AAA WEBINAR TO SUCCESS – SEPTEMBER 2022

Core syllabus versus preparation Make Notes

1. Audit risk / risk of material misstatement
2. Business risk
3. Audit procedures
4. Audit evidence
5. Going concern
6. Audit report
7. Communication to those charged with governance
8. Review of prospective financial information
9. Due diligence review
10. Forensic audit
11. Matters in considering whether to accept a new audit client Yes
(“whether to accept” need conclusion

12. Ethical and professional issues Yes

13. Money laundering Yes
14. Auditor responsibilities for :
a. Fraud Yes
b. Laws and regulations Yes
c. Opening balances Yes
15. Using the work of others
a. Expert
b. Component auditor
c. Internal auditor
16. Quality management – (previously known as quality Yes
control)
17. current issue – climate risk
18. Recent 3 articles

requirement Actual meaning Key tips

Advise To offer guidance or some relevant expertise to a Counsel, inform or notify
recipient, allowing them to make a more informed
decision
Analyse Break into separate parts and discuss, examine, or Give reasons for the current situation or what
interpret each part has happened
Apply To put into action pertinently and/or relevantly Properly apply the scenario/case
Assess To judge the worth, importance, evaluate or Determine the strengths, weaknesses,
estimate the nature, quality, ability, extent, or importance, significance, ability to contribute
significance
Calculate To ascertain by computation, to make an estimate Provide description along with numerical
of; evaluate, to perform a mathematical process calculations
Comment To remark or express an opinion Your answer should include an explanation,
illustration or criticism
Compare Examine two or more things to identify similarities Clearly explain the resemblances or differences
and differences
Conclusion The result or outcome of an act or process or event, End your answer well, with a clear decision
final arrangement or settlement
Criticise Present the weaknesses/problems; evaluate Criticism often involves analysis
comparative worth. Don’t explain the situation.
Instead, analyse it
 Define Give the meaning; usually a meaning specific to the Explain the exact meaning because usually
course or subject definitions are short
Describe Give a detailed account or key features. List Make a picture with words; identification is not
characteristics, qualities and parts sufficient
Discuss Consider and debate/argue about the pros and cons Write about any conflict, compare and contrast
of an issue. Examine in detail by using arguments in
favour or against
Evaluate Determine the scenario in the light of the Mention evidence, case, point, issue to support
arguments for and against evaluation
Explain Make an idea clear. Show logically how a concept is Don’t just provide a list of points, add in some
developed. Give the reason for an event explanation of the points you’re discussing

Illustrate Give concrete examples. Explain clearly by using Add in some description
comparisons or examples
Interpret Comment on, give examples, describe relationships Include explanation and evaluation
List List several ideas, aspects, events, things, qualities, Don’t discuss, just make a list
reasons, etc
Outline Describe main ideas, characteristics, or events Briefly explain the highlighted points
Recommend Advise the appropriate actions to pursue in terms Give advice or counsel
the recipient will understand
Relate Show the connections between ideas or events Relate to real time examples
State Explain precisely Focus on the exact point
Summarise Give a brief, condensed account. Include Remember to conclude your explanation
conclusions. Avoid unnecessary details

Attention on the requirement wordings:

If examiner says, evaluate, assess, comment on the matter whether to accept= give conclusion.
If examiner says, Recommend, actions, procedures, evidence= bullet sentence by numbering
Rest of the paper is para style
If get stuck with a question, leave and come back.
Answer by different para and use headings & subheadings to make marking easier.
Structure Q1 in briefing note format.
Spelling mistake is not a big problem.

Professional Skills marks (10+5+5)=20

Communication:
Briefing notes along with brief introduction, headings, sub-headings & conclusion. Look professional,
appropriate language, answer by sequence. (4 marks for communication for question 1)
Sep18 Q1 Eagle Group
Ans.
Briefing note
To: Name of the partner, Designation
From: Audit manage
Subject: same as email
Introduction
The purpose of writing this briefing note is to evaluate the audit risk in planning the audit of Eagle group.
Further this note explain the audit procedure, audit strategy for the component audit and ethical and
professional issue arising from the request by the group finance director on integrated reporting.

(a) Audit risk

1. Hdskjhfkjhs
2. Hdkjshkjdfh
3. kjjhkjh
(b) Audit procedure
1.jhkjhkjh
2.bjhghjg
(c) Audit strategy
Sub-headings
Subheadings
(d) Ethical and Professional issue
Conclusion(2sentance)

Analysis & evaluation:

Calculate relevant trends or calculation and justify what these trends or calculation are proving or how these
calculation support their argument.
Assess materiality and conclude whether the matter is material or not.
Audit procedures should be relevant and practical in context of given scenario.
Application specific to given scenario.

Skepticism and Judgement:

BLOCK 1
KNOWLEDGE AREAS OF SYLLABUS
EXAM FOCUS: MODERATE

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). Cash based business are at high risk of money laundering.

Money laundering process consist of three activities-

1. Placement is getting money into the system in the first place, which could be done by making bank
deposits, investing in a stock market, buying a property or gold etc.
 The risk of being caught up at the time of placement is higher, because there can be a Customer due
diligence (CDD) known as know your client. (part of anti-money laundering procedure).

Politically exposed person (PEP) who has influence or authority, rise the risk of doing money
laundering because CDD process get impaired with PEPs.

