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ACCA p7 advanced audit and assurance revision kit 2016 2017 ACCA p7 advanced audit and assurance revision kit 2016 2017 ACCA p7 advanced audit and assurance revision kit 2016 2017 ACCA p7 advanced audit and assurance revision kit 2016 2017 ACCA p7 advanced audit and assurance revision kit 2016 2017 ACCA p7 advanced audit and assurance revision kit 2016 2017
Paper P7 Advanced Audit and Assurance (International) This ACCA Study Text for Paper P7 Advanced Audit and Assurance (International) has been comprehensively reviewed by the ACCA examining team This review guarantees appropriate depth and breadth of content and comprehensive syllabus coverage For exams in September 2016, December 2016, March 2017 and June 2017 BPP House 142-144 Uxbridge Road London W12 8AA United Kingdom T 0845 075 1100 (UK) T +44 (0)20 8740 2211 (Overseas) E Learningmedia@bpp.com bpp.com/learningmedia • A user-friendly format for easy navigation • Exam focus points describing what the examining team will want you to • Regular Fast Forward summaries emphasising the key points in each chapter • Questions and quick quizzes to test your understanding • A practice question bank containing exam- standard questions with answers • A full index • All you need in one book Study Text Contact us In addition to ACCA examining team reviewed material you get: Advanced Audit and Assurance (International) BPP Learning Media is dedicated to supporting aspiring business professionals with top-quality learning material as they study for demanding professional exams, often whilst working full time BPP Learning Media’s commitment to student success is shown by our record of quality, innovation and market leadership in paper-based and e-learning materials BPP Learning Media’s study materials are written by professionally qualified specialists who know from personal experience the importance of top-quality materials for exam success ACCA P7 ACCA approved content provider ACCA APPROVED CONTENT PROVIDER ACCA Approved Study Text Paper P7 Advanced Audit and Assurance (International) Free access to our Exam Success site Look inside For exams in September 2016, December 2016, March 2017 and June 2017 February 2016 £32.00 ACP7(INT)ST16 (HO).indd 1-3 04/02/2016 16:07 ACCA APPROVED CONTENT PROVIDER As the first accredited publisher of ACCA materials, BPP Learning Media has set the benchmark for producing exceptional study materials for students and tutors alike Our Study Texts, Practice & Revision Kits and i-Passes (for exams on demand) are reviewed by the ACCA examining team and are written by our in-house authors with industry and teaching experience who understand what is required for exam success EXAM SUCCESS SITE To help maximise your chances of succeeding in your exams, we’ve put together a suite of exclusive ACCA resources Our Exam Success site provides you with access to a free digital version of this publication, as well as extra resources designed to focus your efforts on exams and study methods To access the Exam Success site, please email learningmedia@bpp.com with the subject line “Access to Exam Success site - eBook”, including your order reference number and the name of the book you’ve bought (ie ACCA F5 Study Text) for your access code Once you have received your code, please follow the instructions below: To access the BPP ACCA Exam Success site for this material please go to: www.bpp.com/ExamSuccessSite n Create a user account if you don’t already have one Make sure you reply to the confirmation email n Log in using your registered username and password Select the paper you wish to access n Enter the code you received when prompted You will only have to this once for each paper you are studying PAPER P7 ADVANCED AUDIT AND ASSURANCE (INTERNATIONAL) BPP Learning Media is an ACCA Approved Content Provider for the ACCA qualification This means we work closely with ACCA to ensure our products fully prepare you for your ACCA exams In this Practice and Revision Kit, which has been reviewed by the ACCA examination team, we: Discuss the best strategies for revising and taking your ACCA exams Ensure you are well prepared for your exam Provide you with lots of great guidance on tackling questions Provide you with three mock exams Provide ACCA exam answers as well as our own for selected questions Our Passcards also support this paper FOR EXAMS IN SEPTEMBER 2016, DECEMBER 2016, MARCH 2017 AND JUNE 2017 P R A C T I C E & R E V I S I O N K I T First edition 2007 Tenth edition February 2016 ISBN 9781 4727 4449 (Previous ISBN 9781 4727 2698 8) eISBN 9781 4727 4649 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place 142-144 Uxbridge Road London W12 8AA www.bpp.com/learningmedia Printed in the United Kingdom by RICOH UK Limited Unit Wells Place Merstham RH1 3LG Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media The contents of this book are intended as a guide and not professional advice Although every effort has been made to ensure that the contents of this book are correct at the time of going to press, BPP Learning Media makes no warranty that the information in this book is accurate or complete and accept no liability for any loss or damage suffered by any person acting or refraining from acting as a result of the material in this book We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions The suggested solutions in the practice answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated BPP Learning Media is grateful to the IASB for permission to reproduce extracts from the International Financial Reporting Standards including all International Accounting Standards, SIC and IFRIC Interpretations (the Standards) The Standards together with their accompanying documents are issued by: The International Accounting Standards Board (IASB) 30 Cannon Street, London, EC4M 6XH, United Kingdom Email: info@ifrs.org Web: www.ifrs.org Disclaimer: The IASB, the International Financial Reporting Standards (IFRS) Foundation, the authors and the publishers not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise to the maximum extent permitted by law © BPP Learning Media Ltd 2016 ii A note about copyright Dear Customer What does the little © mean and why does it matter? 