ACCA Professional Level
Paper P7 (INT)
Advanced Audit and Assurance
Course Examination 1
Question Paper
Time allowed
Reading and Planning
Writing
7½ minutes
1½ hours
Section A: this question is compulsory (in your real exam you will
have TWO compulsory questions)
Section B: this question is compulsory (in your real exam you will
have to attempt TWO questions out of THREE).
During reading and planning time only the question paper may be
annotated
Instructions:
Please attempt this exam under test conditions and attach the frontsheet complete with your name and address
to your script. The completed package should be sent to BPP Professional Education.
Take a few moments to review the notes on the inside of this page titled, ‘Get into good exam habits now!’
before attempting this exam.
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS
ACP7CE11(J) Course Exam 1 Questions
Get into good exam habits now!
Take a moment to focus on the right approach for this exam.
Effective time management
•
Watch the clock, allocate 1.8 minutes to each mark and move on if you get behind.
•
Take a few moments to think what the requirements are asking for and how you are going to
answer them.
•
Remember one mark is usually allocated for each valid point you give in a discursive question.
Effective planning
•
This paper is in the same format as the real exam but has only 50 marks on offer and has no
choice of questions. You should read through the paper and plan the order in which you will
tackle both questions. Always start with the one you feel most confident about.
•
Read the requirements carefully: focus on mark allocation, question words (see below) and
potential overlap between requirements.
•
Identify and make sure you pick up the easy marks available in each question.
Effective layout
•
Present your numerical solutions using the standard layouts you have seen. Show and reference
your workings clearly.
•
With written elements try and make a number of distinct points using headings and short
paragraphs. You should aim to make a separate point for each mark.
•
Ensure that you explain the points you are making ie why is the point a strength, criticism or
opportunity?
•
Give yourself plenty of space to add extra lines as necessary, it will also make it easier for the
examiner to mark.
Common terminology
Advise
Analyse
Calculate/compute
Compare and contrast
Define
Describe
Discuss
Distinguish
Evaluate
Explain
Identify
Interpret
Justify
List
Prepare
Recommend
Summarise
To counsel, inform or notify
Examine in detail the structure of
To ascertain or reckon mathematically
Show the similarities and/or differences
Give the exact meaning of
Communicate the key features of
To examine in detail by argument
Highlight the differences between
To appraise or assess the value of
Make clear or intelligible/state the meaning of
Recognise, establish or select after consideration
Process information to explain its meaning
To produce reasons in support of
State short pieces of information on separate lines
To make or get ready for use
To advise on a course of action
To express the most important facts of
2
ACP7CE11(J) Course Exam 1 Questions
SECTION A – This question is compulsory and MUST be
attempted
1
Buy Fair
You are a manager working for Roddick & Co, a firm of Chartered Certified Accountants specialising in
providing professional services to businesses in both the voluntary sector and developing economies.
One of the firm’s audit clients is Buy Fair, a small listed company whose objective is to promote fair trade
and fight poverty. It is associated with a charitable organisation, Just Fair, which holds one ordinary B
share in Buy Fair and has significant powers vested in it by virtue of the constitution of Buy Fair. Such
rights include a right of controlling vote on all matters of strategy.
You have just received the following email from Buy Fair’s Chief Executive, Anita Martin:
From:
anitamartin@buyfair.com
To:
auditmanager@roddick&co.co.uk
Date:
14th January 20X8
Subject:
Risks!!!
Hi there
We are mad busy at the moment following all the refinancing and need to get a
handle on our risks for some sort of disclosure to the City - we are told by our
investment bank that the usual process is to get someone like you to do this for
us?
Can you provide us with a list of our ‘business risks’ please? We will need them
identifying and describing so we are not only aware of what they are but also why
they are risks to us and our investors.
I understand there are ‘engagement’ related issues associated with this, but that
you have already agreed these with Chris, our FD. Please just send me a list
identifying and describing our business risks and we’ll take it from there.
Many thanks
Anita
You review the permanent file for Buy Fair and establish the following financial information:
Client Overview Report: Buy Fair financial situation
In the financial year to 30 June 20X7, Buy Fair undertook a
share restructure and floated on the Stock Exchange. In the
restructure, 20,500 ordinary A 50c shares were bought back
by the company and exchanged for 10,250 ordinary $1
shares. A further 40,750 $1 ordinary shares were sold on the
Stock Exchange for $15. The new issue was fully subscribed.
