Accounting standards are not good, and standards account for about 70% (you must be proficient in standards)

I couldn’t finish the exam, reasons: heavy reading and excessive love for war (time practice)

The quality of the answer is not high. How to dismantle Requirement Relevant - Valid - Specific (must answer for Case)

Q1 50 points

Q2 25 points

Q3 25 points

Risk and Evidence and group audit

Assurance Difficult

Current issue

Ethics and professional issue full score 10-15 points

Review reporting full score 10-15 points

Practice mgt and Quality control

1) Ethical and professional issues

2) Practice management and other issues in audit

3) Audit procedures Accounting standards are centralized and the method of answering questions is step-by-step

4) Audit evaluation and review Accounting standards are centralized and the method of answering questions is step-by-step

5) Risk & Group audit risk Accounting standards are centralized and the method of answering questions is step-by-step

6) Reporting Accounting standards are centralized and the method of answering questions is step-by-step.

7) Assurance is relatively independent

Five Fundamental Principles 5 basic principles

Five (6) Ethical Threats

2.1 Financial interests in/with audit clients

2.2 Purchase goods and services from audit clients

2.3 Business relationship with audit client

2.4 Personal relationship with audit client

2.5 Long association – senior personnel

2.6 Provide accounting related services to audit client

2.7 Provide corporate finance services to audit client

2.8 Recruitment services for audit client

2.9 Evaluation and remuneration policies

2.10 Custody of clients' assets

2.11 Conflict of interest

2.12 Fees

2.13 Exam technique: ethics

May create: Self-interest threat due to additional fee income and possibility to be appointed as auditor to replace current one. AND may affect: Professional competence and due care, since you may only have partial information．

Safeguard: 1) Contact existing auditor to obtain as much information as possible to reduce information gap. 2) Report include a paragraph to describe the situation. 3) Providing the existing auditor with a copy of 2nd opinion, so that they know how a 2nd opinion is arrived at.

May create: Self-interest threat, because auditor will attract new client & new source of fee income Safeguard: Comply with the relevant regulations, i.e. advertise properly Advertisement should be: truthful, not misleading, not imply disparaging reference about competitors

Past question papers 2010/12 Q4a i You are a manager in Neeson & Co, a firm of Chartered Certified Accountants, with three offices and 12 partners. About one third of the firm's clients are audit clients, the remainder are clients for whom Neeson & Co performs tax, accounting and business advisory services. The firm is considering how to generate more revenue, and you have been asked to evaluate two suggestions made by the fi rm's business development manager.

1) Largest firm in the country,whereas, 3 offices&12 partners, untrue. 2) Most professional firm, this cannot be proven, and this implies other firms are less professional, misleading. 3) Guarantee to improve efficiency, guarantee to save tax, are overstated claims, those things cannot be guaranteed before understanding of client’s business. 4) Second opinion suggests the firm can provide a better opinion, misleading

5) 25% cheaper than current audit fee (low ball fee). This creates self-interest threat. In order to stay profitable, auditor may inappropriately reduce extent of work and assign less experienced staff, i.e. compromise quality of audit. 6) Rates are approved by ACCA, this is untrue. Firms are free to set their rates and itis unprofessional to borrowACCAname. 7) The advertisement is posted on national newspaper, this is consistent with the professional image.

Key content of audit proposal 1) Outline of the firm 2) Requirements of the client, e.g. first year audit of FS. 3) Deadline: Confirm deadline = 4 months after y.e. is sufficient to meet 4) Approach/Methodology: e.g. requirement of auditing OBS, how to minimize disruption 5) QC/Ethic: How to comply with ISA 220 & IESBA code. 6) Non-audit services: e.g. highlight consulting services, strategic advice and overseas expansion services.

Past question papers 2014/12 Q4a i You are an audit manager in Weston & Co which is an international firm of Chartered Certified Accountants with branches in many countries and which offers a range of audit and assurance services to its clients. Your responsibilities include reviewing ethical matters which arise with audit clients, and dealing with approaches from prospective audit clients.

The management of Jones Co has invited Weston & Co to submit an audit proposal (tender document) for their consideration. Jones Co was established only two years ago, but has grown rapidly, and this will be the first year that an audit is required. In previous years a limited assurance review was performed on its financial statements by an unrelated audit firm. The company specializes in the recruitment of medical personnel and some of its start up funding was raised from a venture capital company. There are plans for the company to open branches overseas to help recruit personnel from foreign countries.

Jones Co has one full-time accountant who uses an off-the-shelf accounting package to record transactions and to prepare financial information. The company has a financial year ending 31 March 2015. The following comment was made by Bentley Jones, the company's founder and owner-manager, in relation to the audit proposal and potential audit fee:

I am looking for a firm of auditors who will give me a competitive audit fee. I am hoping that the fee will be quite low, as I am willing to pay more for services that I consider more beneficial to the business, such as strategic advice . I would like the audit fee to be linked to Jones Co's success in expanding overseas as a result of the audit firm's advice. Hopefully the audit will not be too disruptive and I would like it completed within four months of the year end.' Required: Explain the specific matters to be included in the audit proposal (tender document), other than those relating to the audit fee. (8 marks)

Outline of Weston&Co A brief outline of the auditfirm, including a description of differentservices offered, and an outline of the firm's international locations. This will be important to JonesCo given that it wishes to expand into overseas markets and will be looking for an auditfirm with experience in different countries. The document should also outline the range of services which Weston&Co can provide, and any specialism which the firm hasin auditing recruitment companies.

Identify the audit requirements of JonesCo There should be an outline of the statutory auditrequirementin the country in which JonesCo is incorporated, to confirm that the company is now at the size which necessitates a full audit of the financial statements. As this is the first time an audit is required, it will be important to outline the regulatory framework and the duties of auditors and of management in relation to the audit requirement.

Audit approach Adescription of the proposed audit approach, outlining the stages of the audit process and the audit methodology used by the firm should be given. The description should state that the audit will be conducted in accordance with ISA requirements. Weston & Co should emphasize the need for thorough testing of opening balances and comparatives given that this is the first year that the financial statements will be audited. The risk-based nature of the audit methodology should be explained, and that it will involve an assessment of accounting systems and internal controls. Controls may not be good given the limited resources of the accounting function,so the audit approach is likely to be substantive in nature.

The auditfirm may at this stage wish to explain that while the audit should not be 'disruptive', the audit team will require some input from JonesCo's employees, especially the accountant, and other personnel includingBentley may need to make themselves available to respond to the audit firm's requests for information and to discussmattersrelating to the audit. The proposal should outline the various communications which will be made with those charged with governance during the audit process, and highlight the value added from such communications, for example, recommendations on any control deficiencies.

Deadlines The auditfirm should clarify the timescale to be used for the audit.Bentley hasrequested that the audit is completedwithin fourmonths of the year end. Thisseemsto be reasonable; it should be possible for the audit of a relatively small company with simple transactions and a full-time accountant to be completedwithin that timeframe .

Quality control and ethics Weston & Co should clarify its adherence to IESBA's Code of Ethics for ProfessionalAccountants, and to International Standards on Quality Control. This should provide assurance that the auditfirm will provide an unbiased and credible audit report. This may be importantforthe venture capitalists whowill wish to gain assurance on the financial information which they are provided with in relation to their investment.

Additional non-audit and assurance services The audit proposal should describe the various non-audit and assurance related services which Weston&Co would be able to offer JonesCo. These may include, for example, business consultancy and corporate finance advice on overseas expansion and obtain any necessary additional funding to help the planned overseas expansion. This discussion should clearly state and emphasize that the provision of such services is subject to meeting ethical requirements and will be completely separate from the auditservice.

IRR FC PC KYC = Know Your Client

Independence = ethics, should comply with code Risk = management integrity problem (listed company, FC struggle to calculate DT), significant IC deficiency, etc. Resource = size of client Fee = fair and reasonable, must be high enough to cover cost and risk, but cannot be too high to create self-interest threat Competence = relevant industry experience Precondition = FS are prepared in accordance with IAS/IFRS Conflict of interest

History Questions 2013/12 Q4a Tetbury Co's managing director, Juan Stanton, has approached Chester & Co to invite the firm to tender for its audit. Tetbury Co is a small, owner-managed company providing financial services such as arranging mortgages and advising on pension plans. The company's previous auditors recently resigned. Juan Stanton states that this was due to 'a disagreement on the accounting treatment of commission earned, and because they thought our controls were not very good.' You are aware that Tetbury Co has been investigated by the financial services authority for alleged noncompliance with its regulations. As well as performing the audit, Juan would like Chester & Co to give business development advice. Required: Identify and discuss the ethical and other professional issues raised, and recommend any actions that should be taken in respect of: (a) Tetbury Co (8 marks)

Ethics 1) Client operates in financial service industry, which is a relatively specialized area. This affects auditor’s competence and due care. 2) Provision of non-auditservices,i.e. business development advice, create self-interest threat from additionalfee income, and potential self-review threat.

Professional issue This appears to be a high risk audit, auditor should consider: 1) Financial service industry is by nature high risk, high reliance on audit report, and higher risk on money laundering. 2) Change auditor due to accounting disagreement, cast doubt on management integrity. 3) Poor internal control system, CRis high. 4) Investigation from regulator on non-compliance, cast doubt on management integrity and the company’s going concern status.

Action 1) Conduct customer due diligence. 2) Communicate with previous auditor on accounting issues. 3) Review status on non-compliance investigation, e.g. contact financial services authority for more information. 4) Auditor should assess whether the audit risk can be reduced to an acceptable level, for example, by using an experienced audit team and a substantive audit approach. 5) Auditor should also consider whether the fee for the audit outweighs the risk involved.

Outsourcing is when certain functions within a business are contracted out to third parties known as service organizations. It is common for companies to outsource one or more of it functions, with payroll, IT and human resources being examples of functions which are typically outsourced. ISA 402 Audit Considerations Relating to an Entity Using a Service Organization requires the auditor to obtain an understanding of how the audited entity (also known as the user entity) uses the services of a service organization in the user entity’s operations, including the following matters:

1) Nature of the services provided by the service organization and significance of those services to the audited entity (audit client), including the effect on internal control. 2) Materiality of the transactions processed. 3) Accessibility of accounting records and supporting documents. 4) Control risk. Consider the control exercise by the audit client over the service organization, and how the audit client ensures quality of the work by the service organization. 5) Initiation of transactions, by client or by service organization. 6) Information available on controls relevant to the service organization, etc.

It is common for a report on the description and design of controls at a service organization to be obtained. A type 1 report focuses on the description and design of controls (control), whereas a type 2 report also covers the operating effectiveness of the controls. This type of report can provide some assurance over the controls which should have operated at the service organization. (test of control & opinion)

Past questions 2014/6 Q4b I worked on the interim audit of Crow Co, a manufacturing company which outsources its payroll function. I know that for Crow Co payroll is material. How does the outsourcing of payroll affect our audit planning? Required: For each of the issues raised, respond to the audit junior, explaining the ethical and professional matters arising from the audit junior’s comments. (4 marks) Please refer to the previous summary for the answer.

Types of fraud 1) Misappropriate of assets 2) Fraudulent reporting Management/Those charged with governance responsibility: Prevent and detect fraud Auditor responsibility: Obtain reasonable assurance that the FS are free from material misstatement that caused by fraud and error. (Error < Fraud < Management fraud - Concealment/Forgery)

Communication Report to management Report to regulator – legal obligation & public interest duty Q: If there is material misstatement caused by fraud, is auditor negligent? A: Depends on whether the audit is properly conducted.

Past question papers 2013/6 Q4a Spaniel Co The audit report on the financial statements of Spaniel Co, a long-standing audit client, for the year ended 31 December 2012 was issued in April 2013, and was unmodified. In May 2013, Spaniel Co's audit committee contacted the audit engagement partner to discuss a fraud that had been discovered. The company's internal auditors estimate that $4·5 million has been stolen in a payroll fraud, which has been operating since May 2012.

Past question papers 2013/6 Q4a The audit engagement partner commented that neither tests of controls nor substantive audit procedures were conducted on payroll in the audit of the latest financial statements as in previous years' audits there were no deficiencies found in controls over payroll. The total assets recognised in Spaniel Co's financial statements at 31 December 2012 were $80 million. Spaniel Co is considering suing Groom & Co for the total amount of cash stolen from the company, claiming that the audit firm was negligent in conducting the audit. Required: Explain the matters that should be considered in determining whether Groom & Co is liable to Spaniel Co in respect of the fraud. (12 marks)

Auditor responsibility: 1) Detectmaterialmisstatement caused by error orfraud 2) Express opinion onwhetherFSisT&F 3) No duty to prevent and detect fraud 4.5/80=5% of TA,material. This fraud occurred during the FS has been auditing, and it has material impact on FS. Therefore, it is reasonable to expect audit procedures to detect this material misstatement.

Consider whether the audit has been done properly, i.e. whether it has been conducted as per ISA. If no, auditor is negligent and maybe liable. This leads to a conclusion that the audit firm may have been negligent in conducting the audit. Negligence is a common law concept in which an injured party must prove three things in order to prove that negligence has occurred:

–That the auditor owes a duty of care; contract exists between the two parties. –That the duty of care has been breached;Duty of care generally means that the audit firm must perform the audit work to a good standard and that relevant legal and professional requirements and principles have been followed.Unfortunately,itis not the case here. – That financial loss has been caused by the negligence; being the amount stolen while the fraud was operating. However, if this fraud was purposely concealed, it is difficult for auditors to detect even if the audit is done properly

In 2012, PwC admitted in court that it had breached its audit obligations for Australia's Centro Properties Group by misclassifying A$1.1 billion in short-term liabilities as long-term liabilities, which was only about nine months away from maturity.

Methods that may be used by an audit firm to reduce exposure to litigation claims 1) Client acceptance procedures Firms should carefully assess the risk associated with potential audit clients. Screening procedures should be used to identify matters that create potential exposure for the audit fi rm. For example, it would be unwise to take on a new client with significant going concern problems. The issue is that a client should only be accepted if the associated risk can be managed to an acceptably low level given the skills and resources of the audit firm.

Methods that may be used by an audit firm to reduce exposure to litigation claims 2) Proper use of engagement letters The engagement letter should be used to clearly state the responsibilities of the auditor, and of management. As it forms a contract between the audit firm and the client, it should be updated on an annual basis, with care being taken to ensure the client is fully aware of any changes in the scope of the audit, or the reporting responsibilities of the audit firm.

Methods that may be used by an audit firm to reduce exposure to litigation claims 3) Performance and documentation of audit work Audit firms should ensure that professional standards are maintained, and that International Standards on Auditing (ISAs) are adhered to. It is crucial that full documentation is maintained for all aspects of the audit, including planning, evaluation of evidence, and consideration of ethical issues . A claim of negligence is unlikely to be successful if the audit firm has documentary evidence that ISAs have been followed.

Methods that may be used by an audit firm to reduce exposure to litigation claims 4) Quality control Firms must ensure they have implemented firm-wide quality control procedures, as well as applicable procedures to the individual audit engagement. Quality control acts as an internal control for the audit firm, helping to ensure that ISAs and internal audit methods have been followed at all times.

Methods that may be used by an audit firm to reduce exposure to litigation claims 5) External consultations Firms should make use of external specialists when the need arises, for example obtaining legal advice where appropriate, to ensure that the auditor’s actions are acceptable within the legal and regulatory framework.

Methods that may be used by an audit firm to reduce exposure to litigation claims 6) Disclaimers In recent years it has become common in some jurisdictions for audit firms to include a disclaimer paragraph in the audit report. This is an attempt to restrict the duty of care of the audit firm to the shareholders of the company, thereby attempting to restrict legal liability to that class of shareholders. Disclaimers, however, may not always be effective. “Do not sue me”

ISQC 1 - ''Quality Control for Firms That Perform Audits and Reviews of Historical Financial Information and Other Assurance and Related Services Engagements" provides guidance on the overall quality control systems that should be implemented by an audit firm. ISA 220 - ''Quality Control for Audits of Historical Financial Information (Revised)'' specifies the quality control procedures that should be applied by the engagement team in individual audit assignments.

QC for individual engagement • Client acceptance procedures • Engagement team has a reasonable personnel structure and reasonable work distribution • Direction = Instruction, must correct and always from top to down • Supervision, should be continuous during the engagement • Review = Check the work done • Consultation, when there are difficult issues

Past question papers 2013/6 Q2a Kennel & Co, a firm of Chartered Certified Accountants, is the external audit provider for the Retriever Group (the Group), a manufacturer of mobile phones and laptop computers. The Group obtained a stock exchange listing in July 2012. The audit of the consolidated financial statements for the year ended 28 February 2013 is nearing completion. You are a manager in the audit department of Kennel & Co, responsible for conducting engagement quality control reviews on listed audit clients. You have discussed the Group audit with some of the junior members of the audit team, one of whom made the following comments about how it was planned and carried out:

Past question papers 2013/6 Q2a 'The audit has been quite time-pressured. The audit manager told the juniors not to perform some of the planned audit procedures on items such as directors' emoluments and share capital as they are considered to be low risk. He also instructed us not to use the firm's statistical sampling methods in selecting trade receivables balances for testing, as it would be quicker to pick the sample based on our own judgment. ‘Two of the juniors were given the tasks of auditing trade payables and going concern. The audit manager asked us to review each other’s work as it would be good training for us, and he didn’t have time to review everything.

Past question papers 2013/6 Q2a 'I was discussing the Group's tax position with the financial controller, when she said that she was struggling to calculate the deferred tax asset that should be recognized. The deferred tax asset has arisen because several of the Group's subsidiaries have been loss making this year, creating unutilized tax losses. As I had just studied deferred tax at college I did the calculation of the Group's deferred tax position for her. The audit manager said this saved time as we now would not have to audit the deferred tax figure. 'The financial The controller also asked for my advice as to how the tax losses could be utilized by the Group in the future. I provided her with some tax planning recommendations, for which she was very grateful.' - Ethics Section

Past question papers 2013/6 Q2a Required: In relation to the audit of the Retriever Group, evaluate the quality control, ethical and other professional matters arising in respect of the planning and performance of the Group audit. (13 marks)

QC 1) Time pressure=Inadequate planning,increase auditrisk -DR 2) Not to performcertain audit procedure, e.g. directorremunerationwhich ismaterial=Wrong instruction 3) Use specific sampling method based on own judgment = Wrong instruction, the firm’sstandard samplingmethod should be followed 4) GCissue which is risky and requires professional judgment, is assigned to junior = Assignment problem, it should be assigned to more experienced personwith relevant experiences 5) Junior reviews each other work = Wong instruction, it should be reviewed by more senior person

Past question papers 2018/9 Q3b One of your colleagues at Jansen & Co, Rodney Evans, has been taken ill at short notice and you have been temporarily assigned as audit manager on Watson Co, an IT consultancy company which is listed on a second tier investment market. The final audit of Watson Co for the year ended 30 June 20X8 is approaching completion and you are in the process of reviewing the audit working papers. The draft financial statements for the year recognize profit before taxation for the year of $54·2 million and total assets of $23· 1 million. The audit supervisor, who is a part‑qualified chartered certified accountant, has sent you an email from which the following extract is taken:

Past questions 'It's great to have you on board as I was beginning to worry that there would be no manager review of our working papers prior to the final audit clearance meeting next week. The audit assistant and myself have done our best to complete all of the audit work but we only saw Rodney on the first day of the audit about a month ago when I think he was already feeling unwell. We had a short briefing meeting with him at which he told us 'if in doubt, follow last year's working papers. '

Past questions One issue which I wanted to check with you is that Watson Co has introduced a cash-settled share-based payment scheme by granting its directors share appreciation rights (SARs) for the first time this year. This was not identified at planning as a high risk area. The SARs were granted on 1 July 20X7 at which date the client obtained a valuation of the rights which was performed by an external firm of valuers. I have filed a copy of the valuation report and I have looked up the valuers online and have found a very professional looking website which confirms that they know what they are doing.

