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AAA PRACTICE TO PASS (WEBINAR) - MARCH 2021
BY KASHIF KAMRAN-FCCA
DAY 4
Day 4: Other assignments
How to excel?
Syllabus: (F)
1. Review of prospective financial information
2. Due diligence review (Day 4)
3. Forensic audit (Day 4)
4. Audit of performance information (Day 5)
Day 4- How to prepare for other assignments?

Due diligence Forensic audit

No examiner article / Book reading Examiner article- forensic audit / No book reading
Scope of due diligence in AAA Scope of Forensic in AAA
Recent 6 papers (Sept 18- Dec 20)- No question Recent 6 papers(Sept18-Dec 20)- One question is
available (Sept/Dec 19- Q3)
Past paper prior to Sept 18 ! Past papers prior to Sept 18!
Dec 17- (webinar) – done Jun 15- Q3c
Dec 15- Q3 (self) Jun 13- Q2b
Dec 13- Q2 (self)

 Self-appraisal- reconcile your answers

o Examiner pointers (marking scheme)
o Examiner report
Due diligence -
Practice: Dec 17 Q3
Self: Dec 15 and Dec 13
Examiner expectations (scope from the past papers)

 Matters – (due diligence)

 Additional information – watch the previous recommended webinars
 Procedures
 Knowledge! (book)
o Benefits of due diligence- 6 mark
o The difference between an audit of FS and a due diligence review- 4 marks
o Purpose of due diligence- 2 marks

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Summary - of what is due diligence?

Due diligence review- is where the auditor help the buyer with adequate and relevant information (about the
seller) so that the buyer can take a decision to buy the company/ for determining the purchase consideration.
The auditor in due diligence focuses on determining or finding info which helps with the fair value of net assets
Auditor will be sharing all information about seller with buyer- mean information about:

 Issues
 Problems
o Supply chain
o Business models
 Control weaknesses
 Legal cases
 Cash flow issues
 Financial issues
 Obsolete market
 Market share
Drill- Dec 17 Q3
Dec 17 – Q3

Required:
In respect of the two matters identified above:
(i) Explain why each matter requires further investigation as part of the due diligence review, and (6 marks)
(ii) Recommend the investigation procedures to be performed. (6 marks)
Matter 1- 3 marks

 Why it requires further investigation

 1.5 marks per why?
Matter 2 – 3 marks

 Why it requires further investigation

 1.5 marks per why?
Procedures- 6 marks

 1 mark per procedures – 6 total procedures

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Read the case/ find the solution

Scope as leopard –

As part of the due diligence review, you have been asked to provide a valuation of Zebra Co’s assets and liabilities and an
analysis of the company’s operating profit forecasts

Matter 1
While reviewing correspondence with customers in relation to outstanding receivables, one of the team found a
letter from a large retailer, for which Zebra Co produces a number of unique products, providing advanced
notice that they are not renewing their purchasing agreement when the current one expires. The customer
advised that they are switching to a new entrant to the market who is substantially cheaper than Zebra Co. A
brief analysis identified that the customer provides, on average, almost 5% of Zebra Co’s annual revenues.

Why matter 1 requires further investigation !

Matter 1- ( 3 marks) – 2 why answer

 Produces- Zebra must be having specific plant and machinery for making unique products for this
customer, and the advance notice from the customer to suspend the contract is an indicator for
impairment for these plant and machinery. Impairment will impact on the fair value of net asset and the
auditor should be concerned about it during the due diligence review
 Unique products- there might be unsold inventory at the year end pertaining to this customer which
should be written off as they cannot be sold to any other customer, which will impact the inventory
valuation and the overall fair value of net asset
 Switching to new competitor- the new competitor is a threat for Zebra future profits and sales because
there is a risk that other customer can also switch in future following the trend of one of the customer.
 Losing the 5% customer- this will have an immediate impact on future profit and sales if any alternative is
not timely found.
Matter 2 – assignment

Procedures: (Correct way)

1. Discuss with Zebra management whether they have performed any impairment review for the plant and
machinery specific to the customer.
2. Review the Zebra impairment working to ensure that the recoverable amount is correctly determined
and the impairment loss is correctly recognized.
3. Review the inventory report to confirm whether there are any unsold inventory pertaining to the specific
customer
4. Review the inventory valuation to confirm that the particular inventory has been written off.
5. Review the sales forecast to confirm the decline in sales in future considering a potential loss of customer.
Procedures:

 Good procedure! = 1 mark

o Action (Discuss)/ review
o Source = subject matter (Zebra management)/ inventory valuation
o Purpose (whether…………………..)/ to confirm……………….
Discuss with Zebra management whether they have performed any impairment review for the plant and
machinery specific to the customer.(1)
Review the inventory valuation to confirm that the particular inventory has been written off.

