Notes
ACCA Paper F8 (INT)
Audit and Assurance
For exams in 2012
   

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ExPress Notes
   
ACCA F8 (INT) Audit and Assurance

Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Audit Reports Ethics Auditor Appointment Audit Letters Audit Risk Internal Control Internal Control & Audit in a Computer Environment Internal Audit Audit Evidence Inventory Subsequent Events Going Concern Corporate Governance

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7 12 15 19 23 26 29 32 34 37 40 43 46

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© 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

 

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ExPress Notes
   
ACCA F8 (INT) Audit and Assurance

START About ExPress Notes
We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials:     The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

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© 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

 

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ExPress Notes
 
ACCA F8 (INT) Audit and Assurance

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© 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

 

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The night before the real exam Read through the ExPress notes in full. Individuals may reproduce this material if it is for their own private study use only.g.   theexpgroup. especially if the notes are very big. These course materials are for educational purposes only and so are necessarily simplified and summarised. You must avoid these! Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow. Highlight the bits that you think are important but you think you are most likely to forget. key workings. Read through the technical articles written by the examiner. or ExPedite notes Avoid reading through your notes again. Give up on any areas that you still don’t understand. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue. ExP recommended exam kit This is your most important tool at this stage. Avoid looking at them in detail. Don’t touch it! ACCA online past exams ACCA F8 (INT) Audit and Assurance Work through the ExPress notes again. Unless there are specific bits that you feel you must revise. focusing on areas you’ve highlighted. At the door of the exam room before you go in. Read through some other older ones. approaches to exam questions. Download the two most recent real exam questions and answers.com   . It will scare you. avoid looking at your course notes. reading notes or listening to CDs). Leave at home.ExPress Notes     Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes. Page | 5 © 2012 The ExP Group. Try to see if there are any recurring criticisms he or she makes. Passive revision tends to be a waste of time. Refer to our full terms and conditions of use. It’s too late now. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them. No liability for damage arising from use of these notes will be accepted by the ExP Group. Read quickly through the full set of ExPress notes. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand. Read through the two most recent examiner’s reports in detail. You pass real exams by passing mock exams. Don’t be tempted to fall into “passive” revision at this stage (e. etc. Leave at home.

the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. Reproduction by any means for any other purpose is prohibited. through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses.com.theexpgroup. As well as courses for ACCA and other professional qualifications.com and for any specific enquiries please contact us at info@theexpgroup.ExPress Notes     Our ExPress notes fit into our portfolio of materials as follows: ACCA F8 (INT) Audit and Assurance Notes Provide a base understanding of the most important areas of the syllabus only. Our clients range from multinational household corporate names. Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions.theexpgroup.com   . START About The ExP Group Born with a desire to be the leading supplier of business training services. Notes Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses Notes Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes. Full details about us can be found at www. Always obtain expert advice on any specific issue. Individuals may reproduce this material if it is for their own private study use only. Page | 6 © 2012 The ExP Group.   theexpgroup. To maximise your chances of success in the exam we recommend you visit www. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use.com where you will be able to access additional free resources to help you in your studies. our portfolio of expertise covers all areas of financial training ranging from introductory financial awareness courses for non-financial staff to high level corporate finance and banking courses for senior executives. No liability for damage arising from use of these notes will be accepted by the ExP Group.

Individuals may reproduce this material if it is for their own private study use only. After all. it is perhaps that much easier to hit the target! Exam questions relating to audit reports occur on a regular basis and so this should be seen as a fairly high priority area in your studies. and 2. Whether the financial statements have been ‘properly prepared’ in accordance with any relevant professional recommendations and/or statutory provisions.   theexpgroup.com   . No liability for damage arising from use of these notes will be accepted by the ExP Group. The auditors must report their opinion in respect of two main issues: 1. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. it is perhaps important to give it consideration at a fairly early stage in your studies. whereby you are asked to recommend an appropriate form of report to be issued based on a given client scenario. Although the auditor’s report is produced after all the detailed field work has been completed. Reproduction by any means for any other purpose is prohibited. Whether the financial statements give a ‘true and fair view’ (or present fairly in all material respects) the company’s financial position and performance. if you know exactly what you are aiming at. These course materials are for educational purposes only and so are necessarily simplified and summarised. Page | 7 © 2012 The ExP Group. Such questions may be purely knowledge based or of a more practical nature.ExPress Notes     Chapter 1 ACCA F8 (INT) Audit and Assurance Audit Reports START Big Picture The one thing all statutory audits of limited liability companies have in common is that at the end of the day an independent auditor has to issue a report to the shareholders as the owners of the company.

the examiner may give you a draft audit report and ask you to identify and explain in what respects the report is not satisfactory. These course materials are for educational purposes only and so are necessarily simplified and summarised. Title 2.000. such modification may or may not result in the auditors giving a qualified opinion. in that a standard benchmark would be to consider an item impacting on PBT as being material if it is in the range of 5% to 10% of such PBT. It is important to remember that modification of the audit report will only be required if there is some material issue. Introductory paragraph 4. Refer to our full terms and conditions of use. Page | 8 © 2012 The ExP Group. Statement of responsibilities of management 5. let us say you are given the information that a company’s profit before tax (PBT) is $1.   theexpgroup. Date of report 10. Opinion 8. Auditor’s signature 9.000 and that the company has failed to make provision for a known bad debt of $150. Auditor’s address KEY KNOWLEDGE Modified Audit Reports The standard audit report may be modified. Addressee 3.000. For example. Statement of responsibilities of the auditors 6.com   . With the practical type of question always make sure that you use any information available in the scenario to help you assess materiality in a sensible way. Reproduction by any means for any other purpose is prohibited. vague references to the fact that you would ‘consider materiality’ will NOT impress the examiner.ExPress Notes   ACCA F8 (INT) Audit and Assurance   Alternatively. State the obvious by saying that at 15% of PBT the bad debt is material. No liability for damage arising from use of these notes will be accepted by the ExP Group. KEY TERMINOLOGY ISA 700 The Auditors Report on Financial Statements identifies the key elements of the auditor’s report (these must be learned and you should be prepared to give a brief explanation of the purpose of each element): 1. Scope paragraph 7. Individuals may reproduce this material if it is for their own private study use only. Always obtain expert advice on any specific issue.

