KASHIF KAMRAN ACCA NOTES Combined Block A Notes

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AAA – BY KASHIF KAMRAN

LECTURE 1- BLOCK 1
Topic 1: Money laundering

Money laundering- is a process whereby the black money (money derived from illegal sources) is converted to
white money (legal economy)
Process- is undertaken by the money launder (criminal) very carefully because there is a risk of being caught
up. The process/ stages of money laundering consist of the following THREE activities.
1. Placement
2. Layering
3. Integration
Placement – is the first transaction under taken by the launderer to convert the black money to white money.
The launderer place the black money on hand in the legal economy, the placement can be done in bank, in a stock
market, in buying a property, in buying gold or in buying a painting from an artist etc.
The risk of being caught up at the time of placement is higher, because at the time of placement, there can be a
customer due diligence (CDD) also known as know your client. (This is part of anti-money laundering procedure)
PEP- Politically exposed person is the one who has influence or authority and normally the PEPs are at high risk
of doing money laundering with ease because the CDD process get impaired with PEPs.
Layering- is the subsequent transactions undertaken by the launderer to convert the white money into more
legal and secured money by undertaking series of activities, like deposit, withdraw, buy, sell, local and abroad
(one country to another country) etc. The layering helps the money launderer accumulate layers so to conceal
the true origin from where the money has come from. It became difficult for the regulator to find the true source
of money if there are multiple layers involved.
Integration- is the point where the launderer believe that the black money has now blended so much into white
economy that it’s difficult for anyone to separate it. It starts to look like as if the money was white since beginning.
Tutor advice: Cash based business are at high risk of money laundering? True or False – TRUE
June 14- Q2 (b)(i)
Explain the stages used in laundering money, commenting on why Waters Co has been identified as high risk.
(5 marks)
Suggested way to answer this question:

 1 mark for each stage
o 3 stages= 3 marks
o Each stage explained should not be more than 2 sentences long.
 1 mark for each – why water is high risk ( accumulative 3 sentences for both reason mention in case study)
o Cash based
o Transfer to overseas bank account
Email me the assignment at : aaamock@gmail.com

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Anti- Money laundering guidance for an audit firm
Policies and procedures which an audit firm should have in place as part of anti-money laundering activities?
 J14- Q2(b)(ii)- 6 marks – FOUR policies and procedures
 D18-Q3(a)(i)- 4 marks- policies and procedures (Each procedure is now worth 1 mark)
Policies and procedures

1. The audit firm should appoint an MLRO (money laundering reporting officer)- What should
the MLRO do? MLRO do the following
a. MLRO receive and assess ML reports (communication / working papers) from his/
her colleagues
b. MLRO passes on a valid suspicion to the regulator (external)
2. More time should be spent on client screening/ know your client/ client due diligence
a. If more time is spent the process will become more skeptical and thorough and there are
more chance that the auditor may find suspicious activities about client like for e.g. tax
evasion, PEPs at a client, or any recent activity of bribery and corruption etc.
3. Review client anti-money laundering policies and procedures by performing a thorough
discussion with management and test of controls over these polices to ensure they are robust.
4. Audit firm should keep records/working paper for 5 years, because this can help in any
regulatory investigation opened against the audit firm client and could be used as evidence that
the client was or was not involve in money laundering
5. Audit team member should not tip-off
a. Should not conceal info that the client is involved in money laundering (ML) from the
MLRO
b. Should conceal this information that the client is involved in ML from the client itself
Assignment / what’s next in lecture 2:

 Complete the June 14 Q2b in full and email me the answer
 Complete the Dec 18 Q3a(i) only for 4 marks and email me the answer
Next lecture (2)
 Tutor will do – Dec 18 Q3(a)(ii)- with students in live class
 June 12 / June 16 in live class and will then give assignment
 Topic 2: Auditor liability
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LECTURE 2- BLOCK 1
Topic 1: Money laundering- Past papers
Objective:
 Tutor will do – Dec 18 Q3(a)(ii)- with students in live class

 June 12 / June 16 in live class and will then give assignment
June 12- Q3a
Required:
 Discuss the implications of the circumstances described in the audit senior’s note; and (6 marks)
o In the case you will read the audit senior note
o You will understand what the circumstance is? Which is described in the senior note?
o You need to discuss its implication (consequences/ impact on the audit)
o 1 mark per relevant point discuss
 Explain the nature of any reporting that should take place by the audit senior. (3 marks)
o What sort of reporting/ communication the senior should do on the circumstance describe
above ( money laundering)
o 1 mark per relevant point
Case:
You are a manager in Lark & Co, responsible for the audit of Heron Co, an owner-managed business which
operates a chain of bars and restaurants. This is your firm’s first year auditing the client and the audit for the
year ended 31 March 2012 is underway. The audit senior sends a note for your attention:
‘When I was auditing revenue I noticed something strange. Heron Co’s revenue, which is almost entirely cash-
based, is recognised at $5·5 million in the draft financial statements. However, the accounting system shows
that till receipts for cash paid by customers amount to only $3·5 million. This seemed odd, so I questioned
Ava Gull, the financial controller about this. She said that Jack Heron, the company’s owner, deals with cash
receipts and posts through journals dealing with cash and revenue. Ava asked Jack the reason for these
journals but he refused to give an explanation.
‘While auditing cash, I noticed a payment of $2 million made by electronic transfer from the company’s
bank account to an overseas financial institution. The bank statement showed that the transfer was
authorised by Jack Heron, but no other documentation regarding the transfer was available.
‘Alarmed by the size of this transaction, and the lack of evidence to support it, I questioned Jack Heron, asking
him about the source of cash receipts and the reason for electronic transfer. He would not give any answers
and became quite aggressive.’
Tutor advice: Read intro para of the case very carefully as it set the tone for the remaining case and your answer.
Brainstorming- circumstances
 Owner managed business

 Bars and restaurants
 First year audit
 Audit is underway (going on)
 Strange- a difference of $2 million between sales recognized in FS versus the cash receipt from
customer (Placement)
 Owner deals with cash receipts and post them ( no segregation of duties/ owner is in a position to
manipulate result or do fraud or money laundering )
 Overseas transfer of $2m ( layering)
 No source document of overseas transfer ( risk of money laundering)
 Aggressive behaviours of Heron ( means management is concealing something)
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Discuss the implications of the money laundering described in the audit senior’s note; and (6 marks)
Versus
Discuss the implications of the circumstances described in the audit senior’s note; and (6 marks)
 You will first conclude by taking info from the case that the circumstances is indeed a money
laundering
 Every info you use to conclude its money laundering – 1 mark for that
 You further need to tell the implication of money laundering on the rest of the audit.
Brainstorming - Implication- on the audit

 Audit is underway versus the senior found something strange, possibly a money laundering?
o The audit team should increase the skeptical threshold
o Increase the audit procedures for the rest of audit
o Increase the sample size for rest of the audit
o Decrease or reassess the materiality level
o Re-assess the client integrity level / and the future of auditor-client relationship
Suggestion to write a 6 mark answer

