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ACCA

Audit and Assurance


Paper F8
Practice & Revision Notes
ISBN: 9781472764669

Blank

Contents

Page

Introduction
How to use the Practice & Revision material

The examination paper and syllabus aims

Analysis of past papers

Skills bank

11

Knowledge bank

23

Appendices

81

INTRODUCTION

Introduction
How to use the Practice & Revision material
Step 1

Learn

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

Step 2

Practise

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

Skills bank (in these notes)


This illustrates the main skills needed to pass this paper. We will teach you how to:

Use your reading time effectively


Analyse the questions requirements
Manage your time
Produce well-constructed numerical and discussion answers
Produce tailored answers that are relevant to the specifics of the question

Knowledge bank (in these notes)


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

Question and answer bank


The Practice & Revision Kit contains:

Step 3

Questions that will be covered in class


Questions you will do during home study following guidance provided by your tutor
Additional questions for further practice

Rehearse

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

INTRODUCTION

The examination paper and syllabus aims


The examination paper
The examination is a three hour paper with 15 minutes reading and planning time. All questions are compulsory. Some
questions will adopt a scenario/case study approach. All questions will require some form of written response although
questions on planning or review may require the calculation and interpretation of some basic ratios.
100% Discussion
10% Knowledge

90% Application

Format of the Exam

Marks

Section A

Comprises 8 two mark and 4 one mark multiple choice questions.

Section B

Comprises:

20

Four 10 mark questions. These will tend to test one of the five syllabus areas of the
Study Guide (A, B, C, D or E)

40

Two 20 mark questions. The 20 mark questions will predominantly examine one or
more aspects of audit and assurance from planning and risk assessment, internal
control or audit evidence, although topics from other syllabus areas may also be
included.

40

100

Time pressure warning

Section A

Section B

Aims
The syllabus aims to test the students ability to:
A

C
D
E

Explain the concept of audit and assurance and the functions of audit, corporate governance, including ethics
and professional conduct, describing the scope and distinguishing between the functions of internal and external
audit.
Demonstrate how the auditor obtains and accepts audit engagements, obtains an understanding of the entity
and its environment, assesses the risk of material misstatement (whether arising from fraud or other
irregularities) and plans an audit of financial statements.
Describe and evaluate internal controls, techniques and audit tests, including IT systems to identify and
communicate control risks and their potential consequences, making appropriate recommendations.
Identify and describe the work and evidence obtained by the auditor and others required to meet the objectives
of audit engagements and the application of the International Standards on Auditing.
Explain how consideration of subsequent events and the going concern principle can inform the conclusions
from audit work and are reflected in different types of audit report, written representations and the final review
and report.

INTRODUCTION

Analysis of past papers


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

Audit framework and regulation


The concept of audit and other assurance engagements

A Q7

External audits
Corporate governance
Professional ethics and ACCA's Code of Ethics and Conduct

A Q5
B Q1a

Internal audit and governance and the differences between external and internal audit

B Q1b

The scope of the internal audit function, outsourcing and internal audit assignments

A Q3

Planning and risk assessment


Obtaining and accepting audit engagements
Objective and general principles
Assessing audit risks

A Q10
B Q5a

Understanding the entity and its environment


Fraud, laws and regulations
Audit planning and documentation

A Q6

Internal control
Internal control systems

A Q4
A Q12

The use and evaluation of internal control systems by auditors


Tests of control

B Q6a

Communication on internal control


Audit evidence
Financial statement assertions and audit evidence

A Q2
B Q4a

Audit procedures

B Q2a

Audit sampling and other means of testing

A Q1

The audit of specific items

B Q2b
B Q4b
B Q6b

Computer-assisted audit techniques


The work of others
Not-for-profit organisations

A Q8

INTRODUCTION

Specimen Paper

Review and reporting


Subsequent events

A Q11

Going concern

B Q5b

Written representations
Audit finalisation and the final review

B Q3a

Audit reports

A Q9
B Q3b

Skills bank
This section explains and demonstrates the key skills
required to enable you to maximise your chance of
exam success. Knowledge of the syllabus is insufficient
on its own. Through question practice you will develop a
set of skills that will enable you to pass this paper.

10

SKILLS BANK

Key skills required to pass


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

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

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

2 Quick and
accurate analysis of
a questions
requirements

4 Tackling
multiple choice
questions
3 Disciplined time
management to
ensure that all parts of
the question are
answered in the time
allowed

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

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SKILLS BANK

Skill 1 Effective use of the 15 minutes reading time at the


start of the exam
1 Take some time to plan the order in which you will attempt the questions
All of the questions in this paper are compulsory so there is no choice to make in terms of which questions you will
attempt, but you should give some thought to the order in which you should attempt them.
Section A comprises multiple choice questions so you would be better to spend your reading time concentrating on the
longer questions in Section B. Focus particularly on questions which include a scenario. The scenarios are likely to
contain some detailed narrative about a client company and its systems or it may also include some numerical
information. To answer these types of questions successfully you will need to use the information in the scenario so
make sure you read the requirements and then spend your reading and planning time annotating key information from
the scenario.

2 Reading scenario based questions

STEP
1

Read the requirements

STEP
2

Focus on the longest requirements

STEP
3

Read the question actively identifying data relevant to each requirement

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

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

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

For example, in the Specimen Paper, Q6 (a) had the following requirement:
(a) In respect of the internal control of Garcia International Co:
(i) Identify and explain SIX deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a test of control Suarez & Co would perform to assess if
each of these controls is operating effectively.

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SKILLS BANK

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

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

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

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

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

Skills practice
When you practice any of the scenario questions from the practice and revision kit you should give
yourself around 5 minutes reading and planning time to highlight and annotate the scenario ahead before
you start writing your answer.

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SKILLS BANK

Skill 2 Quick and accurate analysis of a question's


requirements
1 Be aware of the verbs used in exam questions
You need to be aware of the meaning of the key verbs used by the examiner; these are reproduced in full in the BPP
Practice & Revision Kit.
You dont need to learn each term precisely but it is important that you appreciate the difference between them, for
example, explain means clarifying an issue or developing a point, whereas state means list out the information/
factors or criteria without needing to give further explanation. Generally speaking the requirement to explain will earn
you 1 mark per point whereas the requirement to state carries a mark.

EXPLAIN

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


(i)Explain the ethical threats which may affect the independence of
Remy & Co in respect of the audit of Hazard Co; and
(ii) For each threat explain how it might be reduced to an acceptable
level.

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

Rotation of audit partner


Remys partner has been involved in the audit of Hazard Co for six
years.

This would have scored


mark for stating your point

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

This would have scored


1 mark for explaining your
point

Hazard Co is a listed entity and as such the ACCAs Code of Ethics


and Conduct recommends that engagement partners rotate off an
audit after five years. Consideration should be given to appointing
an alternative audit partner.

This would have scored


1 mark for applying your point
to Hazard Co

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

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SKILLS BANK

2 Identify ALL the questions requirements in your answer plan


The question above also shows how the requirements of a question often contain a number of sub-requirements.
You need to make sure that these sub-requirements are clearly identified on the question paper by highlighting or
underlining them so that your answer is comprehensive and addresses all parts of the requirement.
Failure to answer the whole question is often due to candidates forgetting to address these sub-requirements
and is a key reason why people fail this paper.

