ACCA-高级审计AAA最全笔记

这是一篇关于ACCA-高级审计AAA最全笔记的思维导图，主要内容有1.Introduction 5分2.Ethics (15分)3.Practice management4.Evidence & lAS (70分)等。

ACCA （AAA最全笔记）

• 1.Introduction 5分
  • 通过率只有30%
    • 会计准则不好，而准则占比约70%（要精通准则）
    • 考试写不完，原因：阅读量大+过分恋战（时间练习）
    • 答案质量不高 如何拆解Requirement Relevant - Valid - Specific（一定要针对Case回答）
  • 考试大纲
    • Q1 50分
      • Risk 20-26
        • BR + RMM 26
        • Group AR 20 -24
      • Reliance on component auditor 8
      • Strategy of component auditor 10
      • Evidence 6 - 10
        • Evidence on goodwill 6
      • Ethic and professional 6-15
      • Accept assurance engagement 8
      • Assurance and fraud 6
    • Q2 25 分
      • QC 10
      • Matter to consider 10
      • Justify auditor opinion and impact on audit report 5-17
        • Impact on audit report 6
      • Ethic and professional 8
      • GC uncertainty 10
      • Forecast SOCF 9
    • Q3 25分
      • Current issurance - assurance 8
      • Accept assurance engagement 6-7
      • Forecast SOPL 6-9
      • Report of forecast SOPL 4
      • Procedure on AML 4
  • 学习大纲
    • Risk and Evidence and group audit
    • Assurance 难
    • Current issue
    • Ethic and professional issue 满分 10-15分
    • Review reporting 满分 10-15分
    • Practice mgt and Quality control
  • 授课顺序
    • 1) Ethical and professional issues
    • 2) Practice management and other issues in audit
    • 3) Audit procedures 会计准则集中 答题方法循序渐进
    • 4) Audit evaluation and review 会计准则集中 答题方法循序渐进
    • 5) Risk & Group audit risk 会计准则集中 答题方法循序渐进
    • 6) Reporting 会计准则集中 答题方法循序渐进
    • 7) Assurance 相对独立
• 2.Ethics（15分）
  • 2 Auditor's independence- 审计师的独立性
    • Five Fundamental Principles 5大基本准则
      • 1) Confidentiality 保密性
        • a) Disclosing client's confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose;
        • b) Using client's confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties. 个别情况除外，比如保密豁免权
      • 2) Integrity 正直，坦率，诚实
        • The principle of integrity imposes an obligation on auditors to be straightforward and honest in all professional and business relationships.
        • Integrity also implies fair dealing and truthfulness. Auditors shall not knowingly be associated with reports, returns, communications or other information where the auditors believe that the information:
          • a) Contains a materially false or misleading statement;
          • b) Contains statements or information furnished recklessly;
          • c) Omits or obscures information required to be included where such omission or obscurity would be misleading
      • 3) Objectivity 客观公正
        • The principle of objectivity imposes an obligation on auditors not to compromise their professional or business judgment because of bias, conflict of interest or the undue influence of others.
        • An auditor shall not perform a professional service if a circumstance or relationship biases or unduly influences the auditor's professional judgment with respect to that service.
      • 4) Professional competence and due care 勤勉尽责
        • a) To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service;
        • b) To act diligently in accordance with applicable technical and professional standards when providing professional services.
      • 5) Professional behavior 专业行为
        • The principle of professional behaviour imposes an obligation on auditors to comply with relevant laws and regulations and avoid any action that the professional accountant knows or should know may discredit the profession . (i.e. adversely affects the good reputation of the profession).
    • Five (6) Ethical Threats 6大道德威胁
      • 1) Self-interest threat 自身利益威胁-与auditor利益相关
        • • Direct financial interest in audit client 持有客户的股票，借钱
        • • Money transaction with audit client 从客户手中购买商品
        • • Significant close business relationship 密切的商业伙伴关系
        • • A member of audit team entering into employment negotiations with audit client 审计师有意向为审计客户工作
        • • Undue dependence on total fee from audit client 收入过度依赖某客户
        • • Contingent fee 比如审计费 = 20% of PAT
      • 2) Intimidation threat 胁迫威胁-Pressure，影响auditor专业判断
        • Being threatened with dismissal from client 被威胁解雇
        • Being threatened with litigation by client 被威胁起诉
        • Not award a planned assurance contract 无法获取客户的其他业务
        • Being pressured to reduce inappropriately the extent of work performed to reduce fee 被迫不恰当地减少工作量以降低审计费
      • 3) Advocacy 倾向性威胁 - Promote client’s position Auditor支持客户立场观点
        • Audit firm promote shares in client 帮IPO的客户推荐股票
        • Auditor act as an advocate on behalf of client 在纠纷中帮客户做见证
      • 4) Self-review threat 自我审查威胁-Auditing our own works
        • • A firm issues an audit report on the effectiveness of the operation of financial systems after designing or implementing it 审计师设计系统再审查 其有效性
        • • A firm prepares the accounting records or financial statements and then audit the financial statements 审计师自编自检
        • • A member of the audit team being, or having recently been, a director of the client/ employed by the client in a position to exert significant influence over accounting and financial statements 审计师曾是客户企业的董事/客户企业 中对财务有重大影响的人
      • 5) Familiarity threat 亲密关系威胁-Too accepting of client's book
        • Close or immediate family member who is a director of the client/ in a position to exert significant influence over the accounting or financial statements 直系亲属是客户企业的董事/在客户企业中比较有影响力的 岗位上
        • A director of the client recently served as the engagement partner 合伙人 曾是客户企业的董事
        • Auditor accepting gifts or preferential treatment from a client, unless the value is trivial or inconsequential 审计师接受礼物或优待条款
        • Senior personnel having a long association with client 管理层的长期合 作关系
      • 6）Management threat
  • Ethic 案例情境
    • 2.1 Financial interest in/with audit clients
      • Loan transaction between auditor and audit client
        • 1) Loan from audit client 客户借钱给审计师
          • Q1: Is the amount material? A1: No, no threat. A2: Yes
          • Q2: Is the client a bank? A1: No, not allowed. A2: Yes, normal course of business.
          • Q3: Normal lending procedures? A1: Yes, allowed, A2: No, self-interest threat & apply safeguard. & evaluate significance
        • 2) Loan to audit client 审计师借钱给客户
          • Again, depends on materiality
          • 2014/12 Q1d (y.e. 31/12/2014) Connolly Co has approached its bank to extend its borrowing facilities. An extension of $10 million is being sought to its existing loan to support the on- going development of new drugs. Our firm has been asked by the bank to provide a guarantee in respect of this loan extension. Required: Discuss the ethical issues relevant to the audit firm, and recommend appropriate actions to be taken. (7 marks) （Note: 2 issues in full question）
          • 答题：Marking scheme : 1 point = 1 mark
            • Step 1 识别+原因 Self-interest threat, for this is financial interest in audit client.
            • Step 2 评估+原因 Significant self-interest threat, significance depends on materiality of the loan,potential loan=10,10/200=5%of total assets,material to SOFP.
            • Step 3 引用Code According to lESBA code, prohibited, i.e. audit firmshould not provide significant loan/ guarantee toaudit client.
            • Step 4 措施 Auditor should decline the request politely andexplain why.(措施一般有两种:Decline or Applysafeguard to reduce the threat to acceptable level)
          • 2018/9 Q2b Your client portfolio as an audit manager at Coram & Co also includes Turner Co which is a listed financial institution offering loans and credit facilities to both commercial and retail customers. You have received an email from the audit supervisor who is currently supervising interim testing on systems and controls in relation to the audit for the year ending 31 October 20X8. The email gives the following details for your consideration: One of the audit team members, Janette Stott, has provisionally agreed to take out a loan with Turner Co to finance the purchase of a domestic residence. The loan will be secured on the property and the client’s business manager has promised Janette that he will ensure that she gets ‘the very best deal which the bank can offer.
            • 答题：Marking scheme : 1 point = 1 mark
              • Step 1 识别+原因
                • Turner co, a listed financial institution provides loan to auditoris considered to be normal course of business. However, this may create self-interest threat, due to financialinterestin audit client.
              • Step 2 评估+原因
                • Significance depends on amount of the loan and whether it is under lending procedures.If amount is material and/or client offers special discount for such loan, there issignificantself-interest threat.
              • Step 3 引用Code
                • As per IESBA code, audit team member should not accept such a loan or guarantee from client.Hence,the person should be excluded fromaudit team.
              • Step 4 措施
                • The key issue is whether ‘the very best terms which the bank can offer’ fall withinTurner Co's normal lending procedures, and terms and conditions.Ifthis isthe case, the loan is acceptable, and safeguard should be applied, e.g.review thework done.
    • 2.2 Purchase goods and services from audit clients
      • Q1: Normal course of business? = Does client normally sell this goods or services? A1: No not allowed. A2: Yes
      • Q2: Arm's length? A1: Yes, no threat. A2: No, self-interest threat & evaluate significance.
      • 历年真题 2011/12 Q1a ii (y.e. 30/6/2011) Bill Co (property development company) has recently completed the development of a luxury new office building in Newtown. Several of the office units are empty, and the management of Bill Co has offered the office space to our firm for a nominal rent of $100 per year. Required：In addition, please critically evaluate the planning that has been completed by the previously assigned audit manager. Relevant details are provided in attachment 2, which contains notes made by her, and placed on the current year audit file. Make sure you include discussion of any ethical matters arising from the notes, and recommend any actions you think necessary. (11 marks)
      • 答案 ：Ethical issue BillCo, a property development company rent out an office unit to auditoris normal course of business. This may create self-interest threat, due to potential benefitfromaudit client. In this case, nominalrental $100 per yearfor new and luxury office building is considered to be special discount.Hence, significantself-interest threat. Furthermore, client is offering gift and hospitality. Auditorshould consider hisintention, itmay create familiarity threat because of close relationship or intimidation threat as clientmay threaten tomake it public in future. IESBAcode, prohibit. Decline.
      • Gift and hospitality
        • May create: Self-interest threat, due to amount. Intimidation threat, because client may threaten to make it public. To evaluate significance, look at: Nature and value = what kind of gift? An office building or a piece of cake. Intention = why gives this? To influence judgement or business customary gift. Safeguard: To avoid unless the amount is clearly insignificant.
      • 历年真题 2018/12 Q3b (y.e. 30/9/2018) As a result of your audit review visit at the client’s premises, you have learned that the audit team was invited to and subsequently attended Clean Co’s annual office party. The client provided each member of the audit team with a free voucher worth $30 which could be redeemed at the venue during the party. The audit senior, Paula Metcalfe, who has worked on the audit for the last three years has informed you that the audit team has always been encouraged to attend the party in order to develop good client relations. Required: Comment on the ethical and professional issues arising from your review of the audit working papers and recommend any actions which should now be taken by Thomasson & Co. (15 marks)
      • 答案 ：Ethical issue Inviting auditorto office party is client’s gift and hospitality. This may create familiarity threat, due to close relationship as a result of attendance every year. Auditor may become less objective and reluctant to challenge client’s book. This may also create self-interest threat, as auditorisreceiving directfinancial benefitfromclient,i.e. $30 vouchers. In the case of Clean Co, $30 voucher per person appearsto be immaterial in value, hence, there is no threat to independence. However, auditor may still consider declining the gift in orderto maintain a professional distance from a client.
    • 2.3 Business relationship with audit client
      • Joint venture with audit client
      • Joint operation/marketing with audit client
      • Distributionship/marketing agreement, to distribute each other’s products or services
      • May create: Self-interest threat Significance depends on:Materiality of financial interest
      • 历年真题 2014/6 Q4d I also worked on the audit of Campbell Co, where I heard the managing director, Ting Campbell, discussing a potential new business opportunity with the audit engagement partner. Campbell Co is an events organiser, and is planning to run a programme of nationwide events for accountants, at which speakers will discuss technical updates to financial reporting, tax and audit regulations. Ting proposed that our firm could invest some cash in the business opportunity, supply the speakers, market the events to our audit clients, and that any profit made would be shared between Ryder & Co and Campbell Co. What would be the implications of our firm considering this business opportunity? 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. (7 marks)
      • 真题答案Ethical issue This is joint operation with audit client, asthe audit firm invest cash,supply lecturer,market the event, and finally share profit with audit client.It creates self-interest threat, due to common financial interest. Significant self-interest threat,forthisis a nationwide event, which implies thatitis a reasonably large operation. IESBAcode prohibits close businessrelationshipwith audit client, unlessthe financialinterestis clearly immaterial. Decline.
      • Professional matters
        • = Professional competence and due care = Can you do it properly? 不是答yes or no，而是需要考虑的因素
          • e.g. Professional role = tax advisor Professional responsibility = tax planning Can you do it = knowledge, experience, time
        • Marking scheme：1 point = 1 Mark
          • Step 1 Role : Speaker,Lecturer
          • Step 2 Responsibility: Discuss latest accounting, tax,auditing issue in nationwide events.
          • Step 3 Can you do it: Auditor should consider: (1)Timing of the events; (2)Availability of competent speaker, such aspartner, senior manager.
        • Summary – ethical and professional matters
          • Ethical issue 标准分值4分 [1] 识别道德威胁 (self-interest threat) + 原因 (financial interest) [1] 评估重要程度 (significant threat) + 原因 (数字 materiality, 没有数字) [1] Code规定 (prohibit or allow) [1] 措施 (decline or apply safeguard)
          • Professional matter 标准分值3分 [1] 专业身份和职责 (professional role and responsibility) [2] 需要考虑的因素 & apply to case (loan application & banker)
    • 2.4 Personal relationship with audit client
      • May create: • Familiarity threat. Fail to maintain professional skepticism. • Intimidation threat. Pressure on auditor to influence his judgement. • Self-interest threat. Auditor try to protect family member, thus, not willing to report material misstatement detected.
      • Significance depends on: • Closeness = how close is the relationship? 亲密度 • Seniority = how senior is the person involved? 资历 e.g. Partner & CFO e.g. Audit assistant & Accounts assistant
      • 历年真题 2010/6 Q4b The finance director of Hall Co has requested that a certain audit senior, Kia Nelson, be assigned to the audit team. This senior has not previously been assigned to the audit of Hall Co. On further investigation it transpired that Kia Nelson is the sister of Hall Co’s financial controller. Required: Identify and evaluate the ethical and other professional issues raised, in respect of Hall Co. (6 marks)
      • 真题答案 Ethical issue Self - interest, familiarity, intimidation threats due to family relationship, i.e. FC's sister Significant threats, due to closeness and seniority: 1) Sister, close familymember 2) Audit senior, quite significantin audit field work 3) FC,who has significant influence on FS The code prohibits close family and personal relationships with audit client. Decline and explain why.
      • Professional issue Role = Auditor Responsibility = Anything affects audit The senior has not previously been assigned to the client. Introducing an audit senior with no experience of the client may lead to ineffective leadership of the team, and will increase audit risk, namely detection risk.
    • 2.5 Long association– senior personnel
      • • Long association of senior personnel – KAP 长期的合作关系
        • May create: Familiarity threat Auditor & audit client become friends, too accepting of client's book. Audit client becomes familiar with audit procedures, predictable audit.
        • KAP Rotation: Significance depends on: (same as business and personal relationship) Time = how long is the association? Senior = how senior is the person involved?
        • Key Audit Partner Engagement partner – who oversees the audit and finally sign the report Quality control reviewer – who performs the quality review
        • Rotation Listing company: 7 years rotation, 2 years cooling off period. Private company: Code does not specify rotation period. Private company becomes listing company: - Already serve as KAP up to 5 years, continue till 7 years and rotate, - Already serve as KAP for 6 years or more, continue to up to 2 years and rotate
        • 历年真题 2014/12 Q4b Ordway Co is a long-standing audit client of your firm and is a listed company. Bobby Wellington has acted as audit engagement partner for seven years and understands that a new audit partner needs to be appointed to take his place. Bobby is hoping to stay in contact with the client and act as the engagement quality control reviewer in forthcoming audits of Ordway Co. Required: Explain the ethical threats raised by the long association of senior audit personnel with an audit client and the relevant safeguards to be applied, and discuss whether Bobby Wellington can act as engagement quality control reviewer in the future audits of Ordway Co. (6 marks)
        • 真题答案 Ethical issue Long association and closing business relationship create familiarity threat. Significant familiarity threat, due to time (7 years) and seniority (audit engagement partner). Bobby may become too accepting of client’s book. Safeguard KAP rotation. Ordway Co is a listing company, 7 years rotation, 2 years cooling off period, and during the period auditor shall not participate in the audit of the entity, provide quality control for the engagement, consult with the engagement team or the client regarding technical or industry-specific issues, transactions or events or otherwise directly influence the outcome of the engagement.= No involvement in any capacity of the audit. QC reviewer Bobby can only act as the engagement quality control reviewer of Ordway Co after 2 years.
      • • Active audit partner becomes director/performs director’s duty 合伙人变成经理、董事
        • 2012/6 Q1b Magpie & Co’s ethics partner, Robin Finch, leaves a note on your desk: ‘I have just had a conversation with Steve Eagle concerning the CS Group. He would like the audit engagement partner to attend the CS Group’s board meetings on a monthly basis so that our firm can be made aware of any issues relating to the audit as soon as possible. Also, Steve asked if one of our audit managers could be seconded to Starling Co in temporary replacement of its finance director who recently left, and asked for our help in recruiting a permanent replacement. Please provide me with a response to Steve which evaluates the ethical implications of his requests.’ Required: Respond to the note from the partner. (6 marks)
        • 3 issues in the case Issue 1 = Audit partner to attend monthly BOD meeting Issue 2 = Seconded audit manager as temporary FD Issue 3 = Help to recruit permanent FD
        • Issue 1 = Audit partner to attend monthly BOD meeting IESBA code does not prohibit auditor attending BOD meeting, but auditor must avoid performing management duties and making management decisions, otherwise auditor could in substance act as a director of the client. = management threat The code also states that if an auditor serves as a director or officer of an audit client,the self-review and self-interest threats created would be so significant that no safeguards could reduce the threats to an acceptable level.
      • ** Secondment/Temporary staff assignment 帮忙招聘员工
        • May create: Self-review threat. Significance depends on: • Role performed, e.g. management responsibility, significant, not allowed. • Extent of works performed, e.g. consolidation, significant, not allowed. Cannot provide accounting and bookkeeping services (including payroll) to listing company unless the services relate to matters which are collectively immaterial to the financial statements. Safeguard: The person should be excluded from audit team. The work done should be reviewed additionally
        • 历年真题2018/9 Q2b (y.e. 31/10/2018 listed financial institution) The payroll manager at Turner Co has asked the audit supervisor if it would be possible for Coram & Co to provide a member of staff on secondment to work in the payroll department. The payroll manager has struggled to recruit a new supervisor for the organisation’s main payroll system and wants to assign a qualified member of the audit firm’s staff for an initial period of six months. Required: Comment on the ethical and professional issues raised in respect of the audit of Turner Co and recommend any actions to be taken by the audit firm. (4 marks) 答案参考前面summary
      • • Auditor becomes audit client
        • Before joining May create: Self-interest threat, due to employment negotiation. Significance depends on: Role of person as auditor and his future role in client. Safeguard: The firm should have in place policies and procedures which require members of an audit team to notify the audit firm when entering employment negotiations with the client. Remove the individual from the audit team. Review the work done so far.
        • After joining May create: • Familiarity threat, for he is familiar with the firm’s audit methodology. • Intimidation threat, due to pressure on audit team especially juniors. Significance depends on: Role. Safeguard: Modify audit plan, to make the audit less predictable. Assign experienced team, to reduce intimidation threat.
        • 历年真题2012/12 Q1a iii (y.e. 30/11/2012) Several of Grohl Co’s executive directors and the financial controller left in October 2012, to set up a company specialising in the recycling of old electronic equipment. This new company is not considered to be in competition with Grohl Co’s operations. The directors left on good terms, and replacements for the directors have been recruited. One of Foo & Co’s audit managers, Bob Halen, is being interviewed for the role of financial controller at Grohl Co. Bob is a good candidate for the position, as he developed good knowledge of Grohl Co’s business when he was managing the audit. Required: Discuss any ethical issues raised, and recommend the relevant actions to be taken by our firm. (4 marks)
        • 真题答案 Ethicalissue AuditmanagerforFY30/11/2011,may becomeFCforFY30/11/2012. Before joining： Significantself-interest threat, due toBos’srole in audit(LY auditmanager who issignificant in auditfieldworks), and future role in client(FC who has significantimpact onTYFSand audit). Action: Reviewthework done for hisFY2011 audit. If he finally joins: Significantself-review&familiarity threat. Action: Modify the audit plan, assign experienced staff
      • • Audit client becomes auditor
        • May create: • Self-review threat, if the person used to be responsible for accounting. • Familiarity threat, because his colleagues is still in accounting works. • Intimidation threat, if he used to be a manager. Significance depends on: Role. Safeguard: IESBA code does not prohibit, but provide timeline, 2 years.
    • 2.6 Provide accounting related services to audit client
      • Common accounting related services
        • Accounting services – direct impact on FS
          • Accounting services = Basically, client did not provide figures and paid auditor for that Normal audit work = Application of accounting standards, accounting policies Reconciliations Translation of foreign subsidiary Audit adjustment, etc.
          • May create: • Self-interest threat, due to fee income. • Self-review threat. Auditor produce and subsequently audit the figures. • Management threat. Preparation of accounting records is management responsibility. And the threat is so significant that no safeguard can be applied to reduce to acceptable level. Listing company: Not allowed. Private company: Routine and mechanical works, allowed. Group company? Parent – listing Subsidiary 1 – listing Subsidiary 2 – Private?