 Divide the answer into 2 parts, with two heading, one heading should be circumstances and second
heading should be implication
 Under the circumstance heading, make a 3-4 point answer justifying the situation is money laundering
and keep each of your point to max 2-3 sentence long and each point will give you 1 marks (3-4 marks)
 Under the second heading of implication, write 2-3 point answer telling the impact of money laundering
on rest of audit, each point should not be more than 2 sentences long (2-3 marks)
 Email me the answer at aaamock@gmail.com
Explain the nature of any reporting that should take place by the audit senior. (3 marks)
o What sort of reporting/ communication the senior should do on the circumstance describe
above ( money laundering)
o 1 mark per relevant point
Brainstorming
 Senior – when he identified there is a suspicion that Heron is involved in money laundering,
the senior should not have question Heron directly about it, as this will result in a tip off by a
member of the audit team.
 The senior should had, rather informed the situation directly to the MLRO in the audit firm
with proper evidence of the situation
 The MLR0 would have then further assessed the situation, and communicate the matter to
regulator.
Time management = 9 marks *1.95 min per mark = 18 minutes ( 1/4th is the reading and planning
time and 3/4th is writing time)
Jun16- Q3b (i) – cash transfer ( 7 marks)- Assignment

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Dec 18- Q3(a)(ii)
Evaluate whether there are any indicators of money laundering activities by either Clean Co or its staff. (6
marks)
 1 mark per valid point
 Need to give conclusion
Brainstorming:
 75% of sales are made on cash

 Commission based sales – increase risk of bogus sales/ fictitious
 Mr. Blacker- $33,000 sales to his associate ( related party transaction)
 Transfer to overseas account
 Mr. Blacker tax return
o Numerous buying and selling of properties
o Number overseas bank account
 Good client relationship (last para case)- possibility that the audit team will not be reporting money
laundering to MLRP
 Conclusion- the above indication are clear enough that Mr. Blacker is possibly involve in money
laundering.
This session today- Lecture 2 – on practice must have helped you with:
 How to read and understand a requirement?

 Marking scheme?
 How to read a case, identify point
 How to brainstorm first before you write answer
 How to ensure your answer sync with case to be a good answer
 Whenever examiner say evaluate you need to give a conclusion
Assignment
 Complete – Jun 12- Q3a ( as discussed in class today)

 Complete- Dec 18- Q3(a)(ii) - ( as discussed in class today)
 Do from scratch- Jun 16- Q3(b)(i)- on cash transfer for 7 marks
What’s coming up in Lecture 3
 Topic 2- auditor liability- theory + past paper

 Topic 3- professional skepticism
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LECTURE 3- BLOCK 1
Topic 2: Professional liability
Objective: Professional liability and the past paper practice
Learning outcome-
1. Is auditor liable?
2. When is the auditor liable?
3. Who can make auditor liable? Shareholders or stakeholders or both of them?
4. The audit report is relied upon by many not just shareholders? Is the true?
5. How can the auditor limit or reduce the liability?
Negligence
 Un-intentional – mistake/ error

 Intentional – deliberately / collusion with management etc.
To prove negligence- the injured party must prove:
 The duty of care enforceable by law exist

o Shareholders versus the auditor – there is a relationship known as agency relationship,
whereby the shareholders are the principal and the auditor is the agent.
o In the case of shareholder the duty of care by law exist is easy to prove as this is more automatic
and implied by virtue of Companies Act 2006
o At the start of the audit engagement, an engagement letter is signed ( between the auditor and
the client)
 Duty of care was breached
o The injured party must give evidence/ documentary evidence in the court to prove that the duty
of care was breached
o Breached= auditor is negligent= ( allegation on the auditor)= this must be proven by the injured
party
 Breach caused loss
o Injured party must quantify the loss- ( auditor liability)
o Quantify the loss= evidence to support it (injured party)
Discussing point!
The audit report is addressed to the shareholders of the company (title of the audit report), so shareholder are
protected and shareholder can file a liability against the auditor if they prove auditor was negligent. (Duty of
care by law exist)
What about stakeholders? Who rely on the audited financial statements, even though the audited report is not
addressed to stakeholders, and there is no liability in contract between the auditor and the stakeholders.
Liability in tort versus stakeholders
 Tort- means auditor has a general responsibility / duty of care to conduct a good audit irrespective who
relies on the report
 Code of conduct –
o Professional competence and due care ( general due care irrespective of who rely on the audit
report)
o Professional behaviour ( exercise of behaviour is general responsibility of an auditor)
Exposure of liability in contract is narrow versus the exposure of a liability in tort for the auditor, the liability in
tort general duty of care for the auditor and which exposes auditor a greater liability by anyone.
Discussing point: Should there be a limit to anyone under tort? Else the auditor liability will be unlimited
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Bannerman case! - versus stakeholders
 Verdict- the auditor knew the identity of the third party …………………..
 So that means when the auditor is planning the audit and is gathering knowledge of business , the
auditor will come to know about lots of important stakeholders and their relationship with company
and there expectation
 For example- will the auditor know about:
o The major banks of the company
o The major customers (distributors, retailers etc.)
o The major suppliers
 Auditor = knowledge of business= known stakeholders versus unknown stakeholder
Injured party
 Shareholders ( duty of care by law= Companies act 2006)

 Known stakeholder (duty of care by law= Bannerman case)
Final perspective
The injured party (shareholders/ known stakeholders) must prove auditor negligence to make auditor liability
by following the three steps below
1. Duty of care- by law exist
a. Companies Act
b. Banner case
2. Duty of care – was breached
a. Proven in the court through evidence by injured party
3. The breach- cause loss
a. Quantified by the injured party so that it becomes auditor liability
Unintentional versus intentional negligence
 Un-intentional negligence= civil liability= penalties imposed on audit firm which they have to pay to the
injured party
 Intentional negligence= criminal liability= severe impact on audit firm future/ the regulator can black
list the audit firm/ or else the audit firm will be dissolved or liquidated. (E.g. of Arthur Anderson versus
Enron)
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Limiting auditor liability

1. Quality of audit work should improve because this will reduce negligence and overall exposure to
liability – this is a pro-active approach.
2. UK approach only- Disclaimer of liability
a. U/S 534 in CA’2006-
i. the auditor can use a disclaimer of liability para in audit report subject to a liability
limitation agreement with the audit client
ii. Is agreement with client important to use the disclaimer of liability para? Yes
Example – Disclaimer of liability
 When the auditor uses a disclaimer of liability para in the audit report- its worded like following:
o “this audit report is solely for the company’s shareholders.
Suppose the client which you are auditing, is highly geared, or is negotiating a loan from a bank which will be
issued after the signing of the audit report. If the audit report mention, “this audit report is solely for the
company’s shareholders.” Will it negatively impact the client relationship with banks being highly geared and
the on-going negotiations? Yes, and the client will not agree to the disclaimer para.
3. Incorporated- if an audit firm become incorporated it will become a company for e.g. PWC Inc. however
no audit firm to date is incorporated, because even though incorporation have benefit of limiting liability
there are adverse impacts on audit firm of getting incorporated like adverse tax implication and the
audit firm by virtue of becoming will need to publish the FS and subject to audit
4. LLP- Limited liability partnership ( LLP versus LLC)
a. In case of LLP – the benefits of limiting liability has been taken and the disadvantage of the
becoming company has been excluded.
b. Audit firm mostly around the globe have become LLP in last 10 years
c. No personal bankruptcy of the partners when settling liability
5. Germany only practice – Capping liability – fix the liability (un-intentional negligence) , the max the audit
firm will pay if found negligent un-intentionally.
a. Listed company – Euro 4 million
b. Non-listed – Euro 1 million
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Practice- June 13 Q4 a – Spaniel company

