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ACCA Paper F8:
AUDIT AND ASSURANCE
Questions and Answers
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ACCA Paper F8 (International)
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ACCA Paper F8
AUDIT AND ASSURANCE
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Copyright statement
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Test your knowledge now!
Syllabus
Questions & Answers
Study Guide
The structure of the syllabus
Intellectual levels
Learning hours
Guide to exam structure
Guide to examination assessment
Aim
Main capabilities
Relational diagram of main capabilities
Rationale
Detailed syllabus
Approach to examining the syllabus
A
B
C
D
E
F
G
Audit framework and regulation
Internal audit
Planning and risk assessment
Internal control
Audit evidence
Review
Reporting
Contents
Main Contents
Contents:
Multiple Choice Questions and Answers
Contents:
ISA Short Questions and Answers
Contents:
Diagnostic Questions and Answers
Contents:
Exam Status Questions and Answers
Contents:
Past Exam Questions and Answers
Appendix A:
International Standards on Auditing
Appendix B:
Glossary
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TEST YOUR KNOWLEDGE NOW!
Take a few minutes to see if you have remembered important points from the syllabus.
Test yourself.
Aim to reach a high score.
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ACCA Paper F8 syllabus:
Map of the Diagnostic Tests
The Audit and Assurance syllabus is essentially divided into seven areas. The Tony Surridge +AddVance ebook of Diagnostic Questions and Answers is based on the ACCA syllabus and contains the following seven
sections:
1.
2.
3.
4.
The concept of audit and other assurance engagements
Statutory audits
The regulatory environment and corporate governance
Professional ethics and ACCA’s Code of Ethics and Conduct
1.
2.
3.
4.
5.
Internal audit and corporate governance
Differences between external and internal audit
The scope of the internal audit function
Outsourcing the internal audit department
Internal audit assignments
1.
2.
3.
4.
5.
6.
7.
Objective and general principles
Understanding the entity and knowledge of the business
Assessing the risks of material misstatement and fraud
Analytical procedures
Planning an audit
Audit documentation
The work of others
1.
2.
3.
4.
5.
6.
Internal control systems
The use of internal control systems by auditors
Transaction cycles
Tests of control
The evaluation of internal control components
Communication on internal control
1.
2.
3.
4.
5.
6.
The use of assertions by auditors
Audit procedures
The audit of specific items
Audit sampling and other means of testing
Computer-assisted audit techniques
Not-for-profit organisations
REVIEW
1.
2.
3.
4.
Subsequent events
Going concern
Management representations
Audit finalisation and the final review
REPORTING
1.
2.
3.
Audit reports
Reports to management
Internal audit reports
AUDIT FRAMEWORK
AND REGULATION
INTERNAL AUDIT
PLANNING AND RISK
ASSESSMENT
INTERNAL CONTROL
AUDIT EVIDENCE
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ACCA Paper F8 (International)
Section A:
AUDIT FRAMEWORK
AND REGULATION
1. The concept of audit and other assurance engagements
2. Statutory audits
3. The regulatory environment and corporate governance
4. Professional ethics and ACCA’s Code of Ethics and Conduct
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ACCA Paper F8 (International)
Question 1
Paragraph A15, ISA 200 states ’Part A of the IFAC Code establishes the fundamental principles of
professional ethics relevant to the auditor when conducting an audit of financial statements and
provides a conceptual framework for applying those principles. The fundamental principles with which the
auditor is required to comply by the IFAC Code are:
(a)
Integrity;
(b)
Objectivity;
(c)
Professional competence and due care;
(d)
Confidentiality; and
(e)
Professional behaviour’.
A
Consistent with achieving the fundamental principles is for a Chartered Certified Accountancy firm to set
its objective on providing professional services that conform with professional standards. Reasonable
assurance of achieving this basic objective is provided through
A
Compliance with International Financial Reporting Standards (IFRSs)
B
Continuing professional education.
C
A system of quality control.
D
A system of peer review.
Question 2
A
Which is not correct concerning the word “will” in the ISA 200 guidance?
A
Paragraph A44, ISA 200 states ‘….. Accordingly, some detection risk will always exist’.
B
Paragraph A56, ISA 200 states ‘The auditor will also conduct the audit in accordance with both
ISAs and auditing standards of a specific jurisdiction or country’.
C
Paragraph A39, ISA 200 states ‘…. . Accordingly, some control risk will always exist’.
D
Paragraph A55, ISA 200 states ‘In performing an audit, the auditor may be required to comply with
legal or regulatory requirements in addition to the ISAs. The ISAs do not override law or regulation
that governs an audit of financial statements. In the event that such law or regulation differs from
the ISAs, an audit conducted only in accordance with law or regulation will not automatically
comply with ISAs’.
(Note: the print emphasis is not part of the standard.)
Note:
The first 10 Questions and
Answers have been made
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ACCA Paper F8 (International)
Question 3
A
Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members
should discuss the potential for material misstatement due to fraud. Which of the following best
characterises the mind-set that the audit team should maintain during this discussion?
A
Questioning.
B
Judgmental.
C
Presumptive.
D
Criticising.
Question 4
A
Because an examination of evidence is influenced by the possibility of material errors, the auditor should
conduct the examination with an attitude of
A
Professional responsiveness.
B
Conservative advocacy.
C
Objective judgment.
D
Professional skepticism.
A
Question 5
An independent chartered certified accountant auditor must have which of the following?
A.
A pre-existing and well-informed point of view with respect to the audit.
B.
Technical training that is adequate to meet the requirements of a professional.
C.
A background in many different disciplines.
D.
Experience in taxation that is sufficient to comply with International Standards on Auditing (ISAs).
Question 6
A
An independent audit aids in the communication of economic data because the audit
A
Lends credibility to the financial statements.
B
Assures the reader of financial statements that any fraudulent activity has been corrected.
C
Confirms the accuracy of management's financial representations.
D
Guarantees that financial data are fairly presented.
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Question 7
A
An chartered certified accountant auditor should comply with applicable IASs on every engagement
A
Except in examinations that result in a qualified report.
B
Except in engagements where the chartered certified accountant auditor is associated with
unaudited financial statements.
C
Except in examinations of interim financial statements.
D
Without exception.
Question 8
A
Which of the following best describes the reason why an independent auditor reports on financial
statements?
A
A management fraud may exist and is more likely to be detected by auditors.
B
Different interests may exist between the company preparing the statements and the persons using
the statements.
C
A misstatement of account balances may exist and is generally corrected as the result of the
auditor's work.
D
Poorly designed internal control may exist.
Question 9
A
Independent auditing can best be described as
A
A branch of accounting.
B
A discipline that attests to the results of accounting and other functional operations and data.
C
A professional activity that measures and communicates financial and business data.
D
A regulatory function that prevents the issuance of improper financial information.
Question 10
A
What actions should the auditor take when the two-way communication between the auditor and those
charged with governance is not adequate and the situation cannot be resolved.
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Question 11
Which of the following matters is an auditor required to communicate to those charged with governance?
A
Adjustments that were suggested by the auditor and recorded by management that have a
significant effect on the entity's financial reporting process.
B
The auditor's consideration of risk factors in assessing the risk of material misstatement arising
from the misappropriation of assets.
C
The results of the auditor's analytical procedures performed in the review stage of the engagement
that indicate significant variances from expected amounts.
D
Changes in the auditor's preliminary judgment about materiality that were caused by projecting the
results of statistical sampling for tests of transactions.
Question 12
During the audit of a new client, the chartered certified accountant auditor determined that management
had given illegal bribes to local-government officials during the year under audit and for several prior
years. The auditor notified the client's board of directors, but the board decided to take no action because
the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor
should:
A
Add an explanatory paragraph emphasizing that certain matters, while not affecting the unqualified
opinion, require disclosure.
B
Report the illegal bribes to the local-government official at least one level above those persons who
received the bribes.
C
Consider withdrawing from the audit engagement and disassociating from future relationships with
the client.
D
Issue an "except for" qualified opinion or an adverse opinion with a separate paragraph that
explains the circumstances.
Question 13
Disagreements regarding management's judgment about accounting estimates for goodwill.
B
Disagreements about the scope of the audit.
C
Disagreements in the application of accounting principles relating to software development costs.
D
Disagreements of the amount of the inventory level based on preliminary information.
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A
A
Which of the following disagreements between the auditor and management do not have to be
communicated by the auditor to those charged with governance?
A
A
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ACCA Paper F8 (International)
Question 14
A
Which of the following statements best describes why the ACCA has deemed it essential to promulgate a
‘Code of Ethics and Conduct’ and to establish a mechanism for enforcing observance of the code?
A
A distinguishing mark of a profession is to advance the public interest..
B
A prerequisite to success is the establishment of an ethical code that stresses primarily the
professional's responsibility to clients and colleagues.
C
A requirement of most jurisdictions’ laws calls for the profession to establish a code of ethics.
D
An essential means of self-protection for the profession is the establishment of flexible ethical
standards.
Question 15
A
The ACCA’s ‘Code of Ethics and Conduct’ states, in part, that an ACCA member should maintain
integrity and objectivity. Objectivity in the code refers to an ACCA member’s ability
A
To maintain an impartial attitude on all matters which come under the ACCA member’s review.
B
To independently distinguish between accounting practices that are acceptable and those that are
not.
C
To be unyielding in all matters dealing with auditing procedures.
D
To independently choose between alternate accounting principles and auditing standards.
Question 16
Upon discovering irregularities in a client's tax return that the client would not correct, a chartered certified
accountant auditor withdraws from the engagement. How should the chartered certified accountant
auditor respond if asked by the successor auditor why the relationship was terminated?
A
"It was a misunderstanding."
B
"I suggest you get the client's permission for us to discuss all matters freely."
C
"I suggest you ask the client."
D
"I found irregularities in the tax return which the client would not correct."
Question 17
A
An ACCA member’s retention of client records as a means of enforcing payment of an overdue audit fee
is an action that is
A
Considered acceptable by the ACCA’s ‘Code of Ethics and Conduct’.
B
Ill-advised since it would impair the ACCA auditor’s independence with respect to the client.
C
Considered discreditable to the profession.
D
A violation of International Standards on Auditing (IASs).
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ACCA Paper F8 (International)
Question 18
A
In which of the following circumstances would an ACCA member who audits CAS Company lack
independence?
A
The ACCA member and CAS’s chairman are both on the board of directors of DEF Company.
B
The ACCA member and CAS’s chairman each owns 25% of PQR Company, a ‘close’ company.
C
The ACCA member has a home mortgage from CAS, which is a savings and loan organisation.
D
The ACCA member reduced CAS’s usual audit fee by 40% because CAS’s financial
condition was unfavorable.
Question 19
A
A client company has not paid its 2011 audit fees. According to the ACCA’s ‘‘Code of Ethics and
Conduct’, for the auditor to be considered independent with respect to the 2012 audit, the 2011 audit’s
fees must be paid before the
A
2011 report is issued.
B
2012 field work is started.
C
2012 report is issued.
D
2013 field work is started.
Question 20
A
Section 3.5 of the ACCA’s ‘‘Code of Ethics and Conduct’ states that ACCA ‘Members acquiring
information in the course of their professional work should not disclose any such information to third
parties without first obtaining permission from their clients’. Section 3.5 goes on to state ‘There are,
however, circumstances where members may disclose information to third parties without first obtaining
permission’.
This rule precludes (prevents) the ACCA member responding in the following situation:
A
Where a member is served with a court order under which they are obliged to disclose
information.
B
C
To disclose certain information to the liquidator, administrative receiver or administrator of a client.
To whistleblow to regulators.
D
To disclose information required by the client’s principal shareholder.
Question 21
An ACCA member wrote an article for publication in a professional journal. The ACCA’s ‘Code of Ethics
and Conduct’ would be violated if the ACCA member allowed the article to state that the ACCA member
was
A
A member of the ACCA.
B
A professor at a school of professional accountancy.
C
A partner in a national ACCA firm.
D
None of these.
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ACCA Paper F8 (International)
Question 22
A
During the course of an audit in the United Kingdom, the client's controller asks you if you would like to
spend the weekend in New York (USA) as the company's guest. How should you respond?
A
Go and enjoy yourself.
B
Explain to the client that under the ACCA’s ‘Code of Ethics and Conduct’ you must maintain your
independence so it will be necessary to schedule some appropriate business activities.
C
Explain that under the ACCA’s ‘Code of Ethics and Conduct’ you cannot accept anything of
significant value from a client.
D
Explain that under the ACCA’s ‘Code of Ethics and Conduct’ that this type of activity is prohibited.
Question 23
An ACCA member, while performing an audit, strives to achieve independence in appearance in order to
A
Reduce risk and liability.
B
Comply with the ISAs of audit work.
C
Become independent in fact.
D
Maintain public confidence in the profession.
Question 24
A
Professional competence and due care requires
A
A critical review of the audit work done at every level of supervision.
B
The examination of all corroborating evidence available.
C
The exercise of error free judgment.
D
A study and review of the internal control’s that include tests of controls.
Question 25
A
According to the ACCA’s ‘‘Code of Ethics and Conduct’ in which of the following circumstances may an
chartered certified accountant auditor serve on a company's board of directors?
A
The chartered certified accountant audits a bank to which the company has applied for financing,
and board approval is required for said financing to occur.
B
The chartered certified accountant auditor is asked by the company to test the internal controls of
the company and offers compensation to the ACCA member for said services.
C
The chartered certified accountant auditor does not audit the company and has no other business
connection with the company.
D
The chartered certified accountant auditor performs auditing services for a nonpublic company.
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Question 26
A
In which of the following situations is there a violation of client confidentiality under the ACCA’s ‘‘Code
of Ethics and Conduct’ ?
A
A member discloses confidential client information to a court in connection with arbitration
proceedings relating to the client.
B
A member discloses confidential client information to a professional liability insurance carrier after
learning of a potential claim against the member.
C
A member whose practice is primarily bankruptcy discloses a client's name.
D
A member uses a records retention agency to store clients' records that contain confidential client
information.
Question 27
A
Debbie Jones, an ACCA member, is a partner of Green & Jones Accounting Firm. Green audited the
books of Northtown Bank. Jone’s independence would be impaired under which of the following
circumstances?
A
Jones is a director of Northtown Bank.
B
Jones has a collateralised car loan with Northtown Bank.
C
Jones had an account with Northtown Bank two years ago.
D
Jones and a Northtown Bank board member belong to the same church.
"And how many hours a day did you do lessons?' said Alice, in a
hurry to change the subject.
Ten hours the first day,' said the Mock Turtle: 'nine the next, and
so on.'
What a curious plan!' exclaimed Alice.
That's the reason they're called lessons,' the Gryphon remarked:
'because they lessen from day to day."
Lewis Carroll
Alice's Adventures in Wonderland and Through the LookingGlass
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Original illustrations from Alice's
Adventures in Wonderland, drawn by
John Tenniel
Alice in Wonderland Alice dancing
with Mock Turtle and Gryphon
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ACCA Paper F8 (International)
Section A:
AUDIT FRAMEWORK
AND REGULATION
1. The concept of audit and other assurance engagements
2. Statutory audits
3. The regulatory environment and corporate governance
4. Professional ethics and ACCA’s Code of Ethics and Conduct
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ACCA Paper F8 (International)
Q
Answer to Question 1
C
The question is about how a chartered certified accountancy firm obtains a reasonable assurance of
providing professional services that conform with professional standards. Answer C is correct because
a system of quality control is designed to provide a chartered certified accountancy firm with reasonable
assurance of meeting its responsibility to provide professional services that conform with professional
standards.
Distractor A is incorrect because complying with International Financial Reporting Standards (IFRSs) is
only one part of the basic objective of providing professional services that conform with professional
standards.
Distractor B is incorrect because it is less complete than Distractor C since continuing professional
education is part of the firm’s system of quality control.
Distractor D is incorrect because a peer review provides feedback on whether a chartered certified
accountancy firm is following an appropriate system of quality control.
Q
Answer to Question 2
To access ISA 200 click here
B
The question is about identifying the incorrect statement of the word “will” concerning the ISA 200
guidelines. Answer B is correct because paragraph A56, ISA 200 states ‘The auditor may also conduct
the audit in accordance with both ISAs and auditing standards of a specific jurisdiction or
country. In such cases, in addition to complying with each of the ISAs relevant to the audit, it may
be necessary for the auditor to perform additional audit procedures in order to comply with the
relevant standards of that jurisdiction or country’. The implication of the statement that it may not be
necessary for the auditor to perform the additional audit procedures. Distractors A, C and D are incorrect
because the word “will” is used correctly in each paragraph of ISA 200 referred to.
Distractor A. Paragraph A44, ISA 200 states ‘ISA 300 and ISA 330 establish requirements and
provide guidance on planning an audit of financial statements and the auditor’s responses to
assessed risks. Detection risk, however, can only be reduced, not eliminated, because of the
inherent limitations of an audit. Accordingly, some detection risk will always exist’.
Distractor C. Paragraph A39, ISA 200 states ‘Control risk is a function of the effectiveness of the
design, implementation and maintenance of internal control by management to address identified
risks that threaten the achievement of the entity’s objectives relevant to preparation of the entity’s
financial statements. However, internal control, no matter how well designed and operated, can
only reduce, but not eliminate, risks of material misstatement in the financial statements, because
of the inherent limitations of internal control. These include, for example, the possibility of human
errors or mistakes, or of controls being circumvented by collusion or inappropriate management
override. Accordingly, some control risk will always exist. The ISAs provide the conditions under
which the auditor is required to, or may choose to, test the operating effectiveness of controls in
determining the nature, timing and extent of substantive procedures to be performed’.
Distractor D. Paragraph A55, ISA 200 states ‘In performing an audit, the auditor may be required to
comply with legal or regulatory requirements in addition to the ISAs. The ISAs do not override law
or regulation that governs an audit of financial statements. In the event that such law or regulation
differs from the ISAs, an audit conducted only in accordance with law or regulation will not
automatically comply with ISAs’.
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To access ISA 200 click here
Answer to Question 3
Q
A
The question is about identifying the mind-set that the audit team should maintain during initial
discussions concerning an audit engagement. Answer A is correct. Paragraph A69, ISA 200 states ’ ….
this ISA requires the auditor to adopt an attitude of professional skepticism; this is necessary in
all aspects of planning and performing an audit’. During an audit, the auditor should maintain an
attitude of professional skepticism, which includes a questioning mind and a critical assessment of
audit evidence.
Distractor B is incorrect because judgement is not as important as professional skepticism in the early
discussions.
Distractor C is incorrect because ’to take true without examination’ would be the wrong approach.
Distractor D is incorrect because to ‘disapprove’ would also be wrong at this early stage.
Answer to Question 4
Q
D
The question is about identifying the attitude required of the auditor during the examination of audit
evidence. Answer D is correct because paragraph A20, ISA 200 states ‘Professional skepticism is
necessary to the critical assessment of audit evidence. This includes questioning contradictory
audit evidence and the reliability of documents and responses to inquiries and other information
obtained from management and those charged with governance. It also includes consideration of
the sufficiency and appropriateness of audit evidence obtained in the light of the circumstances,
for example in the case where fraud risk factors exist and a single document, of a nature that is
susceptible to fraud, is the sole supporting evidence for a material financial statement amount’.
Distractor A is incorrect because although the auditor needs to be receptive or aware (i.e. responsive’)
this is not as important as professional skepticism which helps to develop receptiveness or awareness.
Distractor B is incorrect because conservative advocacy (support for traditionalism or low risk) is not
appropriate.
Distractor C is not correct because objectivity (impartiality or detachment) is part of skeptisicism.
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Answer to Question 5
B
Q
The question is about identifying the technical knowledge and background required of an independent
chartered certified accountant auditor. Answer B is correct. Paragraph A24, ISA 200 states ‘The
distinguishing feature of the professional judgment expected of an auditor is that it is exercised
by an auditor whose training, knowledge and experience have assisted in developing the
necessary competencies to achieve reasonable judgments’.
Distractor A is incorrect. The independent auditor should maintain an attitude of professional skepticism
– an unbiased and objective view with respect to the audit which goes against forming pre-existing and
well-informed points of view.
Distractor C is incorrect. An auditor does not need to have a background in many different disciplines. The
auditor must have adequate technical training and proficiency as an auditor and can take advantage of
using ‘The work of an auditor’s expert’ Refer to ISA 620.
Distractor D is incorrect. Generally ISAs do not require the independent auditor to have experience in
taxation; rather the auditor must have adequate technical training and experience as an auditor and be
able to use the work of experts as necessary.
Answer to Question 6
A
Q
The question is about identifying the main objective of an independent audit of historic financial
statements. Answer A is correct. Paragraph 11, ISA 200 states ‘In conducting an audit of financial
statements, the overall objectives of the auditor are:
(a)
To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework; and
(b)
To report on the financial statements, and communicate as required by the ISAs, in
accordance with the auditor’s findings’.
Paragraph A16, ISA 200 states ‘In the case of an audit engagement it is in the public interest and,
therefore, required by the IFAC Code, that the auditor be independent of the entity subject to the
audit. The IFAC Code describes independence as comprising both independence of mind and
independence in appearance. The auditor’s independence from the entity safeguards the auditor’s
ability to form an audit opinion without being affected by influences that might compromise that
opinion. Independence enhances the auditor’s ability to act with integrity, to be objective and to
maintain an attitude of professional skepticism’.
Distractor B is incorrect because the objective of the auditor is not to assure the reader of financial
statements that any fraudulent activity has been corrected, which would suggest a 100% guarantee. For
example, paragraph A47, ISA 200 states ‘Fraud may involve sophisticated and carefully organized
schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may
be ineffective for detecting an intentional misstatement that involves, for example, collusion to
falsify documentation which may cause the auditor to believe that audit evidence is valid when it
is not. The auditor is neither trained as nor expected to be an expert in the authentication of
documents’.
The answer continues on the next screen
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An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given
specific legal powers, such as the power of search, which may be necessary for such an investigation’.
Q
Distractor C is incorrect because the audit report does not confirm the accuracy of management's
financial representations.
Distractor D is incorrect because the word ‘guarantees’ implies 100% assurance which is not given by the
audit report. Paragraph 45, ISA 200 states ‘The auditor is not expected to, and cannot, reduce audit
risk to zero and cannot therefore obtain absolute assurance that the financial statements are free
from material misstatement due to fraud or error. This is because there are inherent limitations of
an audit, which result in most of the audit evidence on which the auditor draws conclusions and
bases the auditor’s opinion being persuasive rather than conclusive’.
Answer to Question 7
Q
D
The question is about identifying when IASs should be used by a chartered certified accountant auditor.
Answer D is correct. Paragraph 1, ISA 200 states ‘This International Standard on Auditing (ISA) deals
with the independent auditor’s overall responsibilities when conducting an audit of financial
statements in accordance with ISAs. Specifically, it sets out the overall objectives of the
independent auditor, and explains the nature and scope of an audit designed to enable the
independent auditor to meet those objectives. It also explains the scope, authority and structure
of the ISAs, and includes requirements establishing the general responsibilities of the
independent auditor applicable in all audits, including the obligation to comply with the ISAs’.
Paragraph 2, ISA 200 goes on to state ‘ISAs are written in the context of an audit of financial
statements by an auditor. They are to be adapted as necessary in the circumstances when applied
to audits of other historical financial information. ISAs do not address the responsibilities of the
auditor that may exist in legislation, regulation or otherwise in connection with, for example, the
offering of securities to the public. Such responsibilities may differ from those established in the
ISAs. Accordingly, while the auditor may find aspects of the ISAs helpful in such circumstances, it
is the responsibility of the auditor to ensure compliance with all relevant legal, regulatory or
professional obligations’. This statement does not imply that the auditor should not comply with
applicable IASs.
Distractors A, B and C are incorrect because ISAs should be complied with in each case.
Answer to Question 8
Q
B
The question is about identifying why an independent auditor reports on financial statements. Answer B
is correct.
Distractors A, C and D are incorrect because they can be dealt with by internal auditors.
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Answer to Question 9
Q
The question is about describing the work of independent auditing. Answer C is correct. Paragraph
13(b), ISA 200 states that audit evidence is ‘Information used by the auditor in arriving at the
conclusions on which the auditor’s opinion is based. Audit evidence includes both information
contained in the accounting records underlying the financial statements and other information.
For purposes of the ISAs:
(i)
Sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity
of the audit evidence needed is affected by the auditor’s assessment of the risks of material
misstatement and also by the quality of such audit evidence.
(ii)
Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for the conclusions on which the auditor’s
opinion is based’.
Paragraph 11, ISA 200 states ‘In conducting an audit of financial statements, the overall objectives
of the auditor are:
(a)
To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework; and
(b)
To report on the financial statements, and communicate as required by the ISAs, in
accordance with the auditor’s findings’.
Distractor A is incorrect. Auditing is not a branch of accounting.
Distractor B is incorrect. The independent auditor is concerned primarily with the financial system and
financial reports and is not concerned with ‘other functional operations and data’.
Distractor D is incorrect. The statement ‘A regulatory function that prevents the issuance of improper
financial information’ suggests a 100% assurance which is not the aim of the independent auditor.
Paragraph A45, ISA 200 states ‘The auditor is not expected to, and cannot, reduce audit risk to zero
and cannot therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are inherent limitations of an
audit, which result in most of the audit evidence on which the auditor draws conclusions and
bases the auditor’s opinion being persuasive’ [i.e. convincing] ‘rather than conclusive’.
Answer to Question 10
Q
Paragraph A44, ISA 260 states ‘If the two-way communication between the auditor and those charged
with governance is not adequate and the situation cannot be resolved, the auditor may take such actions
as:
•
•
•
•
Modifying the auditor’s opinion on the basis of a scope limitation.
Obtaining legal advice about the consequences of different courses of action.
Communicating with third parties (for example, a regulator), or a higher authority in the governance
structure that is outside the entity, such as the owners of a business (for example, shareholders in a
general meeting), or the responsible government minister or parliament in the public sector.
Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation’.
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ISAs
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ISA 200
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Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with International
Standards on Auditing
Note:
The first 9 Questions and
Answers have been made
active for the free sample.
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Question 1
A
What are the stated overall objectives of ISA 200, Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with International Standards on Auditing?
Question 2
A
For purposes of the ISAs, different terms have meanings attributed. In terms of the ISAs define the
following:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
(xv)
Applicable financial reporting framework.
