f8 Practice & Revision Notes 2014-15

ACCA Audit and Assurance Paper F8 Practice & Revision Notes ISBN: 9781472764669

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Con ten ts

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Introduction

How to use the Practice & Revision material 4

The examination paper and syllabus aims 5

Analysis of past papers 6

Skills bank 11

Knowledge bank 23

Appendices 81

INTRODUCTION

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Introduction How to use the Practice & Revision material

Learn Until now you have been introduced to the core skills needed to pass this paper. You must now focus on developing these new skills to address the ultimate test – the exam itself.

Practise Your revision course material will help you to apply this knowledge to the context of the exam-style questions. Using real exam questions written by the examiner you’ll learn the unique exam skills required to achieve success in each paper. Your revision material consists of:

Skills bank (in these notes) This illustrates the main skills needed to pass this paper. We will teach you how to: – Use your reading time effectively – Analyse the question’s requirements – Manage your time – Produce well-constructed numerical and discussion answers – Produce tailored answers that are relevant to the specifics of the question

Knowledge bank (in these notes) During the Step 1 phase of your studies (Learning phase) you have already gained the knowledge required to pass the exam. During this phase reinforcement of this knowledge is critical. To help this reinforcement you will find that the same diagrams contained in your taught course notes are used here with additional information added if we feel it is necessary. If you feel that your knowledge level is weak at the Step 2 phase we recommend you purchase the i-Learn CD from BPP Learning Media.

Question and answer bank The Practice & Revision Kit contains: – Questions that will be covered in class – Questions you will do during home study following guidance provided by your tutor – Additional questions for further practice

Rehearse All your skills need to be applied on the day of the exam to deal with a complete exam paper. This can be developed through use of mock exams within the Practice & Revision Kit, attending a question day at BPP where a final mock exam is sat in full and feedback provided, or through purchasing a mock exam and online debrief. Please see our website for further details www.bpp.com.

Step 3

Step 2

Step 1

INTRODUCTION

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The examination paper and syllabus aims

The examination paper The examination is a three hour paper with 15 minutes reading and planning time. All questions are compulsory. Some questions will adopt a scenario/case study approach. All questions will require some form of written response although questions on planning or review may require the calculation and interpretation of some basic ratios.

Format of the Exam Marks

Section A Comprises 8 two mark and 4 one mark multiple choice questions. 20 Section B Comprises:

Four 10 mark questions. These will tend to test one of the five syllabus areas of the Study Guide (A, B, C, D or E) Two 20 mark questions. The 20 mark questions will predominantly examine one or more aspects of audit and assurance from planning and risk assessment, internal control or audit evidence, although topics from other syllabus areas may also be included.

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Time pressure warning

Section A

Section B

Aims The syllabus aims to test the student’s ability to:

A Explain the concept of audit and assurance and the functions of audit, corporate governance, including ethics and professional conduct, describing the scope and distinguishing between the functions of internal and external audit.

B Demonstrate how the auditor obtains and accepts audit engagements, obtains an understanding of the entity and its environment, assesses the risk of material misstatement (whether arising from fraud or other irregularities) and plans an audit of financial statements.

C Describe and evaluate internal controls, techniques and audit tests, including IT systems to identify and communicate control risks and their potential consequences, making appropriate recommendations.

D Identify and describe the work and evidence obtained by the auditor and others required to meet the objectives of audit engagements and the application of the International Standards on Auditing.

E Explain how consideration of subsequent events and the going concern principle can inform the conclusions from audit work and are reflected in different types of audit report, written representations and the final review and report.

100% Discussion

10% Knowledge 90% Application

INTRODUCTION

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Analysis of past papers Below provides an overview of the syllabus and details of when each element has have been examined. Further details are included in the relevant chapter of the knowledge bank. Specimen Paper

Audit framework and regulation The concept of audit and other assurance engagements A Q7 External audits Corporate governance Professional ethics and ACCA's Code of Ethics and Conduct A Q5

B Q1a Internal audit and governance and the differences between external and internal audit B Q1b The scope of the internal audit function, outsourcing and internal audit assignments A Q3

Planning and risk assessment Obtaining and accepting audit engagements Objective and general principles Assessing audit risks A Q10

B Q5a Understanding the entity and its environment Fraud, laws and regulations Audit planning and documentation A Q6

Internal control Internal control systems A Q4

A Q12 The use and evaluation of internal control systems by auditors Tests of control B Q6a Communication on internal control

Audit evidence Financial statement assertions and audit evidence A Q2

B Q4a Audit procedures B Q2a Audit sampling and other means of testing A Q1 The audit of specific items B Q2b

B Q4b B Q6b

Computer-assisted audit techniques The work of others A Q8 Not-for-profit organisations

INTRODUCTION

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Specimen Paper

Review and reporting Subsequent events A Q11 Going concern B Q5b Written representations Audit finalisation and the final review B Q3a Audit reports A Q9

B Q3b

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Skills bank

This section explains and demonstrates the key skills required to enable you to maximise your chance of

exam success. Knowledge of the syllabus is insufficient on its own. Through question practice you will develop a

set of skills that will enable you to pass this paper.

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SKILLS BANK

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Key skills required to pass Our analysis of the examiner’s comments on past exams, together with our experience of preparing students for this type of exam, suggests that to pass F8 Audit and Assurance you will need to develop a number of key skills.

Each of these key skills is analysed on the following pages, with example(s) from past exam questions of the importance of these skills and how these skills should be applied.

1 Effective use of the 15 minutes reading time at the start of the exam

2 Quick and accurate analysis of a question’s requirements

3 Disciplined time management to ensure that all parts of the question are answered in the time allowed

5 Producing a tailored answer to the scenario in the exam question

4 Tackling multiple choice questions

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Skill 1 – Effective use of the 15 minutes reading time at the start of the exam

1 Take some time to plan the order in which you will attempt the questions All of the questions in this paper are compulsory so there is no choice to make in terms of which questions you will attempt, but you should give some thought to the order in which you should attempt them.

Section A comprises multiple choice questions so you would be better to spend your reading time concentrating on the longer questions in Section B. Focus particularly on questions which include a scenario. The scenarios are likely to contain some detailed narrative about a client company and its systems or it may also include some numerical information. To answer these types of questions successfully you will need to use the information in the scenario so make sure you read the requirements and then spend your reading and planning time annotating key information from the scenario.

2 Reading scenario based questions

STEP

Read the requirements There is no point in wasting time reading through a long scenario before you have identified exactly what you have been asked to do! See key skill 2 for detailed guidance.

STEP

Focus on the longest requirements This will make sure that you concentrate on a manageable amount of the question on your first read through.

STEP

Read the question actively identifying data relevant to each requirement This will ensure that you are actively attacking the question, ie that you are trying to achieve something. This should involve highlighting points that are relevant to your answer and making brief notes in the margin. In many questions this will form the basis of an answer plan and mean that you do not have to re-read all of the highlighted points just to remind yourself why you thought they were important in the first place. In some scenarios, numerical information may be included, and you should use the reading and planning time to make relevant observations on this and in some cases calculate ratios that may be relevant to your answer.

For example, in the Specimen Paper, Q6 (a) had the following requirement:

(a) In respect of the internal control of Garcia International Co: (i) Identify and explain SIX deficiencies; (ii) Recommend a control to address each of these deficiencies; and (iii) Describe a test of control Suarez & Co would perform to assess if each of these controls is operating effectively.

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In reading the scenario, therefore, you have two aims:

Familiarise yourself with the deficiencies in the sales system set out in the scenario, and Think up appropriate internal controls which could address these deficiencies.

If you use this time to understand the scenario then you will have taken a big step towards another of the key skills that the examiner demands in this paper, the ability to produce an answer tailored to the scenario in the question (see skill 5).

By analysing the flow of information you will be able to suggest internal controls that are relevant to the specific deficiencies in the question.

Reading the scenario closely will prevent you falling into “traps” such as writing about substantive procedures when the question is clearly asking for tests of control.