        • Valuation services – may create figures in FS
          • May create: Self-review threat Significance depends on: • Materiality • Subjectivity = Lots of judgement? Listing company: Material, not allowed. （immaterial allowed） Private company: Material and subjective, not allowed. Safeguard: Use different teams Have a professional to conduct additional review
          • 历年真题2013/12 Q4c (y.e. 28/2/2014) Banbury Co is a listed entity, and its audit committee has asked Chester & Co to perform an actuarial valuation on the company’s defined benefit pension plan. One of the audit partners is a qualified actuary and has the necessary skills and expertise to perform the service. Banbury Co has a year ending 28 February 2014, and the audit planning is due to commence next week. Its financial statements for the year ended 28 February 2013, in respect of which the audit report was unmodified, included total assets of $35 million and a pension liability of $105,000. Required: Identify and discuss the ethical and other professional issues raised, and recommend any actions that should be taken in respect of: (c) Banbury Co. (6 marks)
          • 真题答案 Ethical issue Actuarial valuation is a valuation service.May create self-review threat. 105/35,000=0.3% of TA, immaterial to SOFP in LY 2013.Ifthis number remainsthe same aslast year,immaterialtoFS. However, actuarial valuation includes a lot of estimations, e.g. numbers of person entitled,mortality rate,medicalfee, discountfactor, hence subjective. IESBA code says auditor cannot provide valuation service to an audit client which is a public interest entity ifthe valuationswould have amaterial effect, separately orin the aggregate, onFS. (PIE 公众利益实体 > 上市公司) As such,itis okay to provide actuarial valuation service to Banbury Co but should use different teams or engage a professional for additional review.
          • Professional issue Role=Actuary Responsibility=Actuarial valuation One ofthe audit partnersis a qualified actuary and hasthe necessary skills and expertise to performthe service.Seems professional competence is not a problem, however, auditormay still consider otherfactors,such astime.
        • Taxation services – Tax return preparation
          • This does NOT generally create a threat to independence provided management takes responsibility for the returns including any judgements which have been made. • Based on verified historical information • Subject to review and approval by tax authority
          • May create: • Self-review threat. Auditor reviews work which they themselves have previously performed, e.g. tax payables figure in FS. • Advocacy threat. auditor being seen to promote the interests of client with tax authorities and therefore auditor will be biased in favour of the client. Significance depends on: • Materiality • Subjectivity/Complexity Listing company: Not allowed. Private company: Use different team,
        • Taxation services – Tax dispute
          • May create: • Advocacy threat. Auditor act as advocate of client. • Self-review threat. Result of the tax dispute may affect FS. Significance depends on: Materiality. Act as advocate of client in public & amount is material, not allowed. Safeguard: Use different teams.
          • 历年真题 2013/6 Q2a (y.e. 28/2/2013) ‘ 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 recognised. The deferred tax asset has arisen because several of the Group’s subsidiaries have been loss making this year, creating unutilised 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.
          • 2013/6 Q2a (y.e. 28/2/2013) ‘The financial controller also asked for my advice as to how the tax losses could be utilised by the Group in the future. I provided her with some tax planning recommendations, for which she was very grateful.’ 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) 2 issues in the case Issue 1 = Calculation of DTA Issue 2 = Tax planning
          • 真题答案 Ethical issue Issue 1=Calculation of DTA Self-reviewthreat, asDTA calculated for preparing accounting entry will be subsequently audited by the firm. Significance depends on: -Materiality, normallyDTis considered to bematerial. - Subjectivity, and DTsubjective in this case. Because availability offuture tax profit to utilised DTA must be assessed according to IAS 12 and this assessment containslots of judgement. IESBA code, not allowed for listing company. Independent review should be performed.
          • 真题答案 Ethicalissue Issue 2=Tax planning Self-review threat, as the tax planning advice will affect matters to be reflected in the financialstatements. Significant self-reviewthreat,fortax planning is a quitematerial and complex area,which requires appropriate level ofskill and knowledge to performsuch work. IESBAcode, not allowed forlisting company. To advise clientto engage a tax professionalfor proper advice.
          • 真题答案 Professional issue Role=Audit assistant Responsibility=Anything affects audit Audit junior calculate DTA and provide tax planning advice. Lack of relevant experiences, as a result,risk of errorincrease. Client’s FC has difficulty calculating DTA. This indicates management competence and integrity issue,risk ofmaterialmisstatementincrease. Action: Request help fromtaxmanagerto reviewcalculation ofDTA.
          • 历年真题 2018/12 Q3b (y.e. 30/9/2018 unlisted company) Following your review of the audit engagement letter and the working papers of the taxation section of the audit file, you have established that Thomasson & Co performed the taxation computation for Clean Co and completed the tax returns for both the company and Mr Blackers personally. All of the taxation services have been invoiced to Clean Co as part of the total fee for the audit and professional services. Mr Blackers’ personal tax return includes a significant number of transactions involving the purchase and sale of properties in various international locations. The taxation working papers include a detailed review of a number of off-shore bank accounts in Mr Blackers’ name which identified the property transactions.
          • 历年真题 2018/12 Q3b (y.e. 30/9/2018 unlisted company) Required: Comment on the ethical and professional issues arising from your review of the audit working papers and recommend any actions which should now be taken by Thomasson & Co. (15 marks) 3 issues in the case Issue 1 = Perform corporate taxation computation Issue 2 = Complete corporate tax return Issue 3 = Complete director’s individual tax return Issue 1&2 答案参考前面summary Issue 3 涉及到反洗黑钱, 后面讲
    • 2.7 Provide corporate finance services to audit client
      • Finance 债权融资 & 股权融资 1) (Equity) Sell share, Advocacy threat, Not allowed 2) (Liability) Borrow money from bank/ Restructure of loan, Self-review threat, auditor create the number, and audit the number subsequently. Restructure of loan = Extension 借款延期 = Get lower interest rate 下浮利率
      • May create: • Advocacy threat, auditor speak to bank on behalf of the client. • Self-review threat, FL (Loan payable & Amortised cost) will change, auditor prepare the schedule and later audit the schedule. • Management threat, for this is management responsibility. Significance depends on: Materiality and subjectivity Safeguard: Use different teams Have a professional to conduct additional review
      • 历年真题 2010/12 Q4a ii A new partner with experience in the banking sector has joined Neeson & Co. It has been suggested that the partner could specialise in offering a corporate finance service to clients. In particular, the partner could advise clients on raising debt finance, and would negotiate with the client’s bank or other provider of finance on behalf of the client. The fee charged for this service would be contingent on the client obtaining the finance with a borrowing cost below market rate. Required: Evaluate each of the suggestions made above, commenting on the ethical and professional issues raised. (5 marks)
      • 真题答案 2 issues in the case Issue 1 = Help audit client to negotiate loan Issue 2 = Contingent fee (Discuss later) Professional issue Role=Consultant on corporate finance Responsibility=Advise clients on raising debtfinance, andwould negotiate with the client’s bank. Auditor should consider: Whetherthe newpartneris competent.Itlooks okay in this case due to his banking sector experiences.
    • 2.8 Recruitment services for audit client
      • May create: • Self-interest threat, because auditor derive additional fee income. • Familiarity or intimidation threat, if recruit FC/FD, auditor will be less stringent in audit. • Management threat, may assume management responsibilities. Significance depends on: • Role of the person to be recruited • Nature of the requested assistance
      • Possible requested assistance include: 1) Search for candidates -listed company not allowed 2) Interview 3) Conduct reference check -listed company not allowed 4) Review qualification 5) Advise suitability 6) Negotiate salary, etc. (prohibit,management duty) 7) Decide hiring (prohibit,management duty)
      • 历年真题 2012/6 Q1b Magpie & Co’s ethics partner, Robin Finch, leaves a note on your desk: ‘I have just had a conversation with Steve Eagle concerning the CS Group. He would like the audit engagement partner to attend the CS Group’s board meetings on a monthly basis so that our firm can be made aware of any issues relating to the audit as soon as possible. Also, Steve asked if one of our audit managers could be seconded to Starling Co in temporary replacement of its finance director who recently left, and asked for our help in recruiting a permanent replacement. Please provide me with a response to Steve which evaluates the ethical implications of his requests.’ Required: Respond to the note from the partner. (6 marks)
      • 真题答案 3 issues in the case Issue 1 = Audit partner to attend monthly BOD meeting (Done) Issue 2 = Seconded audit manager as temporary FD (Done) Issue 3 = Help to recruit permanent FD 答案参考前面summary Assume CS group is not listed or listed
      • 历年真题 2016/9&12 Q5a i Gull Co is a large, private company which is currently owned by the Brenner family, who own the majority of the company’s shares. Following the completion of the audit this year, the finance director, Jim Brenner, contacted you and told you that the family is considering listing the company on the stock exchange. They would like to recruit one of your audit partners for a six-month period to help prepare for the listing. As the board is concerned that the necessary skills and personnel to support the listing are not currently present within the company, Jim Brenner has also requested that your firm assist them in identifying and recruiting new members to the board. Required: The ethical and professional matters in relation to the recruitment requests made by Gull Co. (5 marks)
      • 真题答案 2 issues in the case Issue 1 = Seconded audit partner to help for listing Issue 2 = Recruit new members to the board
      • 真题答案 Issue 2=Recruitnewmembersto the board Ethical Significantself-interest,familiarity orintimidation, management threats as auditor helpsto recruitstaffwhowill ultimately be: • in seniormanagement positions • responsible forthe running of and oversight of a listed company. • may also go on to be included in any audit committee which the company sets up andwill be responsible for assessing the independence ofthe external auditors. Given that GullCo is potentially going to be a listed company,Raven&Co should not be involved in any activity such as 1&3
    • 2.9 Evaluation and remuneration policies
      • Remuneration/Performance bonus linked to something, e.g. Audit staff receive bonus linked to selling non-audit services TO AUDIT CLIENTS May create: Self-interest threat Significance depends on: • Materiality of the remuneration • Role of the individual on the audit team • The proportion of the performance evaluation that is based on the sale of such services • Whether promotion decisions are influenced by the sale of such services
      • Code states that a KAP shall not be evaluated on or compensated (remunerated) based on that partner’s success in selling non-assurance services to the partner’s audit client, due to their influential position in the audit team. Code does not state that managers should not be evaluated or remunerated for selling services to audit clients. It may be possible in the case of an audit manager having been remunerated for such a sale for safeguards to be put in lace, for example: review work done of the manager in relation to the client. However, it would be more prudent not to offer the remuneration scheme at all.
      • 历年真题2012/12 Q3b i Weller & Co is facing competition from other audit firms, and the partners have been considering how the firm’s revenue could be increased. Two suggestions have been made: 1. Audit partners and managers can be encouraged to sell non-audit services to audit clients by including in their remuneration package a bonus for successful sales. Required: Comment on the ethical and professional issues raised by the suggestions to increase the firm’s revenue. (4 marks)
      • 真题答案 Ethical Self-interestthreat Significance depends on: 1)The role.In this case,itis partner ormanager. 2)The amount of bonus.If also significant,significant threat. IESBAcode,significant bonusis not allowed. Hence: 1)Do notimplementthis policy. 2)Do notsellto audit clients.
    • 2.10 Custody of clients' asset
      • May create: Self-interest threat, auditor may use client’s money for unauthorised use Significance depends on: Materiality Safeguard: • Keep the assets separately, e.g. open a new bank account • Only use for authorised purpose
      • 历年真题 2010/6 Q4 c Collier Co has until recently kept important documents such as title deeds and insurance certificates in a safe at its head office. However, following a number of thefts from the head office the directors have asked if the documents could be held securely at Carter & Co’s premises. The partners of Carter & Co are considering offering a custodial service to all clients, some of whom may want to deposit tangible assets such as paintings purchased as investments for safekeeping. The fee charged for this service would depend on the value of item deosited as well as the length of the safekeeping arrangement. Required: Identify and evaluate the ethical and other professional issues raised. (5 marks)
      • 真题答案 Professional issue Role= Custodial service Responsibility = Safekeep client’s assetsuch astitle deeds and insurance certificates, paintings. Auditor should consider: 1)Security control 2)Environmental controlfor paintings purchased asinvestments 3)Any investmentrequired? Cost&return analysis
    • 2.11 Conflict of interest
      • A firm provides a service in relation to two or more clients whose interests in respect of the matter are in conflict. For example, two direct competitors. May create: Self-interest threat AND may affect: • Confidentiality. Auditor may accidently or purposely disclose sensitive information to the competitor. • Objectivity. It may be perceived that auditor cannot offer objective services and advice to a company where it also audits a competitor.
      • Safeguard: Inform both clients to get consent. Use two different teams. Use of confidentiality agreements by audit team members.
      • 历年真题 2013/6 Q1b Management is planning to expand Parker Co’s operations into a new market relating to beauty salons. This is a growing market, and there is synergy because Parker Co’s products can be sold and used in the salons. Expansion would be through the acquisition of an existing company which operates beauty salons. A potential target, Beauty Boost Co, has been identified and preliminary discussions have taken place between the management of the two companies. Parker Co’s managing director has asked for our firm’s advice about the potential acquisition, and specifically regarding the financing of the transaction. Beauty Boost Co is an audit client of our firm, so we have considerable knowledge of its business. Required: Discuss any ethical issues raised and recommend the relevant actions to be taken by our firm. (7 marks)
      • 真题记录 Issue 1=Conflict ofinterest,bothbuyer andseller are our audit clients Issue 2=Corporate finance service 答案参考前面Summary
      • 历年真题 2015/9&12 Q4c Your firm audits the publisher Homer Winslow Co. During its recent audit, the company’s finance director commented on growing competition in the digital publishing sector. One rapidly expanding competitor, Pissarro Co, was specifically referred to. You are aware that your firm recently acquired another accountancy firm, Maar Associates, and that Pissarro Co is one of their clients. It is hoped that the audit of Pissarro Co will be transferred to your department to take advantage of your specialism in media and publishing. Required: Evaluate each of the issues described above, commenting on the ethical and professional issues raised and recommend any actions necessary in response to the issues identified. (6 marks)
      • 真题答案 Ethic The acquisition ofthe accountancy firmby Monet&Co creates a potential conflict of interest because Monet & Co will become the auditor of both Homer Winslow Co and their competitor Pissarro Co. 答案参考前面Summary Professional issue Role=Auditor Responsibility=Audit two direct competitors Auditorshould consider:Industry experiences,time and resource, etc
      • 历年真题 2017/9&12 Q4c Adder Co is a listed audit client of your firm. The management team of Adder Co has asked you to perform a valuation of the shares of another audit client, Slowworm Co, with a view to buying the entire shareholding. Slowworm Co is a private company whose shares are owned entirely by the original founder, Mr Jim Slow. Required: Comment on the ethical and other professional issues raised, and recommend any actions which should be taken. (6 marks)
      • 真题答案 Ethic Adde Cowill want to purchase the shares for the lowest possible amount and the owner of Slow worm Co will want to sell them for the highest possible amount = conflict of interest, significant threat to objectivity of auditor, who may be seen to be acting in the interest of one party atthe expense of the other. Self-review threat because auditorwould have a significant influence over the valuation ofseller, which would consequently be used to consolidate their accountsinto the new group which auditor would be responsible for auditing in the future.
      • 真题答案 Ethic A firm should not provide valuation services for a listed client if the valuation has a material effect on FS which are consequently audited. Decline and explain why.
    • 2.12 Fees
      • Fees – Contingent fee
        • A contingent fee arises where the audit firm receives a fee which is dependent on a certain outcome, e.g. audit fee = 20% of PAT, corporate finance fee = favourable cost of borrowing May create: Self-interest threat • Not allowed for audit engagement, i.e. audit service to audit client. • Not allowed for non-audit service to audit client.
        • 历年真题 2010/12 Q4a ii A new partner with experience in the banking sector has joined Neeson & Co. It has been suggested that the partner could specialise in offering a corporate finance service to clients. In particular, the partner could advise clients on raising debt finance, and would negotiate with the client’s bank or other provider of finance on behalf of the client. The fee charged for this service would be contingent on the client obtaining the finance with a borrowing cost below market rate. Required: Evaluate each of the suggestions made above, commenting on the ethical and professional issues raised. (5 marks)
        • 真题答案 2 issues in the case Issue 1 = Help audit client to negotiate loan (Done) Issue 2 = Contingent fee 答案参考前面Summary Non-audit service to audit client, not allowed
      • Fees – Overdue fee
        • May create: Self- interest threat, if fees due from an audit client remain unpaid for a long time, especially if a significant part is not paid before the issue of the audit report for the following year. Significance depends on: • Materiality of the amount overdue = how large • Period it has been overdue = how long
        • 历年真题 2013/12 Q4b The audit of Stratford Co’s financial statements for the year ended 30 November 2013 will commence shortly. You are aware that the company is in financial difficulties. Stratford Co’s managing director, Colin Charlecote, has requested that the audit engagement partner accompanies him to a meeting with the bank where a new loan will be discussed, and the draft financial statements reviewed. Colin has hinted that if the partner does not accompany him to the meeting, he will put the audit out to tender. In addition, an invoice relating to interim audit work performed in August 2013 has not yet been paid. Required: Identify and discuss the ethical and other professional issues raised, and recommend any actions. (6 marks)
        • 真题答案 Issue 1:Request partner to attend meeting with bank,to obtainloan Advocacy threat,seen assupporting client’s borrowing. Action:Decline. Issue 2:If refuse,put audit out of tender Intimidation threat, because clientthreaten to change auditor. Action:Bring up themattersto audit committee. Issue 3:Unpaid interim audit fee Interimauditwork performed onAug 2013, and nowisDec 2013, around 3 months after year end.Thisis not considered to be long overdue. Hence, no threatto independence.
      • Fees – Large fee
        • Large = 15% of total income Too consecutive = two years in a row May create: Self-interest threat, fear to lose the client.
      • Fees – Referral fee
        • May create: Self-interest threat, due to additional fee income. Significance depends on: Materiality. Auditor should not recommend those give the highest fee. Safeguard: Get client’s consent about the referral fee arrangement. Ensure the quality of service provider.
        • 历年真题 2010/6 Q4d Several audit clients have requested that Carter & Co provide technical training on financial reporting and tax issues. This is not a service that the firm wishes to provide, and it has referred the audit clients to a training firm, Gates Co, which is paying a referral fee to Carter & Co for each audit client which is referred. Required: Identify and evaluate the ethical and other professional issues raised. (3 marks)
        • Ethic 答案参考前面Summary Professional issue Gate=Good quality? Check and ensure the quality of Gate.
      • Fees - Low ball fee = Purposely quote lower fee, allowed but not encouraged (Discuss later)
    • 2.13 Exam technique: ethics
      • Ethical standards and their application form a major part of the Advanced Audit and Assurance syllabus and are examined regularly. Often the marks for this area will be spread over more than one question and may be combined with planning, professional issues or as a standalone. The basic ethical standards at this level are the same as those examined previously in Audit and Assurance; what sets apart the level of the questions is your ability to apply those standards to more complex situations and show that you understand both threats and safeguards. This is an area of the exam where candidates can use good exam technique to increase the marks attained without having to rote learn much additional information above that learnt for previous exams.
      • This article will demonstrate how to maximise 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:
      • The situations you will be appraising at this level will usually involve an assessment of those same principles within scenarios given in the question. In addition, you may be expected to identify situations where the auditor is at risk of assuming a management responsibility with respect to providing additional services to audit clients or appreciate the differences between listed (or other public interest entities) and non-listed clients when it comes to applying these principles. 特别注意： 评估重要程度，审计师承担了管理职责，上市公司与非上市公司的区别
      • With regards to objectivity and independence, the general conceptual approach in the codes is as follows: (a) Identify threats to independence (b) Evaluate the significance of the threats identified, and (c) Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. When the professional accountant determines that appropriate safeguards are not available or cannot be applied to eliminate the threats or reduce them to an acceptable level, the professional accountant shall eliminate the circumstance or relationship creating the threats or decline or terminate the audit engagement.
      • How to apply the knowledge When addressing ethical situations in the exam, you will usually have to demonstrate these skills: 1. that you can identify an ethical threat 2. that you understand how it arises and the implication of the threat, and 3. that you can relate the guidance to the specific scenario to determine the safeguards or course of action required.
      • Each of these skills can be illustrated through the examples below (note that the answers provided here are focusing on the ethical issues arising and do not cover the professional or other issues you might also need to discuss arising from the scenarios). These answers are not fully comprehensive and give an example of the content which could be produced in an exam. There are further points in each case that could be developed and additional outcomes available within the ethical codes; however, they do represent a well-developed answer a candidate could use to attain the full marks available.
      • Example 1 The audit committee of, Mumbai Co, has asked the partner to consider whether it would be possible for the audit team to perform a review of the company’s internal control system. A number of recent incidents have raised concerns amongst the management team that controls have deteriorated and that this has increased the risk of fraud, as well as inefficient commercial practices. The auditor’s report for the audit of the financial statements of Mumbai Co for the year ended 31 March 2016 was signed a few weeks ago. Mumbai Co is a listed company. Required: Comment on the ethical issues raised and the actions your firm should take in response to the client’s request. (6 marks)
      • In this example, we are asked to provide an additional service to an audit client – a review of systems and controls. This is going to give rise to a self- review threat and may possibly lead to assuming a management responsibility. This identification is the first step to answering the question, but these points alone will not score credit in the exam until you have developed them. In order to do this you can use the steps described to build up marks as follows. The important phrases are in bold.