Audit evidence
Audit risk
Auditor
Detection risk
Financial statements
Historical financial information
Management.
Misstatement
Premise
Professional judgement
Professional skepticism
Reasonable assurance
Risk of material misstatement
Those charged with governance
Question 3
Law or regulation may establish the responsibilities of management and, where appropriate, those
charged with governance in relation to financial reporting. However, the extent of these responsibilities,
or the way in which they are described, may differ across jurisdictions. Despite these differences, an audit
in accordance with ISAs is conducted on the premise that management and, where appropriate, those
charged with governance have acknowledged and understand that they have three responsibilities. What
are these responsibilities.
Question 4
A
Paragraph 15, ISA 200, states that the auditor ‘shall plan and perform an audit with professional
skepticism recognizing that circumstances may exist that cause the financial statements to
be materially misstated’. Give four examples of what professional skepticism includes the auditor being
alert to.
Question 5
A
Paragraphs A19, ISA 200 requires the auditor to maintain professional skepticism throughout the audit to
reduce three risks. What are these risks?
Question 6
A
Paragraph A34, ISA 200, states that ‘the risks of material misstatement may exist at two levels’. What
are they?
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Question 7
A
Para A37, ISA 200, states that ‘The risks of material misstatement at the assertion level consist of two
components: inherent risk and control risk. Inherent risk and control risk are the entity’s risks; they exist
independently of the audit of the financial statements’.
Explain the terms:
(i)
(ii)
‘inherent risk’
‘control risk’.
Question 8
A
Paragraphs A42 and A43, ISA, state ‘For a given level of audit risk, the acceptable level of detection risk
bears an inverse relationship to the assessed risks of material misstatement at the assertion level. For
example, the greater the risks of material misstatement the auditor believes exists, the less the detection
risk that can be accepted and, accordingly, the more persuasive the audit evidence required by the
auditor.
Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are determined by
the auditor to reduce audit risk to an acceptably low level. It is therefore a function of the effectiveness of
an audit procedure and of its application by the auditor’.
Briefly give four examples of matters that assist the auditor to enhance the effectiveness of an audit
procedure and of its application and reduce the possibility that the auditor might select an inappropriate
audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results.
Question 9
Paragraph A45, ISA 200, states that ‘The auditor is not expected to, and cannot, reduce audit risk to
zero and cannot therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result
in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion
being persuasive rather than conclusive’. ISA 200 gives three matters from which the inherent limitations
of an audit arise. What are the three inherent limitations?
Question 10
A
Paragraph A48, ISA 200, states that ‘.... the relevance of information, and thereby its value, tends to
diminish over time, and there is a balance to be struck between the reliability of information and its cost’.
Briefly discuss the implications of this statement for the auditor.
Question 11
A
Parapgraph A55, ISA 200 states ‘In performing an audit, the auditor may be required to comply with legal
or regulatory requirements in addition to the ISAs.’ What are the implications for the auditor in the event
that such law or regulation differs from the ISAs?
Question 12
A
Paragraph A58, ISA 200, lays out the contents of a typical ISA. What are the main contents of an ISA?
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Question 13
A
Paragraph A71, ISA 200 states that ‘The auditor is required to use the objectives to evaluate whether
sufficient appropriate audit evidence has been obtained in the context of the overall objectives of the
auditor’. What actions or procedures should the auditor perform when he or she concludes that the audit
evidence is not sufficient and appropriate?
Question 14
A
Are all ISAs relevant for an audit?
Question 15
A
True or False?
(i)
Sufficiency of audit evidence is the measure of the quality of audit evidence.
(ii)
Appropriateness of audit evidence is the measure of the quantity of audit evidence.
(iii)
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a function of the risks of material misstatement
and detection risk.
(iv)
Detection risk is the risk that the procedures performed by the auditor to increase audit risk to an
acceptably high level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
(v)
A misstatement is a difference between the amount, classification, presentation, or disclosure of a
reported financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting framework.
Misstatements can arise from error but not from fraud.
(vi)
ISA 200 defines professional judgements as ‘An attitude that includes a questioning mind, being
alert to conditions which may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence’.
(vii)
The risk of material misstatement is the risk that the financial statements are materially misstated
prior to audit.
(viii) The risk of material misstatement consists of two components, described as follows (1) inherent
risk and (2) detection risk.
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ISA 200
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Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with International
Standards on Auditing
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Answer to Question 1
Q
Paragraph 11, ISA 200 states ’ In conducting an audit of financial statements, the overall objectives of
the auditor are:
(a)
To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
(b)
To report on the financial statements, and communicate as required by the ISAs, in accordance
with the auditor’s findings’.
Answer to Question 2
Q
Paragraph 13, ISA 200 states ’For purposes of the ISAs, the following terms have the meanings
attributed below:
(a)
Applicable financial reporting framework – The financial reporting framework adopted by
management and, where appropriate, those charged with governance in the preparation of the
financial statements that is acceptable in view of the nature of the entity and the objective of
the financial statements, or that is required by law or regulation.
(b)
Audit evidence – Information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. Audit evidence includes both information contained in the accounting
records underlying the financial statements and other information. For purposes of the ISAs:
-
Sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity
of the audit evidence needed is affected by the auditor’s assessment of the risks of material
misstatement and also by the quality of such audit evidence.
-
Appropriateness of audit evidence is the measure of the quality of audit evidence; that is,
its relevance and its reliability in providing support for the conclusions on which the
auditor’s opinion is based.
(c)
Audit risk – The risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a function of the risks of material misstatement
and detection risk.
(d)
Auditor – “Auditor” is used to refer to the person or persons conducting the audit, usually the
engagement partner or other members of the engagement team, or, as applicable, the firm.
Where an ISA expressly intends that a requirement or responsibility be fulfilled by the engagement
partner, the term “engagement partner” rather than “auditor” is used. “Engagement partner” and
“firm” are to be read as referring to their public sector equivalents where relevant.
(e)
Detection risk – The risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
The answer continues on the next screen
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(f)
Financial statements – A structured representation of historical financial information, including
related notes, intended to communicate an entity’s economic resources or obligations at a point in
time or the changes therein for a period of time in accordance with a financial reporting
framework. The related notes ordinarily comprise a summary of significant accounting policies and
other explanatory information. The term “financial statements” ordinarily refers to a complete set of
financial statements as determined by the requirements of the applicable financial reporting
framework, but can also refer to a single financial statement.
(g)
Historical financial information – Information expressed in financial terms in relation to a
particular entity, derived primarily from that entity’s accounting system, about economic events
occurring in past time periods or about economic conditions or circumstances at points in time in
the past.
(h)
Management – The person(s) with executive responsibility for the conduct of the entity’s
operations. For some entities in some jurisdictions, management includes some or all of those
charged with governance, for example, executive members of a governance board, or an ownermanager.
(i)
Misstatement – A difference between the amount, classification, presentation, or disclosure of a
reported financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting framework.
Misstatements can arise from error or fraud.
Where the auditor expresses an opinion on whether the financial statements are presented fairly, in
all material respects, or give a true and fair view, misstatements also include those adjustments of
amounts, classifications, presentation, or disclosures that, in the auditor’s judgment, are necessary
for the financial statements to be presented fairly, in all material respects, or to give a true and fair
view.
(j)
Premise (relating to the responsibilities of management and, where appropriate, those charged
with governance, on which an audit is conducted) – That management and, where appropriate,
those charged with governance have acknowledged and understand that they have the following
responsibilities that are fundamental to the conduct of an audit in accordance with ISAs. That is,
responsibility:
-
For the preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation;
-
For such internal control as management and, where appropriate, those charged with
governance determine is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error; and
-
To provide the auditor with:
-
Access to all information of which management and, where appropriate, those charged
with governance are aware that is relevant to the preparation of the financial statements
such as records, documentation and other matters;
-
Additional information that the auditor may request from management and, where
appropriate, those charged with governance for the purpose of the audit; and
-. Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
The answer continues on the next screen
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Q
(k)
Professional judgment – The application of relevant training, knowledge and experience, within
the context provided by auditing, accounting and ethical standards, in making informed decisions
about the courses of action that are appropriate in the circumstances of the audit engagement.
(l)
Professional skepticism – An attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence.
(m)
Reasonable assurance – In the context of an audit of financial statements, a high, but not
absolute, level of assurance.
(n)
Risk of material misstatement – The risk that the financial statements are materially misstated
prior to audit. This consists of two components, described as follows at the assertion level:
(o)
-
Inherent risk – The susceptibility of an assertion about a class of transaction, account
balance or disclosure to a misstatement that could be material, either individually or when
aggregated with other misstatements, before consideration of any related controls.
-
Control risk – The risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either individually or
when aggregated with other misstatements, will not be prevented, or detected and
corrected, on a timely basis by the entity’s internal control.
Those charged with governance – The person(s) or organization(s) (for example, a corporate
trustee) with responsibility for overseeing the strategic direction of the entity and obligations related
to the accountability of the entity. This includes overseeing the financial reporting process. For
some entities in some jurisdictions, those charged with governance may include management
personnel, for example, executive members of a governance board of a private or public sector
entity, or an owner-manager’.
Answer to Question 3
Q
Paragraph A2, ISA 200 states ’…. an audit in accordance with ISAs is conducted on the premise that
management and, where appropriate, those charged with governance have acknowledged and
understand that they have responsibility:
(a)
For the preparation of the financial statements in accordance with the applicable financial reporting
framework, including where relevant their fair presentation;
(b)
For such internal control as management and, where appropriate, those charged with governance
determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error; and
(c)
To provide the auditor with:
(i)
Access to all information of which management and, where appropriate, those charged with
governance are aware that is relevant to the preparation of the financial statements such as
records, documentation and other matters;
(ii)
Additional information that the auditor may request from management and, where
appropriate, those charged with governance for the purpose of the audit; and
(iii)
Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence’.
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Answer to Question 4
Q
Paragraph A18, ISA 200 states ’Professional skepticism includes being alert to, for example:
•
•
•
•
Audit evidence that contradicts other audit evidence obtained.
Information that brings into question the reliability of documents and responses to inquiries to be
used as audit evidence.
Conditions that may indicate possible fraud.
Circumstances that suggest the need for audit procedures in addition to those required by the
ISAs’.
Answer to Question 5
Q
Paragraph A19, ISA 200 states ’Maintaining professional skepticism throughout the audit is necessary if
the auditor is, for example, to reduce the risks of:
•
•
•
Overlooking unusual circumstances.
Over generalizing when drawing conclusions from audit observations.
Using inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof’.
Answer to Question 6
Q
Paragraph A34, ISA 200 states ’The risks of material misstatement may exist at two levels:
•
•
The overall financial statement level; and
The assertion level for classes of transactions, account balances, and disclosures.
Risks of material misstatement at the overall financial statement level refer to risks of material
misstatement that relate pervasively to the financial statements as a whole and potentially affect many
assertions.
Risks of material misstatement at the assertion level are assessed in order to determine the nature,
timing, and extent of further audit procedures necessary to obtain sufficient appropriate audit evidence.
This evidence enables the auditor to express an opinion on the financial statements at an acceptably low
level of audit risk’.
Answer to Question 7
(i)
As stated previously, ISA 200 defines ‘inherent risk’ as ‘The susceptibility of an assertion about a
class of transaction, account balance or disclosure to a misstatement that could be material, either
individually or when aggregated with other misstatements, before consideration of any related
controls’.
Paragraph A38, ISA 200 states ’ Inherent risk is higher for some assertions and related classes of
transactions, account balances, and disclosures than for others. For example, it may be higher for
complex calculations or for accounts consisting of amounts derived from accounting estimates
that are subject to significant estimation uncertainty. External circumstances giving rise to
business risks may also influence inherent risk. For example, technological developments
might make a particular product obsolete, thereby causing inventory to be more susceptible to
overstatement. Factors in the entity and its environment that relate to several or all of the classes
of transactions, account balances, or disclosures may also influence the inherent risk related to a
specific assertion. Such factors may include, for example, a lack of sufficient working capital to
continue operations or a declining industry characterized by a large number of business
failures’.
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(ii)
As stated previously, ISA 200 defines control risk as ‘The risk that a misstatement that could
occur in an assertion about a class of transaction, account balance or disclosure and that could
be material, either individually or when aggregated with other misstatements, will not be prevented,
or detected and corrected, on a timely basis by the entity’s internal control
Q
Paragraph A39, ISA 200 states ’ Control risk is a function of the effectiveness of the design,
implementation and maintenance of internal control by management to address identified risks
that threaten the achievement of the entity’s objectives relevant to preparation of the entity’s
financial statements. However, internal control, no matter how well designed and operated, can
only reduce, but not eliminate, risks of material misstatement in the financial statements,
because of the inherent limitations of internal control. These include, for example, the possibility of
human errors or mistakes, or of controls being circumvented by collusion or inappropriate
management override. Accordingly, some control risk will always exist. The ISAs provide the
conditions under which the auditor is required to, or may choose to, test the operating effectiveness
of controls in determining the nature, timing and extent of substantive procedures to be
performed’.
Answer to Question 8
Paragraph A43, ISA 200 states ’Detection risk relates to the nature, timing, and extent of the auditor’s
procedures that are determined by the auditor to reduce audit risk to an acceptably low level. It is
therefore a function of the effectiveness of an audit procedure and of its application by the auditor. Matters
such as:
•
•
•
•
Q
adequate planning;
proper assignment of personnel to the engagement team;
the application of professional skepticism; and
supervision and review of the audit work performed,
assist to enhance the effectiveness of an audit procedure and of its application and reduce the
possibility that an auditor might select an inappropriate audit procedure, misapply an appropriate audit
procedure, or misinterpret the audit results’.
Answer to Question 9
Paragraph A45, ISA 200 states ’The auditor is not expected to, and cannot, reduce audit risk to zero and
cannot therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations of an audit, which
result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s
opinion being persuasive [credible] rather than conclusive [certain]. The inherent limitations of an audit
arise from:
•
•
•
The nature of financial reporting;
The nature of audit procedures; and
The need for the audit to be conducted within a reasonable period of time and at a reasonable cost’.
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Section A:
AUDIT FRAMEWORK
AND REGULATION
1. The concept of audit and other assurance engagements
2. Statutory audits
3. The regulatory environment and corporate governance
4. Professional ethics and ACCA’s Code of Ethics and Conduct
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Question 1
A
Independence
The following are various services that accountants perform for clients. For each type of service,
indicate which of them requires the accountant to be independent.
Service:
1.
2.
3.
4.
5.
6.
Compilation
Tax preparation
Review
Examination
Audit
Agreed upon procedures
A
Question 2
In a brief memo to a client, discuss the function of an audit of historical financial statements, including
the assurance provided, the extent of evidence gathering, and whether independence is required.
Your response in the exam will be graded for both technical content and writing skills. You should
demonstrate your ability to develop, organise, and express your ideas. Do not convey information in
the form of a table or abbreviated presentation.
To
From
Subject
:
:
:
Client
Accountant, ACCA
The audit function as it relates to the assurance provided, the extent of evidence
gathering, and whether independence is required.
Note:
The first 9 Questions and
Answers have been made
active for the free sample.
Please write your answer on paper.
Signature ............
Question 3
A
Complete the IFAC's definition of an audit:
The objective of an ............ of ............ ............ is to enable the auditor to ............ an ............ whether the
financial statements are prepared, in all ............ respects, in accordance with an identified financial
reporting framework. The phrases used to express the auditors' opinion are: 'give a ............ and ............
view' or '............ ............ in all material respects', which are equivalent terms.
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Question 4
A
Which of the following has a statutory obligation for an audit, in the UK.
Type of organisation
Large limited liability company
Small sole trader
Charities
Building societies
Housing associations
Trade unions
A
Question 5
Put the following key stages of an audit in the correct sequence:
Test the financial statements
Assess the system and internal controls
Determine the audit approach
Express an opinion
Test the system and internal controls
Ascertain the system and controls
Review the financial statements
Question 6
A
A partnership might benefit from having an audit though it is not required to do so by law. State five
advantages of the partnership having an audit.
A
Question 7
The term ‘Financial statements’ typically include four basic financial statements. What are they?
A
Question 8
Define the following terms:
1.
2.
3.
4.
Disclosure
Negative assurance
Internal audit
Audit assurance
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A
Question 9
True or false
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
National legislation has precedence over International Accounting Standards.
What is included in the audited financial statements is determined largely by the entity's
management.
When involved in a 'Compilation Engagement' the accountant provides assurance about the matter
in hand.
A review is the same as an audit.
By the end of an audit, an auditor may be able to certify that accounts are correct.
The use of internal auditing is generally not a legal requirement
Principal-agency theory (PAT) predicts that, by behaving rationally, management (the agents) are
motivated to act in the interests of the shareholders (principals).
The auditor ensures that the Audit Report is accurate at the time it is published.
Auditors can rely on controls that are well designed.
The student of auditing is going to enjoy studying this subject.
A
Question 10
List seven postulates of modern auditing. (The term postulate means 'premises' 'foundation' 'groundrules').
A
Question 11
Define corporate governance.
A
Question 12
Describe six features of poor governance.
Question 13
A
State five duties of the members of an Audit Committee.
Question 14
A
If the audit committee operates effectively it can bring significant benefits. List five such benefits.
(note: the question refers to benefits and not aims).
Question 15
A
Discuss six aims of an audit committee.
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A
Question 16
Describe five types of regular reporting that would be useful for the functioning of the audit committee.
Question 17
A
Briefly indicate four requirements that an auditor needs to meet to be eligible to conduct a statutory
audit in most jurisdictions.
Question 18
A
The auditor is regulated by four main regulatory bodies. Name them.
Question 19
A
The IFAC issues different categories of standards and guidelines. What do the following stand for:
1.
2.
3.
4.
ISAs
IAPSs
ISREs
ISAEs
Question 20
A
There are different types of regulatory mechanisms affecting the operations of a company, of which
the auditor needs to be aware. Describe five examples of such regulatory mechanisms.
A
Question 21
What is an 'Elective resolution'?
Question 22
A
The majority of companies are required by national law to have an audit. A key exemption generally
given to this requirement is that given to small companies. List four characteristics of a small entity
that would have some bearing on the auditing activity
Question 23
The need for an external audit arises primarily when the ownership and management of an entity are
separated. There are possible advantages for a small private (limited liability) company in having
financial statements audited even when no statutory requirement exists for such as audit. List five such
advantages.
Question 24
A
Discuss five arguments in favour of a small entity having an audit in respect to the users of financial
statements.
Question 25
A
Discuss five arguments against the statutory audit of small entities in respect to the users of financial
statements.
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Question 26
A
True or false
1.
Exposure drafts of proposed IFAC standards are made available for public comment for at least 60
days.
2.
Private companies that are large enough to require an audit are required to lay out accounts
annually.
3.
Members holding 10% of the nominal value of the issued capital of a private company which is not
required to have a statutory audit, can require the accounts to be audited.
4.
The only occasion when directors have the right to appoint the auditor is to fill a casual vacancy.
5.
In the UK a simple majority of members (in meeting) is required to appoint an auditor.
6.
An auditor must be given at least 28 days of notice of removal by 'Special Notice to remove the
auditor'.
7.
In the UK it is the auditor's responsibility to deposit a 'Statement of Circumstances' at the
company's registered office within 14 days of ceasing to hold office.
8.
When an auditor ceases to hold office a 'Statement of Circumstances' must always be deposited
by the auditor who is leaving the office.
9.
UK Companies Act, 2006 requires the directors to prepare a report with respect to the company's
affairs. This report, as such, does not concern the auditor.
UK legislation (Companies Act,
The contents of an auditor's report is laid out in ISA 700.
2006) is used to exemplify
legislation used in most jurisdictions.
10.
Question 27
A
The duties of an auditor require a report on every balance sheet and income statement laid before the
company in general meeting. What must the auditor consider in order to meet this duty?
Question 28
A
Auditors must have certain rights to enable them to carry out their duties. Briefly discuss five rights of
an auditor, excepting those dealing with resignation or removal.
Question 29
A
UK Companies Act, 2006 requires the directors to prepare a report with respect to the company's
affairs. List six items that the Directors' report should set out.
Question 30
A
Explain five responsibilities of external auditors to directors and shareholders.
Question 31
A
Explain the role of the Professional Bodies in the regulation of auditors.
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Question 32
A
Explain the benefits of external audit.
A
Question 33
Describe five actions auditors can take when being threatened with removal by the directors.
Question 34
A
Explain the requirements of the ACCA's Rules of Professional Conduct relating to the supply of nonaudit services to public company audit clients.
Question 35
A
Explain why the provision of non-audit services to audit clients might be seen as a problem and why it
is sometimes suggested that auditors should not provide such service.
Question 36
The onus is always on the auditor not only to be ethical but also to be seen to be ethical. To this end
the ACCA (recognised as a 'Recognised Supervisory Body [RSB]') promulgates its 'Rules of
Professional Conduct', part of which is the 'Fundamental Principles'. The 'Fundamental Principles' acts
as a code which contains five major points. What are they?
Question 37
The IFAC also has its 'Fundamental Auditing Principles' which requires professional accountants to
observe a number of prerequisites or fundamental principles. These are similar to those of the ACCA.
What are the five principles in the IFAC's code.
Question 38
(d)
A
A
Briefly describe why the objectivity of the external auditor may be threatened or appear to be
threatened in the following circumstances:
(a)
(b)
(c)
A
There is undue dependence on any audit client or group of clients.
The firm, its partners or staff have a financial interest in an audit client.
There are family or other close personal or business relationships between the firm, its partners or
staff and the audit client.
The firm provides other services to audit clients.
Question 39
A
Describe ACCA's requirements that reduce the threats to auditor objectivity for each of the four
circumstances detailed in Question 9.
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Question 40
A
An ACCA regulation states that 'A member's objectivity may be threatened or appear to be threatened
as a consequence of a family or other close personal or business regulation ....' List six types of
people who would be regarded as closely connected with an auditor.
Question 41
A
An ACCA regulation states that 'A member's objectivity must be beyond question if (s)he is to report as
an auditor. That objectivity can only be assured if the member is, and is seen to be, independent'.
Threats to an auditor's independence and objectivity could arise for a number of reasons. List five
reasons.
Question 42
It is argued that the long-term nature of the company audit engagement tends to create a loss of
audit independence, due to an increasing familiarity with the company's management and staff, which
works against the shareholders and the public's interest. For this reason it is argued that there should be
a rotation of the audit appointment every few years. Explain four reasons against such rotation.
Question 43
A
A
An ACCA regulation states, 'Auditor's have a professional duty of confidentiality. However they may
be compelled .... to consider it desirable in the public interest to disclose details of client's affairs to
third parties.' In general information acquired in the course of professional work should not be
disclosed, but there are exceptions to this rule. Explain six recognised exceptions.
A
Question 44
What is meant by 'Due skill and care'?
Question 45
A
Audit firms, even small ones, often offer a wide range of business and accountancy services, and
its services could include a portfolio of services to a client. List eight services (which are not auditing
services) which could be in such a portfolio.
Question 46
A
In the UK, the Public Interest Disclosure Act 1988 gives protection to 'workers' who make qualifying
disclosures (they whistleblow). Under the Act there are qualifying disclosures, in other words the
disclosure of information that, under the Act, is permissible, and for which the worker is protected by
making the disclosure. List six circumstances in which a worker can make a qualifying disclosure
(whistleblow) and seek protection of the courts should it be necessary.
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Question 47
A
Briefly explain who is eligible to act as the auditor of a limited company under the provisions of the
UK Companies Act, 2006.
Question 48
QuickParts Company, a car components manufacturer, made an initial public offer (IPO) and was
listed on the London Stock Exchange and was therefore, for the first time, obliged to have a statutory
audit. The directors are unsure as to their responsibilities and the nature of their relationship with the
external auditors. The audit partner has asked you as audit manager to visit the client and explain to the
directors the more fundamental aspects of the accountability of the company and their relationship with
the auditor.
UK legislation (Companies Act,
2006) is used to exemplify
legislation used in most jurisdictions.
Required:
Prior to your meeting the audit partner asks you to write a letter to the directors of QuickParts Company
explaining the following points in your letter, which will be discussed at the meeting:
(a)
Why an audit is required.
A
(b)
How the auditor of a public company may be appointed under the UK Companies Act, 2006.
A
(c)
What the auditor's rights are under the UK Companies Act, 2006.
A
(d)
he responsibilities of the directors in relation to the accounting function of the company.
A
Question 49
The accountancy profession is constantly concerned by the problem of auditors' liability.
(a)
You are required:
(i)
(ii)
(b)
A
to state to which parties the auditor might be liable;
to state under what circumstances the auditor might be liable to third parties.
A
Your firm has been the auditor of Artak Artworks for many years. It has recently been
discovered that for the past few years the managing director has consistently overvalued
inventory. You are required to prepare a note for your audit partner advising him of the possible
defences should a liability claim arise.
Question 50
It has been suggested that the liability of auditors should be limited because of:
-
the increasing number and size of damages claims being brought against auditors; and
the difficulty in obtaining adequate professional indemnity insurance cover, and its cost.
You are required:
(a)
to list and briefly describe the circumstances when an auditor may be liable for damages for
material mis-statements in published accounts on which he has expressed an audit opinion, and
the circumstances when he may avoid liability.
A
The question continues on the next screen
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(b)
to list the persons who may make successful legal claim against an auditor, and state the basis
a court of law would use to assess the value of damages.
A
(c)
to briefly describe the ways the liability of auditors could be limited, and consider the practicality
of these methods of limiting an auditor's liability.
A
(d)
to consider what the effect of limiting an auditor's liability is likely to have on:
A
(e)
(f)
(i)
the investor's view of the reliability of the audit opinion; and
(ii)
the amount of work an auditor will perform (compared with the work he would perform if his
liability was unlimited), and the effect this will have on the reliability of the audit opinion.
A
to briefly come to a conclusion on:
(i)
whether you consider it is practicable for an auditor's liability to be limited;
(ii)
whether limiting an auditor's liability will affect the reliability of the audit opinion; and
(iii)
whether you would agree with the proposal that an auditor's liability should be limited.
Briefly discuss factors which the external auditor should consider in evaluating the work of the
internal audit department
A
Question 51
You are a partner of a small certified accounting firm and also a member of a local sports centre.