Past questions The cost of the SARs scheme based on this valuation is being appropriately recognized over the three-year vesting period and a straight line expense of $195,000 has been recognized in the statement of profit or loss on this basis. A corresponding equity reserve has also been correctly recognised on the statement of financial position. The amount also seems immaterial and I can't see any need to propose any amendments to the financial statements in relation to either the amounts recognised or the disclosures made in the notes to the financial statements.'

Past questions Required: Comment on the quality of the planning and performance of the audit of Watson Co discussing the quality control and other professional issues raised. (10 marks)

Answers to real questions Engagement team has 2 persons only (audit assistant supervisor) = Inadequate staffing forlisting company. Supervision problem. The original audit manager should have been replaced earlier, due to hisinsufficient monitoring and supervision by auditmanager. Inadequate briefing meeting by original audit manager. The advice to follow last year’s working papers is inappropriate as the auditor must always look out for newsituations and issues.

Answers to real questions Failure to identify high risk area – new SARscheme at planning stage, which should have been identified because this is a complex and judgmental area. Lack of audit evidence in relation to external valuerwhich has been used to value the SAR. Auditor must ensure the valuer’s competence, capabilities, objectivity,satisfactory scope of work, etc. Reference to website is clearly inadequate and reflectsinexperience and poor audit planning

Incorrect accounting treatment of SAR. According to IFRS 2, the valuation of SAR should be updated at each year end and the cumulative cost of SAR should be recognized asliability inSOFP. 0.195/54.2 = 0.4% of PBT, immaterial; 0.195/23.1 = 0.8% of TA, immaterial; Immaterial to FS. However, this is RPT with directors which ismaterial by nature, especially for listing company.RPT should have been included in the related party disclosure notes in accordance with IAS24.

Failure to update and change audit plan as necessary during course of audit(ISA300); clearancemeeting is nextweek and managerreviewis only justtaking place.

QC process Qualified opinion, QC partner must: • Review AWP • Review significant issues • Focus on events/transactions giving rise to modified opinion • Discuss with engagement partner 1) Prior to audit report = Hot review (important) 2) After audit report = Cold review

QC for the firm • Training • QC reviewer

QC for the firm • Training An audit firm shall establish policies and procedures designed to promote an internal culture recognizing that quality is essential in performing engagements. Part of creating this internal culture includes training staff appropriately. Training is essential in order for auditors to be kept up-to-date with developments in the profession. Additionally, qualified members will need to verify that they have met Continuing Professional Development (CPD) requirements, for which training on new developments in auditing will be essential

QC for the firm • QC reviewer 1) Technical knowledge The reviewer must have a high standard of technical knowledge, encompassing a thorough understanding of auditing and financial reporting standards, as well as any specific regulatory issues (such as stock exchange listing rules) which may be relevant to the client.

QC for the firm • QC reviewer 2) Experience The reviewer should be an experienced auditor, preferably with specific practical experience of auditing companies operating in a similar industry or business sector as the client.

QC for the firm • QC reviewer 3) Authority The reviewer should possess a level of authority within the firm. This will allow the reviewer to challenge the decisions made by other members of the firm, including senior managers and partners. It is important that the reviewer is not intimidated by the senior members of the audit team who could feel criticized by any negative comments that the reviewer may have on their work and decisions. ISQC 1 recommends that a reviewer of listed client's audits should normally be at partner level within the firm.

QC for the firm • QC reviewer 4) Independence The reviewer must be independent of the audit team. This allows a totally objective review to take place. The engagement partner therefore should not be involved in deciding who should review the audit. Consultations between the engagement partner and the reviewer can take place during the audit, but care should be taken to preserve the reviewer’s objectivity.

Past question papers 2011/12 Q1b Maple & Co is suffering from declining revenue, and as a result of this, another audit manager has been asked to consider how to improve the firm’s profitability. In a conversation with you this morning he mentioned the following: ‘We really need to make our audits more efficient. I think we should fix materiality at the planning stage at the maximum possible materiality level for all audits, as this would reduce the work we need to do.

Past question papers 2011/12 Q1b I also think we can cut the firm’s overheads by reducing our spending on training. We spend a lot on expensive training courses for junior members of the audit team, and on Continuing Professional Development for our qualified members of staff. We could also guarantee our clients that all audits will be completed quicker than last year. Reducing the time spent on each assignment will improve the firm’s efficiency and enable us to take on more audit clients.’ Required: Comment on the practice management and quality control issues raised by the audit manager’s suggestions to improve the audit firm’s profitability. (6 marks) & 3 issues

Issue 1=Fix materiality Issue 2=Cut down training -ISQC1 Issue 3=Guarantee the audit will be quicker Issue 2=Cut training Non-compliance with ISQC 1. An audit firm shall establish policies and procedures designed to promote an internal culture recognizing that quality is essential in performing engagements. Part of creating this internal culture includes training staff appropriately. Training is essential in order for auditors to be kept up-to-date with developments in the profession. Cutting down training will increase auditrisk &risk to be sued for wrong audit opinion.

Issue 1=Fix materiality Fix and maximize ML i.e. use higher ML to assess misstatements. Hence, many misstatements belowthe newML will be considered to be immaterial, this willreduce extent of testing and increase auditrisk, due to insufficient evidences gathered. Beside, fixed ML is non-compliance with ISA, because ML determined during planning stage can only be revised during audit if additional information shows the revision is necessary, which is not the case here.

Issue 3=Guarantee the audit will be quicker It cannot be guaranteed without knowing the situation of client, e.g. change in operation structure such as M&A may need more time to audit. Inadequate time = insufficient evidence, this will increase detection risk and expose the firm to litigation.

Laundering = washing dirty clothes Money laundering = laundering dirty money Dirty money = Proceeds from criminal activities, e.g. bribery, sell drugs, tax evasion The origin of money laundering: In the 1930s, there was a gang of mafia in Chicago. They had a lot of black income. At the same time, they also had an upright coin-operated laundry business. So when filing tax returns to the tax department every month, they would falsely declare their income and use the guise of using the money to wash it in a laundromat.

Stages of money laundering

Audit firm may commit money laundering offense • Handling the proceeds of criminal activity or advising on that • Failure to report suspicious money laundering activities Failure to report information • Tipping off tipping off • Failure to comply with the specific regulatory requirements Failure to follow procedures

AML procedures which audit firm should have in place:

AML procedures which audit firm should have in place:

2012/6 Q3a You are a manager in Lark & ​​Co, responsible for the audit of Heron Co, an owner-managed business which operates a chain of bars and restaurants. This is your firm's first year auditing the client and the audit for the year ended 31 March 2012 is underway. The audit senior sends a note for your attention:

2012/6 Q3a 'When I was auditing revenue I noticed something strange. Heron Co's revenue, which is almost entirely cash-based, is recognized at $5·5 million in the draft financial statements. However, the accounting system shows that till receipts for cash paid by customers amount to only $3·5 million. This seemed odd, so I questioned Ava Gull, the financial controller about this. She said that Jack Heron, the company's owner, deals with cash receipts and posts through journals dealing with cash and revenue. Ava asked Jack the reason for these journals but he refused to give an explanation.

2012/6 Q3a ‘ While auditing cash, I noticed a payment of $2 million made by electronic transfer from the company’s bank account to an overseas financial institution. The bank statement showed that the transfer was authorized by Jack Heron, but no other documentation regarding the transfer was available. 'Alarmed by the size of this transaction, and the lack of evidence to support it, I questioned Jack Heron, asking him about the source of cash receipts and the reason for electronic transfer. He would not give any answers and became quite aggressive.'

2012/6 Q3a Required: (i) Discuss the implications of the circumstances described in the audit senior’s note; and (6 marks) (ii) Explain the nature of any reporting that should take place by the audit senior. (3 marks) Issue: Revenue=5.5 Till receipt=3.5 Transfer to overseas=2

Implications of the circumstances • Heron Co is a cash-based business, making it an ideal environment for money laundering. • $2 did not come from bars&restaurants, and was not processed through normal accounting system. Thisissuspicioustransaction to put illegal funds into legalrevenue=Placement • $2 overseastransfer with no supporting document, and the owner who deals with the transactions refused to explain=Layering

Implications of the circumstances • Furthermore, the owner’s aggressive behaviors suggested the client may have something to hide, be careful not to tip off. • This is a suspiciousmoney laundering. Tutorial note:Credit will also be awarded for discussion of other relevant matters, such as asfraud, internal control deficiencies and auditimplications.

Reporting 1) Report to MLRO ASAP. 2) The audit senior who discovered this mustreport himself, although the senior may wish to discuss concerns with the audit manager in more detail before making the report, especially if the senior is relatively inexperienced and wants to hear a more senior auditor’s view on the matter. 3) MLRO should evaluate and decide whether to file report to regulator about name of client, amount and reason ofsuspicion.

2018/12 Q3a You are an audit manager in Thomasson & Co, a firm of Chartered Certified Accountants. You have recently been assigned to the audit of Clean Co for the year ended 30 September 20X8. Clean Co is an unlisted company and has been an audit client of your firm for a number of years. Clean Co is a national distributor of cleaning products. The company buys the cleaning products from wholesalers and employs a team of approximately 750 sales staff around the country who sell the company’s products to both domestic households and small to medium-sized businesses.

2018/12 Q3a Around 75% of Clean Co's sales transactions are cash-based and each of the company's sales staff prepares a cash sales report on a monthly basis. According to Clean Co's chief executive, Simon Blackers, and in order to foster 'an entrepreneurial spirit' amongst his staff, each staff member (including the senior management team) is encouraged to make cash sales and is paid on a commission basis to sell the company's products to friends and family. Mr Blackers leads the way with this scheme and recently sold cleaning products with a value of $33,000 to a business associate of his. He has transferred these funds directly into an off-shore bank account in the company's name on which he is the sole signatory

2018/12 Q3a Required: (i) Discuss the policies and procedures which Thomasson & Co should have in place in relation to an anti‑money laundering programme; and (4 marks) See summary above for answers (ii) Evaluate whether there are any indicators of money laundering activities by either Clean Co or its staff. (6 marks) Just refer to the answers to the real questions

ISA 250 Consideration of laws and regulations in an audit of financial statements • Management responsibilities • Auditor responsibility • Audit procedures • Reporting non-compliance to TCWG/shareholder/regulator

Management responsibilities: • to ensure compliance with laws and regulations

Auditor responsibilities: • to express opinion on FS • is not responsible for preventing non-compliance • cannot be expected to detect non-compliance with all laws and regulations However, non-compliance could result in material misstatements, hence, the auditor has to obtain a general understanding of laws and regulations that affects the audit.

Types of laws and regulations: 1) Direct impact on FS • Financial figures are calculated based on the law, e.g. Tax laws • Auditor need to ensure compliance 2) No direct impact on FS • FS is only affected when there is non-compliance of the law, e.g. Company Act, Environmental regulation. There might be penalty & provision for penalty in FS, withdrawn of license & GC uncertainty. • Auditor need to perform audit procedures to detect non-compliance

Audit procedures to detect non-compliance: • Inquire management. • Inspect correspondence with regulator. • Remain alert to possibility of non-compliance, e.g. sales and output tax • Request written representation.

If auditor is aware of this: • Discuss with management to understand the non-compliance. • Assess possible impact on FS, any provision? • Should encourage management to report to regulator. • If management refuse, auditor need to consider whether there is legal obligation and/or public interest duty to report.

Reporting non-compliance to TCWG (those charged with governance) TCWG – listing company = AC audit committee TCWG – private company = Most senior director, e.g. chairman • Report non-compliance unless the matter is clearly inconsequential. • Report as soon as possible. • If auditor suspects management is involved, should report to next higher level.

Report non-compliance to shareholders (in audit report): • Material effect on FS, qualified or adverse opinion. Report non-compliance to regulator: • Consider any legal obligation to report, i.e. any legal requirement that overrides confidentiality. • In the absence of legal obligation, consider any public interest duty (no definition, consider whether members of the public may be affected, the possibility and likelihood of repeated non-compliance) to report．

Past question papers 2013/12 Q3b (Storyline – Coal Mine Accident) Required: In relation to management’s decision not to report the accident to the National Coal Mining Authority, discuss Burton & Co’s responsibilities and recommend the actions which should be taken by the firm. (6 marks)

Past question papers 2012/6 Q4b Plover Co is a private hospital which provides elective medical services, such as laser eye surgery to improve eyesight. The audit of its financial statements for the year ended 31 March 2012 is currently taking place. The audit senior overheard one of the surgeons who performs laser surgery saying to his colleague that he is hoping to finish his medical qualification soon, and that he was glad that Plover Co did not check his references before employing him. While completing the subsequent events audit procedures, the audit senior found a letter from a patient's solicitor claiming compensation from Plover Co in relation to alleged medical negligence resulting in injury to the patient. Required: Identify and discuss the ethical, commercial and other professional issues raised, and recommend any actions that should be taken. (7 marks)

1) Auditor should establish whether the surgeon is not qualified, possibly through reviewing the personnelfile of the surgeon or discussing with the person responsible for recruitment. 2) Evaluate possible impact on FS, e.g. any penalty for legal case to be provided, further legal actions from other patients, possibility of withdrawal of license andGCproblem. 3) Discussthe matter with management and/or TCWG about the non-compliance.And encourage them to report to regulator. 4) Seek legal advice on duty to report to regulator. If no, consider any public interest duty to report. Can discuss confidentiality - ethics

An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence’. - Questioning mind, i.e. why, why, tell me why - Critically assess audit evidence, e.g. management explanation or response to auditor’s enquiry & obtain corroborating evidence to verify the explanation; Non-compliance with internal controls & investigate further to confirm and report control deficiency to TCWG. - Being alert to contradictory evidence, e.g. payroll expenses double, management claims increase in headcount, but HR report shows it remains the same.

Past question papers 2012/6 Q3b You are also responsible for the audit of Coot Co, and you are currently reviewing the working papers of the audit for the year ended 28 February 2012. In the working papers dealing with payroll, the audit junior has commented as follows: 'Several new employees have been added to the company's payroll during the year, with combined payments of $125,000 being made to them. There does not appear to be any authorization for these additions. When I questioned the payroll supervisor who made the amendments, she said that no authorization was needed because the new employees are only working for the company on a temporary basis.

2012/6 Q3b However, when discussing staffing levels with management, it was stated that no new employees have been taken on this year. Other than the tests of controls planned, no other audit work has been performed.’ Required: In relation to the audit of Coot Co’s payroll: Explain the meaning of the term ‘professional skepticism’, and recommend any further actions that should be taken by the auditor. (6 marks) Further action in review stage Do not write audit evidence, it is difficult

Answers to real questions 1)Definition 2)The reliability of the payrollsupervisor’s response to the junior’s enquiry should be questioned. Additional evidence should be sought for the assertion that the newemployees are indeed temporary. 3) No authorization is required when hiring temporary staff, alert of control deficiency. The absence of authorization should be further investigated. If it is true, this is significant control deficiency, as this may lead to fraud. Further action: This should be reported to TCWG,in the form of management letter.

4) Management states that no new employee, whereas, payroll 125K has already been paid to “them”. This is contradictory evidence and would be indicator offraud. Further action: Obtain a list of employees from payroll records, verify existing by checking identity, or interviewing. 5) Only perform TOC, no other procedures. This is insufficient evidence. Auditor should perform substantive procedures such as TOD of payroll expense.

Past question papers 2016/9&12 Q4 You are an audit manager at Thornhill & Co responsible for the audit of Northwest Co, a subsidiary of Valerian Co. A different audit firm is responsible for the audit of Valerian Co and the Valerian Group financial statements. The audit of the financial statements of Northwest Co for the year ended 31 July 2016 is nearing completion, but the following issues require your attention before the auditor's report is signed and your final communication is made to the group auditor in response to their request for information. The draft financial statements of Northwest Co recognize a loss before tax of $50,000.

Past question papers 2016/9&12 Q4 Northwest Co has been loss making for several years and it generates insufficient cash to meet its significant debt obligations. The company relies on support from Valerian Co in order to continue trading. The management of Valerian Co has confirmed verbally that it will continue to support Northwest Co, but has not provided a formal letter of support despite a number of requests.

2016/9&12 Q4 You are aware that Valerian Co is the subject of a major lawsuit following an industrial accident which resulted in significant pollution of local agricultural land and, most seriously, loss of life. You attempted to discuss the matter with the directors of Valerian Co but they refused , saying that it had already been investigated by the group auditor. The group auditor informed you that the case is ongoing and that they have obtained satisfactory representations from both management and legal advisers stating that they were confident of successfully defending the claim. When you asked for copies of the representations, the group auditor refused saying it was a matter relevant to the parent company and that it was not relevant to the audit of Northwest Co.

2016/9&12 Q4 Shortly after making your enquiries, you received a phone call from the group engagement partner who said that the board of Valerian Co was concerned that you might modify the auditor's report of Northwest Co. He also said that, as the only person with full oversight of audit matters relating to the Valerian Group, he did not think that it would be necessary to modify the auditor's report of Northwest Co and that he would oppose any attempt to do so. He suggested that if the debt in the financial statements of Northwest Co was the reason for seeking parental support that he would transfer it to the Group and the letter of support would no longer be necessary

2016/9&12 Q4a Required: a) Discuss how professional scepticism should be applied to the statements made by the management and auditors of Valerian Co regarding the outstanding legal case. (6 marks) b) Comment on the ethical and professional issues raised, considering any implications for completion of the audit, in respect of: (i) The evidence obtained in relation to the support offered by Valerian Co. (ii) The request not to modify the auditor's report of Northwest Co. Note: The total marks will be split equally between each part. (14 marks)

Issue 1=Offer ofsupportbyValerianCo Issue 2=Outstanding legal case Issue 3=Requestnottomodify the auditor’s report ofNorthwestCo

Answers to real questions a)Professional scepticism • Risk of misstatement in relation to a material matter • Reliability of confirmation ofinternally generated evidence • Judgmentrequired in relation ability to provide support • Material uncertainty facing parent company • Unusual behavior of group engagement partner • Need to remain alert for other factors affecting going concern • Need to remain sceptical of all other mattersrequiring management judgment

Answers to real questions b)(i)Support offered by ValerianCo • NorthwestCowould not be a going concernwithoutsupport of parent • Verbal confirmation not sufficient evidence • Additional evidence that ValerianCo is capable of providing support • Examples of further evidence • Suspicious conduct of parent and group auditor • Need for professional due care and potential re-appraisal offraud risk • Communication with those charged with governance • Possible modification of auditor’s report if additional evidence not received

Answers to real questions (ii)Request not to modify report • Intimidation threat • Responsibility for audit opinion remains withThornhill&Co • Transfer of debttoValerian Cowould not resolve the problem • Possible suggestion of inappropriate accounting treatment • Potentiallack of integrity of group audit partner and potential fraud • Matter should be discussed with senior audit staff • Possible resignation as auditor

Evidence how to ask questions

PPE – Dismantling cost

PPE – Borrowing cost

2014/12 Q3a (y.e. 30/11/2014) During the year, Faster Jets Co purchased several large plots of land located near major airports at a cost of $12·5 million. The land is currently rented out and is classified as investment property, which is recognized in the draft financial statements at a fair value of $14·5 million. The audit partner has suggested the use of an auditor's expert to obtain evidence in respect of the fair value of the land. Required: In respect of the land recognized as investment property: (i) Explain the additional information which you require to plan the audit of the land; and (ii) Explain the matters to be considered in assessing the reliance which can be placed on the work of an auditor’s expert. (10 marks)

Additionalinformation is approximately equal to evidence The situation is as above, how do I confirm it, that is, the audit evidence I need to obtain 1)Discusswithmanagement about the reason for acquiring the land, e.g.for rental, capital gain, or construction of building. buy a piece of land 2) Agree cost 12.5mto purchase agreement, to verify amount paid. Cost 12.5 3)Inspect details of the land acquired, e.g. owners, location, price of similar land, etc. This is necessary to plan the logistics of the audit. 4) (currently rented out) Review terms and condition, and other details in lease contract, e.g. whether the lessee is related party. rented out 5) Understand how the FV 14.5misreached, e.g.management assumption &calculation, or valuer assumption&calculation, to assess competence of preparer.Ending value 14.5

Matters to consider when place reliance on expert – valuer 1) Objectivity Auditor and the valuer should: - not financially dependent - have no personal or business relationship 2) Competence and capabilities of the expert - Whether the valuer is member of appropriate professional bodies, e.g. Institute of Quality Surveyor - Valuer’s knowledge and track records, e.g. should have experience in valuing such property, and be familiar with the framework for measuring fair value in accordance with IAS 40 and IFRS 13

Matters to consider when place reliance on expert – valuer 3) Scope of work Auditor should agree the scope of work with the expert, includes: - objectives of the work - how the expert’s work will be used by the auditor - methodology and key assumptions to be used The auditor needs to reach agreement with the expert on the following matters, including: overall goals and requirements; the expert's scope of work; the respective responsibilities of the auditor and the expert; important assumptions and methods involved in the work, etc.