      • Demonstrating you understand the threats, how they arise and the implication 识别道德威胁+原因 Providing a review of the company’s system and controls gives rise to a self- review threat as these controls will then be reviewed by the firm when determining our audit strategy. The firm may be reluctant to highlight errors or adopt a substantive approach during the audit as this may highlight deficiencies in the firm’s work on the additional service. (1 mark) The design of systems and controls is a management responsibility so a review of such may give rise to a situation where the auditor is assuming a management responsibility by taking on the role of management. (1 mark)
      • Apply the guidance to the scenario – evaluate the significance and suggest safeguards and conclude 评估重要程度，措施 The code states that the threat to independence of undertaking management responsibilities for an audit client is so significant that there are no safeguards which could reduce the threat to an acceptable level. (1 mark) However, this answer could score three marks, it is likely that more marks are available. From an exam technique point of view, you should be looking for additional points to make. At this stage, don’t start speculating about relative fee size; try to focus on the information the examiner has given you.
      • Here, the company is flagged as listed, so there must be further development available on this area. Think about how you’ve seen management responsibility issues overcome during your studies and past question practice. It is these points that you can use to attract further marks. Management responsibility can be avoided if the client takes responsibility for monitoring the reports made and taking the decisions on recommendations. (1 mark) However, as this client is listed, we are prohibited from undertaking internal audit services which relate to a significant part of the controls over financial reporting. (1 mark) As such we must decline the additional work. (1 mark)
      • In other circumstances, the safeguard of using separate teams to overcome self-review threats or considering the competence of the firm to provide this service would attain credit; however, in this case, the client is listed so these points are irrelevant here. Note that, in the exam, no marks are awarded for simply listing self-review or management responsibility as they will need to be described before marks are awarded. As such, ensure that you take the time to explain the threats rather than simply writing terms.
• 3.Practice management
  • 3.1 Second opinion
    • 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.
  • 3.2 Advertising
    • 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
    • 历年真题 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) Largestfirmin the country,whereas, 3 office&12 partners, untrue. 2) Most professional firm, this cannot be proven, and thisimplies other firms are less professional,misleading. 3) Guarantee to improve efficiency, guarantee to save tax, are overstated claim, 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 createsself- interest threat.In orderto stay profitable, auditor may inappropriately reduce extent ofwork and assign less experienced staff,i.e. compromise quality of audit. 6) Rates are approved by ACCA, thisis untrue. Firms are free to set their rates and itis unprofessionalto borrowACCAname. 7) The advertisement is posted on national newspaper, thisis consistent with the professionalimage.
  • 3.3 Tender
    • 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 oversea expansion services.
    • 历年真题 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 specialises 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 ofthe auditfirm, including a description of differentservices offered, and an outline of the firm’sinternational locations. This will be important to JonesCo given that it wishesto expand into overseas markets and will be looking for an auditfirm with experience in different countries. The documentshould 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 ofthe statutory auditrequirementin the country in which JonesCo is incorporated, to confirm that the company is now at the size which necessitates a full audit ofthe 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 ofthe proposed audit approach, outlining the stages ofthe 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 emphasise the need for thorough testing of opening balances and comparatives given that thisisthe first year thatthe financialstatementswill be audited.The risk-based nature ofthe audit methodology should be explained, and that it will involve an assessment of accounting systems and internal controls.Controlsmay not be good given the limited resources ofthe accounting function,so the audit approach islikely to be substantive in nature.
    • The auditfirm may at thisstage wish to explain that while the auditshould not be ‘disruptive’, the audit team willrequire some inputfrom JonesCo’s employees, especially the accountant, and other personnel includingBentley may need to make themselves available to respond to the audit firm’s requestsforinformation and to discussmattersrelating to the audit. The proposalshould outline the various communicationswhichwill bemade with those charged with governance during the audit process, and highlight the value added fromsuch communications,for example,recommendations on any control deficiencies.
    • Deadlines The auditfirmshould clarify the timescale to be used forthe audit.Bentley hasrequested that the audit is completedwithin fourmonths ofthe year end. Thisseemsto be reasonable; itshould be possible forthe audit of a relatively small company with simple transactions and a full-time accountant to be completedwithin thattimeframe.
    • Quality control and ethics Weston & Co should clarify its adherence to IESBA’s Code of Ethicsfor 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 providedwith in relation to their investment.
    • Additionalnon-audit and assurance services The audit proposalshould describe the various non-audit and assurance related serviceswhichWeston&Cowould be able to offerJonesCo.These may include,for example, business consultancy and corporate finance advice on overseas expansion and obtaining any necessary additional funding to help the planned overseas expansion.This discussion should clearly state and emphasise that the provision ofsuch servicesissubject to meeting ethical requirements and will be completely separate fromthe auditservice.
  • 3.4 Accept audit appointment （重点）
    • IRR FC PC KYC = Know Your Client
    • Independence = ethic, 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
    • 历史真题 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)
    • Ethic 1) Client operates in financial service industry, which is a relatively specialised area.This affects auditor’s competence and due care. 2) Provision of non-auditservices,i.e. business development advice, create self-interest threatfromadditionalfee income, and potentialself-review threat.
    • Professional issue This appearsto be a high risk audit, auditorshould consider: 1) Financialservice industry is by nature high risk, high reliance on audit report, and higherrisk onmoney laundering. 2) Change auditor due to accounting disagreement, cast doubt on managementintegrity. 3) Poorinternal controlsystem,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) Communicatewith previous auditor on accounting issues. 3) Review status on non-compliance investigation, e.g. contactfinancial services authority formore information. 4) Auditor should assess whether the audit risk can be reduced to an acceptable level,for example, by using an experienced audit teamand a substantive audit approach. 5) Auditorshould also considerwhetherthe fee forthe audit outweighsthe risk involved.
  • 3.5 Service organisation
    • Outsourcing is when certain functions within a business are contracted out to third parties known as service organisations. 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 Organisation requires the auditor to obtain an understanding of how the audited entity (also known as the user entity) uses the services of a service organisation in the user entity’s operations, including the following matters:
    • 1) Nature of the services provided by the service organisation 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 organisation, and how the audit client the ensure quality of the work by the service organisation. 5) Initiation of transactions, by client or by service organisation. 6) Information available on controls relevant to the service organisation, etc.
    • It is common for a report on the description and design of controls at a service organisation 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 organisation. (test of control & opinion)
    • 历年真题 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) 答案参考前面summary
  • 3.6 Fraud
    • Types of fraud 1) Misappropriate of asset 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.
    • 历年真题 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.
    • 历年真题 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 detectfraud 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 isreasonable to expect audit proceduresto detect thismaterialmisstatement.
    • Consider whetherthe audit has been done properly, i.e. whetherit has been conducted as perISA.If no, auditoris negligent andmaybe liable.In this case, there are evidencesthatthe audit has not been done properly, e.g. noTOC, no SP were performed inmaterial accounts. 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 thingsin orderto 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 generallymeansthat 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 notthe 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 difficultfor auditorto detect even ifthe auditis done properly
  • 3.7 Legal obligation
    • 2012年，PwC在法庭上承认违背了对澳大利亚Centro Properties Group的 审计义务，错误分类11亿澳币的短期负债为长期负债，而这笔负债距离 到期只有约9个月。
    • 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 procedures applicable 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”
  • 3.8 Quality control（重点）
    • 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 人员结构合理，工作分配合理 • 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
    • 历年真题 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:
    • 历年真题 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 judgement. ‘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.
    • 历年真题 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 recognised. The deferred tax asset has arisen because several of the Group’s subsidiaries have been loss making this year, creating unutilised 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 controller also asked for my advice as to how the tax losses could be utilised by the Group in the future. I provided her with some tax planning recommendations, for which she was very grateful.’ – 道德部分
    • 历年真题 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) Notto performcertain audit procedure, e.g. directorremunerationwhich ismaterial=Wrong instruction 3) Use specific sampling method based on own judgement = Wrong instruction,the firm’sstandard samplingmethod should be followed 4) GCissuewhich isrisky 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 bymore senior person
    • 历年真题 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 recognise 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:
    • 历年真题 ‘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.’
    • 历年真题 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.
    • 历年真题 The cost of the SARs scheme based on this valuation is being appropriately recognised over the three-year vesting period and a straight line expense of $195,000 has been recognised 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.’
    • 历年真题 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)
    • 真题答案 Engagement team has 2 persons only (audit assistant + supervisor) = Inadequate staffing forlisting company. Supervision problem. The original audit managershould 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 papersisinappropriate asthe auditor must alwayslook outfor newsituations and issues.
    • 真题答案 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 ofSARshould be recognised 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 forlisting company.RPTshould have been included in the related party disclosure notesin accordance with IAS24.
    • Failure to update and change audit plan as necessary during course of audit(ISA300); clearancemeeting is nextweek andmanagerreviewis 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 recognising 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 criticised 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.
    • 历年真题 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.
    • 历年真题 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 recognising 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 forwrong audit opinion.
    • Issue 1=Fix materiality Fix and maximise ML i.e. use higher ML to assess misstatements. Hence, manymisstatements belowthe newMLwill be considered to be immaterial, this willreduce extent oftesting 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 showsthe revision is necessary,which is notthe 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&Amay needmore time to audit.Inadequate time = insufficient evidence, this will increase detection risk and expose the firmto litigation.
  • 3.9 Anti-money laundering
    • Laundering = 洗dirty衣服 Money laundering = 洗dirty money Dirty money = Proceeds from criminal activities, e.g. bribery, sell drugs, tax evasion 洗黑钱的起源： 20世纪30年代美国芝加哥有一帮黑手党，他们有许多黑色收入，与此同时他们还有 一个光明正大的投币式的洗衣业务。于是每个月向税务部门纳税申报的时候，就会 虚报收益将钱套上洗衣店的幌子“洗一洗”
    • Stages of money laundering
      • 1) Placement 安置 Cash based business and mixing of illegal and legitimate sources of cash Part A: Legitimate customer = Real sales revenue $1,000 Part B: Criminal benefit = Dirty money $1,000 & 2nd day refund 90% = Dirty money $100
      • 2) Layering 分流 Complex transactions to hamper tracing the cash such as transfer overseas
      • 3) Integration 整合/回流 Investing or spending cash to place it into the legitimate economy
    • Audit firm may commit money laundering offence • Handling the proceeds of criminal activity or advising on that 跟着干 • Failure to report suspicious money laundering activities 知情不报 • Tipping off 通风报信 • Failure to comply with the specific regulatory requirements 不按程序
    • AML procedures which audit firm should have in place:
      • Appointment of a Money Laundering Reporting Officer (MLRO), who should have a suitable level of seniority and experience; usually this would be a senior partner in the audit firm. 指定一名位高权重的管理层 为洗钱报告官
      • Conduct customer due diligence procedures (KYC). Audit firms must establish the identity of clients using documents such as certificates of incorporation and passports, and should obtain information about business activities in order to gain an understanding of matters such as sources of income, and the rationale for business transactions. 在客户挑选上尽职调 查，避免服务有黑历史或者疑点的公司
    • AML procedures which audit firm should have in place:
      • Enhanced record keeping. Audit firm must ensure that it maintains records of client identification procedures, and of all transactions relevant to audit clients, for example, the receipt of cash for services performed
      • Communication and training. A training programme is essential, to ensure that individuals are aware of the relevant legislation and regulations regarding money laundering. Individuals should also be trained in the firm’s identification, record keeping and reporting policies. 针对职员加强相关知识的培训，制定相关政策，如记录政策、报告 渠道等
    • 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 recognised 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 authorised 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 ofthe circumstances • Heron Co is cash-based business,making it an ideal environmentfor money laundering. • $2 did not come frombars&restaurants, andwas not processed through normal accounting system. Thisissuspicioustransaction to put illegal fundsinto legalrevenue=Placement • $2 overseastransfer with no supporting document, and the owner who dealswith the transactionsrefused to explain=Layering
    • Implications ofthe circumstances • Furthermore, owner’s aggressive behaviorsuggested the clientmay has something to hide, be careful notto tip off. • Thisis a suspiciousmoney laundering. Tutorial note:Creditwill also be awarded for discussion of otherrelevant matters,such asfraud,internal control deficiencies and auditimplications.
    • Reporting 1) Reportto MLRO ASAP. 2) The auditsenior who discovered thismustreport 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 wantsto 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) 答案看前面summary (ii) Evaluate whether there are any indicators of money laundering activities by either Clean Co or its staff. (6 marks) 参考真题答案即可
  • 3.10 Laws and regulations
    • 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 law 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, auditor has to obtain a general understanding of laws and regulations that affects the audit.
    • Types of law and regulations: 1) Direct impact on FS • Financial figures is 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 licence & GC uncertainty. • Auditor need to perform audit procedures to detect non-compliance
    • Audit procedures to detect non-compliance: • Enquire 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 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．
    • 历年真题 2013/12 Q3b (故事情节 – 煤矿事故) 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)
    • 历年真题 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) Auditorshould establish whetherthe surgeon is not qualified, possibly through reviewing the personnelfile ofthe surgeon or discussing with the person responsible forrecruitment. 2) Evaluate possible impact on FS, e.g. any penalty for legal case to be provided, further legal actions from other patients, possibility of withdrawn oflicence andGCproblem. 3) Discussthe matter with management and/or TCWG about the non- compliance.And encourage themto reportto regulator. 4) Seek legal advice on duty to report to regulator. If no, consider any public interest duty to report.可以展开讨论confidentiality - ethic
  • 3.11 Professional skepticism
    • An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence’. - 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.
    • 历年真题 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 authorisation for these additions. When I questioned the payroll supervisor who made the amendments, she said that no authorisation 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 不要写审计证据，难
    • 真题答案 1)Definition 2)The reliability ofthe payrollsupervisor’s response to the junior’s enquiry should be questioned.Additional evidence should be soughtforthe assertion thatthe newemployees are indeed temporary. 3) No authorisation isrequired when hiring temporary staff, alert of control deficiency.The absence of authorisation should be furtherinvestigated.Ifitis true,thisissignificant control deficiency, asthismay lead to fraud. Further action: This should be report to TCWG,in the form of management letter.
    • 4) Managementstatesthat no new employee, whereas, payroll 125K has already been paid to “them”. Thisis contradictory evidence and would be indicator offraud. Further action: Obtain a list of employees from payroll records, verify existing by checking identity, orinterviewing. 5) Only perform TOC, no other procedures. Thisisinsufficient evidence. Auditorshould perform substantive proceduressuch as TOD of payroll expense.
    • 历年真题 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 recognise a loss before tax of $50,000.
    • 历年真题 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
    • 真题答案 a)Professional scepticism • Risk ofmisstatementin relation to amaterialmatter • Reliability of confirmation ofinternally generated evidence • Judgementrequired in relation ability to provide support • Material uncertainty facing parent company • Unusual behaviour of group engagement partner • Need to remain alertfor otherfactors affecting going concern • Need to remain sceptical of all other mattersrequiring management judgement
    • 真题答案 b)(i)Support offered by ValerianCo • NorthwestCowould not be a going concernwithoutsupport of parent • Verbal confirmation notsufficient evidence • Additional evidence thatValerianCo is capable of providing support • Examples offurther evidence • Suspicious conduct of parent and group auditor • Need for professional due care and potentialre-appraisal offraud risk • Communicationwith those chargedwith governance • Possible modification of auditor’s report if additional evidence not received
    • 真题答案 (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 ofintegrity of group audit partner and potential fraud • Matter should be discussed with senior audit staff • Possible resignation as auditor
• 4.Evidence & IAS（70分）
  • 4.1 Audit of PPE
    • Evidence 出题方式
      • Matters to consider ( 4 marks) - IAS/IFRS Marking scheme: 1 point = 1 mark
        • (1)重要性 Calculate and conclude on materiality
        • (2)相关会计准则Relevant accounting standards
        • (3)风险/错报 RMM or Misstatement(APPLY to case)
        • (4)对报表的影响 lmpact on financial statements
      • Evidence = Audit procedure ( 4 marks) -ASP
        • 依据会计准则写
          • Definition Recognition lnitial measurement Subsequent measurement Disclosure
        • Common sense可以写
          • e.g. IAS 37,Insurance claim lnsurance policy - cover the situation Claim report - date and amount claimed Support document to quantify loss Reply from insurer - probability
        • ASP Approach
          • Action e.g Review
          • Source e.g Sales contract
          • Purpose e,g to verify..
    • PPE – Dismantling cost
      • IAS 16 PPE Initial measurement = Cost 1) Purchase price: trade/cash discount, import duty, etc. 2) Direct cost: incurred to bring the PPE to current location, condition, before operation 3) Borrowing cost (IAS 23) 4) Dismantling cost (IAS 37)
      • 子主题
      • • There is present obligation (could be legal or constructive) • To be incurred at the end of useful economic life, which result in future economic benefit outflow, and amount can be reliably measured • Accounting estimates: Amount, UEL, DF – inherently risky • Detailed disclosure is required
      • 历年真题 2011/12 Q3a (y.e. 31/7/2011) Fir Co is a company involved in energy production. It owns several nuclear power stations, which have a remaining estimated useful life of 20 years. Fir Co intends to decommission the power stations at the end of their useful life and the statement of financial position at 31 July 2011 recognises a material provision in respect of decommissioning costs of $97 million (2010 – $110 million). A brief note to the financial statements discloses the opening and closing value of the provision but no other information is provided. Required: Comment on the matters that should be considered, and explain the audit evidence you should expect to find in your file review in respect of the decommissioning provision. (8 marks)
      • 真题答案 Mattersto consider 1) Materiality 2) A/g standard. IAS 37, Provision can only be recognised: present obligation/ probable FEB/ MR.Intention only does not give rise to present obligation, hence no provision should be recognised. 3)Risk or Misstatement • Already recognised as provision. • Risk of wrong calculation. LY 110, TY 97, provision should be higher TYdue to unwinding ofinterest. • Inadequate disclosure. A brief note to FS discloses the opening and closing value of the provision but no other information is provided. However, Fir Co should disclose nature, movement and major assumptions, e.g.UEL,DF. 4)Impact. Understate provision and expense.
      • 真题答案 Evidence 1) Inspect, contract/agreement awarded by authoritiesregarding Fir Co’s operation ofthe powerstations,to confirmobligation exist.有义务 2)Review, quotation fromcontractor,to confirmamount of dismantling cost atthe end of 20 yearslife isreasonable.数字正确 3) Obtain, management calculation of decommissioning provision, assess assumption on remaining usefullife, discountfactor, and recalculate to ensure accuracy.折现正确 4) Review, the disclosure note to FS, to ensure the decommissioning is disclosed adequately in compliancewith IAS37 and IAS1.披露充分 5) Discuss with management aboutreason of change in amount 97 & 110. 异常变动
      • 获取审计证据的主要方法 AEIOU
        • Analytical Review 对比去年数值，行业平均值，查看异常数据
        • Enquiry 询问管理层关于具体事件的处理
        • Inspection 检查相关证据文件
        • Observation 观察具体事件的处理方法
        • Recalculation 验算计算是否正确
        • External confirmation 外部函证，涉及第三方时一般都可用
        • Reperformance 重新执行，比如试一个超过授信范围的订单， 看该订单是否可以生成
      • 历年真题 2017/9&12 Q2a (y.e. 30/6/2017) A provision of $430 million (2016 – $488 million) is recognised as a long- term liability. The provision is in respect of decommissioning a number of gas production and storage facilities when they are at the end of their useful lives. The estimate of the decommissioning costs has been based on price levels and technology at the reporting date, and discounted to present value using an interest rate of 8% (2016 – 6%). The timing of decommissioning payments is dependent on the estimated useful lives of the facilities but is expected to occur by 2046, with the majority of the provision being utilised between 2025 and 2040.
      • 历年真题 2017/9&12 Q2a (y.e. 30/6/2017) The accounting policy note discusses the methodology used by management for determining the value of the decommissioning provision and states that this is an area of critical accounting judgements including key areas of estimation uncertainty. The estimate has been made by management. In previous years, a management expert was engaged to provide the estimate but as this was expensive, management decided to produce their own estimate for the year ended 30 June 2017. 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. (10 marks)
      • 真题答案 Mattersto consider 430/1900=22.6%ofTA,materialtoSOFP. IAS37,Provision can only be recognised:Present obligation/ probable FEB/ MR. Subsequently, it would expected to increase due to unwinding of interest, using an appropriate interest rate. • Risk of wrong calculation.LY 488,TY430, provision should be higher TYdue to unwinding ofinterest. • Risk ofinappropriate discountfactor, which resultsin lower amount of provision.LY6%,TY8%,reason ofthe changemust be considered. • Besides, in previous years an expectwas engaged to provide estimation, this yearit has been prepared bymanagement.This increases both risk of error and management bias. Understate provision and expense.
      • 子主题
    • PPE – Borrowing cost
      • • At date of completion Risk = Continue capitalisation, overstate asset and profit Evidence = Building completion certificate
      • 历年真题 2012/6 Q5a (y.e. 31/1/2012) During the year Snipe Co’s factory was extended by the self-construction of a new processing area, at a total cost of $5 million. Included in the costs capitalised are borrowing costs of $100,000, incurred during the six-month period of construction. A loan of $4 million carrying an interest rate of 5% was taken out in respect of the construction on 1 March 2011, when construction started. The new processing area was ready for use on 1 September 2011, and began to be used on 1 December 2011. Its estimated useful life is 15 years. Required: Comment on the matters that should be considered, and the evidence you would expect regarding the new processing area. (8 marks)
      • 真题答案 Mattersto consider $5mnewly capitalised building&$100Kcapitalised borrowing cost Construction period 1/3-1/9 (6months) Borrowing cost=$4*5%*6/12=100K,reasonable 5/175=2.9%ofTA,materialtoSOFP 0.1/175<0.1 ofTA,immaterialtoSOFP 0.1/1=10%ofPBT,materialtoSOPL, hencematerialtoFS Depreciation period 1/9-31/1 (5months) Depreciation charge=$5/15*5/12=138K
      • 真题答案 Matters to consider IAS 23, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying assetshould be capitalised as part of the cost of that asset. Itshould be capitalised only during the period of construction, with capitalisation ceasing when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Risk is wrongly capitalised when condition not met. Overstate PPE and profit.