The club Chairman, who is a friend of yours, has persuaded you to become the centre's auditor and
accountant.
Required:
(a)
Compare your responsibilities as accountant compared to those of auditor.
(b)
To what extent do you think your independence might be lessened because of:
(i)
(ii)
A
A
your friendship with the club Chairman
your own club membership?
Question 52
A
Discuss the extent to which, in practice, the UK legal requirements relating to the appointment of
limited company auditors ensure auditor independence.
High expectations are the key to everything.
Sam Walton
Samuel Moore "Sam" Walton (1918 – 1992) was a businessman,
entrepreneur, and Eagle Scout born in Kingfisher, Oklahoma best
known for founding the retailers Wal-Mart and Sam's Club.
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Question 53
You have just started working for a small firm of accountants and the first audit which you will be
assisting on is the company where your sister works as a Financial Director. Whilst in the planning
meeting the audit manager is discussing independence and you are unsure as to exactly whether or not
this relationship prevents you from performing any audit work. When discussing this with the
manager he suggests you do some reading on the subject to aid your understanding and continue the
discussion the next day.
He also provides you with details of personal circumstances of other audit staff and asks you to consider
what the outcome should be (see extract below).
Extract
(i)
One of the audit partners is a personal friend of the chief accountant of Manny Company. The
chief accountant is not a director of the company and the audit partners is not responsible for
Manny Company's work.
(ii)
The audit fee receivable from Zoomic Company is $150,000; the total fee income of the audit firm is
$700,000.
(iii)
The audit senior in charge of the audit of Sterling Bank has a personal loan from the bank of
$15,000 on which he is paying the market interest rate.
(iv)
One of the partners is responsible for two audits, Axol Company and Pamoy Company. Axol
Company has recently tendered for a contract with Pamoy Company for a supply of material
quantities of goods over a number of years. Pamoy Company has asked the audit partner to
advise on the matter.
Required:
(a)
Prepare a memorandum addressed to the audit manager explaining what is meant by the
independence and suggest ways in which the auditor can try and ensure his independence is
maintained.
A
Conclude on whether you think your relationship prevents you from assisting on the audit.
(b)
A
State what you think the outcome should be in each of the four situations in the extract provided
to you by the audit manager.
Question 54
(a)
Provided an auditor possesses professional objectivity, he does not have to be seen to be
independent.
A
Required:
Comment on the above statement ensuring that you include an explanation of the term
'professional objectivity' and include commentary on the validity of the statement.
(b)
ACCA's Rules of Professional Conduct describe various situations and relationships, which if
existing, could pose a threat to auditor independence. The guidance notes provide examples of
appropriate actions that can be taken to safeguard against the loss of independence where such
situations and relationships exist. Consider the following scenarios:
The question continues on the next screen
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A
(i)
On the 3 October 2012, the audit engagement partner of White & White Chartered
Certified Co visited the offices of Campbo Company to plan the final audit procedures
for the year ending 31 December 2012. A week later, each of the five partners of White
& White Co received an unsolicited letter from the Managing Director of Campbo
Company offering one year's free membership at one of its golf and country clubs with
effect from 1 November 2012. Individual annual membership normally costs $3,000 and
the offer was not made to anyone else.
(ii)
The wife of one of the audit managers at McDonalds Chartered Certified Accountants and
A
Company - a large audit firm and auditors of Dampont Company - has recently been
appointed as the Financial Director of Dampont Company. Immediately prior to her
appointment she had been employed by one of Dampont's competitors. Each of the
directors of Dampont Company is entitled to an annual bonus based on the reported profit of
the company.
(iii)
Gambles, Gambles & Gambles, a long established firm, audit the financial statements of
two private limited companies owned by Albert Goldsmithe, an entrepreneur with a very
dominant personality. The annual total fee income of Gambles, Gambles & Gambles is
$2.4m and the combined audit fees attributable to the two companies is $220,000. Albert
Goldsmithe has recently approached Gambles, Gambles & Gambles with a view to
appointing them as auditors to a third limited company under his control. The projected
annual fee attributable to the third company is $240,000.
A
Required:
For each of the above scenarios: comment on any concerns you may have regarding the threat to
auditor independence and objectivity and recommend the appropriate action to be taken by the
audit firm to safeguard against any threat identified.
Question 55
You are the audit senior in a firm who has recently completed the audit of Metal Craft Company., and
after extensive discussions with the directors of the company, the audit report has been qualified in
respect of the auditors' inability to agree with the directors on the appropriateness of a provision against
obsolete inventory. The directors have informed you that they intend to dismiss your firm as auditors,
and replace you with a small local firm of accountants. The directors have informed you verbally that the
reason for your dismissal is the disagreement over the provision for stock obsolescence, and further they
intend to appoint the new auditors because they are more likely to accept the accounting policies of the
directors. Your firm has recently received a letter from the nominee auditors asking if there are any
professional reasons why they should not accept appointment as auditors of Metal Craft Company.
Required:
(a)
Prepare a working paper for the audit partners to be used in a meeting to discuss the current
situation with Metal Craft Company. The working paper should outline the rights which the UK
Companies Act, 2006 gives the auditor when a company proposes to dismiss him and has
dismissed him.
A
(b)
Draft a suitable letter in reply to the request from the nominee firm of auditors asking if there are
any reasons why they should not accept appointment as auditors.
A
(c)
One of the junior auditors who has just commenced employment with the firm is very interested
in the situation and would like to discuss it with you further; he asks you to explain what the
ethical implications for the nominee auditor are if he decides to accept appointment as auditor.
A
Draft a suitable response (in memorandum form) to the junior auditor.
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Question 56
You have just qualified with a BA degree in Accounting and Finance and have decided to study for a
further professional accountancy qualification which your firm has offered to sponsor you for.
They have also decided to employ two junior members of staff to study for their ACCA qualification
and have asked you to spend some time with them explaining exactly what is required of them as
accountants by law and by the ACCA.
Required:
(a)
A
Prepare a memorandum addressed to the partners of the firm outlining the provisions of the UK
Companies Act, 2006 which strengthens the independence of the auditor.
This will then be reviewed by the partners prior to being given to the junior members of staff.
(b)
Explain to the junior auditors the requirements of the ACCA's Professional Conduct Rule on
Integrity, objectivity and independence which strengthen the independence of the auditor.
A
UK legislation (Companies Act,
2006) is used to exemplify
legislation used in most jurisdictions.
Winners never quit and quitters never win.
Vince Lombardi
Vincent Thomas "Vince" Lombardi (June 1913 – 1970) was an
American football coach. He is best known as the head coach of
the Green Bay Packers during the 1960s, where he led the team
to three straight league championships and five in seven years,
including winning the first two Super Bowls following the 1966
and 1967 NFL seasons.
Vince Lombardi
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Section A:
AUDIT FRAMEWORK
AND REGULATION
1. The concept of audit and other assurance engagements
2. Statutory audits
3. The regulatory environment and corporate governance
4. Professional ethics and ACCA’s Code of Ethics and Conduct
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Answer to Question 1
1.
2.
3.
4.
5.
6.
No
No
Yes
Yes
Yes
Yes
-
Q
Independence is not required
Independence is not required
Independence is required
Independence is required
Independence is required
Independence is required
Answer to Question 2
To
From
Subject
:
:
:
Client
Accountant, ACCA
The audit function as it relates to the assurance provided, the extent of evidence
gathering, and whether independence is required.
Q
An audit is an examination of the financial statements. It is intended to provide positive assurance about
the true and fair view of the statements. Thus, an audit provides the highest form of assurance. The
audit report states whether the financial statements are fairly presented, in all material respects, in
conformity with International Accounting Standards. An audit is conducted in accordance with the
International Auditing Standards.
The audit should be planned and performed to obtain sufficient competent evidence. The evidence
should provide reasonable assurance about whether the financial statements are free of material
misstatement. Hence, an audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements.
An audit also includes assessing the accounting principles used, significant management estimates, and
the overall statement presentation.
Finally, in all matters related to the assignment, the auditor(s) must maintain an independence in
mental attitude.
Signature ............
Answer to Question 3
Q
The objective of an audit of financial statements is to enable the auditor to give an opinion whether
the financial statements are prepared, in all material respects, in accordance with an identified financial
reporting framework. The phrases used to express the auditors' opinion are: 'give a true and fair view' or
'present fairly in all material respects', which are equivalent terms.
Answer to Question 4
Q
The following require a statutory audit (in the UK):
Large limited liability companies, some charities, building societies, housing associations and trade
unions.
There is only one boss. The customer. And he can fire
everybody in the company from the chairman on down,
simply by spending his money somewhere else.
Sam Walton
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Answer to Question 5
Q
The key stages of the audit process are:
1.
2.
3.
4.
5.
6.
7.
Determine audit approach
Ascertain the system and controls
Assess the system and internal controls
Test the system and internal controls
Test the financial statements
Review the financial statements
Express an opinion
Answer to Question 6
Q
Advantages of an audit for the partnership include:
1.
2.
3.
4.
5.
Means of settling accounts between partners. A partnership which has a complicated profit-sharing
arrangement may require an independent examination of the accounts/financial statements to
ensure as far as possible an accurate assessment and division of profits between the partners.
Deciding entry terms for a new partner.
May make the accounts more acceptable to the Inland Revenue.
May facilitate the negotiation of a loan.
May benefit a 'sleeping partner' who otherwise has little knowledge of partnership affairs.
Answer to Question 7
Q
The IFAC glossary defines ‘Financial Statements’ as ‘A structured representation of historical
financial information, including related notes, intended to communicate an entity’s economic
resources or obligations at a point in time or the changes therein for a period of time in
accordance with a financial reporting framework. The related notes ordinarily comprise a
summary of significant accounting policies and other explanatory information. The term “financial
statements” ordinarily refers to a complete set of financial statements as determined by the
requirements of the applicable financial reporting framework, but it can also refer to a single
financial statement’. IAS 1, [International Accounting Standards Board] includes four basic financial
statements, accompanied by a management discussion and analysis:
(i)
Statement of Financial Position: also referred to as a balance sheet, reports on a company's
assets, liabilities, and ownership equity at a given point in time.
(ii)
Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a "P&L"),
reports on a company's income, expenses, and profits over a period of time. A Profit & Loss
statement provides information on the operation of the enterprise. These include sale and the
various expenses incurred during the processing state.
(iii)
Statement of Changes in Equity: explains the changes of the company's equity throughout the
reporting period .
(iv)
Statement of cash flows: reports on a company's cash flow activities, particularly its operating,
investing and financing activities.
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ISAs
ACCA Paper F8 (International)
Answer to Question 8
Q
1.
Disclosure. Is a release by the entity of information, positive or negative, that might bear on an
entity's existing position or performance. For example, the annual Financial Statements issued by
a company constitute disclosures.
2.
Negative assurance. Is when an auditor gives an assurance that nothing has come to his (her)
attention which indicates that the financial statements have not been prepared according to the
relevant framework. In other words s(he) gives an assurance in the absence of any evidence to
the contrary.
3.
Internal audit. Internal audit is an independent, objective assurance and consulting activity
designed to add value and improve an entity's operations. It helps an entity accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance processes.
4
Audit assurance. Is the auditor's satisfaction as to the reliability of the assertion made by one
party for use by another party.
Q
Answer to Question 9
1.
TRUE
2.
FALSE
What is included in the audited financial statements, and what is excluded, is
determined largely by national legislation and accounting standards.
3.
FALSE
Users of the compiled information gain some benefit from the accountant's (as
opposed to the auditor's) involvement, but no assurance is given.
4.
FALSE
Reviews do not give the same high level of assurance as an audit.
5.
FALSE
Auditors do not certify the financial statements or guarantee that the financial
statements are correct; they report whether in their opinion they give a 'true and fair
view' or 'present fairly' the financial position.
6.
TRUE
Only in specific public sector organisations is the internal audit a statutory requirement.
7.
FALSE
Principal-agency theory (PAT) predicts that, by behaving rationally, management (the
agents) are motivated to act against the interests of the shareholders (principals).
8.
FALSE
The audit report may be out-of-date by the time its published.
9.
FALSE
Controls can be overridden, evidence of the existence of controls is not enough.
10.
TRUE
A good time will be had by all!!!
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ISAs
ACCA Paper F8 (International)
Section A:
AUDIT FRAMEWORK
AND REGULATION
1. The concept of audit and other assurance engagements
2. Statutory audits
3. The regulatory environment and corporate governance
4. Professional ethics and ACCA’s Code of Ethics and Conduct
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ACCA Paper F8 (International)
Exam Status Questions and Answers
(Note: Questions and Answers are also hyper-linked to each other.)
Syllabus Section A: Audit Framework and
Regulation
Title
Screen
Question Letters to a School Friend
Answer
A question covering issues concerning ASAs
903
Letters to a School Friend
904
Question JD Development Company
Answer
Question
Answer
Question
Answer
Question
Answer
Question
Answer
A question covering underpayment, under provisions and the
removal of the auditor
JD Development Company
StrictBus Company
A question covering issues concerning inventory, fundamental
principles set out in ACCA’s Code of Ethics and Conduct of
integrity, objectivity and independence and the engagement letter
StrictBus Company
Put-U-Up Construction Company
A question covering various corporate governance issues
Put-U-Up Construction Company
Objectivity of the external auditor
A question covering the objectivity of the auditor
Objectivity of the external auditor
Holway Hotel and Xfoods Company
A question covering conflict of interests, provisions, contingent
liabilities and contingent assets
906
Holway Hotel and Xfoods Company
921
Question ACS Company
A question covering corporate governance issues
Answer ACS Company
Question Arwan & Co
A question covering issues related to corporate governance
Answer Arwan & Co
Question Newingreen Consolidated Company
A question covering the principles of confidentiality, and audit
independence
Answer Newingreen Consolidated Company
Question Rainbow Company
A question covering weaknesses in a system and advantages of
having an audit committee
Answer Rainbow Company
907
909
910
912
913
916
917
920
924
925
927
928
930
931
933
934
Note:
The first 4 Questions and
Answers have been made
active for the free sample.
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ACCA Paper F8 (International)
Letter to a School Friend: Question - 1 of 1
A question covering issues concerning ISAs
International Standards on Auditing (ISAs) are produced by the International Audit and Assurance
Standards Board (IAASB), which is a technical committee of the International Federation of Accountants
(IFAC). In recent years, there has been a trend for more countries to implement the ISAs rather than
produce their own auditing standards.
A school friend who you have not seen for a number of years is considering joining ACCA as a trainee
accountant. However, she is concerned about the extent of regulations which auditors have to follow and
does not understand why ISAs have to be used in your country.
Required:
Write a letter to your friend explaining the regulatory framework which applies to auditors.
Your letter should cover the following points:
(a)
The due process of the IAASB involved in producing an ISA.
(4 marks)
A
(b)
The overall authority of ISAs and how they are applied in individual countries.
(8 marks)
A
(c)
The extent to which an auditor must follow ISAs.
(4 marks)
A
(d)
The extent to which ISAs apply to small entities.
(4 marks)
(20 marks)
A
Business opportunities are like buses, there's always
another one coming.
Sir Richard Branson
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Letter to a School Friend: Answer - 1 of 2
Q
A question covering issues concerning ISAs
22b Cherry Garden Lane
Anytown
3 March 2013
Dear Peppi
I am pleased you are also thinking about accountancy as a career and understand your concern regarding
the use of Auditing Standards. I will try and explain the need for standards in this letter.
The working procedure of the IAASB to produce an ISA
The start of the process of producing an International Standard on Auditing (ISA) is for a subcommittee of
the International Audit and Assurance Standard Board (IAASB) to determine appropriate areas for an ISA,
or to note where existing ISAs need amendment.
The subcommittee produces an exposure draft on that subject, initially for consideration by the IAASB. If
the IAASB approve the exposure draft, then it is circulated to the member bodies of the International
Federation of Accountants (IFAC) and any other organisations that have an interest in auditing standards
and published on the IAASB website.
These bodies make comments on the exposure draft. Comments are sent back to the IAASB and the
exposure draft is amended as necessary. Finally the exposure draft is re-issued as an ISA or an
International Auditing Practice Statement (IAPS).
The whole process can take between one and two years.
The overall authority of ISAs and how ISAs are applied in individual countries
ISAs are designed to be applied in the audit of financial statements and may be applied to the audit of
other historical financial information.
Each ISA contains the basic principles and procedures to apply to that ISA (identified by bold type in the
ISA itself). Other text in
the ISA provides guidance on the implementation of the principles. In other words, to apply the ISA, the
whole of the text, not simply the parts in bold type, must be read and understood.
ISAs are not designed to override the requirements for the audit of entities in individual countries. So if our
country did not require an audit of specific entities, then the ISAs would not overrule that requirement.
Regarding the detailed requirements of an audit, such as the nature of testing or the issuing of an
engagement letter, where our country requirements meet those of the ISA, then the ISA will be used. It is
therefore unlikely that our country would issue a separate auditing standard; the ISA would be sufficient.
Where our local codes on audit differ from the ISA, then the local requirements are used. However, we
are encouraged to introduce changes in our country so that the requirements of the ISA are met. For
example, our country may require an engagement letter to be signed every five years, but the ISA
requires one every year. In this case, local change is needed to comply with the ISA.
The extent to which an auditor must follow ISAs
An auditor should follow the ISAs wherever possible. However, in some situations an auditor may
consider it necessary to depart from the ISA so that the objectives of the audit can be achieved more
efficiently. In this situation, the auditor can depart from the ISA, but he or she must be prepared to
justify the departure. It is expected that departure from any ISA will be the exception rather than the
rule.
Q
The answer continues on the next screen
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ISAs
ACCA Paper F8 (International)
Letter to a School Friend: Answer - 2 of 2
Q
A question covering issues concerning ISAs
The extent to which ISAs apply to small entities
To be clear, ISAs are meant to be applicable to the audit of any entity, no matter what its size. However,
in small entities, the auditor may have to amend the audit approach to fit the circumstances of that
business. For example, there will be greater reliance on substantive testing and management
representations. However, the appropriate ISAs should be followed.
Conclusion
I hope that this clarifies your understanding of ISAs. Please let me know if I can be of further assistance to
you in your accountancy career.
Yours sincerely,
Q
Toni Ambel
Customers want good value, but they care more than ever
how food and clothing products are made.
Sir Stuart Rose
Marks & Spencer at
Robinsons Mall,
Manila, Philippines
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Sir Stuart Alan Ransom Rose (born 1949) is a British businessman,
who was the executive chairman of the British retailer Marks &
Spencer.
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ACCA Paper F8 (International)
JD Developments Company: Question - 1 of 1
A question covering underpayment, under-provisions and the removal of the auditor
You are the auditor of JD Developments, a limited liability company. The main activity of the company is
the construction of buildings ranging in size from individual houses to large offices and blocks of flats.
Under the laws of the country JD Developments operates in, JD Developments must add sales tax to all
buildings sold and they pay this tax to the government at the end of each month.
The largest non-current asset on JD Development’s balance sheet is the plant and machinery used in the
construction of buildings. Due to the variety of different assets used, four different sub-classes of plant and
machinery are recognised, each with its own rate of depreciation.
You are now reaching the end of the audit work for the year ended 30 June 2013. There are two specific
matters where additional audit work is required:
(i)
The sales tax for the month of May was not paid to the government. This appears to have been an
accidental error and the amount involved is not material to the financial statements.
(ii)
The complicated method of calculating depreciation for plant and machinery appears to have
resulted in depreciation being calculated incorrectly, with the result that depreciation may have
been under-provided in the financial statements.
Required:
(a)
Explain the additional audit procedures you should take regarding the accidental underpayment of
sales tax.
(7 marks)
A
(b)
Explain the additional audit procedures you should take regarding the possible under-provision of
depreciation.
(7 marks)
A
(c)
You have determined that the under-provision is material to the financial statements and therefore
need to modify the audit report. The directors have informed you that they do not intend to take any
action regarding the under-provision of depreciation. They also disagree with your action and have
threatened to remove your company as the auditors of JD Developments unless you agree not to
modify your report.
Required:
Explain the procedures that the directors must follow in order to remove your company as the
auditors of JD Developments.
(6 marks)
(20 marks)
A
I could have closed down bits of British Home Stores to make more money but it's not
my style. I want to make my money as a retailer, not by putting people out of work.
Philip Green
Sir Philip Green (born 1952) is a British businessman. Green was born into a Jewish family in
1952, beginning as a businessman at the age of 15. The first and last quoted company Green
took lead of was "Amber Day", from which he stepped down as CEO and Chairman in 1992.
Since then he has had links to a range of British companies; including a hostile bid for Marks
and Spencer and the management of the Arcadia Group, both alongside or supporting his wife.
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JD Developments Company: Answer - 1 of 2
Q
A question covering underpayment, under-provisions and the removal of the auditor
(a)
(b)
Audit procedures for underpayment of revenue tax
–
Discuss the underpayment with the head of the accounting department to ascertain whether
the error was known, and if so why no action had been taken to correct the error.
–
Evaluate the results of testing to determine the amount of the underpayment. Where
necessary perform additional substantive tests checking from the tax declared on sales
invoices issued during August to the sales tax calculation.
–
Summarise the results of testing, providing an estimate of the amount of sales tax underpaid.
–
Discuss the situation with the directors to obtain an understanding of how the error occurred
and determine what actions the directors will take.
–
Include the weakness in the management letter noting, if possible, the reason for the error
and the action that must be taken to correct the error.
–
Inform the directors that non-payment of sales tax to the government is a breach of specific
law of their country.
–
Ask for a formal response from the directors, clearly indicating what action they propose to
take regarding the underpayment.
–
Where the amount due has been paid to the government, audit the payment and ensure it is
sufficient given the extent of underpayment already detected.
–
Where the amount due is not paid, consider informing the appropriate authorities where
legislation requires this.
–
Consider and ask the directors to provide for any late penalties that will need to be paid to the
government with regards to the late payment.
Audit procedures for under-provision of depreciation
–
Review the results of the audit working papers to check that an error did occur.
–
Extend substantive testing for this particular class of non-current assets to try and determine
the extent of the error.
–
Calculate the new depreciation provision based on the results of your testing.
–
Compare your estimate of depreciation to the amount calculated by the client to determine
whether the difference is material.
–
Discuss the under-provision with the head of the accounting department to ascertain whether
the error was known, and if so why no action had been taken to correct the error.
–
Discuss the situation with the directors to ascertain what action the directors will take. If the
difference is material then an amendment to the financial statements would be
expected.
Q
The answer continues on the next screen
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ACCA Paper F8 (International)
JD Developments Company: Answer - 2 of 2
Q
A question covering underpayment, under-provisions and the removal of the auditor
(c)
–
Include the weakness in the management letter noting, if possible, the reason for the error
and the action that must be taken to correct the error.
–
If the difference is material and the directors do not amend the financial statements, consider
the need to modify the auditor’s report.
To remove the auditor from office before their term of office has expired, the directors of JD
Developments must proceed as follows:
–
Arrange for a meeting of the shareholders of the company.
–
Write to the shareholders providing notice of the meeting and the agenda. The notice must
also be sent to the auditor.
–
Attend the meeting and organise a counting of votes at the meeting on the resolution to
remove the auditor from office.
In most situations, a simple majority of the shareholders is required to confirm the resolution.
–
Auditors are sometimes given the right to make written representations and to speak at the
meeting.
–
If the auditor is removed, where necessary, obtain a statement of circumstances from the
auditor. If there are no circumstances that need to be brought to the attention of the
shareholders then a statement of no circumstances is required. Where required by specific
country legislation, deposit this statement along with notice of removal of auditor, with the
appropriate authorities.
–
Make arrangements to appoint another auditor as companies are normally required to have
auditors.
Q
Every company has two organizational structures: The formal one is written on the
charts; the other is the everyday relationship of the men and women in the organization.
Harold S. Geneen
Harold S. Geneen was born in 1910 in Bournemouth, Hampshire, England and migrated to the
United States as an infant with his parents. He studied accounting at New York University.
Between 1956–1959 he was Senior Vice President of Raytheon, developing his management
structure, allowing large degree of freedom for divisions while maintaining a high degree of
financial and other accountability.
From 1959–1977 he was the president and CEO of International Telephone and Telegraph
Corp. (ITT). He grew the company from a medium-sized business with $765 million sales in
1961 into multinational conglomerate with $17 billion sales in 1970. He extended its interests
from manufacturing of telegraph equipment into insurance, hotels, real estate management and
other areas. Under Geneen's management, ITT became the archetypal modern multinational
conglomerate.
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ACCA Paper F8 (International)
StrictBus Company: Question - 1 of 1
A question covering issues concerning inventory, fundamental principles set out in ACCA’s Code of
Ethics and Conduct of integrity, objectivity and independence and the engagement letter
You are an audit manager in Jacobson & Co. One of your audit clients, StrictBus Co, is a specialist
supplier of business books with over 248,000 customers. The company owns one large warehouse, which
contains at any one time about 1 million books of up to 220,000 different titles. Customers place orders for
books either over the Internet or by mail order. Books are despatched on the day of receipt of the order.
Returns are allowed up to 30 days from the despatch date provided the books look new and unread.
Due to the high inventory turnover, StrictBus maintains a perpetual inventory system using standard ‘off
the shelf’ software. Jacobson & Co has audited the system for the last five years and has found no errors
within the software. Continuous inventory checking is carried out by StrictBus’s internal audit department.
You are currently reviewing the continuous inventory checking system with an audit junior. The junior
needs experience in auditing continuous inventory checking systems and some basic knowledge on
ACCA’s Code of Ethics and Conduct.
Required:
A
(a)
Explain the advantages of using a perpetual inventory system.
(4 marks)
(b)
List the audit procedures you should perform to confirm the accuracy of the continuous inventory
checking at StrictBus Co. For each procedure, explain the reason for carrying out that procedure.
(6 marks)
A
(c)
Explain the fundamental principles set out in ACCA’s Code of Ethics and Conduct of integrity,
objectivity and independence to accountants.
(6 marks)
A
(d)
During your preliminary audit planning you note that the engagement letter has been returned unsigned by the directors of StrictBus. When asked to explain their action, the directors indicate that
they cannot allow you access to information on the company’s new website development as this
contains various trade secrets. You will not, therefore, be able to perform audit procedures on the
research and development expenditure incurred on the website and included in non-current assets.
Briefly explain the actions you should take as a result of the directors not signing the engagement
letter.
