1. Read Acowtancy text book 2. Answer BPP Kit 3. Answer Past paper June 2019. Question HICS – Heading, Introduction, Structure and Clarity 3 mark risk- romm/audit risk In total how may risk to write? - 4 risk for 4 marks = 16 marks – this included Materiality calculated only for question 1 - 6 risks for 2 marks= 12 marks – does not include Materiality Question 1. Briefing Note To: Ben Duval, Audit Engagement partner for Margot co From: Audit Manager Re-Audit planning for Margot Co Introduction The purpose of writing this briefing note is to evaluate Risk of material misstatement in planning the audit of Margot Company. Further this briefing note covered audit procedures, matters to be considered in relying on an auditor expert and implication of email received from Len larch. (a) Risk of Material misstatement Family business Margot co, being a family business or private company has risk of management bias, particularly because the ceo is one of the family member. Hence ceo can influence the financial result for better dividend and the FS could be materially misstated.2 Online sales There are several risk of material misstatement associated with online sales. Firstly, there could be a risk of revenue recognition due to timing of recording revenue generated from website sales as the point of revenue recognition will be more difficult to establish. Thus Revenue could be overstated. Online sales already increase by over 90.4% over the last year, thus such risk of overstatement could exist.2 Further, due to fluctuating discount offered on line sales, there is a possibility that if the discount are not updated into the system properly, the sales could be under or overstated.2 Advertising campaign The advertising campaign capitalized as intangible asset amounted to $225,000 which is 1.8% of the total asset and 10.71% of Profit before tax, thus material to the Financial statement.1 The advertising cost incurred in relation to promotion of the brand name cannot be capitalized as mention in the relevant standard thus it should be expense out.1 Thus the advertising campaign is wrongly capitalized, and thus the intangible asset are overstated and the operating expense are understated, or the profit is overstated.1 Research and development cost (R&D) The R&D pertaining to the new packaging amount of $220,000 is 1.76% of the total asset and 10.48% of the profit before tax, thus material to the financial statement.1 The Research cost should be expense out whereas the development cost should be capitalized subject to the criteria laid in the relevant standard.1 However, the risk is that management has capitalized the entire 220,000 and there is possibility that the research cost has even been wrongly capitalized. Thus the intangible asset are overstated and operating expense are understated. 1 Impairment The carrying amount of the impaired factory i.e $88,250 is 7% of the total assets, thus material to the financial statement..1 The value in used is determined on the basis of the present condition of the factory damage, without incorporating any future plans which management have to repair or restore factory as per the relevant standard. Thus the VIU is wrongly estimated, and therefore the recoverable amount is wrongly determined.1 Due to inappropriate estimation of VIU, the impairment loss determined could be understated and the profit overstated. 1 B Audit procedures - Each procedure is worth 1 mark - Procedure – write like bullet/ sentences not paragraph - Qualities of good procedure - ASP- Action Recalculate) Source(Depreciation Schedule, Finance Cost Schedule, whom u discussing it with, what u are analysing) and purpose( – eg Recalculate the amortization expense to confirm it is accurate , Discuss with management as to why the sales have increase over by 20% over the last year. Analyse the current ratio to confirm the company ability to meet it short term obligation on time - TADMSR – Type of action you can take Perform test of control Analytical procedure Discussion with Minutes of the meeting (review/ inspect) Source document (inspecting source document) Recalculation Good procedure = CVRM - Case specific - Verb - Reason (purpose) - Marks – 1 mark per procedure Purpose of written representation letter when -Assumption based (fair value, estimate, going concern,value in used, intention to , non compliance, sell or close something) June 19 2020 Question 1 b – Procedure 1. Impairment of the Factory Review the fixed asset register to confirm the accuracy of the carrying amount of the factory prior to impairment. Review the management detailed calculation to understand the methodology and assumption used by management to determine the recoverable amount. Discuss with management the underlying basis of the fair value of the sales proceed which could be generating by selling the fair value Discuss with management the rationale why viu take into account the future repair of building. Seek written representation letter on the adequacy of the assumption used in determining the impairment loss for the factory. 