Requirement:
Explain the matters that should be considered in determining whether Groom & Co is liable to Spaniel Co in
respect of the fraud. (12 marks) – 2 marks per matter ( June 13 exams marking scheme)
o Read the case

o Find 6 matters to be considered in determine whether the audit firm is liable
o Headings followed by paragraph
o Email me the full answer at aaamock@gmail.com
Brainstorming
o Matters – from knowledge (Topic 2)
o Duty of care exist – 2 marks
o Duty was breached- 2 marks
o Breach cause loss- 2 marks
o Case specific matters too – which need discussion – 6 marks (from case)
Case
1. Long standing client – generally the audit firm lose skepticism/ and become more reluctant to work (
2 marks)
2. Fraud discovered by Audit committee in May 2013 which was operating since May 2012- so up to the
year end Dec 2012, the fraud was operating for 8 month
3. Fraud- there is a: (ISA240)
a. Management responsibility – is primary ( because management is present at the time when
fraud was occurring / happening) to prevent and detect fraud ( Management detected the
fraud almost 1 year after in May 2013).- 2 marks
b. Auditor responsibility – secondary- carefully plan the auditor with professional skepticism
realizing the fact the FS could be materially misstated. (2 marks)
i. Limitation – 2 marks
1. Audit is done on sample basis
2. Audit is done on material basis
Neither tests of controls nor substantive audit procedures were conducted on payroll in the audit of the
latest financial statements as in previous years’ audits there were no deficiencies found in controls over payroll.
(Negligence- 2 marks) – Breached !!
Claim- $4.5 million stolen!! (loss)
Tutor advice- Comment in AAA paper where possible on materiality
o Something is material if it is:
o 1-2% of the total asset
o 5-10% of the profit before tax
o ½-1% of the revenue
Total assets are $80 million – versus the payroll fraud is $4.5m so far (Estimate)
o $4.5m /$80 million = 5.6% of the total assets (material) – 1 mark is given by examiner
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Assignment and what’s next in lecture 4

Assignments:
o Read the article – auditor liability
o Complete the question and email me – June 13 Q4a (aaamock@gmail.com )
What’s in lecture 4
o Topic 3- Professional skepticism / and past paper
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LECTURE 4- BLOCK 1
Topic 3: Professional skepticism
Objective: Professional skepticism and the past paper practice
Learning outcome:
 Understand what professional skepticism is?

 How important is professional skepticism to the auditor?
 In what situations/ areas does auditor apply high level/ degree of professional skepticism?
 Practice of past papers
Professional skepticism (PS) – is:
 Component – auditor duty of care

 Attitude – of
o Questioning mind
o Critical assessment of the evidence provided by management
 Three elements
o Attributes – personality trait of the auditor
o Mind set – questioning mind / being alert during audit
o Actions- is the response of the auditor as a result of any problem identified through the
application of PS
When does auditor apply PS?
 Throughout the process of audit

 Right from client screening process to planning to gathering evidence and to evaluating evidence
Areas in audit where auditor should exercise high degree of PS
 Planning – assess risk ( risk assessment)- auditor identifies risky areas in FS – and in risky areas auditor
should apply high degree of PS.
 Alert about fraud in the financial statements
 Management estimate- and the risk of management bias in making estimates including the going concern
assessment.
 Management omitting disclosures from the financial statement e.g. related party disclosures
 Alert about compliance with laws and regulator
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Application to past paper- what the examining team expect from you:
 June 12
 June 15
 Dec 16
June 12-
In relation to the audit of Coot Co’s payroll:

Explain the meaning of the term ‘professional skepticism’, and recommend any further actions that should be
taken by the auditor. (6 marks)
 Explain the meaning of PS (Bookish)- 2 marks

 Left with 4 marks- Actions that should be taken by auditor
 When you read the case as a student on payroll you will find that the auditor while performing work on
payroll has not exercise the right attitude of PS (means the auditor has done some flaws in the audit of
payroll), now you are a manager in the case, and you need to think about rectifying action to improve
work on payroll, each rectifying action is worth 1 mark and action are written in bullets.
 Email me the answer at aaamock@gmail.com
June 15-
Q3(a)
Explain the meaning of the term professional skepticism, and discuss its importance in planning and performing
an audit. (5 marks)
 Meaning = 2 marks
 Left with = 3 marks – discuss the importance of PS in planning and performing audit. 1 mark per
importance and each importance should be like a 1-2 sentence long.
Importance of PS:
 Professional skepticism (PS) at the stage of planning helps the auditor in identifying risky areas within
the financial statement which results in auditor being alert right from the stage of planning where to
focus on during audit.
 Further PS, helps the auditor to exercise questioning mind when gathering evidence during fieldwork
and helps auditor inquire management plenty of times during audit and this results in better evidence
for auditor.
 The PS also helps the auditor to critically evaluate the assumptions and estimated developed by
management and recognized in the financial statements to conclude whether the estimate are
appropriate or not.
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(b)(i)
Discuss how professional skepticism should be applied to the statement made by Silvio (6 marks)
 How PS will be applied – each how will give you 1 mark – so 1 mark * 6 = 6 marks
Case
The draft consolidated financial statements recognise profit before tax of $6 million (2014 – $9 million) and
total assets of $90 million (2014 – $82 million). The Group manufactures equipment used in the oil extraction
industry.
Goodwill of $10 million is recognised in the Group statement of financial position, having arisen on several
business combinations over the last few years. An impairment review was conducted in March 2015 by Silvio
Dante, the Group finance director, and this year an impairment of $50,000 is to be recognised in respect of the
goodwill.
Silvio has prepared a file of documentation to support the results of the impairment review, including notes on
the assumptions used, his calculations, and conclusions. When he gave you this file, Silvio made the following
comment:
‘I don’t think you should need any evidence other than that contained in my file. The assumptions used are
straightforward, so you shouldn’t need to look into them in detail. The assumptions are consistent with how we
conducted impairment reviews in previous years and your firm has always agreed with the assumptions used,
so you can check that back to last year’s audit file. All of the calculations have been checked by the head of the
Group’s internal audit department.’
Brainstorming /answer
Goodwill of $10 million is 11.11% of the total assets thus material to the financial statements, whereas the
impairment loss of $50,000 is 0.83% of the profit before tax and hence immaterial. (1). However the impairment
loss could be more than $50,000 and if that is so it could become material.
Don’t need any further evidence other than file, is quite a strange statement from Silvio and its seems as if the
finance director is trying to conceal evidence and auditor access to other evidence needed for concluding whether
impairment loss is accurate or not. (1).
Assumption are straightforward so should need to be look in detail is quite an illogical statement of Silvio because
assumptions are risky areas of financial statement and contain a high risk of management bias and the
assumption can be manipulated to understate the impairment loss and overstate profit so auditor need to
critically evaluate the assumption. (1)
Assumption are consistent with previous years is quite wrong statement by finance director as assumption
changes over time and are never static. Assumption have underlying basis and these basis changes over time for
e.g. the underlying basis of determining a recoverable amount include value in use and fair value both can change
over year. (1)
Auditor agree with assumption last year is quite inappropriate statement as its not necessarily that if auditor
agrees to something in last year he will agree with it this year. Disagreements with management can arise
anytime and in any audit so the conclusion that last time assumption were correct is not a guarantee that they
will be correct this time (1)
Silvio advising the audit team to check the last year working paper for assumption is another strange statement
as last year working papers will only contain basis of last year assumption not this year and for this year
assumption to be verified auditor need to critically evaluate the basis used for this year assumption in light with
auditor current knowledge of business. (1)
All calculation are checked by group internal audit department, means that the internal audit department review
and work on behalf of the finance director and its seems in the absence of info in case that the internal audit dept.
is under the finance director, thus lack independence. So the calculation performed the internal audit dept. should
be re-performed by the external auditor to ensure they are actually correct. (1)
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Dec 16 –
Q4 (a)
Discuss how professional scepticism should be applied to the statements made by the management and
auditors of Valerian Co regarding the outstanding legal case. (6 marks)
 Picking the strange element in the statement and arguing or challenging the statement will fetch you 1
mark per challenging the statement. (Max 6 marks)
 Issue- outstanding legal case
o Statement by management
o Statement by auditor of Veleran company
 Draft the answer just like June 15 and email me at aaamock@gmail.com
Assignment for lecture 4 and what’s coming up next in Lecture 5