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Contents Page Finding questions Question index iv Topic index vii Helping you with your revision viii Revising P7 Topics to revise ix Question practice ix Passing the P7 exam x Exam information xv Examinable documents xvi Analysis of past papers xix Useful websites xxi Questions and answers Questions Answers 85 Exam practice Mock exam Questions 381 Plan of attack .389 Answers .390 Mock exam Questions 409 Plan of attack .417 Answers .418 Mock exam (ACCA September/December 2015 Exam) Questions 441 Plan of attack .451 Answers .452 Review form iii Question index The headings in this checklist/index indicate the main topics of questions, but questions are expected to cover several different topics Questions set under the old syllabus paper Audit and Assurance Services (AAS) are included because their style and content are very similar to that of the current P7 exam The questions have been amended to reflect the current exam format Time Page number Marks allocation Mins Question Answer Parts A and B: Regulatory environment and professional and ethical considerations Lark (6/12) 15 29 85 Plant (12/12) 16 31 87 Becker (12/08) 20 39 91 Peaches (12/09) 16 31 95 Chester (12/13) 20 39 97 Smith & Co (6/08) 17 33 101 Carter (6/10) 20 39 104 Ryder (6/14) 20 39 107 Clifden (6/09) 17 33 110 10 Bunk (6/15) 20 39 113 11 Grape (12/09) 36 70 117 12 Retriever (6/13) 25 49 10 124 13 Nate & Co (12/07) 20 39 11 129 14 Weston (12/14) 20 39 12 132 15 Spaniel & Bulldog (6/13) 20 39 13 136 16 Raven (6/12) 15 29 13 139 17 Dragon Group (6/09) 34 66 14 142 18 Ted (6/15) 35 68 16 147 19 Francis (12/14) 25 49 18 154 20 Mac (6/10) (amended) 26 51 19 161 21 Distant 15 29 20 165 22 Juliet (6/10) 20 39 20 167 23 Apricot (12/09) 16 31 21 170 24 Faster Jets (12/14) 20 39 22 173 25 Magpie (6/12) 37 72 23 177 26 Adder (6/15) 25 49 25 183 27 Setter (6/13) 20 39 26 189 28 Lamont (AAS 6/07) 20 39 27 194 Part C: Practice management Part D and E: Audit of historical financial information and other assignments iv Finding questions Time Page number Marks allocation Mins Question Answer 29 Papaya (12/09) 36 70 27 196 30 Bill (6/11) (amended) 39 76 28 201 31 Mizzen (12/13) 25 49 30 207 32 Parker (6/13) 35 68 32 212 33 Lapwing (6/12) 33 64 34 218 34 Azure Airline (AAS 12/04) 35 68 36 223 35 Stow (12/13) 36 Cooper (6/14) 35 20 68 39 37 39 228 234 37 Butler (6/11) (amended) 32 62 40 239 38 Grohl (12/12) 40 78 42 244 39 Champers (6/09) (amended) 36 70 44 250 40 Grissom (6/10) (amended) 38 74 46 255 41 Jacob (6/11) 18 35 47 260 42 Waters (6/14) 25 49 48 262 43 Oak (12/11) (amended) 41 80 49 266 44 Dasset (12/13) 20 39 51 272 45 Soprano (6/15) 20 39 52 276 46 Willow (12/11) (amended) 27 53 52 280 47 Jovi (12/12) 28 55 54 283 48 Kobain (12/12) 16 31 57 287 49 Cuckoo Group 34 66 58 290 50 Bluebell (12/08) (amended) 36 70 59 292 51 Robster (6/09) (amended) 17 33 61 298 52 Connolly (12/14) 35 68 61 301 53 Adams (6/14) 35 68 63 307 54 Sci-Tech (12/07) (amended) 34 66 65 314 55 Rosie (6/08) (amended) 36 70 67 318 56 Medix (6/08) (amended) 36 70 69 324 57 Yew (12/11) 18 35 72 329 58 Snipe (6/12) 15 29 73 331 59 Nassau Group (6/11) (amended) 18 35 73 334 60 Cinnabar Group (AAS 6/02) 15 29 74 337 61 Poodle (6/13) 20 39 75 339 62 Dexter (12/08) 20 39 76 343 63 Bradley (12/14) 20 39 76 346 64 Lychee (12/09) 16 31 77 351 65 Marr (6/14) (amended) 20 39 77 354 66 Pluto (6/09) 17 33 78 357 67 Burford (12/13) 20 39 79 360 68 Blod (6/08) 17 33 80 363 Part F: Reporting Finding questions v Time Marks allocation Mins Question Answer 69 Axis & Co (Pilot paper) (amended) 15 29 81 366 70 Dylan (12/12) 16 31 81 368 71 Darren (6/15) 20 39 82 371 Mock exam Mock exam Mock exam (ACCA September/December 2015 Exam) vi Page number Finding questions Topic index Listed below are the key Paper P7 syllabus topics and the numbers of the questions in this Kit covering those topics If you need to concentrate your practice and revision on certain topics or if you want to attempt all available questions that refer to a particular subject, you may find this index useful Syllabus topic A REGULATORY ENVIRONMENT International regulatory frameworks for audit and assurance services Money laundering Laws and regulations B PROFESSIONAL AND ETHICAL CONSIDERATIONS Code of Ethics for Professional Accountants Fraud and error Professional liability C PRACTICE MANAGEMENT Quality control Advertising, publicity, obtaining professional work and fees Tendering Professional appointments D AUDIT OF HISTORICAL FINANCIAL INFORMATION Planning, materiality and assessing the risk of material misstatement Evidence Evaluation and review Group audits E OTHER ASSIGNMENTS Audit-related and assurance services Prospective financial information Forensic audits Internal audit Outsourcing The audit of performance information (pre-determined objectives) in public sector F REPORTING Auditor's reports Reports to those charged with governance and management Other reports G CURRENT ISSUES AND DEVELOPMENTS Professional and ethical Transnational audits The audit of social, environmental and integrated reporting Other current issues Question numbers 20(d), 44(b) 1(a), 8, 11(c), 13(a), 42(b) 26(b), 39, 56(b) 1(b), 3-7, 8(c)-(d), 9, 10, 13, 14(b), 15(a), 16, 22(b), 25(b), 35(c), 