Skills practice
In each question you attempt you should spend a minute identifying the verb and planning what structure
your answer should have to ensure you really do explain, discuss, recommend etc.

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SKILLS BANK

Skill 3 Disciplined time management


Although the examining team have reduced the element of time pressure in this paper there is still a lot to do in the
three hours!
The three hours that you are given to write your answers breaks down to 1.8 minutes for each available mark and you
must stick to this closely.
Given the format of the exam, you know from the start that your time allocations will be as follows:
Marks

Time allocation

Section A

20

36 minutes

Section B Question 1

10

18 minutes

Section B Question 2

10

18 minutes

Section B Question 3

10

18 minutes

Section B Question 4

10

18 minutes

Section B Question 5

20

36 minutes

Section B Question 6

20

36 minutes

You may find that the multiple choice questions in Section A do not take the whole 36 minutes however you should be
careful not to rush through them in case you misread a requirement or answer a question that is different from the one
which was set!
In Section B each question will be divided into a number of sub-requirements and it is important to identify how much
time you should allocate to each of these. If you over-run by even a few minutes on several requirements on your way
through the paper, you risk putting yourself in the position where you dont have enough time to complete the paper.
Make sure you keep a careful check on timings as you plan your approach to each question. Note time
allocations and stick to them. If you think you have more to say on a particular part, stop when you run out of
time and leave some space in your answer booklet; theres just a chance you may save time later in the
question and will be able to add one or two extra points.
In this paper, time management skills overlap with the other key skills, if you

Make effective use of the reading time


Accurately analyse the requirements, and
Produce a tailored answer

you should find that it is possible to write good, pass standard answers that are concise, focused and relevant.
It really is true in this exam that, in general less (quantity!) is more (marks!)

Skills practice
When you are practising questions, always work out the time allocations and get into the habit of writing
the answers, to time, just as you will have to do in the exam hall.

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SKILLS BANK

Skill 4 Tackling multiple choice questions


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

Approaching Questions Logically


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

Locate the correct answer

2.

Check the other answers

3.

Read the question again to ensure youre answering the correct question

4.

Confirm that you have the correct answer

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

2 What to do if more than one answer appears plausible


Sometimes more than one option can seem to answer the question. In this case you have to firstly ensure youve read
the requirement carefully, as questions may be phrased in ways that are not what youre expecting. If you still identify
more than one likely option, select the most correct answer. The approach adopted above is useful here too but this
time you have to think through the alternatives a bit more.
For example, Q9 on the Sample Paper states:
An emphasis of matter paragraph is used in an audit
attention to a matter affecting the financial statements.

report

to

draw

Which TWO of the following are correct in relation to an Emphasis of Matter


Paragraph in the Auditors Report?
(1) It is used where there is significant uncertainty.
(2) It constitutes a qualified opinion.
(3) The audit report is referred to as an unmodified report.
(4) The matter is deemed to be fundamental to the users understanding of
the financial statements.
A 1 and 2
B 1 and 4
C 1 and 3
D 2 and 4

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

17

SKILLS BANK

Here are some steps to follow:

STEP
1

Never
Firstly, identify any answers that are immediately wrong. In this question, the key thing to think about
how and when an emphasis of matter paragraph is used and the different ways in which an audit
report can be modified.
Remember that an audit opinion is qualified either due to material misstatement or due to insufficient
audit evidence when the degree of severity is deemed to be material but not pervasive. This means
that statement (2) is not correct and so we can discard options A and D from the answers.

STEP
2

Assess the remaining answers


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

STEP
3

Read the question again


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

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

3 What to do if you still dont know the answer


If you have been through the above steps and cant identify a preferred answer then you have to guess!

What you SHOULD NOT do

Two main things to avoid:


1.

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

2.

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

What you SHOULD do

Having used the three step approaches above to narrow down your possible answers, go with the one that feels right
and move on.
If you have a flash of inspiration later in the exam go back and revisit it but only if you are sure.

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SKILLS BANK

Skills practice
1.

Practice keeping track of the questions you have answered when doing questions from the
Practice and Revision Kit

2.

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

3.

Practice as many multiple choice questions as possible.

4.

If you dont know the answer to a question dont just go to the answer at the back or just guess
use the three step approach described above.

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SKILLS BANK

Skill 5 Producing a tailored answer


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

2 Answer structure general


There are no questions in this exam that require lengthy essay-style answers. The overall principle is to communicate
points clearly, but concisely use headings and write in short paragraphs.

Tabular answers
Many styles of question in this paper can be answered most effectively using a tabular layout, and the examiner
encourages this approach.
Q1 (a), Q5 (a) (ii) and Q6 (a) from the Specimen Paper can all be answered in a tabular format. We looked at Q1 (a)
earlier in skill 2 and this answer could be presented in a tabular format as follows:
Use of headings helps keep you thinking about the requirements

Safeguards to reduce the threat

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

Hazard Co is a listed entity and as such the


ACCAs Code of Ethics and Conduct
recommends that engagement partners rotate
off an audit after five years. Consideration
should be given to appointing an alternative
audit partner.

Matching each threat to the


safeguard by using this
structure means you can cut
out all the 'linking' words

20

SKILLS BANK

3 Writing for your audience


Frequently in the exam you will be asked as an external auditor to produce a report or letter addressed to the directors
of your client. Alternatively you could be asked to write a report to the Board as an internal auditor. It is important that
your answer reflects your role and the addressee and that appropriate language is used.
For example:
Report Format
Reports should be headed,
name the preparer, and be
dated.

Introduction

Deficiency

Implication

Recommendation

INTERNAL AUDIT REPORT


Sales system in X Co
Prepared By: A N Accountant
Date: 10 June 20XX
Use subheadings. The 3-part
structure used in the external audit
report to management works equally
well in the context of an internal audit
report on system deficiencies.
The tone of reports should always be
professional and formal. They should
be written in the third person. No
slang or conversational language
should be used. For example 'the
implication of this deficiency if you
were to sit on it would be.'
Ideally you could present the
deficiency, implication and
recommendation in a tabular format
as an appendix to the report/ letter.

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SKILLS BANK

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

an appropriate structure
headings, and
the number of points you are aiming to cover

Always review your attempted answer and ensure that you have not included any general points without
relating them to specific points within the question.

22

Knowledge
bank

23

Contents

Page

24

The concept of audit and other assurance engagements

25

Statutory audit and regulation

27

Corporate governance

31

Professional ethics

33

Internal audit

35

Risk assessment

37

Audit planning and documentation

41

Introduction to audit evidence

43

Internal control

45

10

Tests of controls

49

11

Audit procedures and sampling

51

12

Non-current assets

55

13

Inventory

57

14

Receivables

61

15

Bank and cash

63

16

Liabilities, capital and directors emoluments

65

17

Notfor-profit organisations

67

18

Audit review and finalisation

69

19

Reports

73

20

Appendix A: Relevant articles/study support videos

83

21

Appendix B: Verbs used in question requirements

84

22

Appendix C: Specimen paper

85

The concept of audit and other


assurance engagements

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Identify and describe the objective and general principles


of external audit engagements
Explain the nature and development of audit and other
assurance engagements
Discuss the concepts of accountability, stewardship and
agency
Define and provide the objectives of an assurance
engagement
Explain the five elements of an assurance engagement
Describe the types of assurance engagement
Explain the level of assurance provided by an external
audit and other review engagements and the concept of
true and fair presentation

Q7 Section A pilot paper

Describe the limitations of external audits

25

The concept of audit and other


assurance engagements

The purpose of external audit

To promote confidence and trust in


financial information
To give an opinion on whether the
financial statements:
Have been prepared in
accordance with an acceptable
financial reporting framework
Comply with statutory
requirements

Accountability, stewardship and


agency
Accountability
Directors are required to prepare
financial statements for shareholders
Stewardship
Directors account for their
stewardship of the assets placed
under their control
Agency
Directors act as agents of
shareholders
External audit addresses the agency
conflict between shareholders and
directors

Types of assurance
'An assurance engagement is an
engagement in which a practitioner
expresses a conclusion designed to
enhance the degree of confidence of
the intended users other than the
responsible party about the
outcome of the evaluation or
measurement of a subject matter
against criteria.'

