AAA SMART COURSE

KASHIF KAMRAN
LECTURE 7 (BLOCK 3 LECTURE 1)
Objective: Block 3 overview + Syllabus area D
BLOCK 3
 Syllabus area D – Planning & audit of historical FS
o Q1- 50 mark ( 4 professional marks)
o 46 technical marks
 Risk assessment – 20 marks
 Audit procedures- 10 marks
 Rest of the marks
 Syllabus area A / B / C
 Syllabus area E- completion(finalization) and audit reporting
o One of the section B question
o 25 marks
 Reporting is must / completion may or may not be in the question
 In certain exam sittings completion marks were more than reporting
 In certain exam sittings completion was not tested
 Topics
 Audit evidence ( the evidence you should expect to find in the review of the
working paper file?)
 Matters to be communicated to TCWG(ISA260)
 Going concern ( matters which bring doubt on the going concern status of the
company + impact on audit report)
 Audit report ( a question testing knowledge of audit report)
ACCOUNTING KNOWLEDGE
 The accounting knowledge (AK) is only needed for syllabus area D and E (Block 3)
 Depth? Extent ?
 Risk assessment / audit procedures/ audit evidence / audit report (AK)
 You need to judge whether the accounting treatment adopted by management is right or wrong
o Material misstatement
o Perform procedures to gain further audit evidence
o Matter to be communicated to TCWG
o Impact on audit report
 Implication of a wrong accounting treatment for AAA paper ?
 Comment on the accounting treatment – each comment is worth 1 marks
 For e.g.
o Management has capitalized the research cost.
o Patent are recognized as an intangible asset, having a useful life of 5 years. (amortization is
silent – risk)
 Accounting treatment for 1 mark- case sync / case specific/ around the case (IMPRESS)
 PRIORITY list of accounting treatment
o Impairment (recoverable amount / indicators / reversal of impairment)
o Intangible asset (R&D cost, finite and infinite life, amortization )
o Provisions / estimate ( when to recognize a provision / disclose contingent liability)
o Government grant (recognize?)
o Share based payment. (types/ recognize?)
o Revenue recognition (how to recognize?)
o Goodwill (recognize/ impairment)
o Revenue and capital expenditure (when to treat an expenditure as revenue or capital)
o Foreign currency transaction ( spot rate/ closing rate?)
o Related party transaction (disclosure)
o Leases ( short term leases under 12 months/ Right of use of asset)
 D: Planning
Interim/ final audit ?
 Interim- which start before the year end (sometime before the year end)
 Is not mandatory – its at the discretion of the auditor
o Size/ complexity of business
 Scope of interim audit – auditor perform a review of internal control system and perform test of
controls
 Final audit- its must / its mandatory – normally in a final audit which is done after interim audit
auditor perform substantive testing on FS.
Summary for audit planning
Audit planning is a careful activity which takes place before the start of the audit fieldwork . 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
Purpose of planning is to asses risk and mitigate risk
First year audit – everything above remain same however following matters are added:
1. Need of a through business knowledge
2. Careful attention to the matters raised by the previous auditor/ modified report/ management
3. Potential risk of misstatement
a. Opening balance
b. Accounting policies
4. Using an experience team
5. Setting a low level of materiality
6. Setting a high sample size
7. Detection risk is high in first year audit (default)
Analytical procedures
 Planning stage – as risk assessment procedures
 Through the AP – the auditor identifies ( unusual fluctuation or implausible relationship) in the FS
data by performing ratio analysis or comparison of current year with last year
 Examples
o Sales has increased by 20% (possibly sales could be overstated as 20% is quite significant
rise over the last year)
o Further the question state , there has been an economic recession and consumer
spending is depressed
 Example
o Inventory days has increased from 45 to 70 over the last year.( possibility of slow moving
inventory / risk in inventory valuation)
o Further the questions states that sales of the company has increased by 25%. (fabrication in
revenue ? overstated?)
 Example
o 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)
 Implausible= illogical = risk
 Unusual fluctuations= risk

Assignment
 Read the article – planning an audit of FS
 Sept 18 Q1c
 Jun 15 Q1a
 AAA SMART COURSE
KASHIF KAMRAN
LECTURE 8 (BLOCK 3 LECTURE 2)
Objective : Practice + continuation of syllabus area D
PRACTICE: SEPT 18 Q1 C
Using the information provided in Exhibit 5, evaluate the extract of the audit strategy prepared by Vulture Associates in
respect of their audit of Lynx Co and discuss any implications for the Group audit. (10 mark)

 EVALUATE- strategy – 1 mark per comment ( criticize/ shortcoming/ wrong/ issues)

 DISCUSS (where possible)- implication for group audit- 1 mark

Brainstorming
Controls effectiveness
We will place reliance on internal controls, which will reduce the amount of substantive testing which needs to be
performed. This is justified on the grounds that in the previous year’s audit, controls were tested and found to be
highly effective. We do not plan to re-test the controls, as according to management there have been no
changes in systems or the control environment during the year.