No liability for damage arising from use of these notes will be accepted by the ExP Group.ExPress Notes   ACCA F8 (INT) Audit and Assurance   It is also important when assessing materiality to remember that this must be considered so far as the user and not the preparer of financial statements is concerned. This paragraph will be ‘self-contained’ and will NOT otherwise impact on the standard wording of an unmodified report.. that you are totally happy with this aspect of audit reports. These course materials are for educational purposes only and so are necessarily simplified and summarised.’ Past examiners’ reports have indicated that many candidates have been unclear as to how and when to make proper use of an emphasis of matter paragraph. therefore. A useful working definition of materiality may be taken as ‘transactions and other events are likely to be seen as material in the context of a company’s financial statements if their omission. The auditor achieves this by including in the audit report an additional paragraph known as an ‘emphasis of matter’ paragraph. Examples of where the use of such paragraph would be appropriate include:  where there the financial statements have been prepared on a going concern basis. Always obtain expert advice on any specific issue.’ KEY KNOWLEDGE Modified Audit Reports with Unqualified Opinion Sometimes there may be matters relating to the financial statements which. Refer to our full terms and conditions of use..  Page | 9 © 2012 The ExP Group. misstatement or non-disclosure would matter to a proper understanding of such financial statements on the part of a potential user. It is important. whilst fully and adequately disclosed within the financial statements. but this is dependent upon some significant uncertainty which is fully and adequately disclosed in the notes to the financial statements where there is a material inconsistency between the financial statements and the Directors’ Report and the adjustment required to remove the inconsistency would need to be made in the Director’s Report but the directors are not prepared to make such adjustment. Key points to remember in relation to the use of such paragraph are:    it should have a separate heading it should be positioned AFTER the opinion paragraph it must be made clear that the audit opinion is not qualified and so this paragraph should start with words such as ‘Without qualifying our opinion we draw attention to . Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited.. the auditor considers worthy of bringing to the particular attention of users.com   .   theexpgroup.

Reproduction by any means for any other purpose is prohibited. The type of qualified opinion to be given will depend not just on the circumstances as indicated above.   theexpgroup. 2. The circumstances giving rise to a qualified audit opinion should be described in a separate paragraph which appears BEFORE the opinion paragraph. whereas if it is because of disagreement. that is to say that the limitation on scope or disagreement is confined to one particular aspect of the financial statements. Always obtain expert advice on any specific issue. the auditor should quantify the qualification circumstances as this should make it easier for the reader to appreciate its significance. Limitation on scope which arises where the auditor has been unable to carry out some audit work which normally they would have expected to perform and/or where the circumstances are such that audit evidence which the auditor would normally expect to be available for some reason does not exist. Refer to our full terms and conditions of use. In such situation if it is caused by limitation on scope. Disagreement exists between the auditors and client management in relation to some aspect of the financial statements. such that the auditor is able to say that ‘except for’ this matter the financial statements give ‘a true and fair view etc’.com   . Material but not pervasive. Page | 10 © 2012 The ExP Group. the auditor should give a Disclaimer of Opinion. Individuals may reproduce this material if it is for their own private study use only. These course materials are for educational purposes only and so are necessarily simplified and summarised. Wherever possible. 2. that is to say that the nature of the limitation on scope or disagreement is such that it will impact on the overall view given by the financial statements. Material and pervasive. there are two main circumstances which might give rise to the auditors deciding that is necessary for them to qualify their audit opinion: 1. but also on how serious the limitation on scope or disagreement is namely is it: 1. they should give an Adverse Opinion. No liability for damage arising from use of these notes will be accepted by the ExP Group.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Modified Audit Reports with Qualified Opinion According to ISA 700.

Individuals may reproduce this material if it is for their own private study use only.ExPress Notes   ACCA F8 (INT) Audit and Assurance   SUMMARY DIAGRAM OF APPROACH TO PRACTICAL AUDIT REPORT QUESTIONS Page | 11 © 2012 The ExP Group.com   . Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use.   theexpgroup. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group.

Always obtain expert advice on any specific issue. Individuals may reproduce this material if it is for their own private study use only. Page | 12 © 2012 The ExP Group. you must always go back to basics and apply the fundamental principles. it must be seen as a key area for your studies.com   . It is important to appreciate that ACCA have adopted a principles based approach to ethics so whilst there are specific recommendations in some areas (which must be learned) if you are faced with a practical question where you are not aware of any specific guidance having been issued. No liability for damage arising from use of these notes will be accepted by the ExP Group. Whilst not necessarily appearing as a question every time in the real exam. Refer to our full terms and conditions of use.ExPress Notes     Chapter 2 ACCA F8 (INT) Audit and Assurance Ethics START Big Picture Ethics is at the heart of the ACCA examination syllabuses featuring to a greater or lesser extent in over half of the papers that you take on route to qualification as a Chartered Certified Accountant.   theexpgroup. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. The fundamental principles of professional ethics as outlined by IFAC have been adopted by ACCA and must be learned. Of particular importance to the auditor are the provisions relating to auditor independence.

No liability for damage arising from use of these notes will be accepted by the ExP Group. Whilst such threats apply generally. in both their private and business life. Technical (professional) competence and due care must be exercised by all members at all times. Individuals may reproduce this material if it is for their own private study use only. Professional behaviour must be demonstrated by members at all times.com   . Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised. so as not to be seen to take any action which might bring the profession into disrepute. Reproduction by any means for any other purpose is prohibited. Confidentiality requires that under normal circumstances members should at all times respect confidentiality with regard to a client’s affairs so far as third parties are concerned and that members should not make use of client information for personal gain. Integrity requires that members are always honest and do not knowingly allow themselves to be associated with anything dishonest so far as others are concerned.   theexpgroup. they are particularly relevant when considering the question of auditor independence. he must always be clearly seen to have been independent in practice. It is always worth remembering the following “It will never be sufficient for an auditor to claim that he was independent in fact. KEY KNOWLEDGE Threats to Ethical Behaviour The ACCA Code of Ethics recognises a number of threats to a member’s ethical professional behaviour. You might like to use TOPIC as a useful mnemonic to help you remember these principles.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY TERMINOLOGY The fundamental principles of professional ethics as outlined in the IFAC Code of Ethics is a very important TOPIC. Refer to our full terms and conditions of use.” The five threats are: Page | 13 © 2012 The ExP Group. Members have a responsibility to act in accordance with best practice and to keep themselves technically up to date. Objectivity must be demonstrated by not allowing personal interest or influence of others to effect a member’s professional judgement.

g. 3. acting as auditor to a company where a close relative is the CEO Intimidation – e. general safeguards may be seen as being:   Those created by the ACCA e. requirement for potential members to complete an ethics module Those created by members themselves e. Always obtain expert advice on any specific issue. Additionally. Refer to our full terms and conditions of use. 2.g. a professional firm must establish its own formalised procedures for the identification and management of such threats. 4. Individuals may reproduce this material if it is for their own private study use only.g.g. owning shares in a client company Self-review – e. providing accounting services to an audit client Familiarity – e. Self-interest . These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited.com   .g. No liability for damage arising from use of these notes will be accepted by the ExP Group.g.e. acting on a client’s behalf in negotiations to raise new finance for the company ACCA F8 (INT) Audit and Assurance Safeguards against threats As part of its quality control procedures. Advocacy – e. ensuring that CPD requirements are met Page | 14 © 2012 The ExP Group.g. continuing to act as auditor to a company which has started legal proceedings against the audit firm 5.ExPress Notes     1.   theexpgroup.