Annual external audit


Half-year review of FS
Going concern review
Review of effectiveness of IT
systems
Review of compliance with
corporate governance
requirements

Levels of assurance

Assurance and reports

Concepts in reporting
Materiality

Reasonable assurance
Eg statutory audit

Positive expression:
'in our opinion, the financial statements
present fairly..

Limited assurance
Eg review of half year accounts

Negative expression:
'nothing has come to our attention that causes
us to believe that the financial statements do
not give a true and fair view .'

Information is material if its omission or


misstatement could influence the economic
decisions of users
True and fair
The auditor reports in terms of whether the
financial statements present fairly in all
material respects (or give a true and fair view)
Reasonable assurance

100% assurance is not possible

Level of assurance given in statutory

audit

26

Communication to different
stakeholders

Potential investors
Current and potential lenders
Employees
Customers
Suppliers
Tax authorities

Statutory audit and regulation

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Describe the regulatory environment within which


external audits take place
Discuss the reasons and mechanisms for the regulation
of auditors
Explain the statutory regulations governing the
appointment, rights, removal and resignation of auditors
Explain the regulations governing the rights and duties of
auditors
Explain the development and status of International
Standards on Auditing (ISAs)
Explain the relationship between International Standards
on Auditing (ISAs) and national standards

27

Statutory audit and regulation

The regulatory environment

Statutory regulations
Appointment
Normally annually
By shareholders resolution
Directors may appoint in
particular circumstances:
First auditors
Casual vacancy
Removal
By shareholders resolution
Auditors entitled to:
Notice of resolution
Make written representations
Speak at shareholders
meetings
Resignation
May resign at any time
Written notice to registered office
Statement of circumstances

Note: throughout these notes the


abbreviation ISA will be used to refer
to the International Standards on
Auditing

28

Mechanisms for regulation of


auditors
IFAC/ IAASB
IFAC aims to strengthen the
global accountancy profession
and promote adherence to highquality standards
National law and standards
Law establishes:
Rights and duties of auditors
Eligibility to be auditor
National standards increasingly
harmonised with ISAs
ACCA/ the profession
Education and training
Ethical requirements

Development and status of ISAs


IAASB produces ISAs, ISAEs and
ISRSs.
IAASB pronouncements do not
overrule local laws or regulations
Where IAASB pronouncements
form part of the regulatory
framework (eg. in UK) they are
mandatory

Stages of an external audit


The following diagram illustrates the main steps in the conduct of an external audit. The following chapters expand each
of these steps.
Plan the audit
Understand the entity (including documenting and confirming
the accounting systems and internal control)
Assess risk of material misstatement
Select audit procedures to respond to risk of material misstatement
Risk assessment does
not include expectation
that controls operate
effectively

Where risk assessment


includes expectation
that controls operate
effectively

Tests of controls (to confirm expectation)


Unsatisfactory

Report
to management

Satisfactory

Restricted
substantive tests

Full
substantive tests

Overall review of
financial statements
Report to
management

Auditors
report

29

30

Corporate governance

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Discuss the objectives, relevance and importance of


corporate governance
Discuss the provisions of international codes of
corporate governance (such OECD) that are most
relevant to auditors
Describe good corporate governance requirements
relating to directors responsibilities (e.g. for risk
management and internal control) and the reporting
responsibilities of auditors
Analyse the structure and roles of audit committees and
discuss their benefits and limitations

31

Corporate governance

Definition

The internal systems by which companies


are directed and controlled

The UK Corporate Governance Code


Provides guidance to UK companies as to how they
should be directed and controlled.
5 headings:
Leadership
Effective Board
Clear division of responsibilities between
Chairman and Chief Executive Officer
(CEO)
Requirement to have non-executive
directors
Effectiveness
Appropriate balance of skills
Procedures for the appointment of new
directors (nomination committee)
Directors should have sufficient time to
perform their duties
Induction/ training
Annual evaluation
Regular re-election
Accountability
Board responsible for risk management
Board responsible for internal control
systems
Remuneration
Sufficient but not excessive
Formal policy for fixing remuneration
packages (remuneration committee)
Relations with shareholders
Open dialogue
Use of AGM to communicate with
shareholders

32

Audit committees

At least 3 members
At least one with recent and relevant
financial experience
Monitor the integrity of the financial
statements:
Recommendations re the
appointment, re-appointment and
removal of external auditors
Approve remuneration and terms of
external auditor
Monitor external auditors
independence, objectivity and
effectiveness of the audit process
Policy on the engagement of the
external auditor to supply non-audit
services

Review the companys internal control


and risk management systems

Monitor and review the effectiveness


of internal audit

Monitor arrangements safeguarding


privacy of whistle blowers

Professional ethics

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Define and apply the fundamental principles of


professional ethics of integrity, objectivity, professional
competence and due care, confidentiality and
professional behaviour

Q5 Section A pilot paper

Define and apply the conceptual framework, including


the threats to the fundamental principles of self-interest,
self-review, advocacy, familiarity and intimidation

Q1(a) Section B pilot paper

Discuss the safeguards to offset the threats to the


fundamental principles

Q1(a) Section B pilot paper

Describe the auditors responsibility with regard to


auditor independence, conflicts of interest and
confidentiality
Discuss the requirements of professional ethics in
relation to the acceptance of new audit engagements
Explain the preconditions for an audit
Explain the process by which an auditor obtains an audit
engagement
Justify the importance of engagement letters and their
contents.

33

Professional ethics

Fundamental principles of
professional ethics

Threats

Self-interest
Self-review
Advocacy
Familiarity
Intimidation

Safeguards

Created by the
profession, regulation
or legislation
In the work
environment
Created by the
individual

Confidentiality
Members must not disclose
information obtained in the course of
professional work without permission
from their clients.
Exceptions
Obliged to disclose
By law
By court order
To regulators

34

Integrity
Objectivity
Professional competence and due
care
Confidentiality
Professional behaviour

Permitted to disclose
Public interest
Protect members interests

Enforcement of the ACCA Code


In countries (such as the UK) where
regulation and monitoring of audit is
delegated to professional bodies such
as ACCA, there is an obligation to:
Check that members are qualified
and eligible to carry out audits
Monitor members conduct and the
standard of their work
Take regulatory action against
members who do not meet
requirements
ACCA disciplinary structures:
Monitoring unit
Professional conduct department
Disciplinary committee

