Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA

DRAFTING TYPE 1 ANSWERS ON EVIDENCE

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
DECEMBER 2013-Q3
Matters and evidence in working paper file
Ledge Hill Mine (LHM) – 14 marks
Matters:
The LHM recognized in SOFP at $ 10 million is 5.7% of the total assets thus material to the SOFP.
The accident at the LHM is an indicator for impairment. There is a risk that Dasset management has either not
performed an impairment review or the recoverable amount of the LHM was wrongly estimated. This could
result into overstatement of LHM and understatement of expenses.
The management is considering incurring improvement of the mines to keep them operational. The
improvement should be carefully dealt in terms of whether they are revenue or capital expenditure. Considering
improvements are for operational nature, they should be expensed out once incurred. If capitalize it will
overstate LHM and understate expenses.
The Dasset management need to recognize a provision for the safely repair or demolition of properties located
as this is a probable outflow and a reliable estimate can be made due to the fact the surveyor was appointed. If
no provision is recognized it will understate expenses and liabilities.
Evidence – working paper file
1. Copy of the board minutes to confirm the decisions taken by the board in a post-accident scenario (i.e.
permanent closure of mines, improvements etc.)
2. Results of observation of the mines to confirm the damage caused at LHM.
3. Photographic evidence of the mine sites to confirm the damage caused
4. Results of discussion with a sample of mine workers to confirm that the accident did not caused any
injuries OR
5. Results of discussion with H&S manager to confirm that the accident did not caused any injuries.
6. Copy of the surveyor report to confirm whether properties are to be demolished or safely repaired
7. Copy of the rent agreement to confirm that Dasset is bearing the rent of 20 residents and the amount of
rent expense.
8. Copy of bank statement to confirm the rent payments
9. Results of discussion with management to confirm whether LHM was reviewed for impairment
10. Copy of the impairment review working performed by management to confirm the recoverable amount
/ and the basis taken.
11. Breakup of operating expenses/ current liabilities to confirm the provision was recognized
Note: 1 mark per evidence , remember evidence rules as discussed in class. There are 7 marks for evidence due
to the cap placed by examiner, so you will make a list upto 7. This is an illustrative answer so the list of evidence
in in excess of the 7 required.

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
June 2013- Question 3
Note: Student should draft the third part themselves based on the drafting of two part below

Distribution licence – 5 marks

Matters
– The amount capitalised as an intangible asset is material to the statement of financial position,
representing 5% of total assets.

– License should be recognized as an intangible asset ( cost can be reliably measures / future economic
benefit will flow to the organization) and should be amortized over it useful life

– As the license has a fixed term of five years, it should be amortized over that period. However, it appears
that amortisation has not been charged, as the amount recognized at the yearend is the original cost of
the licence. Amortisation of $1·25 million (15 million/5 years x 5/12) should have been charged from 1
September to the year end.

Evidence

1. A copy of the distribution licence, confirming the five-year period of the licence, and the cost of $15
million.
2. Copy of the bank statement as evidence of payment made
3. Results of discussion with management regarding the apparent non-amortisation of the licence, including
any reasons given for the non-amortisation.
4. Copy of Sales forecast in relation to the soft drink to determine the future economic benefit to be derived
from the license

Asset held for sale- 8 marks

Matters
The properties classified as assets held for sale are material to the financial statements as the year-end carrying
value of $24 million represent 8% of total assets.

Assets can only be classified as held for sale if the conditions referred to in IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations are met for example, management is committed to sell/ asset is available for
immediate sale etc.
IFRS 5 requires that at classification as held for sale, assets are measured at the lower of carrying value and fair
value less costs to sell. This appears to have been correctly accounted for when classification occurred in October
2012.

The assets should not be depreciated after being classified as held for sale. The risk could be that the asset is
wrongly classified as a non-current asset or further depreciated which could understate profit and overstate
expenses.