tends to take this as an example of good practice generally! You need to be aware of provisions relating to:      Appointment of auditors Auditors’ rights Auditors’ duties Auditors’ resignation Removal of auditors Page | 15 © 2012 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised.com   .   theexpgroup. Refer to our full terms and conditions of use. you are not required to have a knowledge of any specific company law requirements relating to auditors. No liability for damage arising from use of these notes will be accepted by the ExP Group. it should be borne in mind that your examiner is also examiner for the UK variant. and being UK based whilst not requiring specific knowledge of UK legislation. Always obtain expert advice on any specific issue. However. Individuals may reproduce this material if it is for their own private study use only.ExPress Notes     Chapter 3 ACCA F8 (INT) Audit and Assurance Auditor Appointment START Big Picture In that you are taking the International variant of Paper F8. Reproduction by any means for any other purpose is prohibited.

usual matters covered being rights to:      have access to all company books.   theexpgroup. Refer to our full terms and conditions of use.com   .ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Appointment of Auditors Key points to note are:      Normally made by members at company’s AGM Often provision made for initial appointment to be made by directors. Reproduction by any means for any other purpose is prohibited. who may also fill a casual vacancy Under corporate governance provisions approval of audit committee required If previous auditors. records etc at all times obtain all information and explanations considered necessary from company management and staff receive notice of. where not. ‘professional clearance’ should be obtained Before accepting nomination auditors should consider quality control matters such as independence. These course materials are for educational purposes only and so are necessarily simplified and summarised. potential conflicts of interest. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only. to attend and be heard at all general meetings of the company on matters relating to the financial statements and/or their own appointment to resign and request directors to convene GM of company where there are ‘surrounding circumstances’ connected with the resignation to make representations to shareholders where there is attempt to remove them from office with which they do not concur Page | 16 © 2012 The ExP Group. professional competence etc KEY KNOWLEDGE Auditor Rights Often provided under local statute. Always obtain expert advice on any specific issue. sort of thing that should be covered by engagement letter.

Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group. Taking UK provisions as an example therefore. the auditors may request the directors to convene a GM so that the members may have the opportunity of questioning them further  Page | 17 © 2012 The ExP Group. Always obtain expert advice on any specific issue. but main duties and responsibilities would normally be seen as being:  to report to shareholders whether financial statements give a true and fair view and have been properly prepared in accordance with relevant legislation and/or relevant accounting standards to consider implications for audit reporting on financial statements of consistency of ‘other financial information’ published together with the financial statements to review and report on effectiveness of company’s internal control systems under corporate governance /stock exchange provisions in the case of listed companies to qualify audit opinion where necessary to provide proper notice on resignation to detect material fraud and other irregularities to maintain independence       KEY KNOWLEDGE Auditors’ Resignation The main concern here is that auditors should not be able to just ‘fade away quietly’ in order to avoid an awkward situation. Refer to our full terms and conditions of use. leaving shareholders and others who place reliance upon their work.com   . the key points are:   auditors must deposit formal written notice of their resignation at the company’s registered office such notice must be accompanied by a positive/negative statement as to whether in their opinion there are any surrounding circumstances requiring communication to the members or loan creditors of the company where there are surrounding circumstances. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited.   theexpgroup. in the dark about important issues of which the auditors are aware.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Auditors’ Duties Once again may vary from country to country.

No liability for damage arising from use of these notes will be accepted by the ExP Group. if they wish to contest.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Removal of Auditors Once again we can take the UK provisions as being a good example of good practice:   special notice must be given of the resolution proposing a change in auditors auditors must be notified of resolution and. Refer to our full terms and conditions of use. have the right. at the company’s expense.   theexpgroup. to pre-circularise their representations to the members as to why they should remain in office at the meeting auditors may again put forward their position before the vote takes place removal will require the passing of an ordinary resolution (simple majority)   Page | 18 © 2012 The ExP Group. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only.com   . These course materials are for educational purposes only and so are necessarily simplified and summarised.

In the case of the Management Representation letter on occasions the examiner has asked what action the auditor should take if client management refuse to provide such letter. Engagement letter 2. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use. You should also give some thought in your studies to situations where the auditors communicate with third parties seeking direct confirmation from them as part of the process of gathering audit evidence. Management letter 3. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. principally from: Page | 19 © 2012 The ExP Group. Management representation letter Whilst it is highly unlikely that you would ever be asked to reproduce one of these letters in full.com   . These are: 1.   theexpgroup. It is possible that you might be asked to produce an extract from one of these letters. it is quite common to find a question on one or other of them where you are to explain its nature and purpose and to perhaps outline its typical main contents. Individuals may reproduce this material if it is for their own private study use only.ExPress Notes     Chapter 4 ACCA F8 (INT) Audit and Assurance Audit Letters START Big Picture There are a number of what we might call standard audit situation letters through which the auditors will communicate with those responsible for corporate governance within a client company.

Frequency At commencement of any new audit assignment following prior discussion and agreement of terms of engagement with client management.   theexpgroup. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. 3. Helps to avoid future misunderstanding about mutual roles and responsibilities. 2.com   . In practice new engagement letter is usually sent if significant changes in composition of client senior management.ExPress Notes     1. 5. These course materials are for educational purposes only and so are necessarily simplified and summarised. 6. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited. 4. Content Typical content of an audit engagement letter would include reference to the following:                Audit objectives Management responsibilities Relevant legislation Relevant professional standards Audit procedures Liaison with internal audit Risk assessment Use of experts Auditor access rights Auditor/client communications Deadlines Reporting format Fee basis Dispute settlement procedures Request for confirmation Page | 20 © 2012 The ExP Group. Thereafter new engagement letter should be sent whenever terms are materially varied. Banks Customers Suppliers Selling agents Consignees Legal representatives ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Engagement Letter Purpose Serves as a contractual agreement between the auditor and client. Individuals may reproduce this material if it is for their own private study use only.

Such weaknesses may be: 1. Reproduction by any means for any other purpose is prohibited. but usually it will be produced on an annual basis.   theexpgroup. Content Normal content of such letter would include:      Details of material weaknesses identified Identification of possible consequences of such weaknesses Auditors’ recommendations to eliminate weaknesses Caveat Disclaimer KEY KNOWLEDGE Management Representations Letter Purpose The main purposes of such letter may be seen as:  It serves as a useful reminder to management that it is their responsibility to produce financial statements giving a true and fair view and complying with relevant regulations and standards To provide audit evidence where no alternative sources may be available To comply with best practice   Page | 21 © 2012 The ExP Group.com   . Frequency Whenever it is considered necessary by the auditor. Always obtain expert advice on any specific issue. or 2.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Management Letter Purpose To report to management where the auditor has identified weaknesses in the company’s internal control systems. These course materials are for educational purposes only and so are necessarily simplified and summarised. Inherent weaknesses identified by the auditor when initially evaluating the client’s control systems. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only. Weaknesses identified where the auditor’s tests of control reveal that a system is not working as intended. Refer to our full terms and conditions of use.