2. Layering involves the transfer of black money from business to business or place to place to conceal
original source.

3. Integration is extracting funds from the laundering process and integrating them into the world of white
money.

Anti-Money laundering guidance for an audit firm

Policies and procedures
1. The audit firm should appoint Money laundering reporting officer (MLRO) to 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 will become
more skeptical to find suspicious activities like tax evasion, PEPs at a client, any 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. Keep records/working paper for 5 years, because this can help in any regulatory investigation opened
against the audit firm client.

5. Audit team member should not tip-off

a. Should not conceal clients ML from MLRO.
b. Should conceal clients ML information from the clients itself.

06/14- Water & Co [11]

06/12- Lark & Co [9]
06/16- York Co Q3(b)(i)-[7]
12/18- Clean Co Q3(a)- [10]

Topic 2: Professional Liability

Negligence can be
 Un-intentional – mistake/ error (civil liability= penalties on audit firm to pay injured party)
 Intentional- deliberately/ collusion with management etc. (Criminal liability = Regulator can black
list audit firm/ dissolved/ liquidate)

To prove negligence the injured party must prove

 The duty of care enforceable by law exist. Shareholder (principal) and auditor (agent) relationship
known as agency relationship. An engagement letter is signed at start of of audit.

 Duty of care was breached which injured party must prove with evidence in the court.
  Duty of care breached causes loss must quantify with supporting evidence.

Liability in Tort Vs Stakeholders

 Tort means general responsibility / duty of care to conduct a good audit. There should be a limit
to anyone under tort.
 Code of conduct – Professional competence and due care, Professional behavior.

Limiting auditor liability

1. Quality of work should improve
2. Use a disclaimer of liability para in audit report subject to a liability limitation agreement with the
audit client.

06/13 – Spaniel Co Q4 (a)

Topic 3: Professional Skepticism

Professional skepticism (PS) is

 Component of – Auditor duty of care
 Attitude of – Questioning mind and critical assessment of the evidence provided by management
 Three elements
- Attributes- personality trait of the auditor
- Mindset- questioning mind/ being alert during audit
- Actions- is the response of the auditor as a result of any problem identified through the
application of PS.

Areas of high degree of PS

 Assessing engagement acceptance
 Planning stage- risk assessment and any risky areas in FS
 Management estimates and going concern assessment
 Management omitting disclosure e.g. related party disclosures
 Compliance with laws and regulators

06/12- Coot Co Q3(b)-[6]

06/15- Tony Group Q3(a)/ b(i)-[5]/[6]
12/16- Northwest Co Q4(a)-[6]

Topic 4: Auditor liability for fraud

Earning management / window dressing of FS/ massaging the figures/ fraudulent financial reporting/
creative accounting
 Fraud is the 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 =
- Deliberate misstatement
- Falsification of accounting records
 - Intentionally breaching an accounting standard
- Knowingly omitting a: Disclosure, Transaction

Incentive or pressure to commit fraudulent financial reporting / earnings management can come from sources
inside and outside the entity:
 Inside the entity – target set at start of the year become pressure for management if actual results
are far from target. Last quarter of the financial year is risky for earnings management.
 Outside the entity—Listed entity, pressure come from stock market expectation.

Auditor responsibilities for fraud

 Management is primarily responsible for preventing and detecting fraud by ensuring effective
internal controls.
 Auditor is not responsible for prevent a fraud. However, auditor should plan and perform with an
attitude of professional skepticism realizing the fact that the financial statement could be
materially misstated (earnings management).

Auditor responsibilities for responding fraud:

1. Use of Professional skepticism.
2. Discussion among engagement team- planning meeting where partner/ Manager discuss key areas of
the 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 those are in line with IAS/IFRS and there is no breach.
4. Completeness of disclosure- auditor should carefully evaluate the note to the FS to ensure complete
disclosure required by financial reporting standard and applicable laws.
5. Communication to TCWG – if auditor identify any misstatement / breach of law, communicate the
matter to audit committee and to the board, so that action can be taken to rectify the issue.
6. Audit report- Auditor should consider the implication about any unresolved misstatement on the audit
report.
7. Other reporting requirement – auditor also communicate any fraud / misstatement to the relevant
national authority if that is required by the national laws.

06/16- York Co Q3(a)-[7] + b(ii) [6]

12/18- Redback Q1(e)- [6]
Sep-Dec/19- Bayer Co- Q3(c)- [6]
03/20- Goodman Q2(a)(i)- [5]

Topic 5: Auditor responsibilities for laws and regulations (ISA-250)

Management is responsible to implement an internal control system to prevent and detect any non-
compliance with laws and regulations.
Auditor should be alert of any instance of non-compliance with laws and regulations (NOCLAR) which have
a direct or indirect effect on the FS to take appropriate actions.

NOCLAR=Non-compliance with laws and regulations- is the acts of omission or commission, intentional or
un-intentional which are contrary to the prevailing laws and regulations.

Types of laws
 Direct impact on the FS e.g. IAS/IFRS
 Indirect impact on FS e.g. Fundamental to the operating aspect of the client business and can result
in penalties and going concern issues if not adhered to.
Auditor response to NOCLAR
1. Obtain an understanding of:
a. Nature of act (Omission or Commission)
b. Circumstance in which it occurred (intentional or un-intentional)
c. Effect on FS, if any
2. Discuss with:
a. Management (first)
b. Those charged with governance (audit committee/BODs) second
c. Seek a legal advice in certain circumstance
3. Evaluate the implication of NOCLAR in relation to other aspects of the audit e.g. Client integrity,
sample size, materiality level.
4. Evaluate the impact of unresolved NOCLAR on the audit opinion
5. Determine whether to report NOCLAR to an appropriate authority outside the entity
6. Documentation of working paper that auditor has fulfilled the responsibilities for NOCLAR.