      • 真题答案 Evidence 1) Obtain breakdown of the $4.9m, to confirm all are direct costs of the building and eligible for capitalization. 2) Selectsample frombreakdown ofthe $4.9mand agree to the supporting document, e.g.supplierinvoice, payrollrecord forlabor cost.资本化的成 本正确 3) Review loan agreement, to verify amount $4m, interest rate 5%, and whetherthe loan issecured on any asset.资本化的借款利息正确 4)Recalculate capitalised borrowing cost and depreciation charge, to ensure accuracy, and agree allfigurestoFS.计算正确 5) Obtain building completion certificate, to confirm date of completion is 1/9/2011.完工日期
  • 4.2 IAS 40 Investment Property
    • 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 recognised 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 recognised 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约等于evidence 情况如上，我要怎么确认，也就是要拿的审计证据 1)Discusswithmanagement about the reason for acquiring the land, e.g.for rental, capital gain, or construction of building. 买来一块地 2)Agree cost 12.5mto purchase agreement,to verify amount paid.成本12.5 3)Inspect details ofthe land acquired, e.g. owners, location, price ofsimilar land, etc.Thisis necessary to plan the logistics ofthe audit. 4) (currently rented out) Review terms and condition, and other detailsin lease contract, e.g.whetherthe lessee isrelated party.租出去了 5) Understand how the FV 14.5misreached, e.g.management assumption &calculation, or valuer assumption&calculation, to assess competence of preparer.期末价值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 审计师需要就如下事项与专家达成一致，包括：总体目标和要求；专家的工 作范围；审计师和专家各自的责任；工作中涉及的重要假设和方法等。
    • 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. 审计师需要评估：专家工作中使用的原始数据的相关性，准确性和完整性； 重要假设和方法的合理性；结论的相关性以及与其它证据的一致性。
    • ISA 620, Using the Work of an Auditor’s Expert
      • Article - Auditing in specialised industries Besides valuer, this is quite likely in a specialised industry as despite being competent to perform the engagement, the audit firm may not have the necessary specific expertise in some areas. For instance in the audit of a bank, specialists may be brought in to value complex financial instruments.
  • 4.3 IAS 36 Impairment of Assets
    • Common impairment indicators in case scenario
      • Physical damage （limit life span for product obsolescent） Changes in market （limit life span for product obsolescent） Changes in technology （limit life span for product obsolescent） Changes in government policy Bad publicity, lawsuit Business restructuring
    • Impairment test for individual asset & CGU
      • Note: 常考 Impairment of business division due to drop in demand of certain product. As such, all assets in the division need to be tested for impairment as a group.
    • 历年真题 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)
    • 真题答案 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 iswrongly treated as adjusting event, no/insufficient disclosure. Evidence 1)Physical visitto confirmproperty has been damaged/demolished. 2)Obtain expertreportto confirmdate ofthe accident.
    • 历年真题 2014/6 Q3a i (y.e. 31/7/2014) – obsolescence Cooper Co’s factories are recognised 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.
    • 历年真题 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
    • 真题答案 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 recognise impairmentloss,if any. Risk is no impairmenttest, orimpairmentloss notrecognised. Overstate profit, overstate asset.
    • 真题答案 Mattersto consider Issue 2 = Research expenditure 1/15=6.7%ofPBT,materialtoSOPL 1/240=0.4%ofTA,immaterialtoSOFP Hence,materialtoFS As perIAS38,feasibility research expenditure should be expensed off. . Risk is wrongly capitalization of expense. Overstate profit, overstate asset.
    • 真题答案 Evidence 1)Obtain copy of government’s newregulation,to confirmthe prohibition of manufacture ofthe chemicalin 3 yearstime.新政策缩短产品生命周期 2) Review management impairment calculation to assess assumption on futureCFs,DFused and recalculateVIU.确定减值损失 3)Invoice form consulting firm who conducted feasibility study, to confirm amount=1m
    • 历年真题 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)
    • 真题答案 RMM(答题方法参照Mattersto consider) 30/358=8%ofTA,materialtoSOFP 30/28=107%ofPBT,materialtoSOPL Chico brand name should be capitalised and amortised overits useful life. Where thisisindefinite, no amortisation isrequired, however an annual review ofthe appropriateness ofthe assumption ofindefinite life should be performed and an annualimpairmenttestis also required. 【以下为考官文章中指出的风险】 (Indefinite life) Management’sjudgement that the brand names have an indefinite lifemay be incorrect. (Still indefinite life) Management may not have reviewed the useful life of the brand namesin the reporting period to ensure that the assumption of indefinite life isstill correct.
    • RMM( 答题方法参照 Matters to consider) (Accuracy ofimpairment test) The impairmentreviewmay not be accurate asthe 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 offifitsNRVis below cost. Other brands and inventory may be affected by the negative publicity regardingChico andmay also need to bewritten 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 expensesto confirm that the impairment isincluded. 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.
    • 历年真题 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 recognised 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)
    • 真题答案 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 ofthe business division - Shelly cruise, as CGU. Managementshould conduct impairment test for all the assets collectively,to determineRAand to recognise impairmentloss,if any, as per certain priority. Risk is no impairmenttest, no/insufficientrecognition ofimpairmentloss. Overstate assets, overstate profit.
    • 真题答案 Evidence 经济不好，销售额和利润下降，管理层去减值。 1)Inspect post year-end economic condition, e.g.GDPgrowth. 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 offigures. 4)Discusswithmanagement overthe expected future performance including any strategiesto be putin place to resolve the declining performance.
  • 4.4 Legal and insurance claim – IAS 37
    • Recognition of provision
    • 历年真题 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 recognised in the financial statements, but I want to make an adjustment to recognise 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)
    • 真题答案 Mattersto consider 5/12.5=40%of R,material to SOPL 5/(0.3),turn a smalllossto a huge profit,material to SOPL 5/280=1.8%ofTA,material to SOFP IAS 37, ifthe probability ofinsurance claimis virtually certain,recognise as receivable;ifitislessthan that, disclose a contingent assetin notesto FS or no action. Not yet virtually certain,recognised asreceivable. Overstate asset, overstate profit.
    • 真题答案 Evidence 1) Obtain the insurance contract/policy, to ensure it coverssuch 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 supportthe lossincurred. 4)In orderto ensure probability,reviewletterfrominsurance company if any, orsend direct conformation
    • 历年真题 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. The 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 recognised 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.
    • 真题答案 Mattersto consider 1,200/22,000=5.5%ofTA,material. IAS 37, provision should be recognised: present obligation, probable FEB outflows, amount can beMR.In this case, customer has alreadywon the case against company, amount claimed has been agreed by court,settlementisstill outstanding at year end.Hence, provision should be recognised inSOFP. IAS 37 also statesthat contingent assetshould not be recognised unlessthe realization ofincome is virtually certain. AsforClark’sinsurance 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.
    • 真题答案 如果问Evidence 1)Review customer contract to confirmwhetherClarkCo isliable forsuch negligence. 2) Review letter from plaintiff and send direct confirmation to lawyer, to confirmlegal proceeding isin progress.以上两点不适用于这道题，因 为法官已经判了 3)Obtain a copy of court decision,to verify amount awarded is 1.2m. 4) Obtain a copy of letter from insurance company, to verify amount recovered is 1.2mand date is 25/5/2018.
  • 4.5 IAS 38 Intangible Assets
    • General rule to capitalise intangible assets – ICE Identifiable 可辨认 – separated from business or awarded Control 可控制 – control over the economic resource Economic benefit 经济利益 – 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
    • Licence – normally can capitalised 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 capitalised 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 capitalised 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.
    • 历年真题 2013/6 Q3c (y.e. 31/1/2013)- licence The statement of financial position includes an intangible asset of $15 million, which is the cost of a distribution licence acquired on 1 September 2012. The licence 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)
    • 真题答案 Mattersto consider 15/300=5%ofTA,materialtoSOFP Amortisation15/5*5/12=1.25 1.25/47.5=2.6%ofPBT,immaterialtoSOPL IAS38,the licence can only be capitalisedwhen: • Identifiable - acquired • Control- exclusive rightto distribute a popular branded soft drink • Economic benefit- need to demonstrate Risk iswrongly capitalisewhen clientis not able to demonstrateFEB. No amortisationwas charged.题目记的还是成本
    • 真题答案 Evidence 1) Reviewa copy ofthe licence,to confirmcost=15,UEL=5 2) Agree cash paid to bank statement and cashbook. 3) Obtain salesforecast 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 reasonsfor non-amortisation.
    • 历年真题-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)
    • 真题答案 Audit procedures 1) Obtain purchase agreement/invoice,to confirmcost=5m 2) Agree the cost of 5mto the company’s cash book and bank statement. 3) Reviewamortisation calculation,to confirm$5/15 is calculated correctly. 4) Discuss with management the estimated useful life ofthe brand of 15 years and obtain an understanding of how15 years has been determined as appropriate. 5) Obtain anymarket research or customer satisfaction surveysto confirm the existence of a revenue stream.
  • 4.6 IAS 38 Intangible Assets
    • 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?
    • 历年真题 -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 recognises an intangible asset of $12·5 million in respect of capitalised 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
    • 真题答案 -IAS38 Mattersto consider 12.5/ 23=54.3%PBT,materialtoSOPL 12.5/210=5.9%TA,materialtoSOFP As perIAS 38, development cost can only be capitalised when allfollowing conditions aremet –PIRATE,resource to complete, ability to use orsell. Development cost =12.5m, whereas cash = 0.125m. Yew Co appearsto be short offinance,itis questionablewhethersufficientfundswould be available to complete the development and take the producttomarket. Furthermore, market research report indicates little demand, and management agreewith it.Thisindicates client has no ability to use orsell it and probably is not able to generateFEB. Overstate asset, overstate profit.
    • Further action 1) (没有钱)Discusswithmanagement on future possible finance. 2) (不满足资本化条件) IA should be derecognised, with all research and development coststreated as operating expenses.
  • 4.7 IFRS 5 NCAHFS & DO
    • 历年真题-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 recognised 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)
    • 真题答案 Mattersto consider 24/300=8%ofTA,materialtoSOFP 24/47.5=50.5%ofPBT,materialtoSOPL IFRS5,whetherthismeets 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 itfrom26 to 24,this appearsto be consistentwith IFRS5. Depreciation has not been ceased.
    • 真题答案 Evidence 前面Summary+ 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.
    • 历年真题-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
    • 历年真题 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)
    • 真题答案 Mattersto consider The division runsseparately from the rest of business and generated 15% revenue.It meets definition of DO as per IFRS5. Results and cashflowsshould be separated fromthose continuing operation. Risk isseparate presentation is notthere.
    • 历年真题 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.
    • 历年真题 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)
    • 真题答案 Sufficiency of evidence It is not sufficientto simply putmanagement’sjustification forthe accounting treatment in AWP and conclude it is correct. Auditorshould discuss with managementto understand the rational. In terms of the manual journal,recalculation isrelevant butstill notsufficient evidence. Further evidence should be obtained in orderto 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 asDOin SOPL and SOCF. No audit evidence appears to have been obtained in respect ofthese issues.
    • 真题答案 Further audit procedure 1) Obtain confirmation, by a review of production schedules, inventory movement records and payroll records, that production at the factory has stoppedandthusitis available forimmediate sale. 2) Reviewminutes ofBODmeeting, to confirmthat the sale ofthe factory has beenapprovedanddateof approval aswell as announcement. 3) Obtain correspondencewith estate agentsto confirmthatthe factory is being activelymarketed. 4) Use anauditor’s experttoconfirmthe fairvalue ofthe property and agree that thisfigurehasbeenusedinthe impairment calculation. 5) Using management accounts, determine whetherthe factory is a separate major line of business in which case its results should be disclosed as a discontinuedoperation.
  • 4.8 Audit of restructuring provision – IAS 37
    • Possible event in business restructuring: Staff redundancy Breach lease contract Breach other long-term contact, e.g. supplier, 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 recognised for least net loss, lower if: - Cost of fulfilling the contract - Cost of terminating and suffering any penalty payment
    • 历年真题 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
    • 历年真题 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.’
    • 历年真题 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 appearsthe criteria to be classified asNCAHFShas beenmet because: -BODapproved on 1/6/2011, before y.e. -Potential buyerwaslocated before y.e. -Probable saleswill complete in 2months As perIFRS 5,managementshould 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 assessthe validity of any assumptions used. 4) Recalculate depreciation.
    • 历年真题 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)
    • 真题答案 Evidence y.e.=31/5/2012&Today=6/6/2012 Restructuring (close the site) happened inMay, nearto y.e. 1) BOD minute of meeting, to confirm the decision to close the site was made before y.e.现时义务 2) Announcement,to confirmclient announced before y.e.现时义务 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 oflegal claim. 6) Post year-end actual payment, to assessthe sufficiency or accuracy of the provision.
  • 4.9 IAS 2 Inventory
    • Valuation of inventory: Lower of cost & NRV Cost of trading inventory – Supplier invoice Cost of manufactured inventory: Material – Supplier invoice Labour – Payroll record Overhead – Documents such as utility bills WIP – Percentage of completion, rely on expert? NRV – Post y.e. sales invoice
    • 历年真题 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)
    • 历年真题 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
    • 真题答案 Evidence 12/90=13.3%ofTA,materialtoSOFP. Increase 12-9.5/9.5=26.3% 1) Agree cost of RM to supplier invoice/ Labour to payroll record/ AbsorbedOHto understand basis of absorption. 2) To assessthe completeness ofWIP,select a sample of customer orders and trace through to the list ofjobsincluded in work in progress. And Obtain estimation of POC for all WIP at year end to ensure reasonableness. 3) Due to recent customerreturns,review management impairment test, determine NRV which might be 0, and recalculate impairment loss recognised. 4) Discuss with management about the reason why inventory holding period increased during the year.这个答案怎么写出来的？
  • 4.10 Financial instruments
    • Audit procedure (Amortised cost) 1) Review supporting document that management has initially designate/classify this as AC. 2) Review amortisation 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
    • 历年真题 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 recognised 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-terminvestment 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 brokerstatement, bank statement 3) FVagree to stockmarket price 4) RecalculateP/Land agree toSOPL
    • Audit of EPS
      • EPS EPS=PAT&PD/Weighted average no. of ordinary shares 1) Reviewboardminutesto confirmthe authorisation ofthe issue of share capital, the number ofshares and the price at which they were issued. (第三段) 2) Inspect any othersupporting documentation forthe share issue,such as a share issue prospectus or documentation submitted to the relevant regulatory.招股说明书 3) RecalculatePAT&PD 4) Recalculateweighted average no. ofshares 5) Askmanagementto reconcile EPS as per IAS33
    • Financial instruments - TR
      • 历年真题 2013/6 Q5b i (y.e. 31/3/2013) On 1 June 2013, a notice was received from administrators dealing with the winding up of Terrier Co, following its insolvency. The notice stated that the company should be in a position to pay approximately 10% of the amounts owed to its trade payables. Poodle Co, the parent company of the Group, includes a balance of $1·6 million owed by Terrier Co in its trade receivables. Required: (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 (7 marks)
      • 真题答案 Impact on completion of audit = Matters to consider y.e.=31/3/2013 Event=1/6/2013,2months aftery.e. 1.6/2=80%ofPBT,materialtoSOPL 1.6/58=2.8%ofTA,materialtoSOFP 90%irrecoverabledebt=1.44 1.44/2=72%ofPBT,materialtoSOPL 1.44/58=2.5%ofTA,materialtoSOFP IFRS9requiresthatimpairedtrade receivables are recognisedatfairvalue,whichis thepresentvalueof estimatedcashinflows=0.16,hence impairmentloss=1.44. Risk=Noimpairment Impact=Overstateprofit,overstate asset
      • 真题答案 Evidence 1) Reviewnotice fromadministrator,to confirmonly 0.16 isrecoverable. 2) Obtainwritten confirmation,to confirmtiming ofthe repayment. 3) Recalculate impairmentloss. 4) Check subsequent cash receiptsto verify accuracy of the recovered amount.
      • 历年真题-2017/9&12 Q2c (y.e. 30/6/2017) Receivables from business customers are generally reviewed for impairment on an individual basis when a customer changes their gas supplier, discontinuing their relationship with the Group. Receivables from residential customers are reviewed for impairment where they are more than 90 days late in paying their bill, or where customers have a history of late payment. Since a new customer billing system was introduced in September 2016, management has exercised additional judgement regarding the appropriate level of allowance for these trade receivables. 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. (7 marks)
      • 真题答案 Mattersto consider 450/1900=24%ofTA,materialtoSOFP. Unusual trend in TR collection period, increase in residential customers collection period and decrease in business customer collection period. Reasons for this inconsistent trend should be fully explored with management. The note to the FS indicates the introduction of new billing system has impacted on howmanagement estimatesthe allowance for credit losses, and the reasonsforthisshould be discussedwithmanagement. And management usingmore judgement in determining allowance, but the significant increase in allowance = (64-44)/44 = 45% is not adequately explained bymanagement.
      • 真题答案 Evidence 1) Get a copy ofthe aged receivables analysis, and review forsignificant changesin year. 2) Discuss withmanagementregarding assumptions used in determining the amount ofthe allowance, and themethod bywhich itwas calculated. 3) Documentation on the new billing system, to confirm auditor’s understanding ofthe systemand relevant controls
    • Financial instruments – derivative
      • 历年真题-2015/6 Q1b (y.e. 31/5/2015 newly listed company) Recently, a small treasury management function was established to manage the company’s foreign currency transactions, which include forward exchange currency contracts. .Required: (b) Evaluate the audit risks to be considered in planning the audit of Ted Co.
      • 真题答案 Forward contract The treasury management function is involved with forward exchange contracts, meaning that derivatives exist and should be accounted for in accordancewith IFRS9. Risk = Not all forward exchange contracts are identified, leading to incomplete recording ofthe balancesinvolved. Risk=Determining the fair value ofthe derivative atthe year end, asthis can be judgmental and requiresspecialist knowledge. Risk = Hedge accounting rules have not been properly applied, or that inadequate disclosure ofrelevantrisksis made in the notesto the financial statements.
      • 历年真题 2018/3&6 Q4b You are an audit manager in Brearley & Co, responsible for the audit of the Hughes Group (the Group). You are reviewing the audit working papers for the consolidated financial statements relating to the year ended 31 March 2018. The Group specialises in the wholesale supply of steel plate and sheet metals. The draft consolidated financial statements recognise revenue of $7,670 million (2017 – $7,235 million), profit before taxation of $55 million (2017 – $80 million) and total assets of $1,560 million (2017 – $1,275 million). Brearley & Co audits all of the individual company financial statements as well as the Group consolidated financial statements. The audit senior has brought the following matters, regarding a number of the Group’s companies, to your attention:
      • 历年真题-2018/3&6 Q4b Willis Co is a foreign subsidiary whose functional and presentational currency is the same as Hughes Co and the remainder of the Group. The subsidiary specialises in the production of stainless steel and holds a significant portfolio of forward commodity options to hedge against fluctuations in raw material prices. The local jurisdiction does not mandate the use of IFRS Standards and the audit senior has noted that Willis Co follows local GAAP, whereby derivatives are disclosed in the notes to the financial statements but are not recognised as assets or liabilities in the statement of financial position.
      • 历年真题-2018/3&6 Q4b The disclosure note includes details of the maturity and exercise terms of the options and a directors’ valuation stating that they have a total fair value of $6·1 million as at 31 March 2018. The disclosure note states that all of the derivative contracts were entered into in the last three months of the reporting period and that they required no initial net investment. Required: Comment on the matters to be considered and explain the audit evidence you should expect to find during your review of the Group audit working papers in respect of each of the issues described above. (6 marks)
      • 真题答案 Mattersto consider 6.1/55=11.1%ofPBT,materialtoCSOPL 6.1/1560=0.4%ofTA,immaterialtoCSOFP IFRS 9 requiresthe recognition of derivativesin SOFP atfair value with the associated gains and losses being recognised inSOPLforthe period.The fair value of derivative $6·1million should therefore be included in current assets of CSOFP and given that the options were entered into in the last three months of the period at no initial net investment, a fair value gain of $6·1 million should also be recorded inCSOPL. The treatment ofthe derivatives underlocal GAAP is acceptable in Willis’ individual FS. For group purposes, however, accounting policies must be consistent and thePBTinCSOPLismaterially understated
      • 真题答案 Evidence 1) Reviewderivative contract,to confirmterms andmaturity date. 2) Obtain activemarket price ofthe derivative, to verify FVused.And ifit is not available, getindependent valuation report. 3) Discuss with management in relation to the basis of valuation and the accounting treatmentrequired in theConsoFS.
  • 4.11 IFRS 2 Share-based Payment
    • 历年真题-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 recognised 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)
    • 真题答案 Service condition=remain in employment at vesting date 31/12/2013 Performance condition=share price increases by 10%p.a. –NOT relevant - Market condition用于评估和确定期权的公允价值 - Nonmarket condition用于评估未来的行权数量 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. • Reviewthe assumptions used, and inputsinto the option pricingmodel used to estimate the fair value ofthe share options atthe grant date.
    • • Considerthe use of an expert possessing specialistskillsin share option pricing,such as a chartered financial analyst,to provide evidence asto the validity ofthe fair value ofshare options used in the calculations. • Obtain and reviewa forecast ofstaffing levels or employee turnoverrates relevant to executives and senior managers overthe vesting period and considerwhether assumptions used appearreasonable.
    • 历年真题 -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 flotation, when it was $2·90, to the share price at 31 December 2017. On the advice of the newly 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
    • 真题答案 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 ofthe 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 flotation to $3·50 atthe 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 ofIFRS 2 which requires extensive disclosuresincluding the effect ofshare-based paymenttransactions on the entity’sSOPLandSOFP.