Obtaining and accepting new audit


engagements
Obtaining audit engagements

May use advertising and other forms of


promotion
Must not:
Bring ACCA or profession into
disrepute
Discredit services offered by others
Be misleading
Care over references to fees
Acceptance
Before
Ensure firm is independent,
competent and has adequate
resources
Obtain references (client)
Establish certain preconditions are
present
Assess risk
Communicate with present auditor
Obtain clients permission
Decline nomination if refused
Otherwise request information
that would help decision
Present auditor should
Obtain clients permission
If refused, inform new auditor
(who should decline
nomination)
Otherwise, discuss relevant
matters
After
Ensure predecessors
removal/resignation properly
conducted
Ensure appointment properly
conducted

Engagement letters
Document and confirm auditors
acceptance of the appointment,
objective and scope of audit,
extent of auditors responsibilities
to the client and form of any
reports.
Contents

Objective of the audit

Managements responsibility
for the FS

Scope of the audit

Form of reports or other


communication

Inherent limitations of audit and


internal control risk that
some material misstatements
may remain

Access to documents records


and information

Arrangements for planning and


performing audit

Expectation of receiving a letter


of representation

Request for acknowledgement


of receipt of letter

Basis of fees

Internal audit

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Discuss the factors to be taken into account when


assessing the need for internal audit
Discuss the elements of best practice in the structure and
operations of internal audit with reference to appropriate
international codes of corporate governance
Compare and contrast the role of external and internal
audit

Q1(b) Section B pilot paper

Discuss the scope of internal audit and the limitations of


the internal audit function
Discuss the responsibilities of internal and external
auditors for the prevention and detection of fraud and
error
Explain outsourcing
Explain the advantages and disadvantages of outsourcing
the internal audit function
Discuss the nature and purpose of internal audit
assignments including value for money, IT, financial,
regulatory compliance, fraud investigations and customer
experience

Q3 Section A pilot paper

Discuss the nature and purpose of operational internal


audit assignments

35

Assessing the need for internal


audit
Internal audit and corporate
governance codes

It is seen as good corporate governance to


have an internal audit (IA) function to
assess and monitor internal control
policies and procedures.
The Board
Overall responsibility for analysis of risk
and implementation of controls
The Audit Committee
Monitor and review effectiveness of IA
Approve appointment/termination of
appointment of head of IA
Review and assess IA work plan
Monitor management responsiveness to
IA reports
Meet head of IA at least once a year
without management
Internal audit department
Regular report to audit committee
Direct access to board chairman and audit
committee
Accountable to audit committee

Scope and limitations of


internal audit

Objective

Shareholders

Report to

Management/directors

Independent

Status

Employee of company or contracted


to company

Required to have
recognised
qualification

No requirement

36

Advantages

Increased independence

Relevant skills

Increased reliability
Disadvantages

Costs

Limited knowledge of specific


entity

Independence issues if provided


by external audit firm

Independence from activities


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

External audit
Opinion on
FS in terms of
true and fair

Internal audit

Wide ranging up to employers

Trends or factors that have increased


risks
Organisational restructuring or
changes in processes and systems
Adverse trends noted in monitoring of
internal control systems
Unexpected occurrences

Outsourcing internal audit

Limitations could arise from lack


of:

Comparison of internal and external audit

Qualification

Internal audit

Nature and purpose of internal audit


assignments

Value for money audit (VFM)

Economy, efficiency and

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

Internal audit reports

Format will vary


May include executive summary
Findings and recommendations

Risk assessment

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Identify the overall objectives of the auditor and the need


to conduct an audit in accordance with ISAs
Explain the need to plan and perform audits with an
attitude of professional scepticism, and to exercise
professional judgement
Explain the components of audit risk

Q10 Section A pilot paper

Explain the audit risks in the financial statements and


explain the auditors response to each risk

Q5(a) Section B pilot paper

Explain how auditors obtain an initial understanding of


the entity and its environment
Define and explain the concepts of materiality and
performance materiality
Explain and calculate materiality levels from financial
information
Discuss the effect of fraud and misstatements on the
audit strategy and extent of audit work
Explain the auditors responsibility to consider laws and
regulations
Describe and explain the nature and purpose of
analytical procedures in planning
Compute and interpret key ratios used in analytical
procedures

37

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

Professional scepticism

Risk assessment

Risk at the assertion level

Questioning the validity of evidence

Alertness to contradictory evidence

Neither the assumption that


management is dishonest nor the
assumption of unquestioned
honesty

Business risk

Conditions, events and circumstances that


could adversely affect the entitys ability to
achieve its objectives (financial risk,
operational risk and compliance risk)

Professional judgement

Materiality and audit risk

Nature, timing, extent of procedures

Significant risks

Require special audit consideration

Understanding the entity and its


business environment
Matters to consider
Industry, regulatory and other
external factors
Nature of the entity
Objectives and strategies and related
business risks
Measurement and review of entitys
financial performance
Internal control

Materiality and performance


materiality
Materiality
Information is material if its omission
or misstatement could influence the
decisions of users based on the
financial statements
Amount and nature of the
information needs to be considered
Calculation is always judgemental
Firms set criteria for guidance, e.g.:
to 1% of revenue
1 to 2% of total assets
5 to 10% of profit before tax
Impact on audit:
Nature, timing and extent of
audit procedures
Whether to seek adjustments
Degree of any auditors report
modifications
Performance materiality

Amount set by the auditor at less


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

Audit risk
(See below)

Effect of fraud on misstatements


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

Assignment and supervision of


personnel

Consideration of accounting policies

Unpredictability in nature, timing and


extent of audit procedures

Analytical procedures in audit planning

38

Analysis of relationships to identify


inconsistencies and unexpected
relationships
Should be applied as risk assessment
procedures
Include comparisons with;
Prior periods and budgets
Industry information
Predictive estimates
Ratio analysis
Relationships between financial and
non-financial information

THE AUDIT RISK MODEL

AR

IR

CR

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

DR

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

Control risk
The risk that a misstatement
could occur in an assertion
and that could be material,
either individually or when
aggregated with other
misstatements, will not be
prevented, or detected and
corrected, on a timely basis
by the entity's internal
control.

Sampling risk

The risk that the auditor's


procedures will not detect a
misstatement that exists in an
assertion that could be
material either individually or
when aggregated with other
misstatements

Non-sampling risk

39

Common ratios for use in analytical review


Profitability
(i)

Return on Capital Employed (ROCE)

(ii)

Net profit margin =

(iii)

Asset turnover

(iv)

Gross margin

Profit before interest and tax (PBIT)


Share capital reserves NC liabilities
PBIT
Revenue

Revenue
Share capital + reserves + NC liabilities
Gross profit
Revenue

Liquidity
(i)

Current ratio

(ii)

Quick ratio (Acid Test)

(iii)

Inventory turnover

=
or

(iv)

Trade receivables days

(v)

Trade payables days

CA
CL
CA - Inventories
CL
Inventories
COS
COS
Inventories

365 days

No. of times turnover

Trade receivables
Credit sales

Trade payables
Credit purchases

365 days

365 days

Gearing
(i)

40

Debt/equity

Interest bearing debt


Share capital and reserves

Audit planning and documentation

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Identify and explain the need for and importance of


planning an audit
Identify and describe the contents of the overall audit
strategy and audit plan
Explain and describe the relationship between the
overall audit strategy and the audit plan
Explain the difference between interim and final audit
Describe the purpose of an interim audit, and the
procedures likely to be adopted at this stage in the audit

Q6 Section A pilot paper

Describe the impact of the work performed during the


interim audit on the final audit
Explain the need for and the importance of audit
documentation
Describe the form and contents of working papers and
supporting documentation
Explain the procedures to ensure safe custody and
retention of working papers

41

Audit planning and documentation

The need for planning


Planning is required so that the audit will
be carried out in an efficient and
effective manner.
Objectives:
Appropriate attention is devoted to
important areas of the audit
Potential problems are identified
The work is completed expeditiously
Proper assignment of work to
assistants
Coordination of work done by other
auditors and experts; and
Facilitating review.