12/13- Dasset Co Q3(b)- [6]

06/15- Adder Group Q2(b)-[9]

Topic 6: Using the work of others

Who are “Others”?

1. ISA 600- The auditor of subsidiary
2. ISA610- The internal auditor
3. ISA 620- The expert
4. ISA 402- Service organization

Before relying on the work of service organization, auditor should ensure-

1. Independent
2. Competence
3. Experience
4. Documented the work
5. Review the internal control

Parent auditor consideration using of subsidiary auditor-

1. Whether subsidiary is significant or not?
a. A subsidiary is significant to the group if it contributes 15% or more to the total profit of the
group or 15% or more of the total assets of the group.
2. If it is significant subsidiary of the group then whether subsidiary audit firm is related or not?( If
related do nothing)
a. Related firm is related to the parent audit firm in terms of its size, reputation, experience etc.
3. If significant subsidiary is being audited by un-related firm, then parent audit firm should check the
following before relying their work:
a. Independence
b. Experience in the relevant industry
c. Competence of the team members involved in the auditor
d. Quality of working papers developed
12/14-Faster Jet Q3 (a)(ii) – [5]
06/14- Adams Group Q1(b)-[8]
12/13- Stow Group Q1 (c)- [7]
12/16- Zed Group Q1(b)-[7]
Dec 19 exam Q1 – 6 marks

Topic 7: Auditor responsibility for Opening balances

Auditor responsibilities when:

1. prior year FS was audited by another auditor:
 Confirm the competence and independence of the previous auditor before placing reliance on the
previous auditor.
 Review working papers of the previous auditor to confirm closing balance correctly carried
forward as opening balance.
 If difference in last year closing balance with this year opening- discuss with management.
 If prior period auditors report was modified, pay particular attention in the current period to the
matter which resulted the modification.
 If audit report was modified, refer in other matter para, the name of the prior year auditor, the type of
opinion given and the date of the report.

2. Prior year FS was not audited/ First year audit:

 Receivables /Payables
- Verify, how much has been collection or payment of opening accounts receivable or payables in
the current period. Circularize confirmation letters.
 Inventory
- Observation of the current year inventory count to determine closing inventory count
- Roll back the closing inventory to opening inventory by adding GDN and subtracting GRN.
- Confirm post year end selling price for a sample of inventory to confirm inventory was valued at
lower of cost or NRV.
 Non-current assets/liabilities
- Review sours documents of opening loans and fixed assets to confirm they exist and accurate.
- Circularize confirmation from third parties where possible.
 Representation letter from management for overall completeness of opening balances as a last resort
of evidence.

06/11- Wexford Q3 (b)-[8]

Topic 8: Joint audit and transnational audit

Joint Audit
- Two firm jointly perform audit of a single entity
- Issue a joint opinion

Transnational audit
- A transnational audit means the FS be relied upon outside the entity’s home jurisdiction for the
purpose of significant lending. Big four firm.

12/12- Sambora Group Q2(b)-[6]

03/20- Rick Group- Q1(c)-[6]

Topic 9: Audit committee

Role of the audit committee

- Review of published FS
- Monitoring System & controls
- Fraud prevention & detection
- External auditor

Involvement with external auditor

 General principles/ Best practices
- Recommend the appointment, re-appointment & removal
- Approving for audit and non-audit service
- Agreeing the terms of agreement
- Annual review of independence
- Reviewing annually the ethical safeguards

 Annual audit cycle (should involve all stage to ensure quality of audit)
- Planning stage. Engagement partner have a meeting with Audit committee to discuss:
1. Audit strategy and plan
2. Materially level
3. Resources to be used

- Review stage (finalization stage). After fieldwork (test of controls & substantive procedures),
audit manager should meet with audit committee to discuss:
1. Findings form the audit along with limitations in audit
2. Management response to the findings
3. Un-adjusted misstatement

End of audit (Manager/partner should have audit exit meeting with audit committee in which
they will ensure that:
1. Audit was carried out as per plan
2. Robustness of communication between audit team and audit committee
3. Effectiveness of the management letter
4. Feedback of the Audit committee got from management
5. Overall feedback about external auditor is shared with board of director

 Provision of non-audit services

The audit committee 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 audit committee 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

12/16- Gull Co Q5(a)(ii)-[5]

Topic 10: Outsourcing and its impact on audit

If service organization does not have auditor:

 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 service organization have auditor:

1. Take assurance on controls from service organization auditor
2. Assurance report can be a type 1 or type 2 report based on request from entity auditor
3. Type 1 report is an assurance on controls structure and their overall design
4. Type 2 report is an assurance on controls structure, design and their operational effectiveness

June14-Q4b
Dec16-Q2c

BLOCK 2
ETHICAL, PROFESSIONAL AND QUALITY CONTROL ISSUES (EPQ)
Exam Focus: High (Mark-20 approx.)