(4 marks)
20 marks)
A
I think it is an immutable law in business that words are words,
explanations are explanations, promises are promises - but
only performance is reality.
Harold S. Geneen
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StrictBus Company: Answer - 1 of 2
Q
A question covering issues concerning inventory, fundamental principles set out in ACCA’s Code of
Ethics and Conduct of integrity, objectivity and independence and the engagement letter
(a)
(b)
Advantages of perpetual inventory systems
–
There is no disruption caused by an annual inventory count.
–
There is more accurate and regular inventory counting, which enables errors and slow
moving or damaged inventory to be identified earlier.
–
Actual inventory balances are known at any time, allowing re-ordering of best selling books to
take place on a timely basis. There will also be fewer causes of inventory reaching zero
causing stockouts with orders not being fulfilled.
–
Increased control over storekeepers because inventory is being reviewed regularly; this
should decrease any pilferage.
–
Auditors can rely on the computerised inventory system, reducing substantive audit tests of
inventory during the year and at the year end.
Audit procedures
Audit procedure - Physical count
Reason for procedure
Arrange a meeting with the internal audit
department. Discuss the procedures carried out
and review working papers produced during the
continuous inventory checks. For any errors
identified, ensure that appropriate adjustments
were made to the perpetual inventory system.
Determine the extent to which reliance can be
placed on the work of the internal audit
department.
Visit the warehouse and:
Obtain a sample of inventory items already
recorded on the perpetual inventory system and
agree to the book inventory.
To ensure that the inventory recorded on the
computer system actually exists.
For a sample of books in the warehouse, obtain
details and agree perpetual computer system
records.
To ensure that all inventory is recorded on the
inventory computer system – and there is
completeness of recording.
Review the condition of the books, taking details
of any which appear to be old or damaged.
To confirm that any inventory which is damaged
or unsaleable is correctly valued.
Form an opinion regarding the overall accuracy
of the perpetual inventory system.
To confirm that inventory quantities have been
correctly recorded.
Ensure all inventory lines are counted at least
once per year in discussion with the internal
audit department.
To confirm that all inventory is counted regularly.
Q
The answer continues on the next screen
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StrictBus Company: Answer - 2 of 2
Q
A question covering issues concerning inventory, fundamental principles set out in ACCA’s Code of
Ethics and Conduct of integrity, objectivity and independence and the engagement letter
(c)
Fundamental ethical principles
Integrity
Integrity is essential for all people operating in the public interest. Integrity implies not only honesty,
but also related qualities of fairness, candour, intellectual honesty and confidentiality.
During an audit it is essential that directors can rely on an auditor to keep information about the
company confidential. If this was not the case then directors may be less forthcoming with essential
information, decreasing the effectiveness of the audit.
Objectivity
Objectivity is a state of mind that excludes bias, prejudice and compromise and that gives fair and
impartial consideration to all matters that are relevant to the task in hand, disregarding those that
are not.
Accountants have to be objective because many of the factors which make up an opinion on a set
of financial statements relate to questions of judgement rather than fact. Accountants therefore
need to be unbiased and impartial in making their decisions, especially where they may need to
challenge assumptions already made by the directors.
Independence
Independence is freedom from situations and relationships which make it probable that a
reasonable and informed third party would conclude that objectivity is either impaired or could be
impaired. Independence is therefore related to and underpins objectivity.
Accountants will therefore not participate in any activity or relationship that may impair, or appear to
impair, their judgement. They will also not accept anything which may appear to impair their
judgement.
(d)
Actions in respect of the engagement letter not being signed
–
Discuss the matter again with the directors in an attempt to reach a suitable compromise.
–
Remind the directors that statutory audits require the directors to make all the necessary
information and explanations available to the auditor.
–
Explain that lack of information on the website will result in a limitation in scope of the audit
work.
–
Further explain that because the lack of evidence appears to relate to a material amount that
the auditor’s report will have to be modified with an ‘except for’ qualification due to the lack of
information and the possibility of misstatement of non-current assets.
–
Finally note that auditor may have to decline to work for StrictBus unless suitable terms of
engagement can be agreed.
Q
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ACCA Paper F8 (International)
Put-U-Up Construction Company: Question - 1 of 1
A question covering various corporate governance issues
Put-U-Up are an independent construction company, dealing with large scale contracts throughout
the UK and with some international interest in Europe, particularly in Spain. Put-U-Up have recently
established an Audit Committee, the members of which are very concerned about meeting corporate
governance ‘best practice’, particularly since they are currently looking at the possibility of obtaining a
stock exchange listing.
You are an internal auditor with the company and have been asked to conduct a review of how well
the company is meeting relevant corporate governance requirements.
You are required to prepare a report that addresses the following.
(a)
What is meant by ‘corporate governance’ and why is it important that companies should
comply with relevant corporate governance requirements?
(4 marks)
A
(b)
What are the key issues for Put-U-Up to address to achieve effective corporate governance?
(5 marks)
A
(c)
What is the role of internal audit in achieving corporate governance compliance?
(4 marks)
A
(d)
What should the role of the Audit Committee in relation to corporate governance be?
(4 marks)
A
(e)
List the types of regular reporting that would be useful for Put-U-Up in the context of
establishing sound corporate governance.
(3 marks)
(20 marks)
A
Sir John Edward Cohen (6 October 1898 – 24 March 1979), born Jacob Edward
Kohen and commonly known as Jack Cohen, was a British businessman who
founded the Tesco supermarket chain.
He was born in Chatham in the Medway area of Kent, the son of an Avram Kohen,
an immigrant Polish-Jewish tailor, and his first wife, Sime Zamremb. He began his
working life as an apprentice tailor to his father but in 1917 he joined the Royal
Flying Corps where he served as a canvas maker. Upon his demobilisation in 1919
he established himself as a market stall holder in Hackney, in London's East End by
purchasing surplus NAAFI stock with his demob money.
He soon became the owner of a number of market stalls, and started a wholesale
business. Initially the other stalls were run by members of the family but gradually
non-family members were added. Cohen and his wife worked 7 days a week,
starting at dawn and counting money until late. At each market the traders would
gather and, at a signal they would race to their favoured pitch. Cohen could not run
fast so he simply threw his cap at the spot and this could beat anyone.
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Put-U-Up Construction Company: Answer - 1 of 3
Q
A question covering various corporate governance issues
Tutorial comment
This question is ideally answered using bullet points rather than long paragraphs (with the exception
of part (a)). Remember that you are always more likely to achieve high marks by providing a number
of relevant points in your answer rather than just one or two. Use the number of marks as a guide to
the number of points needed for each part of the answer.
Good exam technique requires you to make use of specific information provided in the question.
Here, it is very important to note that Put-U-Up is considering a stock exchange quotation – corporate
governance issues are important if the company’s shares are listed.
Report to the Audit Committee
(a)
Corporate Governance
Corporate Governance concerns the way that a company is operated and directed. It
encompasses the following key aspects:
The role of the Board and Audit Committee.
Overall control and risk management framework.
Corporate Governance has become increasingly important to all organisations, particularly
those with a stock exchange listing. For example, in the UK such companies are subject to the
requirements of the Combined Code and the Turnbull report. Management and control is often
more difficult to achieve in larger, more complex organisations. In addition, shareholders (the
owners) tend to be more remote from the directors who manage the company on their behalf.
The Turnbull Report for example requires that companies have an ongoing process for
identifying, evaluating and managing the company’s key risks. This process should comply
with the Turnbull guidelines, and should be regularly reviewed by the Board. Failure by a
company to comply with relevant corporate governance requirements could result in a
qualification in the audit report and could damage the company’s image and reputation.
(b)
Requirements of Corporate Governance
Put-U-Up need to ensure that the following key requirements are met:
Evaluate risks within the organisation. The key risks throughout the organisation
need to be identified, measured and reported.
Consider the nature and extent of the risks regarded as acceptable. There needs
to be a clear understanding of the risk attitude of Put-U-Up.
Assess the chances of such risks materialising and their likely impact.
Evaluate the ability of the company to reduce incidence and impact if risk arise.
This will include a review of the contingency arrangements which are in place.
Q
The answer continues on the next screen
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Put-U-Up Construction Company: Answer - 2 of 3
Q
A question covering various corporate governance issues
Costs and benefits relating to operating relevant controls will need to be
considered.
The Board and Audit Committee need to establish a culture in the company which is
responsive to the requirements of sound corporate governance.
Regular reporting should be in place to demonstrate that risks are being managed on an
ongoing basis.
(c)
Role of Internal Audit
Turnbull says that an independent and adequately resourced internal audit function should
be in a positive to provide the Board with much of the assurance it requires regarding the
effectiveness of the system of internal control.
Internal Audit’s main role is normally to evaluate risk and monitor the effectiveness of the
system of internal control.
The precise role of internal audit will depend on the nature and type of organisation and what
other risk type functions are in existence within the company.
Key internal audit procedures will be to:
review the company’s measures to achieve corporate governance
ensure that Internal Audit Department’s operation is consistent with the major risks
facing the organisation
produce analysis of and opinions on the effectiveness of the organisation’s control
mechanisms, which should be communicated regularly to the Board and Audit
Committee.
(d)
Role of the Audit Committee
The role and importance of the Audit Committee has increased as the corporate governance
requirements have been strengthened. The audit committee must have at least three nonexecutive directors who should be independent of the company in that they have no direct
involvement in the day to day running of its affairs.
The Audit Committee should:
assess the framework for complying with corporate governance guidelines within the
company, including the risk assessment procedures
review the major risks identified including their chances of occurring and their likely
impact
require regular reporting from internal and external auditors and any other review
bodies, showing how the risks are being managed
Q
The answer continues on the next screen
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Put-U-Up Construction Company: Answer - 3 of 3
Q
A question covering various corporate governance issues
receive and review internal audit assignment reports and follow up information
discuss and consider any concerns of directors and internal audit staff
review annual financial statements and the results of the external auditors’ exam to
ensure that the auditors have performed an effective, efficient and independent audit
receive and deal with external auditors’ criticisms of management and ensure that
recommendations of internal and external auditors have been implemented.
(e)
Types of Regular Reporting
Types of regular reporting that could be produced for the Audit Committee include:
listing of current major risks and up-to-date assessment of impact and likelihood
reports on control of risks including how they are being managed
details of any issues/concerns that have arisen since the last report
audit reports issued and impact on corporate governance
information on follow up on outstanding risks and findings from reports.
Q
Audacity, more audacity, always audacity.
Georges Jacques Danton
Georges Jacques Danton (1759 – 1794) was a leading figure in the
early stages of the French Revolution and the first President of the
Committee of Public Safety. Danton's role in the onset of the
Revolution has been disputed; many historians describe him as "the
chief force in the overthrow of the monarchy and the establishment of
the First French Republic".
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PAST EXAM
QUESTIONS AND
ANSWERS
Click to the next screen
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DinZee Company: Question
Audit procedures – on a purchase system. Procedures prior to an inventory count. Weaknesses
detected in a control system for counting inventory and related discussion.
DinZee Co assembles fridges, microwaves, washing machines and other similar domestic appliances
from parts procured from a large number of suppliers. As part of the interim audit work two weeks prior
to the company year-end, you are testing the procurement and purchases systems and attending the
inventory count.
Procurement and purchases system
Parts inventory is monitored by the stores manager. When the quantity of a particular part falls below
re-order level, an e-mail is sent to the procurement department detailing the part required and the
quantity to order. A copy of the e-mail is filed on the store manager’s computer.
Staff in the procurement department check the e-mail, allocate the order to an authorised supplier and
send the order to that supplier using Electronic Data Interchange (EDI). A copy of the EDI order is filed
in the order database by the computer system. The order is identified by a unique order number.
When goods are received at DinZee, the stores clerk confirms that the inventory agrees to the delivery
note and checks the order database to ensure that the inventory were in fact ordered by DinZee.
(Delivery is refused where goods do not have a delivery note.)
The order in the order database is updated to confirm receipt of goods, and the perpetual inventory
system updated to show the receipt of inventory. The physical goods are added to the parts store and
the paper delivery note is stamped with the order number and is filed in the goods inwards department.
The supplier sends a purchase invoice to DinZee using EDI; invoices are automatically routed to the
accounts department. On receipt of the invoice, the accounts clerk checks the order database,
matches the invoice details with the database and updates the database to confirm receipt of invoice.
The invoice is added to the purchases database, where the purchase day book (PDB) and suppliers
individual account in the payables ledger are automatically updated.
Required:
(a)
List SIX audit procedures that an auditor would normally carry out on the purchases system at
DinZee Co, explaining the reason for each procedure.
(12 marks)
(b)
(c)
A
List FOUR audit procedures that an auditor will normally perform prior to attending the client’s
premises on the day of the inventory count.
(2 marks)
A
On the day of the inventory count, you attended depot nine at DinZee. You observed the
following activities:
1.
Pre-numbered count sheets were being issued to client’s staff carrying out the count. The
count sheets showed the inventory ledger balances for checking against physical
inventory.
2.
All count staff were drawn from the inventory warehouse and were counting in teams of
two.
3.
Three counting teams were allocated to each area of the stores to count, although the
teams were allowed to decide which pair of staff counted which inventory within each
area. Staff were warned that they had to remember which inventory had been counted.
4.
Information was recorded on the count sheets in pencil so amendments could be made
easily as required.
5.
Any inventory not located on the pre-numbered inventory sheets was recorded on
separate inventory sheets – which were numbered by staff as they were used.
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At the end of the count, all count sheets were collected and the numeric sequence of the
sheets checked; the sheets were not signed.
Required:
(d)
(i)
List the weaknesses in the control system for counting inventory at depot nine. (3 marks)
(ii)
For each weakness, explain why it is a weakness and state how that weakness can be
overcome.
(9 marks)
(i)
State the aim of a test of control and the aim of a substantive procedure.
(ii)
In respect of your attendance at DinZee Co’s inventory count, state one test of control
and one substantive procedure that you should perform.
(4 marks)
(30 marks)
A
A
The fool doth think he is wise, but the wise man
knows himself to be a fool.
William Shakespeare
As You Like It
Facsimile of the first page of
As You Like It from the First
Folio, published in 1623.
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DinZee Company : Answer Plan
Q
A quickly drafted answer plan will help you plan and structure your
answer. We provide plans for each answer to show how this might be
done.
Answer (a)
For full answer (a) click here
Procedure
E-mails to order database
Order database to delivery note
Orders to inventory database
Paper goods receipt notes to inventory database
Orders database to payables ledger database
Computerised purchase invoice details to record of
purchase invoice
Details of purchase invoice database to EDI purchase
invoice received
Purchase invoice record to payables database
CAATs – cast Purchase Day Book (PDB), trace to general
ledger
Walk through test
Observing goods being received
Other relevant procedures
Tutorial comment
Only 6 procedures are required. 1 mark would be earned for stating the procedure and 1
mark for the reason for that procedure which must be fully explained. A columnar
approach may save time and give a better visual relationship between procedure and
reason. This is the approach adopted here.
End of Tutorial comment
Q
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Answer (b)
Q
For full answer (b) click here
Audit procedures prior to inventory count attendance
Review prior year working papers for problems
Contact client to obtain stock-take instructions
Book audit staff to attend the inventory counts
Obtain copy of inventory count instructions from client
Ascertain whether any inventory is held by third parties
Obtain last year’s inventory count memo
Prepare audit programme for the count
Obtain prior year management letter for evidence of stocktake problems
Other relevant points
Tutorial comment
0.5 marks for each procedure.
End of Tutorial comment
Answer (c)
For full answer (c) click here
Weaknesses in counting inventory
Inventory sheets stating the quantity of items expected to be
found in the store
Count staff all drawn from the stores
Count teams allowed to decide which areas to count
Count sheets not signed by the staff carrying out the count
Inventory not marked to indicate it has been counted
Recording information on the count sheets in pencil
Count sheets for inventory not on the pre-numbered count
sheets where only numbered when used
Other relevant points
Tutorial comment
The Examiner awarded 1 mark for each weakness, up to 1.5 marks for explaining the
reasons and up to 1·5 for stating how to overcome weakness. 4 max therefore per
weakness.
Q
End of Tutorial comment
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Q
Answer (d)
For full answer (d) click here
Test of control
Test of control aim
Substantive procedure aim
Stating test of control relevant to inventory count
Stating substantive procedure relevant to inventory count
Tutorial comment
1 marks for each.
End of Tutorial comment
All that is gold does not glitter,
Not all those who wander are lost;
The old that is strong does not wither,
Deep roots are not reached by the frost.
J.R.R. Tolkien
The Fellowship of the Ring
John Ronald Reuel Tolkien, CBE (1892 – 1973) was an English
writer, poet, philologist, and university professor, best known as the
author of the classic high fantasy works The Hobbit, The Lord of the
Rings, and The Silmarillion. He served as the Rawlinson and
Bosworth Professor of Anglo-Saxon at Pembroke College, Oxford,
from 1925 to 1945 and Merton Professor of English Language and
Literature at Merton College, Oxford from 1945 to 1959. He was at
one time a close friend of C. S. Lewis—they were both members of
the informal literary discussion group known as the Inklings.
J.R.R Tolkien
Q
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DinZee Company: Answer
Audit procedures – on a purchase system. Procedures prior to an inventory count.
Weaknesses detected in a control system for counting inventory and related discussion.
(a)
Q
Audit procedures procurement and
purchases system
Procedure
Reason for procedure
Obtain a sample of e-mails from the store
manager’s computer. Trace details to the
order database.
Ensure that all orders are recorded and that the
order details are correct.
Obtain a sample of orders in the order
database, record details of the order and
trace to the paper delivery note filed in the
goods inwards department.
To confirm that all goods ordered were received.
For the sample of orders above, agree to
the inventory database.
To confirm that goods received were completely
and accurately recorded in the inventory
database.
Obtain a sample of paper delivery notes
and agree to the order database and
inventory database.
To confirm that inventory received has been
recorded in DinZee’s accounting system and that
liabilities are therefore not understated.
For a sample of orders in the orders
database, agree details to the payables
ledger database, confirming details
against the purchase invoice.
To confirm complete and accurate recording of
the inventory liability in the payables database.
Note: To ensure goods received have been
recorded as a payables liability the sample
selected from the order database should be only
those orders that have been received. The invoice
number in the order database is then noted and
traced to the payables ledger in the purchase
database.
Within the purchase database, obtain a
sample of invoices recorded in the
purchase day book, agree details of price
and supplier to the purchase invoice record
in the database.
To confirm that purchase invoice details have
been correctly recorded in the payables database.
For a sample of purchase invoices in the
purchase day book, agree details to the
delivery notes for items on that invoice.
To confirm that the purchase liability has been
recorded only for goods actually received.
For the sample of purchase invoices above,
agree details to the individual payables
account in the payables database.
To confirm that the liability has been recorded in
the correct payables account.
For a sample of supplier invoices, cast and
cross cast invoice price and quantities
confirming price to the original order.
To confirm the arithmetical accuracy of invoices
and ensure the company was charged the correct
price for goods received.
Select increases in the purchase daybook
and vouch to the order database.
To ensure that invoiced goods have been ordered,
confirming the occurrence assertion.
Using computer-assisted audit techniques,
cast the purchase day book and agree total
of liability incurred to the general ledger.
To confirm the completeness and accuracy of the
liability recorded in the general ledger.
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Audit procedures prior to inventory count attendance
Q
Procedure
–
–
–
–
–
–
–
Review prior year working papers
Contact client to obtain stocktaking instructions
Book audit staff to attend the inventory counts
Obtain copy of inventory count instructions from client
Ascertain whether any inventory is held by third parties
Obtain last year’s inventory count memo
Prepare audit programme for the count.
For an aide memoire chart concerning the procedure of attending an inventory count refer to the
next screen.
(c)
Weaknesses in counting inventory
Weakness
Reason for weakness
How to overcome weakness:
Inventory sheets stated the
quantity of items expected to be
found in the store
Count teams will focus on finding
that number of items making
undercounting of inventory more
likely – teams stop counting when
‘correct’ number of items found.
Count sheets should not state the
quantity of items so as not to
pre-judge how many units will be
found.
Count staff were all drawn from
the stores
Count staff are also responsible
for the inventory. There could be a
temptation to hide errors or
missing inventory that they have
removed from the store illegally.
Count teams should include staff
who are not responsible for
inventory to provide
independence in the count.
Count teams allowed to decide
which areas to count
There is a danger that teams will
either omit inventory from the
count or even count inventory
twice due to lack of precise
instructions on where to count.
Each team should be given a
precise area of the store to count.
Count sheets were not signed by
the staff carrying out the count
Lack of signature makes it difficult
to raise queries regarding items
counted because the actual staff
carrying out the count are not
known.
All count sheets should be signed
to confirm who actually carried out
the count of individual items.
Inventory not marked to indicate it
has been counted
As above, there is a danger that
inventory will be either omitted or
included twice in the count.
Inventory should be marked in
some way to show that it has
been counted to avoid this error.
Recording information on the
count sheets in pencil
Recording in pencil means that
the count sheets could be
amended after the count has
taken place, not just during the
count. The inventory balances will
then be incorrectly recorded.
Count sheets should be
completed in ink.
Count sheets for inventory not on
the pre-numbered count sheets
were only numbered when used
It is possible that the additional
inventory sheets could be lost as
there is no overall control of the
sheets actually being used.
Sheets may not be numbered by
the teams, again giving rise to the
possibility of loss.
All inventory sheets, including
those
for ‘extra’ inventory, should be
pre-numbered.
Q
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Substantive audit tests: inventory count
1
Preliminary
knowledge is
required
2
The auditor
needs to identify
the key factors
3
4
The auditor needs to:
 Review the previous year’s arrangements and success rating.
 Discuss with management inventory control arrangements and
significant changes during the current year.
The key factors concerning the inventory count are:
 The nature and volume of inventory.
 Risks identified with the inventory.
 The identification of high value items.
 Method of accounting for inventory.
 Location of inventory and how it affects inventory control and recording.
 Internal control and accounting systems in use which will enable the
auditor to identify potential areas of difficulty.
Planning
precedes
performance!
The auditor should:
 Plan a representative selection of locations, inventory and procedures to
be covered in the count.
.
 Ensure sufficient attention is given to high value items.
 Arrange to obtain from third parties (such as external warehousing
companies) confirmation of inventory they hold.
 Consider the need for expert help.
Organisation of
the count
The auditor needs to organise the following:
 Client supervision to be present on the count, including senior staff
involved with inventory.
 Tidying and marking inventory to help counting.
 Restriction and control of the production process and inventory
movements during the count.
 Identification of damaged, obsolete, slow-moving, third party and
returnable inventory.
Counting
5
Recording
6
Q
Best practice would require:
 Systematic counting to ensure all inventory is counted.
 Teams of two counters, with one counting and the other checking or
alternatively holding two independent counts.
The following practice is normally adopted:
 Serial numbering, control and return of all inventory sheets.
 Inventory sheets to be completed in ink (or printed) and signed.
 Information to be recorded on the count records (location and
identity, count units, quantity counted, conditions of items, stage
reached in the production process).
 Recording of quantity, conditions and stage of production of work-inprogress.
 Recording of last numbers of goods inwards and outwards and
of internal transfer records.
 Reconciliation with inventory records and investigation and correction of
any difference.
Q
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(d)
(i)
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The aim of a test of control is to check that an audit client’s internal control systems
are operating effectively.
Q
The aim of a substantive procedure is to ensure that there are no material errors at the
assertion level in the client’s financial statements.
(ii)
Regarding the inventory count:
Test of control
Observe the count teams ensuring that they are counting in accordance with the client’s
inventory count instructions.
Substantive procedure
Record the condition of items of inventory to ensure that the valuation of those items is
correct on the final inventory summaries.
It does not do to dwell on dreams and forget to live.
J.K. Rowling
Harry Potter and the Sorcerer's Stone
Harry Potter
and the Philosopher's Stone
Author J. K. Rowling
Illustrators
Thomas Taylor (UK)
Mary GrandPré (US)
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Q
Examiner’s Report
You might find it useful to know what the Examiner reported about the quality of answers for this scenario.
This was a 30 mark question and the rationale behind providing this small case study was two-fold:
•
Firstly, to provided candidates with experience of attempting longer questions in preparation for the
significant case studies that will be found in the professional level papers.
•
Secondly, to allow the examiner to effectively combine two 20 mark questions to use one scenario
rather than two. The aim being to cut down the amount of reading and assimilation time candidates
need to understand a question prior to preparing an answer.
Given the overall higher standard of answers in this exam, the second objective at least appears to have
been met; whether the first has been achieved will depend on results to the Professional papers in future
diets.
The scenario itself was based on a computerised procurement and purchases system and the work of an
auditor in attending the inventory count at a client. The purchases system was deliberately based on a
computer system, in line with the comments made by the examiner in the study guide and at the 2007
lecturers’ conference. As in similar paper 2.6 examinations, candidates were expected to use the
information in the scenario to provide relevant comments in their answers.
Part (a)
Candidates were required to use information concerning the purchases system provided in the scenario.
The question was worth 12 marks, requiring the candidates to list audit procedures and then explain the
reason for each procedure. The marking scheme was clear; six procedures were required with the
procedure itself being worth 1 mark and the explanation of a procedure also being worth one mark. To
obtain full marks candidates needed to provide six procedures meeting this criterion.
Pass standard candidates provided between four and six good procedures, with some explanation of
each procedure. However, only a minority of candidates demonstrated a good understanding of audit
procedures and the reasons for those procedures.
Many candidates struggled with the scenario, particularly regarding the use of the purchases system and
partly in respect to the computerisation of that system. Candidates who recognised that basic audit
procedures such as tracing information through a system or ensuring that details were recorded in
specific ledgers or books did obtain a pass standard.
Common errors and reasons why those errors did not obtain marks included:
Error
Reason for lack of marks
Testing the controls over the computer system
such as passwords and backup systems
These were tests of the general controls over
the computer rather than tests on the
purchases system.
Q
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Q
Error
Reason for lack of marks
Procedures relating to the payment of
suppliers including recording of transactions in
the cash book and supplier ledger accounts
These procedures related to the payments
systems not the purchases systems. If the
distinction was not clear to the candidate,
payment systems were not mentioned within
the scenario indicating that comments in this
area were not relevant.
Procedures relating to cut-off.