45(a), 56(a), 68(b), 70(a) 15(b)–(c), 20(d), 66(a) 15(d), 66(b), 68(c) 2, 10, 11, 12(a), 43(b), 63(a), 66(c) 4, 14(a) 9(b), 14(a), 17(b) 7, 17(a), 21(b), 33(a), 56(a), 70(a) 8(a), 18, 22(b), 25(a), 29-30, 32(a)– (b), 35, 37–40, 43(a), 47-54, 56(b)– (d) 24(a), 47(c) 11(a), 18(c), 19, 24(a), 26(a), 27-28, 33(b), 36, 37(b), 38(b)–(c), 39(c), 40(c), 44(a), 45(b), 46, 47(d), 54(b)– (c), 55(b), 58(a), 61(a), 62(a), 63(b), 64(a), 65(a), 67(a), 71(a)-(b) 25(a), 40, 49-50, 55(c), 59(b), 67(b) 31, 34, 41, 55(a) 21, 23, 33(a), 37(a), 42(a) 12(b), 20(c), 45(c), 20(a)–(b) 8(b), 20(a)–(b), 54(a) 21 37(b), 57, 58(b), 59–60, 61(b), 62(b)–(c), 63(b)–(c) , 64(b), 65(b), 66(b), 67(b), 68(c), 69, 70(b), 71 68(a) 68(a) 22(a) 17(c) 24(b), 32(c), 33(b), 50(c) 22(a) Finding questions vii Helping you with your revision BPP Learning Media – ACCA Approved Content Partner As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use revision materials reviewed by the ACCA examination team By incorporating the ACCA examination team's comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Practice & Revision Kit provides excellent, ACCA-approved support for your revision Tackling revision and the exam Using feedback obtained from the ACCA examination team review: We look at the dos and don'ts of revising for, and taking, ACCA exams We focus on Paper P7; we discuss revising the syllabus, what to (and what not to do) in the exam, how to approach different types of question and ways of obtaining easy marks Selecting questions We provide signposts to help you plan your revision A full question index A topic index listing all the questions that cover key topics, so that you can locate the questions that provide practice on these topics, and see the different ways in which they might be examined Making the most of question practice At BPP we realise that you need more than just questions and model answers to get the most from your question practice Our Top tips provide essential advice on tackling questions, presenting answers and the key points that answers need to include We show you how you can pick up Easy marks on some questions, as we know that picking up all readily available marks often can make the difference between passing and failing We include marking guides to show you what the examining teams reward We include comments from the examination team to show you where students struggled or performed well in the actual exam We refer to the 2016 BPP Study Text (for exams in September 2016, December 2016, March 2017 and June 2017) for detailed coverage of the topics covered in questions Attempting mock exams There are three mock exams that provide practice at coping with the pressures of the exam day We strongly recommend that you attempt them under exam conditions Mock exams and reflect the question styles and syllabus coverage of the exam Mock exam is the ACCA September/December 2015 exam paper This exam is compiled from questions selected by the examination team from the September 2015 and December 2015 exams They not reflect the entire September or December exams but contain questions most appropriate for students to practise viii Helping you with your revision A copy of the original purchase/ongoing maintenance contracts for the software to identify the continuing costs of maintaining the system at its current level of efficiency Historic records of sales by customer to verify management's statement that repeat customers make up over 60% of annual sales Copies of a sample of recent automated customer communications; these can be traced to customer bookings/sales records to confirm the current efficacy of the system Sales forecasts for the foreseeable future to assess the potential future cash flows attributable to the customer database system to assess its value when determining the potential purchase price Confirmation of the current price of similar database software to assess the market value/fair value of the asset Licence (ii) A copy of the original purchase agreement for the licence to confirm the $5 million cost and the exclusivity of the agreement The original purchase agreement can also be used to identify whether any further incremental/contingent considerations or royalties are due in the future A copy of the licence agreement to confirm whether the licence is for a fixed period of time or not and to confirm the exclusivity of the licence A breakdown of the sales figures relating to the new tyres; these can be used to compare the performance of the new tyres to existing brands Forecasts showing the expected future sales attributable to the new tyres to confirm the continued inflow of economic benefit from the asset Contingent liabilities The following enquiries should be made of the management of Titian Tyres Co: 468 Enquire of management and ascertain if any legal advice has been sought to determine who is liable to pay compensation in these cases, Titian Tyres Co or the supplier of the parts Enquire whether management has sought any legal advice with regard to the likelihood of having to settle the claims or not Enquire if management has records showing how many vehicles have been fitted with the faulty parts and whether these have been used in any estimates of the likely settlement costs Discuss with management the level of claims which have been settled since the year end Compare this with the original estimation to establish how effective management has been in making these estimates Enquire of management for how long the company used the faulty parts and for what portion of this time period the known claims relate to Discuss with management the details of any new claims which have been made since the year end which were not included in any estimations of the cost of settlement included in the