ETHICAL, PROFESSIONAL
Lecture 4
Question on this topic:
1. Discuss the ethical issue and recommend appropriate action(safeguard). (1 for issue, 1
for action )
2. Discuss the ethical and professional issues and recommend appropriate actions.
3. Discuss the ethical, quality control and professional issues and recommend
appropriate actions. (1.5 for issue, 1 for action)

(Examiner expect to prioritize the “primary” ethical threat. According to Code of Ethics, some
services are Prohibited, when material & Irrespective of material. Some services are
permissible with safeguard. Actions should be for primary issue & demonstrate which threat is
significant. Significant depends on the, nature of company, Person involve with issue &
Materiality)

For listed audit client some service are Prohibited by Code, when material & Irrespective of
material:
- accounting and bookkeeping services
- prepare tax calculations
- Valuation services that are material to the financial statements
- taking on management responsibility
- Corporate finance matter, if material then prohibited. i.e. assisting any
litigation, any loan, etc.
Ethical issue Professional issue
Integrity Professional behavior
- Honest - Auditor should adhere with
- Straightforward applicable laws and regulations
(this is the duty of the auditor)
- Auditor should be skeptical/ alert
throughout the prosses of audit
Objectivity Professional competence
- Five threats to independence - Auditor should have necessary
1. Self-interest skills/ experience (of the relevant
2. Self-review industry/ in the relevant service)
3. Familiarity threat - Due care is auditor should
4. Advocacy diligent in the conduct of audit
5. Intimidation (discussion with /should exercise care/ careful
client about the matter is best planning of work
solution)
Confidentiality
 Duty to maintain confidentiality
/should not disclose confidential
information about the company.
 However, in exceptional circumstances
the auditor should breach
confidentially /auditor should whistle
blow:
1. E.g. when client is involve
money laundering/ fraud/
non-compliance with laws
and regulation
2. Obligatory duty to disclose-
when it is required by laws
and regulation
3. Voluntary duty to disclose-
when it is in public interest
(society/ consumer) +
whenever the auditor
discloses information
voluntary- the auditor should
seek a legal advice before
doing so .

Lecture 5
Additional Ethical issue- Conflict of interest
 Firm can audit two competitors
- Provided there are proper safeguard
 Safeguards
- Notify affected parties (competitors)/ seek permission
- If permission given by both, have different team
- Confidentiality agreement signed within the teams

Ethics issue = Objectivity threat + Confidentiality + Conflict of interest

Acceptance (Dec 13/Q4)

Case Question on accepting new/ existing client/service:
1. Accepting a new client?
a. Checklist (ethical & Professional issue)
b. Decision
2. Accepting a new service from existing client?
a. Checklist (ethical & Professional issue)
b. Decision

(checklist) Matters to consider when a firm is invited to tender

Accepting a new audit client (6, 7 ethical & Accepting NAS from an existing client
all other are professional matters)
1. Perform Client integrity / screening 1. Deadlines
process Realistic or unrealistic/ can the service
2. Communication with previous auditor be performed within stipulated
-Seek permission of the client deadline or not?
-correspond with previous auditor, ask 2. Competence
reason why resigned In context of the nature of service /
-If client refuse permission, it will bring skills vs. the nature of service.
doubt on client integrity, then refuse 3. Ethical issues associated with service
invitation. 4. Safeguards
3. Ensure pre-conditions of audit are 5. Fees to be charged for the service
present? / Management aware of its 6. When client is a listed company,
responsibilities: - If Service is material in respect
- Compliance with laws & of fees & any other aspect, then
regulations Prohibited
- Implement internal control - If service is immaterial, then
system to prevent & detect allowed with safeguard & use
two different teams.
fraud & error
- Ensure auditor access to all
information & explanation
4. Deadlines given by client is realistic?
 5. Competence- does business nature
match with competence?
6. Ethical issues taking the client?
7. Safeguards to put in place?
8. Fees. Commercially attractive?
(company size & complexity of service
match with fees)

Lecture 7
Audit Proposal (tender) Document
If firm is interested for the invitation/ tender from client, then the firm would send a document
to be prepared name “Proposal document”. Contents of proposal document are (OFER):
1. Outline of the firm- Profile
2. Fees and the basis of fees- Quotation
3. How will the firm meet client expectations?
4. Responsibilities of an auditor- plan, perform & reporting of audit

ACCA guidance on advertisement

The firms are allowed to advertise however the advertisement should not (DDM):
1. Bring disrepute to ACCA
2. Discredit the services offered by other firms e.g. I am the best/ most professional
3. Be misleading -

ACCA guidance on fees:

1. Fees should be fare & reasonable which depends on size of business, complexity of
service
2. Basis of charging fees should be mentioned in proposal document/ engagement letter
3. Fees should not be on a contingent basis
4. If fees is increased from previous year the audit firm should explain to the client
5. Assuming there are no dramatic change in the size or complexity of an audit client it is
reasonable to expect that audit fees should fall over time.

Quality Control
Quality control question will be on, how audit is planned and how it is performed and you have
to find the problem / issue.

ISQC 1 Quality Control at firm level, ISA 220 Quality control for an individual audit

Elements of a firm quality control system

1. Leadership
 a. Partner is doing something right= boost quality/ doing something wrong = impair
quality
b. Manager is doing something right = boost quality/ doing something wrong = impair
quality
c. Leadership actions= set the culture/ set precedence
2. Ethics
a. Relationship of ethical issue with quality
3. Acceptance and continuation of client relationship
a. New client (slide 73)
b. Service from existing client
c. Wrong acceptance decision= compromise quality
4. Human resources
a. Team skilled, caliber, experience will boost quality
b. Training and development boost quality
5. Engagement performance
a. Step 1: Planning
- Good link with quality
- Bad link with quality
b. Step 2: Gather evidence
- Appropriate evidence link with quality
- Inappropriate evidence link with quality
- Document of evidence link with quality
c. Step 3: review of the work/finalization stage/ completion stage
- Review is performed = good quality
-
6. Monitoring
a. Monitoring by:
- Engagement quality control reviewer (Independent manager/ partner)
- Perform the engagement quality control review before the report is signed off (Hot
review)

Exam perspective
1. A typical question on quality control, require students to evaluate the quality control
matters / issues in how the audit was planned and performed (engagement
performance)?
2. A student should be very clear with how audit is planned and performed, i.e. should have
a clear understanding of the planning and performance fundamentals.