If management still not prepared to provide. where knowledge of such facts is confined to management Confirmation of directors’ estimates and judgement used in the preparation of the financial statements ACCA F8 (INT) Audit and Assurance Steps to be taken if directors refuse to provide representation letter 1. 2. 4. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue.com   . Reproduction by any means for any other purpose is prohibited. If auditor feels that there is insufficient audit evidence without management representations should consider possibility of qualifying audit opinion on grounds of limitation on scope. Content Typical content will include the following:     Confirmation of directors responsibilities for financial statements Confirmation that all necessary information and explanations have been provided to the auditors Confirmation of facts. Discuss with management reasons for refusal and try to resolve any contentious area. 3. Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use.ExPress Notes     Frequency Management representations will have been obtained at various stages during the conduct of the audit. If not prepared to do this. No liability for damage arising from use of these notes will be accepted by the ExP Group. consider whether any further audit work required. ask if they would be prepared to minute acceptance of auditors’ version.   theexpgroup. but the formal documentation of these should be obtained on an annual basis. as close as possible to the signing off of the audit report. Page | 22 © 2012 The ExP Group.

  theexpgroup.com   . Not surprisingly. These course materials are for educational purposes only and so are necessarily simplified and summarised. then mere identification may start the mark earning process. but will not get you all of the marks on offer as you must state clearly why it is a risk. whilst others have asked you to identify risks relating to a given scenario. Some questions in the past have given marks simply for giving appropriate definitions for key terms. risk related questions have been and are likely to continue to be a regular feature in the exams. an auditor must as part of his assessment of a client’s internal control systems consider the risks to which a client’s business is exposed and the extent to which there maybe some material misstatement in the client’s financial statements as a consequence of not identifying and managing such risks in an appropriate manner. Refer to our full terms and conditions of use.ExPress Notes     Chapter 5 ACCA F8 (INT) Audit and Assurance Audit Risk START Big Picture As noted elsewhere. On the practical questions it is important to note carefully the verb used by the examiner in the question requirement. Reproduction by any means for any other purpose is prohibited. Page | 23 © 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. if you are asked to explain the risks. Always obtain expert advice on any specific issue. On the other hand. then mere identification will get you the marks. If you are asked to list the risks that you can see in the scenario. No liability for damage arising from use of these notes will be accepted by the ExP Group. Consideration of risk is therefore to be seen as an integral part of a modern day audit.

com   . No liability for damage arising from use of these notes will be accepted by the ExP Group. Always obtain expert advice on any specific issue. they are what they are. Sampling risk – eg. if an auditor gave an unqualified opinion. Eg. before giving consideration to any internal controls that may have been established. if the auditor selects too small a sample size. Page | 24 © 2012 The ExP Group. without the need for collusion. These course materials are for educational purposes only and so are necessarily simplified and summarised. Audit risk is seen as being made up of 3 elements: AUDIT RISK = INHERENT RISK x CONTROL RISK x DETECTION RISK The auditor must assess inherent risk and control risk but cannot influence them. The only element which the auditor can influence directly is detection risk. Individuals may reproduce this material if it is for their own private study use only. then shareholders and others placing reliance on this report in making economic decisions relating to their dealings with the company might suffer financial loss. in a high tech company there is high risk of obsolescent inventory which if not recognised could result in a material overstatement of both profits and asset values. if there is not effective segregation of duties then there is a much higher risk of employee fraud. Refer to our full terms and conditions of use. Eg. Detection risk is the risk that the auditor’s tests and enquiries will fail to detect material errors or misstatements in the transactions and balances reflected in the client’s financial statements. Inherent risk is the risk that there may be material errors or misstatements in the client’s financial statements.   theexpgroup. resulting in the auditor reaching an invalid conclusion about that population.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY TERMINOLOGY AUDIT RISK is very simply the overall risk that the auditor gives an inappropriate audit opinion in his report. Eg. which he must do in order to have overall an acceptable level of audit risk. Eg the detection risk is always greater with a new client because the auditors have had less time to build up their knowledge and understanding of the client’s business and the risks to which it is exposed. Detection risk is seen to include the elements of: 1. Control risk is the risk that the client’s internal control systems will fail to prevent or detect material errors or misstatements. when in fact the company was not a going concern. Reproduction by any means for any other purpose is prohibited. it may not be representative of the population from which it is drawn. going undetected.

Financial risk – eg. Compliance risk – eg.com   . Operational risk – eg. Business risk is to a large extent tied up with the fundamental accounting assumption of going concern. if client management were to deliberately provide the auditor with misleading information and explanations. These course materials are for educational purposes only and so are necessarily simplified and summarised. Business risk = foreign exchange losses reduce company’s profitability 2. Always obtain expert advice on any specific issue. No liability for damage arising from use of these notes will be accepted by the ExP Group. Refer to our full terms and conditions of use. Audit risk = overstatement of profit if foreign exchange losses are not properly recognised Page | 25 © 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Business risk is the risk that a company will fail to meet its strategic objectives or that the policies adopted will be inappropriate. Reproduction by any means for any other purpose is prohibited. shortage of essential raw materials for manufacturing process 2. So if the question scenario makes it clear that the company is trading in different currency zones then: 1. Non-sampling risk – is any other risk that might result in the auditor arriving at the wrong audit conclusion eg. Business risk may also be seen as being made up of 3 main elements: 1. foreign exchange losses when trading internationally 3. From an exam point of view it is important not to confuse audit risk with Business Risk. payment of fines for breach of anti-pollution legislation ACCA F8 (INT) Audit and Assurance It is important to note carefully the question requirement as to what type of risk you have been asked to consider when analysing a given scenario.ExPress Notes     2.   theexpgroup.

  theexpgroup. Always obtain expert advice on any specific issue. as always. with all that this would imply in terms of the knowledge. with all that this would imply in terms of the general and application internal controls that you would expect to be in place and the extent to which you would consider making use of CAATs in your audit work. That you work for a large professional firm of accountants.   Page | 26 © 2012 The ExP Group. the client’s system of internal control is very much one of the foundation stones upon which the audit is based. In terms of practical questions. with all that this would imply in terms of the formalised internal control systems you could expect to be in place.com   . Not surprisingly therefore in almost every exam you are likely to find that your knowledge and understanding of some aspect of internal control will be tested. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use. Individuals may reproduce this material if it is for their own private study use only.ExPress Notes     Chapter 6 ACCA F8 (INT) Audit and Assurance Internal Control START Big Picture In practice. experience and resources you would expect to be available to you. That the client has a computerised accounting system. read the question scenario carefully. but in the absence of any clear indication to the contrary. the following assumptions should normally be applied:  You are dealing with the audit of a large limited liability company. you should. Reproduction by any means for any other purpose is prohibited.