  • 4.12 Related Party Disclosures
    • Related party transaction - 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 payment benefits 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.
    • 历年真题 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)
    • 真题答案 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 oftransaction, e.g. amount,T&C, outstanding balances Risk isinadequate closure.
    • 真题答案 Evidence 1) Review BODminutes ofmeeting, to confirm the transaction was appropriately authorized and reason of the disposal. 2) Obtain a copy of the invoice raised, and agree tothe receivables ledger to confirm the amountof$50,000 which is outstanding.注意不可以写AgreetoFS 3) ReviewnotestoFS,toensureitisadequatelydisclosedasperIAS24. 4) Confirmation that the carrying value of $50,000 has been removed fromthe non- currentassetregisterandgeneralledger. 5) Getwritten representation stating thatmanagement has disclosed to the auditor the identity of the entity’srelated 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 transactionsin accordance with the requirements of IAS24.
    • 历年真题 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.
    • 真题答案 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 isfrom a member of key management personnel, and material by nature,regardless of amount. Disclosure must be made in the notesto the FS, include: information on the nature of the related party transaction, its amount, and the relevant terms and conditions ofthe loan. Risk isthat 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
  • 4.13 IFRS 15 Revenue from contract with customers
    • 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 obtaining 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.
    • 历年真题 2015/12 Q1a i (y.e. 31/12/201) 客户设计和销售采石业的机器设备 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.
    • 真题答案 Paymentinadvance andrevenue recognition According to IFRS 15, revenue should only be recognised as control is passed, either over time or at a point in time. The timing of revenue recognition will depend on factorssuch as: transfer of the physical asset, transfer of legal title, and the customer accepting the significant risks and rewardsrelated to the ownership of the asset. For items where significant design work is needed, Dali Co receives a payment in advance, it islikely the payment in advance should be treated as deferred revenue. Risk is to recognised as revenue too early, especially given the risk of management bias and the incentive to overstate revenue and profit asthe company isseeking forstock listing? Overstate revenue, understate liability.
    • 历年真题 2015/6 Q1b (y.e. 31/5/2015) 客户设计和销售电脑游戏 In some countries Ted Co’s products are distributed under licences which give the licence holder the exclusive right to sell the products in that country. The cost of each licence 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 recognised 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.
    • 真题答案 Sales oflicence 18/ 98=18% of revenue, material to FS As per IFRS 15, revenue from sales of licence should be recognized when controlis passed,i.e.when the licence period started.Hence, the revenue should not be deferred. Understate revenue, overstate liability
    • 历年真题 2018/12 Q1b (y.e. 28/2/2019) 客户经营健身房 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 centre for a day under the company’s ‘pay as you go’ plan. The 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.
    • 真题答案 Revenue recognition 85%ofrevenue frommembers’subscriptions, materialtoSOPL. As perIFRS15,revenue should be recognised when/as control transferred, e.g. delivery of goods,rendering ofservices. 1) Members’subscriptions, revenue should be recognised over the period of membership.Risk=recognised early in full,when itisreceived by the company. 2)Pay as you go scheme现收现付does notindicate risk. Overstate revenue, understate liability
    • 历年真题 2018/12 Q1b (y.e. 28/2/2019) 客户经营健身房 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.
    • 真题答案 Mattersto consider 2/53=3.8%ofrevenue,materialtoSOPL. IAS 20, government grants are recognised in PLon a systematic basis overthe periodsin which the entity recognises expensesforthe related costsfor which the grants are intended to compensate. Misstatement = $2 recognise in full in current year. However, the scheme is intended to run forthree years. Overstate income, understate liability. however,the scheme isintended to run for three years.
    • Mattersto consider Another issue is whetherthe conditions attached to the government grant are likely to bemet.Theremight be repayment ifthe required number of hours of free accessto sport facilitiesis not met. If not,should consider whether it would be appropriate to recognise a provision or disclose a contingent liability in the notestoFS. Risk=This has not been considered bymanagement. Overstate expense, understated liabilities orinadequate disclosure.
    • 历年真题 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)
    • 真题答案 Evidence 1) Reviewthe grant contractto confirmamount&condition, e.g. 25%reduction is statedinthe contract. 2) Determineoverwhatperiodthe25%reductionmustbedemonstratede.g.mustit be achievedbyapointintime andsustainedfor a certainperiod. 3) Obtain management letter submitted to prove 25% reduction in energy consumption. 4) Reviewmonitoring procedures, e.g. compare electricitymeterreadings pre and post installation ofthe packing line to confirm reduced levels of electricity are beingused. 5) Reviewthe termstoestablishthepossibilityandfinancial effects of breaching the condition – would the grant be repayable in full or in part, and when would repaymentbemade.
    • 历年真题 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)
    • 真题答案 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.
  • 4.14 Audit of Leases
    • IFRS 16 Leases
      • 历年真题 2018/9 Q2a i (y.e. 31/5/2018) In the jurisdiction in which Clark Co operates, all motor vehicles over three years old are required to undergo an annual test of vehicle safety and roadworthiness. The annual test requires specialist testing equipment which is inspected by government officials on a regular basis. Following inspection visits in May 20X8, the government inspection report required Clark Co to replace the testing equipment at three of its sites. In order to comply with this requirement, Clark Co has agreed to lease new testing equipment from a leasing company on six-month leases. Under the terms of the leases, the company has no option to purchase the equipment. The testing equipment was made available for use by Clark Co at each of the three sites on 31 May 20X8.
      • 2018/9 Q2a i (y.e. 31/5/2018) The client has capitalised leases with a total carrying amount of $625,000 at two of the sites but has elected to take advantage of the IFRS 16 Leases exemption not to capitalise short-term leases at the largest of the three sites. As a result, the present value of the lease payments of $475,000 relating to this site has not been recognised on the company’s statement of financial position. 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 and on the auditor’s opinion if management does not make the proposed adjustments. (7 marks)
      • 真题答案 Mattersto consider The largestsite 475/22,000=2.3%ofTA,material The othertwo sites 625/22,000=2.8%ofTA,material IFRS 16 requireslessee to recognise right of use asset and lease liability at commencement date, at PV oflease payment. And commencement date is the datewhen the assetis available for use by the lease,which is 31/5/2018. IFRSalso contains exemption forshorttermleases oflessthan 12month and lowvalue leases.IfClark company elect to apply this exemption, it does not recognise the use of asset and liability butrecognise expenses on straight line basis.Ifthis exemption istaken, itmust be applied consistently by each class ofthe asset. Hence,Clark companymust either capitalise the lease across all the sites or apply exemption across any ofthe sites.
      • Impact on FS If Clark company elect to take exemption, asset and liability are materially overstated by 625K. If Clark company elect not to take exemption, asset&liability arematerially understated by 475K, as proposed by auditor.
  • 4.15 Exam technique: accounting issue
    • 以下答题方法适用于多种题目: risk, matters to consider, evidence, reporting 等，几乎贯穿AAA考试
    • 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. You may be expected to discuss accounting 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 utilise 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.
      • A summary of the key financial reporting principles from IAS 36 is provided below: 背下来 • An asset is impaired if its carrying amount is higher than recoverable amount. • The recoverable amount of an asset is the higher of its value in use (the present value of future cash flows deriving from the asset – or group of assets) and its fair value less disposal costs (the price which would be received in an orderly transaction between market participants – e.g. what you could sell it for).
      • • Where an asset is impaired it should be written down to its recoverable amount and generally that loss would be taken to the statement of profit or loss for the year. • An impairment review is required for assets where there is an indicator of impairment such as a change in technology, increase in interest rates or possible obsolescence. • There is also a specific rule to perform annual impairment reviews on intangible assets with indefinite lives, intangible assets not yet available for use and purchased goodwill (remember that internally generated goodwill isn’t recognised).
      • • Where an asset cannot be assessed for its recoverable amount individually it can be assessed as part of a cash generating unit. Where this is done the impairment is written off against the assets of the cash generating unit by allocating first against goodwill then against the other assets on a prorated basis but no asset should be reduced below the higher of its fair value less costs of disposal or value in use.
    • 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 jewellery 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 recognise 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 totalled $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 restate 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 judgemental 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.
      • A summary of the key financial reporting principles from IAS 38 Intangible Assets is provided below: 背下来 • Intangible assets must be - identifiable (capable of being separated and sold/transferred and arise from contractual or other legal rights) - controlled - provide future economic benefits. • In order to be recognised as an asset there must be a probable future economic benefit arising from the asset and the cost must be capable of reliable measurement. If this is not possible then expenditure on the asset must be recognised as an expense. This is why internally generated brands and customer lists are not allowed to be recognised but purchased ones can be (including those purchased as part of the acquisition of another company)
      • • Subsequent treatment of intangible assets will be either on a historical cost basis or under a fair value model if it is possible that fair value can be determined by reference to an active market (e.g. production quotas, taxi licences). Exam focus By definition brands are unique and therefore it would not be possible to compare to an active market hence the fair value model does not apply and they cannot be revalued upwards.
      • • Intangible assets will either have a finite life (a limited period of benefit to the company over which the asset will be amortised with the amortisation expense being charged to profit and loss) or an indefinite life (where no foreseeable limit to the period of economic benefits exist – hence no amortisation is charged) • Where an asset is deemed to have an indefinite life it is not amortised but the useful life should be reviewed every reporting period to determine whether events continue to support an indefinite life and additionally, the asset should be assessed for impairment each reporting period. • All intangible assets are subject to an impairment review where there is an indicator of impairment
      • Recent example – Sample March/June 17, Question 1 This is an extract from a planning question which asked candidates to evaluate risks of material misstatement arising from a scenario where the Group holds several purchased brand names for products. 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.
      • When answering a requirement to evaluate risks from a scenario relating to specific accounting issues you should start by calculating the materiality of the issue- in this question, total assets were $358 million and PBT $28 million. The impairment of the Chico brand is 8.4% of total assets and more than 100% of PBT and is therefore material to both the statement of financial position and the profit and loss for the year. (1 mark for an appropriate calculation and conclusion). You should then state the underlying accounting rule (1 mark). Acquired brand names should be capitalised and amortised over their useful life. Where this is indefinite, no amortisation is required, however an annual review of the appropriateness of the assumption of indefinite life should be performed and an annual impairment test is also required.
      • How this should be written up in a risk question has been illustrated in the second article in this series. Here, the company has decided to hold brands at cost as they deem them to have an indefinite life – this is an acceptable treatment under IAS 38 however the important part of the standard which we need to consider is that this should only be done if there is no foreseeable limit to the periods of benefit. There’s also a requirement that this assumption should be reviewed annually and additionally an impairment review performed. The scenario tells us that an impairment review has been performed but not that a review of the indefinite life has occurred hence there is a risk that this may not have been done.
      • That decision to hold the brands with an indefinite life is a judgement call on behalf of management – judgements are subjective and therefore are a source of inherent risk. Quite often the justification for such a decision would be linked back to expenditure on the brand and marketing efforts along with market research. These costs cannot be capitalised but do provide evidence to support an indefinite life. Similarly, impairment reviews for a brand would be looking at value in use based on the discounted value of future expected cash flows which is complex and judgemental
      • In the exam you need to communicate these risk areas arising above- an example of a description for each that would be sufficient in an exam is shown below: Risk 1 – Management’s judgement that the brands have an indefinite life may be incorrect Risk 2 – Management may not have reviewed the useful life of the brands in the reporting period to ensure that the assumption of indefinite life is still correct.
      • Risk 3 – The impairment review may not be accurate as the assumptions used by management may not be appropriate as the calculation is complex and judgemental. The scenario goes on to describe the impairment of the Chico brand after allegations made about the products. The products have been withdrawn from sale. This brings in the impairment consideration in more detail. Here there has been a specific indicator of impairment for both the brand and inventory relating to Chico and therefore poses more risks.
      • Risk 4 – The impairment of the Chico Brand may not be sufficient (we can’t tell if it has been fully written down IAS 36) Risk 5 – The inventory relating to Chico products may need to be written off if its net realisable value is below cost (IAS 2 Inventories) Risk 6 – Other brands and inventory may be affected by the negative publicity regarding Chico and may also need to be written down (IAS 36)
      • Exam focus No credit is awarded for the name or number of auditing and financial reporting standards. You should avoid describing audit approach or evidence/procedures unless you have been asked to do this in the requirement.
      • Conclusion The above examples aim to demonstrate how candidates can effectively apply their accounting knowledge in the Advanced Audit and Assurance exam in order to maximise their marks in a variety of questions including those which cover planning and matters and evidence considerations. As with most areas of the Advanced Audit and Assurance exam, it is the application of that accounting knowledge to a scenario rather than the knowledge itself which will attract marks. This means that when preparing for this exam, a good grasp of the accounting knowledge underpinning the syllabus is important but practising questions and developing the skills of applying that knowledge is the key to passing.
  • 4.16 Exam technique: audit procedures
    • The Advanced Audit and Assurance (AAA) exam would not be complete without testing the ability to design relevant procedures by which assertions can be assessed. This core skill, started at the applied skills level 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 judgemental 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 learnt 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 poorly described 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 that can’t be rote learned and which need to be tailored to the scenario. There will often be judgements involved in areas examined where candidates will need to decide to what extent management can be relied 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 judgements. 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: (见Audit of PPE章节)-PPE的章节看就可以
    • Written representations from management 管理层声明书
      • Written representations from management are used to support other audit evidence relevant to the financial statements or one or more specific assertions in the financial statements. They are often requested where management’s intentions can affect the validity 正确/正当/有效/符合逻辑 of a judgement. They should not be used as the only audit evidence to support an assertion, and should not be used if it is possible to obtain the evidence without need of a written representation. In the previous example, obtaining a written representation that management’s judgement of the discount factor is correct is not wholly appropriate. The auditor can assess the discount factor with respect to external factors and actual rates incurred by the company, so there are other more relevant and reliable sources of evidence.
      • If the scenario focuses on management’s intentions, written representations could be appropriate, for example the intent to sell a building, or to close down a division. There would still be a requirement however to obtain corroborative evidence. If candidates use a written representation from management as a procedure in the exam then it must be appropriate and the specific content and purpose of the representation should be described. An example of the appropriate use of a written representation and the contents is illustrated below:
    • 历年真题 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 judgements, 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
• 5.Other audit issue 10-15分
  • 5-1 Audit of Opening Balances
    • 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. 适用于去年审计过的情况，注意：newly listed company 去 年一定审计过 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
      • 1) Review client’sinventory record on 31/7/2010, to confirmquantity ofitems held in inventory. 2) Cost. Selectsample inventory on 31/7/2010, agree to supplier invoice to confirmcost. 3) NRV. Select sample inventory on 31/7/2010, agree to sales invoice to confirmNRV is higherthan cost, or cost has already been written down to NRVwhenNRVislower. 4) Request and attend immediate inventory count&rolling back. 5) Conduct analytical proceduressuch asinventory turnover calculationsto highlightslow-moving inventory, and discuss withmanagementregarding any slow-moving items of inventory which were included in opening inventory.
  • 5-2 Subsequent event （ISA 560 Subsequent events）
    • 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 authorised for issue. Adjusting event: 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 enquiry 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,materialtoSOPL 250/3,000=8.3%of profit,materialtoSOPL 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, thisis a material non-adjusting event,should be disclosed.Anote should be provided to the financialstatements, which includesthe nature ofthe event, and an estimate offinancial effect. Risk is no disclosure ofinadequate 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,reviewand confirmitis correct.E.g. it incudes direct expenditure such asredundancy cost only, and excludes ongoing costssuch asrelocation cost. 4) Discuss with management regarding the need to disclose and review the disclosure note inFS for adequacy.
  • 5-3 Written representation（ISA 580 Written representation）
    • 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 ismanagementrepresentation,insufficient because: -Weak evidence subjecttomanagement bias -Othermore 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 itshould be evaluated togetherwith other uncorrectedmisstatement.
    • Further evidence -Discusswith productionmanagerto confirmwhetherthe plastic cover paper can be used forfuture production. -Review subsequent eventsto confirm NRV, e.g.selling price ifthey are sold, or whetherthey are actually been used in production.
  • 5-4 Going concern（ISA 570 Going Concern）
    • 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 face 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 licence may be withdrawn Significant legal claim or punitive penalty - not enough cash to settle
    • 历年真题 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 recognise 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:
    • 历年真题-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.
    • 历年真题-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)
    • 真题答案 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 potentialloan $80,000 immediately. 4) Obsolete best-selling product (which generated 45% revenue). If company cannot have newproduct,therewill be significant drop in cash inflows. 5) Not enough resourcesto completeR&Dof newproduct.
    • Further evidence 1) Obtain identity ofthe preparer of cashflowsforecast,to assesstheir competence. 2) Reviewand discusswithmanagement,to ensure itis prepared using the same accounting policies as previous years. 3) Castto 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 fromsales of newproduct. 6) Obtain correspondence with potential buyer of PPE, to assess the reasonableness of $50,000 inflowand timing=Jan 2014 7) Reviewa list of employeesto be redundant, to assess 15% payrollreduction is also reasonable. 8) Reviewgovernment grant application letter,to confirmamount applied for; and letterfromgovernmentto assesslikelihood ofreceiving $30,000 inFeb 2014.
    • 2018/12 Q2 异 - SOFP and SOPL are provided 同 - Notes include: expansion, loan from bank, legal case, new competitor, cash balance
• 6.Risk（25分）
  • 6-1 Business risk
    • 答题技巧 把自己当成公司的Director，而不是 Auditor，不要出现会计准则
    • 财务/经营/合规角度 -Revenue, Profit, Cashflows, Reputation, etc.
    • 商业分析模型 PESTEL, Five Forces, etc. • Too dependent on key customers = Loss of revenue • Too dependent on key suppliers = Production interruption, stock out • New competitor 常考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 重大错报风险 （答题技巧 与Matter to consider一样， 即Evidence标准题目的前一半）
      • 会计角度 1) Materiality 2) Relevant IAS/ IFRS 3) Risk or Actual misstatement 4) Accounting impact 控制风险 CR e.g. new IT system, no CFO, no IA department (listing company) e.g. Product recall and refund Business risk: bad publicity, cashflow problem RMM: if already paid, provision for refund – IAS 37 if not yet paid, TR impairment – IFRS 9
    • AR 审计风险 （答题技巧 Without PAP 基本与RMM相同 With PAP 难）
      • IR x CR x DR
      • 检查风险 DR e.g. new client (lack of existing knowledge, opening balance), deadline is tight
      • Marking scheme: PAP & Trend, 1 point = 1 mark, up to 5 marks Audit risk, 1 point = 1.5 marks 识别风险 to 2 识别风险加影响 marks Additional information, 1 point = 1 Mark，up to 5 marks
    • BR
      • High-technology industry – rapid development/product becomes obsolete Highly regulated industry – compliance issue/penalty/licence/damage to brand name/going concern problem Competitive industry – pressure to cut price to remain competitive Cash based business – fraud Import – forex rate fluctuation/transportation issue (higher cost, disruption) Export, worldwide operation – control/inefficiency/systems deficiency Overseas manufacturing facility – Control and monitoring/quality issue/delay in communication and implementation of business strategy Reliance on key customers – loss of customer Reliance on key suppliers – inventory and production issue
      • Product quality issue - cancellation of orders/sales return and refund E-commerce - fast increase in volume of sales, unfilled orders, unhappy customers, security of systems New significant loan – highly geared, interest burdens Regulatory issues - changes in regulation, compliance risk, penalty, bad publicity Over-trading - aggressive expansion & not enough cash Change in key management - It will take time for the new directors to build up business knowledge and to develop and begin to implement successful business strategies.
      • Business risk -真题答案 1)Forex risk,import becomemore expensive in foreign currency appreciation. Impact=increase cost,reduce profit 2)Transportation costis high, possible shipment delay. Impact=increase cost, affectreputation 3)All supplies of one key raw material from one oversea supplier, any disruption in supply will lead to stockout. Impact=affect production,late in delivery to customer, unhappy customer 4)Overseas sales,increased competitor form overseas and cheaper product. Impact=pressure to cut price to remain competitive, affect profit
      • 5)Domesticmarket has only 20 customers,too dependent on key customer. Impact=loss of customerlead to significant decrease in sales and profit. 6)Defective products,recall and replace. Defective year-end inventory needstowrite off. Impact=reduce in sale and profit, affect customer confidence. 7) New regulation will be effective soon (4months after y.e.), construction of new production line tomeetthe regulation hasjuststarted,may not be in time to comply. Impact = if continue using the existing line, breach regulation, penalty,reputation problem;if cease production,reduce sales and profit.
      • 8)Newsignificantloan Impact=gearing increase,interest cover<1,liquidity decrease,GCproblem 9)Keymanagementleft Impact=newmanagement need time to build experience and implementstrategy 10)Financialinformation: Revenue reduces, profitreduces Currentratio<2,Quick ratio<1 Impact=not able to pay short-termdebt,GCproblem
  • 6-2 Risk of material misstatement
    • RMM
      • 以下风险点几乎每次都会出现 Management bias, e.g. management bonus based on profit,seek for listing - inherentrisk of overstatement ofrevenue and profit Lack of CFO,IA department(listing company)- inherentrisk and controlrisk increase New IT system- efficiency ofsystem, data transfer problem
      • 以下适用于上市公司 Operating Segments-IFRS 8 requires an entity to report financial and descriptive information about its reportable segments. Choose the correct reporting segment based on how chief decision maker makes business decision and allocate resources, e.g. by geography or by product line. Risk is that entity did not provide segment reporting, inadequate disclosure, or choosewrong segments. EPS -IAS 33 requires an entity to disclose basic and diluted EPS based on profit after tax& preference dividend and weighted average no. of ordinary shares. Risk isthat entity did not discloseEPSor calculated wrongly.
