MOCK EXAM
QUESTION 100 marks
BACKGROUND INFORMATION
Memories R Us (MRU) is an international photography company that specializes in
providing wedding photography services to world famous celebrities and business
individuals who have a high net worth.
The company has seven offices situated in Johannesburg, New York, Paris, Lagos, Hong
Kong, Melbourne and Rio De Janeiro. MRU employs 20 full time employees across its
international offices who are mostly responsible for carrying out administration and
marketing functions on behalf of the company. Most of the employees have been with
MRU since its inception and are considered to be the brains and magic behind the
company’s success.
Humble Beginnings
MRU was formed is 2005 when photos that were taken at a celebrity wedding by MRU
chief executive officer (CEO), Ryan Smith, went viral on social media. As a result, more
celebrities started booking MRU because of the company’s high quality services. To cope
with the demand and to ensure that MRU could provide services to more celebrity
weddings, MRU started subcontracting its wedding contracts to other high profile
photographers. This model proved to be highly successful and within five years MRU saw
offices being opened across the globe.
Management
MRU is managed and 80% owned by Ryan Smith. Ryan holds a bachelor’s degree in art
and history as well a certificate in business administration. Ryan attributes his success to
his late father of whom he says “My father taught me everything I know about business.
He taught me never to fear failure and that the world rewards risk taking”.
Financial Performance
Historically MRU has enjoyed a 30% year-on-year growth in net profit after tax. During
the current year however, MRU started experiencing significant cash flow difficulties and
for the first time in its existence reached its overdraft limit due to the following:
• Decline in sales
MRU’s sales have declined by 40% in comparison to prior year. This is attributed to
MRU’s exorbitant prices and the significant rise in competing photography companies.
• Ongoing litigation
There are number of active cases against MRU due to a breach in its contractual
obligations with clients. MRU’s legal team stated that there is an 80% probability it will
lose all its cases in the current year.
, MOCK EXAM
• International office closures
Due to the ongoing litigations MRU also faces the risk that some of its international offices
may be subject to closure and MRU barred from operating from the countries.
• Pending client contracts
A number of client contracts in respect of 2021 remain unsigned at year end due to the
negative publicity surrounding MRU. These contracts constitute 60% of MRU’s sales for
2021.
CLIENT ACCEPTANCE
Your audit firm, EBPNWP Inc., has been MRU’s auditors since the inception of the
company. Over the year’s EBPNWP and MRU have enjoyed a long and healthy
relationship. The firm has sufficient resources who are skilled, experienced and
knowledgeable. There are also experts available to assist with complex areas. Historically
EBPNWP has always completed the engagement within the given reporting deadlines.
During the current year the was a significant change in senior management at MRU.
Furthermore, Ryan Smith reduced his shareholding from 100% to 80%.
In preparation for this year’s engagement you (as the audit partner) are required to
complete a client acceptance and continuance questionnaire as part of quality control in
line with the applicable standards:
Client acceptance and continuance questionnaire
Questions Responses
1 What policies does have firm in place
with respect client continuance and
acceptance?
2 List the considerations that the firm
has taken into account to conclude
that it has the competence,
capabilities, and resources to
undertake a new engagement?
3 Will the firm be issuing an engagement
letter?
REVENUE
MRU derives 80% of its revenue from wedding photography service contracts. The
remaining balance is made up of photographic products that are manufactured by MRU
and sold to clients as part of the said contracts (see working paper X5).
MRU’s functional and reporting currency is the US$.
QUESTION 100 marks
BACKGROUND INFORMATION
Memories R Us (MRU) is an international photography company that specializes in
providing wedding photography services to world famous celebrities and business
individuals who have a high net worth.
The company has seven offices situated in Johannesburg, New York, Paris, Lagos, Hong
Kong, Melbourne and Rio De Janeiro. MRU employs 20 full time employees across its
international offices who are mostly responsible for carrying out administration and
marketing functions on behalf of the company. Most of the employees have been with
MRU since its inception and are considered to be the brains and magic behind the
company’s success.
Humble Beginnings
MRU was formed is 2005 when photos that were taken at a celebrity wedding by MRU
chief executive officer (CEO), Ryan Smith, went viral on social media. As a result, more
celebrities started booking MRU because of the company’s high quality services. To cope
with the demand and to ensure that MRU could provide services to more celebrity
weddings, MRU started subcontracting its wedding contracts to other high profile
photographers. This model proved to be highly successful and within five years MRU saw
offices being opened across the globe.
Management
MRU is managed and 80% owned by Ryan Smith. Ryan holds a bachelor’s degree in art
and history as well a certificate in business administration. Ryan attributes his success to
his late father of whom he says “My father taught me everything I know about business.
He taught me never to fear failure and that the world rewards risk taking”.
Financial Performance
Historically MRU has enjoyed a 30% year-on-year growth in net profit after tax. During
the current year however, MRU started experiencing significant cash flow difficulties and
for the first time in its existence reached its overdraft limit due to the following:
• Decline in sales
MRU’s sales have declined by 40% in comparison to prior year. This is attributed to
MRU’s exorbitant prices and the significant rise in competing photography companies.
• Ongoing litigation
There are number of active cases against MRU due to a breach in its contractual
obligations with clients. MRU’s legal team stated that there is an 80% probability it will
lose all its cases in the current year.
, MOCK EXAM
• International office closures
Due to the ongoing litigations MRU also faces the risk that some of its international offices
may be subject to closure and MRU barred from operating from the countries.
• Pending client contracts
A number of client contracts in respect of 2021 remain unsigned at year end due to the
negative publicity surrounding MRU. These contracts constitute 60% of MRU’s sales for
2021.
CLIENT ACCEPTANCE
Your audit firm, EBPNWP Inc., has been MRU’s auditors since the inception of the
company. Over the year’s EBPNWP and MRU have enjoyed a long and healthy
relationship. The firm has sufficient resources who are skilled, experienced and
knowledgeable. There are also experts available to assist with complex areas. Historically
EBPNWP has always completed the engagement within the given reporting deadlines.
During the current year the was a significant change in senior management at MRU.
Furthermore, Ryan Smith reduced his shareholding from 100% to 80%.
In preparation for this year’s engagement you (as the audit partner) are required to
complete a client acceptance and continuance questionnaire as part of quality control in
line with the applicable standards:
Client acceptance and continuance questionnaire
Questions Responses
1 What policies does have firm in place
with respect client continuance and
acceptance?
2 List the considerations that the firm
has taken into account to conclude
that it has the competence,
capabilities, and resources to
undertake a new engagement?
3 Will the firm be issuing an engagement
letter?
REVENUE
MRU derives 80% of its revenue from wedding photography service contracts. The
remaining balance is made up of photographic products that are manufactured by MRU
and sold to clients as part of the said contracts (see working paper X5).
MRU’s functional and reporting currency is the US$.