How the audit is planned and performed (engagement performance)?

1. Planned
- Role of the audit engagement partner
- Planning meeting with client / audit committee
- Engagement team briefing
- First year audit (need more concentration in planning stage)
 - Use of analytical procedures
- Risk assessment

2. Performed
- Adherence to applicable standards / firm policies
- The person involved with planning e.g. senior or junior
- Sample size e.g. high/ low
- Adequacy of evidence
- Judgement e.g. right/ wrong
- Supervision e.g. regular monitoring or not?
- Documentation of work?
- Review of work performed (work)

Specific matters which compromise quality (examining team article)

1. Tight deadlines e.g. panic/ rush, reduce quality
2. Materiality level e.g. right or wrong level? (If the risk is high materiality level should set
low)
3. Sample size e.g. right or wrong size?
4. Fees restrictions e.g. compromise quality
5. Use of judgements e.g. right or wrong
6. Competence e.g. who is calculating deferred tax? Junior or Manager?

Exam techniques article:

1. Ethics part 1
2. Acceptance decision for audit and non-audit engagements
3. Audit quality

Practice:
1. Q3b- Sept 18 exams (actual exam)
2. Q2b- Sept 18 exam (actual exams)
3. Q1d- Sept 18 exams (actual exam)
4. Q3 – June 18
5. Q4- Dec 17

Lecture 9 (part-1)
Quality control procedures prior to issuance of audit report of a listed company
Review of work performed
- Detailed review of work performed (every single working paper is checked by
senior in charge)
- Manager review of work performed (working paper of risky areas are only)
- Engagement partner review of work performed (working papers of risky areas
only)
Engagement quality control review undertaken (hot review)
- Independent partner / second partner (performed checklist whether audit planned &
performed)

Practice Quality Control question

Dec 14-Q5a
June 13-Q2A
June 17- 2a

Lecture 9 (part-2)
ISA 520 Analytical Procedures – Auditors perform analytical procedures at three stages of
audit, i.e. Planning stage and finalization stage is a must.

ISA 720 Auditors Responsibilities relating to other information in documents containing

audited financial statements- There should be consistency between the other information
containing the financial statement and the financial statement itself.

BLOCK 3
Planning
Audit planning is a careful activity which takes place before the start of the audit field work. Audit planning
focus on the following matters:
 Evaluates the scope of audit by considering relevant laws and regulations applicable to the engagement
 Evaluate the risky areas within the FS where auditor need to focus attention on and need to exercise greater
professional skepticism
 Determine the right level of materiality by considering the level of risk in the audit engagement
 Determine the appropriate number of resources needed and allocate work among resources in a proper manner
 Develop a time table for performing audit effectively
 Set the sample size for risky areas of the FS
 Develop the audit procedures to be performed to mitigate risk in the FS

Specific matters- initial audit engagement

1. Consider
- any matters which were raised when professional clearance was obtained
- whether any previous auditor reports were modified
- matters discussed with management during our firm’s appointment
2. Risk of misstatement in opening balances/previously applied accounting policies
 3. Need
- to use experienced audit team to reduce detection risk
- to develop thorough business understanding

Analytical procedures
 Use of analytical procedures at planning stage helps auditor identifies unusual fluctuations or
implausible relationships within the financial statement data which potentially identify a risk area for
auditor.
 Analytical procedures at planning stage involves:
- Ratio analysis (exam focus)
- Comparison (exam focus)
 Examples
- Sales has increased by 20% (possibly sales could be overstated as 20% is quite significant rise over the last
year)
- Further the question state , there has been an economic recession and consumer spending is depressed
 Example
- Inventory days has increased from 45 to 70 over the last year.( possibility of slow moving inventory / risk in
inventory valuation)
- Further the questions states that sales of the company has increased by 25%. (fabrication in revenue ?
overstated?)
 Example
- Finance cost is static over the last year , even though the case mention that a new long term loan of $10
million was secured during the year (FC is understated)

Materiality
Total assets 1-2%
Revenue ½ - 1%
PBT 5-10%

Assignment
 Read the article – planning an audit of FS
 Sept 18 Q1c
 Jun 15 Q1a

AUDIT RISK & ROMM

Group Audit
Group audit-recent examiner article
https://www.youtube.com/watch?v=qVYf_agRaxs

Group audits – specific considerations

The auditor must:
 Determine whether it is appropriate to act as the auditor of the group financial
statements.
  If acting as the auditor of the group financial statements:
– Communicate with the component auditors about the scope and timing of their work on
financial information related to components and their findings.
– Obtain sufficient appropriate evidence regarding the financial information of the
components and the consolidation process to express an opinion, on whether the group
financial statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework.

Acceptance
Acceptance as group auditor
must consider:
 Whether sufficient appropriate audit evidence can reasonably be expected to be
obtained in relation to the consolidation process and the financial information of the
components of the group.
 Where component auditors are involved, the engagement partner shall evaluate
whether the group engagement team will be able to be involved in the work of the
component auditors.