contingent liability disclosure in the financial statements Discuss with management their assessment of any risk that further claims will be made which they are currently unaware of Enquire of management if other quality problems have been experienced with other parts from the same supplier Mock exam (Sept/Dec 2015): answers Question Text references Chapters and Top Tips Part (a) basically meant criticising an advert from an ethical and professional perspective There are only marks available but there is quite a lot to criticise here, so it was important not to go over your time allowance (13mins) When you were reading the scenario through, you would hopefully have noticed that the opening paragraph gives details of the accounting firm If you didn't notice this or skipped past it then the lesson is that these opening bits are not just waffle – they contain information that can get you marks In this case, the firm is a fairly small firm, which does not fit well with the advert's claim that it has 'the most comprehensive range of services in the country' The requirement asks you to 'recommend any actions necessary', and it's important that you not overlook this Actions are often get more marks than other comments, so (i) make sure you include some in your answer, and (ii) make it clear to your marker that you're giving an action, eg by using the phrase 'the action would be […]' Parts (b) and (c) were normal P7 ethics questions, and should not have been unduly difficult Try to identify the kind of threats that are present, as there are usually half-marks available for correctly stating the type of threat (eg 'self-review threat') Once you have done this, try to think of some appropriate safeguards, and then evaluate whether the threat will be reduced to an acceptable level (this is one place where the verb 'evaluate' comes in from the requirement) Easy marks There are no obviously easy marks, but the marks for suggesting safeguards in part (c) should not be difficult to come by Marking scheme Marks (a) Advertisement Advert reflects adversely on other professional accountants Misleading with regards to size of firm Misleading comments regarding expertise of tax team Threat to professional behaviour by guaranteeing to save tax Lowballing – self-interest threat and threat to professional competence and due care Potential self-review threat from business advice Free consultations permitted Remove misleading claims from advert Separate teams for audit and other services advertised Maximum marks (b) Renoir Co Intimidation threat to objectivity Meet senior management and explain the terms of the audit Consider integrity of Jim Cassatt and possible implications for audit Thorough performance and review of planning Early notice of audit requirements and logistics Self-interest threat created by overdue fees Delay audit until fees paid (1 max) Maximum marks (c) Homer Winslow Co Conflict of interest due to auditing Homer Winslow Co and Pissarro Co Normal to audit firms in the same industry Threat to objectivity Mock exam (Sept/Dec 2015): answers 469 Confidentiality threat Full disclosure to both clients Possible safeguards (½ each, max) Consideration of resources available Possible resignation from one audit Maximum marks Maximum (a) 20 Advertisement Accountants are permitted to advertise subject to the requirements in the ACCA Code of Ethics and Conduct that the advert should 'not reflect adversely on the professional accountant, ACCA or the accounting profession' The advert does not appear to be in keeping with this principle; it suggests that other firms of accountants charge inappropriately high fees and that the quality of their services is questionable This discredits the services offered by other professional accountants as well as implying that the services offered by Monet & Co are far superior The advert states that the firm offers 'the most comprehensive range of finance and accountancy services in the country' This is misleading; with 12 offices and only 30 partners Monet & Co is unlikely to be one of the largest accountancy firms in the country and is therefore unlikely to offer the most comprehensive range of services If it is misleading, this statement must be withdrawn from the advertisement The advert also implies that they have the country's leading tax team; it is not possible to substantiate this claim as it is not possible to measure the effectiveness of tax teams and even if it were, no such measure currently exists This is, therefore, also potentially misleading and should be withdrawn from the advert The suggestion that the tax experts are waiting to save the client money is inappropriate; no such guarantees can be made because tax professionals must apply relevant tax legislation in an objective manner This may lead to a reduction in a client's current tax expense or it may not Any failure to apply these regulations appropriately could raise questions about the professional behaviour of the practitioner Guaranteeing to be cheaper than other service providers is often referred to as 'lowballing' This could create a potential self-interest threat to objectivity and it could also threaten professional competence and due care if the practitioner is unable to apply the appropriate professional standards for that level of fee Offering business advice to audit clients creates a potential self-review threat to objectivity It depends on the sort of advice offered but it is possible that the auditor in consequent years may have to audit aspects of the business affected by the advice given This would be particularly relevant if the practitioner provided advice with regard to systems design It would be possible to offer both services if Monet & Co can use different teams to provide