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ACCA F8 Audit & Assurance [INT]

Sample Study Note

For exams in DEC2014

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Lesco Group Limited, April 2015

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise, without the prior written

permission of Lesco Group Limited.

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Sample Note Content:

Main study note content [Total Pages: 189] ...................................................... 4

Product Summary .............................................. Error! Bookmark not defined.

Live online note sample plan ............................... Error! Bookmark not defined.

Audit Process: Stage 1 .................................................................................. 13

Example of audit working paper: .................................................................... 18

Stage2 Planning the Audit ............................................................................. 20

Please note:

This is just the sample study note extracted from the main study note in your tuition study

[This tuition study note is consistent in basic/super/gold package]. There would be more

chapters in the main study note covering the whole ACCA syllabus.

You can also take a look at the content within the main study note below:

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Main study note content [Total Pages: 189]

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Product Summary

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Live online course timetable

Timetable: [Super+Gold package-additional revision would

be agreed between tutor and student]

Live Online Revision

Live revision1 Live revision2

F5 Performance management 25th Oct 7:00a.m.-14:00 22nd Nov 6:00a.m.-13:00

F7 Financial Reporting (INT) 2nd Nov 6:00a.m.-13:00 29th Nov 6:00a.m.-13:00

F8 Audit and Assurance (INT) 18th Oct 7:00a.m.-14:00 19th Oct 7:00a.m.-14:00

F9 Financial Management 4th Oct 7:00a.m.-14:00 5th Oct 7:00a.m.-14:00

P1 Governance, Risk and

Ethics 1st Nov 6:00a.m.-13:00 30th Nov 6:00a.m.-13:00

P2 Corporate Reporting (INT) 26th Oct 7:00a.m.-14:00 9th Nov 6:00a.m.-13:00

P3 Business Analysis 11th Oct 7:00a.m.-14:00 12th Oct 7:00a.m.-14:00

P4 Advanced Financial

Management 8th Nov 6:00a.m.-13:00 23rd Nov 6:00a.m.-13:00

P5 Advanced Performance

management 15th Nov 6:00a.m.-13:00 16th Nov 6:00a.m.-13:00

P7 Advanced Audit and

Assurance (INT) 27th Sept 7:00a.m.-14:00 28th Sept 7:00a.m.-14:00

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Last minute revision

Last minute revision Tutor

F5 Performance management 28th Nov 12:00-14:00 Ian

F7 Financial Reporting (INT) 1st Dec 12:00-14:00 Steve

F8 Audit and Assurance (INT) 22nd Nov 14:30-16:30 Alan

F9 Financial Management 22nd Oct 12:00-14:00 Steve

P1 Governance, Risk and Ethics 30th Nov 13:30-15:30 Alan

P2 Corporate Reporting (INT) 16th Nov 14:00-18:00(4hrs) Kieran

P3 Business Analysis 18th Oct 14:30-16:30 Alan

P4 Advanced Financial Management 19th Nov 12:00-14:00 Steve

P5 Advanced Performance management 21st Nov 12:00-14:00 Ian Janes

P7 Advanced Audit and Assurance (INT) 23rd Nov 13:30-15:30 Alan

*Please Note: This Timetable may be subjected to future changes. Kindly check regularly for any possible updates.

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Audit Process: Stage 1 1,Ethics

5 principles by ACCA Code of Ethics

1. Professional behavior

Accountants must comply with all relevant laws and regulations.

There is also a test whereby actions suggested by a third party which would

bring discredit to the profession should also be avoided.

An accountant is required to treat all people contacted in a professional capacity

with courtesy and consideration. Similarly, any marketing activities should not bring

the profession into disrepute.

2. Integrity

Integrity implies fair dealing and truthfulness.

Members cant lie to others by preparing a material misstated statement or mislead

others by window dress the financial statement.

3. Competence and due care

Pass exams + accumulate experience + stick to standards when doing the work.

4. Confidentiality

Accountants cant disclose confidential information of client to 3rd party without

approval.