If the engagement partner concludes that it will not be possible to obtain sufficient
appropriate evidence due to restrictions imposed by group management, and that the
possible effect of this will result in a disclaimer of opinion, then they must not accept the
engagement. If it is a continuing
engagement, the auditor should withdraw from the engagement, where possible under
applicable laws and regulations.

Acceptance as component auditor

- Whether they are independent of the parent and component companies and can
comply with ethical requirements
- Whether they possess any special skills necessary
- Whether they have an understanding of the auditing standards
- Whether they are willing to have the group auditor involved in their work and
evaluate it before relying on it for group audit purposes.

Planning and performing the group audit

Overall audit strategy and plan

The group auditor is responsible for establishing an overall group audit strategy and plan.
The audit plan will describe-
 Obtaining an understanding of-
- the group, its components and their environments including the applicable
financial reporting framework and the system of internal control.
 - the component auditor [ISA 600, 19]
- the consolidation process.
 Setting materiality for the group including the components.
 Responding to assessed risks, including consideration of whether a component is
significant.
 Reviewing subsequent events in relation to the group.

Understanding the component auditor

Group auditor must evaluate the work of others before relying on it.
 Whether the component auditor understands and will comply with the code of ethics.
 The professional competence of the component auditor.
 Whether the group auditor will be able to be involved in the work of the component
auditor.
 Whether the component auditor operates in a regulatory environment that actively
oversees auditors.

Understanding the consolidation process

The group auditor needs to:
 Evaluate whether the adjustments appropriately reflect the events and transactions
underlying them.
 Determine whether adjustments have been correctly calculated, processed and
authorized.
 Determine whether adjustments are supported by sufficient appropriate
documentation.
 Ensure intra-group balances and transactions reconcile and have been eliminated.

Audit risks specific to a group audit

There is a risk that the client does not comply with the relevant accounting treatment which
would mean the financial statements are materially misstated. Some examples include:
- Valuation of goodwill
- Translation of foreign subsidiaries in the consolidation process
- Non-coterminous year-ends
- Inconsistent accounting policies used across the group
- Fair value adjustments
- Calculation of non-controlling interests
- Elimination of intercompany balances and trading
- Profit apportionment where there has been an acquisition or disposal
- Simple transposition or arithmetical errors in the consolidation process.
The auditor must ensure that audit procedures are designed and performed to address these
specific risks.
Risk indicators for group audits
- A complex group structure.
- Frequent acquisitions, disposals and/or reorganizations.
- Poor corporate governance systems.
- Non-existent or ineffective group-wide controls.
- Components operating under foreign jurisdictions that may be subject to unusual
government intervention.
- High risk business activities of components.
- Unusual related party transactions.
- Prior occurrences of intra-group balances that did not reconcile.
- The existence of complex transactions that are accounted for in more than one component.
- Differing application of accounting policies.
- Prior occurrences of unauthorized or incomplete consolidation adjustments.
- Aggressive tax planning.
- Frequent changes of auditor.

Dealing with non-coterminous year-ends

IFRS 10 Consolidated Financial Statements requires the parent and subsidiaries to have the
same year-end. The difference between the parent and subsidiary's year-end must be no more
than three months. Audit risk is increased if there is a difference between the year ends as
some of the transactions and adjustments included within the consolidated financial
statements will not have been audited. The group auditor must plan to obtain sufficient
appropriate evidence about transactions or events that have not been subject to audit.

Auditing the consolidated financial statements

Procedures over the consolidation schedule
- Agree the figures from the component financial statements into the consolidation schedule
to ensure accuracy.
- Recalculate the consolidation schedule to ensure arithmetical accuracy.
- Recalculate the translation of any foreign components to ensure accuracy.
- Recalculate any non-controlling interest balances to verify accuracy.
- Agree the date of any acquisitions or disposals and recalculate the time
apportionment of the results for these components included in the
consolidation.
- Evaluate the classification of the component (i.e. subsidiary, associate,
joint venture etc.) to ensure this is still appropriate.
- For investments in associates, ensure that these are accounted for using
the equity method of accounting and not consolidated.
- Review the financial statement disclosures for related party transactions.
- Review the policies and year-ends applied by the components to ensure
they are consistent across the group.
- Reconcile intercompany balances and ensure they cancel out in the group
financial statements.
- Assess the reasonableness of the client's goodwill impairment review to
ensure goodwill is not overstated.
- Calculate any goodwill on acquisition arising in the year paying special
attention to:
- Consideration paid – agree to bank statements.
- Acquisition related costs – ensure they have been expensed and not capitalized.
- Contingent consideration – whether this has been valued at fair value taking into
account the probability and timing of payment.
- Deferred consideration – should be discounted to present value.

Completion and review

Review of the work of the component auditor
The group auditor must review the work of the component auditor to ensure it is sufficient
and appropriate to rely on for the purpose of the group auditor's report.

Component auditor sending the group auditor a questionnaire or checklist which identifies the
key aspects of the audit. The group auditor can then make an assessment as to whether any
further
work is needed.

• If any significant matters have arisen they should discuss with the component auditor or
group management, as appropriate.
• If necessary the group auditor should then also review other relevant parts of the
component auditor's working papers.
• If the group auditor is not satisfied with the component auditor's work they should
determine what additional procedures are required.
• If it is not feasible for the component auditor to perform this then the group auditor must
perform the procedures.
• When all procedures on the components have been completed, the group engagement
partner must consider whether the aggregate effect of any uncorrected misstatements will
have a material impact on the group financial statements.