Skills practice When you practice any of the scenario questions from the practice and revision kit you should give

yourself around 5 minutes reading and planning time to highlight and annotate the scenario ahead before you start writing your answer.

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Skill 2 – Quick and accurate analysis of a question's requirements

1 Be aware of the verbs used in exam questions You need to be aware of the meaning of the key verbs used by the examiner; these are reproduced in full in the BPP Practice & Revision Kit.

You don’t need to learn each term precisely but it is important that you appreciate the difference between them, for example, ‘explain’ means clarifying an issue or developing a point, whereas ‘state’ means list out the information/ factors or criteria without needing to give further explanation. Generally speaking the requirement to ‘explain’ will earn you 1 mark per point whereas the requirement to ‘state’ carries ½ a mark.

For example, here is an extract from Q1 (a) in the Specimen Paper:

EXPLAIN “(i)Explain the ethical threats which may affect the independence of

Remy & Co in respect of the audit of Hazard Co; and

(ii) For each threat explain how it might be reduced to an acceptable level.”

There were a number of threats to independence that could have been identified from the scenario but note the level of explanation required to gain full marks.

Rotation of audit partner

Remy’s partner has been involved in the audit of Hazard Co for six years.

This would have scored ½ mark for stating your point

Remy’s partner has been involved in the audit of Hazard Co for six years and as such her independence may be impaired. This is because she may have become too close to the directors and staff at the client and may not maintain her professional scepticism and objectivity in relation to the financial statements.

This would have scored 1 mark for explaining your

point

Hazard Co is a listed entity and as such the ACCA’s Code of Ethics and Conduct recommends that engagement partners rotate off an audit after five years. Consideration should be given to appointing an alternative audit partner.

This would have scored 1 mark for applying your point

to Hazard Co

Taking time to consider the exact wording of the requirement will result in a focused answer which satisfies the question set.

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2 Identify ALL the question’s requirements in your answer plan The question above also shows how the requirements of a question often contain a number of sub-requirements.

You need to make sure that these sub-requirements are clearly identified on the question paper by highlighting or underlining them so that your answer is comprehensive and addresses all parts of the requirement.

Failure to answer the whole question is often due to candidates forgetting to address these sub-requirements and is a key reason why people fail this paper.

Skills practice In each question you attempt you should spend a minute identifying the verb and planning what structure

your answer should have to ensure you really do “explain”, “discuss”, “recommend” etc.

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Skill 3 – Disciplined time management

Although the examining team have reduced the element of time pressure in this paper there is still a lot to do in the three hours!

The three hours that you are given to write your answers breaks down to 1.8 minutes for each available mark and you must stick to this closely.

Given the format of the exam, you know from the start that your time allocations will be as follows:

Marks Time allocation

Section A 20 36 minutes

Section B Question 1 10 18 minutes






You may find that the multiple choice questions in Section A do not take the whole 36 minutes however you should be careful not to rush through them in case you misread a requirement or answer a question that is different from the one which was set!

In Section B each question will be divided into a number of sub-requirements and it is important to identify how much time you should allocate to each of these. If you over-run by even a few minutes on several requirements on your way through the paper, you risk putting yourself in the position where you don’t have enough time to complete the paper.

Make sure you keep a careful check on timings as you plan your approach to each question. Note time allocations and stick to them. If you think you have more to say on a particular part, stop when you run out of time and leave some space in your answer booklet; there’s just a chance you may save time later in the question and will be able to add one or two extra points.

In this paper, time management skills overlap with the other key skills, if you

Make effective use of the reading time Accurately analyse the requirements, and Produce a tailored answer

you should find that it is possible to write good, pass standard answers that are concise, focused and relevant.

It really is true in this exam that, in general less (quantity!) is more (marks!)

Skills practice When you are practising questions, always work out the time allocations and get into the habit of writing

the answers, to time, just as you will have to do in the exam hall.

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Skill 4 – Tackling multiple choice questions

Section A is worth 20 marks and comprises 8 two mark and 4 one mark multiple choice questions.

Approaching Questions Logically

1 What to do if you know the answer to the question If you know the answer you should:

1. Locate the correct answer

2. Check the other answers

3. Read the question again to ensure you’re answering the correct question

4. Confirm that you have the correct answer

This systematic check will ensure that you do not throw away marks when you really do know the answer.

2 What to do if more than one answer appears plausible Sometimes more than one option can seem to answer the question. In this case you have to firstly ensure you’ve read the requirement carefully, as questions may be phrased in ways that are not what you’re expecting. If you still identify more than one likely option, select the “most correct” answer. The approach adopted above is useful here too but this time you have to think through the alternatives a bit more.

For example, Q9 on the Sample Paper states:

An emphasis of matter paragraph is used in an audit report to draw attention to a matter affecting the financial statements.

Which TWO of the following are correct in relation to an Emphasis of Matter Paragraph in the Auditor’s Report?

(1) It is used where there is significant uncertainty.

(2) It constitutes a qualified opinion.

(3) The audit report is referred to as an unmodified report.

(4) The matter is deemed to be fundamental to the users understanding of the financial statements.

A 1 and 2

B 1 and 4

C 1 and 3

D 2 and 4

This is testing your knowledge of audit reports. At first sight, it may be tricky to identify the correct answer as there are so many variations in the options.

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Here are some steps to follow:

STEP

Never Firstly, identify any answers that are immediately wrong. In this question, the key thing to think about how and when an emphasis of matter paragraph is used and the different ways in which an audit report can be modified.

Remember that an audit opinion is qualified either due to material misstatement or due to insufficient audit evidence when the degree of severity is deemed to be material but not pervasive. This means that statement (2) is not correct and so we can discard options A and D from the answers.

STEP

Assess the remaining answers We now need to consider statements (3) and (4) as this will differentiate answers B and C. For statement (3), the inclusion of an emphasis of matter paragraph in the auditor’s report DOES mean that the report is modified because it has been changed in some way. This means that statement (3) is not correct and so answer C cannot be correct. Finally we need to verify that statement (4) IS correct and this true because the emphasis of matter paragraph aims to bring significant issues to users’ attention so that they can fully understand the financial statements.

Having discarded answers A, C and D, we have arrived at answer B.

STEP

Read the question again… Finally, we should re-read the requirement before writing down our answer to ensure we are answering the correct question. The question could easily have asked: “Which TWO of the following are incorrect” which would have led us to a different answer!

This systematic approach helps you to break a question down and work through to find the correct answer logically.

3 What to do if you still don’t know the answer… If you have been through the above steps and can’t identify a preferred answer then you have to guess!

What you SHOULD NOT do

Two main things to avoid:

1. Waste excessive time – time spent dithering over a single question could leave you with insufficient time for the rest of the paper.

2. Not answering – this is a common yet serious error – even if you make a wild guess you start with a 25% chance of success. Your chance of getting the 2 marks if you don’t offer an answer is zero!

What you SHOULD do

Having used the three step approaches above to narrow down your possible answers, go with the one that feels right and move on.

If you have a flash of inspiration later in the exam go back and revisit it – but only if you are sure.

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Skills practice 1. Practice keeping track of the questions you have answered when doing questions from the

Practice and Revision Kit

2. Always check your answers through (if you would have time in the exam) before looking at the solutions in the back of the book

3. Practice as many multiple choice questions as possible.

4. If you don’t know the answer to a question – don’t just go to the answer at the back or just guess – use the three step approach described above.

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Skill 5 – Producing a tailored answer

1 Tailored points You are expected to apply your theoretical knowledge to the specifics of the question set in the exam. Often tailoring your answer involves keeping calm and trying to look for clues within the scenario and presenting your answer in an appropriate format.

2 Answer structure – general There are no questions in this exam that require lengthy essay-style answers. The overall principle is to communicate points clearly, but concisely – use headings and write in short paragraphs. Tabular answers Many styles of question in this paper can be answered most effectively using a tabular layout, and the examiner encourages this approach.