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Forensic Audit

 Examiner article – (knowledge / scope)

 Recent paper – practice- Sep/Dec 19- Q3 – 25 marks
Article- knowledge – All you need to know about Forensic
Page 3/4

Forensic accounting engagements are agreed-upon procedures engagements, not assurance engagements. The
forensic accountant will not provide an assurance opinion – that is the role of the auditor when reviewing the
amount of loss included in the financial statements.

This will normally involve determining an appropriate value or quantifying a loss as discussed above; this is quite
distinct from an assurance engagement in which the engagement team would review an amount determined by
the client.

As an agreed-upon procedures engagement, the forensic accountant will normally prepare a report for the client
that sets out their findings, based on the scope agreed in the engagement letter. This report may be addressed to
management, often in the case of a fraud, or to the insurer. (The report will contain finding- Who did it? / how it
happened? / amount of loss?/ recommendation to avoid fraud in future)

It may be that a witness statement/report for submission to the court/arbitrator is required in addition to or
instead of a report to the client. (The court may request the auditor to appear an expert witness to share the
evidence gathered)

However, planning the investigation is likely to be similar to planning an audit or any other assurance
engagement.

Planning will commence with a meeting with the client in which the engagement team will develop an
understanding of the issue/events (the fraud, theft etc) and actions taken by the client since it occurred.

A key part of planning is to confirm exactly what format the output is required in, and exactly what matters are
required to be covered within it.

The team will agree with the client, what access to other information or personnel will be required and this will
be arranged.

Based on the above, the team will design procedures that enable them to meet the requirements of the client, as
agreed. This may or may not include test of controls, depending on the circumstances. There would be no need
to tests control when valuing a business for a matrimonial dispute. However, testing controls will be key to
determining how a fraud took place.

Summary
 Agreed upon procedure
 No assurance
 Expert witness in court
 Plan the forensic is same way as of audit
 There is no format of forensic report
 So the content of report should be agreed with management
 Agree with management access to information
 Design procedures to gain evidence

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Procedures- 4 / 5

Any method of obtaining evidence can be used in a forensic accounting engagement – this is not a limited
assurance engagement in which procedures are likely to be restricted to enquiry and analytical procedures.

Forensic engagements will include a detailed and wholesale review of all documentation and electronic evidence
available. The opinion given by the expert accountant must be reasoned, and backed up by evidence. Their
opinion cannot be objective if only based on what they are told; they must corroborate that information.

To be awarded marks in the exam, your procedures cannot be vague. They must be specific enough that the
engagement team could actually follow your instructions.

For example, it would not be sufficient to write 'interview the suspect'. You must suggest questions that should
be asked of the suspect in interview, depending on the circumstances in the scenario. For example, the suspect
could be asked to explain their job role and what access that gives them to systems, cash, inventory etc.

Page 5- Ethical dilemmas

 What if you are offering forensic to your existing client?
 What can be the ethical issues?

Read page 3 to 5 – of the article.

Practice

In session: Sep/Dec 19 Q3
Assignment- June 13 Q2b/ June 15 Q3c

Past papers – on forensic – what exactly examiner ask?