Evidence
1. A copy of the board minute at which the disposal of the properties was agreed by management to confirm
the rationale for disposal of properties
2. Copy of Marketing literature ( as an evidence that instruction was given to real estate agency for selling
the properties)
3. Copy of correspondences with prospective buyers confirming the buyer intention to buy properties.
4. Copy of management’s calculations on the fair value less cost to sell and assess the validity of any
assumptions used.
5. Copy of client depreciation schedule to confirm that depreciation was charged only upto October 2012
6. Draft SOFP confirming that asset is classified as a current asset

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
DECEMBER 2014- Q2
Matters and Evidence in working paper file
Marking scheme: Each matter is worth 1 mark / each evidence in working paper file is worth 1 mark

Teapot Co (12 marks)

Matters
$ 27 million representing the Goodwill recognized in SOFP is 6% of the total assets thus material to the SOFP.
Goodwill is recognized at the same value at the yearend on which it was initially recognized i.e. $ 27 million. The
management should conduct an annual impairment review of Goodwill and its seems that this has not been
performed. Thus the goodwill could be OS if the impairment review is not performed.
$0.3 million representing the FV adjustment to the book value of property is .49% of the total FV of net assets
thus it is an immaterial matter.
$ 60 million representing the amount of loan taken is 13.3% of the total assets thus material to the SOFP. The
premium on the loan i.e. $ 5 million should be amortized on a 20 year period as a component of the finance cost.
If the premium is not amortized it will US the finance cost and overstate the profit.
Evidence in working paper file:
1. Copy of the board minutes confirming the approval of acquisition of 80% shareholding of the Teapot Co.
2. Copy of the purchase agreement with Teapot Co confirming the acquisition of 80% shareholding and the
purchase consideration of $ 75 million.
3. Copy of the bank statement for payment made to Teapot Co reflecting the purchase consideration
4. Extracts of the shareholding register of Teapot Co confirming the non-controlling interest is 20%
5. Stock exchange quotation as on 1/8/13 confirming the market price/ value of the shares of teapot
company
6. Copy of the DD report / expert report confirming the FV on the net assets acquired (i.e.$ 61 million)
7. Copy of loan agreement confirming the principal amount of loan taken and the loan covenants.
8. Results of discussion with management confirming whether the annual impairment review of the
goodwill was undertaken.
9. Results of discussion with management confirming the treatment undertaken for the amortization of
premium
10. Results of recalculation confirming the accuracy of the finance cost.

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
Natural disaster (7 marks)
Matters:
$ 16 million representing the CV of the property damaged due to natural disaster is 3.5% of the total assets thus
material to SOFP. The natural disaster is a non –adjusting event which requires proper disclosure in notes to
financial statement. If the adequate disclosure is not given the FS could be materially misstated
$ 18 million representing the contingent asset is 4% of the total assets thus material to SOFP. The contingent
asset representing the amount claimed from insurance company could not be recognized as the natural disaster
is a non-adjusting event even if the claim is virtually certain. Thus at present the CA and the DI is overstated.
Evidence in working paper file:
1. Copy of the board minutes confirming the approval of the decision to demolish the properties in wake
of the natural disaster.
2. Copy of the surveyor report confirming the cost to be incurred on demolishing the properties.
3. Extracts of the FAR confirming the CV of the property i.e. $ 16 million
4. Copy of the correspondence with insurance company confirming the amount claimed from insurance
company and the likelihood of receipt of claim.
5. Result of discussion with management confirming their viewpoint on the removal of contingent
assets recognized as CA/ DI.
6. Draft financial statement confirming the completeness of the disclosure given on the natural disaster
including the damaged caused to property and the amount claim from insurance company.

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
Intercompany transactions ( 6 marks)
Matters
$ 20 million representing the IC R/P is 4% of the total assets thus material to the SOFP. The IC R/P should be
eliminated on consolidation else the group receivable and payables will be overstated.
$ 50 million representing the inventory supplied by Marks to Robert is 11% of the total assets thus material to
the SOFP. Any URP on inventory should be eliminated from the consolidation else the group profit will be
overstated.
Evidence in working paper file:
1. Copy of the agreement b/w Marks and Robert confirming that Marks supplies components to Robert (
either at cost or profit)
2. Breakup of Marks Co receivable confirming the amount receivable from Robert company is $ 20 million
3. Breakup of Robert Co payables confirming the amount payable to Mark Co is $ 20 million
4. Copy of the consolidation schedule confirming that all intercompany transaction are eliminated on
consolidation ( i.e. IC R /P and URP)
5. Copy of the inventory valuation report confirming the value of inventory held by Robert is $ 50 million.