Letters of support
If a subsidiary has going concern issues, the parent company may offer financial support to
enable it to continue trading for the foreseeable future. If this is the case the directors must
give the component auditor a letter of support which confirms their intention to support the
subsidiary.

The component auditor should consider whether it has the resources to fulfil its promise of
support before accepting the letter as sufficient appropriate evidence of the going concern
basis for the subsidiary. The group auditor must consider the impact of the going concern
issues for the group as a whole. The parent company must disclose this guarantee of
assistance in their financial statements.

Reporting
Where one or more of the subsidiaries has a modified audit opinion (regardless of who
audited the subsidiary) the group auditor must consider the impact of the issue on the group
financial statements, according to group materiality levels.
• If the matter is not material in a group context, an unmodified opinion will be issued.
• If the matter is material to both the component and the group the auditor should consider
whether the issue causing the modification can be resolved as a consolidation adjustment and
aim to resolve the matter with the client. If this is resolved, an unmodified opinion can be
issued.
• If the matter is material and cannot be resolved through the consolidation process, the
modification should be carried through to the group audit opinion (e.g. if the evidence is not
available to support the balance).
• Note that a matter which is pervasive to the component may be material but not pervasive
to the group. In which case, a disclaimer of opinion or adverse opinion in a subsidiary will
become a qualified opinion in the group auditor's report.

Reporting to management and those charged with governance

The following matters should be reported to those charged with governance of
the group:
• Overview of the work performed and involvement in the component
auditor's work.
• Areas of concern over the quality of the component auditor's work.
• Difficulties obtaining sufficient appropriate evidence.
• Fraud identified or suspected.

Audit Report
Listed Company Non-listed company
Opinion Opinion
Basis of Opinion Basis of Opinion
MU relating to going concern (Conditional) MU relating to going concern (Conditional)
KAM
EOMP (Breakup basis + Disclosed in notes to FS) EOMP (Conditional)
Other information Other information
Other matter para (Conditional) Other matter para (Conditional)
Responsibilities- Management Responsibilities- Management
Responsibilities- Auditor Responsibilities- Auditor
Opinion
 Un-modified
1. No issue or the issue is immaterial

 Modified
1. Qualified
2. Adverse
3. Disclaimer of opinion

There are 2 circumstances which result in a change of opinion

1. Disagreement with management and the FS are materially misstated
a. Materially misstated – qualified opinion
b. Material and pervasively misstated – adverse opinion

2. Auditor is unable to obtain evidence

a. Material– qualified opinion
b. Material and pervasive – disclaimer of opinion

What is the difference between material, material and pervasive?

Immaterial (un- Material (qualified) Material and pervasive
qualified) (adverse/ disclaimer)
Total asset Less than 1% 1-2% and thereafter 60% or more
PBIT Less than 5% 5-10% and thereafter 60% or more
Revenue Less than 0.5% 0.5-1% and thereafter 60% or more

What is the impact on report / implication for the audit report?

Answer pattern (tell examiner):
1. What is issue, i.e. FS are misstated/ unable to obtain sufficient appropriate audit evidence (1mark)
2. In what scale, i.e. Material / Material and pervasive (1 mark)
3. What is the impact on opinion, i.e. Qualified opinion/ Adverse opinion/ Disclaimer of opinion (1 mark)
4. Where is the position/ placement of the impact (1 mark)
5. What type of report will be issued (1 mark)

All disclosures in exam paper are material only with the exception of disclosure related to going concern.
 Related party disclosure not made = material by nature= qualified opinion
 Disclosure of segmental info not given = material by nature= qualified opinion

MURGC
Situation 1:
The company is a going concern but there are material uncertainties facing the business which are:
a. Adequate Disclosure in the notes to FS = Auditor will highlight the disclosure for the shareholders by
inserting a MURGC para in the audit report after the basis of opinion para and this will lead to a
modified audit report but the opinion will remain un-qualified

b. Not disclosed/ Inadequate disclosure in the notes to FS= auditor will issue an adverse opinion
because it is a dis-agreement with management and the disclosure about going concern is fundamental
to the shareholder. This will lead to a modified audit report and the opinion will be qualified.
 Company is a GC + there are MU+ disclosed = MURGC para/ with an un-qualified opinion (Modified
report)
Company is a GC + there are MU+ Not disclosed/ Inadequate disclosure = Adverse opinion

Situation 2:
The company has prepared the FS using the break up basis because the company is no more a going concern.
The management has given the disclosure of the basis why FS are prepared using the break up basis. Auditor
agree to the use of breakup basis and the disclosure.
a. Opinion will be un-qualified
b. Add an EOMP to draw attention to the disclosure

Company is not a GC+ the disclosure of breakup basis is given= EOMP / with an un-qualified opinion
(modified report)- This is the ONLY situation when EOMP will come in LISTED company.

Situation 3:
The auditor concludes that the FS should be prepared on breakup basis because auditor believe that the
company is not a GC, however management disagree with auditor.
a. Adverse opinion (modified audit report)

Company is not a GC+ FS should prepared on breakup basis + management disagreement = Adverse
opinion

Assignment: Formulate the answer for M/J 19-Q2b

EOMP (Non-listed)
EOMP is added to the audit report when, the matter is significant + material/ pervasive + correctly
disclosed in notes to FS.

Examples:
The PBT of a company is $10 million. The company is non-listed
a. There is a legal case on-going and the management has given a disclosure of a contingent liability on
the basis that the lawyer has concluded it will have a possible outflow. The legal claim is $5million.

b. There is a legal case on-going and the management has given a disclosure of a contingent liability on
the basis that the lawyer has concluded it will have a possible outflow. The legal claim is $ 0.1million.