2. Development Review board minutes for the approval of $400,000 budget for research and development. Review the invoice received from pro pack to confirm that 220,000 has been spend on research and development. Correspond with propack to confirm Result of the prototype and the success of the result Progress on the new packaging and it technical viablility Disucss with management the basis of their anticipation the new packaging will be ready in 2 yrs time or seek a written representation letter. Comment on the matter and explain evidence you will find ( same as ROMM) no capped here for question 2-3 - Comment on the materiality -1.5 - Comment on the accounting treatment -1.5 - Comment on the risk and the impact -1.5 = 4.5 marks Evidence in the working paper file? Note, result, copy, original – 1 mark per evidence Working paper can be - Copy of (lease agreement/loan agreement, board minutes) or any management records - Written representation should be original - Confirmation letter should be original - Notes of discussion - Results of recalculation/ analytical procedures June 17 Question 4 - Cost of Inventory Matters- 4.5 marks The inventory valuation at year end is $21 million which is 1.09% of total asset, thus is material to the financial statement. (1.5) The Inventory should be valued at the lower of actual cost not estimated cost or the net realizable value. However in the case the management has value the inventory at the estimated cost. 1.5 Anything estimated by management is inherently risky and contain a risk of management bias, this the inventory could be wrongly valued and thus could be overstated.1.5 Evidence - Note of discussion with management to confirm the rationale why the estimated cost was used for Inventory valuation. 1 mark - Result of recalculation of inventory valuation to confirm the accuracy of the inventory valuation performed by management. 1 mark - Copy of the inventory valuation performed by the company to confirm that inventory is valued at $21 million. 1 mark Type 2 – Evidence (rare) last time dec 16 question 2 Comment on the sufficiency and appropriateness of the audit evidence obtained by the audit team? This mean the evidence gathered by the audit team do you believe it is appropriate or inappropriate. If it is inappropriate justify why it is inappropriate or appropriate – 1 mark For every comment on SAAE = 1 mark per comment Evidence is appropriate when it is: - Writing rather verbal - Original rather photocopy - Third party rather management - Gathered by the auditor himself (like recalculation, observations - The sample size is adequate (that mean more sample when the risk is high) - Senior rather than a junior (on risky area/complex area) Dec 2016. Question 2 A. Asset held for Sale Evidence - The planned disposal was discussed with management and alone is inappropriate because discussion alone is a verbal evidence. 1 mark - Further the brief note is inappropriate because, asset held for sale is not an ordinary event, therefore the auditor should had made a detailed note which much include the conclusion of the auditor whether the treatment is right or wrong, rather than it contain the treatment of the Management. 2 mark - It seem that multiple member of the audit team are involved in the asset held for sale which will create confusion on the adequacy of the work performed. One area should be allocated to one staff member.1 - Procedure Review the board minutes for the rationale to sell the asset and it approval. Review the advertisement or the tender in the newspaper to confirm that the management has taken step to sell the asset within 12 months. Review whether any quotation have been received from potential buyer to confirm the adequacy of the fair value of the asset to be sold. Review the assumption used by management in performing the impairment review or in determining the fair value. Deficiencies - Manual journal is posted by the finance director, the FD is not the relevant person to post the journal entry as the fd should only be involved in strategic planning process and in overall monitoring of the finance system. 1 mark - There is no competent staff in the finance department who is capable of reviewing the journal entry for asset held for sale. Thus it means the finance dept is incapable and it bring into doubt the financial statement prepared by the finance department. 1 mark C Matters – in relation to an experts D Implication – of email from len Conclusion The financial statement of Margot, contains numerous risk of material misstatement as identified above, and we should carefully plan the audit procedure or execute the audit to ensure that proper focus in giving to mitigation of each risk identified. Ethical and professional issues – understanding Professional Issue - Identify form the case an issue which relate to how the audit work has been performed explain why the work performed is wrong and the impact it will have on audit? - Example, Audit starting without planning, Junior performed work on going concern assumption - Identify from the case an issue which relate to , issue like, Client integrity, client behavior, Negligence of the auditor or Liability of an auditor. For every issue raise 1 mark For every action 1 mark Issue – Why - Action Dec 2017 question 4. Asp co. Issue (Issue and why) = 1 mark - Self Review Threat (Audit with other services) Management threat (assuming management responsibility, like bookkeeper, payroll, advice) Intended user (financer relying on audited fs/greater exposure to liability Actions - It permissible, because it is a small company Different teams for audit/other services Permissible in a small company the auditor can assume management responsibility Need to exercise due care How to present the answer: Self review threat Providing audit to asp, will give rise to self review threat, because audit firm is already providing bookkeeping, payroll and tax services all of which are component of the Financial statement. Therefore the audit firm will be reluctant to identify issues in their own work. 1 mark Action Being a small company, the audit firm can provide audit with other services as it is permissible. However the audit firm should have different teams and second partner review for audit and non audit services. 