each service Given that they have 12 offices, it may be possible to keep these services completely separate and they may be able to offer both Offering services for free as part of a promotion is not prohibited but, similar to lowballing, this increases the threat to competence and due care if sufficient time and resources are not allocated to the task This may also devalue the services offered by Monet & Co as they may be perceived as being a promotional tool as opposed to a professional service Firms of accountants are permitted to offer free consultations, so this does not create any specific threats The phrase 'drop in and see us' may cause a problem with potential clients though as it may not always be possible to expect to see senior staff members without an appointment To avoid damaging the professional profile of the firm, Monet & Co would need to make sure they had a dedicated member of staff available to meet potential customers who is available without prior notice Finally, Monet & Co is not permitted to use the term 'Chartered Certified Accountants' because less than 50% of the partners of the firm are ACCA members This reference should be removed 470 Mock exam (Sept/Dec 2015): answers (b) Renoir Co Mr Cassatt's threat that he will seek an alternative auditor unless the audit is cheaper and less intrusive than the prior year constitutes an intimidation threat to objectivity This has arisen because Mr Cassatt is trying to unduly influence the conduct of the audit of Renoir Co The audit manager or partner should arrange a meeting with the senior management of Renoir Co and the audit committee, if one exists, and they should explain how the audit has to be performed and how the fee is calculated They should take care to explain the professional standards which they have to comply with and the terms of the engagement which the client agreed to, specifically that management should provide all necessary documents and explanations deemed necessary by the auditor to collect sufficient appropriate evidence It should be explained that due to the need to comply with these standards, they cannot guarantee to reduce either the volume of procedures or the audit fee Monet & Co should also consider the integrity of Mr Cassatt If the audit firm considers any threat created too significant, then they may wish to resign from the engagement If not, it may be necessary to use more senior, experienced staff on the assignment who are less likely to be intimidated by Mr Cassatt while performing audit fieldwork If the audit proceeds, it should be ensured that the planning is performed by an appropriately experienced member of the audit team This should be reviewed thoroughly by the audit manager and the partner to ensure that the procedures recommended are appropriate to the risk assessment performed In this way Monet & Co can ensure that any unnecessary, and potential time wasting, procedures are avoided The audit manager should then make sure that Mr Cassatt is given adequate notice of the timing of the audit and provide him with a list of documentation which will be required during the course of the audit so that Renoir Co may prepare for the visit by the audit team The manager could also recommend that Mr Cassatt and his team make specific time available to meet with the audit team and then request that the audit team use that time to ask all the necessary enquiries of the client This should minimise any disruption experienced by the client during fieldwork The overdue fees create a self-interest threat IESBA's Code of Ethics for Professional Accountants states that a self-interest threat may be created if fees due from an audit client remain unpaid for a long time, especially if not paid before the issue of the audit report for the following year The audit firm should determine the amount of fee which is unpaid, and whether it could be perceived to be a loan made to the client It may be a relatively insignificant amount, and it may not be long overdue, in which case the threat to objectivity is not significant If the self-interest threat is significant, then no audit work should be performed until the fees are paid This decision, and the reason for it, should be communicated to the management of Renoir Co or their audit committee, if possible (c) Homer Winslow Co The acquisition of the accountancy firm by Monet & Co creates a potential conflict of interest because Monet & Co will become the auditor of both Homer Winslow Co and their competitor Pissarro Co There is nothing ethically inappropriate having clients in the same industry; this is actually normal practice and allows firms of accountants to develop industry specialisms which allow them to offer high quality, expert services It is therefore likely that firms will have clients which compete in the same industry Acting for two competing companies may give rise to ethical threats though It may be perceived that the auditor cannot offer objective services and advice to a company where it also audits a competitor The clients may also be concerned that commercially sensitive information may be inadvertently, or intentionally, passed on to the competitor via the auditor The main safeguard available is to disclose the potential conflict to all parties involved If both Homer Winslow Co and Pissarro Co accept the situation, it is appropriate for Monet & Co to continue in its capacity as auditor to both as long as appropriate safeguards are put in place These include: The use of separate engagement teams Issuing clear guidelines to the teams on issues of security and confidentiality Mock exam (Sept/Dec 2015): answers 471 The use of confidentiality agreements by audit team members Regular review of the safeguards by an independent partner Monet & Co