These course materials are for educational purposes only and so are necessarily simplified and summarised.   Page | 27 © 2012 The ExP Group. This in turn has led to auditors more frequently adopting a risk based approach to auditing. Reproduction by any means for any other purpose is prohibited. Thus. by stating that internal control consists of “the policies. This includes safeguarding the assets from inappropriate use or from loss and fraud and ensuring that liabilities are identified and managed. and also with internal policies with respect to conduct of business. 4. organises and directs the performance of sufficient actions to provide reasonable assurance that objectives and goals will be achieved. Individuals may reproduce this material if it is for their own private study use only. The control environment The entity’s risk assessment process The information system Control activities Monitoring of controls The IIA have provided the following useful definition: “An internal control is any action taken by management to enhance the likelihood that established objectives and goals will be achieved. Always obtain expert advice on any specific issue. 3. control is the result of proper planning. operational. the many corporate scandals and the current world-wide economic recession that nowadays an integral part of any effective internal control system is that it should include an effective system for risk identification and risk management.ExPress Notes   ACCA F8 (INT) Audit and Assurance   It should also be noted carefully that in the light of recent developments in corporate governance frameworks.com   . 5. processes. KEY TERMINOLOGY ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment states that there are 5 components of internal control: 1. Help ensure compliance with applicable laws and regulation. compliance and other risks to achieving the company’s objectives. financial. Management plans. tasks. organising and directing by management. 2. Help to ensure the quality of internal and external reporting. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.” The UK Turnbull report gives us a useful summary of the main purposes of an internal control system. behaviour and other aspects of a company that taken together:  Facilitate its effective and efficient operation by enabling it to respond to significant business.   theexpgroup.

Such weaknesses should be discussed with client management and formally documented in a management letter. If tests of control confirm that the system is working satisfactorily then proceed to step 6. If tests of control reveal that a system evaluated as being sound in theory is not working satisfactorily in practice then proceed as in step 4 where system was evaluated as being inherently weak. Confirm details of client systems (walk through test). 5. 4. No liability for damage arising from use of these notes will be accepted by the ExP Group. 2.   theexpgroup. etc). If system is assessed as being inherently weak. 3. flowcharts. 1. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. If system is assessed as being sound then proceed to step 5. it is important to recognise that part of the whole system which we call internal control should include what we call internal check (segregation of duties) and also internal audit. etc). Record details of client systems (narrative notes. Always obtain expert advice on any specific issue. 7. 6. ICQs. Refer to our full terms and conditions of use. Plan of organisation Custody procedures Recording procedures Authorisation procedures Management supervision NB. you could make use of the mnemonic PCRAM. Design and carry out limited programme of substantive testing. When evaluating any system of internal control. In this area of the client’s activities it will then be necessary to design and carry out an extended programme of substantive testing. Individuals may reproduce this material if it is for their own private study use only. ACCA F8 (INT) Audit and Assurance Page | 28 © 2012 The ExP Group. Test the client systems (tests of control). then there is no purpose to carrying out tests of control in that area. Steps in auditor’s consideration and approach to a client’s internal control systems Ascertain details of clients systems (interview.ExPress Notes     Essential features of any good system of internal control As a useful aide memoire when asked to evaluate a described system of internal control within a question scenario. Assess the results of tests of control.com   . Evaluate the client systems.

These course materials are for educational purposes only and so are necessarily simplified and summarised.   theexpgroup. However. Refer to our full terms and conditions of use. computers Page | 29 © 2012 The ExP Group. KEY TERMINOLOGY The basic requirements for an effective system of internal control do not of course change simply because a computer is brought into the business environment. his subsequent reports have suggested that he has been disappointed with the general standard of candidates’ answers! Clearly. unless clearly told otherwise.ExPress Notes     Chapter 7 ACCA F8 (INT) Audit and Assurance Internal Control & Audit in Computer Environment START Big Picture As indicated in the section on internal control. Individuals may reproduce this material if it is for their own private study use only.com   . Always obtain expert advice on any specific issue. No liability for damage arising from use of these notes will be accepted by the ExP Group. therefore. Reproduction by any means for any other purpose is prohibited. In recent times where the examiner has set questions specifically referring to auditing in a computer environment. this is an area which you need to study quite carefully as it is likely to be revisited on a fairly regular basis. in the exam room you should assume that client has a computerised accounting system.

contingency planning GENERAL CONTROLS – SYSTEMS DEVELOPMENT CONTROLS (CAST) Conversion procedures eg. Essential features of any good system of internal control in a computer environment To help you in learning some of the important practical aspects of internal control systems in a computer environment we can again perhaps make use of a series of mnemonics. acceptance and amendment procedures eg. use of SSADM Testing eg program logic checks APPLICATION CONTROLS (IPOF) Input controls eg. Application Controls These relate to those activities which have been computerised and are concerned with the completeness and accuracy of the processing of authorised data and the maintenance of computer files. These course materials are for educational purposes only and so are necessarily simplified and summarised. they may be either manual or programmed. General Controls These relate to the environment within which computer systems are developed.ExPress Notes   ACCA F8 (INT) Audit and Assurance   bring with them their own additional control considerations. 2. Refer to our full terms and conditions of use. They are often sub-divided into administration controls and systems development controls. Always obtain expert advice on any specific issue. regular file back-ups Fire precautions and standby arrangements eg. sign off procedures Standardisation eg. between IT and user department staff Operator controls eg. use of passwords File controls eg. Individuals may reproduce this material if it is for their own private study use only. internal control in a computer environment is normally considered under 2 main headings: 1. parallel running Authorisation. They may be either manual or programmed. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited. operated and maintained. GENERAL CONTROLS – ADMINISTRATION CONTROLS (DOFF) Division of duties and responsibilities eg. As with general controls. data verification by means of double-keying Page | 30 © 2012 The ExP Group. They will therefore be relevant to all applications.   theexpgroup. Specifically.com   .

No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only. Auditing through the computer Making use of CAATs. principally:  Test data  Audit software eg. Auditing around the computer Here the concentration of audit effort is on the inputs to and outputs from the client’s computer system. data validation by means of check digit Output controls eg. Refer to our full terms and conditions of use.com   . These course materials are for educational purposes only and so are necessarily simplified and summarised. actioning of error reports File maintenance controls eg.   theexpgroup. Reproduction by any means for any other purpose is prohibited.ExPress Notes     Processing controls eg. selection of data for further testing 3. 2. checking amendments to standing data ACCA F8 (INT) Audit and Assurance Alternative audit approaches There are generally seen as being 3 main alternative approaches to the audit of a computerised accounting system: 1. Auditing within the computer Making use of embedded audit facilities such as:  ITF – Integrated Test Facility  SCARF – Systems Control and Review File Page | 31 © 2012 The ExP Group. Always obtain expert advice on any specific issue.

So far as listed companies are concerned.   theexpgroup. Always obtain expert advice on any specific issue. objective assurance and consulting activity designed to add value and improve an organisation’s operations. Page | 32 © 2012 The ExP Group. corporate governance frameworks would normally expect the establishment of an internal audit function as a key element of a company’s internal control systems.com   . Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use.ExPress Notes     Chapter 8 ACCA F8 (INT) Audit and Assurance Internal Audit START Big Picture Whilst no longer specifically included in the title of the paper. management should reassess the need for it on an annual basis. as it was under the old syllabus. These course materials are for educational purposes only and so are necessarily simplified and summarised. KEY TERMINOLOGY The IIA defines internal auditing as follows> “Internal auditing is an independent. where it does not exist. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. questions relating to internal audit have and are likely to continue to appear in the real exam on a regular basis.