Q1 (a), Q5 (a) (ii) and Q6 (a) from the Specimen Paper can all be answered in a tabular format. We looked at Q1 (a) earlier in skill 2 and this answer could be presented in a tabular format as follows:

Ethical threats

Safeguards to reduce the threat

Remy’s partner has been involved in the audit of Hazard Co for six years and as such her independence may be impaired. This is because she may have become too close to the directors and staff at the client and may not maintain her professional scepticism and objectivity in relation to the financial statements.

Hazard Co is a listed entity and as such the ACCA’s Code of Ethics and Conduct recommends that engagement partners rotate off an audit after five years. Consideration should be given to appointing an alternative audit partner.

Matching each threat to the safeguard by using this structure means you can cut out all the 'linking' words

Use of headings helps keep you thinking about the requirements

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3 Writing for your audience Frequently in the exam you will be asked as an external auditor to produce a report or letter addressed to the directors of your client. Alternatively you could be asked to write a report to the Board as an internal auditor. It is important that your answer reflects your role and the addressee and that appropriate language is used.

For example:

Report Format

INTERNAL AUDIT REPORT

Sales system in X Co

Prepared By: A N Accountant Date: 10 June 20XX

Introduction Deficiency Implication Recommendation

Reports should be headed, name the preparer, and be dated.

Use subheadings. The 3-part structure used in the external audit report to management works equally well in the context of an internal audit report on system deficiencies. The tone of reports should always be professional and formal. They should be written in the third person. No slang or conversational language should be used. For example 'the implication of this deficiency if you were to sit on it would be….' Ideally you could present the deficiency, implication and recommendation in a tabular format as an appendix to the report/ letter.

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Skills practice When you attempt questions do not starting writing until you have thought out

an appropriate structure headings, and the number of points you are aiming to cover Always review your attempted answer and ensure that you have not included any general points without

relating them to specific points within the question.

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Knowledgebank

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Con ten ts

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1 The concept of audit and other assurance engagements 25

2 Statutory audit and regulation 27

3 Corporate governance 31

4 Professional ethics 33

5 Internal audit 35

6 Risk assessment 37

7 Audit planning and documentation 41

8 Introduction to audit evidence 43

9 Internal control 45

10 Tests of controls 49

11 Audit procedures and sampling 51

12 Non-current assets 55

13 Inventory 57

14 Receivables 61

15 Bank and cash 63

16 Liabilities, capital and directors’ emoluments 65

17 Not–for-profit organisations 67

18 Audit review and finalisation 69

19 Reports 73

20 Appendix A: Relevant articles/study support videos 83

21 Appendix B: Verbs used in question requirements 84

22 Appendix C: Specimen paper 85

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How have the syllabus learning outcomes been examined? Syllabus learning outcomes Example past paper questions

Identify and describe the objective and general principles of external audit engagements

Explain the nature and development of audit and other assurance engagements

Discuss the concepts of accountability, stewardship and agency

Define and provide the objectives of an assurance engagement

Explain the five elements of an assurance engagement Describe the types of assurance engagement Explain the level of assurance provided by an external audit and other review engagements and the concept of true and fair presentation

Q7 Section A – pilot paper

Describe the limitations of external audits

The concept of audit and other assurance engagements

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The concept of audit and other assurance engagements

The purpose of external audit To promote confidence and trust in

financial information To give an opinion on whether the

financial statements: – Have been prepared in

accordance with an acceptable financial reporting framework

– Comply with statutory requirements

Accountability, stewardship and agency

Accountability Directors are required to prepare

financial statements for shareholders Stewardship Directors account for their

stewardship of the assets placed under their control

Agency Directors act as agents of

shareholders External audit addresses the agency

conflict between shareholders and directors

Types of assurance 'An assurance engagement is 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.' Annual external audit Half-year review of FS Going concern review Review of effectiveness of IT

systems Review of compliance with

corporate governance requirements

Assurance and reports

Communication to different stakeholders

Potential investors Current and potential lenders Employees Customers Suppliers Tax authorities

Concepts in reporting Materiality Information is material if its omission or

misstatement could influence the economic decisions of users

True and fair The auditor reports in terms of whether the

financial statements present fairly in all material respects (or give a true and fair view)

Reasonable assurance 100% assurance is not possible Level of assurance given in statutory

audit

Levels of assurance

Reasonable assurance Positive expression: Eg statutory audit 'in our opinion, the financial statements

present fairly…..’ Limited assurance Negative expression: Eg review of half year accounts 'nothing has come to our attention that causes

us to believe that the financial statements do not give a true and fair view …….'

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Describe the regulatory environment within which external audits take place

Discuss the reasons and mechanisms for the regulation of auditors

Explain the statutory regulations governing the appointment, rights, removal and resignation of auditors

Explain the regulations governing the rights and duties of auditors

Explain the development and status of International Standards on Auditing (ISAs)

Explain the relationship between International Standards on Auditing (ISAs) and national standards

Statutory audit and regulation

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Statutory audit and regulation

The regulatory environment

Mechanisms for regulation of auditors IFAC/ IAASB IFAC aims to strengthen the

global accountancy profession and promote adherence to high-quality standards

National law and standards Law establishes:

– Rights and duties of auditors – Eligibility to be auditor

National standards increasingly harmonised with ISAs

ACCA/ the profession Education and training Ethical requirements

Statutory regulations Appointment Normally annually By shareholders resolution Directors may appoint in

particular circumstances: – First auditors – Casual vacancy

Removal By shareholders resolution Auditors entitled to:

– Notice of resolution – Make written representations – Speak at shareholders

meetings Resignation May resign at any time Written notice to registered office Statement of circumstances

Note: throughout these notes the abbreviation ISA will be used to refer to the International Standards on Auditing

Development and status of ISAs IAASB produces ISAs, ISAEs and

ISRSs. IAASB pronouncements do not

overrule local laws or regulations Where IAASB pronouncements

form part of the regulatory framework (eg. in UK) they are mandatory

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Stages of an external audit The following diagram illustrates the main steps in the conduct of an external audit. The following chapters expand each of these steps.

Plan the audit

Understand the entity (including documenting and confirmingthe accounting systems and internal control)

Assess risk of material misstatement

Select audit procedures to respond to risk of material misstatement

Where risk assessmentincludes expectationthat controls operateeffectively

Risk assessment doesnot include expectationthat controls operateeffectively

Tests of controls (to confirm expectation)

Unsatisfactory

Satisfactory

Restrictedsubstantive tests

Report to management

Fullsubstantive tests

Overall review offinancial statements

Report tomanagement

Auditor’sreport

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Discuss the objectives, relevance and importance of corporate governance

Discuss the provisions of international codes of corporate governance (such OECD) that are most relevant to auditors

Describe good corporate governance requirements relating to directors’ responsibilities (e.g. for risk management and internal control) and the reporting responsibilities of auditors

Analyse the structure and roles of audit committees and discuss their benefits and limitations

Corporate governance

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Corporate governance

Definition The internal systems by which companies

are directed and controlled

The UK Corporate Governance Code Provides guidance to UK companies as to how they should be directed and controlled. 5 headings: Leadership

– Effective Board – Clear division of responsibilities between Chairman and Chief Executive Officer (CEO) – Requirement to have non-executive directors

Effectiveness – Appropriate balance of skills – Procedures for the appointment of new

directors (nomination committee) – Directors should have sufficient time to perform their duties – Induction/ training – Annual evaluation – Regular re-election

Accountability – Board responsible for risk management – Board responsible for internal control

systems Remuneration

– Sufficient but not excessive – Formal policy for fixing remuneration packages (remuneration committee)

Relations with shareholders – Open dialogue – Use of AGM to communicate with shareholders

Audit committees At least 3 members At least one with recent and relevant

financial experience Monitor the integrity of the financial

statements: – Recommendations re the

appointment, re-appointment and removal of external auditors

– Approve remuneration and terms of external auditor

– Monitor external auditor’s independence, objectivity and effectiveness of the audit process

– Policy on the engagement of the external auditor to supply non-audit services

Review the company’s internal control and risk management systems

Monitor and review the effectiveness of internal audit

Monitor arrangements safeguarding privacy of whistle blowers

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Define and apply the fundamental principles of professional ethics of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour


Define and apply the conceptual framework, including the threats to the fundamental principles of self-interest, self-review, advocacy, familiarity and intimidation

Q1(a) Section B – pilot paper

Discuss the safeguards to offset the threats to the fundamental principles


Describe the auditor’s responsibility with regard to auditor independence, conflicts of interest and confidentiality

Discuss the requirements of professional ethics in relation to the acceptance of new audit engagements

Explain the preconditions for an audit Explain the process by which an auditor obtains an audit engagement

Justify the importance of engagement letters and their contents.