1 mark Intended user The audited FS will be relied upon by the financer to issue a bank loan, that means the audit firm is at a greater exposure to professional liability and the bank can make audit firm liable for any negligence detected later. 1 mark Thus the audit firm needs to exercise more due care when performing audit of Asp company to reduce their exposure to liability. 1 mark Quality control Issue Q: Comment on the quality of the audit, discussing the ethical, professional and quality control issues and recommend action? Comment on the quality of planning and performance of the audit/ comment on the quality of the audit performed. - - What compromise the qualities at the stage of planning and at the stage of performance. Assignment of the audit team ( Nature and complexity of the client, size of the client, competence level of team, independent) Engagement performance ( audit service, direction (identifying the risky area/setting goal, audit strategy, audit plan), supervision( on going monitoring/check and balance on the audit team to ensure that audit team is working effectively) and review( at the end of task/ review of working paper file which ensure that sufficient appropriate audit evidence has been gather/there is proper documentation) of an audit. - Discuss the issue explain why it is an issue - If it is a quality control issue – comment on the quality. - Write an ansa Materiality Level should be review during the course of the audit, because risk evolve over time and is not static, so there are chance that risk might change during course of audit which causes the materiality level to change. As materiality level was not review during audit, there is a possibility the sufficiency and appropriateness of the evidence gathered has been compromised. No review of the materiality level, means that there was a lack of supervision during the course of the audit and supervision is an important component engagement quality, thus the quality of the supervision has been compromised. Ethical issue (compromise the independence/Objectivity of the auditor – It will have an impact on the quality of audit. Professional issue (if Something was done wrong by the auditor in the process of Auditor, be at any stage) it will compromise the quality of audit Quality is a concern factor for any audit firm (Quality is basically an output of input) Marking scheme Element of quality - Leadership ( There was no engagement meeting at the start of the audit.) - Ethic - Acceptance of the engagement - Human resource (Giving Junior to perform work on going concern) - Engagement performance – Can be Direction, Supervision & Review. - Monitoring 1 mark per issue Audit Report. - 1 mark for a reporting question Critically appraise State whether it is correct or incorrect if incorrect then why and how it should be corrected. - Listed company Opinion Basis of opinion Material uncertainty relating to going concern KAM Other matter Other information Responsibility - Management Responsibility – Auditor Other legal and regulatory - Non - Listed company Opinion Basis of opinion Material relating to going concern EOMP Other matter Other information Responsibility - Management Responsibility – Auditor Other legal and regulatory Money laundering is defined as the process by which criminals attempt to conceal the origin and ownership of the proceeds of their criminal activity, allowing them to maintain control over the proceeds and, ultimately, providing a legitimate cover for the sources of their income. ACCA – Sep 2020 Professional marks – 4 marks 1 mark – appropriate format 1 mark – brief introduction 1 mark – Structure ie sub heading 1 -mark – clarity Reason for poor performance - Lack of Technical Knowledge – ifrs/ias - Little application to the scenarios - Very little evidence of adequate past exam question practice - Not attempting all question requirement - Not answering the requirement, carelessness Dec 2013 Exam Business risk – 2 marks - Think reduction in profits, losses, customer goodwill, reputation, fines, penalties, business interruption. The car on the ship could become damaged at sea which could result in reduce profit attributable to them. Evaluate RMMS. -3marks A correct calculation ½ and conclusion ½ of materiality An identification of risk factor from scenario ½ No mark for name of accounting standard,.1 Impact on the financial statement ½ Audit Risk ROMMS & Detection risk. We are newly appointed auditor of the client and as such do not have the same level of understanding of the client business and control as we would for an existing client. As such we may fail to recognize certain romm or may apply inappropriate procedures due to this lack of understanding. We are newly appointed auditor of the client so we would not have audited the opening balance. So there is risk that opening balance is incorrect. Goodwill – 8% 1/2 of total asset. Is material ½ Significant component asset, profit and revenue exceed 15% of the group total asset. Audit Risk Business Risk Overtrading – Revenue increase, profit increase and cash decrease. Ethical issue Identify ethical issue Then how auditor behavior change (what cause the threat) why it is a threat There is a self review threat as the auditor will be auditing figures they have helped to produce, and may be reluctant to highlight errors. Self review threat as the auditor would eventually be assessing the effectiveness of the internal control system during the audit ½ and may not inclined to highlight any deficiencies in their review.1/2 How the threat arises and effect on auditor objectivity. Identify an ethical threat, understand how it arises and the implication of the threat. 