Matters to consider when place reliance on expert – valuer 4) Relevance of conclusion Auditor should consider: - source data used, e.g. location, size, condition, usage - appropriateness of assumptions and the reasons for any changes in methodology or assumptions, e.g. future rental income, discount factor, future selling price The conclusion should be consistent with other relevant audit findings and with the auditor’s general understanding of the business. Auditors need to assess: the relevance, accuracy and completeness of the original data used in the expert's work; the reasonableness of key assumptions and methods; the relevance and consistency of the conclusions with other evidence.

ISA 620, Using the Work of an Auditor’s Expert

Common impairment indicators in case scenario

Impairment test for individual asset & CGU

Past question papers 2014/12 Q2b (y.e. 31/7/2014) – accident In September 2014, a natural disaster caused severe damage to the property complex housing the Group's head office and main manufacturing site. For health and safety reasons, a decision was made to demolish the property complex. The demolition took place three weeks after the damage was caused. The property had a carrying value of $16 million at 31 July 2014. Required: Comment on the matters to be considered, and explain the audit evidence you should expect to find during your review of the audit working papers in respect of each of the issues described above. (4 marks)

Answers to real questions Mattersto consider 16/23=69.6%ofPBT,materialtoSOPL 16/450=3.6%ofTA,materialtoSOFP Year end 31/7/2014,Accident 9/2014. This is material non-adjusting event as perIAS10,to disclose in notestoFS: (What happen)Nature,i.e. damage,impairmentindicator (Howmuch)Financial effect,i.e. CV16,RA0,Loss 16 Risk is wrongly treated as adjusting event, no/insufficient disclosure. Evidence 1)Physical visit to confirmproperty has been damaged/demolished. 2) Obtain expert report to confirm date of the accident.

Past question papers 2014/6 Q3a i (y.e. 31/7/2014) – obsolescence Cooper Co's factories are recognized within property, plant and equipment at a carrying value of $60 million. Half of the factories produce a chemical which is used in farm animal feed. Recently the government has introduced a regulation stipulating that the chemical is phased out over the next three years. Sales of the chemical are still buoyant, however, and are projected to account for 45% of Cooper Co's revenue for the year ending 31 January 2015. Cooper Co has started to research a replacement chemical which is allowed under the new regulation , and has spent $1 million on a feasibility study into the development of this chemical.

Past questions 2014/6 Q3a i (y.e. 31/7/2014) Required: Comment on the matters to be considered and explain the audit evidence you should expect to find during your review of the audit working papers in respect of each of the issues described above. (8 marks) 2 issues in the case Issue 1 = Impairment of factory Issue 2 = Research expenditure

Answers to real questions Mattersto consider Issue 1 = Impairment of factory (60/2)/15=200%ofPBT,materialtoSOPL (60/2)/240=12.5%ofTA,materialtoSOFP New regulation prohibiting manufacture of the chemical in 3 yearstime is an impairment indicator. Management should conduct impairment test according to IAS 36 to determine recoverable amount, and recognize impairment loss, if any. Risk is no impairment test, orimpairment loss not recognized. Overstate profit, overstate asset.

Answers to real questions Mattersto consider Issue 2 = Research expenditure 1/15=6.7%ofPBT,materialtoSOPL 1/240=0.4%ofTA,immaterialtoSOFP Hence,materialtoFS As per IAS38, feasibility research expenditure should be expensed off. . Risk is wrongly capitalization of expense. Overstate profit, overstate asset.

Answers to real questions Evidence 1) Obtain copy of government’s new regulation, to confirm the prohibition of manufacture of the chemicalin 3 yearstime. The new policy shortens the product life cycle 2) Review management impairment calculation to assess assumption on futureCFs,DFused and recalculateVIU. Determine impairment loss 3)Invoice form consulting firm who conducted feasibility study, to confirm amount=1m

Past question papers 2017/3&6 Q1a c (y.e. 31/5/2017)-lawsuit Acquired brand names are held at cost and not amortised on the grounds that the assets have an indefinite life. Annual impairment reviews are conducted on all brand names. In December 2016, the Chico brand name was determined to be impaired by $30 million due to allegations made in the press and by customers that some ingredients used in the Chico perfume range can cause skin irritations and more serious health problems. The Chico products have been withdrawn from sale. Required: (a) Evaluate the risks of material misstatement to be considered in planning the Group audit. (c) Recommend the principal audit procedures to be performed on: (i) The impairment of the Chico brand (5 marks)

Answers to real questions RMM (refer to Mattersto consider for the answer method) 30/358=8%ofTA,materialtoSOFP 30/28=107%ofPBT,materialtoSOPL Chico brand name should be capitalized and amortised overits useful life. Where thisisindefinite, no amortisation isrequired, however an annual review of the appropriateness of the assumption ofindefinite life should be performed and an annualimpairmenttestis also required. [The following are the risks pointed out in the examiner’s article] (Indefinite life) Management’s judgment that the brand names have an indefinite life may be incorrect. (Still indefinite life) Management may not have reviewed the useful life of the brand names in the reporting period to ensure that the assumption of indefinite life is still correct.

RMM (refer to Matters to consider for how to answer questions) (Accuracy of impairment test) The impairmentreview may not be accurate as the assumptions used by management may not be appropriate and the calculation is complex and judgmental. (Product is withdrawn from sale) The inventory relating to Chico productsmay need to bewritten offfitsNRVis below cost. Other brands and inventory may be affected by the negative publicity regardingChico and may also need to be written down.

Audit procedures 1)Evaluate the assumptions used by management in their impairment review and consider their reasonableness. 2) Obtain management’s calculations relevant to the impairment, to verify whether the brand has been entirely or partly written off. 3)If the brand is not fully written off, discuss with management the reasons for this treatment given that the brand is now discontinued. 4) Obtain a breakdown of operating expenses to confirm that the impairment is included. 5) Obtain a breakdown of total revenue by brand, to evaluate the significance of the Chico brand to financial performance and whether it constitutes a separate line of business for disclosure as a discontinued operation.

Past question papers 2010/12 Q3b (y.e. 30/9/2010) One part of the company's activities, operating under the Shelly's Cruises brand, provides cruise holidays. Due to economic recession, the revenue of the Shelly's Cruises business segment has fallen by 25% this year, and profit before tax has fallen by 35%. Shelly's Cruises contributed $640 million to total revenue in the year to 30 September 2010, and has identifiable assets of $235 million, including several large cruise liners. The Shelly's Cruises brand is not recognized as an intangible asset, as it has been internally generated. Required: Comment on the matters that you should consider, and state the audit evidence you should expect to find in your review of the audit working papers in respect of: (b) Shelly’s Cruises, and (7 marks)

Answers to real questions Mattersto consider 640/3200=20%ofR,materialtoSOPL 235/4100=5.7%ofTA,materialtoSOFP As per IAS 36, the economic recession and drop in revenue 25%, drop in PBT35% are impairment indicators of the business division - Shelly cruise, as CGU. Management should conduct impairment test for all the assets collectively, to determine RAand to recognize impairment loss, if any , as per certain priority. Risk is no impairment test, no/insufficient recognition of impairment loss. Overstate assets, overstate profit.

Answers to real questions Evidence The economy is not good, sales and profits decline, and management makes impairments. 1)Inspect post year-end economic conditions, e.g. GDP growth. 2) Review post year-end management accounts for the performance of Shelly’sCruises, e.g. bookingsto be taken in future, and operating expenses. 3) Review management impairment analysis and calculation, to confirm reasonableness of assumptions used and accuracy of figures. 4) Discusswithmanagement over the expected future performance including any strategies to be putin place to resolve the declining performance.

Recognition of provision

Past question papers 2012/12 Q1b (y.e. 30/11/2012) You have just received a phone call from Mo Satriani, Grohl Co's finance director, in which he made the following comments: 'There is something I forgot to mention in our meeting. Our business insurance covers us for specific occasions when business is interrupted. I put in a claim on 28 November 2012 for $5 million which I have estimated to cover the period when our production was halted due to the problem with the corroded copper. This is not yet recognized in the financial statements, but I want to make an adjustment to recognize the $5 million as a receivable as at 30 November.' Required: Comment on the matters that should be considered, and recommend the audit procedures to be performed, in respect of the insurance claim. (8 marks)

Answers to real questions Mattersto consider 5/12.5=40% of R,material to SOPL 5/(0.3),turn a small loss to a huge profit,material to SOPL 5/280=1.8%ofTA,material to SOFP IAS 37, if the probability of insurance claim is virtually certain, recognize as receivable; ifitis less than that, disclose a contingent asset in notes to FS or no action. Not yet virtually certain, recognized asreceivable. Overstate asset, overstate profit.

Answers to real questions Evidence 1) Obtain the insurance contract/policy, to ensure it covers such production interruption. 2)Review the claimreportsubmitted by client, to verify amount claimed is 5m, and date submitted is 28Nov. 3) Review supporting documents, e.g. customer return claim, inventory impairment calculation, to support the loss incurred. 4)In order to ensure probability,reviewletterfrominsurance company if any,orsend direct conformation

Past question papers 2018/9 Q2a ii (y.e. 31/5/2018) A customer of Clark Co successfully sued the company for negligence in April 20X8 after suffering a personal injury at one of its sites. The court awarded the customer $1·2 million in damages and this had not yet been paid as at 31 May 20X8. audit working papers include a copy of a verified letter dated 25 May 20X8 from an insurance company confirming that the claim is fully covered under Clark Co's public liability insurance policy. On the basis that the company has no net liability as a result of the claim, the finance director has not recognized any amounts in the financial statements and has not made any disclosures in relation to the matter. Required: Recommend and explain the matters which should be discussed with management in relation to each of the proposed adjustments, including an assessment of their individual impact on the financial statements.

Answers to real questions Mattersto consider 1,200/22,000=5.5%ofTA,material. IAS 37, provision should be recognized: present obligation, probable FEB outflows, amount can beMR. In this case, customer has already won the case against company, amount claimed has been agreed by court, settlement is still outstanding at year end.Hence, provision should be recognized inSOFP. IAS 37 also states that contingent asset should not be recognised unless the realization of income is virtually certain. As for Clark's insurance claim, the verified letter dated 25/5/2018, the settlement of claim as at year end is virtually certain and a receivable should be recognised inSOFP. If adjustment is not made, both asset and liability are materially misstated. There is no net impact on SOPL. Besides, full disclosure of facts and amounts of provision forlegal claimand reimbursementisrequired.

Answers to real questions If you ask Evidence 1)Review customer contract to confirm whetherClarkCo isliable for such negligence. 2) Review letter from plaintiff and send direct confirmation to lawyer, to confirm legal proceeding is in progress. The above two points do not apply to this question because the judge has already ruled 3) Obtain a copy of court decision, to verify the amount awarded is 1.2m. 4) Obtain a copy of letter from insurance company, to verify the amount recovered is 1.2mand date is 25/5/2018.

General rule to capitalize intangible assets – ICE Identifiable – separated from business or awarded Control – control over the economic resource Economic benefit Economic benefit – will be produced by the resource Normally, Training and skill – not IA, no control over staff Goodwill – not IA in individual FS, not identifiable Research – not IA, unsure on economic benefit

License – normally can capitalized as IA • Awarded, hence identifiable • Right to operate, hence control • Economic benefit, look at market research report, sales forecast, actual sales after year end, etc.

Acquired brand name – normally can capitalized as IA • Acquired, hence identifiable • Right to operate, hence control • Economic benefit, look at market survey, sales forecast, actual sales after year end, advertising and marketing expenditure to maintain image

Illustration: • Wrongly capitalized when conditions are not met. • Total expenditure is 60 but increase in IA is only 30. This is unexplained trend, more info is needed to reconcile the 2 amounts. • UEL 15 years is applied to all categories of IA, this is not specific enough. Furthermore, 15 years is considered to be long. Normally technology-related IA will be written off over a relatively short period given the repaid development in high-technology industry.

Past question papers 2013/6 Q3c (y.e. 31/1/2013)- license The statement of financial position includes an intangible asset of $15 million, which is the cost of a distribution license acquired on 1 September 2012. The license gives Setter Stores Co the exclusive right to distribute a popular branded soft drink in its stores for a period of five years. Required: Comment on the matters to be considered, and explain the audit evidence you should expect to find during your file review in respect of each of the issues described above. (5 marks)

Answers to real questions Mattersto consider 15/300=5%ofTA,materialtoSOFP Amortisation15/5*5/12=1.25 1.25/47.5=2.6%ofPBT,immaterialtoSOPL IAS38, the license can only be capitalizedwhen: • Identifiable - acquired • Control- exclusive right to distribute a popular branded soft drink • Economic benefit- need to demonstrate Risk is wrongly capitalized when client is not able to demonstrate FEB. No amortisation was charged. The question was still about cost.

Answers to real questions Evidence 1) Reviewa copy of the license,to confirmcost=15,UEL=5 2) Agree cash paid to bank statement and cashbook. 3) Obtain sales forecast and actual sales after year end in relation to the soft drink, to determine future economic benefit to be derived. 4) Discuss with management regarding reasons for non-amortisation.

Past questions-Brand name 2014/12 Q1c (y.e. 31/12/2014) Another success in 2014 was the acquisition of the 'Cold Comforts' brand from a rival company. Products to alleviate the symptoms of coughs and colds are sold under this brand. The brand cost $5 million and is being amortised over an estimated useful life of 15 years. Required: Recommend the principal audit procedures to be performed in respect of the acquired ‘Cold Comforts’ brand name. (5 marks)

Answers to real questions Audit procedures 1) Obtain purchase agreement/invoice,to confirmcost=5m 2) Agree the cost of 5m to the company’s cash book and bank statement. 3) Reviewamortization calculation, to confirm $5/15 is calculated correctly. 4) Discuss with management the estimated useful life of the brand of 15 years and obtain an understanding of how15 years has been determined as appropriate. 5) Obtain any market research or customer satisfaction surveys to confirm the existence of a revenue stream.

Research • Initial investigation of technical knowledge • Chance of success is low • Success = Economic benefit inflow? Development • Application of existing knowledge • Chance of success is highs • Success = Economic benefit inflow?

Past papers -IAS38 2011/12 Q5a You are the manager responsible for the audit of Yew Co, a company which designs and develops aircraft engines. The audit for the year ended 31 July 2011 is nearing completion and the audit senior has left the following file note for your attention : 'I have just returned from a meeting with the management of Yew Co, and there is a matter I want to bring to your attention. Yew Co's statement of financial position recognizes an intangible asset of $12·5 million in respect of capitalized research and development costs relating to new aircraft engine designs. However, market research conducted by Yew Co in relation to these new designs indicated that there would be little demand in the near future for such designs. Management has provided written representation that they agree with the results of the market research

Answers to real questions -IAS38 Mattersto consider 12.5/ 23=54.3%PBT,materialtoSOPL 12.5/210=5.9%TA,materialtoSOFP As per IAS 38, development cost can only be capitalized when all following conditions aremet –PIRATE,resource to complete, ability to use orsell. Development cost =12.5m, whereas cash = 0.125m. Yew Co appears to be short offinance,itis questionablewhether sufficientfunds would be available to complete the development and take the product to market. Furthermore, market research report indicates little demand, and management agree with it. This indicates client has no ability to use orsell it and probably is not able to generate FEB. Overstate asset, overstate profit.

Further action 1) (No money) Discusswithmanagement on future possible finance. 2) (Does not meet capitalization conditions) IA should be derecognised, with all research and development costs treated as operating expenses.

Past question papers-2013/6 Q3a (y.e. 31/1/2013) Setter Stores Co owns a number of properties which have been classified as assets held for sale in the statement of financial position. The notes to the financial statements state that the properties are all due to be sold within one year. On classification as held for sale , in October 2012, the properties were re-measured from carrying value of $26 million to fair value less cost to sell of $24 million, which is the amount recognized in the statement of financial position at the year end. Required: Comment on the matters to be considered, and explain the audit evidence you should expect to find during your file review in respect of each of the issues described above. (8 marks)

Answers to real questions Mattersto consider 24/300=8%ofTA,materialtoSOFP 24/47.5=50.5%ofPBT,materialtoSOPL IFRS5,whether this meets condition to be classified asNCAHFS123456 Reclassification before conditions are met. However, in the case of Setter store company,management has already transferred the asset to NCAHFS and remeasured it from26 to 24,this appears to be consistent with IFRS5. Depreciation has not been ceased.

Answers to real questions Evidence frontSummary 1) Obtain property valuation report,to confirm24 inSOFPisreasonable. 2) Review management depreciation schedule, to confirm it has been ceased fromOct 2012

DO-Definition A component of an entity that either has been disposed of or is classified as held for sale, and: • represents either a separate major line of business (operationally/financially independent to the rest of business) or a geographical area of ​​operations • is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of ​​operations, or • is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.

Past question papers-2011/6 Q1a i (y.e. 30/6/2011) The second issue concerns one of Bill Co's specialist divisions, which trades under the name 'Treasured Homes' and which deals exclusively in the redevelopment of non-industrial historic buildings such as castles and forts. These buildings are usually acquired as uninhabitable ruins, and are then developed into luxury residences for wealthy individuals. The management of Bill Co decided last week to sell this division, as although it is profitable, it generates a lower margin than other business divisions. 'Treasured Homes' operates separately from the rest of the business , and generates approximately 15% of the total revenue of the company

Past question papers 2011/6 Q1a i (y.e. 30/6/2011) Required: I have just received some information on two significant issues that have arisen over the last week, from Sam Compton, the company’s finance director. This information is provided in attachment 1. I am asking you to prepare briefing notes, for my use, in which you explain the matters that should be considered in relation to the treatment of these two issues in the financial statements, and also explain the financial statement risks relating to them. I also want you to recommend the planned audit procedures that should be performed in order to address those risks. (16 marks)

Answers to real questions Mattersto consider The division runsseparately from the rest of business and generated 15% revenue.It meets definition of DO as per IFRS5. Results and cashflows should be separated from those continuing operation. Risk isseparate presentation is notthere.

Past question papers 2017/9&12 Q2a (y.e. 31/7/2016) Due to the planned disposal of one of Thurman Co's factory sites, the property and associated assets have been classified as held for sale in the financial statements. A manual journal has been posted by the finance director to reclassify the assets as current assets and to adjust the value of the assets for impairment and reversal of depreciation charged from the date at which the assets met the criteria to be classified as held for sale. The finance director asked the audit senior to check the journal before it was posted on the basis of there being no one with the relevant knowledge to do this at Thurman Co.