must also evaluate whether there are sufficient resources available to conduct the audits of both companies using separate teams If not, the audit firm will not be able to accept the additional work into the department If either Pissarro Co or Homer Winslow Co not give their consent, then Monet & Co must resign as the auditor of one of the companies If this is the case, a number of ethical and commercial considerations should be made before deciding which client should be rejected Monet & Co will need to consider the risk profile of both clients and should conduct appropriate acceptance/continuance procedures for both clients prior to making any final decision From a commercial perspective, Monet & Co may also consider which of the two clients provides the highest audit revenue Homer Winslow Co appears to be the larger company currently but Pissarro Co is a rapidly expanding business which could be a more lucrative audit client in the future In this case Monet & Co should also consider if they will be able to offer the range of services required by the rapidly expanding Pissarro Co without creating any self-interest or self-review threats to independence Monet & Co should also consider if any non-audit services are currently offered to the clients and whether additional services could be offered to either of them in the future As a rapidly expanding business, it is possible that Pissarro Co will require more services than the established Homer Winslow Co Question Text references Chapters and 17 Top Tips Part (a) required you to criticise an extract from an auditor's report The way this question is set out might give you the impression that you're only supposed to be criticising the drafting of the report, not the judgements made by the auditor If you did think this then notice that there are quite a lot of marks available for eg discussing the actual opinion expressed You could think of this question as being about two things: (i) what the auditor has done in response to the issue (in this case, express an adverse opinion and include an emphasis of matter paragraph), and (ii) how the report has been written and presented It is clearly wrong to express an adverse opinion and include an emphasis of matter paragraph, so you should spend time saying why this is wrong and what the auditor should have done instead, ie made a judgement based on the materiality and the pervasiveness of the issue, and then either done nothing, qualified the opinion, or issued an adverse opinion The report is vague and waffly, so marks were available for pointing out where it should have been tightened up Auditor's reports should not contain words like 'feel', which in this example is used because the audit senior is not sure of his/her ground What the auditor needs are firm statements and relevant facts to back them up with In part (b), the bottom line is whether the issue is material to the group, and in this case it clearly isn't There are effectively marks in the marking scheme for this issue, ie for calculating and stating materiality, and for stating that there is no effect on the group auditor's report That's 50% of the marks for this part of the question! Other than that, you really just have to discuss the need for the group auditor to understand the issue by communicating both with the component auditor and with the entity This is quite a difficult question in a way, because there is not that much more to say! In part (c) you needed to discuss the quality control procedures This hinged on realising both that this was a listed company (line of the scenario) and that listed company audits must have engagement quality control reviews Even if you didn't know this you probably could have guessed, as a quality control review is your go-to quality control for these kinds of question Easy marks The marks for calculating materiality in part (b) 472 Mock exam (Sept/Dec 2015): answers Marking scheme Marks (a) Critical appraisal of audit report Generally up to 1½ mark for each relevant point of appraisal Heading of 'basis of paragraph' (1 max) Vagueness of description of subsidiary Quantification of contingent consideration Identification of note in financial statements Vagueness in relation to correct accounting treatment Quantification of the effects on the financial statements Vague reference to 'relevant accounting standard' (1 max) Opinion paragraph heading (1 max) Reference to materiality Pervasiveness of the matter Appropriate opinion qualified or unmodified Use of emphasis of matter paragraph Maximum marks (b) 10 Audit of component Generally up to mark for each action and each implication for the Hopper Group explained Consideration of significance to group Discuss matter with component auditor Discuss matter with management of Seurat Sweeteners Co or the Hopper Group Sufficiency of audit evidence Calculation of materiality Materiality to the Hopper Group No modification to the Hopper Group audit report Potential communication to those charged with governance Maximum marks (c) Quality control procedures Up to mark for each procedure explained Appointment of reviewer for listed entities Discuss lack of evidence in subsidiary Discuss contingent consideration including review of working papers Review draft audit report wording Review of working papers to support judgements in opinion Signing of report after review complete Maximum marks Maximum (a) 20 Critical appraisal of the draft audit report Type of opinion When an auditor issues an opinion expressing that the financial statements 'do not give a true and fair view', this represents an adverse opinion The paragraph explaining the modification should, therefore, be titled 'Basis of Adverse Opinion' rather than simply 'Basis of Modified Opinion' Mock