Professional ethics

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Professional ethics Enforcement of the ACCA Code In countries (such as the UK) where regulation and monitoring of audit is delegated to professional bodies such as ACCA, there is an obligation to: Check that members are qualified

and eligible to carry out audits Monitor members’ conduct and the

standard of their work Take regulatory action against

members who do not meet requirements

ACCA disciplinary structures: Monitoring unit Professional conduct department Disciplinary committee

Fundamental principles of professional ethics

Integrity Objectivity Professional competence and due

care Confidentiality Professional behaviour

Engagement letters Document and confirm auditor’s acceptance of the appointment, objective and scope of audit, extent of auditor’s responsibilities to the client and form of any reports. Contents Objective of the audit Managements’ responsibility

for the FS Scope of the audit Form of reports or other

communication Inherent limitations of audit and

internal control risk that some material misstatements may remain

Access to documents records and information

Arrangements for planning and performing audit

Expectation of receiving a letter of representation

Request for acknowledgement of receipt of letter

Basis of fees

Obtaining and accepting new audit engagements

Obtaining audit engagements May use advertising and other forms of

promotion Must not:

– Bring ACCA or profession into disrepute

– Discredit services offered by others – Be misleading – Care over references to fees

Acceptance Before

– Ensure firm is independent, competent and has adequate resources

– Obtain references (client) – Establish certain preconditions are

present – Assess risk – Communicate with present auditor

– Obtain client’s permission – Decline nomination if refused – Otherwise request information

that would help decision Present auditor should

– Obtain client’s permission – If refused, inform new auditor

(who should decline nomination)

– Otherwise, discuss relevant matters

After – Ensure predecessor’s

removal/resignation properly conducted

– Ensure appointment properly conducted

Threats Self-interest Self-review Advocacy Familiarity Intimidation

Safeguards Created by the

profession, regulation or legislation

In the work environment

Created by the individual

Confidentiality Members must not disclose information obtained in the course of professional work without permission from their clients. Exceptions Obliged to disclose

– By law – By court order – To regulators

Permitted to disclose

– Public interest – Protect member’s interests

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Discuss the factors to be taken into account when assessing the need for internal audit

Discuss the elements of best practice in the structure and operations of internal audit with reference to appropriate international codes of corporate governance

Compare and contrast the role of external and internal audit

Q1(b) Section B – pilot paper

Discuss the scope of internal audit and the limitations of the internal audit function

Discuss the responsibilities of internal and external auditors for the prevention and detection of fraud and error

Explain outsourcing

Explain the advantages and disadvantages of outsourcing the internal audit function

Discuss the nature and purpose of internal audit assignments including value for money, IT, financial, regulatory compliance, fraud investigations and customer experience


Discuss the nature and purpose of operational internal audit assignments

Internal audit

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Internal audit

Comparison of internal and external audit

Outsourcing internal audit Advantages Increased independence Relevant skills Increased reliability Disadvantages Costs Limited knowledge of specific

entity Independence issues if provided

by external audit firm

Scope and limitations of internal audit

Limitations could arise from lack of: Independence from activities

subject to audit Independent reporting line Objectivity Skills Ongoing training Action taken in response to

recommendations

Nature and purpose of internal audit assignments

Value for money audit (VFM) – Economy, efficiency and

effectiveness Information technology audit Financial internal audit Regulatory compliance audits Fraud investigations Customer experience audits Operational audits

Internal audit and corporate governance codes

It is seen as good corporate governance to have an internal audit (IA) function to assess and monitor internal control policies and procedures. The Board Overall responsibility for analysis of risk

and implementation of controls The Audit Committee Monitor and review effectiveness of IA Approve appointment/termination of

appointment of head of IA Review and assess IA work plan Monitor management responsiveness to

IA reports Meet head of IA at least once a year

without management Internal audit department Regular report to audit committee Direct access to board chairman and audit

committee Accountable to audit committee

Assessing the need for internal audit

Trends or factors that have increased risks

Organisational restructuring or changes in processes and systems

Adverse trends noted in monitoring of internal control systems

Unexpected occurrences

External audit Internal audit Opinion on Wide ranging up to employers FS in terms of

true and fair Shareholders Management/directors Independent Employee of company or contracted to company Required to have No requirement recognised qualification

Objective

Report to

Status

Qualification

Internal audit reports Format will vary May include executive summary Findings and recommendations

37


Identify the overall objectives of the auditor and the need to conduct an audit in accordance with ISAs

Explain the need to plan and perform audits with an attitude of professional scepticism, and to exercise professional judgement

Explain the components of audit risk Q10 Section A – pilot paper Explain the audit risks in the financial statements and explain the auditor’s response to each risk


Explain how auditors obtain an initial understanding of the entity and its environment

Define and explain the concepts of materiality and performance materiality

Explain and calculate materiality levels from financial information

Discuss the effect of fraud and misstatements on the audit strategy and extent of audit work

Explain the auditor’s responsibility to consider laws and regulations

Describe and explain the nature and purpose of analytical procedures in planning

Compute and interpret key ratios used in analytical procedures

Risk assessment

38

Risk assessment

Business risk Conditions, events and circumstances that

could adversely affect the entity’s ability to achieve its objectives (financial risk, operational risk and compliance risk) Significant risks

Require special audit consideration

Risk at the assertion level A ccuracy (trans/disclosure) C ompleteness (trans/bals/disclosure) C ut off (trans) A llocation (bals) C lassification/understandability (trans/disclosure) O ccurence (trans/disclosure) V aluation (bals/disclosure) E xistence (bals) R ights and obligations (bals/disclosure)

Professional scepticism Questioning the validity of evidence Alertness to contradictory evidence Neither the assumption that

management is dishonest nor the assumption of unquestioned honesty Professional judgement

Materiality and audit risk Nature, timing, extent of procedures

Materiality and performance materiality

Materiality Information is material if its omission

or misstatement could influence the decisions of users based on the financial statements

Amount and nature of the information needs to be considered

Calculation is always judgemental Firms set criteria for guidance, e.g.:

– ½ to 1% of revenue – 1 to 2% of total assets – 5 to 10% of profit before tax

Impact on audit: – Nature, timing and extent of audit procedures – Whether to seek adjustments – Degree of any auditor’s report modifications

Performance materiality Amount set by the auditor at less

than the materiality level for a particular class of transactions or account balance.

Understanding the entity and its business environment

Matters to consider Industry, regulatory and other

external factors Nature of the entity Objectives and strategies and related

business risks Measurement and review of entity’s

financial performance Internal control

Effect of fraud on misstatements If risk assessment suggests there may be material misstatements arising from fraud the main effects on the audit strategy will relate to: Assignment and supervision of

personnel Consideration of accounting policies Unpredictability in nature, timing and

extent of audit procedures

Analytical procedures in audit planning Analysis of relationships to identify

inconsistencies and unexpected relationships

Should be applied as risk assessment procedures

Include comparisons with; – Prior periods and budgets – Industry information – Predictive estimates – Ratio analysis – Relationships between financial and non-financial information

Audit risk (See below)

39

THE AUDIT RISK MODEL

AR = IR x CR x DR

Audit risk The 'risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated'

Inherent risk The susceptibility of an assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there were no related internal controls.

Control risk The risk that a misstatement could occur in an assertion 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.