      • Loss of major customer - going concern Production recall and refunds- obsolete inventory,(paid) provision forrefund, (not yet paid)TRimpairment Inventory: WIP- estimation of percentage of completion Inventory count before/after year end -rolling forward/back PPE: Upgrade,refurbish,repair- capitalise or expense off Dismantling cost-wrongmeasurement, omission Revaluation - upwardsrevaluation&DTL, downwardsrevaluation&impairment loss,FVmeasurement DTA– unused tax losss
      • +Evidence章节全部的准则 Foreigncurrency transactions-initialrecognition using spotrate/average rate Foreigncurrency receivables/payables- using closing rate, difference goestoP/L Changesin accounting estimates, e.g. PPE useful life, depreciation method, residual value,provisionforwarranties- accounted for prospectively
      • Risk of material misstatement 1)Forex risk fromimport IAS21,initially record atspot/average rate Risk=wrong rate is adopted Impact=misstatement of purchase,TP IAS21, y.e.TPshould be restated using closing rate Risk=no remeasurement Risk=wrong rate Impact=misstatement of TP 2)Y.E.inventory – copper NRV maybe 0 IAS2,inventory should be recorded at lower of cost andNRV Risk=no impairment Impact=overstate profit, overstate assets
      • 3)Product recall&replacement 3.1) If customer has already paid, will demand refund, as per IAS 37, provision should be recognized Risk=no provision or insufficient provision Impact=overstate profit, understate liability 3.2)If customer not yet paid,TRwill be irrecoverable As perIFRS9,TRshould be impaired,i.e. 0 Risk=Notimpaired Impact=overstate profit, overstate asset
      • 4)New loan for self-constructed production line=30 30/180=18%ofTA,materialtoSOFP IAS 23, asset under construction & period under construction, BC should be capitalized. Risk=wrongly expense off Impact=understate profit, understate assets
  • 6-3 Audit risk without PAP （答题技巧 Without PAP 基本与RMM相同 With PAP 难）
    • 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 showgood result,management biasto 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%ofrevenue is generated through the company’swebsite,material. -Customer pay immediately.RMM = to recognise revenue too early, as perIFRS 15,revenue should only be recognisedwhen delivery of goods. - Should be separately disclosed asreportable segment as perIFRS 8.RMM = not separately presented. 6)(para 2)Revenue fromsales oflicence - 18/ 98=18%ofrevenue,materialtoSOPL -As perIFRS 15,revenue fromsales oflicence should be recognised when control is passed, i.e. when the licence period starts. Hence, the revenue should not be deferred.Misstatement=understate revenue, overstate liability
    • 7)(para 3)Management bias -Pressure tomeetthe requirementsfrominstitutionalinvestor,who holdmajority 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 independentNEDto challenge the founder of company. Governance structures are notstrong, controlrisk is very high.
    • 9)(para 5)Forward exchange contract -Derivatives exist and should be accounted forin accordancewith IFRS9. -RMM = Not allforward exchange contracts are identified, leading to incomplete recording ofthe balancesinvolved. -RMM=Determining the fair value ofthe derivative at the year end, asthis can be judgmental and requiresspecialist knowledge. -RMM=Hedge accounting rules have not been properly applied, orthatinadequate disclosure ofrelevantrisksismade in the notesto the financialstatements. 10)(para 5)Speculative investment -The short termspeculative investmentshould be accounted for as FVTPL as per IFRS9.Assuch,the investmentshould be recognized at $6which isFV,ratherthan $8which 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)Capitalised development - 58-35/134=18%ofTA,materialtoSOFP -IAS38, development can only be capitalisedwhenPIRATEismet. -RMM=wrongly capitalised
  • 6-4 Audit risk with PAP
    • PAP = Preliminary Analytical Procedures 主要的Ratio 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) 变动幅度不统一 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)分类错误 COSmaybe overstated by $250 due to the provision forfine payable,which should have been classified as operating expenses.And probably itwas understated by $200 (=450-250) Additionalinfo=Correspondencewith regulator, discusswithmanagement, to find outwhy only 250was 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)Capitalised development cost 2250/27250=8%ofTA,material toSOFP It can only be capitalised when PRIATE condition has been met per IAS 38, however, cash balance=(900).Itseemsthat no sufficientresource to complete. Risk=Wrongly capitalised as IA Impact=Overstate asset, understate profit
    • 7)Currentratio dropsfrom1.8 to 0.96 Quick ratio dropsfrom0.82 to 0.25 Both are lowerthan 1&negative cash balance (900) Risk=Not able to pay short-termdebt,GCproblem 8)Inventory dates如果增加，存货减值风险 TRdates如果增加,坏账风险 TPdays如果增加，现金流风险 9)Revaluation surplusincreased by 500,material Revaluation should be performed as perIAS16&IFRS13F. Risk=Did not complywith relevant accounting standards Additional info=Details of valuer,such as qualification, experience,source data and valuation report
    • 10)Newfinance lease –旧准则 Lease liabilitywas notrecorded as per accounting standards. Additional info = Lease agreement, to confirm details ofthe lease, e.g. date, lease term,interestrate, etc. 11)IConOT paymentis notfollowed, no segregation of duties=CR increases Additional info=IAreportto understandmore about IC system 12)Newclient,lack of cumulative knowledge&opening balance not audited by us =DRincreases
    • 补充 - PPE
      • 2016/3&6 Q1 (Upgrade PPE, Complex asset, Borrowing cost) The Group has not changed its operations significantly this year. However, it has completed a modernisation programme of its warehousing facilities at a cost of $25 million. The programme was financed with cash raised from two sources: $5 million was raised from a debenture issue, and $20 million from the sale of 5% of the share capital of Calgary Co, with the shares being purchased by an institutional investor
      • Modernisation of warehousing facilities Increase inPPE230-187=43/ 367=12%ofTA,materialtoSOFP Cost ofmoderisation=25/367=7%ofTA,materialtoSOFP IAS16,modernisation costswhich give rise to enhancedFEBshould be capitalised, whereas costswhich do not createFEBshould be expensed. RMM=Capital and revenue expendituremay not have been correctly identified and accounted for. Impact=Misstatement ofPPEand expenses.
      • Modernisationofwarehousing facilities In addition,IAS 16 requiresthat each part of an item of PPE with a cost which is significantin relation to the total cost ofthe itemshould be accounted for as different assets and depreciated separately. RMM = Various components of each warehouse have not been treated asseparate components and depreciated over a specific usefullife. Impact=Misstatement ofthe assets’ carrying values and depreciation expenses.
      • Modernisationofwarehousing facilities Anotherissue isthe finance costsin respect ofthe $5million debenture taken out to finance themodernisation programme. IAS 23, a qualifying asset is an asset which takes a substantial period oftime to get ready for its intended use or sale, so depending on the length of time that the modernization hastaken, itmaymeet the definition so borrowing costs would need to be capitalised. RMM=Borrowing costs have not been capitalised ifthe qualifying asset definition has been met, and equally a risk that borrowing costs may have been capitalised incorrectly ifthe definition has not beenmet. Impact=Misstatement ofthe assets’ carrying values, depreciation and finance cost.
      • 2015/9&12 Q1 (PPE revaluation, DT relating to PPE revaluation) The finance director recommended that the company’s manufacturing sites should be revalued. An external valuation was performed in June 2015, resulting in a revaluation surplus of $3·5 million being recognised in equity. The finance director has informed the audit committee that no deferred tax needs to be provided in respect of the valuation because the property is part of continuing operations and there is no plan for disposal.
      • Revaluationofproperty $3.5/90=3.9%ofTA,material to SOFP. 1)Property should be revalued such thattheCVis close toFVat year end. 2)FVof property should be determined according to IFRS13FVMeasurement. 3)All propertiesin the same classshould be revalued; no selective revaluation. RMM= Determination ofFVissubjective,which isinherently risky. Not all manufacturing sites have been included in the revaluation exercise, the amountsrecognisedwill not be correct. Depreciation had not been recalculated on newrevalued amount. Insufficient disclosure, e.g.revaluation policy Impact=Misstatement ofPPEand expenses.
      • Deferredtax recognition IAS 12 requires DT to be recognised in respect of taxable temporary differences which arise between the carrying amount and tax base of assets and liabilities, including the differences which arise on the revaluation of non-current assets, regardless ofwhetherthe assets are likely to be disposed ofin the foreseeable future. Assuch,FD’s argumentfor notrecognisingDTisincorrect. Misstatement=NoDTwasrecognised. Impact=(DrOCI,CrDTL)Overstate equity, understate ofliability
      • 2017/3&6 Q1 (DTL) Notes: 4. The deferred tax liability relates to timing differences in respect of accelerated tax depreciation (capital allowances) on the Group’s property, plant and equipment. The liability has increased following changes to the estimated useful lives of assets discussed in note 1. 1. During the year, a review of assets’ estimated useful lives concluded that many were too short, and as a result, the projected depreciation charge for the year is $5 million less than the comparative figure.
      • Deferredtax liability 1 0/358=2.8%ofTA,materialtoSOFP. AndDTLhasincreased by 5 times. IAS 12, when PPE’sCV > Tax base, DTL arises and it is calculated asfollowed: DTL=Temporary difference * tax rate RMM&Impact= （Depreciation lower,CVhigher,Tax base remains no change） The impact on profit andCV of PPE is $5, hence, the $8 increase (=10-2)in DTL seemsinappropriate and itislikely thatthe liability is overstated.
    • 补充 – DTA
      • Deferredtax asset According to IAS 12, a DTA isrecognised for an unused tax loss carry-forward if, and only if, it is considered probable that therewill be sufficientfuture taxable profit againstwhich it can be utilised. RMM&Impact= While it appearsthatsome ofthe deferred tax asset has been utilised this year, there remains a risk that ifit is no longerrecoverable, then the amount would need to be written off.As a result, assetmay be overstated.
• 7.Group audit 10-15分
  • 7-1 Audit of consolidated FS
    • 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
      • Consideration FVof NCI Less:FV of NA Goodwill
    • Audit of Consideration transferred
      • Dr Investmentinsubsidiary Cr 12345 at DOA Audit evidence: 1)Cash –Cashbook, bank statement 2)Share –No. of sharesissued * (listed company)share price (private company) expert valuation report 3)Loan note (NCL) –DiscountedCFs and assumption used 4)Deferred cash (CL) –DiscountedCFs and assumption used 5)Contingent consideration (profittarget)-Expected value, probability 6) Most important evidence – SPA = Sales and Purchase Agreement, to confirm amount andDOA(when controltransferred)
    • Audit of NCI (FV)
      • Audit evidence: 1)SPA,to confirmNo. of ordinary shares acquired, e.g. 80 2)Shareholderregister,to verify totalNo. of ordinary shares, e.g. 100, 3)RecalculateNCI%=20% 3)FVofNCI,(listed company)share price (private company) expert valuation report – high risks
    • Audit of Net assets (FV)
      • RMM 1)Goodwill 1100/3492=30%ofTA,material. Analytical review shows goodwill increased by 130, due to acquisition of Lynx company. However, ae per management calculation, goodwill = 100. Although there might be changes in value on translation of goodwill relating to foreign subsidiary,itis very unlikely due to large amount. RMM=Goodwillis overstated. Besides, goodwill must be tested for impairment annually as per IFRS 3. Management has concluded no impairment is necessary based on assumption of future growth. RMM=Understate impairmentloss.
      • 2b) FVofNCI(listed, use share price to calculate,looks ok) 2c) FVofNA RMM=Misstatement asitis based on assumptions RMM=Overstatement of asset e.g.PPEincreased by 12 RMM=Omission of certain items,such as contingentliability and contingent asset.
      • Evidence 1) Obtain SPA, to confirmownership 80%, DOA, consideration,revenue and profit target to be used asthe basisfor payment of contingent consideration in four years’ time. 2) Agree cash consideration 80 to cashbook & bank statement, to confirm it was settled on 1/3/2018. 3) Asfor contingent consideration, obtain management calculation of PV 271 and evaluate assumptions used, in particular to consider the probability of payment by obtaining revenue and profitforecastsforLynxCo forthe next 4 years. 4)Discusswithmanagementthe reason for usingDF 18%,when the group’sWACC is 10%. 5)VerifyFVofNCI, agree share price used to stockmarketrecords atDOA. 6)Obtain due diligence reportissued by Sidewinder&Co, to confirmFVof all assets and liabilities at DOA. Evaluate methods and assumptions used, whetherthey were done according to IFRS13.s
      • Acquisition of new subsidiary - Enlarge SOFP and SOPL - Team, time and resources - Materiality level, new goodwill, etc.
      • 2012/6 Q1a i Required： (i) Identify and explain the implications of the acquisition of Canary Co for the audit planning of the individual and consolidated financial statements of the CS Group; (8 marks)
      • 2012/6 Q1a i Acquisition of Canary Co The most significant event for the CS Group this year was the acquisition of Canary Co, which took place on 1 February 2012. Crow Co purchased all of Canary Co’s equity shares for cash consideration of $125 million, and further contingent consideration of $30 million will be paid on the third anniversary of the acquisition, if the Group’s revenue grows by at least 8% per annum. Crow Co engaged an external provider to perform due diligence on Canary Co, whose report indicated that the fair value of Canary Co’s net assets was estimated to be $110 million at the date of acquisition. Goodwill arising on the acquisition has been calculated as follows:
      • IndividualFS Newaudit client=Canary 1) Review previous auditor AWP to understanding the business ofCanary and performnecessary audit procedure on opening balances. 2) Understand internal control in Canary. This coststime due to differentsales systems. (Group – outletsales,Canary –Online sales) 3) FYE, Parent 31/7 (Permanentfile), Subsidiary 30/6 (Email). Auditorshould discuss with management about the different year end. If Canary need to prepare additionalFSfor consolidation purpose,more time&resource. 4) Determinemateriality level.
      • Consolidated FS 1) 16/135>10%ofrevenue, 2/8.5>20%ofPBT.Canary is a significantsubsidiary; MLforConsolidatedFSmust be significantly differentfromLY. 2) PAP.Itis notmeaningfulto compareConsolidated revenueTY135 toLY125, due to new subsidiary. Exclude the impact of Canary, TY=135-16=119, LY=125,showsthatrevenue actually dropped. 3) Time and resources.To allocatemore forthe new subsidiary, new accounting itemssuch as goodwill=45,which represents 30%of consolidated revenue. 4) Team. To assign experienced team membersfor new goodwill, contingent consideration.
      • Disposal of subsidiary
        • Parent FS De-recognise investment in subsidiary Gain or loss on disposal = Sales proceeds – CV of Investment in subsidiary Audit evidence: 1) SPA, to confirm amount & date of disposal 2) Agree selling price to cashbook and bank statement 3) Recalculate gain or loss on disposal 4) Agree to prior year FS, to confirm investment in subsidiary has been removed
        • Consolidated FS Consolidated SOPL Include disposed subsidiary’s results up to disposal date. This can be consolidated line by line or shown separately as a discontinued operation. Consolidated SOFP De-recognise assets and liabilities, De-recognise goodwill Gain or loss on disposal = = Sales proceeds – (Net assets at disposal date + Net goodwill at disposal date – NCI at disposal date) Audit evidence: Consolidation schedule
        • 2013/12 Q1b Required: (b) Recommend the principal audit procedures to be performed in respect of the disposal of Broadway Co. (8 marks)
        • 2013/12 Q1b Disposal of Broadway Co On 1 September 2013, the Group disposed of its wholly-owned subsidiary, Broadway Co, for proceeds of $180 million. Broadway Co operated a distribution centre in this country. The Group’s statement of profit or loss includes a profit of $25 million in respect of the disposal. Broadway Co was acquired by a retail organisation, the Cornwall Group, which wished to bring its distribution operations in house in order to save costs. Compton & Co resigned as auditor to Broadway Co on 15 September 2013 to be replaced by the principal auditor of the Cornwall Group.
        • Parent FS 1)ReviewSPA,to verify selling price 180 and disposal date 1/9/2013. 2)Review SOFP as at 1/9/2013 disposal date, to confirmthe cost ofinvestment in subsidiary has been derecognized. 3)Recalculate profit on disposal, agree toSOPLto confirmitisrecorded correctly.
        • Consolidated FS 25/ 200=12%of consolidatedPBT,materialtoFS. 1)Reconcile profit on disposalin parentFSand thatin consolidatedFS 2)Review SOFP ofBroadway company as at 1/9/2013 disposal date, to determine CVofsubsidiary’s assets and liabilities.Cross checkwith consolidated FS to ensure they have been derecognized. 3)Review SOCI ofBroadway company up to 1/9/2013 disposal date, cross check with consolidatedFSto ensure profit and loss are consolidated up to disposal date. 4)Recalculate gain orloss on disposal.
      • Audit of Associate
        • Associate - Percentage of shareholding - Significant influence, both financially and operationally, e.g. right to appoint directors, whether directors appointed are active (in board level committees) RMM Condition (shareholding & significant influence) not met, but wrongly accounted for as associate = wrongly apply equity accounting, overstate asset, namely investment in associate.
  • 7-2 Group audit risk - component auditor
    • Group audit
      • 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?
    • Reliance on component auditor
      • ISA 600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors). A ‘component’ means a division, branch, subsidiary, joint venture or associate whose financial information is included in the financial statements of the group. As standalone companies, they will have to prepare their own audited accounts unless they are exempt. The group auditor is the firm with responsibility for the opinion on the group financial statements. In most countries this responsibility is not diminished by reliance on the work of the other auditors of the components of the group. The auditors of those components are source of evidence only and are known as component auditors.
      • Can you rely on the work done by component auditor? Matters to consider: 1) Ethic status, e.g. Independence issue? Can he meet IESBA code? 2) Professional qualification, licence, e.g. Certified accountant? ACCA member? 3) Relevant experience, e.g. Industry experience? 4) Regulatory monitoring, e.g. Does regulator actively monitor? When and what result of last inspection? 5) Audit methodology, e.g. Does he follow ISA? 6) Audit evidence, e.g. sufficient? appropriate?
      • 2014/6 Q1b (b) Explain the matters to be considered, and the procedures to be performed, in respect of planning to use the work of Clapton & Co. (8 marks) Lynott Co (one of three subsidiaries) is audited by Clapton & Co, and its audit reports in all previous years have been unmodified. Clapton & Co is a small accounting and audit firm, but is a member of an international network of firms. Lynott Co’s draft statement of financial position recognises assets of $24 million at 31 May 2014.
      • 1) Ethic status Evidence: Obtain direct confirmation formcomponent auditor. 2)Professional qualification,licence Evidence: Obtain director confirmation fromprofessional bodies,regulator. 3)Regulatory monitoring Evidence: Reviewresults ofthe latestinspection. 4)Audit methodology Evidence: Ask component auditor to provide summary of audit proceduresthey usually performed.
  • 7-3 Group audit risk without PAP
    • Group audit
      • 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?
      • Group AR – 2014/6 Q1a i
        • Group audit risk 1)(background) One ofthe subsidiary is audited by localfirm. Thisincrease DR, because quality control ofthe localfirmmay not be sufficient, lead to inappropriate reliance on thework done.这个点在集团审计风险题目中几乎可以确定考 2)(background)Newclient FYE31/5/2014, appointment in Jan 2014. New audit client, 1st year audit, lack of knowledge, opening balances,insufficienttime.
        • 3)(para 1)Acquired brand namewasrecognised at historical cost, i.e. no impairment so far.IAS38,IAwith indefinite life should be tested forimpairment annually． RMM=No impairmenttest, notrecognize possible impairmentloss. Impact=Overstate asset, overstate profit. 4)(para 2)Newly acquired associate 12/107.5=12%of consolidatedTA,materialtoSOFP. 12 -11.5=0.5, this appearsto beAdam’sshare of associate profit, which isrecorded using equitymethod. As perIAS28,Associate=20-50%, presume significantinfluence. RMM=Condition notmeet,wrongly apply equitymethod. Impact=Overstate asset, overstate profit.
        • 5)(para 3)Ross –Lynott,inter-company transfer of unsold inventory Ifthe transferincludes profit, therewill beURP in the year end inventory.TheURP should be eliminated in full. RMM=Not eliminateURP. Impact=Overstate profit,Overstate asset. 补充A/g treatment ofURP inSOCI,-intercompany revenue,-intercompanyCOS inSOFP,- profit(seller),-inventory,-TR,-TP
        • 6)(para 4)Lynott -Newinventory system If the opening balance in new systemare wrongly transferred fromold system, the inventory balancewill bewrong. RMM=Lack of controlin systemdevelopment. Impact=Misstate inventory. 7)(para 4)Lynottis audited by component auditor 24/107.5=20%of consolidatedTA,significantsubsidiary If the audit done by component auditor was not done according to ISA, possible materialmisstatementinLynottmay becomematerialmisstatement in consolidated FS.s
        • 8)(para 5) Investment properties 10/107.5=10%of consolidatedTA,materialtoSOFP (OCI) 1/(PBT) 12.2=9%of consolidatedPBT,materialtoSOPL As perIAS40, value ofinvestment propertiesshould be done by independent valuer according to IFRS 13 FV measurement and IAS 40. Any differences between opening balance and closing balance ofinvestment propertiesshould be recognised in profit orloss. RMM=Wrong valuation. RMM = Increase in value has been recorded in OCI, which should be recorded in P/L. Impact=Understate profit,OverstateOCI.
        • 9)(Otherinfo para 1)Management bias – bonus based on increase in revenue. Management biasto overstate revenue. (725-650)/650=12%increase,significantincrease. RMM=Manipulate revenue.
        • 11)(FS) No goodwill.The group has 3 100% subsidiary, it is unusual to have no goodwill. Risk is goodwilliswrongly calculated.