exam (Sept/Dec 2015): answers 473 An adverse opinion means that the auditor considers the misstatement to be material and pervasive to the financial statements of the Hopper Group According to ISA 705 Modifications to Opinions in the Independent Auditor's Report, pervasive matters are those which affect a substantial proportion of the financial statements or fundamentally affect the users' understanding of the financial statements It is unlikely that the failure to recognise contingent consideration is pervasive; the main effect would be to understate goodwill and liabilities This would not be considered a substantial proportion of the financial statements, neither would it be fundamental to understanding the Hopper Group's performance and position However, there is also some uncertainty as to whether the matter is even material If the matter is determined to be material but not pervasive, then a qualified opinion would be appropriate on the basis of a material misstatement If the matter is not material, then no modification would be necessary to the audit opinion Wording of opinion/report The auditor's reference to 'the acquisition of the new subsidiary' is too vague; the Hopper Group may have purchased a number of subsidiaries which this phrase could relate to It is important that the auditor provides adequate description of the event and in these circumstances it would be appropriate to name the subsidiary referred to The auditor has not quantified the amount of the contingent element of the consideration For the users to understand the potential implications of any necessary adjustments, they need to know how much the contingent consideration will be if it becomes payable It is a requirement of ISA 705 that the auditor quantifies the financial effects of any misstatements, unless it is impracticable to so In addition to the above point, the auditor should provide more description of the financial effects of the misstatement, including full quantification of the effect of the required adjustment to the assets, liabilities, incomes, revenues and equity of the Hopper Group The auditor should identify the note to the financial statements relevant to the contingent liability disclosure rather than just stating 'in the note' This will improve the understandability and usefulness of the contents of the audit report The use of the term 'we not feel that the treatment is correct' is too vague and not professional While there may be some interpretation necessary when trying to apply financial reporting standards to unique circumstances, the expression used is ambiguous and may be interpreted as some form of disclaimer by the auditor with regard to the correct accounting treatment The auditor should clearly explain how the treatment applied in the financial statements has departed from the requirements of the relevant standard Tutorial note: As an illustration to the above point, an appropriate wording would be: 'Management has not recognised the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree, which constitutes a departure from International Financial Reporting Standards.' The ambiguity is compounded by the use of the phrase 'if this is the case, it would be appropriate to adjust the goodwill' This once again suggests that the correct treatment is uncertain and perhaps open to interpretation If the auditor wishes to refer to a specific accounting standard they should refer to its full title Therefore instead of referring to 'the relevant standard' they should refer to International Financial Reporting Standard Business Combinations The opinion paragraph requires an appropriate heading In this case the auditors have issued an adverse opinion and the paragraph should be headed 'Adverse Opinion' As with the basis paragraph, the opinion paragraph lacks authority; suggesting that the required adjustments 'may' materially affect the financial statements implies that there is a degree of uncertainty This is not the case; the amount of the contingent consideration will be disclosed in the relevant purchase agreement, so the auditor should be able to determine whether the required adjustments are material or not Regardless, the sentence discussing whether the balance is material or not is not required in the audit report as to warrant inclusion in the report the matter must be considered material The disclosure of the nature and financial effect of the misstatement in the basis paragraph is sufficient 474 Mock exam (Sept/Dec 2015): answers Finally, the emphasis of matter paragraph should not be included in the audit report An emphasis of matter paragraph is only used to draw attention to an uncertainty/matter of fundamental importance which is correctly accounted for and disclosed in the financial statements An emphasis of matter is not required in this case for the following reasons: (b) Emphasis of matter is only required to highlight matters which the auditor believes are fundamental to the users' understanding of the business An example may be where a contingent liability exists which is so significant it could lead to the closure of the reporting entity That is not the case with the Hopper Group; the contingent liability does not appear to be fundamental Emphasis of matter is only used for matters where the auditor has obtained sufficient appropriate evidence that the matter is not materially misstated in the financial statements If the financial statements are materially misstated, in this regard the matter would be fully disclosed by the auditor in the basis of qualified/adverse opinion paragraph and no emphasis of matter is necessary Communication from the component auditor The qualified opinion due to insufficient evidence may be a significant matter for the Hopper Group audit While