Past question papers 2017/9&12 Q2a (y.e. 31/7/2016) The planned disposal was discussed with management. A brief note has been put into the audit working papers stating that in management's opinion the accounting treatment to classify the factory as held for sale is correct. The manual journal has been arithmetically checked by a different member of the audit team, and the amounts agreed back to the non-current asset register. Required: (i) Comment on the sufficiency and appropriateness of the audit evidence obtained; (ii) Recommend further audit procedures to be performed by the audit team; and (iii) Explain the matters which should be included in a report in accordance with ISA 265 Communicating Deficiencies in Internal Controls to Those Charged with Governance and Management. (9 marks)

Answers to real questions Sufficiency of evidence It is not sufficient to simply put management’s justification for the accounting treatment in AWP and conclude it is correct. Auditor should discuss with management to understand the rational. In terms of the manual journal, recalculation is relevant but still not sufficient evidence. Further evidence should be obtained in order to conclude that the basis of the calculation and the assumptions used are in accordance with IFRS5,IFRS13 etc. Besides, the factory site to be disposed ofmay need to be disclosed as DOin SOPL and SOCF. No audit evidence appears to have been obtained in respect of these issues.

Answers to real questions Further audit procedures 1) Obtain confirmation, by a review of production schedules, inventory movement records and payroll records, that production at the factory has stopped and thus available for immediate sale. 2) Review minutes of BODmeeting, to confirm that the sale of the factory has been approved and date of approval as well as announcement. 3) Obtain correspondence with estate agents to confirm that the factory is being actively marketed. 4) Use anauditor’s expert to confirm the fairvalue of the property and agree that this figure has been used in the impairment calculation. 5) Using management accounts, determine whether the factory is a separate major line of business in which case its results should be disclosed as a discontinued operation.

Possible event in business restructuring: Staff redundancy Breach lease contract Breach other long-term contacts, e.g. suppliers, customers Sell ​​PPE (NCAHFS), throw away PPE (impairment loss) Expected loss in future

Future operating loss • No provision • Indication of impairment test Onerous contract = Loss making contract • Unavoidable cost of completing contract exceed FEB • Provision can be recognized for least net loss, lower if: - Cost of fulfilling the contract - Cost of terminating and suffering any penalty payment

Past question papers 2011/6 Q1a i (y.e. 30/6/2011) - sell a business The second issue concerns one of Bill Co's specialist divisions, which trades under the name 'Treasured Homes' and which deals exclusively in the redevelopment of non-industrial historic buildings such as castles and forts. These buildings are usually acquired as uninhabitable ruins, and are then developed into luxury residences for wealthy individuals. The management of Bill Co decided last week to sell this division, as although it is profitable, it generates a lower margin than other business divisions. 'Treasured Homes' operates separately from the rest of the business , and generates approximately 15% of the total revenue of the company

Past question papers 2011/6 Q1a i (y.e. 30/6/2011) - sell a business In a board minute dated 1 June 2011, it was noted that 'interest has already been expressed in this division from a potential buyer, and it is hoped that sale negotiations will soon commence, leading to sale in August 2011. There is a specific office building and some other tangible assets that will be sold as part of the deal. These assets are recorded at $7·6 million in the financial statements. No redundancies will be necessary as employees' contracts will transfer to the new owners.'

Past question papers 2011/6 Q1a i (y.e. 30/6/2011) - sell a business Required: I have just received some information on two significant issues that have arisen over the last week, from Sam Compton, the company’s finance director. This information is provided in attachment 1. I am asking you to prepare briefing notes, for my use, in which you explain the matters that should be considered in relation to the treatment of these two issues in the financial statements, and also explain the financial statement risks relating to them. I also want you to recommend the planned audit procedures that should be performed in order to address those risks. (16 marks)

NCAHFS It appears the criteria to be classified asNCAHFShas been met because: -BODapproved on 1/6/2011, before y.e. -Potential buyer was located before y.e. -Probable sales will complete in 2months As per IFRS 5, management should re-measure all identifiable assets based on lower ofCVandFVlessCTS. Risk: -Still classify asNCA -Still depreciate, overstate expenses, understateNCA

Evidence 1) Review and file a copy of BOD minute of meeting, to confirm management is committed to the planned sale and the decision was made on 1/6/2011. 2) Review correspondence with potential buyer, to understand details of sales negotiation. 3) Review management calculations on the fair value less cost to sell of ‘TreasuredHomes’ and assess the validity of any assumptions used. 4) Recalculate depreciation.

Past question papers 2012/6 Q2b i (y.e. 31/5/2012) Osprey Co's finance director called me yesterday to explain that unfortunately over the last few weeks, one of its four factories leaked a small amount of toxic chemicals into the atmosphere. The factory's operations were halted immediately and a decision has been taken to permanently close the site . Though this is a significant event for the company and will result in relocation and some restructuring of operations, it is not considered to be a threat to its going concern status. Costs of closure of the factory have been estimated to be $1·25 million , which is expected to be material to the financial statements, and a provision has been set up in respect of these costs. Required: Recommend the principal audit procedures to be performed in respect of the costs of closure of the factory (6 marks)

Answers to real questions Evidence y.e.=31/5/2012&Today=6/6/2012 Restructuring (close the site) happened in May, near to y.e. 1) BOD minute of meeting, to confirm the decision to close the site was made before y.e. Current obligations 2) Announcement, to confirmclient announced before y.e. present obligation 3) Reviewdetailed formal plan. 4) Get breakdown of $1.25m:- Obtain a list ofstaff may be affected and agree the redundancy cost to notification letter. - Review and ensure ongoing costs, e.g.relocation are notincluded. 5) Direct confirmation to lawyer, to confirmpossibility of legal claim. 6) Post year-end actual payment, to assess the sufficiency or accuracy of the provision.

Valuation of inventory: Lower of cost & NRV Cost of trading inventory – Supplier invoice Cost of manufactured inventory: Material – Supplier invoice Labor – Payroll record Overhead – Documents such as utility bills WIP – Percentage of completion, rely on expert? NRV – Post y.e. sales invoice

Past question papers 2015/9&12 Q1b i (y.e. 31/12/2015) All of the company's manufacturing sites will be closed at the year end to allow the inventory counts to take place. According to the most recent management accounts which are available, at 30 November 2015 work in progress is valued at $12 million (2014 – $9· 5 million) and the majority of these orders will not be complete until after the year end. In recent weeks several customers have returned equipment due to faults, and Dali Co offers a warranty to guarantee that defective items will be replaced free of charge. Required : Explain the principal audit procedures to be performed in respect of: (i) The valuation of work in progress. (4 marks)

Past questions Required: Explain the principal audit procedures to be performed in respect of: (i) The valuation of work in progress. (4 marks) = initial measurement, subsequent measurement, impairment

Answers to real questions Evidence 12/90=13.3%ofTA,materialtoSOFP. Increase 12-9.5/9.5=26.3% 1) Agree cost of RM to supplier invoice/ Labor to payroll record/ AbsorbedOH to understand basis of absorption. 2) To assess the completeness of WIP, select a sample of customer orders and trace through to the list of jobs included in work in progress. And Obtain estimation of POC for all WIP at year end to ensure reasonableness. 3) Due to recent customer returns, review management impairment test, determine NRV which might be 0, and recalculate impairment loss recognized. 4) Discuss with management about the reason why inventory holding period increased during the year. How to write this answer?

Audit procedure (Amortized cost) 1) Review supporting document that management has initially designed/classify this as AC. 2) Review amortization schedule, i.e. to recalculate FC based on EIR and repayment based on nominal interest 3) Ensure the reasonableness of EIR used by reference to company's WACC, market interest rate, expert report, etc. 4) Review bond agreement to confirm there ate only interest and principal, e.g. no conversion right

Past question papers 2015/6 Q1c (y.e. 31/5/2015 newly listed company) The treasury management function also deals with short-term investments. In January 2015, cash of $8 million was invested in a portfolio of equity shares held in listed companies, which is to be held in the short term as a speculative investment. The shares are recognized as a financial asset at cost of $8 million in the draft statement of financial position. The fair value of the shares at 31 May 2015 is $6 million. Required: Recommend the principal audit procedures to be performed in the audit of: (i) The portfolio of short-term investments, and (ii) The earnings per share figure. (8 marks)

Short-term investment Investin shares oflisted company (4monthsto y.e.), defaultFVTPL OBS=8,CBS=6,Difference=2 goestoP/L 1) Obtain a schedule of portfolio 2) Cost agree to broker statement, bank statement 3) FVagree to stockmarket price 4) RecalculateP/Land agree toSOPL

Audit of EPS

Financial instruments-TR

Financial instruments-derivatives

Past question papers-2011/12 Q1a ii (y.e. 30/11/2011) Oak Co established an equity-settled share-based payment plan for its executives on 1 January 2011. 250 executives and senior managers have received 100 share options each, which vest on 31 December 2013 if the executive remains in employment at that date, and if Oak Co's share price increases by 10% per annum. No expense has been recognized this year as Oak Co's share price has fallen by 5% in the last six months, and so it is felt that the condition relating to the share price will not be met this year end. Required: Please also recommend the principal audit procedures which should be performed in respect of: (1) the recognition and measurement of the share- based payment plan (4 marks)

Answers to real questions Service condition=remain in employment at vesting date 31/12/2013 Performance condition=share price increases by 10%p.a. –NOT relevant - Market conditions are used to evaluate and determine the fair value of options - Nonmarket condition is used to evaluate the number of future exercise options Evidence • Reviewshare option plan to confirm: - 250 executives and seniormanagers are included - 100 options are given to each ofthem -The grant date 1/1/2011 and vesting date 31/12/2013 -The required conditions attached to the options • Recalculate FV of the option at grant date. • Review the assumptions used, and inputs into the option pricing model used to estimate the fair value of the share options at the grant date.

• Consider the use of an expert possessing specialistkillsin share option pricing,such as a chartered financial analyst,to provide evidence as to the validity of the fair value ofshare options used in the calculations. • Obtain and review a forecast of staffing levels or employee turnover rates relevant to executives and senior managers over the vesting period and consider whether assumptions used appearreasonable.

Past question papers -2015/12 Q1a i (y.e. 31/12/2015) In March 2015, a cash-settled share-based payment plan was introduced for senior executives, who will receive a bonus on 31 December 2017. The amount of the bonus will be based on the increase in Dali Co's share price from that at the date of the new flotation, when it was $2·90, to the share price at 31 December 2017. On the advice of the appointed finance director, no accounting entries have been made in respect of the plan, but the details relating to the cash- settled share-based payment plan will be disclosed in the notes to the financial statements

Answers to real questions As per IFRS 2, SAR should be recognised @ FV of SAR at year end * numbers * vesting period&truing up.Aliability should be recognised based on the fair value of the liabilitywhich has accrued up to 31/12/2015,with the expense recognisedP/L . (DrPayroll exps,CrLiability) Amount = Based on the increase in share price from $2·90 at floatation to $3·50 at the year end. Risk is no recognition, overstate profit, understate liability. And disclosure in respect of the plan may not be sufficient to meet the requirements of IFRS 2 which requires extensive disclosures including the effect of share-based payment transactions on the entity’sSOPLandSOFP.

Related party transactions - Purchases or sales of goods, property and other assets - Rendering or receiving of services - Provision of guarantees or collateral - Settlement of liabilities on behalf of the entity or by the entity on behalf of another party

Related party disclosure 1) Relationships (e.g. parents and subsidiaries) Regardless of whether there have been transactions. 2) Related party transactions If there have been transactions between related parties, disclose: - Information (amount, terms and conditions) about the transactions -Outstanding balances

Related party disclosure 3) Management Compensation Disclose key management personnel compensation in total and for each of the following categories: • Short-term employee benefits/Post-employment benefits/Other long-term benefits/Termination benefits • Share-based benefits payment Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including any directors (whether executive or otherwise i.e. non-executive) of the entity.

Past question papers 2014/6 Q3a ii (y.e. 31/1/2014) In October 2013, Cooper Co's finance director, Hannah Osbourne, purchased a car from the company. The carrying value of the car at the date of its disposal to Hannah was $50,000, and its market value was $75,000. Cooper Co raised an invoice for $50,000 in respect of the disposal, which is still outstanding for payment. Required: Comment on the matters to be considered and explain the audit evidence you should expect to find during your review of the audit working papers in respect of each of the issues described above. (7 marks)

Answers to real questions FD=Keymanagementpersonnel=Relatedparty Purchase car fromcompany=Relatedparty transaction CV=50,FV=75,SP=50not yetpaid Mattersto consider 50/15,000=0.3%ofPBT,immaterialtoSOPL 50/240,000=0.02%ofTA,immaterialtoSOFP Related party transaction is by naturematerial,regardless of amount.Hence it must be disclosed in notes as perIAS24: • Related party relationship • Details of transaction, e.g. amount, T&C, outstanding balances Risk is inadequate closure.

Answers to real questions Evidence 1) Review BODminutes of meeting, to confirm the transaction was appropriately authorized and reason of the disposal. 2) Obtain a copy of the invoice raised, and agree to the receivables ledger to confirm the amount of $50,000 which is outstanding. Note that you cannot write AgreetoFS 3) ReviewnotestoFS,toensureitisadequatelydisclosedasperIAS24. 4) Confirmation that the carrying value of $50,000 has been removed from the non-current asset register and general ledger. 5) Getwritten representation stating that management has disclosed to the auditor the identity of the entity's related parties and all the related party relationships and transactions of which they are aware, and that management has appropriately accounted for and disclosed such relationships and transactions in accordance with the requirements of IAS24.

Past question papers 2018/12 Q1b (y.e. 28/2/2019) Capital expenditure was mostly financed through borrowings. On 1 March 20X8, a ten-year $30 million loan was received from the company's bank. The loan does not bear interest and is repayable at par value of $34 million. As well as the bank loan, a loan of $1 million was advanced to the company from its managing director, Bob Glider, on 1 July 20X8. The terms of this loan include 3% interest paid to Bob annually in arrears, and the capital will be repaid in seven years' time in 20Y5. Required: Evaluate the risks of material misstatement to be considered in developing the audit strategy and audit plan.

Answers to real questions The managing director of client Bob Glider, has made a loan to the company of $1million. This is a related party transaction according to IAS 24 given that the loan to the company is from a member of key management personnel, and material by nature,regardless of amount. Disclosure must be made in the notes to the FS, include: information on the nature of the related party transaction, its amount, and the relevant terms and conditions of the loan. Risk is that the disclosures are incomplete. There is also a risk that interest will not be accrued on the loan. The loan was made on 1 July 20X8,so by the year end interest of $20,000 ($1mx 3% x 8/12) should be accrued

Principle of IFRS 15 • Income generated from normal course of business • Timing of revenue recognition – when it is earned How to apply? 5 step model 1) Identify the contracts with a customer. 2) Identify the performance obligations in the contract. 3) Determine the transaction price. 4) Allocate the transaction price to the performance obligations in the contract. 5) Recognise revenue when (or as) the entity satisfies a performance obligation. = control transferred

Control of an asset is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. This includes the ability to prevent others from directing the use of and obtain the benefits from the asset. The benefits related to the asset are the potential cash flows that may be obtained directly or indirectly. These include, but are not limited to: using the asset to produce goods or provide services; using the asset to enhance the value of other assets; using the asset to settle liabilities or to reduce expenses; selling or exchanging the asset; pledging the asset to secure a loan; and holding the asset.

Past questions 2015/12 Q1a i (y.e. 31/12/201) Customers design and sell machinery and equipment for the quarrying industry The machines and equipment made by Dali Co are mostly made to order in the company's three manufacturing sites. Customers approach Dali Co to design and develop a machine or piece of equipment specific to their needs. Where management considers that the design work will be significant, the customer is required to pay a 30% payment in advance, which is used to fund the design work. The remaining 70% is paid on delivery of the machine to the customer. Typically, a machine takes three months to build, and a smaller piece of equipment takes on average six weeks. Required: Evaluate the audit risks to be considered in planning the audit of Dali Co.

Answers to real questions Payment advance and revenue recognition According to IFRS 15, revenue should only be recognized as control is passed, either over time or at a point in time. The timing of revenue recognition will depend on factors such as: transfer of the physical asset, transfer of legal title, and the customer accepting the significant risks and rewards related to the ownership of the asset. For items where significant design work is needed, Dali Co receives a payment in advance, it is likely the payment in advance should be treated as deferred revenue. Risk is to be recognized as revenue too early, especially given the risk of management bias and the incentive to overstate revenue and profit as the company is seeking for stock listing? Overstate revenue, understate liability.

Past papers 2015/6 Q1b (y.e. 31/5/2015) Customer designs and sells computer games In some countries Ted Co's products are distributed under licences which give the license holder the exclusive right to sell the products in that country. The cost of each license to the distributor depends on the estimated sales in the country to which it relates, and licences last for an average of five years. The income which Ted Co receives from the sale of a licence is deferred over the period of the licence. At 31 May 2015 the total amount of deferred income recognized in Ted Co's statement of financial position is $18 million. Required: Evaluate the audit risks to be considered in planning the audit of Ted Co.

Answers to real questions Sales of license 18/ 98=18% of revenue, material to FS As per IFRS 15, revenue from sales of license should be recognized when control is passed,i.e.when the license period started.Hence, the revenue should not be deferred. Understate revenue, overstate liability

Past questions 2018/12 Q1b (y.e. 28/2/2019) Client operates a gym The company offers a membership scheme whereby, for an annual subscription, members can use the facilities at any of the centres. Customers who are not members can pay to access a center for a day under the company's 'pay as you go' plan. membership scheme accounts for approximately 85% of the company's revenue, with the remaining revenue resulting from 'pay as you go' sales. Required: Evaluate the risks of material misstatement to be considered in developing the audit strategy and audit plan.

Answers to real questions Revenue recognition 85% of revenue from members’ subscriptions, material to SOPL. As per IFRS15, revenue should be recognized when/as control transferred, e.g. delivery of goods, rendering of services. 1) Members’ subscriptions, revenue should be recognized over the period of membership. Risk=recognised early in full, when itis received by the company. 2)Pay as you go scheme does not indicate risk. Overstate revenue, understate liability

Past questions 2018/12 Q1b (y.e. 28/2/2019) Client operates a gym Redback Sports Co is also involved with a government initiative to help unemployed people have access to sport facilities. The company received a grant of $2 million in September 20X8, under the terms of which it allows unemployed people three hours of free access to its facilities per month. By the end of November, 33,900 free hours of facility use have been provided under this scheme. The government intends the initiative to run for three years, to promote long-term health of participants. Required: Evaluate the risks of material misstatement to be considered in developing the audit strategy and audit plan.

Answers to real questions Mattersto consider 2/53=3.8%ofrevenue,materialtoSOPL. IAS 20, grants are recognized in PL on a systematic basis over the periods in which the entity recognizes government expenses for the related costs for which the grants are intended to compensate. Misstatement = $2 recognize in full in current year. However, the scheme is intended to run for three years. Overstate income, understate liability. However, the scheme isintended to run for three years.

Mattersto consider Another issue is whether the conditions attached to the government grant are likely to be met. There may be repayment if the required number of hours of free access to sport facilities is not met. If not, should consider whether it would be appropriate to recognize a provision or disclose a contingent liability in the notestoFS. Risk=This has not been considered by management. Overstate expense, understated liabilities orinadequate disclosure.

Past question papers 2010/6 Q1c ii (y.e. 30/6/2010) Hodges Co This company's operations involve the manufacture and distribution of packaged nuts and dried fruit. The government paid a grant in November 2009 to Hodges Co, to assist with costs associated with installing new, environmentally friendly, packing lines in its factories. The packing lines must reduce energy use by 25% as part of the conditions of the grant, and they began operating in February 2010. Required: Recommend the principal audit procedures that should be performed on: (ii) The condition attached to the grant received by Hodges Co. (4 marks)

Answers to real questions Evidence 1) Review the grant contract to confirmamount&condition, e.g. 25% reduction is stated in the contract. 2) Determineoverwhatperiodthe25%reductionmustbedemonstratede.g.mustit be achievedby apointintime andsustainedfor a certainperiod. 3) Obtain management letter submitted to prove 25% reduction in energy consumption. 4) Reviewmonitoring procedures, e.g. compare electricitymeter readings pre and post installation of the packing line to confirm reduced levels of electricity are being used. 5) Review the terms to establish the possibilities and financial effects of breaching the condition – would the grant be repayable in full or in part, and when would repaymentbemade.