Buy Fair's results show an increase on the previous year.
Revenue is $14,080,905 (20X6: $11,898,427) and profit
before tax is $612,042 (20X6: $354,000). The cash raised by
the flotation enabled the company to pay off some long-term
debts and still show an improvement in its cash-in-hand
figure.
ACP7CE11(J) Course Exam 1 Questions
3
You also find the following operational report on Buy Fair which helps to increase your knowledge of the
company:
Client Overview Report: Buy Fair operations
Buy Fair has two main product divisions: food and gifts. Food includes a wide range of products,
including tea and coffee, rice and pasta, cocoa and various chocolate products, and various mueslis and
cereal bars. Gifts includes a wide-ranging combination of craft products from around the third world,
including items made from wood, fabrics and paper.
The company has three main sources of revenue: mail order catalogue, supermarkets and personal
selling via agents. In the past, the income from these three sources has been fairly comparable. In 20X7,
the personal selling revenue has seen a large decrease and the income from mail order (which includes
sales made through Buy Fair's new website) has increased substantially. Personal selling is carried out
by individuals who receive a discount on items purchased from Buy Fair, which they then sell on to
family and friends.
Buy Fair sometimes makes advanced payments to suppliers as is common practice amongst fair trade
ventures. Due to Buy Fair's expansion policy and the number of new producers it has forged links with in
the year, the figure for advanced payments in the company’s financial statements is much bigger than it
has been in previous years, at $756,234 (20X6: $356,199).
Required
(a)
Respond to Anita Martin’s email providing her with the required information.
(12 marks)
Note: within the mark scheme for this requirement, there are 2 professional marks for the
layout and tone of the email response. You do not need to address any engagement or selfreview issues for this piece of work.
(b)
Identify and describe the principal audit risks presented by the audit of Buy Fair and for each one
describe the effect that it will have on the audit plan for the year ended 30 June 20X7.
(12 marks)
(c)
Briefly outline how the audit team might make use of analytical procedures in the Buy Fair audit
for the year ended 30 June 20X7, and discuss any issues associated with using analytical
procedures arising in that year.
(6 marks)
(Total = 30 marks)
4
ACP7CE11(J) Course Exam 1 Questions
SECTION B – This question is compulsory and MUST be
attempted
2
Ennios
You are the manager responsible for the quality of the audits of new clients of CLC, a firm of Chartered
Certified Accountants. You are visiting the audit team at the head office of Ennios Co. The audit team
comprises Steve Jones (audit supervisor), Peter Kaye (audit senior) and Jack Duckworth and Betty
Turpin (trainees). The company provides food hygiene services which include the evaluation of risks of
contamination, carrying out bacteriological tests and providing advice on health regulations and waste
disposal
Ennios' principal customers include food processing companies, wholesale fresh food markets (meat,
fish and dairy products) and bottling plants. The draft accounts for the year ended 30 September 20X7
show revenue of $20 million (20X6 $24 million) and total assets $6.5 million (20X6 $6 million) including
land and buildings owned by the company.
You have summarised the findings of your visit and review of the audit working papers relating to the
audit of the financial statements for the year to 30 September 20X7 as follows:
(1)
Ennios' purchase clerk, Pat Evans, keeps $2,500 cash to meet sundry expenses. The audit
programme shows that counting it is 'outstanding'. Peter Kaye has explained that when Betty was
sent to count it she reported back, two hours later, that she had not done it because it had not
been convenient for Pat Evans. Betty Turpin had instead been explaining to Jack Duckworth how
to extract samples for the audit. Although Pat Evans had later announced that she was ready to
have her cash counted, Peter Kaye decided to postpone it until later in the audit. This is not
documented in the audit working papers.
(4 marks)
(2)
Ennios has drafted its first 'Report to society' which contains health, safety and environmental
performance data for the year to 30 September 20X7. Peter Kaye has filed it with the comment
that it is 'to be dealt with when all other information for inclusion in the company's annual report
is available'.