Detection risk The risk that the auditor's procedures will not detect a misstatement that exists in an assertion that could be material either individually or when aggregated with other misstatements

Sampling risk Non-sampling risk

40

Common ratios for use in analytical review Profitability

(i) Return on Capital Employed (ROCE) = sliabilitie NC reserves capital Share

(PBIT) tax andinterest beforeProfit

(ii) Net profit margin = = Revenue

PBIT

(iii) Asset turnover = sliabilitie NC + reserves + capital Share

Revenue

(iv) Gross margin = Revenue

profit Gross

Liquidity

(i) Current ratio = CLCA

(ii) Quick ratio (Acid Test) = CL

sInventorie - CA

(iii) Inventory turnover = days365 COS

sInventorie

or turnover times of No. sInventorie

COS

(iv) Trade receivables days = days 365salesCredit

sreceivable Trade

(v) Trade payables days = days 365purchasesCredit payables Trade

Gearing

(i) Debt/equity = reserves and capital Share

debt bearingInterest

41


Identify and explain the need for and importance of planning an audit

Identify and describe the contents of the overall audit strategy and audit plan

Explain and describe the relationship between the overall audit strategy and the audit plan

Explain the difference between interim and final audit Describe the purpose of an interim audit, and the procedures likely to be adopted at this stage in the audit


Describe the impact of the work performed during the interim audit on the final audit

Explain the need for and the importance of audit documentation

Describe the form and contents of working papers and supporting documentation

Explain the procedures to ensure safe custody and retention of working papers

Audit planning and documentation

42

Audit planning and documentation

The audit strategy and the audit plan

The need for planning Planning is required so that the audit will be carried out in an efficient and effective manner. Objectives: Appropriate attention is devoted to

important areas of the audit Potential problems are identified The work is completed expeditiously Proper assignment of work to

assistants Coordination of work done by other

auditors and experts; and Facilitating review.

Audit documentation ISA 230 Audit Documentation states that the auditor shall prepare audit documentation on a timely basis. Contents: Sufficiently complete and detailed to enable

an experienced auditor with no previous connection with the audit to ascertain what work was performed and to support the conclusions reached

Planning, nature, timing and extent of audit procedures and conclusions drawn

Reasoning on all significant matters of judgement

Permanent file/current file

Interim and final audit Interim audit procedures (before y/e) Analytical procedures Tests of controls Updating risk assessments Review of relevant internal audit

reports Substantive testing (of transactions

in the first part of the year) Final audit procedures (post y/e) Completion of tests of controls and

substantive tests of transactions started at interim

Analytical procedures on financial statements

Substantive testing of financial statements

Audit strategy sets out: Scope Financial reporting framework Locations Reporting objectives Materiality levels Preliminary identification of:

– Higher risk areas – Material balances

Whether auditor plans to perform tests of controls

Resources Management

Audit plan sets out Nature, timing and extent of audit

procedures For each material class of

transactions, account balances or disclosure

43


Explain the assertions contained in the financial statements about classes of transactions and events, account balances at the period end and presentation and disclosure


Describe audit procedures to obtain audit evidence, including inspection, observation, external confirmation, recalculation, re-performance, analytical procedures and enquiry

Discuss the quality and quantity of audit evidence Discuss the relevance and reliability of audit evidence Q2 Section A – pilot paper Discuss substantive procedures for obtaining audit evidence

Discuss and provide examples of how analytical procedures are used as substantive procedures

Discuss the difference between tests of control and substantive procedures


Introduction to audit evidence

44

Introduction to audit evidence

Financial statement assertions

Quality of evidence

Assertions A ccuracy (trans/disclosure) C ompleteness (trans/bals/disclosure) C ut off (trans) A llocation (bals) C lassification/understandability (trans/disclosure) O ccurence (trans/disclosure) V aluation (bals/disclosure) E xistence (bals) R ights and obligations (bals/disclosure)

Sources of evidence A nalytical procedures E nquiry and confirmation I nspection O bservation Recalc U lation

Factors to consider are: Risk assessment Nature of accounting

and internal control systems

Materiality of the item Experience gained

during previous audits Results of audit

procedures Source and reliability of

information available

Relevant The evidence gathered must cover the financial statement assertions.

Reliable External better

than internal Internal more

reliable when controls effective

Auditor generated better than client generated

Documentary better than oral

Original documents more reliable than copies/faxes

ISA 500 Audit Evidence

Sufficient Appropriate Quantity – Sufficient to support the audit opinion

45


Explain why an auditor needs to obtain an understanding of internal control relevant to the audit

Describe and explain the five components of an internal control system; the control environment, the entity’s risk assessment process, the information system, control activities relevant to the audit and monitoring of controls


Explain how auditors record internal control systems including the use of narrative notes, flowcharts, internal control questionnaires and internal control evaluation questionnaires

Evaluate internal control components, including deficiencies and significant deficiencies in internal control

Discuss the limitations of internal control components Describe computer system controls including general IT controls and application controls


Explain the importance of internal control and risk management

Internal control

46

Internal control

General controls

Controls over data centre and network operations Operating logs Standby arrangements Regular backup and secure storage Virus protection/firewalls

System software acquisition, change and maintenance Physical controls Segregation of duties The entity’s risk assessment process The information system Control activities Monitoring of controls

Access security Passwords Dedicated terminals Job scheduling

Application system acquisition, change and maintenance Testing of new systems Authorisation, approval and testing of

changes Use of standard packages Regular review of unauthorised

changes Restricted access to application

systems documentation

Use of internal control systems by auditors

Application controls Controls over input Batch controls Range/limit checks Existence checks Check digits Sequence checks

Controls over output Test checks Approval of computer-generated

payments Reconciliations of report totals to

general ledger accounts

Controls over standing data

Passwords restricting access to amend standing data

Regular printouts produced and reviewed by someone in authority

Regular lists of amendments, additions and deletions produced and reviewed

Computer systems controls

See below

Internal control is the process designed and effected by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.'

Internal control systems Components of an internal control system The control environment The entity’s risk assessment process The information system Control activities Monitoring of controls

Examples of internal control Segregation of duties Physical controls Information processing Review (performance) Authorisation

Limitations of internal control Poor judgement in decision making Human error Processes being deliberately circumvented

by employees and others Management overriding controls The occurrence of unforeseen

circumstances

47

Internal control

Use of internal control systems by auditors

Document the system - how?

Narrative notes

Flow charts

Internal control questionnaires (ICQs)

Internal control evaluation questionnaires (ICEQs)

Document the system - why?

Identify potential misstatements

Consider factors that affect the risk of material misstatements

Design the nature, timing and extent of further audit procedures

48

49


Describe control objectives, control procedures, activities and tests of control in relation to: The sales (revenue) system The purchases system The payroll system The cash system The inventory system Revenue and capital expenditure (non-current assets)


Discuss and provide examples of how the reporting of significant deficiencies in internal control and recommendations to overcome those significant deficiencies are provided to management

Tests of controls

50

Communication of deficiencies in internal control No duty to report control deficiencies to shareholders

ISA 265 Communicating deficiencies in internal control to those charged with governance and management requires significant deficiencies in internal control to be reported to those charged with governance

Form of communication should be agreed at planning stage

Should be prompt and before FS finalised

Contents should first be discussed with management

Addressed to audit committee (or board, if no audit committee)

Detailed recommendations structured:

– Deficiency – Implication – Recommendation

Caveat

– Not for external use – Not a complete list

Tests of controls Enquiry Inspection of documents supporting

controls Observation of procedures Re-performance of the application of a

control Testing of the control activities

performed by a computer, possibly using CAATs

Examination of evidence of management review

Test that the control – Is properly designed – Exists, and – Has operated throughout the

period Deviations should be recorded and

investigated regardless of amounts involved

Assess whether deviations are isolated departures or indicate the existence of errors in accounting records