Individuals may reproduce this material if it is for their own private study use only. it is important for the external auditor to always be aware of certain fundamental differences as indicated below: SCOPE APPROACH RESPONSIBILITY INTERNAL AUDITOR MANAGEMENT MANAGEMENT MANAGEMENT EXTERNAL AUDITOR ISAs + REGULATIONS ISAs + REGULATIONS SHAREHOLDERS NB under Corporate Governance provisions. with a consequent benefit of time and cost savings. TYPICAL AREAS OF INTERNAL AUDIT INVOLVEMENT These would include.” FUNDAMENTAL DIFFERENCES BETWEEN INTERNAL AND EXTERNAL AUDITORS Both internal auditors and external auditors will have a major interest in the effectiveness of a company’s internal control systems. control and governance processes. Both are assurance providers and as such will make use of similar techniques and procedures. the head of internal audit should be appointed by and report to the Audit Committee. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Key factors to consider in assessing the potential reliability of the work of internal audit will include such matters as:      Qualifications Experience Quality of audit documentation Independence Management response to internal auditor recommendations Effective co-operation between the two sets of auditors can help to avoid unnecessary duplication of effort.com   . but not be restricted to the following (any of which you need to be prepared to write briefly about):     VFM audits (the 3 Es) IT audit Financial audit Operational audit Page | 33 © 2012 The ExP Group. However. Reproduction by any means for any other purpose is prohibited. The external auditor should approach internal audit as any other aspect of internal control before placing any reliance upon the work of internal audit to perhaps reduce the level of some of their own testing. No liability for damage arising from use of these notes will be accepted by the ExP Group.   theexpgroup. Refer to our full terms and conditions of use. The Audit Committee should also be responsible for determining the nature and scope of the work of internal audit.ExPress Notes   ACCA F8 (INT) Audit and Assurance   It helps an organisation accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management.

Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Page | 34 © 2012 The ExP Group.com   .ExPress Notes     Chapter 9 ACCA F8 (INT) Audit and Assurance Audit Evidence START Big Picture Examination questions relating to audit procedures and evidence are a regular feature in all examinations.   theexpgroup. The auditors need to obtain audit evidence that these assertions are reasonable if they are to form an opinion as to whether the financial statements give a true and fair view and comply with relevant statutory and other obligations in relation to their form and content. some marks may well be available for purely theoretical knowledge. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. the client management are in fact making a number of assertions. Individuals may reproduce this material if it is for their own private study use only. It also perhaps goes without saying that you need to know the theory as the critical start point in your studies. Whilst the majority of marks are likely to be awarded for demonstrating your ability to apply knowledge in a practical way. KEY KNOWLEDGE Financial Statement Assertions In the production of financial statements.

the auditors’ past knowledge and experience of that client etc.com   . this breaks down into whether the evidence is relevant and reliable. the auditors must always look to obtain SUFFICIENT APPROPRIATE audit evidence on which to base their opinion. SUFFICIENT What will be seen as sufficient is a matter of professional judgement and will be influenced by such factors as the nature of the business. When considering what is appropriate audit evidence. No liability for damage arising from use of these notes will be accepted by the ExP Group. Refer to our full terms and conditions of use. Page | 35 © 2012 The ExP Group. Always obtain expert advice on any specific issue. the size of the business. Individuals may reproduce this material if it is for their own private study use only. RELEVANT What is relevant will depend upon the nature of the item being tested and the financial statement assertion being considered. Reproduction by any means for any other purpose is prohibited.ExPress Notes     ASSERTIONS RELATING TO TRANSACTIONS AND EVENTS      OCCURRENCE COMPLETENESS ACCURACY CUT-OFF CLASSIFICATION ACCA F8 (INT) Audit and Assurance ASSERTIONS RELATING TO ACCOUNT BALANCES     EXISTENCE RIGHTS AND OBLIGATIONS COMPLETENESS VALUATION AND ALLOCATION ASSERTIONS RELATING TO PRESENTATION AND DISCLOSURE     OCCURRENCE AND RIGHTS AND OBLIGATIONS COMPLETENESS CLASSIFICATION AND UNDERSTANDABILITY ACCURACY AND VALUATION KEY KNOWLEDGE Audit Evidence In accordance with ISA 500.   theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised.

6. inventory records (ii) Third party originated but client maintained eg. No liability for damage arising from use of these notes will be accepted by the ExP Group. the auditors will base their opinion upon a variety of evidence rather than a single source. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. 7. 4. any audit working paper detailing audit work performed and conclusion reached ACCA F8 (INT) Audit and Assurance AUDIT PROCEDURES RELATING TO AUDIT EVIDENCE ISA 500 indicates 8 procedures some combination of which may be adopted by auditors in order to obtain audit evidence: 1. Inspection of records or documents Inspection of tangible assets Observation Enquiry Confirmation Recalculation Reperformance Analytical procedures Page | 36 © 2012 The ExP Group.ExPress Notes     RELIABLE In most instances. 2. 2. 3.   theexpgroup. 8. they may be seen as: (i) Client originated and client maintained eg. Documentary evidence will be more reliable than oral evidence. Individuals may reproduce this material if it is for their own private study use only. These course materials are for educational purposes only and so are necessarily simplified and summarised. In considering the comparative reliability of the different forms of evidence which may be available the following general rules may be applied: 1. Putting the different forms of documentary audit evidence in ascending order of comparative reliability. supplier invoice (iii) Evidence obtained directly from third party eg. bank confirmation letter (iv) Auditor generated eg. 5.com   .

In practice inventory is often one of the most significant items in the client’s financial statements. quite simply because if management are so inclined it is one of the easiest areas to fiddle! Exam questions might test your knowledge and understanding of internal control considerations or audit procedures or valuation requirements or perhaps some combination of these. Page | 37 © 2012 The ExP Group. Refer to our full terms and conditions of use.ExPress Notes     Chapter 10 ACCA F8 (INT) Audit and Assurance Inventory START Big Picture The area of inventory has always been a popular area for examination questions. remember you could be asked what audit procedures you would carry out with any of the items typically appearing in a company’s financial statements. Over the years there have been many frauds relating to inventory manipulation.   theexpgroup. If inventory is a material item and it is materially misstated. Always obtain expert advice on any specific issue. Individuals may reproduce this material if it is for their own private study use only.com   . Reproduction by any means for any other purpose is prohibited. Although we are looking here specifically at inventory. No liability for damage arising from use of these notes will be accepted by the ExP Group. then it will impact directly both on the Income Statement and the Statement of Financial Position. because of its popularity with examiners over the years. These course materials are for educational purposes only and so are necessarily simplified and summarised.