Past papers 2015/9&12 Q1b ii (y.e. 31/12/2015) In July 2015, a government grant of $10 million was received as part of a government scheme to subsidise companies which operate in deprived areas. Specifically $2 million of the grant compensates the company for wages and salaries incurred in the year to 31 December 2015. The remaining grant relates to the continued operations in the deprived area, with a condition of the grant being that the manufacturing site in that area will remain operational until July 2020. Required: Explain the principal audit procedures to be performed in respect of: (ii) The recognition and measurement of the government grant. (4 mark)

Answers to real questions Evidence 1) Review bank statement to confirm $10 was received in 7/2015. 2) Review contract to confirm amount&condition.i.e. $2, offset wages in current year,1/7/2015 - 31/12/2015 – earned,P/L; $8, continue operating from1/1/2016 to 1/7/2020 ,4.5years-notyet earned,Deferred income 3) Review payroll record for workers in deprive area, to confirm they were employed throughout July to Dec2015. 4) Review budget/forecast of the next 4.5 years, to confirm the deprive site is projected to remain operational in order to meet the grant condition.

IFRS 16 Leases

The following answering methods are applicable to a variety of questions: risk, matters to consider, evidence, reporting, etc., and are used almost throughout the AAA exam

In the Advanced Audit and Assurance exam you will be required to discuss accounting issues in many contexts. It could be that during planning you are asked identify areas of audit risk or risk of material misstatement arising from accounting issues. issues and their treatment in a completion question, where the appropriateness of a treatment is considered, or areas of risk exist. Accounting issues could arise in reporting questions where there may be an impact on the auditor's report and the type of opinion which will be given . This list is not exhaustive but illustrates how important it is to have a good understanding of the accounting and financial reporting issues covered in all of the financial reporting areas of the qualification. In addition you will be required to recommend audit procedures or explain the evidence you would expect to see in the audit file in order to conclude on the appropriateness of these treatments and amounts.

As such, bringing forward a sound knowledge of financial reporting is crucial when preparing for the Advanced Audit and Assurance exam. Some of those areas may be relatively straight forward, for example the valuation of inventory at the lower of cost and net realisable value while others can be more involved or complex such as financial instruments, revenue recognition or pensions. The purpose of this article is to utilize past questions from the Advanced Audit and Assurance exam to illustrate how accounting issues could be examined and to recap the accounting treatment on some of the areas candidates typically find difficult in this exam.

Example 1 – Impairment It is rare to see an Advanced Audit and Assurance exam which does not cover impairment and the requirements of IAS 36 Impairment of Assets. This is a crucial standard which you need to understand as impairment considerations apply to so many assets within a set of financial statements.

Recent example – Sample March/June 17, Question 4 This is an example from a matters and evidence style question. These questions are typically set at the completion stage of an audit. Materiality, accounting treatment and risks are typical areas which would count as matters to be considered. In these questions the auditor's report implication is only relevant if you are asked specifically to consider this area.

You are the manager responsible for the audit of Osier Co, a jewelry manufacturer and retailer. The final audit for the year ended 31 March 2017 is nearing completion and you are reviewing the audit working papers. The draft financial statements recognize total assets of $1,919 million (2016 – $1,889 million), revenue of $1,052 million (2016 – $997 million) and profit before tax of $107 million (2016 – $110 million). At the year end management performed an impairment review on its retail outlets, which are a cash generating unit for the purpose of conducting an impairment review. While internet sales grew rapidly during the year, sales from retail outlets declined, prompting the review. At 31 March 2017 the carrying amount of the assets directly attributable to the retail outlets totaled $137 million, this includes both tangible assets and goodwill.

During the year management received a number of offers from parties interested in purchasing the retail outlets for an average of $125 million. They also estimated the disposal costs to be $1·5 million, based upon their experience of corporate acquisitions and disposals. Management estimated the value in use to be $128 million. This was based upon the historic cash flows attributable to retail outlets inflated at a general rate of 1% per annum. This, they argued, reflects the poor performance of the retail outlets. Consequently the retail outlets were impaired by $9 million to restore them to their estimated recoverable amount of $128 million. The impairment was allocated against the tangible assets of the outlets on a pro rata basis, based upon the original carrying amount of each asset in the unit. (7 marks)

In this question you can open with the materiality of the impairment. The impairment loss of $9m represents 0.47% of total assets and 8.41% of profit before tax and is material to the statement of profit or loss (1 mark for an appropriate calculation and conclusion). You should then state the underlying rule that an indicator of impairment triggers an impairment review and define impairment and recoverable amount. (1 mark) Most of the credit will be available for determining and explaining the risks arising and applying the accounting treatment to the information you have available.

We’re told that: - Carrying value is $137m - Net realisable value is $125m - $1.5m = $123.5m (you will generally receive ½ mark for calculating this figure) - Value in use is estimated at $128m - Recoverable amount is therefore $128m based on management’s calculations - Impairment write off was based on value in use and has been pro-rated against assets based on the original carrying value of the assets in each unit.

As auditors we need to look for risks in the process and treatment. Based on the information you can conclude that the carrying value is relatively low risk – we audited last year's figures and it's not an inherently risky area in general so in the absence of other information to the contrary you need to focus on the more risky areas. The net realisable value carries some risk – external offers though are a good source of evidence and while not set in stone there have been several parties interested so it’s likely that the company would be able to sell the retail outlets for that price. So what are the key risk areas and the matters which should be considered?

Risk 1 – Management has estimated the costs of sale. An estimation is inherently risky as it is not certain. It’s also been estimated by management who could be biased. Risk 2 – The value in use is the major source of risk. The calculation is complex and judgmental and so is inherently risky. It has been calculated by management who may be biased to keep the impairment loss as low as possible. The calculation was based on historic cash flows with 1% annual growth which appears unrealistic given that retail sales have fallen not grown at 1%. If the forecast used is overly optimistic then the impairment write off is insufficient and therefore assets are overstated and profit is overstated (as expenses are understated).

Risk 3 – The treatment of the impairment write off may be incorrect as goodwill should be reduced before reducing the assets on a prorate basis and it should be ensured that no individual asset is reduced to below its own recoverable amount.

The matters part of this question as illustrated within the boxes above and answer points which focused on these risk areas would attract maximum credit for that part of the question. As this was a matters and evidence question remember that you also need to go on to explain evidence you would expect to find on the audit file. The requirement is for the evidence to be explained in these questions so listing sources of evidence is not sufficient. Your answer points must also explain what they are providing evidence of in order to attract high marks. If you write out evidence as a list of described procedures then this will be acceptable and well described, relevant procedures will generally receive a mark each.

Example 2 – Intangibles Intangible assets are non-monetary assets without physical substance such as patents, trademarks, customer lists, quotas, brands, franchise agreements etc.

The Advanced Audit and Assurance (AAA) exam would not be complete without testing the ability to design relevant procedures by which assertions can be. This core skill, started at the applied skills level assessed in Audit and Assurance (AA), is further developed and tested in AAA. In this exam the issues being audited will be extended to more complex areas of financial reporting and the more judgmental areas of a set of financial statements such as KPIs, forecasts and documents used for other services. It is important that candidates can move beyond learn lists of procedures or generic tests to specific focused procedures which will examine specific assertions. Candidates must ensure they can describe the appropriate action, source and purpose for a procedure.

This article examines the key syllabus requirements in relation to procedures and considers the level of detail needed in order to obtain credit at this level. It will also look at some examples of past questions on this syllabus area and explain the difference between a strong answer and a weak answer to illustrate the detail and specificity that candidates should produce in their answers to attain marks in the exam.

Syllabus requirements Audit procedures are covered in several areas of the AAA syllabus and the relevant learning outcomes require candidates to 'identify and describe audit procedures to obtain sufficient appropriate evidence from identified sources' or to 'design appropriate audit procedures' with respect to the audit of historical financial statements, or for other assignments to 'describe and recommend appropriate substantive, exam or investigative procedures which can be used to gather sufficient appropriate evidence in the circumstances'.

Note that these learning outcomes require candidates to design or describe audit procedures not simply provide a list of sources of evidence or a verb with no purpose such as review. When audit procedures are required as part of the exam it is expected that for credit to be awarded, candidates will describe the procedure in sufficient detail to demonstrate that they understand what it is trying to corroborate and what underlying piece ovidence will assist with that process. A good rule of thumb is to ask, if you gave your list of procedures to a new trainee auditor, would they know what to do, how to do it and why they are doing it? If there is a specific source of information and an action that is aimed at a specific purpose, then the answer is more likely to be complete and understandable.

Structuring procedures In the AAA exam, procedures are often examined in planning questions where you may be required to plan audit procedures over a specific area of ​​risk, or later in the audit, when reviewing the evidence you would expect to find on the audit file when it is reviewed by the manager or partner. For both requirements, the basic principle is the same. The marking guides in published questions state 'up to 1 mark for each well described audit procedure' hence a described poorly procedure will not obtain 1 mark, it will obtain at most ½ mark.

Simple example (note this is for illustration and is not indicative of an AAA scenario) The client has purchased a new machine for use in production of widgets. Design the principle audit procedures to be performed in respect of the new machine. A good start to answering the question would be to consider what assertions need to be covered. Here the auditor will want to know whether the machine is owned by the company, its existence, and its valuation. We can address valuation and ownership at the same time for an outright purchase using the invoice in most cases. This should be an easy mark in the exam and everyone should be aiming for a full mark for this procedure. Consider the answers below.

Strong answer Obtain the purchase invoice for the machine and confirm the purchase value to the non-current asset register and ownership of the machine - 1 mark Weak answers Review purchase invoice – this would score ½ mark- this does not state what the invoice is being reviewed for or what assertion is being targeted. Purchase invoice – this would score no marks – this is a source of evidence but without an action is not a procedure. Review the relevant document- this would score no marks – there is no detailed action or purpose and no identifiable source.

For the existence of the machine, we could physically examine it Strong answer Physically examine (or inspect) the asset to confirm it exists - 1 mark Weak answers Physically examine machine - this would score ½ mark – not tied to an assertion so does not explain why the asset is being examined. Observe assets – this would score no marks – there is no detailed action or purpose and no identifiable source.

Adapting the basic technique to the AAA exam The basic process illustrated above applies to the more complex situations that you will come across in the AAA exam questions however you will be facing more challenging areas than those seen in the AA exam. Rather than the existence of PPE, candidates may be required to consider the existence and valuation of intangible assets such as a brand (March/June 2017 Q1), the classification of an investment (March/June 2018 Q4) or the appropriateness of a forecast for assessing going concern or applying for finance (March/June 2018 Q2). Here candidates will be working with procedures that can't be rote learned and which need to be tailored to the scenario. There will often be judgments involved in areas examined where candidates will need to decide to what extent management can be relied on Upon and where candidates may be expected to demonstrate professional scepticism.

• March/June 2017 Q1 Brand name – ICE, useful life • March/June 2018 Q4 Classification of investment • March/June 2018 Q2 SOCF, SOFP, SOPL Practising past questions is important to extend your range of sources of evidences and develop an understanding of the sort of approaches which can be taken relating to specific judgments. However, it is also important to be able to think of original procedures to adapt to the differences in the scenario each time. What was appropriate in one exam may not be appropriate in another. The syllabus requirement to design procedures is the underlying skill being tested not the ability to learn a list of procedures for every occasion.

Example AAA procedures questions The following is an extract from Question 2 in the September/December 2017 sample questions: (See the Audit of PPE chapter) - Just look at the PPE chapter

Written representations from management Management statement

Past question papers March/June 2018 Q2b Procedures to be performed on a profit forecast to be used to obtain bank funding • Obtain written representation from management regarding the completeness of significant assumptions AND accepting their responsibility for the forecast (this is required by ISA 3400, The Exam of Prospective Financial Information and therefore is appropriate), or • Obtain written representation from management the bank overdraft will be repaid by 1 September 2019 (note this is management’s intention and can be part of the evidence for justifying that it is appropriate that there is no overdraft interest in the forecast after that date)

A final point on written representations from management, is that where management are not believed to be reliable, for example they have been showing signs of earnings management and inappropriate judgments, then written representations are not likely to be a reliable form of evidence.

Review board minutes Often candidates include this as part of every answer to every requirement without considering whether it is likely to be discussed at board level or in what detail. This procedure might be relevant when supporting management's intentions regarding strategy or approval regarding major decisions such as acquisitions, but it is not likely to be the case that the board of directors approve every individual asset purchase (rather than the capex, i.e. capital expenditure, budget as a whole) or every allowance for slow paying customers. If it isn't something the board discuss then candidates won't be credited for this as a procedure. In addition, the purpose of reviewing the board minutes will need to be stated in order for any credit to be awarded.

Strong answer Confirm that the acquisition of the new subsidiary was approved by the board through review of board minutes - 1 mark Weak answers Review board minutes for approval (½ mark – not stated approval of what) Review board minutes for acquisition (½ mark – does not state what information regarding the acquisition is being obtained from the board minutes) Review board minutes (would score no marks – this will not receive credit as it is not specific to the scenario at all)

Agree to the financial statements This is another area where candidates appear to make a general statement that is often not appropriate. For example, in the March/June 2018 Q4 candidates testing the elimination of the intercompany balances often stated to check the elimination of a single transaction between two of the group companies to the financial statements. By their nature financial statements are aggregate figures and do not show every transaction. The elimination would be something that could be agreed to a consolidation schedules but will not be visible in the financial statements issued by a company

The distinction between detailed management accounts, breakdowns of the figures in the financial statements, consolidation schedules and the financial statements themselves should be something that candidates at this level appreciate. To obtain marks for agreeing something to the financial statements it will be necessary that the item can be seen in the financial statements or the notes and that the specific detail of what is being agreed is stated.

Strong answer – for example, for an acquisition in the year Confirm disclosures in the financial statements include the date of acquisition, the fair value of consideration and the fair value of the net assets acquired (1 mark – note this isn't everything that IFRS 3 Business Combinations requires to be disclosed but it does give some specific details that shows understanding of the sorts of disclosures required) Weak answers Agree to financial statements – this would score no marks – no detail of what is being agreed Agree the amounts for the acquisition have been disclosed in the financial statements – ½ marks – no specific detail of the items to be disclosed

Conclusion As can be seen from the discussion above, a good structure for presenting procedures (action-source-purpose) is key to obtaining strong marks on this section of the exam. For a candidate to score well they will need to be able to adapt the procedures to the details given in a scenario and question whether the source is appropriate. Past question practice is a good start for expanding the range of procedures in a candidate's toolkit and the ability to tailor answers to the specific circumstances in the exam they are sitting

2015/6 Q1a - Matters specific to the planning of an initial audit engagement which should be considered in developing the audit strategy General procedures: 1) Make arrangement to review previous auditor AWP, to assess whether there are sufficient appropriate evidences to support opening balance on 1/6/2014 and this increase reliance. Applicable to situations that were audited last year, note: newly listed company must have been audited last year 2) Consider whether any previous years’ audit reports were modified, and if so, the reason for the modification.

3) Based on result of the above, i.e. when previous audit is not reliable, consider the need to perform additional audit procedures to verify OBS. 4) Review audited FS to understand accounting policies adopted. And discuss with management regarding whether accounting policies are consistently applied or whether they are changed. 5) Agree last year CBS on 31/5/2014 to this year OBS on 1/6/2014 to ensure they have been correctly carried forwards or appropriately restated. (y.e. 31/5/2015)

6) It is particularly important to develop an understanding of the business, including the legal and regulatory framework applicable to the company. This understanding must be fully documented and will help the audit team to perform effective analytical review procedures and to develop an appropriate audit strategy .

Specific procedures: 1) Receivables 2) Payables 3) Bank 4) PPE 5 )Inventory - Non-current liabilities (Contract, certificate of incorporation) - Equity, etc. (Contract, certificate of incorporation)

Specific procedures – inventory

IAS 10 Events After The Reporting Period Event after the reporting period: An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorized for issue. Adjusting events: An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period.

Adjusting event • Settlement of court case • Bankruptcy of customer • Sales of inventory that NRV<CV at year end • Determination of amount of bonus payment • Discovery of fraud or errors • The going concern assumption in relation to the whole or part of the enterprise is not appropriate.

Non-adjusting event Natural disaster, decline in market value of investment, payment of dividend, changes in tax rate, etc.

Subsequent events are defined as those events occurring between the date of the financial statements and the date of the auditor’s report, and also facts discovered after the date of the auditor’s report. & Auditor’s responsibilities in each stage

Stage 1 - Events occurring up to the date of the auditor’s report. The auditor has an active duty to perform audit procedures designed to identify, and to obtain sufficient appropriate evidence of all events up to the date of the auditor's report that may require adjustment of, or disclosure in, the financial statements. These procedures should be performed as close as possible to the date of the auditor's report, and in addition, representations would be sought on the date that the report was signed. Procedures would include reviewing management procedures for ensuring that subsequent events are identified, reading minutes of meetings of shareholders and management, reviewing the latest interim financial statements, and making appropriate enquiries of management.

Where a material subsequent event is discovered, the auditor should consider whether management have properly accounted for and disclosed the event in the financial statements in accordance with IAS 10 Events After the Reporting Period. Stage 2 - Facts discovered after the date of the auditor’s report but before the date the financial statements are issued. The auditor does not have any responsibility to perform audit procedures or make any inquiry regarding the financial statements or subsequent events after the date of the auditor's report. In this period, it is the responsibility of management to inform the auditor of facts which may affect the financial statements.

When the auditor becomes aware of a fact which may materially affect the financial statements, the matter should be discussed with management. If the financial statements are appropriately amended then a new audit report should be issued, and procedures relating to subsequent events should be extended to the date of the new audit report. If management do not amend the financial statements to reflect the subsequent event, in circumstances where the auditor believes they should be amended, a qualified or adverse opinion of disagreement should be issued.

Stages 3 - Facts discovered after the financial statements have been issued. After the financial statements have been issued, the auditor has no obligation to make any enquiry regarding the financial statements. However, the auditor may become aware of a fact which existed at the date of the audit report, which if known at the date may have caused a modification to the auditor's report. In this case, the matter should be discussed with management. This could result in the revision of the financial statements, in which case the auditor should issue a new audit report on the revised financial statements. This report should include an emphasis of matter paragraph referring to a note to the financial statements in which the reason for the revision is fully discussed. If management do not revise the financial statements, the auditor should take legal advice with the objective of trying to prevent further reliance on the auditor's report.

2009/12 Q5b You are the manager responsible for the audit of Lychee Co, a manufacturing company with a year ended 30 September 2009. The audit work has been completed and reviewed and you are due to issue the audit report in three days. The draft audit opinion is unmodified . The financial statements show revenue for the year ended 30 September 2009 of $15 million, net profit of $3 million, and total assets at the year-end are $80 million.

2009/12 Q5b The finance director of Lychee Co telephoned you this morning to tell you about the announcement yesterday, of a significant restructuring of Lychee Co, which will take place over the next six months. The restructuring will involve the closure of a factory, and its relocation to another part of the country. There will be some redundancies and the estimated cost of closure is $250,000. The financial statements have not been amended in respect of this matter. Required: In respect of the announcement of the restructuring, comment on the financial reporting implications, and advise the further audit procedures to be performed. (6 marks)

Financial reporting implications=Mattersto consider 250/15,000=1.7% of revenue, material to SOPL 250/3,000=8.3% of profit, material to SOPL 250/80,000<1% of total asset,immaterialtoSOFP Hence, materialtoFS. The plan to close a factory was announced after year end, as such this is no present obligation at year end. As per IAS 10, this is a material non-adjusting event, should be disclosed. A note should be provided to the financial statements, which includes the nature of the event, and an estimate of financial effect. Risk is no disclosure of inadequate disclosure.