If results are unsatisfactory – Preliminary assessment of control

risk is not supported – Must modify nature, timing and

extent of planned substantive procedures

Revenue

Bank and cash Purchases

Inventories

Revenue and capital expenditure

Payroll

Other communication by the auditor with those charged with governance The auditor’s responsibilities in relation to FS

audit Planned scope and timing of the audit Significant findings from the audit e.g. views

on significant accounting policies Statement of compliance with independence

requirements

51


Discuss the problems associated with the audit and review of accounting estimates

Describe why smaller entities may have different control environments and describe the types of evidence likely to be available in smaller entities

Define audit sampling and explain the need for sampling

Identify and discuss the differences between statistical and non-statistical sampling

Discuss and provide relevant examples of, the application of the basic principles of statistical sampling and other selective testing procedures


Discuss the results of statistical sampling, including consideration of whether additional testing is required

Explain the use of computer-assisted audit techniques in the context of an audit

Discuss and provide relevant examples of the use of test data and audit software for the transaction cycles and balances included in the syllabus

Discuss why auditors rely on the work of others Discuss the extent to which auditors are able to rely on the work of experts, including the work of internal audit


Discuss the audit considerations relating to entities using service organisations

Explain the extent to which reference to the work of others can be made in audit reports

Audit procedures and sampling

52

Sampling Audit sampling means the application of audit procedures to less than 100% of the items within a class of transactions or account balance such that all sampling units have an equal chance of selection, in order to assist in forming a conclusion concerning the population from which the sample is drawn [ISA 530].

Sample size Required confidence level Risk of material misstatement Tolerable error Expected error Population size Stratification Sample selection Random Systematic Haphazard Value weighted Evaluation of results Nature and cause of errors? Effect on other areas? Anomalous? Project monetary errors to the population If this indicates material error is likely the auditor may:

– Ask management to investigate and make adjustments – Modify nature timing and extent of further audit procedures – Consider effect on auditor’s report

Computer-assisted audit techniques

Test data Conducting audit procedures by entering data into an entity’s computer system, and comparing the results obtained with pre-determined results.

Examples of tests (usually tests of controls) Testing specific controls in computer programs Test transactions Integrated test facilities

Audit software Computer programs used by the auditor, as part of his auditing procedures, to process data of audit significance from the entity’s accounting system. Data may be down-loaded from the client’s system to the auditor’s in order to perform tests on it. Examples of tests (usually substantive) Reperformance of calculations Extraction of samples Analytical review

Audit procedures and sampling

53

Audit procedures

and sampling

Using the work of others

Internal audit

If the external auditor can rely on the work conducted by the internal auditor, the volume of detailed work undertaken by the external auditor may be reduced. When the external auditor intends to use specific internal audit work, the external auditor should evaluate and perform audit procedures to confirm that it is adequate for the external auditor’s purposes. (ISA 610 Using the work of internal auditors) General assessment Scope of function Organisational status Due professional care Independence Technical competence Evaluation of internal audit work Adequacy of technical training and

proficiency Whether properly supervised,

reviewed and documented Sufficiency and appropriateness of

evidence Whether conclusions are

appropriate and reports consistent with work performed

Whether exceptions/unusual matters resolved

Planning, controlling and recording Liaise with IA at all stages Compare own results with those of

IA Report to management Consider whether to include any

weaknesses/irregularities discovered by IA

Audit report Cannot make reference to work

done by IA

Service organisations Examples Accounting records Payroll Credit control Data entry/information processing Auditor’s responsibilities Assess significance of

organisation’s activities to the audit

Assess risk of material misstatement and extent of control risk

Consider whether information held by client is sufficient

If necessary, request service organisation’s auditor to perform additional procedures, or visit to perform tests of controls

Audit report Consider any implications for the

auditor’s report

Auditor’s Expert Examples Valuations of land and buildings Determination of inventory

quantities/condition Legal opinions

Auditor’s responsibilities Evaluate objectivity/competence

of expert Evaluate appropriateness of

auditor’s expert’s work as evidence – Data and assumptions – Consistency with other

evidence Unmodified audit report Should not refer to work of an

expert

Audit of accounting estimates Examples Allowances to reduce inventory or

receivables to their estimated realisable value

Depreciation Provisions Accrued revenue 3 approaches Review and test process used by

management Use independent estimate for

comparison Review of subsequent events for

evidence of reasonableness of estimate

Auditing smaller entities The problem of control Many controls relevant to large

entities neither practical nor appropriate

Likely to have poor segregations of duties

Management override of controls Management should instigate

additional authorisation, arithmetical, accounting and supervisory controls

Audit approach Unlikely to be able to rely on controls Focus will be on substantive

procedures

54

55


Explain the audit objectives and the audit procedures relating to: Tangible and intangible non-current assets: (i) Evidence in relation to non-current assets and (ii) Depreciation (iii) Profit/ loss on disposal (iv) The related profit or loss section (income

statement) entries.

Q6(b) Section B – pilot paper Q2(b) Section B – pilot paper

Non-current assets

56

Non-current assets

Evidence on figures in the statement of financial

position

Evidence on entries in the statement of profit or loss

Depreciation Gains/ losses on disposals Impairments

Tangible Additions Disposals Revaluations

Intangible Development expenditure Remember the IAS 38 criteria that require/permit capitalisation: Probable future economic benefits Intention to complete and use/sell asset Resources adequate and available to complete

and use/sell asset Ability to use/sell the asset Technical feasibility of completing asset for

use/sell Expenditure can be measured reliably

57


Explain the audit objectives and the audit procedures in relation to: Inventory (i) Inventory counting procedures in relation to year-

end and continuous inventory systems (ii) Cut-off (iii) Auditor's attendance at inventory counting (iv) Direct confirmation of inventory held by third parties (v) Valuation (vi) Other evidence in relation to inventory.

Inventory

58

Inventory

Year end inventory counting Before Review working papers for previous year to identify

risks and familiarise yourself with the inventories Determine arrangements with management in

advance Inventories held by/for third parties – what

arrangements have been made? Review client’s inventory count instructions Investigation of differences (where inventory records

exist) Consider the need for an expert Determine procedures to cover a representative

selection of inventories During Ensure staff are following the inventory counting

instructions Test counts from

– Inventories inventory sheets and – From the inventory sheets inventories.

Note damaged, old or obsolete inventories. Review WIP for stage of completion Inventories held by client for third parties: ensure

excluded from count Record the number of the last GRN and the last GDN Form an overall impression of inventory levels Photocopy inventory sheets After Check sequence of inventory sheets Check client’s computation of final figure Trace own test count items through to final inventory

sheets Check replies from third parties Inform management of any problems Follow up cut-off details Ensure necessary adjustments to book inventories

have been made (where records are maintained).

3rd party confirmations

Cut-off Cut-off is usually tested by obtaining a sample of GRNs and GDNs either side of the year end and then matching them to purchase/sales invoices to ensure they have been included in the correct account balances(s) (see below)

Valuation Record basis of valuation used Test material costs

– Check to individual invoices – Ensure FIFO or appropriate

basis being used – Check quantities used in

WIP/FG Test labour costs

– Check calculations to supporting documentation

– Review costing against actual labour and production

Test application of overheads

– Ensure only production overheads included

– Ensure based on normal levels of activity

Other evidence

Continuous inventory Review company's procedures

– Independence of counters – Frequency of counts – Ensure all lines covered at

least once per year – Investigation of discrepancies – Updating of records

Attend at least one of the company's counts (to observe)

Review whole year's results – Extent of counting – Accuracy of records – Reasons for discrepancies

Perform test counts at the year end

Quantity x Value

59

Year end

Before After

Purch

ase

Included in? Purchases Payables Inventories

GRN

Included in? Sales Receivables Inventories

GDN

Included in? Purchases Payables Inventories

GRN

Included in? Sales Receivables Inventories

GDN

Sales

Purch

ase

Sales

60

Subject:

61

How have the syllabus learning outcomes been examined? Syllabus learning outcomes Example past paper questions Explain the audit objectives and audit procedures in relation to: Receivables (i) direct confirmation of accounts receivable (ii) other evidence in relation to receivables and

prepayments, and (iii) the related profit or loss section (income statement)

entries


Receivables

62

Receivables

Other evidence GDNs pre/post year end Analytical procedures Correspondence with

customers/liquidators

Statement of financial performance: receivables and prepayments Statement of profit or loss: revenue, irrecoverable debts expense

Direct confirmation Obtain listing of trade receivables as at the

confirmation date Agree total to nominal ledger Review for any obvious omissions/misstatements

by comparing this year's list with last year's Select a sample of accounts for confirmation Select the sample including the following balances:

– Old, unpaid amounts – Credit balances – Nil balances – Material balances

Letter should be on the client's paper, signed by the client with a copy of the current statement attached. It should request that the reply be sent direct to the auditor and reply paid envelopes should be sent.