 We do not plan to re-test control – each year controls are to be evaluated for any changes from the last
year in terms of system design or its operations by performing walkthrough test to identify any changes and
if there are any changes this should be documented. (1)
 Further if there are any changes in the system, auditor should plan test of control on the particular system
where the changes have been brought in. (1)
 Moreover, test of control cant be skipped at all, even if controls are effective last year and there are no
changes , control should be tested on rotational basis that is some system should be test each year (1)
 according to management there have been no changes in systems- the auditor cannot just rely on
management statements on whether there are changes or not, it is the active responsibility of the auditor to
identify the changes himself. Management can be wrong/ fabrication/ conceal ? (1)
 Bison should discuss this issue with Vulture , and inform Vulture of changes needed in audit strategy and
performing the walkthrough test to identify changes and performing TOC for changes in any (1)
 Further Bison SHOULD discuss the need to document changes in system if any. (1)
Internal audit
Lynx Co has offered the services of its internal audit team to help perform audit procedures. We are planning to use
the internal auditors to complete the audit work in respect of trade receivables, as they have performed work on this
area during the year. It will be efficient for them to perform and conclude on the relevant audit procedures,
including the trade receivables circularisation, and evaluation of the allowance for trade receivables, which we
will instruct them to carry out.

 Can we take help from IA- Yes, after confirming the IA is independent, competent and experienced.
 We are planning to use the work of IA? Should Vulture check pre-requisites first?
 Perform procedures (IA) on receivables- Vulture should review and check the procedure perform and
conclude whether the procedure give sufficient appropriate audit evidence.
 Who will decide whether the audit procedure is relevant for audit or not?
 Risky areas cant be delegated to IA
 Decision and judgement should be taken by EA
 Confirmation letter should be circularized by EA

Sum up
 Pre-requisites of placing reliance on IA has not been checked by Vulture (1)
 Conclusion on relevant procedures shouldn’t be taken by IA rather Vulture (1)
 Risky areas like allowance cant be delegated to IA , it’s the responsibility of Vulture (1)
 Confirmation letters should be in custody of Vulture at least the selection of customer and receiving the
letters directly from customer should be in direct control of Vulture (1)
 Vulture should review the work performed by IA (1)

Assignment –
 (Sept 18 Q1c) make a proper answer – with 10 points in para form and email me [email protected]
 (March 20 Q1B(i))- Do it yourself email me at [email protected]
 June 15 Q1a – 6 marks
 Syllabus area D: Risk assessment

Audit risk / RoMM

 Audit risk consist of RoMM and Detection risk

 Exam paper- AAA
o Q: Evaluate audit risk?
o Q: Evaluate the risk of material misstatement?
 RoMM?
o Inherent- susceptibility of an account balance or an assertion to a misstatement assuming there are no
control in the organization
 Susceptibility- possibility/ chance/ doubt
 Assuming no control ( builds auditor professional skepticism to identify risk in FS)
 Inherent- by default/ integral or an embedded of the FS
 Massaging the figure
 Fabrication of FS
 Window dressing of FS
 Management bias to show better result
o Assets- overstatement
o Liabilities – understatement
o Income – overstatement
o Expenses- understatement
o Control – that control fails to prevent or detect a misstatement
 Weak internal controls
 No internal audit department
 No audit committee
 Few NEDs
o IR+CR= RoMM in FS
 Misstatement
o Difference between reported and required
o Reported in FS-
 Amount (recognize)
 Classification
 Disclosure
 Presentation
 Detection risk-
o Failure of the auditor to detect a misstatement

 VERY IMPORTANT (AUDIT RISK)

Where you are asked to evaluate audit risks in an exam, much of your answer would be the same as for a
requirement asking for risks of material misstatements as these form the major part of audit risk. The
difference here is that detection risk is now also relevant.
 Examples of detection risk could include a recent appointment as the auditor (FIRST YEAR AUDIT/ NEW
AUDIT CLIENT), inexperience in a client’s new market (Dec 14 Q1) or time pressure for the audit.

Assignment: Read March 2020 Q1 part a (case study)

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 9
(BLOCK 3 LECTURE 3)
Objective: Practice of audit risk/ RoMM
Types of questions:
1. Evaluate the audit risk OR risk of material misstatement? _______ marks
2. Evaluate the audit risk OR risk of material misstatement. You should utilize analytical procedure as
part of the risk assessment? ______ marks
Good answer- audit risk /RoMM
Source: Exam technique article part 2 risk

When describing RoMMs, an effective approach is to use the following steps to construct your answer

1. Calculate and conclude on the materiality of the issue where sufficient information is available –
a mark will be given for a correct and relevant calculation of materiality with an appropriate
conclusion – this will only be awarded once per issue and materiality marks may be capped in
an exam question.
2. Briefly describe the relevant financial reporting requirement – note that no credit is awarded
for the accounting standard names or numbers, only the accounting treatment.
3. Relate the risk in the scenario to the accounting treatment.
4. Illustrate the impact of the risk on the financial statements

Summary

1. Calculate/ comment on the materiality – 1 mark per comment (max of 3 marks)

2. Briefly describe- accounting treatment (1 mark per accounting treatment)- 2 to 4 sentences
max and keeping the accounting treatment close to case study.
3. Risk – in the accounting treatment ( e.g. disclosure, presentation, classification, recognition,
valuation)
4. Impact of risk on FS-
a. Under or overstatement
b. Thus the FS could be materially misstatement

For e.g.