 Procedures ( is the important part)
 Matters to consider when invited to perform a forensic investigation (Practice management)
 Auditor and management for responsibilities for fraud (ISA-240)

Sep/Dec 19 Q3

Required:
Evaluate the matters which should be considered before your firm accepts the invitation to perform a forensic
investigation for Beyer Co. (8 marks)

 EACH MATTER is worth 2 marks

 8 marks/ 2 = 4 matters to complete the answers

Required:
(i) Recommend the procedures which should be performed in order to quantify the inventory loss; and (6 marks)

 1 mark per procedures

 6 marks/ 1 = 6 procedures in all

(ii) Evaluate the deficiencies in Beyer Co’s internal control system, and explain how they contributed to the fraud,
together with recommendations to prevent such a fraud reoccurring. (6 marks)

Pick a deficiency
 Evaluate (Why) the deficiency- 1 mark
 How it contributed to the fraud – 1 mark
 Recommendation- 1 mark

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There is no physical security at warehouse (Pick)

If there is no physical security at the warehouse the inventory items in the warehouse will become susceptible
to theft, particularly the small inventory items which are more prone to theft. (1)
The recent incident of theft from warehouse occurred because of no security in place at time of fraud. (1). There
should be proper physical security or CCTV cameras at the warehouse (1)

Required:
Explain the difficulties arising for management and for the auditor with respect to discovering fraud. (5 marks)

 Each difficulty is – 1 mark

 5 marks/ 1 = 5 difficulties

Brainstorming:
Management-
1. Is done with perfection/ concealment
2. Collusion in fraud – complex
3. IC system is not a guarantee rather assurance
4. Overlooking of fraud – human error
5. Management override of control
Auditor
1. Auditor perform audit on material basis
2. Auditor perform audit on sample basis
3. Auditor has very less time/ comes after year auditor

Required:
Evaluate the matters which should be considered before your firm accepts the invitation to perform a forensic
investigation for Beyer Co. (8 marks)

 EACH MATTER is worth 2 marks

 8 marks/ 2 = 4 matters to complete the answers

Matter:
 Client screening/ client due diligence – to confirm is Beyer good client or not (case specific)

matters which should be considered before your firm accepts the invitation
 Scope
 Fees
 Deadline
 Court proceeding or not
 Competence level

Specific – 8 marks
1. Client screening
2. Court proceeding – clarity from audit committee
3. Competence – with Kaffe have a forensic department
4. Deadlines – what are deadline?
5. Fees- fee level ?

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Client screening
Beyer is a new client for the audit firm, so the audit firm must investigate the client for screening, whether the
client has a good background and history or not. Because Kaffe would not like to take on a client whose integrity
is doubtful

Scope
Keffe should discuss with the audit committee the clarity on scope of work to be performed as this will help in
determination of fees. Clarity should be taken with regards to whether the forensic audit team will be required
to appear as an expert witness in court, or whether the matter will be settled out of court.

Intended user
Keffe should consider the intended users of the forensic report, to ensure who the report will be addressed to ,
or the overall exposure of the engagement. It seems that the insurance company will be using the report alongside
the audit committee from Beyer

Recommend the procedures which should be performed in order to quantify the inventory loss; and (6 marks)

 1 mark per procedures

 6 marks/ 1 = 6 procedures in all

Suppose
1. Discuss with audit committee their finding on who are the main culprits behind this fraud (X)
2. Perform TOC to evaluate the deficiencies in the internal control system which led to fraud (X)

Inventory- loss: (Read case)

The warehouse manager has been working with one of the sales representatives to dispatch goods to a
fictitious customer which the warehouse manager has created on the dispatch system.
The sales orders are input by the sales representative into the dispatch system which is not directly linked to
the invoicing and accounting system.
After the goods dispatch note is issued by the warehouse manager and the goods leave the warehouse for
delivery to the fictitious customer, the sales representative cancels the original order.

The warehouse manager reverses the dispatch immediately so that the daily report on inventory movement
used to generate invoices in the sales system does not reflect movement of the goods.

The sales representative takes delivery of the goods at the address of the fictitious customer and then sells the
parts on the internet, splitting the proceeds with the warehouse manager.

The warehouse manager supervises and participates in all inventory counts and this way ensures he is able to
adjust the records of inventory to disguise the missing items.’
The operations director has informed you that no authorisation is required for either the cancellation of orders
or the reversal of dispatch notes.

1. Perform a physical inventory count to confirm the inventory position of different inventory item
2. Reconcile the physical inventory position with the inventory position on system to identify the
differences.
3. Once the difference has been identify, determine the value of the inventory items to quantity the loss
4. Review the price list of inventory items to confirm accuracy of inventory valuation

Procedure= ASP + case specific

Read the case- found a clue – converted the clue- into procedures (4)

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