Assignments:
 Read the article- professional skepticism
 Email me 2 answers – June 12 and Dec 16
Lecture 5 (coming up)
 Topic 4 with past paper – Auditor responsibilities for fraud
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LECTURE 5- BLOCK 1
Topic 4: Auditor and fraud
Objective: Auditor and fraud
Learning outcome:
 You will understand- the split of management and auditor responsibilities for fraud
 You will also understand- how the auditor should plan and perform the audit realizing the fact that the
FS could be materially misstated
 Practice of past paper- understand the exam rigor.
Earning management / window dressing of FS/ massaging the figures/ fraudulent financial reporting/
creative accounting
 Risk of management bias in manipulating the FS to present better results to shareholder. This risk is
linked with management rewards and bonus ( self –interest)
 Earning management =
o Deliberate misstatement
o Falsification of accounting records
o Intentionally breaching an accounting standard
o Knowingly omitting a:
 Disclosure
 Transaction
 ISA-240(R)- Incentive or pressure to commit fraudulent financial reporting / earning management can
come from sources inside and outside the entity
o Inside the entity- target set at the start of the year becomes pressure for management if actual
results are far away from target. Normally the last quarter of the financial year is risky for earning
management.
o Outside the entity- (Listed entity- the pressure comes from stock market expectations) and
normally these expectation from stock market add pressure on the board of directors to present
better results to meet the expectation.
 In times of economic recession or economic downturn, there is an opportunity for earning management.
For e.g. lots of company in economic recession can face material uncertainties relating to going concern
but the management will deliberately omit disclosure relation to the uncurtaining from the FS to
present a better picture of company
EXAMPLE: ALPHA COMPANY
There is an economic recession. The sales of the company has gone down by 5.8% over the last year. The
company has lost several customer contracts as a result of economic recession.
Is there a risk that revenue could be misstated?
Thinking point- (this is the way the auditor should think!)- What if the decline in sales is more that 5.8% and
the management has fabricated to show a decline of just 5.8%.? Is the sales overstated? Yes could be.
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How should the auditor respond to earning management? – Auditor responsibilities for fraud.
 Management is primarily responsible for preventing and detecting a fraud be ensuring effective
internal controls in place including the internal audit department.
 Auditor is not responsible to prevent a fraud! However the fact that an annual audit will be carried
might work as a deterrence (Fear) for management.
 However, auditor should plan and perform the auditor with an attitude of professional skepticism
realizing the fact that the financial statements could be material misstated (earning management).
 The auditor has limitation – namely, audit is done on sample basis and auditor focuses on material aspects
of financial statement and also has a time pressure.
Auditor responsibilities for responding to fraud!
1. Use of professional scepticism
2. Discussion among engagement team- this is planning meeting whereby the partner/ manager
discussed the key areas of FS where risk is high so that the team is mentally alert before the start of
audit where to focus on.
3. Evaluate the accounting policies- to ensure that accounting policies are in line with IAS/ IFRS and there
is no breach with the relevant standards.
4. Completeness of disclosures- auditor should carefully evaluate the notes to the financial statements to
ensure complete disclosure required by financial reporting standard and applicable national laws are
given.
5. Communication to TCWG- if there auditor identifies any material misstatement / breach of standard etc.
the auditor should on a timely basis communicate the matter to Audit committee and then to the Board
of directors so that an action can be taken to rectify the issue. ( Question management integrity)
6. Audit report- the auditor should consider the implication of an unresolved misstatement on the audit
report
7. Other reporting requirement – the auditor should also communicate any fraud in the FS/ or any
misstatement in the FS to the relevant national authority if that is required by the national laws
Student note – Read article- massaging the figure to have excellent knowledge of exam paper
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Past papers
June 16- Q3a
3 (a) According to ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements:
‘When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a
presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue
transactions or assertions give rise to such risks.’
Required:
Discuss why the auditor should presume that there are risks of fraud in revenue recognition and why ISA
240 requires specific auditor responses in relation to the risks identified. (7 marks)
Why auditor should presume there is a risk of fraud in revenue recognition? – 2 marks to discuss each !
Presumption
 Revenue is the top line of income statement and any manipulation in the top line will have a trickle-
down effect on the profitability so it is easier for management to manipulate revenue for window
dressing the financial statement (2)
 Because the revenue recognition criteria can be wrongly applied and revenue can be recognized early
even when performance obligation is not met which will overstate the revenue (2)
 The number of transactions within revenue throughout the year is significantly higher which means the
management can easily use the volume of transaction within the sales ledger, to create fictitious
transaction or falsification of records to overstate revenue (2)
 Most of the time management rewards or bonuses are linked with sales growth and market share and
this also increase the chances of fraud of revenue (2)
Why ISA 240 requires specific responses in relation to risk? – 2 marks for each why!
 So that the auditor may detect a material misstatement by using the responses in an effective manner
(2)
 The responses given in ISA240 are standardized responses which will be used by all audit firm globally
which will result in more standardization approach of how to deal with fraud in the financial
statement(2)
 Specific responses will help the auditors to plan and perform the auditor is a more appropriate manner
helping them to realize that FS could be materially misstated. (2)
21
3B(ii)
Legal dispute
At the year-end York Co reversed a provision relating to an ongoing legal dispute with an ex-employee who was
claiming $150,000 for unfair dismissal. This amount was provided in full in the financial statements for the year
ended 30 November 2014 but has now been reversed because Mr Smith believes it is now likely that York Co
will successfully defend the legal case. Mr Smith has not been available to discuss this matter and no
additional documentary evidence has been made available since the end of the previous year’s audit. The
audit report was unmodified in the previous year. (6 marks)
Required:
Evaluate the implications for the completion of the audit, recommending any further actions which
should be taken by your audit firm.
Brainstorming
 Evaluate – implication of the legal dispute for the completion of audit ( 2 marks)
 Recommend- the action to be taken ( 1 mark each)
 6 mark
Notes:
 Reversal of provision – alert ! the auditor should exercise professional skepticism asking management
reason why
 $150,000 has been reversed- means the expenses are understated and profit is overstated ( technique
for creative accounting )
 Mr. Smith- is the owner – believe is an assumption which could be wrong unless sufficient appropriate
audit evidence is gathered
 Mr Smith is Unavailable to discuss the matter
 No documentary evidence is provided.
Implication for completion of audit