Audit documentation

The audit strategy

ISA 230 Audit Documentation states that the


auditor shall prepare audit documentation on a
timely basis.

and the audit plan

Contents:

Sufficiently complete and detailed to enable


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

Planning, nature, timing and extent of audit


procedures and conclusions drawn

Reasoning on all significant matters of


judgement

Permanent file/current file

Audit strategy sets out:

Scope
Financial reporting framework
Locations
Reporting objectives
Materiality levels
Preliminary identification of:
Higher risk areas
Material balances
Whether auditor plans to perform
tests of controls
Resources
Management

Audit plan sets out

Nature, timing and extent of audit


procedures
For each material class of
transactions, account balances or
disclosure

Interim and final audit


Interim audit procedures (before y/e)

Analytical procedures

Tests of controls

Updating risk assessments

Review of relevant internal audit


reports

Substantive testing (of transactions


in the first part of the year)
Final audit procedures (post y/e)

42

Completion of tests of controls and


substantive tests of transactions
started at interim

Analytical procedures on financial


statements

Substantive testing of financial


statements

Introduction to audit evidence

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Explain the assertions contained in the financial


statements about classes of transactions and events,
account balances at the period end and presentation and
disclosure

Q4(a) Section B pilot paper

Describe audit procedures to obtain audit evidence,


including inspection, observation, external confirmation,
recalculation, re-performance, analytical procedures and
enquiry
Discuss the quality and quantity of audit evidence
Discuss the relevance and reliability of audit evidence

Q2 Section A pilot paper

Discuss substantive procedures for obtaining audit


evidence
Discuss and provide examples of how analytical
procedures are used as substantive procedures
Discuss the difference between tests of control and
substantive procedures

Q2(a) Section B pilot paper

43

Introduction to audit evidence

Quality of evidence
ISA 500 Audit Evidence
Sufficient
Quantity Sufficient to
support the audit opinion
Factors to consider are:

Financial
statement
assertions

Risk assessment

Nature of accounting
and internal control
systems

Materiality of the item

Experience gained
during previous audits

Results of audit
procedures

Source and reliability of


information available

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

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

44

Appropriate

Relevant
The evidence
gathered must
cover the
financial
statement
assertions.

Reliable

External better
than internal

Internal more
reliable when
controls effective

Auditor
generated better
than client
generated

Documentary
better than oral

Original
documents more
reliable than
copies/faxes

Internal control

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Explain why an auditor needs to obtain an understanding


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

Q12 Section A pilot paper

Explain how auditors record internal control systems


including the use of narrative notes, flowcharts, internal
control questionnaires and internal control evaluation
questionnaires
Evaluate internal control components, including
deficiencies and significant deficiencies in internal
control
Discuss the limitations of internal control components
Describe computer system controls including general IT
controls and application controls

Q4 Section A pilot paper

Explain the importance of internal control and risk


management

45

Internal control

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

Computer systems controls

Internal control systems


Components of an internal control system

The control environment

The entitys risk assessment process

The information system

Control activities

Monitoring of controls

Examples of internal control

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

Limitations of internal control

Poor judgement in decision making


Human error
Processes being deliberately circumvented
by employees and others
Management overriding controls
The occurrence of unforeseen
circumstances

Use of internal control


systems by auditors

See below

46

General controls

Application controls

Controls over data centre and network


operations
Operating logs
Standby arrangements
Regular backup and secure storage
Virus protection/firewalls

Controls over input


Batch controls
Range/limit checks
Existence checks
Check digits
Sequence checks

System software acquisition, change


and maintenance
Physical controls
Segregation of duties
The entitys risk assessment process
The information system
Control activities
Monitoring of controls

Controls over output


Test checks
Approval of computer-generated
payments
Reconciliations of report totals to
general ledger accounts

Access security
Passwords
Dedicated terminals
Job scheduling

Passwords restricting access to


amend standing data

Regular printouts produced and


reviewed by someone in authority

Application system acquisition,


change and maintenance
Testing of new systems
Authorisation, approval and testing of
changes
Use of standard packages
Regular review of unauthorised
changes
Restricted access to application
systems documentation

Regular lists of amendments,


additions and deletions produced
and reviewed

Controls over standing data

Internal control

Use of internal control systems by auditors


Document the system - how?

Narrative notes

Flow charts

Internal control questionnaires (ICQs)

Internal control evaluation questionnaires (ICEQs)

Document the system - why?

Identify potential misstatements

Consider factors that affect the risk of material


misstatements

Design the nature, timing and extent of further audit


procedures

47

48

Tests of controls

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Describe control objectives, control procedures, activities


and tests of control in relation to:

Q6(a) Section B pilot paper

The sales (revenue) system


The purchases system
The payroll system
The cash system
The inventory system
Revenue and capital expenditure (non-current assets)
Discuss and provide examples of how the reporting of
significant deficiencies in internal control and
recommendations to overcome those significant
deficiencies are provided to management

49

Revenue

Tests of controls

Test that the control


Is properly designed
Exists, and
Has operated throughout the
period
Deviations should be recorded and
investigated regardless of amounts
involved
Assess whether deviations are isolated
departures or indicate the existence of
errors in accounting records
If results are unsatisfactory
Preliminary assessment of control
risk is not supported
Must modify nature, timing and
extent of planned substantive
procedures

Inventories

Purchases

Enquiry
Inspection of documents supporting
controls
Observation of procedures
Re-performance of the application of a
control
Testing of the control activities
performed by a computer, possibly
using CAATs
Examination of evidence of
management review

Payroll

Revenue and capital


expenditure

Bank and cash

Communication of deficiencies in internal control

Other communication by the auditor with


those charged with governance

The auditors responsibilities in relation to FS


audit
Planned scope and timing of the audit
Significant findings from the audit e.g. views
on significant accounting policies
Statement of compliance with independence
requirements

No duty to report control deficiencies to shareholders

ISA 265 Communicating deficiencies in internal control to those


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

Form of communication should be agreed at planning stage

Should be prompt and before FS finalised

Contents should first be discussed with management

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

Detailed recommendations structured:

Deficiency
Implication
Recommendation
Caveat

50

Not for external use


Not a complete list

Audit procedures and sampling

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Discuss the problems associated with the audit and


review of accounting estimates
Describe why smaller entities may have different
control environments and describe the types of
evidence likely to be available in smaller entities
Define audit sampling and explain the need for
sampling
Identify and discuss the differences between statistical
and non-statistical sampling
Discuss and provide relevant examples of, the
application of the basic principles of statistical
sampling and other selective testing procedures

Q1 Section A pilot paper

Discuss the results of statistical sampling, including


consideration of whether additional testing is required
Explain the use of computer-assisted audit techniques
in the context of an audit
Discuss and provide relevant examples of the use of
test data and audit software for the transaction cycles
and balances included in the syllabus
Discuss why auditors rely on the work of others
Discuss the extent to which auditors are able to rely
on the work of experts, including the work of internal
audit

Q8 Section A pilot paper

Discuss the audit considerations relating to entities


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

51

Audit procedures and sampling

Sampling

Computer-assisted
audit techniques

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

Required confidence level

Risk of material misstatement

Tolerable error

Expected error

Population size

Stratification
Sample selection

Random

Systematic

Haphazard

Value weighted
Evaluation of results

Nature and cause of errors?