25 mark for audit completion & reporting 25 marks for ethical issue Going concern Report. - If Going concern is appropriate but a material uncertainty exist and management have included adequate disclosure relating to the material uncertainties an unmodified opinion will be issue but a material uncertainty relating to going concern paragraph. ( this paragraph state these event or condition indicate that a material uncertainty exist and draw attention to the note in the fS. - If the uncertainty is not adequately disclosure a modified opinion will be issued - Material but not pervasive ( If the omission is material but not pervasive) then a qualified opinion will be issue stating that the financial statement are presented fairly in all material respects except for this disclosure.This will follow by a basis for qualified opinion paragraph, which give detail of the going concern uncertainties and it financial effect. - Material and pervasive ( If the omission is material and pervasive) then a adverse opinion will be issued stating that the financial statement are not presented fairly in all material respects.This will follow by an basis for adverse opinion paragraph, which give detail of the going concern uncertainties and financial effect. Fraud - Identify the type of Fraud – corruption, misappropriate of asset or Financial statemen fraud, how long it has been operating for and how it was concealed. - Identify the Fraudster involved - Quantifying the financial loss - Gather evidence – used computer assisted audit technique. Testing control, analytical procedure, Discussion with employees, substantive technique. - Provide advice. Reporting Other information - Auditor must read other information to if there is any material inconsistency with the audit financial statement If there is any material inconsistency with the auditor understanding of the entity If there is a material inconsistency, the auditor must identify whether the other information is incorrect or the audit financial statement If the audit financial statement is incorrect and is not revise a modified opinion will be issue If the other information is incorrect then other information paragraph will be issue 0.5 – 1% of turnover 5 – 10% of profits reported 1 – 2 % of gross assets Audit quality - Ethical dilemmas Competence Judgmental area Fee and tight deadlines Due Diligence - Information gathering Verification of specific management rep Identify of asset and liability Operational issues Acquisition planning Reduce management time Credibility Difference between due diligence and audit - Due diligence Is much forward looking than audit Less procedure is used in due diligence Focus on wider range of information, Audit give an opinion due diligence don’t give an opinion Business risk – 2 marks Identify what is the business risk Explain why is it a business risk How it affect the business objective Sync to case study. - Financial risk -cash flow problem - Operational risk – decline in sale - Compliance risk – health and safety Dec 2012 Dec 2014 Dec 2017 Dec 2018 - Examiner report Sec 2017 and Dec 2018 Marking scheme for business risk Most common implication in an exam paper – Objective, Profit, Cashflow and Business survival Plan - Aug 25- 30 ( questions) – Technical article and ifrs standard (Dec 2015, Mar 2020 & Workbook) - 31 – 6 ( Revision) include All ifrs/isa, Reporting , Read bk text book, Technical article Matter to be consider for using component auditor - Ethical requirement Resource Competence Regulatory environment Rp 265086 Ias 21, ifrs 10, ias , ifrs 3 Data Analytic Is the examination of data to try to identify pattern, trend or correlation. Benefit - Better understanding of the business - Focus on risk - Increase consistency across group audit - Increase efficiency though the use of computer programmes - Data can be manipulated by auditor - Increase fraud detection - Share data with client Disadvantage - No specific regulation - Data privacy and confidentiality - Compatibility issues - Audit staff may not be competent - Insufficient or inappropriate audit evidence may be retained What affect the Audit Quality - Tight Deadlines - Restriction on audit fee - Competence - Ethical dilemmas Six element of Quality - Leadership – role of partner – partner role is wrong - Ethical issue – too familiar with client - Acceptance – procedure - Engagement team – size of team is wrong too less ppl in team to perform audit of large client./incompetent team member. - Engagement performance – how you perform audit – directionsupervision-Review - Monitoring Example Two hrs spend by bob is too less. This mean bob has not fulfilled his leadership responsibilities in an effective manner. This must had compromise