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If client is involved in illegal activities like money laundering then accountant is able

to disclose this to 3rd party.

5. Objectivity

When preparing the financial statement, accountant should only focus on standards

not other factors like personal bias, conflict of interest, or the undue influence of

others.

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Ethical threat to objectivity

Self interest threat:

The threat that a financial or other interest (eg concern about job security) will

inappropriately influence the professional accountants judgement or behaviour. In

other words, this relates to the threat of a conflict of interest.

Self review threat:

The threat that a professional accountant will not appropriately evaluate the

results of a previous judgement made by themselves, or by another individual

within their organisation, but will rely on that judgement as part of a service they

are currently providing.

Advocacy threat:

It occurs if a professional accountant is promoting a client or employers position or

opinion to the extent that the accountants subsequent objectivity is compromised.

Familiarity threat:

If the accountant develops too close a relationship with a client or employer (for

example, through length of service) the accountant could become too sympathetic

to the interestsof the client or employer such that their professional judgement

becomes compromised.

Intimidation threat:

When an accountant is deterred from acting objectively by actual or perceived

threats, including attempts to exercise undue influence over the accountant.

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Safeguards to ethical threats

Safeguards are actions of other measures designed to eliminate threats or reduce

them to an acceptable level.

There are two broad categories of safeguard:

(a) Safeguards created by the profession, legislation or regulation:

Education, training and experience requirements for entry into the profession Requirements for continuing professional development Corporate governance regulation Professional standards Professional monitoring and disciplinary procedures External review by a legally empowered third party (eg an auditor) of the reports,

returns and information produced by a professional accountant

(b) Safeguards in the work environment:

These include complaint systems within employing organisations which enable staff

to draw attention to unprofessional or unethical behaviour. For example,

whistleblowing procedures to help protect employees against threats.

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DEC2007 Q2(a) [Ethics]: 2 (a) Explain each of the FIVE fundamental principles of ACCAs Code of Ethics and

Conduct. (5 marks)

Answer to DEC2007 Q2(a) [Ethics]:

Professional behavior

A professional accountant should Should respect laws and regulations and not do anything

that could discredit the accountancy profession.

Integrity

A professional accountant should be honest in all business and professional relationships.

Competence and due care

When performing professional services, a professional accountant should show

competence(eg, passing exams and gaining qualifications) and keep up-to-date with

developments in related regulations as well as putting diligence into the work.

Confidentiality

A professional accountant should not use or disclose confidential information of the clients

entity to the 3rd party without obtaining client permission,eg, to competitors.

But if there is a legal or professional obligation to do so, eg, when client is involved in

money laundering issues, then the confidential information can be disclosed to the 3rd party,

ie, court.

Objectivity

A professional accountant should be fair and not allow personal bias, conflict of interest or

influence of others to override objectivity.

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Example of audit working paper:

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DEC2010 Q2 audit documentation

(c) ISA 230 Audit Documentation deals with the auditors responsibility to prepare audit

documentation for an audit of financial statements.

Required:

State FOUR benefits of documenting audit work. (4 marks)

Answer to DEC2010 Q2 audit documentation

It provides evidence of the auditors basis for a conclusion about the achievement of the overall objective of the audit.

It provides evidence that the audit was planned and performed in accordance with

ISAs.

It assists members of the engagement team responsible for supervision to direct,

supervise and review the audit work.

It can be used to train new coming auditors.

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Stage2 Planning the Audit

Audit strategy:

Audit strategy sets out the scope, timing, nature and direction of the audit and it

tells auditor which audit approach should be used, ie, system based or full

substantive approach and how the recourses would be allocated.

Within direction of audit, it requires auditors firstly understand clients

business(ISA315 Identifying and Assessing the Risks of Material Misstatement

through Understanding the Entity and Its Environment) and then deal with

preliminary materiality and performance materiality issues.

ISA 315

Aspects that auditors need to understand:

Internal control system Auditors should understand clients internal control system because weaknesses in

the internal control system will result in potential material misstatement in the

financial statement. For example a failure to reconcile bank statement and cash

book regularly will result in bank balances within financial statement being

misstated.