(4 marks)
(3)
The main office building where Ennios carries out all its testing has just been revalued by the
company’s Finance Director, Mike Baldwin, according to a note on the file from Steve Jones. The
audit supervisor has noted that the new value of $1.5 million ($1.2 million in 20X6) has been
calculated despite the current property market reporting similar buildings in the same area falling
in value by around 20% over the last 12 months. He queried this with Mike Baldwin but was
reassured that as this was a result of ‘a temporary wobble in market conditions’ it was more likely
that the true value of the building was always going to increase due to the buoyancy of the food
hygiene industry and the attractive location of the offices. The file comment is ‘no further action
required - client evidence satisfactory’.
(8 marks)
(4)
The Managing Director of Ennios, Derek Wilton, has advised your firm that, because of the
confidentiality of the directors' salaries, the appropriate records will only be made available to the
partner-in-charge and not to you or the rest of the audit team. Steve Jones has made a note on
the permanent file saying ‘partner to chase - satisfactory.’
(4 marks)
Required
Comment on the implications of each of these findings for CLC's practice management and
quality control policies and procedures. Where appropriate suggest actions that you would expect
to see on file. The marks available are shown beside each scenario.
(Total = 20 marks)
ACP7CE11(J) Course Exam 1 Questions
5
Student self-assessment
Having completed this paper take a few minutes to consider what you did well and what you found difficult. Use
this as a basis to focus your future study on effectively improving your performance.
Common problems
Future emphasis if you answer Yes
Timing and planning
Did you finish too early?
Y/N
Focus your planning time on generating more ideas.
Use models to help develop breadth to your thinking.
Did you overrun?
Y/N
Focus on allocating your time better.
Practise questions under strict timed conditions.
If you get behind leave space and move on.
Did you waffle?
Y/N
Focus your planning time on developing a logical structure to
your answer.
Layout
Was your answer difficult to follow? Y/N
Use headings and subheadings.
Use numbering sequences when identifying points.
Leave space between each point.
Did you fail to explain each
point clearly?
Y/N
Show why the point identified answers the question set.
Did you fail to show any workings
or were your workings unclear?
Y/N
Give yourself time and space to make the marker's job easy.
Interpreting the questions?
Y/N
Learn the meaning of common terminology (inside front cover).
Learn subject jargon (key terms in study text).
Read questions carefully noting all the parts.
Practise as many questions as possible.
Understanding the subject?
Y/N
Review your notes/text.
Work through easier examples first.
Classroom students please contact your tutor for further help.
Home Study students please contact ACCA queries for further
help (accaqueries@bpp.com).
Remembering the notes/text?
Y/N
Quiz yourself constantly as you study. You need to develop your
memory as well as your understanding of a subject.
Content
Did you struggle with:
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6
ACP7CE11(J) Course Exam 1 Questions
ACCA Professional Level
Paper P7 (INT)
Advanced Audit and Assurance
Course Examination 1
Guidance, Marking scheme and
Suggested solutions
ACP7CE11(J) Course Exam 1 Solutions
AC111 – P7(1)
Guidance on improving your exam performance
To help improve your performance you should focus on these key areas.
Which questions to do first?
It is important for you to decide which order to attempt the questions. You may prefer to attempt the
questions that you are more confident about first. This means you will build up marks early on giving you a
solid base to tackle the harder questions later. However do not spend too long on the questions you are
confident about as you need to spend an appropriate amount of time on each of them. You cannot pass the
exam answering two or three questions well and the rest poorly.
An alternative strategy is to answer all questions in strict order. You could use the time saved choosing the
order by starting to plan your answers. You may prefer to use this method if you find yourself spending too
long on your favourite questions as it forces you to spend the right time on each before moving on.
Strategy
Make sure your answers are focused and specific to the circumstances in each scenario. Show clear
workings for any calculations and write full sentences in your explanations, making clear, succinct points.
Most importantly, apply your skills in a practical context.
Time management
Use the reading and planning phase to make sure that you get as many of the marks as possible. Write a
short plan for each question containing bullet points per mark and use it to write your answer when the
writing time begins. Never overrun on any question and once the time is up move on to the next.