Effect on other areas?

Anomalous?

Project monetary errors to the population

If this indicates material error is likely the auditor may:


Ask management to investigate and make adjustments
Modify nature timing and extent of further audit procedures
Consider effect on auditors report

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

52

Test data
Conducting audit procedures by entering data into an
entitys computer system, and comparing the results
obtained with pre-determined results.
Examples of tests (usually tests of controls)
Testing specific controls in computer programs
Test transactions
Integrated test facilities

Audit procedures
and sampling

Using the work of others

If the external auditor can rely on the


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

Adequacy of technical training and


proficiency

Whether properly supervised,


reviewed and documented

Sufficiency and appropriateness of


evidence

Whether conclusions are


appropriate and reports consistent
with work performed

Examples

Examples

Accounting records
Payroll
Credit control
Data entry/information processing
Auditors responsibilities

Valuations of land and buildings

Determination of inventory
quantities/condition

Legal opinions

Assess significance of
organisations activities to the
audit

Assess risk of material


misstatement and extent of control
risk

Consider whether information held


by client is sufficient

If necessary, request service


organisations auditor to perform
additional procedures, or visit to
perform tests of controls
Audit report

Examples
Allowances to reduce inventory or
receivables to their estimated realisable
value

Depreciation

Provisions

Consider whether to include any


weaknesses/irregularities
discovered by IA

Audit report

Cannot make reference to work


done by IA

Evaluate objectivity/competence
of expert

Evaluate appropriateness of
auditors experts work as
evidence
Data and assumptions
Consistency with other
evidence

Unmodified audit report

Should not refer to work of an


expert

Auditing smaller entities


Audit of accounting estimates

Auditors responsibilities

Consider any implications for the


auditors report

Whether exceptions/unusual
matters resolved
Planning, controlling and recording
Liaise with IA at all stages
Compare own results with those of
IA
Report to management

Auditors Expert

Service organisations

Internal audit

Accrued revenue
3 approaches

Review and test process used by


management

Use independent estimate for


comparison

Review of subsequent events for


evidence of reasonableness of estimate

The problem of control

Many controls relevant to large


entities neither practical nor
appropriate

Likely to have poor segregations of


duties

Management override of controls

Management should instigate


additional authorisation, arithmetical,
accounting and supervisory controls
Audit approach

Unlikely to be able to rely on controls

Focus will be on substantive


procedures

53

54

Non-current assets

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Explain the audit objectives and the audit procedures


relating to:
Tangible and intangible non-current assets:
(i)

Evidence in relation to non-current assets and

(ii)

Depreciation

(iii) Profit/ loss on disposal

Q6(b) Section B pilot paper


Q2(b) Section B pilot paper

(iv) The related profit or loss section (income


statement) entries.

55

Non-current assets

Evidence on figures in the


statement of financial
position

Tangible

Additions
Disposals
Revaluations

Depreciation
Gains/ losses on disposals
Impairments

Intangible
Development expenditure
Remember the IAS 38 criteria that require/permit
capitalisation:

56

Evidence on entries in the


statement of profit or loss

Probable future economic benefits


Intention to complete and use/sell asset
Resources adequate and available to complete
and use/sell asset
Ability to use/sell the asset
Technical feasibility of completing asset for
use/sell
Expenditure can be measured reliably

Inventory

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Explain the audit objectives and the audit procedures in


relation to:
Inventory
(i)

Inventory counting procedures in relation to yearend and continuous inventory systems

(ii)

Cut-off

(iii) Auditor's attendance at inventory counting


(iv) Direct confirmation of inventory held by third parties
(v) Valuation
(vi) Other evidence in relation to inventory.

57

Inventory

3rd party confirmations

Quantity x Value

Other evidence

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

Year end inventory counting


Before

Review working papers for previous year to identify


risks and familiarise yourself with the inventories
Determine arrangements with management in
advance
Inventories held by/for third parties what
arrangements have been made?
Review clients inventory count instructions
Investigation of differences (where inventory records
exist)
Consider the need for an expert
Determine procedures to cover a representative
selection of inventories
During

Ensure staff are following the inventory counting


instructions
Test counts from
Inventories inventory sheets and
From the inventory sheets inventories.

Note damaged, old or obsolete inventories.


Review WIP for stage of completion
Inventories held by client for third parties: ensure
excluded from count
Record the number of the last GRN and the last GDN
Form an overall impression of inventory levels
Photocopy inventory sheets
After

Check sequence of inventory sheets


Check clients computation of final figure
Trace own test count items through to final inventory
sheets
Check replies from third parties
Inform management of any problems
Follow up cut-off details
Ensure necessary adjustments to book inventories
have been made (where records are maintained).

58

Valuation

Record basis of valuation used

Test material costs


Check to individual invoices

Review company's procedures


Independence of counters

Frequency of counts

Ensure all lines covered at


least once per year

Investigation of discrepancies

Updating of records

Attend at least one of the


company's counts (to observe)

Review whole year's results


Extent of counting
Accuracy of records
Reasons for discrepancies

Perform test counts at the year end

Ensure FIFO or appropriate


basis being used

Check quantities used in


WIP/FG

Test labour costs


Check calculations to
supporting documentation

Continuous inventory

Review costing against actual


labour and production

Test application of overheads

Ensure only production


overheads included

Ensure based on normal levels


of activity

After

GRN

GRN

Included in?
Purchases
Payables
Inventories

Sales

GDN
Included in?
Sales
Receivables
Inventories

Included in?
Purchases
Payables
Inventories

Purchase

Before

GDN
Included in?
Sales
Receivables
Inventories

Sales

Purchase

Year end

59

60

Subject:

Receivables

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Explain the audit objectives and audit procedures


in relation to:
Receivables
(i)

direct confirmation of accounts receivable

(ii)

other evidence in relation to receivables and


prepayments, and

Q4(b) Section B pilot paper

(iii) the related profit or loss section (income statement)


entries

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Receivables

Statement of financial performance: receivables and prepayments


Statement of profit or loss: revenue, irrecoverable debts expense

Direct confirmation
Obtain listing of trade receivables as at the
confirmation date
Agree total to nominal ledger
Review for any obvious omissions/misstatements
by comparing this year's list with last year's
Select a sample of accounts for confirmation
Select the sample including the following balances:
Old, unpaid amounts
Credit balances
Nil balances
Material balances
Letter should be on the client's paper, signed by
the client with a copy of the current statement
attached. It should request that the reply be sent
direct to the auditor and reply paid envelopes
should be sent.
After reasonable period, send 'follow-up' request
Follow up by telephone or fax if there is no reply
No reply:
Confirmation of individual outstanding invoices
Alternative procedures
Agree opening balance on account with last
year's closing balance
Test casts
Verify outstanding items to back up
documentation
Review cash received after year end
Discuss with responsible company official

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Other evidence
GDNs pre/post year end
Analytical procedures

Correspondence with
customers/liquidators

Bank and cash

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Explain the audit objectives and the audit procedures in


relation to:
Bank and cash:
(i)

Bank confirmation reports used in obtaining


evidence in relation to bank and cash

(ii)

Other evidence in relation to bank, and

(iii) Other evidence in relation to cash.