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA

DRAFTING TYPE 2 ANSWERS ON EVIDENCE

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
DRAFTING TYPE 2 QUESTION ON EVIDENCE
Marking scheme: Each comment on the sufficiency and appropriateness of evidence is 1 mark, each matter to be
included in report to those charged with governance is 1 mark and each procedure is 1 mark as well
DECEMBER 2016

Asset held for sale – 9 MARKS

Sufficiency and appropriateness of evidence
The discussion with management over the planned disposal alone is insufficient and inappropriate audit
evidence because discussion alone is not a documentary form of evidence and more importantly discussion needs
to be corroborative for it to be sufficient and appropriate
A brief note itself is insufficient and inappropriate as the event to which the note pertain is an extra-ordinary
event which require detail note, which must had included the auditor conclusion on the accounting treatment
and verification of IFRS-5 conditions.
Arithmetical accuracy itself is a procedure to verify casting of the manual journal but it alone cannot give auditor
sufficient and appropriate audit evidence on the condition and on the right treatment of asset held for sale.
The agree back of amount to non-current asset register by the team member is inappropriate evidence, as the
asset has been classified as current asset (held for sale) and will no longer exist in the non-current asset register.
Deficiencies
Manual journal was posted by the finance director who is not a relevant person to post a manual journal because
it does not portray value for money.
There is a lack of accounting knowledge in the Thurman company finance department because there was no one
with relevant knowledge to check the journal related to asset held for sale.
Procedures
1. Review the board minutes to confirm the basis/ justification or the rationale as to why the board planned
to dispose of the factory sites?
2. Review the tender document floated by the management to confirm management intention to sell the
factory within the year
3. Review any quotations received from potential buyers to confirm that process to sell has been initiated
and it is likely that the factory will be sold within a year
4. Review marketing document related to the factory disposal to confirm management intention to sell
within a year.
Student guidance note:

 Important events/ decision – board minutes

 Something which is subjective/ like provision / fair value etc. – representation letter

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
Capital expenditure – 7 MARKS
Sufficiency and appropriateness of evidence
Selecting a sample or a single transaction for performing test of control is insufficient evidence. Further, just
noting details of deficiency alone is not sufficient as the deficiency should had been communicated to those
charged with governance or management. It was inappropriate to update the system notes in permanent file
because the deficiency identified relates to current year only.
Weaknesses
Lack of authorization over capital expenditure and inappropriate segregation of duties maintained over initiating
and processing of transaction should be communicated to TCWG for timely response and actions from
management so the system could possibly be rectified.
Procedures
1. Physically verify a sample of vehicles to premises to confirm their existence
2. Discuss with management the useful life taken for vehicles
3. Recalculate the depreciation charged on vehicles to confirm its accuracy.
Payroll expense -9 marks
Sufficient and appropriate audit evidence
The tracing of payroll expense to year-end report issued by Jackson alone was insufficient and inappropriate
audit evidence as the audit team should had maintained a direct contact with the service organization in
compliance with the requirement of ISA-402.
The payments to casual workers were traced back to petty cash records by the audit team which is very strange,
as salary payments can’t be disburse from petty cash, and the audit team didn’t even brought this to management
attention or questioned them.
Deficiencies
Casual workers are not entered in the payroll system, so it would be difficult for the management to identify at
any point in time the total number of workers in the company and may give rise to risk of ghost employees
The payments to casual workers were being made from petty cash records, whereas the petty cash record is only
meant for miscellaneous payments, and salary payments are made through cash book.
Procedures
1. Visit the Jackson company , the service organization
2. Obtain relevant information regarding salary expense from Jackson
3. Perform test of controls on payroll expenses during the visit to Jackson company
4. Determine the extent of substantive to be performed on payroll expense on the basis of the outcome of
control testing.
5. Discuss with management reason why casual workers are not entered into the payroll system
6. Discuss with management reasons why the payments to casual workers are made through petty cash.

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
DRAFTING QUESTION 2

DECEMBER 2012

Note: For each risk identified and explained carry 2 marks , in the same way as RoMM are written in Q1. Further
for every comment on adequacy of evidence , each comment is worth 1 mark. In this question you have to read
each key audit finding, and if you think there is a RoMM is a key audit finding then explain what the risk is for
taking 2 marks. Further, if you think there is a lacking of evidence in the key audit finding comment on adequacy
of evidence to obtain 1 mark.
1. Revenue
The overall group revenue has decreased marginally from last year i.e. 4 % despite the fact that revenue
from one of the subsidiary Copeland has fallen by 25%. There could be a possibility that revenue is
overstated to present a better group position.