The likely implication for completion of audit knowing the fact that there has been a reversal of provision by Mr.
Smith is a follow:
 The auditor is failing to gather sufficient appropriate audit evidence to conclude whether the
reversal is right or wrong due to the fact that Mr. Smith is unavailable and there is no documentary
evidence provided to the auditor for Mr. Smith believe.
 Due to the behaviour of Mr. Smith hiding from the auditor and is absent to face the auditor, it bring into
doubt the client integrity and also raises question mark on rest of the evidence gathered during audit
from Mr. Smith.
 Further the likelihood that Mr. Smith is involve is fraudulent financial reporting as demonstrated by the
characteristics of Mr. Smith and the reversal of provision with no documentary evidence, the auditor
should consider the implication for the audit report and further implication for reporting the instance
to any regulatory authority if that is required so.
Action (is to find a solution to the problem given in case)

1. Correspond directly with the legal advisor dealing with case to find evidence in absence of Mr. Smith
2. Review any correspondence during the year from the ex-employee do identify any change in the legal
dispute circumstance
3. Discuss with matter with any other person in top management in absence of Mr. Smith
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Sep/Dec 2019 - Q3c

(c) The audit committee members have expressed their dissatisfaction that the company’s auditor did not identify the
fraud.
Required:
Explain the difficulties arising for management and for the auditor with respect to discovering fraud. (5 marks)
Marking scheme- for each difficulty – you will fetch 2 marks.
Management: (write in para form –each is worth 2 marks)
 Concealment of information / fraud is done with perfection

 Collusion between different department / employees
 If the fraud is done by top management (directors)
Auditor:
 Time pressure
 Sampling basis of audit – not 100% transactions are verified
 Material basis of auditor- auditor don’t focus on immaterial things.
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Assignment- Lecture 5
 Read the article- massaging the figures

 Attempt the Q2(A)(i)- March 2020- for 6 marks and email me at aaamock@gmail.com
 Read and plan Q1e Dec 18 – for 6 marks
What’s coming next in Lecture-6
 Doing Dec 18 Q1e – 6 marks at the start of lecture 6

 New topic- Topic 5 auditor responsibility for laws and regulations
24

LECTURE 6- BLOCK 1
Topic 5: Auditor responsibilities for laws and regulations (ISA-250)
Objective/ learning outcome
1. Split of responsibilities between the management and the auditor ( laws and regulator)
2. Auditor responsibilities when a non-compliance with laws is detected (Read the article by the
examining team- Responding to NOCLAR- [ non-compliance with laws and regulation] )
3. Past paper practice
Split of responsibilities
Management- is responsible to implement a robust or a sound system of internal controls in order to prevent
and detect any non-compliances with laws and regulation. (E.g. NEDs, Audit committee, internal audit
department, policies and procedures, training and development etc.)
Auditor – should be alert (exercise professional skepticism) throughout the process of audit for any instance of
non-compliances with laws and regulations and if any instance is identified (NOCLAR) should take appropriate
actions. (Article- Responding to NOCLAR)
What is NOCLAR?
NOCLAR- Non-compliance with laws and regulations
 Omission or commission
o Omission- means that the laws is not followed
o Commission – means that the laws is followed by not properly or completely
 Intentional or un-intentional
o Intentional- deliberate (serious)/ with purpose
o Un-intentional – mistake(Error)
Types of laws
Background-
 At the stage of planning- the auditor gathers knowledge of business (KOB) including knowledge about
relevant laws and regulations
 Knowledge about laws at planning stage helps auditor to identify any instance of NOCLAR during audit
Types of laws:
1. The ones which have direct impact on the financial statement (e.g. IAS/IFRS etc.)
2. The ones which are fundamental to the operating aspect of the client business and can result in penalties
and going concern issues if not adhered
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Auditor response to NOCLAR (Read the article)

1. Obtain an understanding of:
a. The nature of act (omission or commission)
b. The circumstance in which it occurred (intentional or un-intentional)
c. The effect on FS if any
2. Discuss with:
a. Management (middle management / CEO)- first
b. Those charged with governance (Audit committee/ BODs)- second (if needed)
c. Seek a legal advice in certain circumstance ( correspond with a legal expert for discussing the
likely implication of the NOCLAR on FS or on the going concern of the company pertain to laws in
relation to operating aspect of client business)
3. Evaluate the implication of NOCLAR on:
a. Other aspects of audit
i. Reassess
1. Client integrity – the auditor should rethink or reassess the client integrity
2. the sample size for the rest of the auditor
3. the materiality level
4. The future of auditor-client relationship
4. Evaluate the impact on: (unresolved NOCLAR)
a. Audit opinion- if management and TCWG failed to rectify the NOCLAR
5. Determine whether to report NOCLAR to a: (un-resolved)
a. Regulator (consider the national laws and national requirement)
6. Documentation – the working paper in a proper manner for NOCLAR to ensure auditor has sufficient
appropriate audit evidence that auditor has fulfilled the responsibilities for NOCLAR.
Summary
Auditor response to NOCLAR

1. Understand
a. Omission/commission
b. Deliberate/ un-intentional
2. Discuss
a. Management
b. TCWG
c. Legal expert
3. Implication
a. FS
b. Opinion
c. Other aspects of audit
4. Regulator
5. Documentation
26
Past papers
Dec 13 / Jun 15
Dec 13 Q3b- 6 marks
In relation to management’s decision not to report the accident to the National Coal Mining Authority,
discuss Burton & Co’s responsibilities and recommend the actions which should be taken by the
firm. (6 marks)
Brainstorming
 Discuss Burton responsibilities ( Laws and regulations) – 2 marks ( for one para)
 Recommend actions to be taken (in response to the management decision?) – 1 mark per action to a
max of 4
Burton responsibilities
The audit firm Burton is responsible to plan and perform the audit by being alert to any instances of non-
compliance with laws and regulation pertain to the coal mine industry and should take timely actions if any
instance of non-compliance is detected during audit.
The accident at the ledge hill mine where luckily no one was injured, Burton Company should:
1. Investigate the accident log book to confirm whether the claim of Dasset Company about no one injured
is right or wrong as this will give understanding to Burton about the nature of act and the circumstances.
2. Evaluate the implications of the accident on the financial statement if any, like any need of
impairment or any provisions to be recognized etc.
3. Seek a legal advice whether the accident is reportable to regulator considering no one was injured and
decide on the future course of action
4. Evaluate the implication on the opinion if the implication on the FS of the accident are not correctly
recognized by the management
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June 15 – Q2b
Discuss the implications of the audit senior’s note (Case above) for the completion of the audit,
commenting on the auditor’s responsibilities in relation to laws and regulations, and on any
ethical matters arising. (9 marks)
Brainstorming
 Likely implication of the matter in the case on completion of audit ( 1 mark per implication /
para form)
 Auditor responsibility for laws and regulations (2 mark per responsibility/ para form)
 Ethical matters if any in case ( 1 mark per ethical matter/ para form)
Assignments from Lecture 6
 Read an article- responding to NOCLAR