  • 7-4 Group audit risk with PAP
    • 主要的 Ratio: Revenue&GP & OP Revenue&COS & Operating profit OPM Current ratio Gearing Interest cover Effective interestrate Effective tax rate
    • Groupaudit risk(Goodwill参考集团审计第一部分) 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 capitalised when PRITAE conditions are met, e.g. probable FEB will be flow into entity. RMM=Wrongly capitalisedwhen conditions are notmet. RMM = Total expenditure is 60 but increase in IA is only 30. Thisis unexplained trend;more info is needed to reconcile the 2 amounts. RMM = UEL15 yearsis applied to all categories ofIA, thisis 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 from9 to 12.6.This due to both increase in OP and decrease in FC, thisseems contradictory to increase in borrowing 50, as a result of which an increase inFCshould be expected. RMM=Understate ofFC, overstate of profit.
    • 3) Revenue and OP Revenue decrease by 4% OPincrease by 30% OPMTY6.1%,LY4.5% This duemainly to a reduction in operating expense by 4.5%and significantincrease in other operating income 50%. RMM=Understate of expense, overstate of profit.
    • Looks further at breakdown of operating expense: -Cost ofmaterial decrease by 3%appearsreasonable, given the decline in revenue of 4%. - Staff cost increased lightly by 1% isinconsistent with revenue trend. Besides, 5000 staffweremade redundant during the year, the increase in staffis difficult to be explained. - Most noticeable trend isthat 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 impairmentloss by 50%. RMM= Overstate of profit as earningmanagement technique in reaction to the fall in revenue.The risk ofmanagement biasis high given the listed status.The gain of forex and gain on disposal ofPPEwould 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 isthe only subsidiarywhich is not audited by principal auditor.This givesrise 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,whichwill be discussed in part c ofthe briefing notes.
  • 7-5 Others
    • Transnational audit
      • Audit of Group FS with special features: Client is MNC & normally is listed on several stock exchange - Different law and culture - Different accounting standards and auditing standards - Shareholders from different countries with different expectation (MNC stands for multi-national corporation)
    • • Advantages: - Retention of knowledge, i.e. learn from other firm - Additional resource - Quality Disadvantages: - Cost - Inefficiency, e.g. different approach - Lack of trust - Dispute
  • 7-6 Exam technique-risk
    • 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 rote learn much additional information. It is application and understanding that is important at the Professional level.
    • This article will demonstrate how to maximise 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 maximise 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 analysing 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 recognised 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 recognised as deferred income. There is a risk that revenue might be recognised 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 cancelled 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 recognise 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 maximise 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.
• 8.Report 8-10分
  • 8-1 Unmodified Opinion
    • 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 problem
    • Unmodified Opinion
      • a) No material misstatements • Financial figures are not materially overstated or understated, either individually or on an aggregate basis • Accounting estimates are reasonable • Compliance with IAS/IFRS • Adequate disclosure - reliable, understandable • Presentation is fair
      • b) Able to obtain sufficient appropriate evidence • No limitation on scope of audit imposed by management • No limitation on scope of audit due to circumstances • All necessary evidence, including written management representation has been obtained.
      • - Title - Addressee - Heading = Report on the Audit of the Financial Statements - Opinion - Basis for Opinion - Responsibilities of Management and Those Charged with Governance for the Financial Statements - Auditor's Responsibilities for the Audit of the Financial Statements - Report on Other Legal and Regulatory Requirements - Signature - Auditor Address - Date
      • Unmodified Opinion – Illustration
        • To the Shareholders of ABC Company [or Other Appropriate Addressee] Report on the Audit of the Financial Statements Opinion We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
        • In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of the Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
        • Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
        • 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. [Description of each key audit matter in accordance with ISA 701.]
        • Other Information Management is responsible for the other information. The other information comprises the [information included in the X report, but does not include the financial statements and our auditor‘s report thereon.] 管理层对此负责 Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. 审计师对此不发表意见
        • In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 但审计师会读一下，以保证其与财报的一致性，如果不一致要披露。
        • Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error
        • In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process.
        • Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
        • As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
        • • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
        • • Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.
        • • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
        • We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
        • Report on Other Legal and Regulatory Requirements [The form and content of this section of the auditor's report would vary depending on the nature of the auditor's other reporting responsibilities prescribed by local law, regulation, or national auditing standards.] The engagement partner on the audit resulting in this independent auditor's report is [name]. [Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate for the particular jurisdiction] [Auditor Address] [Date]
        • 历年真题 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 recognise 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.
        • 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.
        • 真题答案 Procedures Chairman statement=20%,whereasFS=(18-17)/17=6% Material inconsistency with FS. Further procedures: 1)Review AWP,to ensure revenue $18 is correct 2)No adjustment to FS is required. 3)Inform management to amend chairman statement. Impact onaudit report If management amend, no impact. If management refuse, add OM paragraph afterBasis paragraph,to inform users that 20% is inconsistent with FS.
  • 8-2 Modified 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) 会计问题或审计问题，影响重大但不广泛
    • 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) 会计问题，影响重大且广泛 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 审计问题，影响重大且广泛
    • 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? 得出审计意见前，必须提及以上两件事： 1) 会计问题or审计问题？ 2) 重大 or 重大广泛？
    • 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
      • Form and content of the auditor’s report when the opinion is modified 1) Amend the Opinion paragraph 2) Add a basis paragraph after opinion paragraph
      • 1) Amend the Opinion paragraph 1.1) Heading When the auditor modifies the audit opinion, the auditor shall use the heading: • "Qualified Opinion", • "Adverse Opinion", or • "Disclaimer of Opinion", as appropriate. 1.2) Qualified - due to misstatements State in the opinion paragraph that, in the auditor's opinion, except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view in accordance with the International Financial Reporting Standards.
      • 1.3) Qualified - due to limitation on scope State in the opinion paragraph that, in the auditor's opinion, except for the possible effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view in accordance with the International Financial Reporting Standards. 1.4) Adverse opinion State in the opinion paragraph that, in the auditor's opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion paragraph, the financial statements do not give a true and fair view in accordance with the International Financial Reporting Standards
      • 1.5) Disclaimer of Opinion State in the opinion paragraph that: • Because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion; and, accordingly, • The auditor does not express an opinion on the financial statements.
      • 2) Add a "Basis for Modification Paragraph" after the opinion paragraph The auditor shall place this paragraph immediately after the opinion paragraph in the auditor's report and use the heading: • "Basis for Qualified Opinion", • "Basis for Adverse Opinion", or • "Basis for Disclaimer of Opinion", as appropriate.
      • 2.1) Misstatement • State the account affected and the account balance ($) • Explain the misstatement and refer to IAS if applicable • Quantify the misstatement (if it is impractical to quantify, state so) • Explain the impact, e.g. on profit
      • 2.2) Lack of disclosure • Describe the nature of the omitted information • Include the omitted disclosures 2.3) Limitation on scope • State the account and the balance affected by limitation on scope • Explain how the limitation arise
      • Modified Opinion – Illustration - Misstatements
        • Qualified opinion We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of the Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs)
        • Basis for Qualified Opinion The Company's inventories are carried in the statement of financial position at xxx. Management has not stated the inventories at the lower of cost and net realizable value but has stated them solely at cost, which constitutes a departure from IFRSs. The Company's records indicate that, had management stated the inventories at the lower of cost and net realizable value, an amount of xxx would have been required to write the inventories down to their net realizable value. Accordingly, cost of sales would have been increased by xxx, and income tax, net income and shareholders' equity would have been reduced by xxx, xxx and xxx, respectively. 要素: Accounts & Amount + A/g standards + Misstatement + Impact
        • We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
      • Modified Opinion – Illustration - Evidences
        • Qualified opinion We have audited the consolidated financial statements of ABC Company and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 20X1, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
        • In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section of our report, the accompanying consolidated financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of the Group as at December 31, 20X1, and (of) its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
        • Basis for Qualified Opinion The Group's investment in XYZ Company, a foreign associate acquired during the year and accounted for by the equity method, is carried at xxx on the consolidated statement of financial position as at December 31, 20X1, and ABC's share of XYZ's net income of xxx is included in ABC's income for the year then ended. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC's investment in XYZ as at December 31, 20X1 and ABC's share of XYZ's net income for the year because we were denied access to the financial information, management, and the auditors of XYZ. Consequently, we were unable to determine whether any adjustments to these amounts were necessary.
        • We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
      • Adverse Opinion – Illustration
        • Adverse Opinion We have audited the consolidated financial statements of ABC Company and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 20X1, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
        • In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated financial statements do not present fairly (or do not give a true and fair view of) the consolidated financial position of the Group as at December 31, 20X1, and (of) its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
        • Basis for Adverse Opinion As explained in Note X, the Group has not consolidated subsidiary XYZ Company that the Group acquired during 20X1 because it has not yet been able to determine the fair values of certain of the subsidiary's material assets and liabilities at the acquisition date. This investment is therefore accounted for on a cost basis. Under IFRSs, the Company should have consolidated this subsidiary and accounted for the acquisition based on provisional amounts. Had XYZ Company been consolidated, many elements in the accompanying consolidated financial statements would have been materially affected. The effects on the consolidated financial statements of the failure to consolidate have not been determined.
        • We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse opinion.
        • Disclaimer of opinion We were engaged to audit the consolidated financial statements of ABC Company and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 20X1, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
        • We do not express an opinion on the accompanying consolidated financial statements of the Group. Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these consolidated financial statements.
      • Disclaimer of Opinion – Illustration
        • Basis for Disclaimer of Opinion The Group's investment in its joint venture XYZ Company is carried at xxx on the Group's consolidated statement of financial position, which represents over 90% of the Group's net assets as at December 31, 20X1. We were not allowed access to the management and the auditors of XYZ Company, including XYZ Company's auditors' audit documentation. As a result, we were unable to determine whether any adjustments were necessary in respect of the Group's proportional share of XYZ Company's assets that it controls jointly, its proportional share of XYZ Company's liabilities for which it is jointly responsible, its proportional share of XYZ's income and expenses for the year, and the elements making up the consolidated statement of changes in equity and the consolidated cash flow statement.
      • Modified Opinion
        • 2018/9 Q2a You are an audit manager in Coram & Co, a firm of Chartered Certified Accountants. The audit of one of your clients, Clark Co, for the year ended 31 May 20X8 is nearly complete and the auditor’s report is due to be issued next week. Clark Co is an unlisted, family owned business which specialises in the service and repair of both commercial and privately owned motor vehicles. The company operates from seven geographically distinct sites, each of which is considered a separate cash generating unit for impairment review purposes. The draft financial statements recognise profit before taxation for the year of $2·3 million and total assets of $22 million.
        • 2018/9 Q2a The schedule of uncorrected misstatements included in Clark Co’s audit working papers and prepared by the audit supervisor is shown below. You are due to attend a meeting with the finance director of Clark Co tomorrow, at which the uncorrected misstatements will be discussed.
        • 2018/9 Q2a (i) Lease of testing equipment In the jurisdiction in which Clark Co operates, all motor vehicles over three years old are required to undergo an annual test of vehicle safety and roadworthiness. The annual test requires specialist testing equipment which is inspected by government officials on a regular basis. Following inspection visits in May 20X8, the government inspection report required Clark Co to replace the testing equipment at three of its sites. In order to comply with this requirement, Clark Co has agreed to lease new testing equipment from a leasing company on six-month leases. Under the terms of the leases, the company has no option to purchase the equipment.
        • 2018/9 Q2a The testing equipment was made available for use by Clark Co at each of the three sites on 31 May 20X8. The client has capitalised leases with a total carrying amount of $625,000 at two of the sites but has elected to take advantage of the IFRS 16 Leases exemption not to capitalise short-term leases at the largest of the three sites. As a result, the present value of the lease payments of $475,000 relating to this site has not been recognised on the company’s statement of financial position. (7 marks)
        • 2018/9 Q2a (ii) Legal claim 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. The 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 recognised any amounts in the financial statements and has not made any disclosures in relation to the matter. (5 marks)
        • 2018/9 Q2a (iii) Asset impairment During the year, a significant new competitor entered the market place at one of Clark Co’s seven sites. As a result, the site has experienced a decline in market share and revenue. The company has therefore conducted an impairment test on the site’s assets. The company’s working papers for the impairment test have been audited and the following figures have been agreed by the audit team:
        • 2018/9 Q2a 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 and on the auditor’s opinion if management does not make the proposed adjustments.
        • Lease The largestsite 475/22,000=2.3%ofTA,materialtoFS The othertwo sites 625/22,000=2.8%ofTA,materialtoFS IFRS 16 requires leasee to recognise right of use asset and lease liability at commencement date, at PVoflease payment.And commencement date isthe date when the assetis available for use by the lease,which is 31/5/2018. IFRS also contains exemption forshort term leases oflessthan 12 month and low value leases.IfClark company elect to apply this exemption, it does notrecognise the use of asset and liability butrecognise expsin SOPLon straight line basis.Ifthis exemption istaken,itmust be applied consistently by each class ofthe asset. Hence,Clark company must either capitalise the lease across all the sites or apply exemption across any of the sites.
        • Lease Impact onFS: IfClark company electto take exemption, asset and liability arematerially overstated by 625.IfClark company elect notto take exemption, asset&liability arematerially understated by 475, as proposed by auditor. Impact on audit opinion: If Clark does not amend, SOFP is materially misstated. Audit opinion should be qualified.
        • Legal claim 1,200/22,000=5.5%ofTA,material. IAS 37, provision should be recognised: present obligation, probable FEBinflows, amount can be measured reliably.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 recognised inSOFP. IAS 37 also states that contingent asset should not be recognised unless the realization ofincome is virtually certain.AsforClark’sinsurance claim, the verified letter dated 25/5/2018,the settlement of claimas at year end is virtually certain and a receivable should be recognised inSOFP.
        • Legal claim Impact onFS: If adjustment is notmade, both asset and liability aremateriallymisstated.There is no netimpact onSOPL. Besides,full disclosure offacts and amounts of provision forlegal claim, together with full details ofreimbursementisrequired. Impact on audit opinion: If adjustmentis notmade,SOFPismateriallymisstated and audit opinion should be qualified.
        • Asset impairment Correct Recoverable amount=3,900-126-174-85=3,515. Given thisis higherthan Value in use 2,900, Recoverable amount = 3,515 and therefore assets are impaired by 3,600 – 3,515=85. 85/22,000=0.4%ofTA,immaterialtoSOFP. 85/2,300=3.7%ofPBT,immaterialtoSOPL. Hence,immaterialtoFS. IAS36, entity should assess at year endwhetherthere is an indication ofimpairment. Asset/CGUshould be impaired when CV exceeds RA, and RAis defined as higher of FV less CTS and VIU.
        • Asset impairment Impact on FS: Auditor’s adjustmentis correct.Even though the amount is immaterial to bothSOFP and SOPL,it is appropriate to request the adjustment to bemade. Impact on audit opinion: Given the asset and profit are both immaterially misstated, if no adjustment is made, there will be no impact on audit opinion in relation to this matter in isolation. However,it should be assessed together with other misstatements.
        • 2012/12 Q5a i You are the manager responsible for the audit of Dylan Co, a listed company, and you are reviewing the working papers of the audit file for the year ended 30 September 2012. The audit senior has left a note for your attention: ‘Dylan Co outsources its entire payroll, invoicing and credit control functions to Hendrix Co. In August 2012, Hendrix Co suffered a computer virus attack on its operating system, resulting in the destruction of its accounting records, including those relating to Dylan Co. We have therefore been unable to perform the planned audit procedures on payroll, revenue and receivables, all of which are material to the financial statements. Hendrix Co has manually reconstructed the relevant figures as far as possible, and has supplied a written statement to confirm that they are as accurate as possible, given the loss of accounting records.’
        • 2012/12 Q5a i Required: (i) Comment on the actions that should be taken by the auditor, and the implications for the auditor’s report; and (7 marks)
        • Actions 1)Performsubstantive procedures usingmanually reconstructed figures. 2)Request extension to audit deadline to performalternative proceduresstated 1. 3) Do notrely on written statementregarding the restated figures because it is not a reliable audit evidence.
        • Implication for audit report Impact on auditreport depends on, afterstep 1, themateriality and pervasiveness of the limitation. 1)If the possible limitation ismaterial but not pervasive, a qualified opinion should be given. A basis for qualified opinion paragraph should be included after the qualified opinion paragraph,to explain the limitation. 2)If the possible limitation ismaterial and pervasive, given themultiple limitations, a disclaimer of opinion should be given. A basisfor disclaimer of opinion paragraph should be included afterthe disclaimer of opinion paragraph, to statesthe auditoris not able to obtain sufficient appropriate audit evidence to provide a basisfor an audit opinion, accordingly, the auditor does not express an opinion on the financial statements.
  • 8-3 Emphasis of Matter, Other Matter, et
    • Impact on audit opinion 不等于 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 emphasised by referring to where it is presented and disclosed in the financial statements. This paragraph is not used for going concern uncertainties. 强调会计事项，而且是记对了的
    • 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 describes 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. 强调其他事项，一般是审计事项
    • 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. 强调已经 充分披露的可持续经营不确定性
    • 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 recognise 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 thisis higherthan profit, very material. As perIAS 37, there islegal obligation, but FEBoutflow is only possible, itshould be disclosed in notestoFS.
    • Implication on auditor’s report Ifthisis adequately disclosed,it does not affect audit opinion.Auditorshould express unmodified opinion, and addEOMparagraph after basis paragraph to highlight the significantlegal case,which isfundamentally importantto 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 thisissue. Further action Reviewthe disclosure note to ensure its adequacy.
  • 8-4 Key Audit Matters
    • 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 judgement 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. 当期审计过程中，依审计师判断有重大意义 的事项（重大错报风险的领域，涉及管理层重大判断的领域，期间发生的重大事 项），比如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. 重要
    • 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 recognise 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 judgement, were of mostsignificance in our audit of the financial statements ofthe current period. 2)Auditoris notforming a separate opinion on the itemsidentified asKAM=These matters were addressed in the context of our audit ofthe financialstatements as a whole, and in forming our opinion thereon, andwe do not provide a separate opinion on thesematters.
    • Valuation of financial instrument This is an area of significant audit judgement with a high risk of material misstatement, hence inclusion asKAMis appropriate. Auditorshould also: 1)Quantify the size and significance of the issue and explained itsimpact. 2)Describe howtheKAMwas addressed in the audit. 3)Besides, the reportshould notreferto the Group’sfinance director by name and should not imply criticismof himasresult of hisinexperience.The use ofthe word ‘guesswork’isinappropriate 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, qualify except for opinion is appropriate. However, the details of the material misstatement should not be included in the KAMat all butshould be given in the basisfor qualified opinion paragraph.
    • Opinionparagraph 1)Title=QualifiedOpinion 2) Sequence = The opinion paragraph should be clearly crossreferenced to the ‘BasisforQualifiedOpinion’ paragraphwhich should be placed immediately below the opinion paragraph and should clearly describe the issuewhich has given rise to a qualified opinion. EOM As for GC uncertainty, auditor’sreportshould nowinclude a specific section headed ‘Material UncertaintyRelated to GoingConcern’ immediately after the basisfor opinion paragraph and before theKAMsection. The material uncertainty related to going concern should be crossreferenced clearly to the disclosure notewhere the directors have given details ofthe uncertainty.
  • 8-5 Other information in AR
    • 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.
    • 历年真题-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 recognise 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.
    • 历年真题- 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.
    • 真题答案 Procedures Chairman statement=20%,whereasFS=(18-17)/17=6% MaterialinconsistencywithFS. Further procedures: 1)ReviewAWP,to ensure revenue $18 is correct 2)No adjustmenttoFSisrequired. 3)Informmanagementto amend chairman statement. Impact on audit report If management amend, no impact. If management refuse, add OM paragraph after Basis paragraph,to inform users that 20% is inconsistent withFS.
  • 8-6 Comparative Information
    • ISA 710 Comparative Information
      • LY Qualified – Does it affect TY? 去年FS错了，已经发现 Qualify，关注对今年的影响 - Un-resolved, still qualify - Resolved, unmodified LY Unmodified - Discover PYE (Prior Year Error), Does it affect TY? 去年FS错了，没有发现 Unmodified，今年发现了，关注对今年的影响 As per IAS 8, retrospective application. Ask management to amend LY FS. - Yes, amended, unmodified + EOM - No, un-amended, consider materiality and pervasiveness, maybe qualify
      • 历年真题-2014/6 Q3b You are an audit manager in Rose & Co, responsible for the audit of Cooper Co. You are reviewing the audit working papers relating to the financial year ended 31 January 2014. Cooper Co is a manufacturer of chemicals used in the agricultural industry. The draft financial statements recognise profit for the year to 31 January 2014 of $15 million (2013 – $20 million) and total assets of $240 million (2013 – $230 million).
      • 历年真题-2014/6 Q3b Max noticed that a section of the audit file had not been completed on the previous year’s audit. The incomplete section relates to expenditure incurred in the year to 31 January 2013, which appears not to have been audited at all in the prior year. The expenditure of $1·2 million was incurred in the development of an internally generated brand name. The amount was capitalised as an intangible asset at 31 January 2013, and that amount is still recognised at 31 January 2014. Required: Explain the implications of this matter for the completion of the audit, and any other professional issues raised, recommending any actions to be taken by the auditor. (5 marks)
      • Implications of this matter for the completion of the audit&actions 1.2/20=6%ofLY-PBT,materialtoSOPL 1.2/15=8%ofTY-PBTmaterialtoSOPL IAS 38, internally generated brand name fails to meet the condition ICE, e.g. identifiability,i.e.separable frombusiness.Hence,itshould bewritten offin the year to 31/1/2013,last year. Misstatement= LY2013, overstate asset, overstate profit, hence overstate closingRE TY2014,Overstate openingRE, overstate asset This misstatement is discovered TY 2014,should have caused the opinion in LY 2013 to be qualifies.During this year,should askmanagement to amendLYFS,Dr RE,CrIA.Ifmanagementrefuse, qualifyTYopening balance.
