensure all
their proposals are passed at the board meetings,
which reduces the effectiveness of the NEDs
The 2 NEDs appointed are close relatives of the CEO. The 2 NEDs have to be replaced with independent NEDs
There is a lack of independence in the NEDs.
Independent NEDs are necessary to challenge the
decisions of the executive directors. The current NEDs
are unlikely to challenge any decisions, due to their
relations with the CEO, therefore they are ineffective
There does not appear to be a chair on the board. An independent person should be appointed as the
Corporate governance principles require an chair
independent chairman to be appointed to run the
board and a CEO is in charge of running the company.
This is to ensure no single individual holds too much
power within the company, so these two roles cannot
be held by the same person
The contracts signed by the NEDs appear to be The 2 NEDs should be replaced by independent NEDs
continuous. In order to make sure they work in the
company’s best interests; they should be subject to re-
elections at regular intervals
The NEDs have some share options in their All new NED contracts should have remuneration that is
remuneration. Corporate governance principles state, based on time commitment and responsibility of the
in order to maintain independence, NEDs should be role
paid a flat fee based on time commitment and
responsibility of the role
There appears to be an executive director in the audit The HR director should be removed from the audit
committee. The audit committee must be independent, committee and replaced with one of the new NEDs
so it requires only NEDs to sit on it
None of the members of the audit committee appear to When appointing independent NEDs to the audit
have relevant financial experience. At least one committee, at least one of them should have relevant
member of the audit committee should have relevant financial experience
financial knowledge in order to provide valuable input
into accounting and auditing matters.
An executive director sits on the remuneration The finance director should be removed from the
committee. Under corporate governance principles, no remuneration committee and replaced with an
director should be involved in the setting of their own independent NED. The remuneration committee should
remuneration, as this could lead to excessive pay being set the pay of the executives, senior management and
awarded chair, and the board should set the pay of the NEDs
TYU 2
You are the audit manager of Tela & Co, a medium sized firm of accountants. Your firm has just been asked for assistance
from Jumper & Co, a firm of accountants in an adjacent country. This country has just implemented the internationally
recognised codes on corporate governance and Jumper & Co has several clients where the codes are not being followed. One
example of this, from SGCC, a listed company, is shown below. As your country already has appropriate corporate governance
codes in place, Jumper & Co have asked for your advice regarding the changes necessary in SGCC to achieve appropriate
compliance with corporate governance codes.
Extract from financial statements regarding corporate governance:
Jiang Sheppard is the chief executive officer and board chair of SGCC. He appoints and maintains a board of five executive and
two non-executive directors. While the board sets performance targets for the senior managers in the company, no formal
targets are set for the board and no review of board policies is carried out. Board salaries are therefore set and paid by Jiang
Sheppard based on his assessment of all the board members, including himself, and not their actual performance.
Internal controls in the company are monitored by the senior accountant, although a detailed review is assumed to be carried
out by the external auditors. SGCC does not have an audit committee or an internal audit department.
Annual financial statements are produced, providing detailed information on past performance.
(a) Explain SIX corporate governance deficiencies in SGCC, and recommend the changes necessary to overcome
each deficiency
Deficiencies Recommendation
The chairman and the CEO appear to be the same An independent person should be appointed the chair
person. He has too much power over key decisions
The board consists of 5 EDs and 2 NEDs. The NEDs are 3 more NEDs need to be appointed to the board
outnumbered, making them less effective when
opposing the decisions of the EDs
The CEO appoints all the members of the board. He A nomination committee comprising of independent
may appoint people who will support his decisions. NEDs should be established
There may be no clear and transparent process for
determining appointments

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KAPLAN

- List and explain the elements of an assurance engagement.

1-B, 2-C, 3-D, 4-C, 5-A

1-A, 2-C, 3-A, 4-D, 5-B

1-D, 2-C, 3-B, 4-A&E, 5-D

(b) Explain the strengths of Murray Co’s current governance arrangements

Weaknesses Recommended Action

Extract from financial statements regarding corporate governance:

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