Further audit evidence: 1) Review BOD minutes of meeting, to confirm the plan is approved. 2) Obtain Announcement/Staff memo, to confirm it happened after year end. 3) Obtain breakdown of $250 closure cost, review and confirmitis correct.E.g. it incudes direct expenditure such as redundancy cost only, and excludes ongoing costs such as relocation cost. 4) Discuss with management regarding the need to disclose and review the disclosure note in FS for adequacy.

Written representation Also known as management representation. • is a confirmation letter • from management or TCWG to auditor • at the end of the audit, i.e. after completion of all audit procedures and just prior to audit report being issued

Matters commonly included in the letter of representation: 1) Confirmation of responsibility for, and approval of, the financial statements. • Significant assumptions used, e.g. accounting estimates, fair value • Related parties relationship and transactions • Subsequent events • Expected outcome of legal claims • Effects of uncorrected errors, both individually and in the aggregate, are immaterial to FS, etc.

2) Confirmation that all of the accounting records, and all related documentation (such as minutes of management and shareholder meetings) have been made available, and that company transactions have been properly reflected therein. • Access to all information • Additional information for the purpose of the audit • Unrestricted access to persons • All information in relation to fraud or suspected fraud • Non-compliance or suspected non-compliance with laws and regulations, etc.

Written representation as audit evidence To confirm management intention, e.g. intention to sell an asset, intention to cease a factory, intention to trade a financial asset. This is a weak evidence, and it is not a substitute for other evidence, e.g. title deed, bank confirmation to confirm bank balance, stock taking are more reliable evidence.

2011/12 Q2a Materiality has been determined as follows: $800,000 for assets and liabilities $250,000 for income and expenses Issues related to audit work performed: (i) Audit work on inventory Audit procedures performed at the inventory count indicated that printed inventory items with a value of $130,000 were potentially obsolete. These items were mainly out of date training manuals. The finance director, Cherry Laurel, has not written off this inventory as she argues that the paper on which the items are printed can be recycled and used again in future printing orders.

2011/12 Q2a However, the items appear not to be recyclable as they are coated in plastic. The junior who performed the audit work on inventory has requested a written representation from management to confirm that the items can be recycled and no further procedures relevant to these items have been performed. Required: Consider the sufficiency of evidence obtained, explain any adjustments that may be necessary to the financial statements, and describe the impact on the audit report if these adjustments are not made. You should also recommend any further audit procedures necessary. (5 marks)

Sufficiency The only evidence is management representation, insufficient because: -Weak evidence subjecttomanagement bias -Other reliable evidence is expected to be available Adjustment Dr Impairment loss 130<250 Cr Inventory 130<800 Immaterial because both amounts are less than ML Impact onaudit report If uncorrected, on its own it does not affect audit opinion, but it should be evaluated together with other uncorrectedmisstatement.

Further evidence -Discusswith productionmanager to confirm whether the plastic cover paper can be used for future production. -Review subsequent events to confirm NRV, e.g.selling price ifthey are sold, or whether they are actually been used in production.

1) IAS 1, FS should be prepared on GC basis unless: • Management has intention to cease trading, or • There is no choice to cease trading 2) Company is GC but faces GC uncertainty: • FS should be prepared on GC basis • Disclose the significant GC uncertainty in notes • RMM = No disclosure or inadequate disclosure, breach IAS 1 3) Company is not GC: • FS should be prepared on break up basis • RMM = Prepare FS using GC basis, breach IAS 1

Management responsibilities 1) Management should assess going concern in order to decide on the most appropriate basis for the preparation of the financial statements. 2) IAS 1 Presentation of Financial Statements requires that where there is significant doubt over an entity's ability to continue as a going concern, the uncertainties should be disclosed in a note to the financial statements. 3) Where the directors intend to cease trading, or have no realistic alternative but to do so, the financial statements should be prepared on a 'break up' basis.

Auditors responsibilities 1) Consider the appropriateness of the management's use of the going concern assumption in the preparation of the financial statements. 2) Consider whether there are material uncertainties about the entity's ability to continue as a going concern that need to be disclosed in a note. 3) To consider the length of the time period that management have looked at in their assessment of going concern

Indicator of going concern uncertainty Profitability GPM = GP/Sales OPM = PBIT/Sales ROCE = PBIT/TALCL ROE = PAT&PD/ Equity

Liquidity (short-term) Current ratio = CA/CL Quick ratio = CA - Inventory/CL Inventory holding period = Inventory/ COS x 365 TR collection period = TR/ Credit sales x 365 TP payment period = TP/ Purchase or COS x 365 Working capital cycle = Inventory date TR date - TP date Asset turnover = Sales/TALCL

Liquidity (long-term) D/E = (interest bearing) Debt/ Equity D/(D E) = Debt/ (Debt Equity) Interest cover = PBIT/FC

Other indicators Obsolete product - cash inflows are likely to be very much reduced by the obsolescence of major product Breach loan covenant - may result in the loan provider recall the loan Breach regulations - operating license may be withdrawn Significant legal claim or punitive penalty - not enough cash to settle

Past question papers 2013/12 Q5a You are the manager responsible for the audit of Burford Co, a company which designs and manufactures engine parts. The audit of the financial statements for the year ended 31 July 2013 is nearing completion and you are reviewing the working papers of the going concern section of the audit file. The draft financial statements recognize a loss of $500,000 (2012 – profit of $760,000), and total assets of $13·8 million (2012 – $14·4 million). The audit senior has left the following note for your attention:

Past question papers-2013/12 Q5a ‘ I have performed analytical review on Burford Co's year-end financial statements. The current ratio is 0·8 (2012 – 1·2), the quick ratio is 0·5 (2012 – 1·6). The latest management accounts show that ratios have deteriorated further since the year end, and the company now has a cash balance of only $25,000. Burford Co has a long-term loan outstanding of $80,000 with a covenant attached, which states that if the current ratio falls below 0·75, the loan can be immediately recalled by the lender.

Past question papers-2013/12 Q5a You are also aware that one of Burford Co's best-selling products, the QuickFire, has become technically obsolete during 2013 as customers now prefer more environmentally friendly engine parts. Historically, the QuickFire has generated 45% of the company's revenue. In response to customers ' preference, $1·3 million has been spent on designing a new product, the GreenFire, due for launch in February 2014, which will be marketed as an environmentally friendly product. A cash flow forecast has been prepared for the year to 31 July 2014 , indicating that based on certain assumptions, the company's cash balance is predicted to increase to $220,000 by the end of the forecast period. Assumptions include:

2013/12 Q5a 1. The successful launch of the GreenFire product, 2. The sale of plant and machinery which was used to manufacture the QuickFire, generating cash proceeds of $50,000, forecast to take place in January 2014, 3. A reduction in payroll costs of 15%, caused by redundancies in the QuickFire manufacturing plant, and 4. The receipt of a grant of $30,000 from a government department which encourages innovation in environmentally friendly products, scheduled to be received in February 2014.

2013/12 Q5a Required: (i) Identify and explain the matters which cast doubt on the going concern status of Burford Co. (6 marks) (ii) Explain the audit evidence you should expect to find in your file review in respect of the cash flow forecast. (8 marks)

Answers to real questions Indicator of GC uncertainty 1) Profitability: TY - loss of $500,000 & LY - profit of $760,000, It is likely that profitability will suffer even more in the next financial year due to obsolete best-selling product. 2) Currentratio and quick ratio<1, and evenworse at y.e. 3) Low cash position $25,000, likely to breach loan covenant, not able to repay potential loan $80,000 immediately. 4) Obsolete best-selling product (which generated 45% revenue). If company cannot have newproduct, there will be significant drop in cash inflows. 5) Not enough resources to complete R&D of new product.

Further evidence 1) Obtain identity of the preparer of cashflows forecast, to assess their competence. 2) Review and discuss with management, to ensure it is prepared using the same accounting policies as previous years. 3) Cast to ensure accuracy. 4) Agree OBS on 1/8/2013 of cashflows forecast to actual cash balance on 31/7/2013 ofFS. 5) Reviewmarketresearch report/customer query, to assessforecast cash inflows from sales of new products. 6) Obtain correspondence with potential buyer of PPE, to assess the reasonableness of $50,000 inflow and timing=Jan 2014 7) Review a list of employees to be redundant, to assess 15% payroll reduction is also reasonable. 8) Reviewgovernment grant application letter,to confirmamount applied for; and letterfromgovernmentto assesslikelihood ofreceiving $30,000 inFeb 2014.

2018/12 Q2 Different - SOFP and SOPL are provided Same - Notes include: expansion, loan from bank, legal case, new competitor, cash balance

Tips for answering questions: Treat yourself as the director of the company, not the auditor, and do not mention accounting standards

Financial/operational/compliance perspective -Revenue, Profit, Cashflows, Reputation, etc.

Business analysis models PESTEL, Five Forces, etc. • Too dependent on key customers = Loss of revenue • Too dependent on key suppliers = Production interruption, stock out • New competitor often tested overseas competitor = Pressure to cut price • Substitute product = Pressure to cut price • Barrier to entry = Pressure to cut price

Common sense • Import = Forex rate, transportation cost, delay • Overseas production = Inefficiency, control, quality problem

RMM Risk of material misstatement (Answering techniques are the same as Matter to consider, that is, the first half of Evidence standard questions)

AR Audit Risk (Answering skills Without PAP are basically the same as RMM With PAP are difficult)

BR

RMM

AP = Analytical procedures PAP = Preliminary Analytical Procedures - Mandatory during planning stage -To understand business - To identify unusual fluctuation, i.e. RMM SAP = Substantive Analytical Procedures - Optional during fieldwork -To detect misstatement FAP = Final Analytical Procedures - Mandatory during overall review (last stage before issuing auditor’s report) - To check whether figures in FS are consistent with auditor’s understanding

Audit risk 17marks, of which1-3marks – trend 16/2=8points 1)(background)Newclient -DRis high,lack of existing knowledge, accounting policies, etc. -Opening balance,may containmisstatement 2)(background)Newly listed company -Pressure to show good result, management bias to overstate profit -IAS33EPS,RMM=wrongly calculated - IFRS 8 Operating segment, RMM = did not disclose or wrongly choose the segment

3)(para 1)Globalsalesin over 60 counties -IAS21, attransaction date=spotrate/ transaction rate, at y.e.=closing rate.RMM =wrong rate ??? 4)(para 1)Physical product overseas -Clientmay have overseasinventory at y.e. 31/5/2015, today is 1/6/2015 butstill at planning stage.Probably auditoris not able to attend inventory count and hence not able to verify inventory figure inSOFP.

5)(para 2) Online sales of games - 25% of revenue is generated through the company’s website, material. -Customer pay immediately.RMM = to recognize revenue too early, as per IFRS 15, revenue should only be recognized when delivery of goods. - Should be separately disclosed as reportable segment as perIFRS 8.RMM = not separately presented. 6)(para 2)Revenue from sales of license - 18/ 98=18%ofrevenue,materialtoSOPL -As perIFRS 15,revenue fromsales oflicence should be recognized when control is passed, i.e. when the license period starts. Hence, the revenue should not be deferred.Misstatement=understate revenue, overstate liability

7)(para 3)Management bias -Pressure to meet the requirements from institutional investor, who hold majority of shares. - Founderretains 30% ofshareholding directly and indirectly, incentive to overstate profitso that dividend can be distributed. 8) (para 4) No IA department to provide assurance on systems and controls, no independentNED to challenge the founder of company. Governance structures are not strong, controlrisk is very high.

9)(para 5)Forward exchange contract -Derivatives exist and should be accounted for in accordance with IFRS9. -RMM = Not allforward exchange contracts are identified, leading to incomplete recording of the balancesinvolved. -RMM=Determining the fair value of the derivative at the year end, as this can be judgmental and requiresspecialist knowledge. -RMM=Hedge accounting rules have not been properly applied, or that inadequate disclosure of relevant risks is made in the notes to the financial statements. 10)(para 5)Speculative investment -The short termspeculative investment should be accounted for as FVTPL as per IFRS9. As such, the investment should be recognized at $6 which is FV, ​​rather than $8 which is cost. Misstatement=overstate asset, overstate profit. -(8-6)/8=25%ofPBT, hence, materialmisstatement.

11)Earning per share Adjusted profit=PBT Dep/Amortisation –wrong No. of ordinary shares at y.e. –wrong 12)PAP=preliminary analytical procedures -Revenue increase 46.3%, very high growth,RMM=overstate revenue - GP increase 62.5%, OP increase 30.4%, this would due to: understatement of COS/overstatement of operating expenses/misallocation of costs between the two. 13)Capitalized development - 58-35/134=18%ofTA,materialtoSOFP -IAS38, development can only be capitalizedwhenPIRATEismet. -RMM=wrongly capitalized

PAP = Preliminary Analytical Procedures MainRatio Revenue GP/GPM OP/OPM Current ratio/Quick ratio Gearing Interest cover = PBIT/FC (Interest) Effective interest rate = FC/Finance (Interest bearing debt) Effective tax rate = Tax/PBT

PerformPAP=5 (1 point=1mark) EvaluateAuditRisk>14 (1 point=2marks) Additional info<5 (1 point=1mark) ---------------------------------------- -------------------------------------------------- 1) The range of changes is not uniform Sales decrease (7800-8500)/8500=8% COSdecrease (5680-5800)/5800=2% Operating expense decrease (1230-1378)/1378=11% Risk=Misallocation of expenses betweenCOSand operating expenses Additionalinfo=Detailed sales and expenses analysis

2)GP,OP,PATdecrease due to:recession, competitor newproduct, cutting price. Risk=GCuncertainty 3) Classification error COSmaybe overstated by $250 due to the provision forfine payable, which should have been classified as operating expenses.And probably it was understated by $200 (=450-250) Additionalinfo=Correspondencewith regulator, discusswithmanagement, to find out why only 250 was provided.

5)Effective tax rate LY 300/1,197=25% TY 70/735=10% Very lowcompared toLY Risk=Tax accrualis understated Impact=Overstate profit, understate liability 6)Capitalized development cost 2250/27250=8%ofTA,material toSOFP It can only be capitalized when PRIATE condition has been met per IAS 38, however, cash balance=(900).Itseemsthat no sufficient resources to complete. Risk=Wrongly capitalized as IA Impact=Overstate asset, understate profit

7)Current ratio drops from1.8 to 0.96 Quick ratio drops from0.82 to 0.25 Both are lower than 1&negative cash balance (900) Risk=Not able to pay short-termdebt,GCproblem 8) If inventory dates increase, the risk of inventory impairment will If TRdates increase, bad debt risk If TPdays increase, cash flow risk 9)Revaluation surplus increased by 500, material Revaluation should be performed as perIAS16&IFRS13F. Risk=Did not comply with relevant accounting standards Additional info=Details of valuer,such as qualification, experience,source data and valuation report

10)Newfinance lease – Old Guidelines Lease liability was notrecorded as per accounting standards. Additional info = Lease agreement, to confirm details of the lease, e.g. date, lease term, interestrate, etc. 11)IConOT payment is notfollowed, no segregation of duties=CR increases Additional info=IAreportto understand more about IC system 12)Newclient,lack of cumulative knowledge&opening balance not audited by us =DRincreases

Supplement - PPE

Supplement – ​​DTA

1) RMM – Individual FS level 2) RMM – Consolidated FS level Initial and subsequent measurement of goodwill Consolidation of income and expenses of newly acquired subsidiary Audit of consolidation schedule, e.g. Intra-group transactions Overseas subsidiary FS in foreign currency – translation Different financial year ends, different accounting policies Implication of acquisition & disposal of subsidiary Audit of Associate 3) DR 1st year audit: lack of existing knowledge/opening balance Subsidiary is audited by component auditor, rely on work done?

Goodwill

Audit of Consideration transferred

Audit of NCI (FV)

Audit of Net assets (FV)

Group audit

Reliance on component auditor

Group audit

Main Ratio: Revenue & GP & OP Revenue&COS & Operating profit OPM Current ratio Gearing Interest cover Effective interest rate Effective tax rate

Groupaudit risk (Goodwill Reference Group Audit Part 1) 1) Intangible asset 200/2492=6% of TA,material. Breakdown of increases: R&D of system = 35, R&D of Robot = 20, R&D of software=5,Total=60 As IAS 38, R&D can only be capitalized when PRITAE conditions are met, e.g. probable FEB will be flow into entity. RMM=Wrongly capitalizedwhen conditions are notmet. RMM = Total expenditure is 60 but increase in IA is only 30. This is unexplained trend; more info is needed to reconcile the 2 amounts. RMM = UEL15 yearsis applied to all categories of IA, this is notspecific enough. Furthermore, 15 yearsis considered to be long.Normally technology-related IA will be written off over a relatively short period given the repaid development in high-technology industry.

2)Current ratio -TY2.4,LY2.6 Gearing -TY25%,LY24% Interest cover=OP/FC-TY12.6,LY9 Current ratio and gearing do not indicate risk, however further investigation is still needed. Interest cover increases from 9 to 12.6. This due to both increase in OP and decrease in FC, this seems contradictory to increase in borrowing 50, as a result of which an increase in FC should be expected. RMM=Understate of FC, overstate of profit.

3) Revenue and OP Revenue decrease by 4% OPincrease by 30% OPMTY6.1%,LY4.5% This is due mainly to a reduction in operating expenses by 4.5% and a significant increase in other operating income by 50%. RMM=Understate of expense, overstate of profit.

Looks further at breakdown of operating expenses: -Cost of material decrease by 3%appearsreasonable, given the decline in revenue of 4%. - Staff cost increased lightly by 1% isinconsistent with revenue trend. Besides, 5000 staff were made redundant during the year, the increase in staff is difficult to be explained. - Most noticeable trend is that operating expense (with no details) is only 8% of previous years. Significant drop indicates possible understatement of exps, such as accrued expense.

4)Other operating income Operating income increases by 50%, of which reversal of provision increases by 50% and reversal of impairment loss by 50%. RMM= Overstate of profit as earningmanagement technique in reaction to the fall in revenue.The risk of management bias is high given the listed status.The gain of forex and gain on disposal ofPPE would also be indication.

5)Effective tax rate LY60/240=25% TY64/322=20%, decreases. RMM = Understate of income tax expense and current tax liability. Again, this would indicate management bias as profit increases but profit chargeable to tax actually decreases, this cannot be reasonably explained when tax rate remaining the same

6)Detection risk Lynx is the only subsidiary which is not audited by principal auditor.This gives rise to a risk that component auditor’s work done may not be to the same standard as principal auditor,resultsinmisstatementin consolidatedFS.DRincreases. This risk is significant by the problems with the audit strategy prepared by component auditor, which will be discussed in part c of the briefing notes.

Transnational audit

Risk is examined in several ways within the Advanced Audit and Assurance syllabus and understanding the difference between these can be key to scoring good marks in the exam. Quite often, risk forms part of a planning question but it is also examined with respect to financial reporting issues elsewhere in the exam. The key to attaining good marks for risk comes from understanding the types of risk you are looking for and explaining them in the correct context. As with many areas of the exam, good exam technique can be used to increase the marks attained without having to rotate learn much additional information. It is application and understanding that is important at the Professional level.