 Attempt the June 15 Q2b and email me the assignment at aaamock@gmail.com
What’s coming up in Lecture 7 to 10?
 Lecture 7- Topic 6
 Lecture 8- Topic 7 and 8
28

LECTURE 7- BLOCK 1
Topic 6: Using the work of others
Learning objective:
 Who others are? In the context of the external auditor

 Criteria to use the work of others (pre-requisite of using the work of others)
 Significant component / component auditor?
 Practice of past paper
Who others are?
ISA-600, ISA-610 & ISA-620
 ISA-600 – Group audit (Parent auditor versus the component auditor (Subsidiary auditor))
 ISA-610- Using the work of internal auditor
 ISA-620- Using the work on an expert
Criteria to use the work of others (pre-requisite of using the work of others)
Whenever the external auditor, uses the work of others, given in ISA-600 series, the external auditor should
ensure before using or relying on the work of others that: (ICED)
 The other is independent (I)

 The other is competent (C)
 The other is experienced (E)
 The work perform by other is well documented. (D)
Examples
1. If the internal auditor is working under directors is the internal audit independent? (e.g. the IA report
directly to finance director) – No
2. If the internal auditor in working under audit committee is the IA independent? Yes, definitely
3. The internal audit department was recently established? Is the department experienced? No
4. The legal expert is a friend of the finance directors or the legal expert has a shareholding in the company
of which he is a legal expert? Is the legal expert independent? No
5. Qualification/ certifications etc. to pick up the competence of the others?
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Group audit
 Group involve a parent company and subsidiaries

 Group audit-
o involves a parent auditor and a component(subsidiary) auditor
o parent auditor is also known as the principal auditor or is also known as the group auditor
o parent auditor is responsible for the audit of:
 the parent company financial statement
 the consolidated financial statement
o The group can involve many subsidiaries- some of which will be significant. What is a significant
subsidiary and how will you decide in exam paper is the subsidiary significant?
 A significant subsidiary is the one which is 15% or more of the group profit / or revenue
or total asset.
 Not only the 15% threshold is important to judge a significant components- if in the exam
the financial numbers are not given, and you cannot identify the % to judge whether the
component is significant or not , then use other criteria to judge whether the
component is significant or not
 New subsidiary acquired during the year
 Loss making subsidiary
 Subsidiary on which some legal case is going on/ or something special in the case
 What if a subsidiary is not 15% of the group total assets/ or profit / or revenue when you
find the % on the calculator BUT the question mention that the subsidiary is newly
acquired/ loss making/ has some legal case going on etc.
o Summary – for student
 If the subsidiary is 15% or more – conclude its significant
 If the subsidiary is less than 15% - look into other factors to conclude whether the
 If the % calculation is not possible- then look into other factors to conclude whether the
o Should the group auditor/ parent auditor identify – which component of the group are significant
at the planning stage of group audit? YES
Situation – involving significant components
Suppose, Unilever plc. In UK is audited by PWC so PWC is the parent auditor. The parent auditor identified one
subsidiary of Unilever which is significant i.e. for e.g. Unilever in China. What if?
1. Unilever China is audited by PWC in China (no application of ICED)
2. Unilever China is audited by another firm of auditor (Yes, ICED will be applied)
Conclusion
 For the parent auditor the first step is to identify the significant component/s of the group
 In the second step the parent auditor need to evaluate which of the significant component are audited
by another firm (which is not the same as parent auditor)
30
Past papers – drill

1. 12/13- Q1C
2. 06/14-Q1B
3. 12/14-Q3A
4. 12/16-Q1B
5. 06/18-Q1B
06/18- Q1b
1(b) To assist the audit assistants’ understanding of our audit strategy in respect of Borzoi Co:
(i) Explain the term ‘significant component’ (2 mark) and assess whether Borzoi Co is a significant
component of the Group, and (if you find the % it will give you 1 mark+ you will get 2 mark to conclude on
the basis of % or other factors that Barzoi is a significant component)
(ii) Discuss the nature and extent of involvement which our firm should have with the audit risk assessment
to be performed by Saluki Associates. (8 marks)- (Each nature and extent is worth 2 marks – from above we
are now left with 5 marks/ 2 = 3 points to write here)
B(i)
Significant component
A significant component to the group can be on the basis of qualitative or quantitative factors. The quantitative
factors includes, that for a component to be significant must be 15% or more of the group total assets, revenue
or profit. The qualitative factors includes other special matters pertaining to the component like a new
subsidiary, or a foreign subsidiary etc. (2)
Borzoi
Borzoi total assets are 68 million Oska which at the current exchange rate coverts to $17 million. On this basis
Borzoi is 17.8% of the group total assets. (1)
On the basis of 17.8% Borzoi is a significant component for the Bassett group as it is more than 15% of the
threshold which define whether a component is significant or not (2).
Moreover, Borzoi is also significant on the basis of being the only foreign subsidiary in the group located out of
the home country and also facing issues like political turmoil and currency fluctuations. (2)
B(ii)- Nature and extent of involvement by Whippet with Saluki Associates.
 Whippet in order to ensure that risk assessment procedures have been well performed by Saluki in
context of Borzoi, Whippet will need to review the planning working papers of Saluki to conclude
whether risk assessment has been rightly performed (2)
 Further Whippet can ask Saluki to perform additional risk assessment procedures including asking
Saluki to focus on some other risk not identified by Saluki yet to ensure that risk assessment has been
thoroughly performed (2)
Tutor note: Please read the article GROUP AUDIT – as it will be excellent for your knowledge
31
Dec 16- Q1b
1(b) Discuss the matters to be considered in determining the assistance which could be provided by, and the
amount of reliance, if any, which can be placed on the work of ZCG’s internal audit department; (7 marks)
Brainstorming
Discuss the matters – each matter discussed in worth 2 marks – i.e. 7 marks / 2 – you will be discussing 4 matters
 Assistance which can be provided by IA to EA

o Can it lead to efficiency ? yes
o Internal controls / test of control- can reduce amount of work in external audit
 Amount of reliance the EA can put on the work of IA
o ICED? Application to the case
o If ICED is in favour of IA - the reliance will increased
o If the ICED is against IA – the reliance will reduce
Points-
 Well established department ( old ones- a lot of experience)

 Range of services – so the scope of department work is good / lot of monitoring
 Qualified accountants – head the department
 Report to group finance department
 Irregularities (Assistance)
o Authorization of expenses
o IT controls
o Payroll fraud
Assistance – some suggestions
 Except for independence most of the matters goes in favour or reliance which means assistance is
possible from the IA
 The irregularities already identified will help improve efficiencies for external auditor as the EA can pick
the issues identified by IA as risky areas and during the course of audit EA can perform more procedures
in areas of irregularities and be skeptical. ( lot of time will be saved in identifying issues as they are
already identified by IA)
Tutor note: Complete this answer and email me as assignment at aaamock@gmail.com