the quality of the audit opinion. Total time spend on engagement considering it a listed company is too less because audit of a listed company requires more time. Thus the overall quality of engagement - Extent of judgement that is required when auditing certain balance and transaction. A joint audit is where two firm work two or more firm are responsible for conducting the audit and issuing the audit opinion Adv - Resource - Quality - Efficiency Disadvantage - Expensive Different audit approach Liability Problem working together. Ethical issues - Read the case Identify threat Explain why it is an ethical issue Recommend action 1. that you can identify an ethical threat 2. that you understand how it arises and the implication of the threat, and 3. that you can relate the guidance to the specific scenario to determine the safeguards or course of action required. Matter to consider when accepting new client 2 marks - Know you client Communicate with previous audit Pre-condition of audit is met Ethical issue Safeguard Competence Deadlines. Fee and basis of fees. Matter to consider when accepting additional services from an existing client 1 marks - Competence Deadlines Ethical Issues Safeguards Fee and basis Audit procedure for consolidation process. - Audited accounts of each subsidiary should be agreed to the consolidation schedules to ensure accuracy of the figures. - Verify that all subsidiary are included on the consolidation schedules to ensure it all subsidiary exist. - Cast the consolidation schedules to ensure it is arithmetically correct. - Recalculate all consolidation adjustment to ensure it is correct. - Obtain a schedule of intercompany transaction to check to ensure that all intercompany balances are eliminated. - Verify that accounting policies have been applied consistently across the group - Verify that all subsidiary item which should have been carried at fair value are carried at fair value to ensure it is accurate. - Evaluating the classification of the component of the group to ensure component have been correctly identified. - Review the disclosure to ensure it is accurate and appropriate. Matter to be consider in respect of using the work of component auditor - Ethical requirement – The group engagement team should ascertain whether the component auditor understand and will comply with the ethical requirement which are relevant to the group audit. - Competence – The group engagement team must assessed whether the component auditor has the relevant skill and experience to carry out the audit of Lynott co. such as they have knowledge of IFRS. - Resources – Whether Clapton & co have the necessary resources to carry out the work required by the Group in order to obtain sufficient appropriate audit evidence. - Regulatory environment – Whether Clapton & co operte within a regulatory environment. The group audit team should ascertain whether an independent oversight bodies have been established in the jurisdiction in which Clapton & co operates. Examination tips Due diligence - Dec 17 - Dec 15 - Dec 13 Forensic - Sep/dec 19 - June 15 - June 13 Audit of performance information - DEC 15 Q@B, - JUNE 17 Q3 IAS/IFRS - IAS 8,16,20,21,23,24,36,37,38,IFRS 2,5,8,15,16,28,3,10,11 Exposure draft. Integrity – having the determination to act appropriately when confronted with dilemmas or difficult situation Objectivity - actual exercise of professional or business judgement, without these being compromised by factors such as bias, conflict of interest or any form of under influence by or undue reliance on other parties Professional skepticism for auditor Inquiring mind for professional accountant - PA is a wider term which includes different roles adopted by the accountant. Auditor is a confined term which mean external auditor Inquiring mind is used by PA - Being open and alert for situation and information that might required further investigation Considering whether there is a need to critically evaluate the information obtained where the need for, extent and nature of any investigation, including critical evaluation will depend on the nature scope and output of the professional - 1. Emphasizing the importance of being bias - Anchoring bias: a tendency to use an initial piece of information as an anchor against which subsequent information is adequately assessed - Automation bias: a tendency to favour output generated from automated systems, even when human reasoning or contradictory information raises questions as to whether such output is reliable or fit for purpose - Availability bias: a tendency to place more weight on events or experiences that immediately come to mind or are readily available than on those that are not - Confirmation bias: a tendency to place more weight on information that corroborates an existing belief than information that contradicts or casts doubt on that belief - Groupthink: a tendency to think or make decisions as a group that discourages creativity or individual responsibility - Overconfidence bias: a tendency to overestimate one’s own ability to make accurate assessments of risk and other judgements or decisions - Representation bias: a tendency to base an understanding on a pattern of experiences, events or beliefs that is considered to be representative - Selective perception: a tendency for a person’s expectations to influence how the person views a particular matter or person 2. Having a positive internal culture in firm