This assertion relates to year-end testing of
stock and purchases. The scenario was dated
prior to the year-end making these comments
not relevant.
Just stating an assertion word as a reason for
performing a procedure.
This was generally not sufficient for an answer
as it was not necessarily clear that the
candidate understood the assertion , and in
many cases stating an incorrect assertion.
Providing a few words of explanation e.g.
“confirming occurrence of purchases by
agreeing purchase invoice details to the
delivery notes, provided useful and relevant
Explanation.
Writing out what the purchase system should
do without actually stating any audit
procedures. For example, stating that for all
goods received there should be a three part
delivery note raised. These comments
showed good knowledge of systems but
not of audit procedures.
No marks could be awarded because no audit
procedure was actually stated. Mark earning
comments would include observing the goods
receipt system to ensure that goods receipt
notes were raised, or reviewing a sample of
goods receipt notes to ensure they were
signed to confirm receipt of goods etc.
Other answers failed to provide sufficient detail to obtain either the procedure mark or the explanation
mark.
Many candidates also continued to “check” documents rather than actually show clear what procedures
were. For example, typical comments in this respect were:
•
•
•
Check the invoice
Check the goods received note
Check return of goods.
Unfortunately, it was not clear exactly what was being checked or why; more detail was needed to earn
the procedure mark. For example, obtain details from a sample of purchase invoices and agree these to
the purchase day book and ledger would form a valid procedure.
Regarding the explanation mark, many candidates correctly attempted to link audit procedures to the
audit assertions. However, the quoting of assertions was not always clear or accurate. For example:
•
Suggesting that agreeing purchase order details to the inventory ledgers confirmed the
completeness of invoices – when the correct assertion was occurrence.
•
Tracing details from the delivery note to the purchase order to confirm correct valuation of the
invoice – the completeness assertion would normally be used here.
Finally, many comments related to procedures that either could not be carried out or were simply
incorrect. For example:
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Q
Example “procedure”
Problem with “procedure”
Agreeing details from the purchase invoice
to the goods held in the inventory store.
There are two problems with this comment:
Firstly, goods received notes are normally
used to update inventory, not purchase
invoices. Secondly, it would be virtually
impossible to agree details to the goods held
– as the parts, etc. would have been used
during the year in the manufacture of the
items produced by the company.
Agreeing individual items of physical
inventory to the goods inwards
documentation.
Again, agreeing physical goods to the goods
inwards documentation would be impossible
– as noted above, the goods would be
included in items manufactured by the
company.
Tracing details of orders to the purchase
day book.
Orders are normally agreed to the delivery
notes, not the purchase day book. The latter
is for recording the purchase invoices. So
agreeing orders to purchase day book is not
possible.
Overall, the standard of the answers for this basic auditing question was disappointing. Candidates and
tutors are reminded of the importance of understanding sales, purchases and similar systems and the
need to be able to provide clear audit procedures and explanation for those procedures. This will remain
a key element of the audit and assurance examination.
Part (b)
Candidates were required to list four audit procedures that the auditor would perform prior to attending
the inventory count at a client.
The marking scheme for this question was therefore 0.5 mark for each procedure. The key difference
between this sub-question and part (a) being the lack of need to relate those procedures to the scenario
and therefore the award of 1 mark per point.
Candidates tended to obtain either full marks or zero marks for this question, depending on whether or
not they had read the question requirement correctly. The key word in the requirement was prior; a
significant minority of candidates missed reading this word and listed procedures relevant to actually
attending the inventory count; these procedures were unfortunately not relevant.
Other common errors and reasons why those errors did not obtain marks included:
Error
Reason for lack of marks
Not stating the procedure in sufficient detail
It was unclear what the procedure aimed to
do. For example, contact client was
insufficient for a procedure whereas contact
client to obtain inventory count instructions
was sufficient.
While not an error as such, many candidates wrote significant amounts of text in providing an answer to
this section, in some cases easily exceeding one page of writing. Given that only four procedures had to
be listed, this amount of writing was clearly inappropriate. Candidates and tutors need to understand that
the requirement verb list is simply that; no explanation of the individual procedures was required to obtain
the 0.5 mark for each procedure.
Q
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Part (c)
Q
Candidates were required to list the weaknesses in the control system for counting inventory at
one of the client depots and then explain the weakness and state how the weakness could be overcome.
In other words, the question was based on a letter of weakness, although the specific format for that letter
was not required.
While not completely transparent, the marking scheme followed the convention of parts (a) and (b). The
requirement verb was “list” indicating that simply the weakness was required to obtain a mark. In this
case three procedures would provided the full 3 marks for sub-question (i) as those procedures had to be
related to the scenario, as in part (a). This meant that there were 3 marks for each section in (ii) to
explain the weakness (1.5 marks) and state how the weakness could be overcome (again 1.5 marks). A
candidate providing valid weaknesses, with an explanation and method of overcoming that weakness
could obtain full marks. The scheme was possibly generous in allowing 1.5 marks for explanation and
recommendation.
In practice, most candidates provided more than three weaknesses with some explanation and methods
of overcoming each weakness. As the question requirement did not place any cap on the number of
weaknesses that could be mentioned in the answer, all valid weaknesses were marked. This scheme
allowed many candidates to obtain full marks in this section with most candidates deserving those marks
as many clear and well thought out comments were made.
For the future, where letter of weakness type questions are allowed, a cap will be placed on the number
of weaknesses allowed to provide a clear and transparent guide to candidates.
As already noted, the overall standard of answers to this section was high. The identification of
weaknesses and how to respond to those weaknesses had clearly been well learned/taught enabling
candidates to provide sound answers. The difficulty for many candidates appeared to be simply when to
stop writing as the scenario did include six or seven key weaknesses where marks could be obtained.
Following the published guidance from the examiner in this respect in the Examiner’s Approach may
have helped provide this guidance.
Common errors and reasons why those errors did not obtain marks included:
Error
Reason for lack of marks
Not linking the explanation of the weakness to
the weakness itself. For example, stating that
the count sheets were completed in pencil and
then stating that this did not provide an
adequate segregation of duties.
To obtain the reason marks there had to be a
clear link between the weakness and the
reason for that weakness. For example, where
count sheets were recorded in pencil then the
weakness was those sheets could be amended
easily to show incorrect inventory quantities –
and there would be no record of that
amendment.
Not linking the method of overcoming the
weakness with the weakness itself. For
example, stating that the count sheets were
completed in pencil and then indicating that all
sheets should be signed by a senior official.
To obtain the method of overcoming the
weakness marks there had to be a clear link
between the weakness and the method of
alleviating that weakness.
Not necessarily thinking about the practicality
or realism of the comments being made. For
example, stating that the auditor would assign
count teams to different areas of the depot.
In practice, the auditor is there to observe the
inventory count, not organise it. Marks were
generally not awarded where comments did not
relate to the auditors’ standard work.
Overall, the question was well answered, with almost all candidates correctly using the information
in the scenario .
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ISAs
ACCA Paper F8 (International)
Part (d)
Candidates were required to state the aim of a test of control and substantive procedure and then
to provide examples of those tests/procedure with reference to inventory count attendance.
Q
The marking scheme for this question was simply 1 mark for each explanation and 1 mark for each
test/procedure. As in parts (a) and (c), the test/procedure had to be linked to the specific scenario, hence
1 mark was available for each test/procedure rather than 0.5.
This question turned out to be an unusually good discriminator of candidates. Many candidates obtained
full marks, clearly demonstrating their knowledge of tests of control and substantive audit procedures.
However, a significant minority of candidates either did not attempt the question or scored zero points
due to poor and incorrect explanation and examples.
Common errors and reasons why those errors did not obtain marks included:
Error
Reason for lack of marks
Explaining substantive audit procedures as
being used when tests of controls were not
available or had failed.
While the reason for using substantive
procedures may have been partly correct, the
reason for the procedure in terms of validating
balance sheet assertions was not mentioned.
Explaining tests of controls as substantive test
and substantive tests as tests of controls. For
example, stating that ensuring all count sheets
were signed was a substantive test or agreeing
the quantities of inventory to the inventory
ledgers.
No marks could be awarded because the
example was incorrect.
Providing examples not relevant to the
inventory count, for example, confirmation of
balances in the suppliers’ ledger or other
substantive tests on purchasing system.
The question requirement clearly stated
examples had to be provided from the inventory
count, therefore these points were not relevant.
The auditor is a watchdog and not a bloodhound.
Lord Justice Lopes
Henry Charles Lopes, 1st Baron Ludlow PC, QC (3 October 1828-25
December 1899), was a British judge and Conservative Party politician.
Ludlow was a younger son of Sir Ralph Lopes, 2nd Baronet, and the
uncle of Henry Lopes, 1st Baron Roborough. He was educated at
Winchester and Balliol College, Oxford, and was called to the Bar, Inner
Temple, in 1852.
Ludlow sat as Member of Parliament for Launceston from 1868 to 1874
and for Frome from 1874 to 1876. He was also a Recorder of Exeter from
1867 to 1876 and became a Queen's Counsel in 1868. In 1876 he was
appointed a Justice of the Common Pleas Division of the High Court of
Justice, a post he held until 1880, and then served as a Lord Justice of
Appeal from 1885 to 1897. Lopes was knighted in 1876 and sworn of the
Privy Council in 1885. In 1897 he was raised to the peerage as Baron
Ludlow, of Heywood in the County of Wiltshire.
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Q
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CONTENTS
GLOSSARY
ISAs
ACCA Paper F8 (International)
Section B:
INTERNAL AUDIT
1. Internal audit and corporate governance
2. Differences between external and internal audit
3. The scope of the internal audit function
4. Outsourcing the internal audit department
5. Internal audit assignments
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ISAs
ACCA Paper F8 (International)
Exam Status Questions and Answers
(Note: Questions and Answers are also hyper-linked to each other.)
Syllabus Section B: Internal Audit
Title
Screen
938
Question Office Equipment and Furniture
Answer
A question covering the relations between internal and external
audit work
Office Equipment and Furniture
Question WindHopper Airline
939
941
A question covering the extent to which the external auditor can
rely on the work on the internal auditor
Answer WindHopper Airline
Question Fix It! Company
A question covering the issues concerning the work of internal
auditors
Answer Fix It! Company
Question Newingreen Industrial Co
A question covering the issues involved in outsourcing internal
audit responsibilities
Answer Newingreen Industrial Co
942
944
945
947
948
Note:
No Questions and Answers
have been made active for
the free sample.
In short, we have, among African countries, a duty of solidarity.
Omar Bongo
El Hadj Omar Bongo Ondimba (1935 – 2009), born as Albert-Bernard Bongo, was a
Gabonese politician who was President of Gabon for 42 years from 1967 until his
death in office in 2009.
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ISAs
ACCA Paper F8 (International)
Section C:
PLANNING AND RISK
ASSESSMENT
1.
2.
3.
4.
5.
6.
7.
Objective and general principles
Understanding the entity and knowledge of the business
Assessing the risks of material misstatement and fraud
Analytical procedures
Planning an audit
Audit documentation
The work of others
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ISAs
ACCA Paper F8 (International)
Exam Status Questions and Answers
(Note: Questions and Answers are also hyper-linked to each other.)
Syllabus Section C: Planning and Risk
Assessment
Title
Screen
952
Question Fordcon Textiles
Answer
Question
Answer
Question
Answer
Question
Answer
Question
Answer
Question
Answer
A question covering audit planning
Fordcon Textiles
ExpoZ
A question covering understanding the entity and its environment,
assessing risk of material misstatements and the features of audit
working papers
ExpoZ
Spectrual Gemstones Company
A question covering inventory and the auditor’s external agent
Spectrual Gemstones Company
CallV Company
A question covering audit acceptance and the engagement letter
CallV Company
LinkZ Company
A question covering risk assessment and audit procedures
LinkZ Company
Guston Company
A question covering the assessment of inherent and control risk
and the design of specific audit procedures
Guston Company
953
957
958
961
962
964
965
967
968
970
971
Question Link Arms Charity
974
A question covering inherent, control and detection risk and
associated audit tests
Answer Link Arms Charity
Question SeeUs Company
A question covering audit documentation
Answer SeeUs Company
975
977
978
It's the job that's never started takes longest
to finish.
J. R. R. Tolkien
J. R. R. Tolkien
1916
John Ronald Reuel Tolkien (1892 – 1973)
was an English writer, poet, philologist, and
university professor, best known as the
author of the classic high fantasy works The
Hobbit, The Lord of the Rings, and The
Silmarillion.
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84
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CONTENTS
GLOSSARY
ISAs
ACCA Paper F8 (International)
Section D:
INTERNAL
CONTROL
1.
2.
3.
4.
5.
6.
Internal control systems
The use of internal control systems by auditors
Transaction cycles
Tests of control
The evaluation of internal control components
Communication on internal control
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GLOSSARY
ISAs
ACCA Paper F8 (International)
Exam Status Questions and Answers
(Note: Questions and Answers are also hyper-linked to each other.)
Syllabus Section D: Internal Control
Title
Question DustUp Company
A question covering risk and internal controls assessment
Answer DustUp Company
Question PlastU Company
A question covering assessment of internal controls
Answer PlastU Company
Question Express AM Company
A question covering problems resulting from poor internal controls
and associated recommendations
Answer Express AM Company
Question Internal Controls
A question covering adherence to management policies,
safeguarding of assets, the prevention of fraud and error and the
completeness and accuracy of the accounting records and audit
sampling
Answer Internal Controls
Question ShoesR Company
A question covering risk assessment and internal control
Answer ShoesR Company
Question Ashley Enterprise (AE) Company
A question covering control objectives and audit tests carried out
a sales and despatch system
Answer Ashley Enterprise (AE) Company
Screen
982
983
986
987
989
990
992
993
995
996
998
999
Note:
No Questions and Answers
have been made active for
the free sample.
You cannot shake hands with a clenched fist.
Indira Gandhi
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GLOSSARY
ISAs
ACCA Paper F8 (International)
Section E:
AUDIT
EVIDENCE
1.
2.
3.
4.
5.
6.
The use of assertions by auditors
Audit procedures
The audit of specific items
Audit sampling and other means of testing
Computer-assisted audit techniques
Not-for-profit organisations
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GLOSSARY
ISAs
ACCA Paper F8 (International)
Exam Status Questions and Answers
(Note: Questions and Answers are also hyper-linked to each other.)
Syllabus Section E: Audit Evidence
Title
Question Training Material
A question covering audit purpose, procedures and processes
Answer Training Material
Question Audit Evidence
Answer
Question
Answer
Question
Answer
Question
Answer
Question
Answer
Answer
Question
Answer
Question
Answer
Question
1008
1011
1012
1014
1016
1019
1020
1022
1023
1026
A question covering occurrence, completeness and measurement
testing
Watch & Black
BigginWood
A question covering audit sampling
BigginWood
IAS2, Inventories
A question covering the valuation of inventory
IAS2, Inventories
4-U Beds Company
A question covering inventory and auditing issues
4-U Beds Company
Sodafizz Company
A question covering different audit tests
Answer Sodafizz Company
Question BurgerQueen Company
Answer
1005
1007
A question covering the methods of obtaining audit evidence
Audit Evidence
TeddyMax Company
A question covering five procedures used for gathering audit
evidence
TeddyMax Company
Ethel Bancroft
A question covering aspects concerning the audit of a charity
Ethel Bancroft
Greenway Tennis Club
A question covering the audit of a not-for-profit entity
Greenway Tennis Club
Small Entities
A question covering the audit of small entities
Small Entities
Question Watch & Black
Answer
Question
Screen
1004
1028
1032
1034
1038
1039
1042
1043
1045
1046
1048
A question covering the audit of accounts payable and accruals
BurgerQueen Company
1049
Note:
1 OF 2
No Questions and Answers
have been made active for
the free sample.
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ISAs
ACCA Paper F8 (International)
Exam Status Questions and Answers
(Note: Questions and Answers are also hyper-linked to each other.)
Syllabus Section E: Audit Evidence
Title
Question Furnital Company
A question covering sufficiency of audit evidence and substance
audit procedures
Answer Furnital Company
Question Analytical Procedures
Answer
Question
Answer
Question
Answer
Question
Answer
Question
Answer
Screen
1052
1053
1056
A question covering analytical procedures and concept of
materiality and its implications
Analytical Procedures
Jacobson Gravel (JB) Company
A question covering audit work and analysing stated figures
Jacobson Gravel (JB) Company
Barton, Rialto, Goodsel, Wright and Conibear
A question covering materiality considerations, relevant
accounting principles and appropriate accounting standards
Barton, Rialto, Goodsel, Wright and Conibear
Confirmations
A question covering the audit evidence provided by confirmations
Confirmations
DK Electronics
A question covering computer application controls
DK Electronics
Question Leadworks Quays
1057
1059
1060
1062
1064
1068
1069
1072
1074
1079
A question covering general controls in a computer environment
Answer Leadworks Quays
Question Lympne Industrials
A question covering ‘test data’ and Computer Assisted Audit
Techniques
Answer Lympne Industrials
Question DriveU Company
A question covering Computer Assisted Audit Techniques
Answer DriveU Company
1081
1084
1086
1091
1092
2 OF 2
After climbing a great hill, one only finds that there are many
more hills to climb.
Nelson Mandela
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ISAs
ACCA Paper F8 (International)
Section F:
REVIEW
1.
2.
3.
4.
Subsequent events
Going concern
Management representations
Audit finalisation and the final review
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GLOSSARY
ISAs
ACCA Paper F8 (International)
Exam Status Questions and Answers
(Note: Questions and Answers are also hyper-linked to each other.)
Syllabus Section F: Review
Title
Question Injan Computers Company
A question covering and analytical procedure and consideration of
going concern
Answer Injan Computers Company
Question OrganZ Company
Screen
1096
1099
1102
A question covering issues concerning ethical threats of going
concern
Answer OrganZ Company
Question Caddymol Retailers
A question covering subsequent events
Answer Caddymol Retailers
Question FrostLand Supermarkets
A question covering audit objectives and the auditor’s
responsibilities with regard to subsequent events
Answer FrostLand Supermarkets
Question Wolfe Incorporated
A question covering the management representation letter
Answer Wolfe Incorporated
1103
1105
1106
1110
1111
1113
1114
Note:
No Questions and Answers
have been made active for
the free sample.
‘I am inclined to think - ‘ said I [Dr Watson]. ‘I should do so,’
Sherlock Holmes remarked, impatiently.
Arthur Conan Doyle, 1859 - 1930
The Valley of Fear (1915)
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ISAs
ACCA Paper F8 (International)
Section G:
REPORTING
1. Audit reports
2. Reports to management
3. Internal audit reports
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GLOSSARY
ISAs
ACCA Paper F8 (International)
Exam Status Questions and Answers
(Note: Questions and Answers are also hyper-linked to each other.)
Syllabus Section G: Reporting
Title
Screen
1118
Question ABC Company
A question covering audit and review reports
Answer ABC Company
1120
Question MCA Industrials Company
A question covering the auditor’s report and audit procedures
Answer MCA Industrials Company
Question Audit Reports
A question covering internal and external audit reports
Answer Audit Reports
Question TQR Transporters
A question covering the management representation letter
Answer TQR Transporters
Question AG Industrials Company
A question covering the responsibilities of directors and auditors,
the contents of the audit report and the difference between positive
and negative assurance
Answer AG Industrials Company
1122
1123
1125
1126
1128
1129
1131
1132
Note:
No Questions and Answers
have been made active for
the free sample.
He:
She
He:
She:
He:
We met at nine
We met at eight
I was on time
No, you were late
Ah yes! I remember it well.
Alan Jay Lerner, 1918-86
‘I Remember It Well’ (1957)
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GLOSSARY
ISAs
ACCA Paper F8 (International)
+AddVance
ACCA F8 Questions and Answers
Main Contents
Study classification
Screen
Multiple Choice Questions and Answers
1135
Short Questions and Answers: International Standards on
Auditing
1136
Diagnostic Questions and Answers
1137
Exam Status Questions and Answers
1138
Past Exam Questions and Answers
1532
Did you know?
From 1986 poetry became and remains a familiar sight on
London Underground’s trains and posters.
One of the first poems to be published on the Underground was
Wordsworth’s ‘Composed Upon Westminster Bridge’ which
prompted twenty people to gather on the bridge at dawn on 3rd
September 1986, the 184th anniversary of the poems
composition, to read it aloud.
Source: Stephen Halliday, ‘London Underground Facts, ‘D&C’.
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GLOSSARY
ISAs
ACCA Paper F8 (International)
+AddVance
ACCA F8 Questions and Answers
Contents: Multiple Choice Questions and
Answers
Screen
Section
section
Syllabus classification
Questions
Answers
Number
of Q&As
A
Audit Framework and Regulation
20
29
27
B
Internal Audit
43
45
3
C
Planning and Risk Assessment
48
69
77
D
Internal Control
104
119
55
E
Audit Evidence
141
165
20
F
Review
206
213
20
G
Reporting
221
223
2
Total number of Multiple Choice Questions and Answers
204
Did you know?
In Greek myth, the Amazons were a race of mounted
women warriors who lived near the Black Sea. Expert
riders and archers, they displayed their fighting abilities in
raiding expeditions. They kept men as slaves for
procreation. It was said that any male off-spring of these
unions were abandoned to die, while the girls were
bought up to be warriors like their mothers.
A woodcut depicting defeated Greeks being
cruelly executed by Amazons.
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CONTENTS
GLOSSARY
ISAs
ACCA Paper F8 (International)
+AddVance
ACCA F8 Questions and Answers
Contents: ISA Short Questions and Answers
Screen
International Standard on Auditing
Questions
Answers
ISA 200
225
229
15
ISA 210
237
240
9
ISA 230
245
248
11
ISA 240
307
313
14
ISA 250
327
330
10
ISA 260
334
338
11
ISA 265
344
347
7
ISA 300
351
354
14
ISA 315
359
367
33
ISA 320
386
389
7
ISA 330
393
399
28
ISA 402
409
413
12
ISA 450
420
423
11
ISA 500
428
433
23
ISA 501
442
447
21
ISA 505
454
458
19
ISA 510
464
467
10
ISA 520
473
476
11
ISA 530
481
486
15
ISA 540
495
501
25
ISA 560
511
514
11
ISA 570
519
523
11
ISA 580
528
532
8
ISA 610
538
541
6
ISA 620
545
549
13
ISA 700
557
562
13
ISA 705
568
578
21
ISA 706
586
590
9
ISA 710
594
597
7
ISA 720
600
602
5
Total number of ISA Short Questions and Answers
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CONTENTS
GLOSSARY
ISAs
ACCA Paper F8 (International)
+AddVance
ACCA F8 Questions and Answers
Contents: Diagnostic Questions and
Answers
Screen
Questions
Answers
Number of
Q&As
Audit Framework and Regulation
605
618
56
B
Internal Audit
653
658
21
C
Planning and Risk Assessment
672
687
34
D
Internal Control
728
748
28
E
Audit Evidence
803
820
30
F
Review
873
876
4
G
Reporting
883
890
7
Syllabus
section
Syllabus classification
A
Total number of Diagnostic Questions and Answers
180
Did you know?
An arch was a ceremonial gateway, a
triumphal feature of Roman architecture,
recalling the ancient Classical associations
of the arch with the sky and its supreme
god Zeus. Initiates passing under an arch
symbolically leave their former lives, hence
the ceremonial arches formed for
newlyweds.
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CONTENTS
GLOSSARY
ISAs
ACCA Paper F8 (International)
+AddVance
ACCA F8 Questions and Answers
Contents: Exam Status
Questions and Answers
Syllabus
section
Syllabus classification
Contact
screen
Number of
Q&As
A
Audit Framework and Regulation
901
10
B
Internal Audit
936
4
C
Planning and Risk Assessment
950
8
D
Internal Control
980
6
E
Audit Evidence
1001
21
F
Review
1094
5
G
Reporting
1116
5
Total number of Exam Status Questions and Answers
59
Did you know?
Aristotle (384 - 322 BC) was a Greek
philosopher, scientist and pupil of Plato.
A tutor of Alexander the Great, a medieval
legend relates how he expounded that women
were the downfall of men and tried to persuade
Alexander to abandon his favourite courtesan,
Campaspe. In revenge Campaspe charmed
the old philosopher. To prove his love, she
insisted that Aristotle allow her to ride on his
back, and Alexander saw how a woman could
undo the wisest of men. The subject was often
painted on domestic furniture along with related
themes, such as Samson and Delilah.
Apelles paints Campaspe, mistress of Alexander the
Great, also called Indiscrete love, 1716.
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GLOSSARY
ISAs
ACCA Paper F8 (International)
PAST EXAM
QUESTIONS AND
ANSWERS
Click to the next screen
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GLOSSARY
ISAs
ACCA Paper F8 (International)
Pages
Contents: Past Exam Q&As – 1 of 8
Wesestra Co: Pilot Paper
Question
Answer
plan
Answer
Examiner’s
report
1081
1082
1085
n/a
1091
1092
1094
n/a
1097
1098
1100
n/a
1102
1103
1105
n/a
1107
1108
1110
n/a
1112
1114
1117
1121
1126
1127
1128
1129
1131
1132
1133
1135
1138
1139
1141
1143
Substantive audit procedures to confirm assertions. Audit
procedures on the trade payables balance. Control
procedures over standing data. Extent to which CAATs
might be used.
ISAs 210/500/700: Pilot Paper
Items to be included in an engagement letter. Types of
audit evidence. Ways in which an auditor’s report may be
modified.
Dark and Co: Pilot Paper
Threat to independence. Corporate governance
requirements. Communication with an audit committee.
SouthLea Co: Pilot Paper
Weaknesses in a system of internal control.
Responsibilities of external/internal auditors to detect fraud.
Factors an entity should consider when appointing an
external consultant.
EastVale Co: Pilot Paper
Additional audit procedures. Amendments to financial
statements. Whether or not an audit report should be
modified.
DinZee Company: December 2007
Audit procedures – on a purchase system. Procedures
prior to an inventory count. Weaknesses detected in a
control system for counting inventory and related
discussion.
ACCA Code: December 2007
Actions of the auditor to ascertain going concern.
Matalas Co : December 2007
Issues which limit the independence of the internal audit
department. Internal control weaknesses in a petty cash
system.
Delphic Co: December 2007
Procedures when using audit software on a receivables
balance. Potential problems of using audit software. The
concept of ‘auditing around the computer’ and associated
audit risk.
Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green
shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources.
Note: the ACCA Official solutions are available free of charge on www.accaglobal.com.
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ISAs
ACCA Paper F8 (International)
Pages
Contents: Past Exam Q&As – 2 of 8
JonArc & Co: December 2007
Question
Answer
plan
Answer
Examiner’s
report
1146
1147
1149
1151
1154
1156
1159
1161
1166
1167
1169
1173
1176
1177
1179
1183
1186
1187
1189
1191
1193
1194
1197
1199
1202
1204
1206
1209
Audit procedures regarding non-deprecation of buildings.
Meaning and purposes of extracts in a draft audit report.
Effect on an audit report of two alternative situations.
Brennon & Co: June 2008
Checking the accuracy of an internal control questionnaire.
Six tests of control re a despatch and sales system. Four
assertions that relate to the direct confirmation of
receivables. Procedures re a direct confirmation of
receivables. Deciding on a sample for categories of
receivables.
Sufficiency of evidence: June 2008
Four factors regarding the sufficiency of evidence obtained.
Six items that could be included in a management
representation letter. Actions required when audit evidence
is not considered to be sufficient to support the audit
opinion.
ISA 520: June 2008
Discussion re ‘analytical procedures’ – explanation of,
procedures available and situations where applicable.
Analysing changes in a presented income statement
covering two years. Procedures to obtain a bank
confirmation letter.
MonteHodge Co: June 2008
Advantages/disadvantages of an entity outsourcing an
internal audit department. By using a stated situation a
discussion of the reasons for and against an entity having
an internal audit department.
Smithson Co: June 2008
The auditor’s responsibilities in respect of ‘Going concern’.
Audit procedures to determine going concern. Procedures
in a case when the client is unlikely to be a going concern.
Explanation/implication of the term ‘negative assurance’.
Blake Co: December 2008
Control objectives of a wages system. Identification and
discussion of four weaknesses in a (described) wages
recording and payment system. Three substantive
analytical procedures re a shift managers’ salary system.
Four audit procedures in respect of testing the accuracy of
the time recording system.
Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green
shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources.
Note: the ACCA Official solutions are available free of charge on www.accaglobal.com.
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ISA 620: December 2008
Question
Answer
plan
Answer
Examiner’s
report
1213
1214
1216
1217
1219
1220
1222
1224
1226
1227
1229
1231
1233
1234
1236
1238
1240
1242
1246
1249
1253
1254
1255
1256
1258
1259
1261
1264
1266
1267
1268
1271
Three factors re assessing the competence and objectivity
of an auditor’s expert. Three rights that enable auditors to
carry out their duties. Four assertions relevant to the audit
of non-current assets and one related audit procedure.
Ali & Co: December 2008
Discussion and mitigation of ethical threats which may
affect an auditor . Benefits of an entity establishing an
internal audit department.
The EuKaRe Charity: December 2008
Areas of inherent risk and the effect of these risks.
Explanation as to why a (described) control environment
may be weak.
ZeeDiem Co: December 2008
Adjusting or non-adjusting events? (IAS 10). The auditor’s
responsibility/procedures that should be carried out
according to ISA 560.
B-Star Theme Park: June 2009
Purpose of the main sections of an audit strategy document.
Risks that could affect the assertion of completeness and
associated controls and substantive procedures.
Substantive procedures re total income from ticket sales for
one day and one year. Audit procedures on a credit card
receivables balance.
ISAs 530/500: June 2009
Four methods of selecting a sample (ISA 530). Four
assertions from ISA 500 that relate to the recording of
classes of transactions. In terms of audit reports
explanation of the term ‘modified’.
Cal & Co: June 2009
Benefits of using audit software. Problems that may be
encountered in the audit of described (computer) situations
and explanation of how these problems may be overcome.
Evaluation of computer systems documentation.
Conoy Co: June 2009
Contrasting the role of internal and external auditors.
Benefits to an entity of forming an audit committee.
Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green
shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources.
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Pages
Contents: Past Exam Q&As – 4 of 8
Tye Co: June 2009
Question
Answer
plan
Answer
Examiner’s
report
1273
1274
1276
1278
1280
1281
1284
1289
1291
1292
1294
1296
1297
1298
1300
1303
1304
1305
1307
1309
1311
1312
1314
1317
1318
1320
1323
1328
1330
1331
1332
1333
Audit procedures/actions in respect of aviation fuel
inventory. External auditor’s responsibilities regarding the
detection of fraud and reporting of ‘fictitious’ aviation fuel
inventory. Safeguards to overcome the intimidation threat
from a client’s directors.
Redburn Co: December 2009
Two procedures to ensure that sales statistics may be relied
on. Three substantive tests to ensure that a royalties charge
is accurate and complete. Two inherent risks that may
affect an inventory figure and one mitigation control.
Definition/procedures re net realisable value.
ISAs 500/260: December 2009
Four factors that influence the reliability of audit evidence.
Two specific responsibilities of those charged with
governance and four examples of matters that might be
communicated to such people by the auditors.
Letham Co: December 2009
Understanding the entity and its environment. Six strengths
in a (described) control environment in respect of noncurrent assets. Explanation/discussion of a test for
completeness.
Brampton Co: December 2009
Reliance on the work on internal auditors. Three
procedures in an examination of a cash flow forecast.
Providing assurance.
Have a Bite Co: December 2009
Two controls concerning purchases and two associated
audit procedures. Three items of evidence concerning a
(described) potential claim and how the matter should be
reported in the financial statements/audit report.
Smoothbrush Paints Co: June 2010
Audit risks identified at the audit planning stage. Discussion
of the importance of assessing such risks. Suitable controls
that should exist over a continuous/perpetual inventory
counting system. Three substantive procedures for each of
(i) the valuation of inventory, and (ii) the completeness of
provisions or contingent liabilities.
Non-audit engagements/ISA 320: June 2010
The elements of an assurance engagement. Definition of
materiality and determination of how the level of materiality
is assessed.
Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green
shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources.
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Pages
Contents: Past Exam Q&As – 5 of 8
Shiny Happy Windows Co: June 2010
Question
Answer
plan
Answer
Examiner’s
report
1334
1335
1337
1339
1341
1342
1344
1347
1348
1349
1353
1356
1358
1360
1363
1370
1372
1373
1375
1376
1377
1378
1381
1384
Definition of (i) a ‘test of control’, and (ii) a ’substantive
procedure’. Three deficiencies in a (described) system and
controls required to address them. Audit test of controls to
assess if controls are operating effectively. Substantive
procedures performed to verify a company’s bank balance.
Jones & Co: June 2010
Five audit threats (ACCA’s Code) and an example of a
circumstance that may create each of the threats.
Independence threats (using a described scenario) and how
each threat might be avoided. Steps of an audit firm prior to
accepting a new audit engagement.
Medimade Co: June 2010
Definition of the going concern assumption. Identification of
indicators that a (described) company is not a going
concern. Audit procedures in assessing whether or not a
company is a going concern. Impact on the audit report if
the auditor believes the client is a going concern but a
material uncertainty exists.
Greystone Co: December 2010
Matters concerning a deficiency in internal controls (ISA
265). Four deficiencies in a (described) purchasing system,
implications of and recommendation to address each
deficiency. Substantive procedures on year-end payables.
Additional assignments that the internal audit department
could be asked to perform.
General auditing aspects: December 2010
Explanation of the concept of TRUE and FAIR. Status of
International Standards on Auditing. Four benefits of
documenting audit work (ISA 230).
White & Co: December 2010
Assessment of whether the pre-conditions of an audit are
present. Four matters when obtaining an understanding of
the entity. Calculation of five ratios, for each of two years,
which would assist the audit senior in planning the audit. (A
described scenario).Explain the audit risks that arise from
the scenario with appropriate audit response.
Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green
shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources.
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Pages
Contents: Past Exam Q&As – 6 of 8
Bluesberry Hospital: December 2010
Question
Answer
plan
Answer
Examiner’s
report
1386
1387
1389
1392
1393
1394
1397
1399
1401
1402
1405
1408
1410
1411
1413
1415
1416
1417
1419
1422
1424
1425
1427
1430
Identification of four strengths within a (described) operating
environment and how the client might use each strength to
provide the best value for money. Description of two
substantive procedures used to verify each of the following
assertions in relation to an entity’s property, plant and
equipment: (i) valuation, (ii) completeness and (iii) rights
and obligations.
Greenfields Co: December 2010
Audit procedures in respect of accounting estimates. The
appropriateness of written representation as a form of audit
evidence. Reaching a conclusion on a (described) balance
in the financial statements. Implications of the refusal of
management to provide a requested written representation.
Tinkerbell Toys Co: June 2011
Six tests of controls on the (described) sales systems with
explanation of the objective for each test. Substantive
procedures to confirm year-end receivables balance.
Identification and explanation of controls used to reduce the
risk of fraud and how each control would mitigate the risk.
Substantive procedures performed to confirm revenue.
Audit documentation: June 2011
Advantages/disadvantages to the auditor of (i) narrative
notes and (ii) internal control questionnaires. Purposes of
an engagement letter and six matters that should be
included within an audit engagement letter.
Donald Co: June 2011
Five procedures for obtaining audit evidence and for each
an example relevant to the audit of purchases and other
expenses. From information provided a description of five
audit risks and the auditor’s response to each risk in
planning the audit.
Goofy Co: June 2011
Safeguards for auditors to ensure that conflict of interest is
properly managed. Advantages/disadvantages to both
client and auditor of outsourcing the internal audit
department. From information provided an explanation of
ethical threats to the audit independence and how each
threat may be reduced.
Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green
shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources.
Note: the ACCA Official solutions are available free of charge on www.accaglobal.com.
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Pages
Contents: Past Exam Q&As – 7 of 8
Daffy & Co: June 2011
Question
Answer
plan
Answer
Examiner’s
report
1431
1432
1435
1438
1440
1442
1447
1451
1454
1455
1457
1459
1460
1461
1463
1468
1470
1471
1474
1478
1479
1480
1482
1485
‘Misstatement’ and the auditor’s responsibility. Factors that
an entity should consider when placing reliance on the work
of an independent valuer. Discussion of three (provided)
issues and their impact on the audit report if they remain
unresolved.
Chuck Industries: December 2011
For deficiencies already identified (i) an explanation of
implications and (ii) recommendation to address each
deficiency. Substantive procedures to confirm accuracy
and completeness of a (described) payroll charge.
Responsibilities of management/auditors in relation to
compliance with law and regulations (ISA 250). Substantive
procedures to confirm a redundancy provision. Factors
considered by the auditor before reliance can be placed on
the work performed by a client’s internal audit department.
ISAs 315/700: December 2011
Five components of an entity’s internal control with an
explanation of each. Five elements of an unmodified
auditor’s report.
Abrahams Co: December 2011
Description of the component of audit risk with an example
of a factor which can result in increased audit risk. Using
information provided identification/description of five audit
risks and the auditor’s response to each. Substantive
procedures used to obtain sufficient appropriate audit
evidence in relation to: (i) inventory held by a third party,
and (ii) use of standard costs for inventory valuation.
Serena VDW Co: December 2011
Explanation/importance of ‘corporate governance’.
Description of six corporate governance weaknesses (using
a provided scenario) and recommendations to address
each weakness. The auditor’s ethical responsibilities with
regard to client confidentiality and when they have (i)
obligatory obligations, and (ii) voluntary responsibility to
disclose client information.
Humphries Co: December 2011
The auditor’s responsibility for subsequent events. For
each of three provided events: (i) discussion of whether
financial statements require amendment, (ii) description of
audit procedures to form a conclusion on the amendment,
and (iii) the impact on the audit report should the issue
remain unresolved.
Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green
shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources.
Note: the ACCA Official solutions are available free of charge on www.accaglobal.com.
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ACCA Paper F8 (International)
Pages
Contents: Past Exam Q&As – 8 of 8
Pear International Co: June 2012
Question
Answer
plan
Answer
Examiner’s
report
1487
1489
1492
1496
1498
1499
1501
1502
1503
1504
1506
1509
1510
1511
1514
1517
1519
1520
1523
1525
In respect of the internal control (scenario provided) (i)
identification/ explanation of five deficiencies, (ii)
recommendation of a control to address each and (iii) a test
of control to assess if each of these controls is operating
effectively. Substantive procedures to confirm each of the
following for plant and equipment: (i) additions, and (ii)
disposals. Identification/explanation of the level of
assurance provided by external audit/other review
engagements. Contrast of internal/external audit.
ISAs 300/530: June 2012
Explanation of the benefits of audit planning.
Identification/explanation of three methods of selecting a
sample. Description of the three types of modified audit
opinions.
Orange Financial Co: June 2012
From a scenario provided an explanation of six ethical
threats which might affect audit independence and how
each might be reduced to an acceptable level. Benefits to
an organisation of establishing an audit committee.
Pineapple Beach Hotel Co: June 2012
Identification of four financial statement assertions relevant
to year-end account balances and for each a description of
a substantive procedure relevant to the audit of year-end
inventory. Substantive procedures relevant to obtain
sufficient/appropriate audit evidence in relation to two stated
issues. Four items that should be included on every audit
working paper.
Strawberry Kitchen Designs Co: June 2012
Three stages of an audit when analytical procedures can be
used by the auditor. Using information provided an
explanation of three potential indicators that the entity is not
a going concern, Audit procedures in assessing whether or
not a company is a going concern. The auditor’s
responsibility for reporting on going concern to
management. The impact on the auditor’s report if
management refuse to amend the financial statements.
Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green
shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources.
Note: the ACCA Official solutions are available free of charge on www.accaglobal.com.
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ISAs
ACCA Paper F8 (International)
Appendix A:
International Standards on Auditing:
June and December 2013 Examinations – 1 of 5
The following six screens itemise the International
Audit Standards and other examinable documents for
the June and December 2013 examinations.
Reference is made to them as applicable in the body
of this Tony Surridge +AddVance e-publication.
Hyperlinks are provided both on the following
screens or when referred to in the text.
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ISAs
ACCA Paper F8 (International)
EXAMINABLE DOCUMENTS JUNE AND DECEMBER 2013
AUDIT INTERNATIONAL – 2 of 5
Knowledge of new examinable regulations issued by 30th September will be examinable in examination
sessions being held in the following calendar year. Documents may be examinable even if the effective date is
in the future. This means that all regulations issued by 30th September 2012 will be examinable in the
June and December 2013 examinations.
The study guide offers more detailed guidance on the depth and level at which the examinable documents
should be examined. The study guide should therefore be read in conjunction with the examinable documents
list.
Accounting Standards
Paper F8 Audit and Assurance
The accounting knowledge that is assumed for Paper F8 is the same as that examined in Paper F3. Therefore,
candidates studying for Paper F8 should refer to the Accounting Standards listed under Paper F3.
Click here
Title
F8
International Standards on Auditing (ISAs)
CLICK
√
Glossary of Terms
http://web.ifac.org/download/2009_Auditing_Handbook_A005_Glossary.pdf
CLICK
International Framework for Assurance Assignments
√
http://web.ifac.org/download/2008_Auditing_Handbook_A055_Framework.
pdf
CLICK
Preface to the International Standards on Quality Control,
Auditing, Review, Other Assurance and Related Services
√
http://web.ifac.org/download/2009_Auditing_Handbook_A004_2009_Prefa
ce-WithConformingAmendments.pdf
ISA 200
Overall Objectives of the Independent Auditor and the Conduct
of an Audit in Accordance with International Standards on
Auditing
√
http://web.ifac.org/download/2009_Auditing_Handbook_A008_ISA_200.pdf
ISA 210
Agreeing the Terms of Audit Engagements
http://web.ifac.org/download/2009_Auditing_Handbook_A009_ISA_
210.pdf
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√
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ISAs
ACCA Paper F8 (International)
EXAMINABLE DOCUMENTS JUNE AND DECEMBER 2013
AUDIT INTERNATIONAL - 3 of 5
Click here
Title
F8
ISA 230
(Redrafted) Audit Documentation
√
http://web.ifac.org/download/2009_Auditing_Handbook_A011_ISA_230.pdf
ISA 240
(Redrafted) The Auditor’s Responsibilities Relating to Fraud in
an Audit of Financial Statements
√
http://web.ifac.org/download/2009_Auditing_Handbook_A012_ISA_240.pdf
ISA 250
(Redrafted) Consideration of Laws and Regulations in an Audit
of Financial Statements
√
http://web.ifac.org/download/2009_Auditing_Handbook_A013_ISA_250.pdf
ISA 260
(Revised and Redrafted) Communication with Those Charged
with Governance
√
http://web.ifac.org/download/2009_Auditing_Handbook_A014_ISA_260.pdf
ISA 265
Communicating Deficiencies in Internal Control to those
Charged with Governance and Management
√
http://web.ifac.org/download/2009_Auditing_Handbook_A015_ISA_265.pdf
ISA 300
(Redrafted) Planning an Audit of Financial Statements
√
http://web.ifac.org/download/2009_Auditing_Handbook_A016_ISA_300.pdf
ISA 315
(Redrafted) Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and Its
Environment
√
http://web.ifac.org/download/2009_Auditing_Handbook_A017_ISA_315.pdf
ISA 320
Materiality in Planning and Performing and Audit
√
http://web.ifac.org/download/2009_Auditing_Handbook_A018_ISA_320.pdf
ISA 330
(Redrafted) The Auditor’s Responses to Assessed Risks
√
http://web.ifac.org/download/2009_Auditing_Handbook_A019_ISA_330.pdf
ISA 402
Audit Considerations Relating to an Entity Using a Service
Organisation
√
http://web.ifac.org/download/2009_Auditing_Handbook_A020_ISA_402.pdf
ISA 450
Evaluation of Misstatements Identified During the Audit
√
http://web.ifac.org/download/2009_Auditing_Handbook_A021_ISA_450.pdf
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ACCA Paper F8 (International)
EXAMINABLE DOCUMENTS JUNE AND DECEMBER 2013
AUDIT INTERNATIONAL – 4 of 5
Click here
Title
ISA 500
Audit Evidence
F8
√
http://web.ifac.org/download/2009_Auditing_Handbook_A022_ISA_500.pdf
ISA 501
Audit Evidence – Specific Considerations for Selected Items
√
http://web.ifac.org/download/2009_Auditing_Handbook_A023_ISA_501.pdf
ISA 505
External Confirmations
√
http://web.ifac.org/download/2009_Auditing_Handbook_A024_ISA_505.pdf
ISA 510
(Redrafted) Initial Audit Engagements – Opening Balances
√
http://web.ifac.org/download/2009_Auditing_Handbook_A025_ISA_510.pdf
ISA 520
√
Analytical Procedures
http://web.ifac.org/download/2009_Auditing_Handbook_A026_ISA_520.pdf
ISA 530
√
Audit Sampling
http://web.ifac.org/download/2009_Auditing_Handbook_A027_ISA_530.pdf
ISA 540
(Revised and Redrafted) Auditing Accounting Estimates,
Including Fair Value Estimates and Related Disclosures
√
http://web.ifac.org/download/2009_Auditing_Handbook_A028_ISA_540.pdf
ISA 560
(Redrafted) Subsequent Events
√
http://web.ifac.org/download/2009_Auditing_Handbook_A030_ISA_560.pdf
ISA 570
(Redrafted) Going Concern
√
http://web.ifac.org/download/2009_Auditing_Handbook_A031_ISA_570.pdf
ISA 580
(Revised and Redrafted) Written Representations
√
http://web.ifac.org/download/2009_Auditing_Handbook_A032_ISA_580.pdf
ISA 610
Using the Work of Internal Auditors
√
http://web.ifac.org/download/2009_Auditing_Handbook_A034_ISA_610.pdf
ISA 620
Using the Work of an Auditor’s Expert
√
http://web.ifac.org/download/2009_Auditing_Handbook_A035_ISA_620.pdf
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EXAMINABLE DOCUMENTS JUNE AND DECEMBER 2013
AUDIT INTERNATIONAL – 5 of 5
ISA 700
Forming an Opinion and Reporting on Financial Statements
√
http://web.ifac.org/download/2009_Auditing_Handbook_A036_ISA_700.pdf
ISA 705
Modifications to the Opinion in the Independent Auditor’s
Report
√
http://web.ifac.org/download/2009_Auditing_Handbook_A037_ISA_705.pdf
ISA 706
Emphasis of Matter Paragraphs and Other Matter Paragraphs
in the Independent Auditor’s Report
√
http://web.ifac.org/download/2009_Auditing_Handbook_A038_ISA_706.pdf
ISA 710
Comparative Information – Corresponding Figures and
Comparative Financial Statements
√
http://web.ifac.org/download/2009_Auditing_Handbook_A039_ISA_710.pdf
ISA 720
(Redrafted) The Auditor’s Responsibilities Related to Other
Information in Documents Containing Audited Financial
Statements
√
http://web.ifac.org/download/2009_Auditing_Handbook_A040_ISA_720.pdf
International Standards on Assurance Engagements (ISAEs)
ISAE
3000
Assurance Engagements other than Audits or Reviews of
Historical Financial Information
√
http://web.ifac.org/download/2008_Auditing_Handbook_A270_ISAE_3000.
pdf
Other documents
CLICK
√
ACCA’s ‘Code of Ethics and Conduct’
http://rulebook.accaglobal.com/
CLICK
√
IFAC’s ‘Code of Ethics for Professional Accountants’
http://web.ifac.org/download/2008_Auditing_Handbook_A025_Code_of_Et
hics.pdf
CLICK
UK Code of Corporate Governance 2012 as an example of a
code of best practice
√
http://www.frc.org.uk/getattachment/b0832de2-5c94-48c0-b771ebb249fe1fec/The-UK-Corporate-Governance-Code.aspx
Moral codes adjust themselves to environmental conditions”
Will Durant
William James Durant (1885 – 1981) was a prolific American writer,
historian, and philosopher. He is best known for The Story of Civilization,
11 volumes written in collaboration with his wife Ariel Durant and
published between 1935 and 1975. He was earlier noted for The Story of
Philosophy, written in 1926, which one observer described as "a
groundbreaking work that helped to popularize philosophy".
Will and Ariel Durant
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ISAs
ACCA Paper F8 (International)
APPENDIX B:
GLOSSARY OF TERMS
(* International Auditing and Assurance Standards Board [IAASB] - February 2009)
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
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ACCA Paper F8 (International)
GLOSSARY OF TERMS
(* International Auditing and Assurance Standards Board [IAASB] - February 2009)
Access controls*
Procedures designed to restrict access to on-line terminal devices, programs and data. Access controls
consist of “user authentication” and “user authorisation.” “User authentication” typically attempts to identify a
user through unique logon identifications, passwords, access cards or biometric data. “User authorisation”
consists of access rules to determine the computer resources each user may access. Specifically, such
procedures are designed to prevent or detect:
(a)
(b)
(c)
(d)
(e)
Unauthorised access to on-line terminal devices, programs and data;
Entry of unauthorised transactions;
Unauthorised changes to data files;
The use of computer programs by unauthorised personnel; and
The use of computer programs that have not been authorised.
Accounting estimate*
An approximation of a monetary amount in the absence of a precise means of measurement. This term is
used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts
that require estimation. Where ISA 540 addresses only accounting estimates involving measurement at fair
value, the term “fair value accounting estimates” is used.
Accounting records*
The records of initial accounting entries and supporting records, such as cheques and records of electronic
fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments
to the financial statements that are not reflected in formal journal entries; and records such as work sheets
and spreadsheets supporting cost allocations, computations, reconciliations and disclosures.
Accrued revenue
This is revenue that has been credited but not yet paid.
Adverse opinion
When the auditor expresses an adverse opinion, the auditor shall state in the opinion paragraph that, in the
auditor’s opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion
paragraph:
(a) The financial statements do not present fairly (or give a true and fair view) in accordance with the
applicable financial reporting framework when reporting in accordance with a fair presentation
framework; or
(b) The financial statements have not been prepared, in all material respects, in accordance with the
applicable financial reporting framework when reporting in accordance with a compliance
framework.
An adverse opinion is expressed when the effect of a disagreement is so material and pervasive to the
financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the
misleading or incomplete nature of the financial statements.
Agent
An agent is authorised to act on behalf of another (called the Principal)
Agree
To confirm that balances in the general ledger are correct.
Agreed-upon procedures engagement*
An engagement in which an auditor is engaged to carry out those procedures of an audit nature to which the
auditor and the entity and any appropriate third parties have agreed and to report on factual findings. The
recipients of the report form their own conclusions from the report by the auditor. The report is restricted to
those parties that have agreed to the procedures to be performed since others, unaware of the reasons for
the procedures may misinterpret the results.
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Analyse
Separation of account balances into separate parts and the ascertainment of those parts.
Analytical procedures*
Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. Analytical procedures also encompass such investigation as is necessary of identified
fluctuations or relationships that are inconsistent with other relevant information or that differ from expected
values by a significant amount.
Annual report*
A document issued by an entity, ordinarily on an annual basis, which includes its financial statements
together with the auditor’s report thereon.
Anomaly*
A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a
population.
Applicable financial reporting framework*
The financial reporting framework adopted by management and, where appropriate, those charged with
governance in the preparation of the financial statements that is acceptable in view of the nature of the entity
and the objective of the financial statements, or that is required by law or regulation. The term “fair
presentation framework” is used to refer to a financial reporting framework that requires compliance with the
requirements of the framework and:
(a) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may
be necessary for management to provide disclosures beyond those specifically required by the
framework; or
(b) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the
framework to achieve fair presentation of the financial statements. Such departures are expected to be
necessary only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework, but does not contain the acknowledgements in (a)
or (b) above.
Application controls in information technology*
Manual or automated procedures that typically operate at a business process level. Application controls can
be preventative or detective in nature and are designed to ensure the integrity of the accounting records.
Accordingly, application controls relate to procedures used to initiate, record, process and report transactions
or other financial data.
Applied criteria (in the context of ISA 810)*
The criteria applied by management in the preparation of the summary financial statements.
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Appropriateness (of audit evidence)*
The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for
the conclusions on which the auditor’s opinion is based.
Archived files
An archive is a collection of records, and the location in which the collection is kept. Archives contain records
which have accumulated over the course of time. The archives of an organisation tend to contain
administrative files, business records, memos, official correspondence and meeting minutes. In general,
archives consist of records which have been selected for permanent or long-term preservation,
Arm’s length transaction*
A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are
unrelated and are acting independently of each other and pursuing their own best interests.