2
ACP7CE11(J) Course Exam 1 Solutions
1
Buy Fair
Marking guide
(a)
Marks
Up to 1½ marks for each risk identified and described (maximum of ½
mark allowed if risks are identified only)
Factors – business risk
–
–
–
–
–
–
–
Stock Exchange listing - governance requirements
Impact on financing if unable to comply
Charitable aims
Products
Sales mix
Selling methods
Website
Suppliers
Maximum
10
Professional marks - 1 for email layout and 1 for tone and language
adopted in response
2
Maximum professional marks
(b)
Up to 1½ marks for each risk identified and described (maximum of ½
mark allowed if risks are identified only)
Mention of relevant accounting standards scores ½ mark each
Award an extra ½ mark for the effect of each audit risk on the audit plan
Factors – audit risk
–
–
–
–
–
–
–
Share transactions
Advanced payments
Inventory (IAS 2)
Corporate governance
Revenue (IAS 18)
Website (IAS 38)
Related party transactions (IAS 24)
Maximum
(c)
12
Analytical procedures
–
–
–
Planning/risk assessment
Overall review at completion
Substantive procedures
Specific mention of ISA 315, ISA 330 or ISA 520 scores ½ mark each
Up to 2 marks per point (plus issues) to a maximum of
6
30
ACP7CE11(J) Course Exam 1 Solutions
3
Suggested solution
Chapter references. Chapters 6 and 8
Top tips. In part (a) use the information in the question scenario to help you identify the business
risks to the company – make sure you distinguish between business risks and audit risks – read the
question requirement carefully and don’t just launch into your answer without using some time to
plan. Part (b) asks you to identify the audit risks to the firm so make sure you do this from the correct
perspective.
Note the format required to answer a specific request for information (such as the email here) will
be replicated in the real exam, hence its inclusion here.
Easy marks. Easier marks are available in part (c) of the question on the use of analytical procedures
but make sure you address both elements of this requirement. You should also be able to score
reasonably well in parts (a) and (b) on risks, provided you use the information in the question and
explain the risks well.
(a)
From:
auditmanager@roddick&co.co.uk
To:
anitamartin@buyfair.com
Date:
15th January 20X8
Subject:
re: Risks!!!
Hello Anita
Please find attached a summary of what we feel are the main business risks faced by your
company:
Stock Exchange listing
The fact that the company has achieved Stock Exchange listing in the year brings a high level
of additional compliance risk to the company. Listed companies are encouraged to comply
with corporate governance requirements and are required to report on any incidence of noncompliance.
As a small company by listed company standards, Buy Fair is likely to encounter particular
difficulty meeting some of the requirements in relation to the board, particularly obtaining
suitable non-executive directors. This problem is exacerbated that the company is an unusual
company, with a charitable foundation, and therefore specific skills may be required from nonexecutive directors that are hard to come by.
The company will have to ensure either that its corporate governance arrangements comply
with best practice, or it will have to be prepared to explain its reasons for not doing so.
Financing issues
It is possible that failing to comply with corporate governance requirements could
compromise the investment potential of Buy Fair's shares for the market. However, given the
charitable foundation of the company, it is equally possible that its shares will be held and
traded by people in sympathy with its aims rather than for any significant hope of gain from
the investment.
4
ACP7CE11(J) Course Exam 1 Solutions
Charitable aims
As discussed above, it is possible that the investment decisions for people wishing to hold
shares in Buy Fair will be different from the market generally.
However, the company must be aware that the fact that company strategy is directed and
controlled by the charity Just Fair (by virtue of the clause in the company's memorandum)
may represent a financial risk. This is because it may restrict the attractiveness of the shares
in the market, as shareholders are going to be unable to fully influence policy with regard to
capital growth and dividends.
Products
Another risk, with both compliance and operational elements, is that Buy Fair imports
foodstuffs from developing countries.
The company must ensure that the goods it imports meet regulatory requirements in terms of
food hygiene and packaging for the country in which they are being sold. It must also ensure
that goods are transported and stored in a suitable way to ensure that they do not perish.
Change in sales mix
The company has experienced a change in sales mix during the year, although in the past the
sales mix has been stable. This may be as a result of the new website and the fact that this is
really a new source of sales.