After reasonable period, send 'follow-up' request Follow up by telephone or fax if there is no reply No reply:

– Confirmation of individual outstanding invoices – Alternative procedures

– Agree opening balance on account with last year's closing balance

– Test casts – Verify outstanding items to back up

documentation – Review cash received after year end – Discuss with responsible company official

63


Explain the audit objectives and the audit procedures in relation to: Bank and cash: (i) Bank confirmation reports used in obtaining

evidence in relation to bank and cash (ii) Other evidence in relation to bank, and (iii) Other evidence in relation to cash.

Bank and cash

64

Bank and cash Related entries in the

statement of profit or loss

Bank interest

Other evidence Bank reconciliation Attend physical count of cash if

material.

Bank confirmation letters Authority to disclose Banks require the explicit written authority of their customers to disclose the information requested:

– An ongoing standing authority, or – A separate authority each time information is requested.

Bank confirmation process A request for a bank confirmation issued on the auditors' own headed paper and

sent to the bank branch with which the client has the prime business arrangement.

The bank confirmation request should specify: – The names of all entities covered by the request – Whether the auditor is requesting 'standard information'

– Details of 'additional information' if so required – The date for which the auditor is requesting confirmation (the audit

confirmation date); – A statement that the bank's response will not create a contractual

relationship between the bank and the auditor – A statement requesting the bank to advise the auditor if the Authority is

insufficient to allow the bank to provide full disclosure of the information requested; and

– A contact name and telephone number. The bank confirmation request should reach the branch at least two weeks in

advance of the audit confirmation date. Standard information requested Full title of all bank accounts in all currencies, with account numbers and

balances, including nil balances Full title and dates of closure of all accounts closed during the period Amounts accrued but not yet charged or credited of:

– Charges – Interest

Amount of interest charged during the period if not shown separately on bank statement

Particulars of any right of set-off Details of:

– Overdrafts and loans repayable on demand – Other loans, specifying dates of review and repayment – Other facilities

Customer’s assets held as security Customer’s other assets held Contingent liabilities

65


Explain the audit objectives and audit procedures in relation to: Payables and accruals (i) Supplier statement reconciliations and direct

confirmation of accounts payable, (ii) Obtain evidence in relation to payables, accruals

and (iii) Purchases and other expenses. Non-current liabilities, provisions and contingencies (i) Evidence in relation to non-current liabilities (ii) Provisions and contingencies. Share capital, reserves and directors’ emoluments: (i) Evidence in relation to share capital, reserves and

directors’ emoluments and (ii) The related profit or loss section (income

statement) entries


Liabilities, capital and directors’ emoluments

66

Liabilities, capital and directors’ emoluments

Payables and accruals – Supplier statement

reconciliations – Analytical procedures – Subsequent events review Purchases and expenses

Non-current liabilities – Bank letters – Loan agreements – Finance costs Provisions – IAS 37 criteria – Subsequent events review – Management representations – Recalculation of estimates Finance costs – Analytical procedures – Recalculation

Share capital Share issues

– Memo and Articles – Board minutes – Cash book receipts Reserves – Brought forward figures – Profit/ loss for year – Dividends (board minutes, cash

book payments) Directors’ emoluments – Contracts – Board minutes – Cash book payments

67


Apply audit techniques to small not-for-profit organisations

Not-for-profit organisations

68

Not-for-profit organisations

Application of audit techniques

Audit evidence Mainly substantive procedures

Comparison with audit of for-profit organisations

Risk factors Complexity and extent of regulation Significance of cash receipts Restrictions imposed in the entity's

governing documents Sensitivity of certain key statistics Need to maintain adequate, but not

excessive resources

Control risk Competence, training and qualification

of paid staff and volunteers Segregation of duties Reliability of accounting

systems/computer systems Controls over compliance with laws and

regulations Power of trustees

Types of not-for-profit organisations

Charities Clubs Societies

69


Explain the purpose of a subsequent events review Explain the responsibilities of auditors regarding subsequent events

Discuss the procedures to be undertaken in performing a subsequent events review


Define and discuss the significance of the concept of going concern

Explain the importance of and the need for going concern reviews

Explain the respective responsibilities of auditors and management regarding going concern

Identify and explain potential indicators that an entity is not a going concern

Discuss the procedures to be applied in performing going concern reviews


Discuss the disclosure requirements in relation to going concern issues

Explain the purpose of and procedure for obtaining written representations

Discuss the quality and reliability of written representations as audit evidence

Discuss the circumstances where written representations are necessary and the matters on which representations are commonly obtained

Discuss the importance of the overall review of evidence obtained

Discuss the procedures an auditor should perform in conducting their overall review of financial statements

Explain the significance of uncorrected misstatements Evaluate the effect of dealing with uncorrected misstatements


Audit review and finalisation

70

Audit review and finalisation

Overall review of evidence

Uncorrected misstatements Schedule maintained of errors identified

that have not been corrected by the client Consider whether material in aggregate

Audit procedures Review procedures established by client management Read minutes of meetings Read latest available interim accounts, budgets and forecasts Enquire of legal counsel concerning litigation and claims Enquire of management as to whether any subsequent events

have occurred that might affect the financial statements Auditor’s duties Up to date of auditor’s report

– Perform procedures After report but before FS issued, if auditor becomes aware of

a fact that may materially affect the FS: – Discuss with management – If management does not amend FS, and audit report has

not been released to the client, express qualified or adverse opinion

After FS issued, if auditor becomes aware of a fact that existed at the date of the audit report and, if known then, might have caused the auditor to modify the report : – Discuss with management – If management issue revised accounts, issue new

auditor’s report, referring to previous report – If management do not take appropriate action, auditor

should take steps to prevent reliance on the report, eg speak at AGM or resign

Written representations The auditor should request written representations: Management fulfilled its responsibility to

prepare FS, that all transactions have been recorded and they have approved the FS

On ISA specific disclosures (fraud, laws & regulations, estimates, going concern, related parties and subsequent events)

Appropriate use of accounting policies

Procedures Agree procedures at early stage (e.g. letter of

engagement) Discuss letter with client first Usually signed by senior executive officer

and senior financial officer on behalf of board Should be minuted Dated – after all other audit work completed

but before signing of the auditor’s report If the client refuses to sign Auditor should write letter setting out his

understanding and ask for management confirmation.

If management does not reply, auditor should follow up to ascertain that his understanding is correct.

If management refuses to provide a representation that the auditor considers necessary, this constitutes insufficient evidence and the auditor should express a qualified opinion or disclaimer of opinion.

Subsequent events Accounting issue: IAS 10 Events after the reporting period Adjusting events provide evidence of conditions

that existed at the reporting date Non-adjusting events indicative of conditions that

arose after the reporting date

71

Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future * with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations. * where the foreseeable future implies at least one year from the reporting date (year end)

Audit procedures Analysing and discussing forecasts with directors

Analysing and discussing latest available interim financial statements

Reviewing terms of loans agreements

Reading minutes of meetings of shareholders, those charged with governance and relevant committees for reference to financial difficulties

Enquiring of the entity’s lawyers about the existence of litigation or claims

Confirming the existence and enforceability of arrangements with third parties to provide financial support

Considering the entity’s plans to deal with unfulfilled orders

Reviewing events after balance sheet date to identify those that either mitigate or otherwise affect the entity’s ability to continue as a going concern.