Arrestment
An arrestment is a notice which prohibits a debtor from handing over to his creditor money or property until a
debt due by that creditor to a third party, the arrester, is paid or secured.
Assertions*
Representations by management, explicit or otherwise, that are embodied in the financial statements, as
used by the auditor to consider the different types of potential misstatements that may occur.
Assertions (and the ‘assertion level’, i.e. the assertion for which audit procedures are used) used by the
auditor fall into the following categories:
(a) Assertions about classes of transactions and events for the period under audit:
(i) Occurrence—transactions and events that have been recorded have occurred and pertain to the
entity.
(ii) Completeness—all transactions and events that should have been recorded have been recorded.
(iii) Accuracy—amounts and other data relating to recorded transactions and events have been
recorded appropriately.
(iv) Cut-off—transactions and events have been recorded in the correct accounting period.
(v) Classification—transactions and events have been recorded in the proper accounts.
(b) Assertions about account balances at the period end:
(i) Existence—assets, liabilities, and equity interests exist.
(ii) Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.
(iii) Completeness—all assets, liabilities and equity interests that should have been recorded
have been recorded.
(iv) Valuation and allocation—assets, liabilities, and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded.
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(c) Assertions about presentation and disclosure:
(i) Occurrence and rights and obligations—disclosed events, transactions, and other matters have
occurred and pertain to the entity.
(ii) Completeness—all disclosures that should have been included in the financial statements have
been included.
(iii) Classification and understandability—financial information is appropriately presented and
described, and disclosures are clearly expressed.
(iv) Accuracy and valuation—financial and other information are disclosed fairly and at appropriate
amounts.
Assess*
Analyse identified risks of to conclude on their significance. “Assess,” by convention, is used only in relation
to risk. (also see Evaluate)
Association*
(see Auditor association with financial information)
Assurance*
(see Reasonable assurance – on this screen)
Attributes sampling
Attribute sampling provides results based on two possible values (i.e. correct, not correct).
Audit committee
An audit committee is a committee consisting primarily of non-executive directors which is able to view a
company’s affairs in a detached and independent way and liaise effectively between the main (executive)
board of directors and the external and internal auditors.
Assurance engagement*
An engagement in which a practitioner expresses a conclusion designed to enhance the degree of
confidence of the intended users other than the responsible party about the outcome of the evaluation or
measurement of a subject matter against criteria. The outcome of the evaluation or measurement of a subject
matter is the information that results from applying the criteria. Under the “International Framework for
Assurance Engagements” there are two types of assurance engagement a practitioner is permitted to
perform: a reasonable assurance engagement and a limited assurance engagement.
Reasonable assurance engagement
The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement as the basis for a positive form of
expression of the practitioner’s conclusion.
Limited assurance engagement
The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level
that is acceptable in the circumstances of the engagement, but where that risk is greater than for a
reasonable assurance engagement, as the basis for a negative form of expression of the practitioner’s
conclusion.
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Assurance engagement risk*
The risk that the practitioner expresses an inappropriate conclusion when the subject matter information is
materially misstated.
Audit documentation*
The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor
reached (terms such as “working papers” or “work-papers” are also sometimes used).
Audit evidence*
Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit
evidence includes both information contained in the accounting records underlying the financial statements
and other information. (See Sufficiency of audit evidence* and Appropriateness of audit evidence*.)
Audit file*
One or more folders or other storage media, in physical or electronic form, containing the records that
comprise the audit documentation for a specific engagement.
Audit firm*
(see Firm*)
Audit opinion*
(see Modified opinion* and Unmodified opinion*)
Audit procedures
Audit procedures are methods, steps, acts or tasks used by the auditor to gather evidence about the subject
matter.
Audit risk*
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are
materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. Audit
risk has three components: inherent risk, control risk and detection risk. See also: Risk of material
misstatement.
Audit sampling (sampling)*
The application of audit procedures to less than 100% of items within a population of audit relevance such
that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on
which to draw conclusions about the entire population.
Audited financial statements* (in the context of ISA 810)
Financial statements audited by the auditor in accordance with ISAs, and from which the summary financial
statements are derived.
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Auditor
“Auditor” is used to refer to the person or persons conducting the audit, usually the engagement partner or
other members of the engagement team, or, as applicable, the firm. Where an ISA expressly intends that a
requirement or responsibility be fulfilled by the engagement partner, the term “engagement partner” rather
than “auditor” is used. “Engagement partner” and “firm” are to be read as referring to their public sector
equivalents where relevant.
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




Continuing auditor – The auditor who performed the audit and reported on the prior period’s financial
statements and continues as the auditor for the current period.
Engagement auditor - The partner or other person in the firm who is responsible for the engagement
and its performance, and for the report that is issued on behalf of the firm, and who, where required, has
the appropriate authority from a professional, legal or regulatory body. (Often referred to as the ‘Principal
auditor’.)
External auditor – Referred to in the Internal Auditing Standards as the independent auditor the
external auditor is defined in the first paragraph above.
Existing audit – The auditor who is currently holding an audit or assurance services appointment with
the entity (client).
Incoming auditor – The incoming auditor is the current period’s auditor who did not audit the prior
period’s financial statements.
Internal auditor - Those individuals who perform the activities of the internal audit function. Internal
auditors may belong to an internal audit department or equivalent function.
Auditor association with financial information*
An auditor is associated with financial information when the auditor attaches a report to that information or
consents to the use of the auditor’s name in a professional connection.
Auditor’s expert*
An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in
that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An
auditor’s expert may be either an auditor’s internal expert (who is a partner or staff, including temporary staff,
of the auditor’s firm or a network firm), or an auditor’s external expert.
Auditor’s opinion
The auditor’s report contains a clear written expression of opinion (‘what seems to be probably true’) on the
financial statements as a whole.

Adverse opinion - An adverse opinion should be expressed when the effect of a disagreement is
so material and pervasive to the financial statements that the auditor concludes that a qualification of the
report is not adequate to disclose the misleading or incomplete nature of the financial statements.
Disclaimer of opinion - A disclaimer of opinion should be expressed when the possible effect of a
limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient
appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.
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Qualified opinion - A qualified opinion should be expressed when the auditor concludes that an
unqualified opinion cannot be expressed but that the effect of any disagreement with management, or
limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of
opinion. A qualified opinion should be expressed as being ‘except for’ the effects of the matter to which
the qualification relates.

Unqualified opinion – The opinion expressed by the auditor when he or she concludes that the
financial statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework.
Auditor’s point estimate or auditor’s range*
The amount, or range of amounts, respectively, derived from audit evidence for use in evaluating
management’s point estimate.
Auditor’s procedures
Procedures used by the auditor to gather evidence about the subject matter.
Auditor’s range*
(see Auditor’s point estimate* - on this screen)
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Balance sheet
A balance sheet (or statement of financial position) is a summary of a company’s balances. Assets,
liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance
sheet is often described as a snapshot of a company's financial condition.[ Of the four basic financial
statements, the balance sheet is the only statement which applies to a single point in time.
Bank transfer schedule
A bank transfer schedule shows the dates of all transfers of cash among the client’s various bank accounts.
The schedule is prepared by using bank statements for the periods before and after year-end and by using
the client’s cash receipts and payments cash books.
Best-estimate assumption
A best-estimate assumption is an assumption about future events which management expects to take place
and actions management expects to take as of the date the information is prepared. This should be
compared with hypothetical assumption.
Block sampling
Block sampling is a method in which a number of adjacent transactions or items will be selected, e.g. all sales
invoices in a particular week, or all debtors with a name beginning with a particular letter.
Business risk*
A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely
affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate
objectives and strategies.
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Carrying value
Is the value of an asset or liability in a company’s books or balance sheet.
Casual vacancy
Is an unforeseen vacancy
Check-point restart
Check-point restart is a facility offered by some database management systems (DBMSs) and backuprestore software. Check-points are taken in anticipation of the potential need to restart a software process.
Many ordinary batch processes on impersonal computers are time-consuming, as are backup and restore
operations. They consist of many units of work. If check-pointing is enabled, checkpoints are initiated at
specified intervals, in terms of units of work or of processing time. At each checkpoint the process's progress
is saved to back-up storage. The contents of the program's memory area may also be saved. The purpose of
check-pointing is to minimise the amount of time and effort wasted when a long software process is
interrupted by a hardware failure, a software failure, or resource unavailability. With check-pointing, the
process can be restarted from the latest checkpoint rather than from the beginning.
Compare
To set one group of figures with another set so as to ascertain how far they agree or disagree, such as to
compare the beginning balances with last year’s audited figures.
Comparative financial statements*
Comparative information where amounts and other disclosures for the prior period are included for
comparison with the financial statements of the current period but, if audited, are referred to in the auditor’s
opinion. The level of information included in those comparative financial statements is comparable with that of
the financial statements of the current period.
Comparative information*
The amounts and disclosures included in the financial statements in respect of one or more prior periods in
accordance with the applicable financial reporting framework.
Compare
To set one group of figures with another set so as to ascertain how far they agree or disagree, such as to
compare the beginning balances with last year’s audited figures.
Compensating cash balance
A compensating cash balance is an account with a bank in which a company has agreed to maintain a
specified minimum amount; compensating balances are typically required under the terms of bank loan
agreements. Such restrictions on cash, when material, should be disclosed in financial statements.
Compliance
Agreement with, such as agreement that there has been correct application of International Financial
Reporting Standards.
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Compilation engagement*
An engagement in which accounting expertise, as opposed to auditing expertise, is used to collect, classify
and summarise financial information.
Complementary user entity controls*
Controls that the service organisation assumes, in the design of its service, will be implemented by user
entities, and which, if necessary to achieve control objectives, are identified in the description of its system.
Compliance framework*
(see Applicable financial reporting framework and General purpose framework)
Component*
An entity or business activity for which group or component management prepares financial information that
should be included in the group financial statements.
Component auditor*
An auditor who, at the request of the group engagement team, performs work on financial information related
to a component for the group audit.
Component management*
Management responsible for the preparation of the financial information of a component.
Component materiality*
The materiality for a component determined by the group engagement team.
Computer-assisted audit techniques*
Applications of auditing procedures using the computer as an audit tool (also known as CAATs).
Consignment inventory
Consignment inventory is stock legally owned by one party, but held by another. Ownership of consignment
inventory is passed only when the stock is used (issued). Unused inventory in a warehouse may be returned
to the manufacturer.
Conclusion
To form a final judgement concerning the subject matter.
Confidence
A firm trust or belief in the outcome.
Confidentiality
A professional accountant should respect the confidentiality of information acquired as a result of professional
and business relationships and should not disclose any such information to third parties without proper and
specific authority unless there is a legal or professional right or duty to disclose. Confidential information
acquired as a result of professional and business relationships should not be used for the personal advantage
of the professional accountant or third parties.
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Control activities*
Those policies and procedures that help ensure that management directives are carried out. Control activities
are a component of internal control.
Control environment*
Includes the governance and management functions and the attitudes, awareness and actions of those
charged with governance and management concerning the entity’s internal control and its importance in the
entity. The control environment is a component of internal control.
Control risk*
(see Risk of material misstatement*)
Corporate governance*
(see Governance*)
Corresponding figures*
Comparative information where amounts and other disclosures for the prior period are included as an integral
part of the current period financial statements, and are intended to be read only in relation to the amounts and
other disclosures relating to the current period (referred to as “current period figures”). The level of detail
presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current
period figures.
Count
To sum the value of (volume, monetary value, etc), such as reckoning the value of cash, inventory, etc.
‘Creeping materiality’
Misrepresentations or omissions which may not be material in isolation but may be cumulatively.
Credibility
Credibility relates to the amount of confidence placed on the information or the ability of the person producing
it. It has two key components: trustworthiness and expertise. Trustworthiness is based more on subjective
factors (honesty, diligence, etc.), but can include objective measurements such as proven ability and
reliability. Expertise can be similarly subjectively perceived, but also includes relatively objective
characteristics such as credentials, certification or information quality.
Criteria*
The benchmarks used to evaluate or measure the subject matter including, where relevant, benchmarks for
presentation and disclosure. Criteria can be formal or less formal. There can be different criteria for the same
subject matter. Suitable criteria are required for reasonably consistent evaluation or measurement of a
subject matter within the context of professional judgment. (Criteria, for example, could include International
Financial Reporting Standards.)
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Suitable criteria*
Exhibit the following characteristics:
(a) Relevance: relevant criteria contribute to conclusions that assist decision-making by the intended
users.
(b) Completeness: criteria are sufficiently complete when relevant factors that could affect the
conclusions in the context of the engagement circumstances are not omitted. Complete criteria
include, where relevant, benchmarks for presentation and disclosure.
(c) Reliability: reliable criteria allow reasonably consistent evaluation or measurement of the subject
matter including, where relevant, presentation and disclosure, when used in similar circumstances
by similarly qualified practitioners.
(d) Neutrality: neutral criteria contribute to conclusions that are free from bias.
(e) Understandability: understandable criteria contribute to conclusions that are clear, comprehensive,
not subject to significantly different interpretations.
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Data analytics
Data analytics relates to data analysis. Data analysis is a process of gathering, modelling, and transforming
data with the goal of highlighting useful information, suggesting conclusions, and supporting decision making.
Date of approval of the financial statements*
The date on which all the statements that comprise the financial statements, including the related notes, have
been prepared and those with the recognised authority have asserted that they have taken responsibility for
those financial statements.
Date of report (in relation to quality control)*
The date selected by the practitioner to date the report.
Date of the auditor’s report*
The date the auditor dates the report on the financial statements in accordance with ISA 700.
Date of the financial statements*
The date of the end of the latest period covered by the financial statements.
Date the financial statements are issued*
The date that the auditor’s report and audited financial statements are made available to third parties.
Deficiency in internal control*
This exists when:
(a) A control is designed, implemented or operated in such a way that it is unable to prevent, or detect
and correct, misstatements in the financial statements on a timely basis; or
(b) A control necessary to prevent, or detect and correct, misstatements in the financial statements on
a timely basis is missing.
Detection risk*
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not
detect a misstatement that exists and that could be material, either individually or when aggregated with other
misstatements.
Disclaimer of opinion
A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and
pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is
unable to express an opinion on the financial statements.
Disclosure
A release by the company of information, positive or negative, that might bear on a company’s existing
position or performance. For example, the annual Financial Statements issued by a company constitute
disclosures. In general there is a requirement to disclose all material facts relevant to the aspect reported on.
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Elective resolution
(UK) Companies Act, 1989 introduced for private companies the right to dispense with certain formalities,
such as to dispense with the requirement to appoint auditors annually. An elective resolution can be revoked
by ordinary resolution, and ceases to have effect if the company is re-registered as a plc.
Element*
(see Element of a financial statement – on this screen*)
Element of a financial statement* (in the context of ISA 805)
An element, account or item of a financial statement.
Emphasis of Matter paragraph*
A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the
financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to
users’ understanding of the financial statements.
Engagement documentation*
The record of work performed, results obtained, and conclusions the practitioner reached (terms such as
“working papers” or “work-papers” are sometimes used).
Engagement letter*
Written terms of an engagement in the form of a letter.
Engagement partner*
The partner or other person in the firm who is responsible for the engagement and its performance, and for
the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a
professional, legal or regulatory body.
Engagement quality control review*
A process designed to provide an objective evaluation, on or before the date of the report, of the significant
judgments the engagement team made and the conclusions it reached in formulating the report. The
engagement quality control review process is for audits of financial statements of listed entities and those
other engagements, if any, for which the firm has determined an engagement quality control review is
required.
Engagement quality control reviewer*
A partner, other person in the firm, suitably qualified external person, or a team made up of such individuals,
none of whom is part of the engagement team, with sufficient and appropriate experience and authority to
objectively evaluate the significant judgments the engagement team made and the conclusions it reached in
formulating the report.
Engagement team*
All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm
who perform procedures on the engagement. This excludes external experts engaged by the firm or a
network firm.
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Entity
Something that exists independently. (Note ISAs refer to the engagement client as entity.)
Entity’s risk assessment process*
A component of internal control that is the entity’s process for identifying business risks relevant to financial
reporting objectives and deciding about actions to address those risks, and the results thereof.
Environmental matters*
(a) Initiatives to prevent, abate, or remedy damage to the environment, or to deal with conservation of
renewable and non-renewable resources (such initiatives may be required by environmental laws and
regulations or by contract, or they may be undertaken voluntarily);
(b) Consequences of violating environmental laws and regulations;
(c) Consequences of environmental damage done to others or to natural resources; and
(d) Consequences of vicarious liability imposed by law (for example, liability for damages caused by
previous owners).
Environmental performance report*
A report, separate from the financial statements, in which an entity provides third parties with qualitative
information on the entity’s commitments towards the environmental aspects of the business, its policies and
targets in that field, its achievement in managing the relationship between its business processes and
environmental risk, and quantitative information on its environmental performance.
Environmental risk*
In certain circumstances, factors relevant to the assessment of inherent risk for the development of the
overall audit plan may include the risk of material misstatement of the financial statements due to
environmental matters.
Error*
An unintentional misstatement in financial statements, including the omission of an amount or a disclosure.
Estimation uncertainty*
The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its
measurement.
Evaluate*
Identify and analyse the relevant issues, including performing further procedures as necessary, to come to a
specific conclusion on a matter. “Evaluation,” by convention, is used only in relation to a range of matters,
including evidence, the results of procedures and the effectiveness of management’s response to a risk. (also
see Assess*)
Examine
To enquire into evidence, such as to enquire into authoritative documents.
Exception*
A response that indicates a difference between information requested to be confirmed, or contained in the
entity’s records, and information provided by the confirming party.
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Experienced auditor*
An individual (whether internal or external to the firm) who has practical audit experience, and a reasonable
understanding of:
(a)
(b)
(c)
(d)
Audit processes;
ISAs and applicable legal and regulatory requirements;
The business environment in which the entity operates; and
Auditing and financial reporting issues relevant to the entity’s industry.
Expert*
(see Auditor’s expert* and Management’s expert*.)
Expertise*
Skills, knowledge and experience in a particular field.
External confirmation*
Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in
paper form, or by electronic or other medium.
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Fair presentation framework*
(see Applicable financial reporting framework and General purpose framework)
Financial statements*
A structured representation of historical financial information, including related notes, intended to
communicate an entity’s economic resources or obligations at a point in time or the changes therein for a
period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a
summary of significant accounting policies and other explanatory information. The term “financial statements”
ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable
financial reporting framework, but it can also refer to a single financial statement.
(Note: ‘Financial statement’ usually consist of the balance sheets, income statements [or profit and loss
accounts], statements of changes in financial position [which may be presented in a variety of ways, for
example, as a statement of cash flows), notes and other statements and explanatory material which are
identified as being part of the financial statement.)
Final audit
The final audit is the main period of audit testing, when work is focused on the final financial statements.
This should be compared with interim audit.
Firm*
A sole practitioner, partnership or corporation or other entity of professional accountants.
Foot
Add figures, such as to add the figures in a column of monetary values.
Forecast*
Prospective financial information prepared on the basis of assumptions as to future events which
management expects to take place and the actions management expects to take as of the date the
information is prepared (best-estimate assumptions).
Fraud*
An intentional act by one or more individuals among management, those charged with governance,
employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.
Fraud risk factors*
Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to
commit fraud.
Fraudulent financial reporting*
Involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to
deceive financial statement users.
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(* International Auditing and Assurance Standards Board [IAASB] - February 2009)
GAAP
Generally Accepted Accounting Principles (GAAP) is the term used to refer to the standard framework of
guidelines for financial accounting used in any given jurisdiction. GAAP includes the standards, conventions,
and rules accountants follow in recording and summarising transactions, and in the preparation of financial
statements. Many countries use or are converging on the International Financial Reporting Standards
(IFRS), established and maintained by the International Accounting Standards Board.
Garnishee order
A garnishee order is a notice to a person or organisation to retain custody of assets in his control that are
owed to or belong to another person. The garnishee (possibly a bank) merely holds the assets until legal
proceedings determine who is entitled to the property.
General IT-controls*
Policies and procedures that relate to many applications and support the effective functioning of application
controls by helping to ensure the continued proper operation of information systems. General IT-controls
commonly include controls over data centre and network operations; system software acquisition,
change and maintenance; access security; and application system acquisition, development, and
maintenance.
General purpose financial statements*
Financial statements prepared in accordance with a general purpose framework.
General purpose framework*
A financial reporting framework designed to meet the common financial information needs of a wide range of
users. The financial reporting framework may be a fair presentation framework or a compliance framework.
The term “fair presentation framework” is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework and:
(a) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may
be necessary for management to provide disclosures beyond those specifically required by the
framework; or
(b) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the
framework to achieve fair presentation of the financial statements.
Such departures are expected to be necessary only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework, but does not contain the acknowledgements in (a)
or (b) above.
Governance*
Describes the role of person(s) or organisation(s) with responsibility for overseeing the strategic direction of
the entity and obligations related to the accountability of the entity.
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(* International Auditing and Assurance Standards Board [IAASB] - February 2009)
Grandfather-father-son data cycling
This procedure refers to at least three generations of backup master files. thus, the most recent backup is the
son, the oldest backup is the grandfather. It's commonly used for a batch transaction processing system with
a magnetic tape. If the system fails during a batch run, the master file is recreated by using the son backup
and then restarting the batch. However if the son backup fails, is corrupted or destroyed, then the next
generation up backup (father) is required. Likewise, if that fails, then the next generation up backup
(grandfather) is required. Of course the older the generation, the more the data may be out of date.
Organisations can have up to twenty generations of backup.
Group*
All the components whose financial information is included in the group financial statements. A group always
has more than one component.
Group audit*
The audit of group financial statements.
Group audit opinion*
The audit opinion on the group financial statements.
Group engagement partner*
The partner or other person in the firm who is responsible for the group audit engagement and its
performance, and for the auditor’s report on the group financial statements that is issued on behalf of the firm.
Where joint auditors conduct the group audit, the joint engagement partners and their engagement teams
collectively constitute the group engagement partner and the group engagement team.
Group engagement team*
Partners, including the group engagement partner, and staff who establish the overall group audit strategy,
communicate with component auditors, perform work on the consolidation process, and evaluate the
conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial
statements.
Group financial statements*
Financial statements that include the financial information of more than one component. The term “group
financial statements” also refers to combined financial statements aggregating the financial information
prepared by components that have no parent but are under common control.
Group management*
Management responsible for the preparation of the group financial statements.
Group-wide controls*
Controls designed, implemented and maintained by group management over group financial reporting.
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(* International Auditing and Assurance Standards Board [IAASB] - February 2009)
Haphazard selection
This is a selection process used in sampling in which the auditor attempts to give all items in a population a
chance of being selected by choosing items in a haphazard way.
Historical financial information*
Information expressed in financial terms in relation to a particular entity, derived primarily from that entity’s
accounting system, about economic events occurring in past time periods or about economic conditions or
circumstances at points in time in the past.
Hypothetical assumption
A hypothetical assumption is a projection which is based partly or wholly on assumptions about future events
and management actions which are not necessarily expected to take place, and may typically include entities
that are in a start-up phase or are considering a major change in the nature of operations. This should be
compared with best-estimate assumption.
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(* International Auditing and Assurance Standards Board [IAASB] - February 2009)
IFAC
The International Federation of Accountants - an organisation of national accounting associations and
other groups interested in accounting matters.
IFRS
International Financial Reporting Standards issued by the International Accounting Standards Board
(IASB).
Imprest system
The Imprest system is a form of financial accounting system. The most common imprest system is the petty
cash system. The basis of an imprest system is that a fixed amount is issued to a fund-holder (as a debt)
which is replenished at the end of a period in return for documentation of payments (vouchers, etc.) made
during the period, or when the circumstances request it. This replenishment is paid from a central cash
account.
Inconsistency*
Other information that contradicts information contained in the audited financial statements. A material
inconsistency may raise doubt about the audit conclusions drawn from audit evidence previously obtained
and, possibly, about the basis for the auditor’s opinion on the financial statements.
Incremental backup
An incremental backup is a computer data backup method where multiple backups are kept (not just the last
one). These backups will be incremental if each original piece of backed up information is stored only once,
and then successive backups only contain the information that changed since a previous backup.
As a backup method, it is highly efficient.
Independence*
Comprises:
(a) Independence of mind
The state of mind that permits the provision of an opinion without being affected by influences that
compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity
and professional skepticism.
(b) Independence in appearance
The avoidance of facts and circumstances that are so significant that a reasonable and informed third
party, having knowledge of all relevant information, including any safeguards applied, would reasonably
conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism
had been compromised.
Information system relevant to financial reporting*
A component of internal control that includes the financial reporting system, and consists of the procedures
and records established to initiate, record, process and report entity transactions (as well as events and
conditions) and to maintain accountability for the related assets, liabilities and equity.
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Inherent risk*
(see Risk of material misstatement*)
Initial audit engagement*
An engagement in which either:
(a) The financial statements for the prior period were not audited; or
(b) The financial statements for the prior period were audited by a predecessor auditor.
Inquiry*(Enquiry)
Enquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the
entity or outside the entity.
Inspection (as an audit procedure)*
Examining records or documents, whether internal or external, in paper form, electronic form, or other media,
or a physical examination of an asset.
Inspection (in relation to quality control)*
In relation to completed engagements, procedures designed to provide evidence of compliance by
engagement teams with the firm’s quality control policies and procedures.
Integrity
The principle of integrity imposes an obligation on all professional accountants to be straightforward and
honest in professional and business relationships. Integrity also implies fair dealing and truthfulness.
Intended users*
The person, persons or class of persons for whom the practitioner prepares the assurance report. The
responsible party can be one of the intended users, but not the only one.
Interim audit
An interim audit is undertaken prior to the final audit, often during the period under review. The auditor is
likely to carry out tests of control at interim audits. This should be compared with the final audit.
Interim financial information or statements*
Financial information (which may be less than a complete set of financial statements as defined above)
issued at interim dates (usually half-yearly or quarterly) in respect of a financial period.
Internal audit:
‘Internal auditing is an independent, objective assurance and consulting activity designed to add value and
improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and
governance processes’ (The Institute of Internal Auditors).