This is an operational risk as the systems of the company may not be flexible to changes in
the sales mix, which could result in loss to the company and customer dissatisfaction. It is
also possible that the company could waste resources directing marketing and selling effort in
the wrong areas.
It is important that the company keeps track of the nature of its sales patterns and directs
resources appropriately in order to maintain and grow them.
Personal selling
In the past the company has relied to an extent on personal selling, where individuals sold Buy
Fair products on behalf of the company. This source of income appears to have fallen in this
year. The company should monitor this situation.
There is likely to be a degree of informality in the arrangements with personal sellers and
without monitoring, the company could find that it experiences big changes in this source of
income which it has very little control over.
While its place in the sales mix has reduced, it is still significant, so the company may want to
invest in encouraging other personal sellers to form a relationship with Buy Fair or in
encouraging personal sellers who have stopped selling to start again. Additionally, the
company may want to use these people to raise awareness of the alternative methods of sales
which it has, particularly mail order and web sales.
Website
In opening this new avenue of selling, Buy Fair has opened itself up to a significant number of
risks associated with information technology.
These include the high level of technological intelligence the company will require to maintain
the web facility and any related systems, the risk of business interruption due to technological
failure, for example, caused by viruses. There is also increased use of the company being
subject to credit card frauds, although it will already be exposed to such risks in its mail order
division.
ACP7CE11(J) Course Exam 1 Solutions
5
Advanced payments to suppliers
It is common practice amongst such fair trade enterprises to make advanced payments to
suppliers in order to enable them to produce the goods.
However, this practice puts Buy Fair at risk of having made payments to a supplier that does
not produce the goods, for which the company may have very little comeback, given the
implied financial situation of the suppliers that it deals with. It also puts the company at risk of
paying in advance for goods which do not meet quality standards, with similar effect for the
company. Buy Fair should establish systems to ensure that goods are of appropriate quality
before shipping.
This risk is currently particularly high due to the number of new suppliers that the company is
dealing with. Although Buy Fair is likely to have carried out significant research before dealing
with the suppliers, it will still be learning through the course of its trading relationship with
them.
This is a good list to start off with for your governance reports, but we will monitor progress of
Buy Fair and review these on a regular basis.
If you have any queries on anything in this list, please get in touch with me at the office.
Regards,
A. Manager
(b)
Audit risks
Share transactions
The company has undertaken a significant share restructure during the year that will require
full disclosure in the financial statements. As auditors, we will have to audit this disclosure as
well as ensuring that the accounting treatment has been carried out satisfactorily.
The auditors should allocate some time to a senior member of the audit team to audit the share
restructure. It should be possible to gain good audit evidence by referring to the company's
advisers, particularly the solicitors and by reviewing the statutory records of shares and
members.
The auditors should also ensure that they have planned to collect evidence of the payments
and receipts during the year in respect of this transaction.
Accounting for the advanced payments
The advanced payments are a risk for the audit. The company has bought the right to future
goods. However, as noted above, this right carries a significant degree of risk. This issue is
more risky this year as the amount relating to advanced payments has more than doubled in
the year and is material in the context of profit of $600K.
The auditors must plan to review the accounting policy for accounting for advanced payments
to ensure that it is reasonable. They must also review the arrangements and contracts made
with the suppliers to ensure that the assumptions inherent in the accounting policy are
justified. In addition, they should verify the payments made to bank statements, and confirm
from the suppliers that they were genuinely received by the suppliers - however, given the
nature of these suppliers that may be difficult in practice.
Inventories
We have already mentioned that some of the company's products are potentially perishable.
The company needs to ascertain the level of inventories held at the year-end and also where it
6
ACP7CE11(J) Course Exam 1 Solutions
is held. If the amount of inventories is likely to be material, attending inventory counts will be
an important part of establishing the existence of the inventories as per IAS 2.
The auditors need to establish at what point the company owns the inventories. This is to
ensure correct cut-off between inventories and payments on account in the first instance, but it
is also to discover whether the auditors need to plan to attend inventory counts at the
premises of suppliers. The fact that this might not be simple and would certainly be expensive
should not affect the fact that they should attend. The firm may have alliances or overseas
offices and so could arrange to have other auditors attend any such counts.