the possible adjustments relating to the current year may not be material to the Hopper Group, the inability to obtain sufficient appropriate evidence with regard to a material matter in Seurat Sweeteners Co's financial statements may indicate a control deficiency which the auditor was not aware of at the planning stage and it could indicate potential problems with regard to the integrity of management, which could also indicate a potential fraud It could also indicate an unwillingness of management to provide information, which could create problems for future audits, particularly if research and development costs increase in future years If the group auditor suspects that any of these possibilities are true, they may need to reconsider their risk assessment and whether the audit procedures performed are still appropriate If the detail provided in the communication from the component auditor is insufficient, the group auditor should first discuss the matter with the component auditor to see whether any further information can be provided The group auditor can request further working papers from the component auditor if this is necessary However, if Seurat Sweeteners has not been able to provide sufficient appropriate evidence, it is unlikely that this will be effective If the discussions with the component auditor not provide satisfactory responses to evaluate the potential impact on the Hopper Group, the group auditor may need to communicate with either the management of Seurat Sweeteners or the Hopper Group to obtain necessary clarification with regard to the matter Following these procedures, the group auditor needs to determine whether they have sufficient appropriate evidence to draw reasonable conclusions on the Hopper Group's financial statements If they believe the lack of information presents a risk of material misstatement in the group financial statements, they can request that further audit procedures be performed, either by the component auditor or by themselves Ultimately the group engagement partner has to evaluate the effect of the inability to obtain sufficient appropriate evidence on the audit opinion of the Hopper Group The matter relates to research expenses totalling $1.2 million, which represents 0.2% of the profit for the year and 0.03% of the total assets of the Hopper Group It is therefore not material to the Hopper Group's financial statements For this reason no modification to the audit report of the Hopper Group would be required as this does not represent a lack of sufficient appropriate evidence with regard to a matter which is material to the Group financial statements Although this may not have an impact on the Hopper Group audit opinion, this may be something the group auditor wishes to bring to the attention of those charged with governance This would be particularly likely if the group auditor believed that this could indicate some form of fraud in Seurat Sweeteners Co, a serious deficiency in financial reporting controls or if this could create problems for accepting future audits due to management's unwillingness to provide access to accounting records (c) Quality control procedures prior to issuing the audit report ISA 220 Quality Control for an Audit of Financial Statements and ISQC Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Agreements require that an engagement quality control reviewer shall be appointed for audits of financial statements of listed entities The audit engagement partner then discusses significant matters arising during the audit engagement with the engagement quality control reviewer Mock exam (Sept/Dec 2015): answers 475 The engagement quality control reviewer and the engagement partner should discuss the failure to recognise the contingent consideration and its impact on the auditor's report The engagement quality control reviewer must review the financial statements and the proposed auditor's report, in particular focusing on the conclusions reached in formulating the auditor's report and consideration of whether the proposed auditor's opinion is appropriate The audit documentation relating to the acquisition of Seurat Sweeteners Co will be carefully reviewed, and the reviewer is likely to consider whether procedures performed in relation to these balances were appropriate Given the listed status of the Hopper Group, any modification to the auditor's report will be scrutinised, and the firm must be sure of any decision to modify the report, and the type of modification made Once the engagement quality control reviewer has considered the necessity of a modification, they should consider whether a qualified or an adverse opinion is appropriate in the circumstances This is an important issue, given that it requires judgement as to whether the matters would be material or pervasive to the financial statements The engagement quality control reviewer should ensure that there is adequate documentation regarding the judgements used in forming the final audit opinion, and that all necessary matters have been brought to the attention of those charged with governance The auditor's report must not be signed and dated until the completion of the engagement quality control review Tutorial note: In the case of the Hopper Group's audit, the lack of evidence in respect of research costs is unlikely to be discussed unless the audit engagement partner believes that the matter could be significant, for example, if they suspected the lack of evidence is being used to cover up a financial statements fraud 476 Mock exam (Sept/Dec 2015): answers Notes Notes Notes Notes Review Form – Paper P7 Advanced Audit and Assurance (International) (02/16) Name: Address: How have you used this Kit? 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