      • Professional issue 1)QC for individual engagement It seems likely that properreview procedures did not take place and that the audit was not properly directed and supervised. Auditor should considerwhether any other balances ortransactionsin the prior year financialstatementsshould be reviewed. 2)QC for the firm Theremay be implicationsfor other auditswhich have been conducted
  • 8-7 Other report
    • ISA 265 Communicating Deficiencies in Internal Control to Those Charged With Governance (TCWG) and Management
      • Deficiency in internal control includes: Significant deficiency; Other deficiency Deficiency in internal control exists when: a) A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis; or b) A control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis is missing.
      • Significant deficiency in internal control is a deficiency or combination of deficiencies in internal control that, in the auditor's professional judgment, is of sufficient importance to merit the attention of those charged with governance. Significant deficiencies are those that: • Could lead to material misstatements in the financial statements in the future. • Could lead loss or fraud of the related asset or liability
      • Communication 1) Significant deficiency: The auditor shall communicate in writing significant deficiencies in internal control identified during the audit to those charged with governance and management on a timely basis. 2) Deficiency Other deficiencies in internal control identified during the audit are of sufficient importance to require management's attention.
      • Content of communication a) A description of the control deficiencies b) An explanation of the potential effects of control deficiencies
      • ISA 260 - Communication of Audit Matters with Those Charged With Governance (TCWG) Guidance of matters which could be communicated, including: • the overall approach (e.g. the concept of materiality and its application to the audit process) and scope of the audit, including any limitations on the scope of the audit • the accounting policies, and any changes to them, that could materially affect the financial statements
      • • adjustments arising as a result of audit procedures which could materially impact the financial statements • material events or uncertainties which could jeopardise the going concern status, and which require disclosure within the financial statements • disagreements with management over accounting treatments or disclosures • any expected modifications to the audit report • significant deficiencies discovered in the internal systems and controls • recommendations, where relevant, to help improve the entity’s internal systems and controls • details of any threats to independence and objectivity, and of any safeguards adopted
      • 历年真题 -2019/3&6 Q2b Your firm, Eddie & Co, has asked you to perform an independent review of the working papers of Taylor Co which is a listed entity and has been an audit client of your firm for the last ten years. The audit fieldwork is almost complete and as part of your review, you have been asked to advise the audit team on the drafting of their report to those charged with governance. Taylor Co is a discount food retailer which operates 85 stores nationally. The financial statements for the year ended 30 April 20X9 recognise revenue of $247 million (20X8 – $242 million), profit before tax of $14·6 million (20X8 – $14·1 million) and total assets of $535 million (20X8 – $321 million)
      • 历年真题-2019/3&6 Q2b The audit supervisor’s review of Taylor Co’s board minutes identified that the company has renovated car parking facilities at 17 of its stores which has resulted in a significant increase in customer numbers and revenue at each of these locations. The total cost of the renovation work was $13·2 million and has been included in operating expenses for the current year. The audit file includes a working paper recording discussions with management which confirms that capital expenditure authorisation forms had not been completed for this expenditure. Required: From the information provided above, recommend the matters which should be included in Eddie & Co’s report to those charged with governance, and explain the reason for their inclusion. (5 marks)
      • Renovation of car parking facilities 13.2/535=2.5%ofTA,materialtoSOFP. IAS16,the renovation expenditure on the car parking facilitiesshould be capitalised asPPEifitis probable thatFEBwillflowto the entity and the cost can beMR. In TaylorCo’s case, the cost has been quantified as $13·2million and it has already derived economic benefitsin the formof a significant increase in customer numbers and revenue at each ofthese locations. Misstatement=wrongly expense off.Thisshould be included in a report toTCWG as a significantfinding fromthe audit which will impact on the formand content of the auditor’sreport.
      • ISA 265 requiresthe auditorto communicate appropriately to those charged with governance deficienciesin internal control which the auditor hasidentified during the audit and which, in the auditor’s professional judgement, are of sufficient importance tomerittheirrespective attentions. The audit working papersincludeminutes of discussions withmanagement which confirm that authorisation had not been gained for this expenditure. The lack of authorisation indicates a lack of management oversight and a serious weaknessin controlwhich could allowfraud to occur.
  • 8-8 Exam technique-reporting
    • 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 focusses 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. 审计报告的两种考试形式： 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 error 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
      • The next thing a candidate needs to have clear in their mind are the possible modifications for opinions. 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.
    • Exam technique: auditor reporting
      • ISA 705 (revised), Modifications to The Opinion in The Independent Auditor’s Report identifies three types of modified opinion: • 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) para 17 会计问题或审计问题，影响重大但不广泛
      • • 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) and, 会计问题，影响重大且广泛 • 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 审计问题，影响 重大且广泛
      • In order to distinguish between these types of modified opinion a candidate must determine two things: • Is there a material misstatement or is there insufficient evidence to know whether there is a material misstatement, and • Is the effect material or material and pervasive? 注意：考试中得出审计意见前，必须提及以上两件事： 1）会计问题or审计问题？ 2）重大 or 重大广泛？
      • In determining whether a misstatement is pervasive ISA 705 (revised) gives the following definition: 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.
      • Common errors in the exam – candidates often identify correctly there is a material misstatement in the accounts that is not pervasive, then state that the opinion should be unmodified or that the misstatement should be covered by an emphasis of matter paragraph. This is incorrect; a material misstatement which is not pervasive will result in a qualified opinion.
      • Basis for opinion paragraph The auditor’s report contains a paragraph after the opinion paragraph describing the basis on which auditors form their opinion. Where a modified audit opinion is given the details of the misstatements or the inability to obtain sufficient appropriate audit evidence will be provided. Common error in the exam – using outdated standards and stating the basis for opinion paragraph is presented before the audit opinion.
      • Other modifications to the auditor’s report In a requirement that asks candidates to consider the effect on the auditor’s report rather than the effect on only the audit opinion, there are other modifications which should be considered. 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 emphasised by referring to where it is presented and disclosed in the financial statements. This paragraph is not used for going concern uncertainties.
      • Common errors in exams - Using an EoM paragraph for a material misstatement or failure to obtain evidence – these give rise to qualified opinions - Using an EoM paragraph for uncertainties surrounding going concern – these have a separate paragraph - Using an EoM paragraph for something which would be a key audit matter for a listed company.
      • 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.
      • Other information ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information also requires the inclusion of an Other Information paragraph which includes: • A statement that management is responsible for the other information • An identification of: • other information, if any, obtained by the auditor prior to the date of the auditor’s report, and for an audit of financial statements of a listed entity, other information, if any, expected to be obtained after the date of the auditor’s report • A statement that the auditor’s opinion does not cover the other information and Accordingly that the auditor does not express (or will not express) an audit opinion or any form of assurance conclusion thereon
      • • A description of the auditor’s responsibilities relating to reading, considering and reporting on other information as required by this ISA, and • When other information has been obtained prior to the date of the auditor’s report, either: a statement that the auditor has nothing to report, or if the auditor has concluded that there is an uncorrected material misstatement of the other information, a statement that describes the uncorrected material misstatement of the other information Common exam error – not appreciating that the audit has a responsibility for reporting misstatements in the other information in addition to inconsistencies
      • 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.
      • Common exam errors - Including going concern issues in an EoM paragraph – this is no longer in line with revised ISAs 570 and 706 - Stating that an uncertainty arising due to going concerns means the break up basis of accounting should be used – an uncertainty such as withdrawal of one form of finance or the loss of a major customer may give rise to uncertainties but do not always mean a company will cease trading and be required to use the break up basis of accounting. Candidates should appreciate that it is extremely rare to see 'break-up basis' financial statements, which are only used where a reporting entity has no option but to wind up operations. - Using the uncertainty paragraph where the uncertainty is not disclosed in the financial statements – this would give rise to a material misstatement and require a qualified or adverse opinion.
      • Note that all three of these modifications do not result in a qualified opinion. They modify only the report. None of these is an alternative to a qualification of the audit opinion.
      • 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 judgement 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.
      • Exam focus Auditor reporting is covered by many ISAs and it is often hard to visualise how an auditor’s report should look. Many candidates in the exam still refer to outdated auditing standards or do not seem to understand how the auditor’s report flows. Listed companies generally publish their annual report online and these can be accessed freely. Candidates should take time to read the auditor’s reports for several real companies to appreciate this fundamental part of the syllabus. The profession revolves around the auditor’s report, the audit process and the ethics and professional issues that surround it all lead to this crucial document that is the output of the audit. View an example of a real auditor’s report.
      • Exam questions on reporting can take different forms. Here’s some examples from past questions and common misstates that have been seen in candidate answers. The links below can be used to see the scenario details relating to the question: March/June 2018, Q5 Scenario summary Candidates were presented with an extract from a proposed auditor’s report for a listed company, comprising KAM, qualified opinion and EoM paragraphs.
      • Requirement 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. Exam focus To critically appraise candidates should consider each piece of information and assess whether it is correct or incorrect, describing why and how to amend it as necessary
      • Commons mistakes in the exam - stating the qualification matter should have been an EoM - stating the financial statements should be prepared on a break up basis because of a potential breach of funding covenants (it’s an uncertainty over going concern but the company is not about to commence winding up) - stating that the auditor should not disclose the potential uncertainty regarding going concern because it hasn’t happened yet (the uncertainty exists therefore it will impact the auditor’s report) - not identifying that the uncertainty discussion did not refer to adequate disclosures in the accounts (these are needed if the opinion will not be qualified)
      • Commons mistakes in the exam - not identifying that the EoM paragraph should have been a Material Uncertainty Relating to Going Concern paragraph - saying the report was missing a title and signature – this was an extract not a complete report
      • September/December 2017, Q5 (b) (ii) Scenario summary Candidates were presented with material misstatements identified during the audit. Part b(i) asked candidates to explain matters which should be discussed with management in relation to the uncorrected misstatements and then lead to b(ii) below Requirement Assuming that management does not adjust the misstatements identified, evaluate the effect of each on the audit opinion.
      • Commons mistakes in the exam - considering the effects on wider areas of the auditor’s report not specifically the opinion - assuming that misstatements in disclosures didn’t need a qualification and recommending using an EoM instead - a material misstatement in disclosure still requires a qualified audit opinion - believing that the auditor’s disagreement with management regarding the reduction in provision was an inability to obtain sufficient appropriate evidence rather than a material misstatement - suggesting putting qualification matters that were material but not pervasive in an EoM paragraph rather than qualifying
      • September/December 2016 Scenario summary Candidates were presented with two unresolved issues arising from the audit of a non-listed company. The first was an imposed limitation in scope arising from a confidentiality agreement signed by the client and the second was a significant event properly disclosed in the financial statements. Requirement In respect of each of the matters described above, discuss the implications for the auditor’s report and recommend any further actions necessary. Note this requirement covers the auditor’s report not simply the opinion and is for a non-listed company
      • Commons mistakes in the exam - ignoring the requirement for further actions in addition to the auditor’s report implications – this includes trying to resolve the limitation of scope with management and the requirement to communicate the matter to TCWG - recommending an EoM paragraph for the limitation of scope – this has to give rise to a qualified opinion - omitting the description of the effect on the basis for opinion paragraph or stating it should be placed before the audit opinion - not stating that an EoM paragraph needs to draw attention to the significant event disclosure in the notes to the financial statements or that this matter does not modify the audit opinion
      • Conclusion With good preparation and a logical approach this area of the exam can enable candidates to score strong marks and question practice will help to hone those skills.
• 9.Assurance 10分
  • 9-1 Due diligence
    • Assurance
      • Due diligence Forensic audit Assurance on KPI report Examination on PFI Review on interim financial statements
    • Due diligence
      • Identify risk of any potential business change 1) Financial due diligence 财务方面 2) Operational and IT due diligence 生产经营，IT风险方面 3) People due diligence 核心人员方面 （合同终止成本，整合成本等） 4) Regulatory due diligence 合规方面 5) Environmental due diligence 环境，安全等方面
      • Report 1) Factual finding = List of facts, no opinion e.g. There are risks as followed 123456 2) Negative assurance e.g. Nothing causes us to believe that the financial figures are materially misstated
      • Matters to consider 1) KYC procedures 2) Independence 3) Risk – the more users rely on your report, the higher is the risk 4) Resource – 1 or 10 acquire 5) Fee – high enough 6) Competence – relevant sector experience 7) Pre-condition – friendly takeover or hostile takeover 8) Conflict of interest
      • Information required （Focus on reasons for buying） - Synergy, e.g. sales, cost, market share Info required = Ability to retain customer - Diversify, e.g. management expertise, technical skills Info required = Key management personnel and employment contact - Acquire asset, PPE, IA etc. Info required = Ownership, or lease contract
      • 2011/6 Q4 Jacob Co, an audit client of your firm, is a large privately owned company whose operations involve a repair and maintenance service for domestic customers. The company offers a range of services, such as plumbing and electrical repairs and maintenance, and the repair of domestic appliances such as washing machines and cookers, as well as dealing with emergencies such as damage caused by flooding. All work is covered by a two-year warranty.
      • 2011/6 Q4 The directors of Jacob Co have been seeking to acquire expertise in the repair and maintenance of swimming pools and hot-tubs as this is a service increasingly requested, but not offered by the company. They have recently identified Locke Co as a potential acquisition. Preliminary discussions have been held between the directors of the two companies with a view to the acquisition of Locke Co by Jacob Co. This will be the first acquisition performed by the current management team of Jacob Co. Your firm has been asked to perform a due diligence review on Locke Co prior to further discussions taking place. You have been provided with the following information regarding Locke Co:
      • 2011/6 Q4 Locke Co is owner-managed, with three of the five board members being the original founders of the company, which was incorporated thirty years ago. The head office is located in a prestigious building, which is owned by the founders’ family estate. The company recently acquired a separate piece of land on which a new head office is to be built.
      • 2011/6 Q4 The company has grown rapidly in the last three years as more affluent customers can afford the cost of installing and maintaining swimming pools and hot-tubs. The expansion was funded by a significant bank loan. The company relies on an overdraft facility in the winter months when less operating cash inflows arise from maintenance work.
      • 2011/6 Q4 Locke Co enjoys a good reputation, though this was tarnished last year by a complaint by a famous actor who claimed that, following maintenance of his swimming pool by Locke Co’s employees, the water contained a chemical which damaged his skin. A court case is on-going and is attracting media attention. The company’s financial year end is 31 August. Its accounting function is outsourced to Austin Co, a local provider of accounting and tax services.
      • 2011/6 Q4 Required: (a) Explain THREE potential benefits of an externally provided due diligence review to Jacob Co. (6 marks) (b) Recommend additional information which should be made available for your firm’s due diligence review, and explain the need for the information. (12 marks)
      • THREE benefits 考官答案 1) The assets and liabilities of Locke Co can be identified and a potential value placed on them.Without a due diligence review it will be difficult for management to negotiate a fair price for LockeCo, asthe price paid should include consideration of assets and liabilities not necessarily shown in the accounts, for example, any contingent liabilities which may exist in connection with warranties provided to customers of LockeCo. 2)It should uncover more information about operational issues, which may then help JacobCo’s directorsin deciding whetherto go ahead with the acquisition. For example,LockeComay need to relocate its head office, asit is currently located on the owners’family estate.Ifthisisthe case,significant expense could be involved in building or purchasing new premises, orthe head office function could be merged with that of Jacob Co.Either way, it is a practical operational issue that will need to be planned for,ifthe acquisitionwere to go ahead.
      • THREE benefits 考官答案 3) An externally provided due diligence review, as opposed to a review conducted by management ofJacob Co, islikely to provide information in a time-efficient, impartialmanner.The auditfirmhasthe financial and business understanding and expertise to provide a quality due diligence review. The management ofJacobCo can focustheir attention on operational issues,for example, considering how best to merge the acquired business into existing operations, leaving the detailed due diligence reviewto be performed by independent experts. Tutorial note:The answer above includesthree benefits(asrequired).Credit will be awarded for explanation of any three benefits which are specific to the scenario. Other benefits could include an assessment of the significance of the court case against the company, and its potential impact on the valuation of the business; enhanced credibility provided by an external due diligence review; and a review of the terms and conditions ofthe significant bank loan, and its potential impact on the future liquidity profile ofLockeCo.
      • Information and the need Reason for buying = seeking to acquire expertise in the repair and maintenance of swimming pools and hot-tubs. 1)Organisation structure chart,list ofmanagement personnel Why= To identify keymanagement andwhose expertise isimportantto retain 2)Employment contract ofthose identified persons Why = To assess the likelihood of key management staying or leaving after acquisition 3)Building and land registration documents Why=To confirmthe building and land are owned byLockeCo, and to verify the authorised use ofthe land, e.g. any restriction?
      • 4)Details of the bank loan Why = (principal, interestrate, amount outstanding, any asset pledge) To confirm whether and towhat extentJacobCowill be liable forthe bank loan. 5)Legal correspondence Why=To assess outcome of the legal case andwhetherJacobCo need to bear any obligation after acquisition.Thiswill affect purchase consideration. 6)Marketresearch report Why=To assess extent of damage to reputation due to the significantlegal case.
      • 7)Outsourcing agreement Why=To find outwork done by service provider and its quality.And to help Jacob Co determine whetherit want to continue orterminate the outsource arrangement through cost and benefit analysis. 8)List of major customers and their contracts Why=To assessthe value of customer contracts,thiswill also affect consideration.
  • 9-2 Forensic audit
    • 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 the 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 stillwith the client? 3)Whetherthere is any inventorymovement duringMay?Sell orreceive? 4) Objective of the forensic accounting, e.g. Quantify lossfor 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 ofrelevant documents,responsibilities ofmanagement and auditor, etc. Obtain correspondencewith 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 oflorries and identify no. of lorries stolen, in order to quantify loss of PPE. 3) Review PPE register&Depreciation schedule,in orderto assess loss on PPE. 4) Conduct immediate inventory count and reconcile quantity counted to the no. of the last inventory count 30/4,in orderto quantify loss ofinventory. 5) Retrieve the cost ofinventory fromsystem, and compare toNRV,to assess any impairment ofinventory 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 statementto identify those customerswho have received such payment.Thisis 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 andmanagement who approved and processed those payments, as they are also potential culprits. 4) Discusswith internal audit department,to verify other details, e.g. amount ofthe cash payment.
  • 9-3 Assurance on KPI report
    • 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, auditorshould 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 accidentsin theworkplace Need to constitute “serious” accident
    • 4)Intended users=“in response to requestsfromshareholders and pressure groups” - Shareholder: Client is listing on 2 major stock exchanges, meaning many shareholdersfromdifferent countries&with different expectations. -Pressure group=close scrutiny.In summary,thisis a very high risk engagement. 5) Management bias to show favourable performance in the KPI report, e.g. understateCO2 emission, energy use and no. ofserious accident. Overstatement of donation is an indicator ofsuchmanagement bias.
    • 6) New assurance team. The newly established team, may not have sufficient experience forsuch a big engagement. 7)Independence. Thisis an existing audit client, assuch, providing assurance on KPI report in addition to auditing may create self-review threat, e.g. charitable donation appearsin both FS and Sustainability report, although the use ofseparate teammay reduce the threat.
    • Procedures Number of serious accidents 1)Clarifywithmanagementthe definition of “serious”. 2)Reviewthe accident log to understand the nature ofthe accidents and identify all those thatmeetthe criteria asserious accidents.Add up the number ofsuch accidents and agree the numberto theKPIreport. 3) Review supporting documents to confirm the nature and seriousness of the accident, e.g. hospitalrecords,insurance claims.
    • Procedures Average annualspend on training per employee 1)Training cost: get breakdown and agree to training provider’sinvoices. 2)No. of employees: agree toHRrecords. 3)Recalculate the figuresto verify accuracy
  • 9-4 Examination on PFI
    • 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 oversea 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 differentteams. 2) The purpose of the review engagement is to apply bank loan, resulting in advocacy threat.Auditoris considered to supportthe client’s application. 3)Scope ofwork:Auditorisrequired to reviewSOPLonly?WhetherincludeSOFP andSOCF? 4)Deadline ofthe reviewengagement 5)Competence 6)Resource
    • Procedures General procedures(通用答案) 1)Identity ofthe preparer oftheSOPLforecast, and assess his competence. 2)Reviewthe SOPLforecast and discusswithmanagement to ensure it is prepared using the same accounting policies as previous years’. 3)Castto ensure accuracy
    • 4) (Revenue – price) Compare proposed new price $10 to competitor’s price, to assesswhetheritisreasonable and competitive. 5)(Revenue – quantity)Review the proposed upgrading schedule/plan, to assess whether all cinemaswould be upgraded before 1/9/2014.Thisis done to support the assumption regarding increase in price. 6) (Revenue – total) Perform analytical procedures using seating capacity of all cinemaswith the newprice,to assessreasonableness ofthe forecastrevenue.
    • 7)(Operating expenses)Performanalytical procedures on operating expense, taking into account newPPEand depreciation.Besides, consider any loss on disposal of old equipment has been included? 8)Reviewof capital expenditure budgets,SOCF forecast and any otherinformation that accompany the SOPL forecast for consistency, e.g. to confirm that amount planned to spent can bemetwith 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 comprising 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参考前面一题(慎写，注意组织答案) 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. ofthe sharesto be issued and issue price. 6)(Projected increase in newloan $30):Obtain letterfrombank 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.
  • 9-5 Interim FS
    • 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 recognised 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 recognise 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, carssold 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 have legal obligation to repair, probable cash outflow&MR.Provision forwarranty should be recognised. Misstatement=No provision Impact=Understate liability, understate expense