Auditor’s report (chapter 19) Going concern assumption appropriate but a material uncertainty

exists unqualified opinion with emphasis of matter

Inadequate disclosure qualified or adverse opinion

Going concern assumption inappropriate (and management have used going concern basis) adverse opinion

Management unwilling to make or extend its assessment may amount to insufficient evidence and a modified opinion

Going concern

72

73

How have the syllabus learning outcomes been examined? Syllabus learning outcomes Example past paper questions Identify and describe the basic elements of the auditor’s report

Explain unmodified audit opinions in the auditor’s report Explain modified audit opinions in the audit report Q3(b) Section B – pilot paper

Describe the format and content of emphasis of matter and other matter paragraphs


Discuss the reporting implications of the findings of going concern reviews

Reports

74

Standard Report Unmodified opinion

Reports

Audit reports

Unmodified opinions with additional communication

Modified on matters that do affect the auditor's opinion

Emphasis of matter paragraph 'Without qualifying our opinion ….' (Eg 2)

Insufficient or inappropriate audit

evidence

Material but not pervasive Qualified 'except for'

(Eg 5)

Material and pervasive Disclaimer 'do not express an opinion' (Eg 6)

Material misstatement

Material but not pervasive Qualified 'except for' (Eg 3)

Material and pervasive Adverse '…. do not give a true and fair view'

(Eg 4)

Changes to the audit reports

Other matters

paragraph

75

Auditor’s report Going concern assumption appropriate but a material uncertainty

exists unqualified opinion with emphasis of matter

Inadequate disclosure qualified or adverse opinion

Going concern assumption inappropriate (and management have used going concern basis) adverse opinion

Management unwilling to make or extend its assessment may amount to insufficient evidence and a modified opinion

Going concern

76

Example 1 Basic Unmodified Report

INDEPENDENT AUDITOR'S REPORT

(APPROPRIATE ADDRESSEE)

Report on the Financial Statements

We have audited the financial statements of ABC company, which comprise the statement of financial position as at 31 December, 20X1, and the statement or profit or loss, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion the financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

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Report on Other Legal and Regulatory Requirements

[Form and content of this section of the auditor's report will vary depending on the nature of the auditor's other reporting responsibilities.]

[Auditor's signature]

[Date of the auditor's report]

[Auditor's address]

Example 2 Emphasis of matter paragraph

We draw attention to Note X to the financial statements which describes the uncertainty related to the outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not qualified in respect of this matter.

Example 3 Qualified opinion due to material misstatement of inventories

Basis for qualified opinion

The company’s inventories are carried in the statement of financial position at xxx. Management has not stated inventories at the lower of cost and net realisable value but has stated them solely at cost, which constitutes a departure from International Financial Reporting Standards. The company’s records indicate that had management stated the inventories at the lower of cost and net realisable value, an amount of xxx would have been required to write the inventories down to their net realisable value. Accordingly, cost of sales would have been increased by xxx, and income tax, net income and shareholders’ equity would have been reduced by xxx, xxx and xxx, respectively.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

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Example 4 Adverse opinion due to material misstatement with a pervasive effect

Basis for adverse opinion

As explained in Note X, the company has included houses built for resale (including related land) at a cost of $X as non-current assets and depreciated them at a rate of X%, resulting in depreciation of $X. Under International Financial Reporting Standards, these should have been included as inventory in the financial statements and no depreciation should have been provided in respect of these. The carrying value of houses represent 90% of the company’s total assets and the company’s records indicate that … [explanation of the effect on amounts presented in the financial statements].

Adverse Opinion

In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph, the financial statements do not present fairly (or do not give a true and fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards.

Example 5 Qualified opinion due to inability to obtain sufficient appropriate audit evidence about the carrying amount of inventory (material but not pervasive) Basis for qualified opinion

With respect to inventory having a carrying amount of $X the audit evidence available to us was limited because we did not observe the counting of the physical inventory as at 31 December 20X1, since that date was prior to our appointment as auditor of the company. Owing to the nature of the company’s records, we were unable to obtain sufficient appropriate audit evidence regarding the inventories quantities by using other audit procedures.

Qualified Opinion

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

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Example 6 Disclaimer of opinion due to inability to obtain sufficient appropriate audit evidence about multiple elements of the financial statements

Basis for disclaimer of opinion

We were not appointed as auditors of the company until after December 31, 20X1 and thus did not observe the counting of physical inventories at the beginning and end of the year. We were unable to satisfy ourselves by alternative means concerning the inventory quantities held at December 31, 20X0 and 20X1 which are stated in the statement of financial position at xxx and xxx, respectively. In addition, the introduction of a new computerised accounts receivable system in September 20X1 resulted in numerous errors in accounts receivable. As of the date of our audit report, management was still in the process of rectifying the system deficiencies and correcting the errors. We were unable to confirm or verify by alternative means accounts receivable included in the statement of financial position at a total amount of xxx as at December 31, 20X1. As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of recorded or unrecorded inventories and accounts receivable, and the elements making up the income statement, statement of changes in equity and statements of cash flows.

Disclaimer of Opinion

Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. According, we do not express an opinion on the financial statements.

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Appendices

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Appendix A: Relevant articles/study support videos

Articles/study support videos that provide further insight into the F8 syllabus are available on the ACCA website at: http://www.accaglobal.com/uk/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f8/technical-articles.html

The attached list of articles/ study support videos has been compiled to provide you with some structure during the home study phase of your revision and includes the most recent, or more important, articles/ study support videos.

Article Author Read?

The audit of wages This article helps candidates identify significant deficiencies in internal control and recommend internal controls. It considers a typical wages system and the procedures that should be undertaken during the interim and final audit stages.

Member of the FAU examining team

The control environment of a company This article provides candidates with a more detailed appreciation of the auditor’s need to evaluate the effectiveness of a company’s control environment.

Member of the audit examining team

ISA 315 (Revised) This article reminds us about the different elements of an entity’s internal control system and the need for the external auditor to consult with the internal audit function in order to get a better understanding of the entity’s internal control system.

Raymond Wong

Audit procedures This article provides you with tips on how to describe audit procedures which are properly explained and specific to the relevant financial assertion.

Vijaya Swaminathan

Going concern This article summarises the responsibilities of auditors and management for going concern and uses the question Medimade from the June 2010 exam to demonstrate how to approach questions on this area.

Steve Collings (Assessor for Paper F8)

Audit Risk In this article the F8 examiner, Pami Bahl, aims to identify the most common mistakes made by candidates on audit risk questions in previous exam sittings, as well as clarifying how these questions should be tackled in order to maximise marks.

Pami Bahl (F8 examiner)

Audit Sampling This article considers the various sampling methods in the context of Paper F8 and other audit papers.

Steve Collings (Assessor for Paper F8)

Subsequent events This article looks at the audit of subsequent events (events after the reporting period).

Steve Collings

Specific aspects of auditing in a computer based environment This article provides guidance on auditing in a computer based accounting environment.

Brian Pine

A matter of opinion This article looks at the auditor’s opinion on the financial statements.

Simon Finlay

IAS 330 and responses to assessed risk Martyn Jones Examiner’s approach F8 This article considers the examiner’s approach to the Paper F8 exam and aims to recognise a change in examiner with effect from the June 2010 exam

Pami Bahl (New F8 examiner)

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Appendix B: Verbs used in question requirements Advise To counsel, inform or notify Analyse Examine in detail the structure of Calculate/compute To ascertain or reckon mathematically Compare and contrast Show the similarities and/or differences Define Give the exact meaning of Describe Communicate the key features of Discuss To examine in detail by argument Distinguish Highlight the differences between Evaluate To appraise or assess the value of Explain Make clear or intelligible/state the meaning of Identify Recognise, establish or select after consideration Interpret Process information to explain its meaning Justify To produce reasons in support of List State short pieces of information on separate lines Prepare To make or get ready for use Recommend To advise on a course of action Summarise To express the most important facts of

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Appendix C: Specimen paper

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f8 Practice & Revision Notes 2014-15