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Related entries in the


statement of profit or loss

Bank and cash

Bank confirmation letters


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

An ongoing standing authority, or

A separate authority each time information is requested.

Bank confirmation process

A request for a bank confirmation issued on the auditors' own headed paper and
sent to the bank branch with which the client has the prime business
arrangement.
The bank confirmation request should specify:
The names of all entities covered by the request

Whether the auditor is requesting 'standard information'

Details of 'additional information' if so required


The date for which the auditor is requesting confirmation (the audit
confirmation date);

A statement that the bank's response will not create a contractual


relationship between the bank and the auditor

A statement requesting the bank to advise the auditor if the Authority is


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

A contact name and telephone number.

The bank confirmation request should reach the branch at least two weeks in
advance of the audit confirmation date.
Standard information requested

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Full title of all bank accounts in all currencies, with account numbers and
balances, including nil balances

Full title and dates of closure of all accounts closed during the period

Amounts accrued but not yet charged or credited of:


Charges
Interest

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

Particulars of any right of set-off

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

Customers assets held as security

Customers other assets held

Contingent liabilities

Bank interest

Other evidence

Bank reconciliation

Attend physical count of cash if


material.

Liabilities, capital and


directors emoluments

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Explain the audit objectives and audit procedures in


relation to:
Payables and accruals
(i)

Supplier statement reconciliations and direct


confirmation of accounts payable,

(ii)

Obtain evidence in relation to payables, accruals


and

(iii) Purchases and other expenses.


Non-current liabilities, provisions and contingencies
(i)

Evidence in relation to non-current liabilities

(ii)

Provisions and contingencies.

Q2(b) Section B pilot paper

Share capital, reserves and directors emoluments:


(i)

Evidence in relation to share capital, reserves and


directors emoluments and

(ii)

The related profit or loss section (income


statement) entries

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Liabilities, capital and


directors emoluments

Payables and accruals


Supplier statement
reconciliations
Analytical procedures
Subsequent events review
Purchases and expenses

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

Share capital
Share issues
Memo and Articles
Board minutes
Cash book receipts
Reserves
Brought forward figures
Profit/ loss for year
Dividends (board minutes, cash
book payments)
Directors emoluments
Contracts
Board minutes
Cash book payments

Not-for-profit organisations

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Apply audit techniques to small not-for-profit


organisations

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Not-for-profit organisations

Types of not-for-profit
organisations
Charities
Clubs
Societies

Comparison with audit of forprofit organisations


Risk factors

Audit evidence

Complexity and extent of regulation

Mainly substantive procedures

Significance of cash receipts


Restrictions imposed in the entity's
governing documents
Sensitivity of certain key statistics
Need to maintain adequate, but not
excessive resources
Control risk
Competence, training and qualification
of paid staff and volunteers
Segregation of duties
Reliability of accounting
systems/computer systems
Controls over compliance with laws and
regulations
Power of trustees

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Application of
audit techniques

Audit review and finalisation

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Explain the purpose of a subsequent events review


Explain the responsibilities of auditors regarding
subsequent events
Discuss the procedures to be undertaken in performing a
subsequent events review

Q11 Section A pilot paper

Define and discuss the significance of the concept of


going concern
Explain the importance of and the need for going
concern reviews
Explain the respective responsibilities of auditors and
management regarding going concern
Identify and explain potential indicators that an entity is
not a going concern
Discuss the procedures to be applied in performing
going concern reviews

Q5(b) Section B pilot paper

Discuss the disclosure requirements in relation to going


concern issues
Explain the purpose of and procedure for obtaining
written representations
Discuss the quality and reliability of written
representations as audit evidence
Discuss the circumstances where written representations
are necessary and the matters on which representations
are commonly obtained
Discuss the importance of the overall review of evidence
obtained
Discuss the procedures an auditor should perform in
conducting their overall review of financial statements
Explain the significance of uncorrected misstatements
Evaluate the effect of dealing with uncorrected
misstatements

Q3(a) Section B pilot paper

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Overall review of evidence


Audit review and finalisation
Uncorrected misstatements

Subsequent events
Accounting issue: IAS 10 Events after the reporting
period

Adjusting events provide evidence of conditions


that existed at the reporting date

Non-adjusting events indicative of conditions that


arose after the reporting date

Schedule maintained of errors identified


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

Written representations
The auditor should request written
representations:
Management fulfilled its responsibility to
prepare FS, that all transactions have been
recorded and they have approved the FS

On ISA specific disclosures (fraud, laws &


regulations, estimates, going concern,
related parties and subsequent events)

Appropriate use of accounting policies

Audit procedures

Review procedures established by client management

Read minutes of meetings

Read latest available interim accounts, budgets and forecasts

Enquire of legal counsel concerning litigation and claims

Enquire of management as to whether any subsequent events


have occurred that might affect the financial statements
Auditors duties

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


engagement)

Discuss letter with client first

Usually signed by senior executive officer


and senior financial officer on behalf of board

Should be minuted

Up to date of auditors report


Perform procedures
After report but before FS issued, if auditor becomes aware of
a fact that may materially affect the FS:
Discuss with management

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Procedures

If management does not amend FS, and audit report has


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

After FS issued, if auditor becomes aware of a fact that


existed at the date of the audit report and, if known then, might
have caused the auditor to modify the report :
Discuss with management

If management issue revised accounts, issue new


auditors report, referring to previous report

If management do not take appropriate action, auditor


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

Dated after all other audit work completed


but before signing of the auditors report
If the client refuses to sign

Auditor should write letter setting out his


understanding and ask for management
confirmation.

If management does not reply, auditor should


follow up to ascertain that his understanding
is correct.

If management refuses to provide a


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

Going concern

Under the going concern assumption, an entity is ordinarily viewed


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

Audit procedures
Analysing and discussing forecasts with directors
Analysing and discussing latest available interim financial
statements
Reviewing terms of loans agreements
Reading minutes of meetings of shareholders, those charged with
governance and relevant committees for reference to financial
difficulties
Enquiring of the entitys lawyers about the existence of litigation or
claims
Confirming the existence and enforceability of arrangements with
third parties to provide financial support
Considering the entitys plans to deal with unfulfilled orders
Reviewing events after balance sheet date to identify those that
either mitigate or otherwise affect the entitys ability to continue as
a going concern.
Auditors report (chapter 19)
Going concern assumption appropriate but a material uncertainty
exists unqualified opinion with emphasis of matter
Inadequate disclosure qualified or adverse opinion
Going concern assumption inappropriate (and management have
used going concern basis) adverse opinion
Management unwilling to make or extend its assessment may
amount to insufficient evidence and a modified opinion

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72

Reports

How have the syllabus learning outcomes been examined?