Internal audit function*
An appraisal activity established or provided as a service to the entity. Its functions include, amongst other
things, examining, evaluating and monitoring the adequacy and effectiveness of internal control.
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Internal auditors*
Those individuals who perform the activities of the internal audit function. Internal auditors may belong to an
internal audit department or equivalent function.
Internal control*
The process designed, implemented and maintained by those charged with governance, management and
other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard
to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable
laws and regulations. The term “controls” refers to any aspects of one or more of the components of internal
control.
International Financial Reporting Standards*
The International Financial Reporting Standards issued by the International Accounting Standards Board.
Investigate*
Enquire into matters arising from other procedures to resolve them.
IT environment*
The policies and procedures that the entity implements and the IT infrastructure (hardware, operating
systems, etc.) and application software that it uses to support business operations and achieve business
strategies.
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Joint venture
A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic
activity together. The parties agree to create a new entity by both contributing equity, and they then share in
the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a
continuing business relationship.
Judgemental sampling
This is a selection process used in sampling in which the auditor attempts to give all items in a population a
chance of being selected by choosing items according to judgement.
Jurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body to deal with and make
pronouncements on legal matters and, by implication, to administer justice within a defined area of
responsibility.
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Kiting
Kiting is a form of fraud that overstates cash by causing it to be simultaneously included in two or more bank
accounts.
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Limitation on scope
A limitation on the scope of the auditor’s work may sometimes be imposed by the client, usually the
management (e.g. when the terms of the engagement specify that the auditor will not carry out the audit
procedure that the auditor considers is necessary). A scope limitation may be imposed by circumstances
(e.g. the timing of the auditor’s appointment is such that the auditor is too late [unable] to observe the
counting of inventories). It may also arise when, in the opinion of the auditor, the client’s accounting records
are inadequate or when the auditor is unable to carry out an audit procedure considered necessary.
Limited assurance engagement*
(see Assurance engagement*)
Listed entity*
An entity whose shares, stock or debt are quoted or listed on a recognised stock exchange, or are marketed
under the regulations of a recognised stock exchange or other equivalent body.
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Management*
The person(s) with executive responsibility for the conduct of the entity’s operations. For some entities in
some jurisdictions, management includes some or all of those charged with governance, for example,
executive members of a governance board, or an owner-manager.
Management bias*
A lack of neutrality by management in the preparation of information.
Management letter
The management letter is the means by which the auditor communicates to management any weaknesses
discovered in the system of internal control, and is usually sent at the end of both the interim and final audits.
Management’s expert*
An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in
that field is used by the entity to assist the entity in preparing the financial statements.
Management’s point estimate*
The amount selected by management for recognition or disclosure in the financial statements as an
accounting estimate.
Material misstatement
A significant mistake found in financial information which could arise from errors and fraud and which could
influence the economic decisions of users taken on the basis of the financial statements.
Mind-set
In decision theory and general systems theory, a mindset is a set of assumptions or methods held by one or
more people or groups of people which is so established that it creates a powerful incentive within these
people or groups to continue to adopt or accept prior behaviors, choices, or tools.
Misappropriation of assets*
Involves the theft of an entity’s assets and is often perpetrated by employees in relatively small and
immaterial amounts. However, it can also involve management who are usually more capable of disguising or
concealing misappropriations in ways that are difficult to detect.
Misstatement*
A difference between the amount, classification, presentation, or disclosure of a reported financial statement
item and the amount, classification, presentation, or disclosure that is required for the item to be in
accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
Where the auditor expresses an opinion on whether the financial statements are presented fairly, in all
material respects, or give a true and fair view, misstatements also include those adjustments of amounts,
classifications, presentation, or disclosures that, in the auditor’s judgment, are necessary for the financial
statements to be presented fairly, in all material respects, or to give a true and fair view.
Misstatement of fact*
Other information that is unrelated to matters appearing in the audited financial statements that is incorrectly
stated or presented. A material misstatement of fact may undermine the credibility of the document
containing audited financial statements.
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Moderate level of assertion
A moderate level of assertion is an assertion in which the professional accountant states, based on the
examination of the evidence supporting the assumptions, anything has come to his or her attention which
causes him or her to believe that the assumptions do not provide a reasonable basis for the prospective
financial information. It represents limited assurance.
Modified opinion*
Is a qualified opinion, an adverse opinion or a disclaimer of opinion.
Monitoring (in relation to quality control)*
A process comprising an ongoing consideration and evaluation of the firm’s system of quality control,
including a periodic inspection of a selection of completed engagements, designed to provide the firm with
reasonable assurance that its system of quality control is operating effectively.
Monitoring of controls*
A process to assess the effectiveness of internal control performance over time. It includes assessing the
design and operation of controls on a timely basis and taking necessary corrective actions modified for
changes in conditions. Monitoring of controls is a component of internal control.
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(* International Auditing and Assurance Standards Board [IAASB] - February 2009)
Negative assurance
Negative assurance is when an auditor gives an assurance that nothing has come to his attention which
indicates that the financial statements have not been prepared according to the framework. In other words,
he or she gives their assurance in the absence of any evidence to the contrary.
Negative confirmation request*
A request that the confirming party respond directly to the auditor only if the confirming party disagrees with
the information provided in the request.
Network*
A larger structure:
(a) That is aimed at cooperation, and
(b) That is clearly aimed at profit or cost-sharing or shares common ownership, control or management,
common quality control policies and procedures, common business strategy, the use of a common brand
name, or a significant part of professional resources.
Network firm*
A firm or entity that belongs to a network.
Non-compliance (in the context of ISA 250)*
Acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the
prevailing laws or regulations. Such acts include transactions entered into by, or in the name of, the entity,
or on its behalf, by those charged with governance, management or employees. Non-compliance does not
include personal misconduct (unrelated to the business activities of the entity) by those charged with
governance, management or employees of the entity.
Non-response*
A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a
confirmation request returned undelivered.
Non-sampling risk*
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.
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Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others to override
professional or business judgments.
Observation*
Consists of looking at a process or procedure being performed by others, for example, the auditor’s
observation of inventory counting by the entity’s personnel, or of the performance of control activities.
Opening balances*
Those account balances that exist at the beginning of the period. Opening balances are based upon the
closing balances of the prior period and reflect the effects of transactions and events of prior periods and
accounting policies applied in the prior period. Opening balances also include matters requiring disclosure
that existed at the beginning of the period, such as contingencies and commitments.
Other information*
Financial and non-financial information (other than the financial statements and the auditor’s report thereon)
which is included, either by law, regulation, or custom, in a document containing audited financial statements
and the auditor’s report thereon.
Other Matter paragraph*
A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in
the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
Outcome of an accounting estimate*
The actual monetary amount which results from the resolution of the underlying transaction(s), event(s) or
condition(s) addressed by the accounting estimate.
Overall audit strategy*
Sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.
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Partner*
Any individual with authority to bind the firm with respect to the performance of a professional services
engagement.
Peer review
Peer review is a process of self-regulation by a profession involving qualified individuals within the relevant
field, such as qualified auditors reviewing the work of other auditors. Peer review methods are employed to
maintain standards, improve performance and provide credibility.
Performance materiality*
The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to
reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the financial statements as a whole. If applicable, performance
materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels
for particular classes of transactions, account balances or disclosures.
Perpetual inventory
In business and accounting/accountancy, perpetual inventory (or continuous inventory) describes systems of
inventory where information on inventory quantity and availability is updated on a continuous basis as a
function of doing business. Generally this is accomplished by connecting the inventory system with order
entry and in retail the point of sale system.
Personnel*
Partners and staff.
Persuasive
Having the power or ability to persuade or convince.
Pervasive*
A term used, in the context of misstatements, to describe the effects on the financial statements of
misstatements or the possible effects on the financial statements of misstatements, if any, that are
undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the
financial statements are those that, in the auditor’s judgment:
(a) Are not confined to specific elements, accounts or items of the financial statements;
(b) If so confined, represent or could represent a substantial proportion of the financial statements; or
(c) In relation to disclosures, are fundamental to users’ understanding of the financial statements.
Population*
The entire set of data from which a sample is selected and about which the auditor wishes to draw
conclusions.
Positive confirmation request*
A request that the confirming party respond directly to the auditor indicating whether the confirming party
agrees or disagrees with the information in the request, or providing the requested information.
Practitioner*
A professional accountant in public practice.
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Preconditions for an audit*
The use by management of an acceptable financial reporting framework in the preparation of the financial
statements and the agreement of management and, where appropriate, those charged with governance to
the premise on which an audit is conducted.
Predecessor auditor*
The auditor from a different audit firm, who audited the financial statements of an entity in the prior period and
who has been replaced by the current auditor.
Premise, relating to the responsibilities of management and, where appropriate, those charged with
governance, on which an audit is conducted*
That management and, where appropriate, those charged with governance have acknowledged and
understand that they have the following responsibilities that are fundamental to the conduct of an
audit in accordance with ISAs. That is, responsibility:
(a) For the preparation of the financial statements in accordance with the applicable financial reporting
framework, including where relevant their fair presentation;
(b) For such internal control as management and, where appropriate, those charged with governance
determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error; and
(c) To provide the auditor with:
(i)
Access to all information of which management and, where appropriate, those charged with
governance are aware that is relevant to the preparation of the financial statements such as
records, documentation and other matters;
(ii) Additional information that the auditor may request from management and, where appropriate,
those charged with governance for the purpose of the audit; and
(iii) Unrestricted access to persons within the entity from whom the auditor determines it necessary to
obtain audit evidence.
In the case of a fair presentation framework, (a) above may be restated as “for the preparation and fair
presentation of the financial statements in accordance with the financial reporting framework,” or “for the
preparation of financial statements that give a true and fair view in accordance with the financial reporting
framework.” The “premise, relating to the responsibilities of management and, where appropriate, those
charged with governance, on which an audit is conducted” may also be referred to as the “premise.”
Principal
A principal is a person or entity who authorises an agent to act.
Principal-agency problem
The principal-agent problem (or agency dilemma) concerns the difficulties that arise when a principal
hires an agent, in a situation where the two may not have the same interests, and where the principal is,
presumably, hiring the agent to pursue the interests of the former.
Principal-agency Theory
Principal -agency relationships occur when one party, the principal, employs another, the agent, to perform a
task on their behalf.
Professional accountant*
An individual who is a member of an IFAC member body.
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Professional accountant in public practice*
A professional accountant, irrespective of functional classification (for example, audit, tax or consulting) in a
firm that provides professional services. This term is also used to refer to a firm of professional
accountants in public practice.
Professional Behaviour
A professional accountant should comply with relevant laws and regulations and should avoid any action that
discredits the profession.
Professional Competence and Due Care
A professional accountant has a continuing duty to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent professional service based on current
developments in practice, legislation and techniques. A professional accountant should act diligently and in
accordance with applicable technical and professional standards when providing professional services.
Professional judgment*
The application of relevant training, knowledge and experience, within the context provided by auditing,
accounting and ethical standards, in making informed decisions about the courses of action that are
appropriate in the circumstances of the audit engagement.
Professional skepticism*
An attitude that includes a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of evidence.
Professional standards*
International Standards on Auditing (ISAs) and relevant ethical requirements.
Professional standards (in the context of ISQC 1). IAASB Engagement Standards, as defined in the
IAASB’s Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance
and Related Services, and relevant ethical requirements.
Projection*
Prospective financial information prepared on the basis of:
(a) Hypothetical assumptions about future events and management actions which are not necessarily
expected to take place, such as when some entities are in a start-up phase or are considering a major
change in the nature of operations; or
(b) A mixture of best-estimate and hypothetical assumptions.
Prospective financial information*
Financial information based on assumptions about events that may occur in the future and possible actions
by an entity. Prospective financial information can be in the form of a forecast, a projection or a combination
of both. (see Forecast* and Projection – on this screen*)
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Prove
To test the genuineness of, such as to re-calculate totals to ascertain their correctness.
Public sector*
National governments, regional (for example, state, provincial, territorial) governments, local (for example,
city, town) governments and related governmental entities (for example, agencies, boards, commissions and
enterprises).
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Qualified opinion
A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed
but that the effect of any disagreement with management, or limitation of scope, is not so material and
pervasive as to require an adverse opinion or a disclaimer of opinion.
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Random selection
Simple random selection is a method of selection used in sampling in which every item in a population has the same
statistical probability of being selected as every other item.
Read
To interpret facts, such as to read minutes of directors’ meetings, etc.
Reasonable assurance (in the context of assurance engagements, including audit engagements, and
quality control)*
A high, but not absolute, level of assurance. (Note: assurance is ‘confidence’)
Reasonable assurance engagement*
(see Assurance engagement*)
Recalculation*
Consists of checking the mathematical accuracy of documents or records.
Reconcile
To prove consistency, such as to test that cash balances, or accounts receivables balances are consistent
with the facts.
Related party*
A party that is either:
(a) A related party as defined in the applicable financial reporting framework; or
(b) Where the applicable financial reporting framework establishes minimal or no related party
requirements:
(i)
A person or other entity that has control or significant influence, directly or indirectly through one or
more intermediaries, over the reporting entity;
(ii) Another entity over which the reporting entity has control or significant influence, directly or
indirectly through one or more intermediaries; or
(iii) Another entity that is under common control with the reporting entity through having:
a.
b.
c.
Common controlling ownership;
Owners who are close family members; or
Common key management.
However, entities that are under common control by a state (that is, a national, regional or local government)
are not considered related unless they engage in significant transactions or share resources to a significant
extent with one another.
Related services*
Comprise agreed-upon procedures and compilations.
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Relevant ethical requirements*
Ethical requirements to which the engagement team and engagement quality control reviewer are subject,
which ordinarily comprise Parts A and B of the International Federation of Accountants’ Code of Ethics for
Professional Accountants (IFAC Code) together with national requirements that are more restrictive.
Reliance approach to auditing
The reliance approach is based on the convention that when control testing uncovers a strong control system
(control detection risk is low) then because audit risk is low, substantive testing can be reduced.
Re-performance*
The auditor’s independent execution of procedures or controls that were originally performed as part of the
entity’s internal controls.
Report on the description and design of controls at a service organisation (referred to in ISA 402
as a type 1 report)*
A report that comprises:
(a) A description, prepared by management of the service organisation, of the service organisation’s
system, control objectives and related controls that have been designed and implemented as at a
specified date; and
(b) A report by the service auditor with the objective of conveying reasonable assurance that includes the
service auditor’s opinion on the description of the service organisation’s system, control objectives and
related controls and the suitability of the design of the controls to achieve the specified control
objectives.
Report on the description, design, and operating effectiveness of controls at a service organisation
(referred to in ISA 402 as a type 2 report)*
A report that comprises:
(a) A description, prepared by management of the service organisation, of the service organisation’s
system, control objectives and related controls, their design and implementation as at a specified date or
throughout a specified period and, in some cases, their operating effectiveness throughout a specified
period; and
(b) A report by the service auditor with the objective of conveying reasonable assurance that includes:
(i)
The service auditor’s opinion on the description of the service organisation’s system, control
objectives and related controls, the suitability of the design of the controls to achieve the specified
control objectives, and the operating effectiveness of the controls; and
(ii) A description of the service auditor’s tests of the controls and the results thereof.
Representation
A presentation of facts, view or argument. For example a company’s financial statements , which are the
responsibility of the company’s management, would constitute management representation.
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Responsible party*
The person (or persons) who:
(a) In a direct reporting engagement, is responsible for the subject matter (often the client’s management);
or
(b) In an assertion-based engagement, is responsible for the subject matter information (the assertion), and
may be responsible for the subject matter.
The responsible party may or may not be the party who engages the practitioner (the engaging party).
Review (in relation to evidence)
An inspection of, such as the inspection of disclosures, legal documents, etc.
Review (in relation to quality control)*
Appraising the quality of the work performed and conclusions reached by others.
Review engagement*
The objective of a review engagement is to enable an auditor to state whether, on the basis of procedures
which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s
attention that causes the auditor to believe that the financial statements are not prepared, in all material
respects, in accordance with an applicable financial reporting framework.
Review procedures*
The procedures deemed necessary to meet the objective of a review engagement, primarily enquiries of
entity personnel and analytical procedures applied to financial data.
Risk assessment procedures*
The audit procedures performed to obtain an understanding of the entity and its environment, including the
entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels.
Risk based auditing
Risk based auditing is based on the theory that the assessed level of audit risk will have a direct impact on:
(i) the way the audit is conducted, and
(ii) what constitutes sufficient appropriate evidence.
Risk of material misstatement*
The risk that the financial statements are materially misstated prior to audit. This consists of two
components, described as follows at the assertion level:
(a) Inherent risk
The susceptibility of an assertion about a class of transaction, account balance or disclosure to a
misstatement that could be material, either individually or when aggregated with other
misstatements, before consideration of any related controls.
(b) Control risk
The risk that a misstatement that could occur in an assertion about a class of transaction, account
balance or disclosure and that could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal
control.
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Sampling*
(see Audit sampling*)
Sampling risk*
The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire
population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous
conclusions:
(a) In the case of a test of controls, that controls are more effective than they actually are, or in the case of a
test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily
concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely
to lead to an inappropriate audit opinion.
(b) In the case of a test of controls, that controls are less effective than they actually are, or in the case of a
test of details, that a material misstatement exists when in fact it does not. This type of erroneous
conclusion affects audit efficiency as it would usually lead to additional work to establish that initial
conclusions were incorrect.
Sampling unit*
The individual items constituting a population.
Scan
To examine critically, for example to study a set of data to specifically identify unusual items.
skepticism
skepticism relates to the doctrine that no facts can be certainly known. A sceptic is someone who has doubts
or tends to disbelieve.
Scope of a review*
The review procedures deemed necessary in the circumstances to achieve the objective of the review.
Securities
Financing or investment instruments (some negotiable, others not) bought and sold in financial markets, such
as bonds, debentures, notes, options, shares (stocks), and warrants.
Service auditor*
An auditor who, at the request of the service organisation, provides an assurance report on the controls of a
service organisation.
Service organisation*
A third-party organisation (or segment of a third-party organisation) that provides services to user entities that
are part of those entities’ information systems relevant to financial reporting.
Service organisation’s system*
The policies and procedures designed, implemented and maintained by the service organisation to provide
user entities with the services covered by the service auditor’s report.
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Side agreement
A side agreement (or side letter) is a collective agreement that is not part of the underlying or primary
collective bargaining agreement (CBA), and which the parties to the contract utilise to (i) reach agreement on
issues the CBA does not cover, (ii) to clarify issues in the CBA, or (iii) to modify the CBA (permanently or
temporarily).
Significance*
The relative importance of a matter, taken in context. The significance of a matter is judged by the
practitioner in the context in which it is being considered. This might include, for example, the reasonable
prospect of its changing or influencing the decisions of intended users of the practitioner’s report; or, as
another example, where the context is a judgment about whether to report a matter to those charged with
governance, whether the matter would be regarded as important by them in relation to their duties.
Significance can be considered in the context of quantitative and qualitative factors, such as relative
magnitude, the nature and effect on the subject matter and the expressed interests of intended users or
recipients.
Significant component*
A component identified by the group engagement team (i) that is of individual financial significance to the
group, or (ii) that, due to its specific nature or circumstances, is likely to include significant risks of material
misstatement of the group financial statements.
Significant deficiency in internal control*
A deficiency or combination of deficiencies in internal control that, in the auditor’s professional judgment, is of
sufficient importance to merit the attention of those charged with governance.
Significant risk*
An identified and assessed risk of material misstatement that, in the auditor’s judgment, requires special audit
consideration.
Smaller entity*
An entity which typically possesses qualitative characteristics such as:
(a) Concentration of ownership and management in a small number of individuals (often a single individual –
either a natural person or another enterprise that owns the entity provided the owner exhibits the
relevant qualitative characteristics); and
(b) One or more of the following:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Straightforward or uncomplicated transactions;
Simple record-keeping;
Few lines of business and few products within business lines;
Few internal controls;
Few levels of management with responsibility for a broad range of controls; or
Few personnel, many having a wide range of duties.
These qualitative characteristics are not exhaustive, they are not exclusive to smaller entities, and smaller
entities do not necessarily display all of these characteristics.
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Special purpose financial statements*
Financial statements prepared in accordance with a special purpose framework.
Special purpose framework*
A financial reporting framework designed to meet the financial information needs of specific users. The
financial reporting framework may be a fair presentation framework or a compliance framework.
Staff*
Professionals, other than partners, including any experts the firm employs.
Statistical sampling*
An approach to sampling that has the following characteristics:
(a) Random selection of the sample items; and
(b) The use of probability theory to evaluate sample results, including measurement of sampling risk.
A sampling approach that does not have characteristics (a) and (b) is considered non-statistical sampling.
Stratification*
The process of dividing a population into sub-populations, each of which is a group of sampling units which
have similar characteristics (often monetary value).
Subject matter
In an assurance engagement (such as an audit), the subject matter is the topic about which the assurance is
conducted. Subject matter could be financial statements, non-financial indicators, an internal control process
or statistical information.
Subject matter information*
The outcome of the evaluation or measurement of a subject matter. It is the subject matter information about
which the practitioner gathers sufficient appropriate evidence to provide a reasonable basis for expressing a
conclusion in an assurance report.
Subsequent events*
Events occurring between the date of the financial statements and the date of the auditor’s report, and facts
that become known to the auditor after the date of the auditor’s report.
Sub-service organisation*
A service organisation used by another service organisation to perform some of the services provided to user
entities that are part of those user entities’ information systems relevant to financial reporting.
Substantive procedure*
An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures
comprise:
(a) Tests of details (of classes of transactions, account balances, and disclosures); and
(b) Substantive analytical procedures.
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Sufficiency (of audit evidence)*
The measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the
auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.
Suitable criteria*
(see Criteria*)
Suitably qualified external person*
An individual outside the firm with the competence and capabilities to act as an engagement partner, for
example a partner of another firm, or an employee (with appropriate experience) of either a professional
accountancy body whose members may perform audits and reviews of historical financial information, or
other assurance or related services engagements, or of an organisation that provides relevant quality control
services.
Summary financial statements (in the context of ISA 810)*
Historical financial information that is derived from financial statements but that contains less detail than the
financial statements, while still providing a structured representation consistent with that provided by the
financial statements of the entity’s economic resources or obligations at a point in time or the changes therein
for a period of time. Different jurisdictions may use different terminology to describe such historical financial
information.
Supplementary information*
Information that is presented together with the financial statements that is not required by the applicable
financial reporting framework used to prepare the financial statements, normally presented in either
supplementary schedules or as additional notes.
Systematic selection
The systematic selection method used in sampling where the auditor calculates a uniform sampling interval
by dividing the population by the sample size.
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Teeming and lading
Teeming and lading (or ‘lapping’) is an embezzlement scheme in which cash collections from customers are
stolen and the shortage is concealed by delaying the recording of subsequent cash receipts. It involves the
offsetting of one debtor’s cash received against another debtor’s account to cover up a misappropriation of
the first debtor’s cash received.
Test*
The application of procedures to some or all items in a population.
Tests of controls*
An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting
and correcting, material misstatements at the assertion level.
Those charged with governance*
The person(s) or organisation(s) (for example, a corporate trustee) with responsibility for overseeing the
strategic direction of the entity and obligations related to the accountability of the entity. This includes
overseeing the financial reporting process. For some entities in some jurisdictions, those charged with
governance may include management personnel, for example, executive members of a governance board of
a private or public sector entity, or an owner-manager.
Tolerable misstatement*
A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of
assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the
population.
Total rate of deviation*
A rate of deviation from prescribed internal control procedures set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not
exceeded by the actual rate of deviation in the population.
Tracing
Checking from supporting document to recorded entry.
True and fair
True and fair has become a term of art. It is generally understood to mean a presentation of accounts drawn
up according to accepted accounting principles using accurate figures as far as possible and reasonable
estimates otherwise, and arranging them so as to show within the limits of current accounting practice as
objective a picture as possible free from wilful bias, distortion, manipulation or concealment of material facts.’
(Lee)
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Unadjusted error worksheet
An unadjusted error worksheet is adjusting proposed entries with accompanying justifications suggested by
the auditor and required by management to bring the account balance on the company financial statements in
line with the audited account balance.
Uncertainty*
A matter whose outcome depends on future actions or events not under the direct control of the entity but that
may affect the financial statements.
Uncorrected misstatements*
Misstatements that the auditor has accumulated during the audit and that have not been corrected.
Unmodified opinion*
The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared,
in all material respects, in accordance with the applicable financial reporting framework.
Unqualified opinion
An audit opinion expressed when the auditor concludes that the financial statements give a true and fair view
(or are presented fairly, in all material respects) ) in accordance with the identified financial reporting
framework.
User
The individual or individuals who are going to use the subject matter for some advantageous purpose, for
example a company’s shareholders who are going to use the company’s financial statements to make
investment decisions.
User auditor*
An auditor who audits and reports on the financial statements of a user entity.
User entity*
An entity that uses a service organisation and whose financial statements are being audited.
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Variable sampling
Variables sampling is concerned with sampling units which can take a value within a continuous range of
possible values and is used to provide conclusions as to the monetary value of a population. It can test either
whether a certain statement is true or false or give an estimate of the true value of a population.
Vouching
Checking from recorded entry to supporting document.
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Walk-through test*
Involves tracing a few transactions through the financial reporting system.
Whistleblower
A whistleblower is a person who publicly alleges concealed misconduct on the part of an organisation or body
of people, usually from within that same organisation. This misconduct may be classified in many ways; for
example, a violation of a law, rule, regulation and/or a direct threat to public interest, such as fraud,
health/safety violations, and corruption. Whistleblowers may make their allegations internally (for example, to
other people within the accused organisation) or externally (to law enforcement agencies, to the media or to
groups concerned with the issues).
Written resolution
A resolution is a written motion adopted by a deliberative body (an organisation, committee or meeting,
comprising members) who use parliamentary procedure (a body of rules, ethics, and customs governing
meetings) for making decisions. The substance of the resolution can be anything that can normally be
proposed as a motion. For long or important motions, though, it is often better to have them written out so that
discussion is easier or so that it can be distributed outside of the body after its adoption.
Written representation*
A written statement by management provided to the auditor to confirm certain matters or to support other
audit evidence. Written representations in this context do not include financial statements, the assertions
therein, or supporting books and records.
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