by observation on a test basis whilst stocktaking is in progress. therefore we can usefully consider what work we might do BEFORE. DURING and AFTER the client’s stocktaking. recording and custody procedure exist to control the movements in inventory and that there should be regular checking of physical quantities against the stock records.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Main Audit Considerations The main internal control considerations relating to inventory will require that effective authorisation. These course materials are for educational purposes only and so are necessarily simplified and summarised. BEFORE         Review previous year working papers Obtain and review client stocktaking instructions Consider sales method Consider stock locations Consider need for independent experts Confirm date and timing of stock count Liaise with internal auditors Allocate and brief own staff DURING       Observe procedures Test counts Re-counts Note third party inventories Notes re cut-off Notes re condition Page | 38 © 2012 The ExP Group. To a large extent. Refer to our full terms and conditions of use. the auditors must satisfy themselves as to the effectiveness of the client’s stocktaking procedures. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. As a useful exercise when you have a spare 5 minutes take a blank piece of paper and under these 3 headings see if (in point form) you can come up with the following sort of ideas. No liability for damage arising from use of these notes will be accepted by the ExP Group. but they do have a responsibility to consider the effectiveness of the client’s stocktaking procedures and the reasonableness of the subsequent inventory valuation. Where inventory is a material item in the client’s financial statements and whenever it is practicable to do so. It is important to recognise that it is not part of the auditors’ duty to take stock nor to value it.com   .   theexpgroup. Always obtain expert advice on any specific issue.

it should give as close as possible an approximation to the actual cost. the test should be made for the lower of cost OR net realisable value. Cost should as necessary include ‘costs of conversion’. Page | 39 © 2012 The ExP Group. The aggregate figure for inventories in the Statement of Financial Position (classified under appropriate headings) should be shown at the lower of cost AND net realisable value. In the exam room be prepared to do some fairly basic calculations to demonstrate that you properly understand the principles involved. Individuals may reproduce this material if it is for their own private study use only.com   . or groups of similar items. to as necessary revise those Accounting Standards which are examinable under F7. Refer to our full terms and conditions of use. It is an important part of your preparation therefore. No liability for damage arising from use of these notes will be accepted by the ExP Group. Whatever method is used to determine cost. when looking at individual items of inventory. KEY KNOWLEDGE Valuation of Inventory It is important to remember that accounting knowledge assumed for Paper F8 is that examined in Paper F7. However.   theexpgroup. COST should include all expenditure incurred in getting the item in question to its present location and condition up to the stage where it is in a saleable condition. Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised. given production at a normal level of capacity. NET REALISABLE VALUE should be taken as the estimated proceeds of sale less ALL estimated further costs to be incurred.ExPress Notes     AFTER       Follow up on attendance notes Routine tests on inventory records Analytical procedures Test valuation Review disclosure Obtain management representations ACCA F8 (INT) Audit and Assurance The above is not necessarily a fully comprehensive list but should give a good flavour for the level of detail that might be required. Reproduction by any means for any other purpose is prohibited.

Page | 40 © 2012 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised.com   . Reproduction by any means for any other purpose is prohibited.ExPress Notes     Chapter 11 ACCA F8 (INT) Audit and Assurance Subsequent Events START Big Picture Subsequent events is another of the classic question areas which may well require you to combine your assumed accounting knowledge with auditing knowledge. Whilst pure knowledge questions must not be ruled out. but before formal approval of the financial statements by a company’s management. KEY TERMINOLOGY Subsequent Events Relate to events occurring or facts emerging after the accounting period end. the attraction of this syllabus area to the examiner has perhaps always been the fact that it is an area which readily lends itself to a very practical scenario based question. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only.   theexpgroup. Always obtain expert advice on any specific issue.

Always obtain expert advice on any specific issue.   theexpgroup. As auditors we should give careful consideration to those events which at first sight may appear to be non-adjusting. which could mean that in fact they need to be treated as adjusting events. tests relating to sales and purchases cut-off Obtaining management representations Page | 41 © 2012 The ExP Group. ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Audit Approach – Proactive Period Up to the date of signing the audit report .ExPress Notes     Adjusting Events Are those which relate to an item or condition existing at the SOFP date. making provision at the year end because of the subsequent insolvent liquidation of a customer. Individuals may reproduce this material if it is for their own private study use only. but not necessarily be restricted to:      Discussions with management and subsequent review of company procedures for dealing with subsequent events Examining minutes of board and board committee meetings Review of management forecasts. Such nonadjusting events should be communicated by way of notes to the financial statements. The destruction by fire shortly after the year end of one of a company’s warehouses. No liability for damage arising from use of these notes will be accepted by the ExP Group.com   . Typical audit procedures During the period where best practice requires the auditor to be proactive in relation to subsequent events typical procedures would include. where at the SOFP date there was some doubt about the value. but which would have had a material impact on the financial statements if they had occurred prior to the year end. Eg. Refer to our full terms and conditions of use. Eg. where the amount outstanding at the year end was still unpaid at the time of the subsequent liquidation. These course materials are for educational purposes only and so are necessarily simplified and summarised. in order to consider whether or not the client has dealt with such events in an appropriate manner. where the subsequent events assist in forming an opinion as to the amount properly attributable to such item or condition. the auditor must be proactive in seeking out audit evidence relating to subsequent events. Reproduction by any means for any other purpose is prohibited. Non-adjusting Events Are those which do not alter the year end position. budgets and management accounts Routine audit work which naturally takes auditor into subsequent period eg. but which might be seen to impact on going concern.

Refer to our full terms and conditions of use. What constitutes appropriate action will obviously depend on the actual nature and timing of events. Individuals may reproduce this material if it is for their own private study use only.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Audit Approach – Reactive Period After signing the audit report. Reproduction by any means for any other purpose is prohibited. but might include:     Discussions with management on their proposed reaction Revision/withdrawal of earlier report Addressing company AGM/GM Seeking further advice Page | 42 © 2012 The ExP Group.   theexpgroup. No liability for damage arising from use of these notes will be accepted by the ExP Group. if there is some late event which if the auditor had known about it earlier would have impacted on the financial statements and/or the auditor’s opinion thereon. the auditor need only be reactive to subsequent events. he must react by taking appropriate action. In other words.com   . Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised.

No liability for damage arising from use of these notes will be accepted by the ExP Group. Appropriate application of this assumption is vital if the financial statements are to give a true and fair view. Examination questions in this area often have an element relating to audit reporting.ExPress Notes     Chapter 12 ACCA F8 (INT) Audit and Assurance Going Concern START Big Picture You will be aware from earlier financial reporting studies. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue.com   . Going concern considerations may also apply when dealing with questions relating to audit risk and also subsequent events. because of the very real danger that the audit report may become a self-fulfilling prophesy. Individuals may reproduce this material if it is for their own private study use only. Usually when such questions have appeared the examiner has expressed disappointment with the standard of many candidates’ answers. These course materials are for educational purposes only and so are necessarily simplified and summarised. with many businesses failing every day this is certainly a topical issue from an exam point of view. Page | 43 © 2012 The ExP Group. that going concern is one of the fundamental assumptions underlying the preparation of all general purpose financial statements.   theexpgroup. In the current economic climate. Reproduction by any means for any other purpose is prohibited. In practice. a going concern qualification is perhaps one of the most difficult for an auditor to give.