32
Lecture 7 assignment
 Read 2 articles – see the title slides

 Complete the Q-Dec 16 Q1b and email me
 Do the rest of these questions yourself and email me
o 12/13- Q1C
o 06/14-Q1B
o 12/14-Q3A
Lecture 8 coming up – what to expect
 Topic 7- opening balances

 Topic 8 – Joint audit
33

LECTURE 8- BLOCK 1
Topic 7 & 8 : Opening balances & Joint audit
Objective/ learning outcome:
 Opening balance- auditor responsibility (ISA-510)

 Joint audit-
o What it is?
o Advantages and dis-advantages (Examined twice)
 Transnational audit – what it is?
Topic 7- Opening balances – ISA510
When there is a change of auditor- what are the responsibilities of the new (incoming) auditor with regards
to opening balances?
 The new auditor should confirm the competence and independence of the previous auditor before
placing any reliance on the previous auditor work with regards to last year closing balance.
 Review the working papers of the previous auditor to confirm the closing balances to be carried
forward as opening balances for this year
 If there is any difference in last year closing balances and this year opening – discuss with management
the reason thereof
 If last year audit report was modified, the new auditor will emphasize on the year of modification in
the current year audit
 The change of auditor, will be mention in the other matter para of the audit report ( OMP because it is
a conditional para of the audit report if added, will make the audit report modified.)
If the company was exempt from audit in the last year, and this is the first year that the audit is required by law,
what responsibilities will the auditor have in this situation for opening balances?
 Receivable/ payables
o Verify the collection in the current year against the opening receivables
o Verify the payment in the current year against the opening payable
o Circularize confirmation letters to receivables and payable for confirm the current year and the
last year balance
 Inventory
o Observe the current year inventory count and determine the closing inventory position for the
current year
o Roll back the closing inventory to the opening inventory by adding the GDN and subtracting the
GRN.
o A sample of the opening inventory and confirm the post year end selling prices to confirm
whether inventory was rightly valued at lower of cost or NRV.
 Non-current assets / liabilities
o Review the source documents underlying the opening loans and fixed assets to confirm they exist
and are accurate
o Circularize confirmation to bank for confirming the closing balance of current year and last year
for loan
 Obtain a representation letter from the management for the overall completeness of the opening
balances.
Tutor note: (ISA580- Representation letter)
 Representation is not a substitute of the evidence obtained directly by the auditor. Thus representation
is a last resort of evidence.
34
Exam paper – Opening balances

Jun11- Q3b
Required:
In relation to opening balances where the financial statements for the prior period were not audited:
Explain the audit procedures required by ISA 510 Initial Audit Engagements – Opening Balances, and
recommend the specific audit procedures to be applied to Wexford Co’s opening balance of inventory.
(8 marks)
8 marks- ( 1 mark each so a total of 8 procedures)
 General procedures on opening balance when prior year FS was not audited
 Specific procedures on inventory.
Email me your assignment at aaamock@gmail.com
35
Topic 8: Joint audit and transnational audit

Joint audit
Joint audit is a practice whereby one entity is audited by two auditors. In the case of joint audit both auditor
work together on a joint basis and issues a joint audit opinion.
In the EU, audit reforms, it was suggested that in order to give opportunity to small firms to learn from big firm
and to open commercial opportunities for small firm to earn, all listed companies will have 2 auditors, one big
firm and one small firm.
Advantages- of joint audit includes – synergy effect (pool of experience)+ efficient conduct of audit+ reduce
detection risk broadly + growth of profession (As mentioned in reform point above)
Disadvantages- generally when 2 auditors work together, there will be conflicts, difference of opinion ,
arguments. Moreover, engaging 2 auditors is costly.
Practice
 Dec 12- Q2b

 March 2020- Q1c
Marking scheme of each adv. or dis-adv. is 2 marks each. So for a 6 marks question you need to write in total 3
points. Each can be explained in max 2 sentences not more than that
Email me the assignment at aaamock@gmail.com
Transnational audit
 No question/ this is just a term you should know for AAA paper.
Transnational
 National means something within the local/ national boundary (jurisdiction)

 Transnational means something relied or trusted outside the national boundary ( jurisdiction)
What is a transnational audit?
- An audit performed by the forum of firms (FOF) means the BIG-6, (i.e. PWC, EY, KPMG. DELOITTE,
GRANT THORTON AND BDO) is known as transnational audit because the audited results can be relied
upon outside the home country for any future loan or listing internationally.
36
Assignments and what’s coming next in lecture 9

Assignments – attempt the THREE questions and email me at aaamock@gmail.com
- June 11- Q3b
- Dec 12- Q2b
- March 2020- Q1c
What’s up in lecture 9?
- Topic 9- Audit committee
- Topic 10- Outsourcing
37

LECTURE 9- BLOCK 1
Topic 9: Audit committee & 10: Outsourcing
Topic 9- Audit committee (AC)

Student note: You should be aware of the role the AC plays in context of external audit. You should know the
following:
1. The general principles of corporate governance – relating to the role of AC in context of external audit
2. The involvement of AC in the annual audit cycle
3. Provision of non-audit services – whether the external auditor can provide non-audit services to an
audit client or not?
General principles – AC versus the external auditor

1. Recommend - appointment , re-appointment and removal
2. Approve – fees for audit and non-audit services (NAS)
3. Agree – terms of engagement ( engagement letter)
4. Review –
a. Threat to independence
b. Safeguard in place
Annual audit cycle- the role of audit committee.
Planning stage- the engagement partner (EP) have a meeting with AC in which the following are discussed:
1. The audit strategy and the audit plan
2. Materiality levels
3. Resources to be used ( audit team)- competence/ callibre / size
Review stage (finalization stage)- after the completion of the fieldwork (i.e. after the performance of test of
controls and substantive procedures), the audit manager or the audit partner should meet the AC again to
discuss:
1. The findings from the audit (i.e. the misstatements, or the weaknesses in the IC system, or any issues
pertaining to management behaviour or limitations in the audit etc.)
2. The management response to the findings ( whether management agree to resolve or dis-agree)
3. The un-adjusted misstatements (errors) – i.e. the misstatements on which the management disagree.
End of audit – at the end of audit , the engagement partner should have an audit clearance meeting with the
audit committee in which the audit committee will ensure that:
1. The audit was carried out as per plan ( if there are any deviation – this will be discussed and justified by
the engagement partner)
2. The robustness of communication between the audit team and the audit committee
3. The effectiveness of the management letter communicated by the auditor to the management in which
issues identified during audit was discussed
4. The feedback the AC got from management involved with external auditor (e.g. finance director)
5. The overall feedback about external auditor is shared with board of director.
38
Non- audit services

Student note: You should be familiar that in the case of listed company the code of conduct and corporate
governance is very alert to the types of non-audit services which are permissible to listed companies and the
ones which are prohibited to listed company.
The AC is the custodian of external audit independence and should develop a policy of prohibited and
permissible services in light of the code of conduct.
If a service is permissible to be offered by the auditor, the AC will look into:
1. Competence of the audit firm against the service to be offered
2. Safeguard put in place by the audit firm
3. The level of fees to be concluded.
Past paper – understanding and assignment