Corporate governance
External auditors are usually required to review the report on corporate governance included
within the annual report (depending on jurisdiction). They will probably not have been required
to do this when the company was a private company.
They should therefore plan additional time to enable them to undertake this task, and they may
need to incorporate additional systems work into their audit to enable them to assess the new
systems becoming a listed company may have entailed.
Revenue
Revenue will also be a risky area for the audit given the variety of sales channels and likely
difficulty in reconciling each one with accounting records. The recognition of revenue in the
financial statements will need careful review to ensure compliance with IAS 18.
The auditors must review the accounting policy in the light of the new types of revenue and
ensure that it is reasonable in addition to planning time to verify amounts received from these
various different sources.
Website
If the website was new in the year, it will represent a risk to the audit in terms of new systems
and whether the costs of it were capitalised or written-off.
The auditors will again have to review the accounting policy to ensure that it is reasonable and
verify the costs against invoices as per IAS 38.
Related party transactions
Related party transactions are clearly an important part of this audit, due to the relationship
between Buy Fair and Just Fair, its controlling party, and the fact that the sponsorship of
overseas suppliers could also result in Buy Fair having a related party relationship with them.
There is also the issue of the share transactions which may form part of the related party
transaction disclosure, depending on who held the shares previously.
The auditors must plan to devote time on the audit to researching the relationships between
Buy Fair and other parties and ensuring that the disclosures in the financial statements are in
line with IAS 24.
(c)
Analytical procedures
Risk assessment
Analytical procedures should be used as risk assessment procedures, in line with ISA 315
Identifying and assessing the risks of material misstatement through understanding the entity
and its environment.
An exercise in comparing draft accounts to prior year financial statements and/or budget will
highlight areas that may need some attention on the audit, but may be misleading given the
change the company has recently gone through - hence careful interpretation is required.
ACP7CE11(J) Course Exam 1 Solutions
7
Overall review level
Towards the end of the audit, the auditors will follow ISA 520 Analytical procedures to assess
whether the financial statements are internally consistent, for example, checking that the
level of depreciation in the income statement is reasonable against the value of non-current
assets in the balance sheet / statement of financial position, or that the wages and salaries
figures are reasonable compared to the staff disclosures in the notes.
Substantive procedures
Analytical procedures are often used by auditors following ISA 330 The auditor’s responses to
assessed risks as a substantive procedure to obtain audit evidence about balances and
transactions in financial statements.
However, in the audit of Buy Fair for the year to 30 June 20X7, it may be inappropriate to rely
too heavily on analytical procedures due to the high number of changes in the year in the
company's business which will make numerous changes in the financial statements (for
example, the new source of revenue and the fact that the company is now listed.)
This is because these key changes may appear to explain differences, but in fact, these may
mask other changes occurring in the business.
8
ACP7CE11(J) Course Exam 1 Solutions
2
Ennios
Marks
Marking guide
Cash count (max. 4 marks)
1
Immaterial
Poor direction of trainees
Competence of trainees
Lack of documentation
1
1
1
Report to society (max. 4 marks)
Other information (ISA 720)
(mention of specific standard scores ½ mark)
Assurance service
Necessary resources to undertake assurance assignment
Nature of report unclear
Impairment (max. 8 marks)
Materiality
Make sense if revenues are falling?
Poor QC if no professional scepticism or follow up
Integrity of management?
Poor accounting knowledge - suggests impairment
IAS36 conditions
(mention of specific standard scores ½ mark)
Definitions of carrying value and recoverable amount
Procedures to verify each value/amount
1
1
1
1
1
1
1
1
1
1
2
2
Directors' salaries (max. 4 marks)
Partner should speak to MD
Emphasise confidentiality of all information provided to audit team
Expensive if partner performs the work
Junior staff competent to do this work
1
1
1
1
Maximum
20
ACP7CE11(J) Course Exam 1 Solutions
9
Suggested solution
Chapter reference. Chapters 2, 4, 8, 9 and 10
Top tips. In this question, deal with each scenario in turn before moving on to the next one. Don’t get
too bogged down in each – make sure you spend the right amount of time and then move on.
Remember to consider materiality where relevant and take a logical approach to each situation.