This article will demonstrate how to maximize marks on these areas using good technique. It is, however, specific to the context of auditing and assurance and will therefore have a different focus and application to the way ethics is examined in other areas of the ACCA Qualification . What you need to know The starting point for preparing for any exam is to know the underlying knowledge that is required for this part of the syllabus. At this level the content of the guidance is what you should focus on. Marks are not awarded for memorising or quoting standard numbers, it is the application of the content of those standards that is important. For the Advanced Audit and Assurance exam the following standards are examinable:

This article will demonstrate how to maximize marks on these areas using effective exam technique. It is, however, specific to the context of auditing and assurance and will therefore have a different focus and application to the way risks are examined in other areas of the ACCA Qualification. What you need to know The three main types of risk you might be asked to evaluate in the exam are business risk, risk of material misstatement and audit risk. These are defined as follows:

Business risk - A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies (ISA 315) Risk of material misstatement (RoMM) - ‘The risk that a material misstatement exists in figures or disclosures within the financial statements prior to audit’ Audit risk - ‘The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of material misstatement and detection risk’

You should know from your study of Audit and Assurance that the audit risk model is comprised of: Audit risk = RoMM x Detection risk For a risk of misstatement to occur there must be an inherent risk of an item being misstated and a risk that the client's controls did not identify and correct this misstatement. When you are asked to evaluate RoMM in an exam, the examiner is looking for those inherent and control risks and, in many cases, these arise from underlying business risks. For something to be an audit risk, there must be either a RoMM or a detection risk, the risk that the auditor’s procedures do not identify a material misstatement in the financial statements.

How to apply the knowledge Knowing these definitions will help you to remember which type of risk is which or to categorise risks into these sub types but it is not something you will be awarded direct credit for in an Advanced Audit and Assurance exam. Remember that you are often being asked to prepare an answer for the attention of the audit engagement partner, who will certainly not need these terms explained. Therefore, these definitions are so that you know what type of risk you are looking for in a question but the marks will be awarded for your evaluation of these risks.

Let’s consider an example of information that may be provided in the exam and how your answer would differ for each of the risk types you might be asked to evaluate. The following is an extract from the published September/December 2015 sample questions: Dali Co was established 20 years ago and has become known as a leading supplier of machinery used in the quarrying industry, with its customers operating quarries which extract stone used mainly for construction.

The machines and equipment made by Dali Co are mostly made to order in the company's three manufacturing sites. Customers approach Dali Co to design and develop a machine or piece of equipment specific to their needs. Where management considers that the design work will be significant, the customer is required to pay a 30% payment in advance, which is used to fund the design work. The remaining 70% is paid on delivery of the machine to the customer. Typically, a machine takes three months to build, and a smaller piece of equipment takes on average six weeks. The design and manufacture of bespoke machinery involving payments in advance has increased during the year. Dali Co also manufactures a range of generic products which are offered for sale to all customers, including drills, conveyors and crushing equipment.

business risk For the purpose of the exam, these risks can usually be thought of in terms of conditions that may prevent a business from meeting its objectives and might include risks to achieving future profits or cashflows or to business survival. This is a simplified explanation, but will help you describe the implications of most risks you come across in the exam. There will be some risks whose explanation is more involved and you can find examples of these in past exams.

In general, you are looking for risks in the information that the examiner has presented to you within the scenario. You will be asked to evaluate those risks. At this level you will not be credited for defining business risk, nor will you receive credit for describing what a client could do to mitigate those business risks. As set out in the ISAs, the focus of business risk evaluation as part of the audit process is identifying matters that could impact on audit planning, in particular matters that could give risk to risks of material misstatement or audit risks.

The focus in the Advanced Audit and Assurance exam is therefore quite different from other strategic level exams where you might be expected to consider risks from a business perspective and to describe methods the business may use to manage those risks. If you stray into risk mitigation from a business perspective rather than an auditor's perspective you are wasting valuable time on making points that cannot score marks. As such, you need to consider how to frame the information which is provided as a business risk. As a general rule, marks for business risks will be awarded along the following lines:

ü For identifying only without meaningful explanation, ½ mark ü For a briefly explained business risk, 1 mark will be awarded, and ü Full marks will only be awarded where a well explained business risk is presented. Marks will not be awarded for points that are purely speculative – i.e. not based on specific information provided in the question scenario – nor will marks be awarded for business risks that do not impact on the audit. Let’s now apply that logic to the example provided above:

Identification only – worth ½ mark The company manufactures bespoke machines for clients which may take six months to complete. In an exam, an answer that merely repeats facts from the question is unlikely to attain many marks – in a business risk question it can score ½ mark for identification only as the implications for the company have not been considered.

Identified and briefly explained – worth 1 mark The company manufactures bespoke machines for clients which may take six months to complete. During this time the company has funds tied up in work in progress. This point cannot score full marks as there is no development of why this is a risk; how does it impact on the business or the audit?

Identified and well explained – worth full marks The company manufactures bespoke machines for clients which may take six months to complete. During this time the company has funds tied up in work in progress, which could give rise to cashflow problems, especially as the 30% deposit may not cover all the upfront costs . This service has increased in the year putting further strains on cash flow.

It is also possible that a risk can have other implications or alternative descriptions that are valid and, if the answer was developed in one of these directions, that would still attract credit. For example, the following would also be an appropriate way to fully explain the same risk: Identified and well explained – worth full marks The company manufactures bespoke machines for clients which may take six months to complete. There is a risk that the customer cancels the order after the company has spent significant funds on the design and manufacture of the machine. This will have put strain on the company cash flow and it is unlikely that the machine can be sold to a different customer for the same price due to its bespoke nature. This may mean that the company makes a loss on the sale of the inventory or cannot sell it at all.

In an exam such as this, it's reasonable to assume that the examiner has given you each piece of information for a reason. It is likely to be relevant to one of the requirements and the examiner will often flag if there are areas which you should not consider. A good technique is to try and identify risks in each paragraph – there could be more than one but there is unlikely to be a section of text that does not flag something relevant for at least one requirement.

Another thing to watch for is describing risks that are speculative or insignificant in the context of the scenario you are given. There will be sufficient risk areas described in the scenario to score maximum credit if they are well described. If you find yourself hypothesising about potential issues that may affect the client, but you don't have enough information to know if it's a risk or not, then you are likely to be making irrelevant or marginal points. While it is true that valid risks – beyond those on the marking guide – can attract credit, it is much easier and less risky to use those that are flagged by the examiner.

Risks of Material Misstatement (RoMM) RoMM often follow from business risks and are the impact that those risks might have on the financial statements. It can be good practice during preparation for the exam to try and think of how a business risk might affect the financial statements every time you are analyzing them . You are looking to convert that business risk into an impact on the calculation or disclosure of items within the financial statements.

When describing RoMMs, an effective approach is to use the following steps to construct your answer: 1) Calculate and conclude on the materiality of the issue where sufficient information is available – a mark will be given for a correct and relevant calculation of materiality with an appropriate conclusion – this will only be awarded once per issue and materiality marks may be capped in an exam question. 2) Briefly describe the relevant financial reporting requirement – ​​note that no credit is awarded for the accounting standard names or numbers, only the accounting treatment. 3) Relate the risk in the scenario to the accounting treatment. 4) Illustrate the impact of the risk on the financial statements.

In general, there will be credit available for each of these processes and you should recall this approach every time you tackle a question requirement on evaluating RoMM. Let's consider the business risk we looked at above. The issue of bespoke machinery with an upfront payment can affect the financial statements in terms of revenue recognition, when dealing with the upfront payments, and inventory valuation. For the purposes of the exam, these two accounting issues are likely to be assessed as two separate RoMMs. Applying this to the scenario we have above, the following illustrates a possible answer that could be written under exam conditions and would score full marks for each of the addressed risks.

Note that we did not have sufficient information to calculate materiality. Revenue recognition The company receives a 30% deposit for the design of bespoke machinery. Revenue should be recognized over time or at a point in time when control is passed. Such points will be determined by the contractual terms. Payments received in advance of control passing should be recognized as deferred income. There is a risk that revenue might be recognized early when payment is received rather than being deferred. This would result in an overstatement of revenue and an understatement of liabilities for deferred revenue.

Inventory valuation The company manufactures machines over a period of up to three months. This gives rise to work in progress. Work in progress is valued at the lower of cost and NRV where cost includes all the costs of purchase and conversion including overheads of getting the item to its present location and condition. There is a risk that an order for bespoke machinery is canceled and the inventory NRV falls below the net costs incurred. This would result in an overstatement of inventory (or assets) in the statement of financial position and an understatement of cost of sales, therefore an overstatement of profit.

Audit risks Where you are asked to evaluate audit risks in an exam, much of your answer would be the same as for a requirement asking for risks of material misstatements as these form the major part of audit risk. The difference here is that detection risk is now also relevant. Examples of detection risk could include a recent appointment as the auditor, inexperience in a client's new market or time pressure for the audit.

If the information provided in the example we have been using included the following information: You are the audit manager of Dali Co, a new audit client of your firm. The partner has asked you to plan the audit for 31 December 2015 and has provided you with the following information after a discussion with the client.

Then, in addition to the RoMMs we have discussed, there would be an additional audit risk. We are newly appointed auditors of the client and, as such, do not have the same level of understanding of the client's business and controls as we would for an existing client. As such, we may fail to recognize certain RoMMs or may apply inappropriate procedures due to this lack of understanding. In addition, we have not audited the opening balances, so there is a risk that the opening balances may be incorrect or inappropriate accounting policies have been used.

There are two common errors candidates make in the exam around the issue of a new client. First, some candidates consider that a new auditor is a business risk or gives rise to a RoMM. This is incorrect. The underlying business is the same regardless and it is only detection risk that alters. The second is to assume that a new manager on an assignment is the same as having a new client. The audit partner and the knowledge of the client within the firm is unaltered, so the discussion of a new manager to the audit resulting in a significant audit risk does not attract credit.

It is also important to note that, from an exam point of view, none of these examples require a definition to be given of risk types nor do they require any explanation of theories as part of the answer – if the examiner asks you to evaluate risks , then presenting your answer using the approach of a subheading for each risk and answers like those shown in the examples above is sufficient.

Conclusion This article has focused on planning type questions where there is a specific requirement to describe one or more of business risk, RoMM and audit risk, and has laid out an effective approach for how you can tackle these questions to maximize your marks. Note that RoMM is also relevant for matters and evidence questions where the structure of the answer in those questions may be broader but the basic thought process is similar. This will be addressed further in a separate article on accounting issues for Advanced Audit and Assurance.

Auditor’s report Unmodified opinion Modified opinion Modified report – paragraphs Other information in Annual Report Comparative information Other report Report on internal control system Report on other problems

Unmodified Opinion

These arise if the auditor • is not able to obtain sufficient appropriate audit evidence • determines uncorrected material misstatements exist, or • has concluded that the financial statements are NOT prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework which includes consideration of the qualitative aspects of the entity's accounting practices, including indicators of possible bias in management's judgments. Where this is the case the auditor will need to assess whether the issues considered are material or material and pervasive.

Qualified opinion Where the auditors concludes either that the misstatements in the financial statements are material but not pervasive (qualified on the basis of material misstatement) or the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion but conclude the possible effects on the financial statements of undetected misstatements would be material but not pervasive (qualified on the basis of an inability to obtain sufficient audit evidence). Qualified opinions are given in the form of 'except for' opinions and examples of the wording for such opinions can be found in ISA 705 (revised) Accounting or auditing issues, significant but not widespread

Adverse opinion Where the auditor concludes that the material misstatements in the financial statements are pervasive (therefore they do not present fairly/are not true and fair) accounting issues with significant and widespread impact Disclaimer of opinion Where the auditor concludes that there is insufficient evidence on which to base an opinion and the possible effects of undetected misstatements are material and pervasive Audit issues, significant and widespread impact

MUST determine two things: 1) Is there a material misstatement or is there insufficient evidence to know whether there is a material misstatement, and 2) Is the effect material or material and pervasive? Before drawing an audit opinion, the above two things must be mentioned: 1) Accounting issues or auditing issues? 2) Significant or significant and extensive?

Pervasive A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditor's judgment: (i) Are not confined to specific elements, accounts or items of the financial statements (ii) If so confined, represent or could represent a substantial proportion of the financial statements, or (iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements.

Modified Opinion – Impact on report

Impact on audit opinion is not equal to Impact on auditors report Other modifications which should be considered: Emphasis of matter (EoM) Other matter (OM) Material Uncertainty Related to Going Concern Key audit matters (KAM)

Emphasis of matter (EoM) Used by auditors where they consider that there is a matter correctly presented or disclosed in the financial statements that the auditor deems to be of fundamental importance to a user's understanding of the financial statements. This paragraph is used to draw attention to the matter being emphasized by referring to where it is presented and disclosed in the financial statements. This paragraph is not used for going concern uncertainties. Emphasizes accounting matters and remembers them correctly

What are the matters that should be and could be included in the emphasis of matter paragraph? 1) The matter is of fundamental importance to users' understanding of the financial statements; (means ''so important that users must know'') 2) The matter is correctly accounted for and adequately presented or disclosed in the financial statements; (means ''no material misstatements'') 3) Auditor has obtained sufficient appropriate evidence that the matter is not materially misstated in the financial statements. (means ''no limitation on scope'')

Example: Emphasis of Matter We draw attention to Note X to the financial statements which describe the uncertainty related to the outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not modified in respect of this matter.

Other matter (OM) Used by auditors where they consider it necessary to communicate a matter other than those presented or disclosed in the financial statements that is relevant for a user’s understanding of the audit, auditor’s responsibilities or the auditor’s report. Emphasis on other matters, usually audit matters

There are specific circumstances where the Other Matter paragraph must be used? 1) Where prior period financial statements were audited by a predecessor auditor. The auditor shall state in an Other Matter paragraph in the auditor's report: a) Financial statement of prior period were audited by the predecessor auditor; b) The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons therefore; and c) The date of that report 2) Where prior period financial statements were not audited (note that this does not relieve the auditor of the obligation to obtain sufficient appropriate audit evidence on opening balances). 3) When reporting on prior period financial statements in connection with the current period's audit, if the auditor's opinion on the prior period financial statements differs from the opinion the auditor previously expressed. Emphasis of Matter, O

Example: Other Matter The financial statements of ABC Company for the year ended December 31, 20X0, were audited by another auditor who expressed an unmodified opinion on those statements on March 31, 20X1.

Material Uncertainty Related to Going Concern ISA 570 (revised) Going Concern requires auditors to include a paragraph drawing attention to uncertainties relating to going concern which are adequately disclosed in the financial statements by reference to those disclosures.

2015/6 Q5b You are a manager in the audit department of Nidge & Co, a firm of Chartered Certified Accountants, responsible for the audit of Darren Co, a new audit client operating in the construction industry. Darren Co's financial year ended on 31 January 2015, and the draft financial statements recognize profit before tax of $22·5 million (2014 – $20 million) and total assets of $370 million, including cash of $3 million. The company typically works on three construction contracts at a time. The audit is nearly complete and you are reviewing the audit working papers. The audit senior has brought several matters to your attention:

2015/6 Q5b A significant contract was completed in September 2014 for Newbuild Co. This contract related to the construction of a 20-mile highway in a remote area. In November 2014, several large cracks appeared in the road surface after a period of unusually heavy rain, and the road had to be shut for ten weeks while repair work was carried out. Newbuild Co paid for these repairs, but has taken legal action against Darren Co to recover the costs incurred of $40 million. Disclosure on this matter has been made in the notes to the financial statements. Audit evidence, including a written statement from Darren Co's lawyers, concludes that there is a possibility, but not a probability, of Darren Co having to settle the amount claimed

2015/6 Q5b Required: Discuss the implications of the matters described above on the completion of the audit and on the auditor’s report, recommending any further actions which should be taken by the auditor. (6 marks)

Implication on completion of audit Legal case amount=40 and this is higher than profit, very material. As per IAS 37, there is legal obligation, but FEBoutflow is only possible, it should be disclosed in notestoFS.

Implication on auditor’s report If this is adequately disclosed, it does not affect audit opinion. Auditor should express unmodified opinion, and addEOMparagraph after basis paragraph to highlight the significant legal case, which is fundamentally important to users. The EOM paragraph should: 1)Describe the uncertainty to possibility. 2)Referto the note that explain the lawsuit and uncertainty toFEBoutflow. 3)State the opinion is not affect by this issue. Further action Review the disclosure note to ensure its adequacy.

Key audit matters - For listed companies, auditors are required to include a Key Audit Matters (KAM) section within the auditor's report ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report defines key audit matters as — those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with Those Charged with Governance. They are areas of high risk, high levels of management judgment or significant events or transactions arising within the period. The auditor is required to explain why each matter was deemed important and how it was addressed during the audit. This section cannot be used to avoid giving a qualified opinion. Events (areas of risk of material misstatement, areas involving significant management judgment, major events that occurred during the period), such as Goodwill impairment

Example: Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. important

Goodwill Under IFRSs, the Group is required to annually test the amount of goodwill for impairment. This annual impairment test was significant to our audit because the balance of XX as of December 31, 20X1 is material to the financial statements. In addition, management's assessment process is complex and highly judgmental and is based on assumptions, specifically [describe certain assumptions], which are affected by expected future market or economic conditions, particularly those in [name of country or geographic area].

Our audit procedures included, among others, using a valuation expert to assist us in evaluating the assumptions and methodologies used by the Group, in particular those relating to the forecasted revenue growth and profit margins for [name of business line]. We also focused on the adequacy of the Group's disclosures about those assumptions to which the outcome of the impairment test is most sensitive, that is, those that have the most significant effect on the determination of the recoverable amount of goodwill. The Company's disclosures about goodwill are included in Note 3, which specifically explains that small changes in the key assumptions used could give rise to an impairment of the goodwill balance in the future.

Revenue Recognition The amount of revenue and profit recognized in the year on the sale of [name of product] and aftermarket services is dependent on the appropriate assessment of whether or not each long-term aftermarket contract for services is linked to or separate from the contract for sale of [name of product]. As the commercial arrangements can be complex, significant judgment is applied in selecting the accounting basis in each case. In our view, revenue recognition is significant to our audit as the Group might inappropriately account for sales of [name of product] and long-term service agreements as a single arrangement for accounting purposes and this would usually lead to revenue and profit being recognized too early because the margin in the long-term service agreement is usually higher than the margin in the [name of product] sale agreement.

Our audit procedures to address the risk of material misstatement relating to revenue recognition, which was considered to be a significant risk, included: • Testing of controls, assisted by our own IT specialists, including, among others, those over: input of individual advertising campaigns' terms and pricing; comparison of those terms and pricing data against the related overarching contracts with advertising agencies; and linkage to viewer data; and • Detailed analysis of revenue and the timing of its recognition based on expectations derived from our industry knowledge and external market data, following up variances from our expectations.

2018/3&6 Q5b You are the manager responsible for the audit of the Blackmore Group (the Group), a listed manufacturer of high quality musical instruments, for the year ended 31 March 2018. The draft financial statements of the Group recognize a loss before tax of $2·2 million (2017 – loss of $1·5 million) and total assets of $14·1 million (2017 – $18·3 million). The audit is nearing completion and the audit senior has drafted the auditor's report which contains the following extract:

2018/3&6 Q5b Key audit matters 1. Valuation of financial instruments The Group enters into structured forward contracts to purchase materials used in its manufacturing process. The valuation of these unquoted instruments involves guesswork and is based on internal models developed by the Group's finance director, Thomas Bolin. Mr Bolin joined the Group in January 2018 and there is significant measurement uncertainty involved in his valuations as a result of his inexperience. As a result, the valuation of these contracts was significant to our audit.

2.Customer liquidation Included in receivables shown on the consolidated statement of financial position is an amount of $287,253 from a customer which has ceased trading. On the basis that the Group has no security for this debt, we believe that the Group should make a full provision for impairment of $287,253 thereby reducing profit before taxation for the year and total assets as at 31 March 2018 by that amount.