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Typical control activities would include:

Comparison Comparing the budgeted company performance with the actual one.

Authorisation There would be authorization of transaction by management to ensure transaction

is genuine.

Reconciliations Bank reconciliation should be done to identify any difference and investigate

reasons why.

Computer Controls Password should be set to protect the access of the system by others.

Arithmetical There should be controls which check the arithmetical accuracy of accounting

records.

Physical There should be restricting access to physical assets such as cash to reduce the risk

of theft.

External factors Auditors should understand clients external factors because this would impact on

the overall financial statements. For example if a new law and regulation have been

passed then clients existing activities may not comply with new laws and

regulations and so penalty will need to be paid by client so client might ignore this

and as a result a failure to provide for a provision according to IAS37 in its financial

statement resulting in understatement of expenses and liability.

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Company structure and its accounting policy Auditors should understand client companys structure and its accounting policy

because if the structure is very complicated then when trying to consolidate the

group there would be risks of material misstatement exists, ie, inaccurate

calculation of goodwill.

Also auditors should understand its accounting policy and ensure they are

consistent with the applicable financial reporting framework

Performance measurement Auditors should understand cleints performance measurement because this would

have an impact on the financial statement whether to be misstated. For example if

a manager of company is measured based on profit before tax and then manager

may have an incentive to overstate this figure in order to get more bonuses and as

a result a misstatement exist in this figure.

Business strategy, business plan and its related business risks The business strategy, plan and risk would have an impact on companys financial

statement whether or not it will be misstated.

For example there is a business risk that business strategy and plan would fail

leading to decrease in shareholders wealth and as a result management may have

an incentive to overstate eg, profit within company to make its figure look better

and as a result a misstatement in the profit figure.

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Ways that auditors use to understand clients business: [AEIOU]

Analytical procedure

Auditors should perform analytical procedures to compare financial information with

non-financial information to identify any unexpected trend between the two, eg,

comparing revenue growth from last year to this year with economic recession to

identify any unexpected trend.

Enquiry

Auditors should enquire with management about the internal control system

comment of the company.

Inspection

Auditors should inspect managements business strategy and plan to identify any

business risks exist.

Observation

Auditors should physically observe the internal control operations to verify they are

not just paper work.

Recalculation

Auditors should recalculate figures in the financial statement to verify its accuracy.

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Audit Plan:

Audit plan sets out the risk assessment, materiality and potential audit procedures

to be used in stage4 of audit.

Risk equation:

The risk assessment is based on risk equation:

Audit risk=Risks of material misstatement X Detection risk

Inherent risk This is a risk happened in the first place.

Eg: if the balance is very complicated then accountants would easily make a

mistake. / change in industry

Control risk This is a risk that errors cant be detected by internal control system.

Eg: no segregation of duties between accountant and cashier leading to cash being

stolen.

Detection risk This is a risk that errors cant be detected by auditors.

Eg: auditor lacks of experience to deal with the issue and cant spot the mistake.

Potential audit procedures: [Actions+ Doc+ Assertions]

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DEC2009 Q3(a) Understand the environment of Client:

ISA 315 (Redrafted) Identifying and Assessing the Risks of Material Misstatement Through

Understanding the Entity and Its Environment requires auditors to obtain an understanding

of the entity and its environment, including its internal control.

Required:

(a) Explain why obtaining an understanding of the entity and its environment is

important for the auditor. (4 marks)

Answer to DEC2009 Q3(a) Understand the environment of Client:

1, By doing that, they can identify and assess the risks of material misstatements within the

FS and to decide whether to use a system based approach to audit(control testing +a little

substantive testing) or use full substantive testing.

2, By doing that, it can then help auditors design and implement audit procedures to reduce

those assessed risks.

3, By doing that, it can help auditors assess the adequacy of the accounting system as a

basis for preparing financial statements

4, By doing that, it can help auditors consider whether they are competent to do the audit

for the client, eg, if the client is going to go listed then are there enough resources for

auditor to conduct the audit service?