2. Profit on disposal
The disposal of property is not a genuine sales transaction due to an option to re-purchase in 5 year time.
Thus in substance it is a loan secured on the asset. Thus the profit on disposal should be deferred over 5
years and the property should be re-instated into the fixed asset register. Currently the non-current
assets are understated as property has been removed from register and profit is overstated as it has been
recognized in full.

Moreover, the evidence is insufficient to the extent that the particular clause i.e. the option to re-purchase
even though identified was not discussed with management which resulted into the wrong treatment.

3. Revaluation
No work has been done on revaluation, which is insufficient evidence despite the fact the revaluation
surplus arising is $ 800,000 more than the revised level of materiality which is $ 700,000. Sufficient
evidence should be gathered on material items within financial statements.

4. Actuarial losses
The evidence gathered is inappropriate as the auditor has not gathered any specific evidence required to
be obtained for entity use of service organization. Tracing numbers or relying on report of service
organization alone are not sufficient evidence.

5. Goodwill
Goodwill should annually be reviewed for impairment. The decline in revenue of Copeland is an indicator
for impairment review. The goodwill is stated in the SOFP at the same value as of the last year, reflect
that the impairment review was not properly carried out and the goodwill could be overstated.

Further the evidence gathered insufficient as arithmetical accuracy alone is not a valid evidence. The
impairment review work should had been thoroughly reviewed for its effectiveness.

6. Associates
The investment is associates has been held at the same value in SOFP as of last year despite the fact there
is a share of profit of profit from associate presented in SOCI. Thus the investment in associate in
understated.

No work has been performed itself in insufficient evidence as associate is an important area of group
audit and need careful attention of auditor. The static nature should had been further investigated for
reasons. Moreover the account balance is material and anove the $ 700,000 threshold.

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
7. Asset held for sale
The asset held for sale has been classified as non-current asset, when it should had been classified as
current. Thus NCA are overstated and current assets are understated.

The evidence gathered seems to be sufficient as mostly the condition for asset held for sale were verified.
However the only insufficiency caused in evidence gathered was that the wrong classification was not
properly checked.

8. Non –controlling interest

The NCI has been properly presented as a component of equity in the SOFP, however the profit
attributable to NCI has not been shown as a separate line item in the SOCI. Thus the FS are materially
misstated.

9. Loan
The increase in finance cost as shown in SOCI is only $ 40,000 whereas it should had been $ 160,000
(show working here). Thus the finance cost is understated by $ 120,000 and the profit is overstated by
the same amount.

Reading the bank loan agreement alone is not a sufficient evidence obtained by auditor. Loan is an
important area of the financial statement which required careful attention of auditor and other aspects
of the loan should had been checked.

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Drafting _ Evidence Type 1 / 2 _Kashif Kamran- FCCA
December 2011- Question 2
Requirement
Assess the audit implications of the THREE issues related to audit work raised by the audit senior. Your
assessment should consider the sufficiency of evidence obtained, explain any adjustments that may be necessary
to the financial statements, and describe the impact on the audit report if these adjustments are not made. You
should also recommend any further audit procedures necessary. (15 marks)

Note: The issue 1 is drafted for guidance purpose, student are encouraged to do issue 2/3 themselves.

The question specifically ask for four things on each issue i.e.
1. Consider sufficiency of evidence ( 1 mark)
2. Explain any adjustment ( 1 mark)
3. Describe the impact on audit report ( 1 mark )
4. Recommend further procedures ( 2 marks)

Issue 1- Audit work on inventory. (5 marks)

The representation alone is not sufficient appropriate audit evidence as a written representation is not a
substitute of evidence obtained directly by the auditor. The auditor should have further investigated the
management claim that the paper on which the manual are printed are recyclable.

Auditor should have:

1. Corresponded with an expert in recycling to confirm whether paper coated with plastic is recyclable or
not.
2. Discuss with finance director any past events where such material was recycled and evidence related to
it

The adjustment necessary for the printed inventory found obsolete is:
DR Cost of sales $ 130,000
CR Inventory $ 130,000

$130,000 worth of printed inventory found obsolete in less than the materiality threshold set by the auditor for
balance sheet and income statements, therefore the individual misstatement i.e. to write of the obsolete
inventory even if not adjusted in financial statement will have no impact on the audit report

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