Ans:
a. Disclosure is correct and material to PBT as 50% of PBT= EOMP & opinion will be un-qualified=
Modified audit report
b. Disclosure is correct and immaterial to PBT as 1% of PBT= opinion will be un-qualified= Un-
modified audit report

KAM (Listed & unconditional)

ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report requires the
auditor to determine KAMs from the matters communicated to TCWG and communicate those matters to shareholders and
other users of the financial statements by describing them in the auditor's report before
reporting them as KAMs to TCWG.

Key audit matter (area of focus) in listed company which can be positive in respect of opinion & significant, is-
- Risky areas in FS & how it was addressed during the audit
- Significant disclosure (except MURGC & Breakup basis)
- Significant judgement & Estimates or subjective matter of FS
 - Significant events- adjusting, non-adjusting
- Change in policy & standards

Doubts on going concern+ company is listed+ no material uncertainty related to going concern= KAM, as it is
an early warning to shareholder before the problem becomes material uncertainty.

Example of KAM: Without qualifying our opinion, we draw attention to note no. 22 of FS where a significant
case has been disclosed as a contingent liability.

Other Matter Para (Conditional)

To be inserted if, change of auditor and to inform shareholder that last year audit was performed by another
auditor, mention the name of auditor/ the date of audit report and the type of opinion published= Modified audit
report.
Local reporting requirements

Other Information Para (Q3b- Dec2020)

Other information refers to financial or non-financial information, other than the financial statements and
auditor's report, included in the entity's annual report. If the auditor issues a disclaimer of opinion on the
financial statements, the Other Information section should not be included in the auditor’s report.

Examples:
- Management responsibility
- Auditor responsibly
- To tell SH whether there is any material inconsistency or not
- OIP = unmodified report

• Chair's report
• Operating and financial review
• Social and environmental reports
• Corporate governance statements

Other information comes irrespective of whether there is a material inconsistency or not.

AAA CBE Practice platform session by KK: https://www.youtube.com/watch?v=kXlToEBLcNc

PRIORITY list of accounting treatment

Revenue and capital expenditure (when to treat an expenditure as revenue or capital)

IAS 16 Property Plant & Equipment

PPE are tangible assets held for use in a business for more than one accounting period.
Recognition when –
 Probable future economic benefits will flow
 Cost of the asset can be measured reliably
Initial recognition at cost= Purchase price + Directly attributable cost to bring in working condition + Removal
or dismantle cost

If the payment is deferred for future then the amount shall be discounted and the difference between
future payment and cash price is the interest.

If an asset acquired in exchange for other non-monetary asset, then it shall initially measure at Fair Value in
line with IFRS 13 Fair Value Measurement.

Subsequent expenditure can only be capitalized if it enhances the economic benefits above the original
recognition expected. The cost of the day to day servicing (repair & maintenance) should be recognized in
SOPL.

Cost model

Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if
it is idle.

The residual value, useful life and depreciation methods should be reviewed at each financial year-end and
revised if necessary.

Straight line method

Depreciation = (Cost – residual value) ÷ useful life.

If revision of useful life,

Depreciation = NBV at date of revision ÷ revised useful life

If addition of NCA during the year,

Depreciation = (NBV + addition) ÷ remaining life

If revision of residual value,

Depreciation = (NBV up to revision – new residual value) ÷ remaining life

Reducing balance method = (NBV X %)

Measurement
IAS 16 allows a choice between –

Cost model = (cost – acc’td dep’n) – Impairment loss

Revaluation model = FV – Subsequent acc’td dep’n

 Revaluation must be made with ‘sufficient regulatory’ to ensure NBV does not differ materially from
the FV.
 If an item is revalued, ‘the entire class of assets’ must be revalued.
 If a revaluation increases, the increase is presented as OCI and held in a ‘revaluation reserve, within
‘Other Components of Equity’.
  If a revaluation decreases, the decrease should be recognized immediately in SOPL, unless there is a
revaluation surplus on the same asset.

Revalued asset—
Dr NCA (revalued amount – cost)
Dr Acc’td dep’n (prior to revaluation date)
Cr Revaluation reserve (revalued amount – NBV)

Excess dep’n on revaluation gain transferred to R/E—

Dr Revaluation reserve
Cr Retained Earnings (RE)

De-recognize on disposal or when no future economic benefits are expected from use of asset.

Disposal of asset—
Dr Cash / Bank (sales proceeds)
Dr Acc’td dep’n (up to date)
Dr/Cr Loss/gain on disposal (sale proceeds – NBV)
Cr NCA (at cost)

When a revalued asset is disposed off, any revaluation surplus may be transferred directly to retained
earnings –
Dr Revaluation reserve
Cr Retained earnings

IAS 20> Government grant (recognize?)

IAS 36> Impairment (recoverable amount / indicators / reversal of impairment)
IAS 37> Provisions / estimate ( when to recognize a provision / disclose contingent liability)
IAS 38> Intangible asset (R&D cost, finite and infinite life, amortization )
IFRS 2> Share based payment. (types/ recognize?)
IFRS 15> Revenue recognition (how to recognize?)
IAS 38> Goodwill (recognize/ impairment)
IAS 21> Foreign currency transaction ( spot rate/ closing rate?)
IAS 24> Related party transaction (disclosure)
IFRS 16> Leases ( short term leases under 12 months/ Right of use of asset)