2018/3&6 Q5b Qualified opinion arising from disagreement about accounting treatment In our opinion, except for the effect on the financial statements of the matter described above, the financial statements have been properly prepared in all material respects in accordance with IFRS Standards. Emphasis of matter We draw attention to the loss before tax of $2·2 million for the year ended 31 March 2018 and that the Group is in breach of loan covenants with its key finance providers. A material uncertainty therefore exists which may cast doubt on the Group's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

2018/3&6 Q5b Required: Critically appraise the extract from the auditor’s report on the consolidated financial statements of the Blackmore Group for the year ended 31 March 2018. You are NOT required to re-draft the extract from the auditor’s report. (12 marks)

KAM The section should include an introduction stating that: 1) Significance of KAM = Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. 2) Auditoris notforming a separate opinion on the itemsidentified asKAM=These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of financial instruments This is an area of ​​significant audit judgment with a high risk of material misstatement, hence inclusion asKAMis appropriate. Auditor should also: 1)Quantify the size and significance of the issue and explained its impact. 2)Describe how theKAM was addressed in the audit. 3)Besides, the report should not refer to the Group’s finance director by name and should not imply criticism of him as results of his inexperience. The use of the word ‘guesswork’ is inappropriate and unprofessional.

Customer liquidation 287,253/2,200,000=13%ofLoss,materialtoSOPL 287,253/14,100,000=2%ofTA,materialtoSOFP This is a material but not pervasive misstatement, qualifying except for opinion is appropriate. However, the details of the material misstatement should not be included in the KAMat all but should be given in the basis for qualified opinion paragraph.

Opinionparagraph 1)Title=QualifiedOpinion 2) Sequence = The opinion paragraph should be clearly crossreferenced to the ‘BasisforQualifiedOpinion’ paragraph which should be placed immediately below the opinion paragraph and should clearly describe the issue which has given rise to a qualified opinion. EOM As for GC uncertainty, auditor’sreport should nowinclude a specific section headed ‘Material UncertaintyRelated to GoingConcern’ immediately after the basis for opinion paragraph and before theKAMsection. The material uncertainty related to going concern should be crossreferenced clearly to the disclosure note where the directors have given details of the uncertainty.

FS - Revenue increase = 10% Chairman statement - Revenue increase = 30% Material inconsistency with FS. Further procedures: • Confirm no adjustment to FS is necessary • Request management to amend Annual Report • If management amend, go ahead. If management refuse, include Other Matter paragraph in auditor’s report, to inform users that 30% increase in revenue is inconsistent with FS.

Past question papers-2013/6 Q5c You are the manager responsible for the audit of the Poodle Group (the Group) and you are completing the audit of the consolidated financial statements for the year ended 31 March 2013. The draft consolidated financial statements recognize revenue of $18 million (2012 – $17 million ), profit before tax of $2 million (2012 – $3 million) and total assets of $58 million (2012 – $59 million). Your firm audits all of the components of the Group, apart from an overseas subsidiary, Toy Co, which is audited by a small local firm of accountants and auditors.

Past question papers - 2013/6 Q5c Chairman's statement The draft chairman's statement, to be included in the Group's annual report, was received yesterday. The chairman comments on the performance of the Group, stating that he is pleased that revenue has increased by 20% in the year. (6 marks) Required: In respect of each of the matters described: (i) Assess the implications for the completion of the Group audit, explaining any adjustments that may be necessary to the consolidated financial statements, and recommending any further procedures necessary; and (ii) Describe the impact on the Group audit report if these adjustments are not made.

Answers to real questions Procedures Chairman statement=20%,whereasFS=(18-17)/17=6% MaterialinconsistencywithFS. Further procedures: 1)ReviewAWP,to ensure revenue $18 is correct 2)No adjustmenttoFSisrequired. 3)Inform management to amend chairman statement. Impact on audit report If management amends, no impact. If management refuse, add OM paragraph after Basis paragraph, to inform users that 20% is inconsistent with FS.

ISA 710 Comparative Information

ISA 265 Communicating Deficiencies in Internal Control to Those Charged With Governance (TCWG) and Management

Auditor reporting forms an important part of the Advanced Audit and Assurance syllabus and exam. Prior to September 2018 auditor reporting typically featured in one of the optional questions and was often the least popular question each session. Candidates should be aware that as the exam moves to its new syllabus format all questions will be compulsory and one of the 25-mark questions each session will be drawn from the completion and reporting area of ​​the syllabus. Questions could focus on syllabus areas including final evaluation of audit evidence, matters such as going concern and subsequent events, and the reports which auditors produce at the final stage of the audit, including the auditor's report to shareholders and reports to those charged with governance.

This article focuses on auditor reporting to shareholders. It is imperative for candidates to be prepared to answer questions on auditor reporting and will need an understanding of the format of the report, the types of opinions which may be given by the auditor and the other modifications which could be required to an auditor's report.

Exam questions on the auditor's report have often taken one of two forms. The first is an appraisal of information provided within a scenario and a requirement to consider further actions and possible reporting implications, the other a critique of draft wording for an auditor's report. These requirements are slightly different as one is at an earlier stage than the other and hence it is important to focus the answer to what the requirement is asking for. There are also different wordings of the requirements which mean that the answers to two questions may look similar but conclusions have been reached for different reasons. There are two exam formats for audit reports: 1) Appraisal of info, Further action, Justify opinion report 2) Critisise audit report

Audit opinions The audit opinion is perhaps the most important thing to understand for an auditor’s report question. Where the auditor has gathered sufficient and appropriate evidence that the financial statements are free from material misstatements an unmodified opinion can be issued.

Unmodified opinions ISA 700 (revised) Forming an Opinion and Reporting on Financial Statements gives two alternative forms for an unmodified opinion. These are: In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the company as at 31 December 20X1 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS), or In our opinion, the accompanying financial statements give a true and fair view, in all material respects, the financial position of the company as at 31 December 20X1 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).

Common errors in the exam – candidates often state that the first of these opinions is incorrect and that the report should state the financial statements are true and fair – this is not the case, either wording is allowed by the standard.

Modified opinions

Exam technique: auditor reporting

Assurance

Due diligence

Use accounting and auditing skills to gather information 1) Fraud related 2) Non-fraud related

2013/6 Q2b The audit committee of the Group has contacted Kennel & Co to discuss an incident that took place on 1 June 2013. On that date, there was a burglary at the Group's warehouse where inventory is stored prior to despatch to customers. CCTV filmed the thieves loading a lorry belonging to the Group with boxes containing finished goods. The last inventory count took place on 30 April 2013. The Group has insurance cover in place and Kennel & Co’s forensic accounting department has been asked to provide a forensic accounting service to determine the amount to be claimed in respect of the burglary. The insurance covers the cost of assets lost as a result of thefts.

2013/6 Q2b It is thought that the amount of the claim will be immaterial to the Group’s financial statements, and there is no ethical threat in Kennel & Co’s forensic accounting department providing the forensic accounting service. Required: In respect of theft and the associated insurance claim: (i) Identify and explain the matters to be considered, and the steps to be taken in planning the forensic accounting service; and (ii) Recommend the procedures to be performed in determining the amount of the claim. Note: The total marks will be split equally between each part. (12 marks)

Matters to consider and steps 1)Whether police report has been lodged? 2)WhetherCCTVrecording/inventory record are still with the client? 3)Whetherthere is any inventorymovement duringMay?Sell orreceive? 4) Objective of the forensic accounting, e.g. Quantify loss for insurance claim? Identify and advise on ICdeficiency? Act as expertwitness? 5)Fee 6)Resource Steps to be taken: Clarify with client about objective of the engagement, accessibility of relevant documents, responsibilities of management and auditor, etc. Obtain correspondence with insurance company, etc.

Procedures 1) Review CCTV recording and count no. of boxes, to roughly assess the no. of inventory stolen. 2) Conduct physical count of lorries and identify no. of lorries stolen, in order to quantify loss of PPE. 3) Review PPE register&Depreciation schedule,in order to assess loss on PPE. 4) Conduct immediate inventory count and reconcile quantity counted to the no. of the last inventory count 30/4, in order to quantify loss of inventory. 5) Retrieve the cost of inventory from system, and compare to NRV, to assess any impairment of inventory is needed. 6) Review the insurance policy, to verify whether this can be claimed and amount.

2015/6 Q3c Silvio has also informed you that two members of the sales team are suspected of paying bribes in order to secure lucrative customer contracts. The internal audit team were alerted to this when they were auditing cash payments, and found significant payments to several new customers being made prior to contracts being signed. Silvio has asked if Soprano & Co would perform a forensic investigation into the alleged bribery payments. Required: Recommend the procedures to be used in performing a forensic investigation on the alleged bribery payments. (4 marks)

Procedures 1) Obtain a list of newcustomers during the year, and retrieve the cash book/bank statement to identify those customers who have received such payment. This is done to quantify the amount given as bribery. 2) Review salesrecord/sales contractsigned to identify the salesmen who are responsible forthese customers, since they are the suspects. 3) Reviewpaymentrecord to identify the accounting staff and management who approved and processed those payments, as they are also potential culprits. 4) Discusswith internal audit department,to verify other details, e.g. amount of the cash payment.

Assurance on KPI Report/CSR Report/Sustainability Report Focus on: - Matters to consider - Information required - Relevance, i.e. whether the KPI report is relevant to users? - Measurability i.e. whether the KPIs can be reliably measured?

Report 1) Reasonable assurance (positive assurance) e.g. In our opinion, the KPI report is fairly presented, in all material aspects. 2) Limited assurance (negative assurance) e.g. In our review, nothing cause us to believe the KPI report is not fairly presented.

2010/12 Q2 You are a manager in Newman & Co, a global firm of Chartered Certified Accountants. You are responsible for evaluating proposed engagements and for recommending to a team of partners whether or not an engagement should be accepted by your firm. Eastwood Co, a listed company, is an existing audit client and is an international mail services operator, with a global network including 220 countries and 300,000 employees. The company offers mail and freight services to individual and corporate customers, as well as storage and logistical services.

2010/12 Q2 Eastwood Co takes its corporate social responsibility seriously, and publishes social and environmental key performance indicators (KPIs) in a Sustainability Report, which is published with the financial statements in the annual report. Partly in response to requests from shareholders and pressure groups, Eastwood Co's management has decided that in the forthcoming annual report, the KPIs should be accompanied by an independent assurance report. An approach has been made to your fi rm to provide this report in addition to the audit. To help in your evaluation of this potential engagement, you have been given an extract from the draft Sustainability Report, containing some of the KPIs published by Eastwood Co. In total, 25 environmental KPIs, and 50 social KPIs are disclosed.

2010/12 Q2 Notes from meeting with audit manager, Ali Monroe Newman & Co has audited Eastwood Co for three years, and it is a major audit client of our firm, due to its global presence and recent listing on two major stock exchanges. The audit is managed from our office in Oldtown, which is also the location of the global headquarters of Eastwood Co. We have not done any work on the KPIs, other than review them for consistency, as we would with any 'other information' issued with the financial statements. The KPIs are produced by Eastwood Co's Sustainability Department, located in Fartown. We have not visited Eastwood Co's offices in Fartown as it is in a remote location overseas, and the departments based there are not relevant to the audit.

2010/12 Q2 We have performed audit procedures on the charitable donations, as this is disclosed in a note to the financial statements, and our evidence indicates that there have been donations of $9 million this year, which is the amount disclosed in the note. However, the draft KPI is a different figure – $10·5 million, and this is the figure highlighted in the draft Chairman's Statement as well as the draft Sustainability Report. $9 million is material to the financial statements. The audit work is nearly complete, and the annual report is to be published in about four weeks, in time for the company meeting, scheduled for 31 January 2011

2010/12 Q2 Your firm has recently established a sustainability reporting assurance team based in Oldtown, and if the engagement to report on the Sustainability Report is accepted, it would be performed by members of that team, who would not be involved with the audit. Required: (a) Identify and explain the matters that should be considered in evaluating the invitation to perform an assurance engagement on the Sustainability Report of Eastwood Co. (12 marks) (b) Recommend procedures that could be used to verify the following draft KPIs: (i) The number of serious accidents in the workplace; and (ii) The average annual spend on training per employee. (6 marks)

Matters to consider 1)No. ofKPIs=25 environmental&50 social,i.e. 75KPIs Big engagement, auditor should consider time (4 weeks to publish report) and resources. 2)TechnicalKPI=CO2 emission,Energy use. Whether auditoris competent?Able to engage auditor’s expert? 3)SubjectiveKPI=Number ofserious accidents in theworkplace Need to constitute “serious” accident

4)Intended users=“in response to requests fromshareholders and pressure groups” - Shareholder: Client is listing on 2 major stock exchanges, meaning many shareholders from different countries&with different expectations. -Pressure group=close scrutiny.In summary,this is a very high risk engagement. 5) Management bias to show favorable performance in the KPI report, e.g. understateCO2 emission, energy use and no. ofserious accident. Overstatement of donation is an indicator of such management bias.

6) New assurance team. The newly established team, may not have sufficient experience for such a big engagement. 7)Independence. This is an existing audit client, as such, providing assurance on KPI report in addition to auditing may create self-review threat, e.g. charitable donation appears in both FS and Sustainability report, although the use ofseparate team may reduce the threat.

Procedures Number of serious accidents 1)Clarifywithmanagementthe definition of “serious”. 2)Review the accident log to understand the nature of the accidents and identify all those that meet the criteria assertious accidents.Add up the number of such accidents and agree the number to theKPIreport. 3) Review supporting documents to confirm the nature and seriousness of the accident, e.g. hospital records, insurance claims.

Procedures Average annual spend on training per employee 1)Training cost: get breakdown and agree to training provider’s invoices. 2)No. of employees: agree toHRrecords. 3)Recalculate the figures to verify accuracy

Prospective financial information Forecast Based on historical information and management actions, e.g. management has already placed order on PPE, hence, realistic assumption on timing and amount. Projection Based on hypothetical assumption about timing or amount, e.g. feasibility study of a new overseas business division.

2014/6 Q2a - SOPL Forecast You are a manager in Hunt & Co, a firm which offers a range of services to audit and non-audit clients. You have been asked to consider a potential engagement to review and provide a report on the prospective financial information of Waters Co, a company which has been an audit client of Hunt & Co for six years. The audit of the financial statements for the year ended 30 April 2014 has just commenced.

2014/6 Q2a - SOPL Forecast Waters Co operates a chain of cinemas across the country. Currently its cinemas are out of date and use projectors which cannot show films made using new technology, which are becoming more popular. Management is planning to invest in all of its cinemas in order to attract more customers. The company has sufficient cash to fund half of the necessary capital expenditure, but has approached its bank with a loan application of $8 million for the remainder of the funds required. Most of the cash will be used to invest in equipment and fittings , such as new projectors and larger screens, enabling new technology films to be shown in all cinemas. The remaining cash will be used for refurbishment of the cinemas.

2014/6 Q2a - SOPL Forecast The draft forecast statements of profit or loss for the years ending 30 April 2015 and 2016 are shown below, along with the key assumptions which have been used in their preparation. The unaudited statement of profit or loss for the year ended 30 April 2014 is also shown below. The forecast has been prepared for use by the bank in making its lending decision, and will be accompanied by other prospective financial information including a forecast statement of cash flows.

2014/6 Q2a - SOPL Forecast Note 1: The forecast increase in revenue is based on the following assumptions: (i) All cinemas will be fitted with new projectors and larger screens to show new technology films by September 2014. (ii) Ticket prices will increase from $7·50 to $10 from 1 September 2014. Note 2: Operating expenses include mainly staff costs, depreciation of property and equipment, and repairs and maintenance to the cinemas.

2014/6 Q2a - SOPL Forecast Required: (a) (i) Explain the matters to be considered by Hunt & Co before accepting the engagement to review and report on Waters Co’s prospective financial information. (6 marks) (ii) Assuming the engagement is accepted, describe the examination procedures to be used in respect of the forecast statement of profit or loss. (8 marks)

Mattersto consider 1) Self-review threat as Waters Co is an existing audit client. Safeguard: Use different teams. 2) The purpose of the review engagement is to apply bank loan, resulting in advocacy threat. Auditoris considered to support the client’s application. 3)Scope of work: Auditorisrequired to reviewSOPLonly?WhetherincludeSOFP andSOCF? 4)Deadline of the review engagement 5)Competence 6)Resource

Procedures General procedures (general answers) 1)Identity of the preparer of the SOPLforecast, and assess his competence. 2)Review the SOPL forecast and discuss with management to ensure it is prepared using the same accounting policies as previous years’. 3)Cast to ensure accuracy

4) (Revenue – price) Compare proposed new price $10 to competitor’s price, to assess whetheritisreasonable and competitive. 5)(Revenue – quantity)Review the proposed upgrading schedule/plan, to assess whether all cinemas would be upgraded before 1/9/2014.This is done to support the assumption regarding increase in price. 6) (Revenue – total) Perform analytical procedures using seating capacity of all cinemas with the new price, to assess reasonableness of the forecast revenue.

7)(Operating expenses)Performanalytical procedures on operating expenses, taking into account newPPEand depreciation.Besides, consider any loss on disposal of old equipment has been included? 8)Review of capital expenditure budgets, SOCF forecast and any other information that accompany the SOPL forecast for consistency, e.g. to confirm that amount planned to spent can be met with client’s cash balance and the amount of bank loan applied for.

2012/6 Q2a ii - SOFP Forecast You are a manager in Lapwing & Co. One of your audit clients is Hawk Co which operates commercial real estate properties typically consisting of several floors of retail units and leisure facilities such as cinemas and health clubs, which are rented out to provide rental income.

2012/6 Q2a ii - SOFP Forecast Your firm has just been approached to provide an additional engagement for Hawk Co, to review and provide a report on the company's business plan, including forecast financial statements for the 12-month period to 31 May 2013. Hawk Co is in the process of negotiating a new bank loan of $30 million and the report on the business plan is at the request of the bank. It is anticipated that the loan would be advanced in August 2012 and would carry an interest rate of 4%. The report would be provided by your firm's business advisory department and a second partner review will be conducted which will reduce any threat to objectivity to an acceptable level.

2012/6 Q2a ii - SOFP Forecast Notes: 2. Hawk Co is planning to invest the cash raised from the bank loan in a new retail and leisure park which is being developed jointly with another company, Kestrel Co. Required: In respect of the engagement to provide a report on Hawk Co's business plan: (ii) Recommend the procedures that should be performed in order to examine and report on the forecast financial statements of Hawk Co for the year to 31 May 2013. ( 13 marks)

Procedures General procedures refer to the previous question (write carefully and pay attention to organizing the answers) Specific procedure 4)(Projected increase in PPE)Approved budget with KestrelCo regarding amount of capital expenditure required. 5)(Projected increase in share capital $5)Review BOD approval about no. of the shares to be issued and issue price. 6)(Projected increase in newloan $30): Obtain letter from bank and reviewdetails. 7) PPE disposal: Review PPE register to confirm NBV and confirm it is not included in the forecastPPEbalance at 31/5/2013. 8)Agree the forecast cash balance of $2.25mtoSOCFforecast.

Review on Interim FS

2012/12 Q5b You are also responsible for the audit of Squire Co, a listed company, and you are completing the review of its interim financial statements for the six months ended 31 October 2012. Squire Co is a car manufacturer, and historically has offered a three-year warranty on cars sold. The financial statements for the year ended 30 April 2012 included a warranty provision of $1·5 million and recognized total assets of $27·5 million. You are aware that on 1 July 2012, due to cost cutting measures, Squire Co stopped offering warranties on cars sold. The interim financial statements for the six months ended 31 October 2012 do not recognize any warranty provision. Total assets are $30 million at 31 October 2012.

2012/12 Q5b Required: Assess the matters that should be considered in forming a conclusion on Squire Co’s interim financial statements, and the implications for the review report. (6 marks)

Procedures 1.5/27.5=5%TA,materialtoSOFP. IAS 37, there is unexpired warranty. At 31/10/2012, cars sold before 1/7/2012 still have 3 years warranty. And at 1/7/2012,stop warranty. Assuch,forthe interimFS ending 31/10/2012, the company still has legal obligation to repair, probable cash outflow&MR.Provision forwarranty should be recognized. Misstatement=No provision Impact=Understate liability, understate expense