Dec 16 Q5 (A)- 10 MARKS
Required:
In relation to the information provided for Gull Co, comment on:
(i) The ethical and professional matters in relation to the recruitment requests made by Gull Co; (5)
(ii) The implications the governance structure and proposed listing may have on the audit process. (5)
Note: The total marks will be split equally between each part. (10 marks)
Brainstorming
(i)- You will read the recruitment request from the Gull Company in the case and identify ethical and professional matters
with respect to the request. 1 mark per ethical/ professional matter and 1 mark per action. 5 marks answer means in total
5 points.
(ii)- Implication (impact) – the governance structure and the proposed listing will have on audit process ?
 Due to proposed listing – the AC will become part of governance structure of Gull company- so you need to think,
what will be the impact of AC on the audit process – 1 mark per implication you write.
 The proposed listed- you need to think what impact the proposed listing will have on audit- for e.g. the following
(1 mark per implication you write.)
o The auditor needs to adhere with more applicable laws
o The audit risk will increase (e.g. the risk of management bias will go up)
o The need to exercise due care or to be skeptical will increase
Email the assignment at aaamock@gmail.com

39
Topic 10: Outsourcing and its impact on audit

Student note- If an audit client has outsourced a function to a service organization, how will the
auditor conduct an audit in this situation considering the outsource function is material to the
financial statements?
The guidance on the conduct of audit comes from the following standards:
 ISA-402
 ISAE-3402
ISA-402 – guides the auditor of the client who has outsourced a function to a service organization to
perform extra audit procedures as follow:
1. Visit the service organization
2. Gather information from service organization
3. Perform test of control at the service organization pertaining to the function outsource
4. Perform substantive procedures based on the outcome of test of control ( if control are
ineffective more substantive procedures or less substantive if control are effective)
Visit- the service organization – should the auditor of the client plan the visit carefully in terms of:
1. Timing of visit- when to visit
2. How long the visit should be ( number of days)
3. Resources required for visit
ISAE-3402- What if the service organization to whom a function was outsource by the audit client
has an auditor?
Suppose you are PWC, an audit firm responsible for the audit of ALPHA company. Alpha company has
outsourced, its payroll function to GAMA Company. Payroll is material to the FS. Gama Company is
audited by Deloitte. How will PWC plan the audit of ALPHA Company?
The auditor of Alpha company, i.e. PWC should directly interact with Gama auditor i.e. Deloitte, and ask
Deloitte to provide an assurance on the controls at Gama company and whether control are effective or
not. PWC can request a TYPE 1 report or a TYPE 2 report from Deloitte on control effectiveness.
Type 1 report is about design of system (i.e. the policies and procedures are good)
Type 2 report is about design and operation of the system (i.e. the polices and there adherence)
Note: Deciding factor between type 1 and 2 is – dependable on the repute, market image and standing
of service organization.
40
Exam papers
Jun14-Q4b
I worked on the interim audit of Crow Co, a manufacturing company which outsources its payroll function. I know
that for Crow Co payroll is material. How does the outsourcing of payroll affect our audit planning? (4 marks)
Brainstorming
 How does the outsourcing of payroll affect our audit planning?
Answer: (every point is worth 1 mark)
 The auditor need to identify at the planning stage whether the service organization has an auditor or not.
 If there is an auditor for the service organization, the auditor should plan to seek assurance on controls
from the service organization auditor
 If the service organization does not have an auditor, the auditor should plan, performing additional audit
procedures during the conduct of the final audit.
 The audit firm should plan the visit to the service organization and plan the resources required to visit
the organization for performing audit procedures
Dec 16 – Q2c
The payroll function is outsourced to Jackson Co, a service organisation which processes all of Thurman Co’s
salary expenses. The payroll expenses recognised in the financial statements have been traced back to year-
end reports issued by Jackson Co. The audit team has had no direct contact with Jackson Co as the year-end
reports were sent to Thurman Co’s finance director who then passed them to the audit team.
Recommend further audit procedures

1. Visit Jackson company
2. Gather information from Jackson company about payroll
3. Perform test of control at Jackson company pertaining to the payroll function
4. Perform substantive procedures based on the outcome of test of control at Jackson company (if control
are ineffective more substantive procedures or less substantive if control are effective)
41
Assignment from Lecture 9- Block 1
 Dec 16 Q5 (A)- 10 MARKS – topic 9

 Read one article- corporate governance and its impact on audit.

KASHIF KAMRAN ACCA NOTES Combined Block A Notes

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AAA – BY KASHIF KAMRAN

Topic 1: Money laundering

Suggested way to answer this question:

Email me the assignment at : aaamock@gmail.com

Anti- Money laundering guidance for an audit firm

Policies and procedures

Assignment / what’s next in lecture 2:

AAA – BY KASHIF KAMRAN

 Tutor will do – Dec 18 Q3(a)(ii)- with students in live class

 Owner managed business

Brainstorming - Implication- on the audit

Suggestion to write a 6 mark answer

Jun16- Q3b (i) – cash transfer ( 7 marks)- Assignment

Dec 18- Q3(a)(ii)

 75% of sales are made on cash

 How to read and understand a requirement?

 Complete – Jun 12- Q3a ( as discussed in class today)

 Topic 2- auditor liability- theory + past paper

AAA – BY KASHIF KAMRAN

 Un-intentional – mistake/ error

 The duty of care enforceable by law exist

Bannerman case! - versus stakeholders

 Shareholders ( duty of care by law= Companies act 2006)

Unintentional versus intentional negligence

Limiting auditor liability

Example – Disclaimer of liability

Practice- June 13 Q4 a – Spaniel company

o Read the case

Assignment and what’s next in lecture 4

AAA – BY KASHIF KAMRAN

 Understand what professional skepticism is?

Professional skepticism (PS) – is:

 Component – auditor duty of care

 Throughout the process of audit

In relation to the audit of Coot Co’s payroll:

 Explain the meaning of PS (Bookish)- 2 marks

Assignment for lecture 4 and what’s coming up next in Lecture 5

AAA – BY KASHIF KAMRAN

Implication for completion of audit

Action (is to find a solution to the problem given in case)

Sep/Dec 2019 - Q3c

Marking scheme- for each difficulty – you will fetch 2 marks.

Management: (write in para form –each is worth 2 marks)

 Concealment of information / fraud is done with perfection

 Read the article- massaging the figures

What’s coming next in Lecture-6

 Doing Dec 18 Q1e – 6 marks at the start of lecture 6

AAA – BY KASHIF KAMRAN

Auditor response to NOCLAR (Read the article)

Auditor response to NOCLAR

 Read an article- responding to NOCLAR

AAA – BY KASHIF KAMRAN

 Who others are? In the context of the external auditor

 The other is independent (I)

 Group involve a parent company and subsidiaries

Past papers – drill

B(ii)- Nature and extent of involvement by Whippet with Saluki Associates.

Dec 16- Q1b

 Assistance which can be provided by IA to EA

 Well established department ( old ones- a lot of experience)

Tutor note: Complete this answer and email me as assignment at aaamock@gmail.com

 Read 2 articles – see the title slides

 Topic 7- opening balances