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