Syllabus learning outcomes

Example past paper questions

Identify and describe the basic elements of the


auditors report
Explain unmodified audit opinions in the auditors report
Explain modified audit opinions in the audit report

Q3(b) Section B pilot paper

Describe the format and content of emphasis of matter


and other matter paragraphs

Q9 Section A pilot paper

Discuss the reporting implications of the findings of going


concern reviews

73

Reports

Audit reports

Standard Report
Unmodified opinion

Changes to the
audit reports

Unmodified opinions with


additional communication

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

Other
matters
paragraph

Modified on matters that do affect


the auditor's opinion

Insufficient or
inappropriate audit
evidence

Material but
not pervasive
Qualified
'except for'
(Eg 5)

74

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

Material misstatement

Material but not


pervasive
Qualified
'except for'
(Eg 3)

Material and
pervasive
Adverse
'. do not give
a true and fair view'
(Eg 4)

Going concern

Auditors report
Going concern assumption appropriate but a material uncertainty
exists unqualified opinion with emphasis of matter
Inadequate disclosure qualified or adverse opinion
Going concern assumption inappropriate (and management have
used going concern basis) adverse opinion
Management unwilling to make or extend its assessment may
amount to insufficient evidence and a modified opinion

75

Example 1
Basic Unmodified Report
INDEPENDENT AUDITOR'S REPORT
(APPROPRIATE ADDRESSEE)
Report on the Financial Statements
We have audited the financial statements of ABC company, which comprise the statement of
financial position as at 31 December, 20X1, and the statement or profit or loss, statement of
changes in equity and statement of cash flows for the year then ended, and a summary of
significant accounting policies and other explanatory information.
Management's responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements
in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
Auditors responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with International Standards on Auditing. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor's
judgement, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion the financial statements present fairly, in all material respects, (or give a true and
fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) its financial
performance and its cash flows for the year then ended in accordance with International Financial
Reporting Standards.

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Report on Other Legal and Regulatory Requirements


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

Example 2
Emphasis of matter paragraph
We draw attention to Note X to the financial statements which describes the uncertainty related to the
outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not qualified in
respect of this matter.

Example 3
Qualified opinion due to material misstatement of inventories
Basis for qualified opinion
The companys inventories are carried in the statement of financial position at xxx. Management has not
stated inventories at the lower of cost and net realisable value but has stated them solely at cost, which
constitutes a departure from International Financial Reporting Standards. The companys records
indicate that had management stated the inventories at the lower of cost and net realisable value, an
amount of xxx would have been required to write the inventories down to their net realisable value.
Accordingly, cost of sales would have been increased by xxx, and income tax, net income and
shareholders equity would have been reduced by xxx, xxx and xxx, respectively.
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph,
the financial statements present fairly, in all material respects, (or give a true and fair view of) the
financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and its
cash flows for the year then ended in accordance with International Financial Reporting Standards.

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Example 4
Adverse opinion due to material misstatement with a pervasive effect
Basis for adverse opinion
As explained in Note X, the company has included houses built for resale (including related land) at a
cost of $X as non-current assets and depreciated them at a rate of X%, resulting in depreciation of $X.
Under International Financial Reporting Standards, these should have been included as inventory in the
financial statements and no depreciation should have been provided in respect of these. The carrying
value of houses represent 90% of the companys total assets and the companys records indicate that
[explanation of the effect on amounts presented in the financial statements].
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion
paragraph, the financial statements do not present fairly (or do not give a true and fair view of) the
financial position of ABC Company as at December 31, 20X1, and (of) their financial performance and
their cash flows for the year then ended in accordance with International Financial Reporting Standards.

Example 5
Qualified opinion due to inability to obtain sufficient appropriate audit evidence about the carrying
amount of inventory (material but not pervasive)
Basis for qualified opinion
With respect to inventory having a carrying amount of $X the audit evidence available to us was limited
because we did not observe the counting of the physical inventory as at 31 December 20X1, since that
date was prior to our appointment as auditor of the company. Owing to the nature of the companys
records, we were unable to obtain sufficient appropriate audit evidence regarding the inventories
quantities by using other audit procedures.
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion
paragraph, the financial statements present fairly, in all material respects, (or give a true and fair view of)
the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and
its cash flows for the year then ended in accordance with International Financial Reporting Standards.

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Example 6
Disclaimer of opinion due to inability to obtain sufficient appropriate audit evidence about multiple
elements of the financial statements
Basis for disclaimer of opinion
We were not appointed as auditors of the company until after December 31, 20X1 and thus did not
observe the counting of physical inventories at the beginning and end of the year. We were unable to
satisfy ourselves by alternative means concerning the inventory quantities held at December 31, 20X0
and 20X1 which are stated in the statement of financial position at xxx and xxx, respectively. In addition,
the introduction of a new computerised accounts receivable system in September 20X1 resulted in
numerous errors in accounts receivable. As of the date of our audit report, management was still in the
process of rectifying the system deficiencies and correcting the errors. We were unable to confirm or
verify by alternative means accounts receivable included in the statement of financial position at a total
amount of xxx as at December 31, 20X1. As a result of these matters, we were unable to determine
whether any adjustments might have been found necessary in respect of recorded or unrecorded
inventories and accounts receivable, and the elements making up the income statement, statement of
changes in equity and statements of cash flows.
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion. According, we do not express an opinion on the financial statements.

79

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Appendices

81

82

Appendix A: Relevant articles/study support videos


Articles/study support videos that provide further insight into the F8 syllabus
are available on the ACCA website at:
http://www.accaglobal.com/uk/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f8/technicalarticles.html
The attached list of articles/ study support videos has been compiled to provide you with some structure during the
home study phase of your revision and includes the most recent, or more important, articles/ study support videos.
Article

Author

The audit of wages


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

Member of
the FAU
examining
team

The control environment of a company


This article provides candidates with a more detailed appreciation of the auditors need
to evaluate the effectiveness of a companys control environment.

Member of the
audit examining
team

ISA 315 (Revised)


This article reminds us about the different elements of an entitys internal control
system and the need for the external auditor to consult with the internal audit function in
order to get a better understanding of the entitys internal control system.

Raymond
Wong

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

Vijaya
Swaminathan

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

Steve Collings
(Assessor for
Paper F8)

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

Pami Bahl
(F8 examiner)

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

Steve Collings
(Assessor for
Paper F8)

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

Steve Collings

Specific aspects of auditing in a computer based environment


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

Brian Pine

A matter of opinion
This article looks at the auditors opinion on the financial statements.

Simon Finlay

IAS 330 and responses to assessed risk

Martyn Jones

Examiners approach F8
This article considers the examiners approach to the Paper F8 exam and aims to
recognise a change in examiner with effect from the June 2010 exam

Pami Bahl
(New F8
examiner)

Read?

83

Appendix B: Verbs used in question requirements


Advise
Analyse
Calculate/compute
Compare and contrast
Define
Describe
Discuss
Distinguish
Evaluate
Explain
Identify
Interpret
Justify
List
Prepare
Recommend
Summarise

84

To counsel, inform or notify


Examine in detail the structure of
To ascertain or reckon mathematically
Show the similarities and/or differences
Give the exact meaning of
Communicate the key features of
To examine in detail by argument
Highlight the differences between
To appraise or assess the value of
Make clear or intelligible/state the meaning of
Recognise, establish or select after consideration
Process information to explain its meaning
To produce reasons in support of
State short pieces of information on separate lines
To make or get ready for use
To advise on a course of action
To express the most important facts of

Appendix C: Specimen paper

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BPP House, Aldine Place, London W12 8AA


Tel: 0845 0751 100 (for orders within the UK)
Tel: +44 (0)20 8740 2211
Fax: +44 (0)20 8740 1184
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