You are on page 1of 39

• Advanced Audit and Assurance  Exam Format 

from Sep 2018 exam


• Time: Three-hour 15 minutes
• Questions: 3 compulsory questions
• Question 1 = 50 marks
• One case study, with multiple parts
• Focus: Planning stage for the audit of a single company or a
group of companies = audit conso FS
• Risk assessment  about 20 marks = always tested
• Business risk
• Risk of material misstatement
• Audit risk
• Analytical procedures
• Materiality
• Rely on internal audit
• Rely on component auditor
• Ethics
• Audit procedures Always tested; about 5 to 8 marks
• Professional marks: 4 marks  presentation,
structure, clarity of answer
• In Q1  present answer in a briefing note format;
from audit manager to audit partner
• Question 2 and Question 3  25 marks each
• One question will always predominantly relating to
completion, review and reporting.
• Completion and review = audit manager reviews audit
work completed by audit senior and assistant 
requirements:
• Matters to consider
• Evidence expected
• Reporting = audit report
• Different types of questions on audit report:
• Criticise draft audit report
• Multiple misstatements in FS  evaluate individually and
on an aggregated basis  then recommend audit opinion
• Single problem  misstatement or limitation on scope
• Guaranteed topics
• Risk
• Audit procedures
• Matters to consider and evidence expected
• Audit report
• Ethics
• 2014 June Q3a(i) page 82
• matters to be considered and explain the audit
evidence  8 marks
• Matters  5 marks; 4 marks
• Evidence  3 marks; 4 marks
• Cooper Co’s factories are recognised within property, plant and
equipment at a carrying value of $60 million. Half of the factories
produce a chemical which is used in farm animal feed. Recently the
government has introduced a regulation stipulating that the chemical
is phased out over the next three years.
• Sales of the chemical are still buoyant, however, and are projected to
account for 45% of Cooper Co’s revenue for the year ending 31
January 2015.
• Cooper Co has started to research a replacement chemical which is
allowed under the new regulation, and has spent $1 million on a
feasibility study into the development of this chemical.
• Half the factories = $30m
• Represents 12.5% of TA  material to the statement
of financial position
• New regulation prohibits the use of the chemicals in 3
years’ time = an impairment indicator
• Management should perform an impairment analysis
to determine the recoverable amount of the factories.
• Recoverable amount = the higher of value in use and
fair value less cost of disposal
• If carrying amount is less than recoverable, recognise
impairment loss
• Risk
• Management did not perform an impairment analysis
and thus any impairment loss will not be recognised.
 assets and profits may be overstated
• Estimating value in use is subjective and inherently
risky. Management may be bias and overstate value in
use to minimise impairment loss.
• $1m on researching feasibility of a new chemical
represents 6.7% of profit and is material to the profit
or loss.
• Research should be charged to income statement as
expense.
• Risk = wrongly capitalised as intangible asset 
overstate assets and profits
• Evidence
• A review of the new regulation to confirm the chemicals used
will be phased out in 3 years and thus impairment indicator
exists.
• A review of management impairment analysis to assess
whether the assumptions used are reasonable, e.g. projected
cash inflow is for next 3 years only
• Recalculate the impairment analysis to ensure arithmetic
accuracy
• Review supporting documents for feasibility study and agree
amounts to income statement.
• during planning you are asked identify areas of audit risk or
risk of material misstatement arising from accounting
issues
• discuss accounting issues and their treatment in a
completion question  matters to consider/evidence
expected question
• Accounting issues could arise in reporting questions where
there may be an impact on the auditor’s report and the
type of opinion
• 2017 Mar/Jun Q4
• CGU NBV = $137m
• Fair value to sell = $125m
• Cost to sell = $1.5m
• Fair value less cost to sell = $125m - $1.5m = $123.5m
• Value in use = $128m
• Recoverable amount = $128m
• NBV – recoverable amount = $137m - $128m = impairment
loss = $9m
• Assumption = projected cash inflow = historical rate + 1 %
every year  unrealistic
• Impairment loss $9m  material?
• Accounting
• Indicator = retails sales reducing
• Recoverable amount = higher of FV less cost to sell and VIU
• Impairment loss = NBV – recoverable amount
• Impairment loss
• Write off goodwill first
• Then write off against assets on pro rata basis
• The impairment loss of $9m represents 0.47% of total
assets and 8.41% of profit before tax and is material to
the statement of profit or loss (1 mark for an
appropriate calculation and conclusion).
• Audit Procedures/Evidence Expected  Acquired
Licence
• Licence from government
• Licence from an owner, e.g. Disney
• Most important evidence = contract
• Cost
• Duration  useful life
• Right
• 2013 June Q3c page 63
• year ended 31 January 2013
• total assets of $300 million
• profit before tax of $47·5 million.
• an intangible asset of $15 million, cost of a
distribution licence acquired on 1 September 2012.
• period of five years.
• Materiality  $15m represents 5% of TA = material to the SFP
• Consider whether it met the criteria as IA:
• Identifiable  arose from contractual arrangement
• Control  exclusive right to sell a brand of soft drinks
• Economic benefits  whether management can demonstrate future
economic benefits exist
• Amortised over useful life of 5 years
• RMM
• Not able to show future economic benefits  should not be
capitalised  overstate assets/profits
• did not amortise  overstate assets/profits
• Amortisation = $1.25m which represents 2.6% of profit = immaterial
to profit
• Evidence
• Contract  cost/duration/right
• Cash book/bank statement = confirm amount paid
• Sales forecast/market research = future economic
benefits
• Discussion with management = why no amortisation
• 2014 Dec Q1c page 86
• Recommend the principal audit procedures to be
performed in respect of the acquired ‘Cold Comforts’
brand name; and (5 marks)
• The brand cost $5 million and is being amortised over
an estimated useful life of 15 years
• Contract = cost/ownership
• Payment = bank statement/cash book
• Recalculate amortisation
• Actual sales and forecast sales = economic benefits
• Discussion with management = 15 yr useful life
• Examiner article  example 2
• Dec 2011 Q5a page 36
• intangible asset of $12·5 million
• capitalised research and development costs
• market research = little demand in the near future for such
designs  management not able to show future economic
benefits exist  should not be capitalised
• cash balance of only $125,000  may not have sufficient
financial resources to complete the development  should
not be capitalised
• Misstatement = overstate IA and profit by $12.5m,
representing 54% of profit and 6% of TA  material to both
SFP and profit
• Material but not pervasive misstatement=> qualified opinion