Remember the risk to the firm of not following any of the quality control procedures outlined, as well
as the ethical guidelines that firms should work within.
Easy marks. There aren’t easy marks as such in this question but by using the approach outlined
above, you should be able to pick up some marks on this question for making logical, sensible
comments that are relevant to each situation.
(1)
Cash count
Although $2,500 is immaterial, the client's management may well expect the auditor to count
it, albeit routinely, to confirm that it has not been misappropriated.
Monitoring of the trainee may have been inadequate. For example, Betty may not have
understood the need to count the cash immediately the request was made of the client.
However, the behaviour of Betty also needs to be investigated in that she failed to report back
to the audit senior on a timely basis and allowed herself to be unsupervised.
The trainees do not appear to have been given appropriate direction. Betty may not be
sufficiently competent to be explaining sample selection methods to another trainee.
Although it is not practical to document every matter, details should have been recorded to
support Peter's decision to change the timing of a planned procedure. (Peter's decision
appears justified as it is inappropriate to perform a cash count when the client is 'ready' for it).
Also, if some irregularity is discovered by the client at a later date (e.g. if Pat is found to be
'borrowing' the cash) documentation must support why this was not detected sooner by the
auditor.
(2)
'Report to Society'
The audit senior appears to have assumed that this is 'other information' to be included in a
document containing audited financial statements (the annual report) to be dealt with in line
with ISA 720 The auditor’s responsibilities relating to other information in documents
containing audited financial statements. 'To be dealt with' presumably means 'to be read' with
a view to identifying significant misstatements or inconsistencies. However, Ennios may be
intending to publish it as an entirely separate report and require an assurance service (other
than audit) such as an independent verification statement on performance standards.
(3)
‘Revalued building’
The building’s revaluation is material as it makes up 23% of net assets. The reason for the
revaluation seemingly makes no sense however, as revenues and assets are actually falling and
despite the FD’s assertion that the property price issue is ‘temporary’ this must be considered
on more than just face value. The audit supervisor has failed to display the professional
scepticism required and should have been more alert to the possible implications of possible
concerns about the FD’s integrity.
The circumstances seem to suggest that instead of an upward revaluation, the building should
have been reviewed for signs of impairment. IAS 36 Impairments indicate that if the carrying
amount in the financial statements exceeds the recoverable amount, then there is a possible
impairment. Such an impairment requires either writing off against profits for the year if the
asset is valued at cost or a reduction in reserves if the asset has been previously revalued.
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ACP7CE11(J) Course Exam 1 Solutions
You should expect to see some evidence verifying the recoverable amount, which is the higher
of fair value less costs to sell and the value in use. Fair value requires some knowledge of
market conditions to estimate an amount based on similar properties locally - given the
property slump mentioned, this is likely to be quite risky and might require an expert surveyor.
Value in use considers how much the asset would be worth if retained by the company and
calculates the present value of future cash flows earned by the asset. This would require some
knowledge of future business performance.
As both of these measures is highly subjective, given the uncertain nature of both the
property market and the company’s revenues, the audit supervisor should have queried with
the FD how the asset was only likely to increase in value in such circumstances. This is poor
implementation of the engagement.
(4)
Confidentiality of salaries
This matter would need to be handled very tactfully as one would not wish to upset a client
needlessly. The partner should perhaps initially write to the Derek Wilton or arrange for a
meeting if this were felt to be a better approach.
The partner should advise the MD that respecting confidentiality with regard to a client's affairs
is an important part of professional ethics. He should point out that recommendations in this
area are in fact set out in the profession's ethical guide and that this guide is binding upon the
most junior member of audit staff just as much as on the partner himself.
It would be important for the partner to show that he has every confidence in his audit staff in
this respect. The MD should therefore be advised that his fears are groundless.
Perhaps the most convincing argument in changing the client's mind would be to conclude by
saying that if the partner were to carry out his audit work which he would be prepared to do,
then the cost to the client would be much greater. This is because the charge out rate of a
partner's time is much higher than that of a more junior member of the audit team who would
normally be considered quite competent to carry out this particular audit task.
ACP7CE11(J) Course Exam 1 Solutions
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ACP7CE11(J) Course Exam 1 Solutions