KEY KNOWLEDGE Audit Approach The auditor should always be alert to possible indicators of going concern problems.com   . A useful starting point for consideration of such indicators may be to relate to the elements of Business Risk (= Operational Risk x Financial Risk x Compliance Risk) as considered previously. If for any reason. See examples in following table: RISK OPERATIONAL FINANCIAL COMPLIANCE POSSIBLE INDICATOR Shortage essential raw materials for manufacturing process Material FOREX losses Numerous fines for breach of anti-pollution legislation POSSIBLE MITIGATING FACTOR R & D Dept close to finding synthetic alternative New hedging policy New more environmentally friendly manufacturing process about to come on line Specific audit procedures would include: Page | 44 © 2012 The ExP Group. Individuals may reproduce this material if it is for their own private study use only.ExPress Notes     ACCA F8 (INT) Audit and Assurance KEY TERMINOLOGY Going concern The concept of going concern is based upon the assumption that the business will continue to exist as a viable commercial entity for the foreseeable future. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use. Foreseeable future is normally taken as being a minimum of 12 months from the current accounting date.   theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised. without the need for any significant cut-back in its present level of activity. then there should be a note to the financial statements indicating what that shorter period is and management’s reasons for choosing it. No liability for damage arising from use of these notes will be accepted by the ExP Group. It is important that when risks are identified that the auditor also considers the possibility of mitigating factors which might counter balance the indicator of possible going concern problems. management consider a shorter period.

CIRCUMSTANCES Going concern basis used and considered appropriate with no related significant uncertainty Going concern basis used but appropriateness dependent upon some significant uncertainty which is fully and adequately disclosed Going concern basis used but appropriateness dependent upon some significant uncertainty which is either not disclosed at all or inadequately disclosed Going concern basis used but in auditor’s opinion not appropriate Going concern basis inappropriate but financial statements prepared on acceptable alternative basis which is adequately disclosed Chapter 13 REPORT IMPLICATIONS None Unqualified opinion but use emphasis of matter paragraph to draw attention to disclosure of significant uncertainty Qualified opinion on grounds of disagreement. No liability for damage arising from use of these notes will be accepted by the ExP Group.   theexpgroup.com   . probably adverse rather than except for Qualified opinion on grounds of disagreement. These course materials are for educational purposes only and so are necessarily simplified and summarised.ExPress Notes      Assessment of current and projected economic environment in which company operates Assessment of state of industry sector in which company operates Review of correspondence files and board minutes for evidence of significant disputes Review of subsequent period cash flow and profit forecasts Discuss management procedures and review and obtain management representations ACCA F8 (INT) Audit and Assurance     KEY KNOWLEDGE Audit Report Considerations As always. Individuals may reproduce this material if it is for their own private study use only. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. The following table provides a useful summary of the most likely scenarios. the type of audit report to be issued will be dependent upon the circumstances and the auditor’s assessment of materiality of the issues involved. Refer to our full terms and conditions of use. probably adverse rather than except for Unqualified opinion but use emphasis of matter paragraph to draw attention to unusual circumstances Page | 45 © 2012 The ExP Group.

whilst others are principles based such as the Combined Code in the UK.   theexpgroup. Refer to our full terms and conditions of use. Individuals may reproduce this material if it is for their own private study use only. Corporate governance is a very topical issue and you can read about important issues on almost a daily basis in the financial press. No liability for damage arising from use of these notes will be accepted by the ExP Group. Parmalat etc etc). These course materials are for educational purposes only and so are necessarily simplified and summarised. Barings. questions nowadays are perhaps more likely to be knowledge based. Key points to learn are the main features which are nowadays generally seen as being indicative of potentially affective corporate governance. Many countries have developed corporate governance frameworks in response to major corporate scandals (eg. Enron. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. KEY TERMINOLOGY Page | 46 © 2012 The ExP Group. Some of these frameworks are rules based such as the Sarbanes-Oxley Act in the US.com   . but you should not rule out entirely the prospect of a practical scenario based question.ExPress Notes     ACCA F8 (INT) Audit and Assurance Corporate Governance START Big Picture This is not the first time (F4 Corporate and Business Law) you will have come across this topic and it will not be the last (P1 Professional Accountant)! Perhaps because of the fact that corporate governance is at the very heart of the later P1 paper.

Internal Control Page | 47 © 2012 The ExP Group.” (Cadbury Report) 2. Separation at the top Ideally.ExPress Notes     WHAT IS CORPORATE GOVERNANCE? Various definitions have been provided such as: 1. its shareholders and other stakeholders. These course materials are for educational purposes only and so are necessarily simplified and summarised. Individuals may reproduce this material if it is for their own private study use only. the roles of Chairman and Chief Executive (CEO) should not be combined. Refer to our full terms and conditions of use. Board Committees The establishment of the following main board committees is indicative of good corporate governance practices: 1. are determined. 4. “Corporate governance is a set of relationships between a company’s directors.   theexpgroup. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue.” (OECD) ACCA F8 (INT) Audit and Assurance KEY KNOWLEDGE Features of Effective Corporate Governance Balanced Board Ideally. but rather the Chairman should run the board. No liability for damage arising from use of these notes will be accepted by the ExP Group. whilst the CEO runs the company. Audit Committee – all NEDs Remuneration Committee – all NEDs Appointments Committee – majority NEDs Risk Committee – majority NEDs Director training There should be an effective induction programme for all new directors and thereafter the company should ensure that there is an on-going programme for CPD for all directors. there should be a balance between executive directors (EDs) and independent nonexecutive directors (NEDs) excluding the chairman (independent). 3.com   . It also provides the structure through which the objectives of the company are set. and the means of achieving those objectives and monitoring performance. 2. “Corporate governance is the system by which organisations are directed and controlled.

Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue.ExPress Notes   ACCA F8 (INT) Audit and Assurance   The directors will be responsible for establishing and maintaining an effective system of internal control. especially the AGM. In particular management in such review should give consideration to:      Internal audit Enterprise risk management Corporate ethical culture Corporate social responsibility Whistleblowing facility Communication with shareholders Management should encourage smaller investors to participate in company GMs. Institutional investors in their turn are expected to exercise their voting power responsibly.com   . and have a regular dialogue with institutional investors. This system should be assessed and reported on by management on an annual basis. Individuals may reproduce this material if it is for their own private study use only. (end of ExPress Notes) Page | 48 © 2012 The ExP Group. No liability for damage arising from use of these notes will be accepted by the ExP Group.   theexpgroup. present position and future prospects. Financial reporting The board needs to present a balanced and understandable assessment of the company’s past performance. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use.

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