 No disclosure is made/given- what is the impact on the FS? ( fs are MM)

 Share based payment expense is not recorded – what is the impact on FS? (expense is
understated and profit is overstated)

Marking scheme (latest_ March/Jun 21)

 Up to 3 marks for each audit risk evaluated unless otherwise indicated. Marks may be
awarded for other, relevant risks not included in the marking guide.
 Materiality calculations should be awarded 1 mark each (max 3 marks).
 In addition, ½ mark for each relevant trend or calculation which form part of a relevant
explanation of the risk (max 2 marks).
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Summary of marking scheme – when the question ask for evaluate the audit risk / RoMM?

Suppose- you read a case and you found the following issues from the case.
1. There was no disclosure of a related party transaction
2. Management has recognized the cash settled shared based payment plan inappropriately, that
is has credited the equity not liability. The expense recognized in $195000.
3. Long the term taken during the year was classified as a non-current liability. The loan is for 5
years and the amount of loan is $30 million
4. Provision was not recognized on a legal case on going. The claim filed by the customer is $0.5
million.
5. New audit client
6. There is no internal audit function in the company
The profit of the company is $ 1 million. The total assets of the company is $ 300 million.

Answer:
Related party
Related party transaction are material by nature(1) and requires a complete disclosure in the notes to
the financial statements(1). No disclosure (0.5) has been made by the management for the related
parties identified during audit, thus the FS are materially misstated. (0.5)= 3 marks

Cash settled share based payment

The expense recognized for cash settled share based payment is $195,000, which is 19.5% of the profit
before tax, thus material to the financial statement (1). For a cash settled share based payment plan
the right accounting treatment is to debit the expenses and credit the liability (1) . However
management has wrongly recognized equity instead of liability(0.5). Thus at present equity is
overstated and liability is understated. (0.5) = 3 marks

Long term loan

The long term loan of $30 million is 10% of the total assets, thus material to the financial statements.(1).
The long term loan should be classified as current liability (the loan to be paid within 1 year time) and
non- current liability (1). Thus the present classification of long term loan is wrong (0.5). Thus the
non-current liabilities are overstated and current liabilities are understated. (0.5)= 3 marks

Provision
The claim filed by the customer of $0.5 million is 50% of the profit before tax, thus material to
the financial statement. The provision should be recognized when there is a present obligation as a
result of a past event and a reliable estimate can be made. (1). Thus at present no provision is
recognized. (0.5). Thus the liability/ expenses is understated and profit is overstated. (0.5)= 2 marks

Evaluate the audit risk- 20 marks

 3 risk of 3 marks each (max) = 9 marks
 20-9 =11 marks / 2 mark risk= 6 risk worth 2 marks each.
 Total = 3 risk+ 6 risk = 9 risk for a 20 marks answer

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Statement by default- worth 2 marks( when there is no accounting treatment / nor materiality)
New audit client
The audit firm will have less knowledge of business being a new audit client which will increase the detection
risk in the first year audit. (2 marks) – only write detection risk if the question is on audit risk
Further, being a new audit client there is a potential risk in opening balances and the opening balances could be
materially misstatement if wrongly brought forward because we were not the auditor last year. (2 marks)
No internal audit function
This is a control risk. Because there is no internal audit function this means that the monitoring of internal
controls will be weak, which increases the risk of weaknesses in the internal control system going un-detected.
Weak internal controls will increases the overall risk of material misstatement in the financial statements. 2
marks

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Type 2 question: Evaluate the audit risk/ RoMM. You should utilize the analytical procedure as part of assessing
the audit risk/ RoMM?

You should utilize the analytical procedures? – 5 marks

Suppose – Sept 18 Q1 (example)

 Part (a) 24 marks

 5 marks for analytical procedures
 24-5 = 19 marks
 3 marks * 3 risk= 9 marks
 19-9= 10 marks/ 2 mark risk = 5 risk for 2 marks

AA paper – Calculate the FIVE ratio? – 5 marks

AAA paper – Utilize the analytical procedures? – 5 marks

 1 mark per ratio with comparative + comment on the associated risk identified from the ratio

Sept 18 – Q1 part (a) Answer:

Results of analytical procedures

Year to 31 December Year to 31 December

20X8 20X7

Current ratio 2.4 2.6

Debt/equity ratio 24.5% 23.9%

Operating profit margin 6.1% 4.5%

Interest cover 12.5t 9t

Effective tax rates 19.9% 25%

Current ratio has decreased over the last year from 2.6 to 2.4. There is a possibility that current assets could be overstated
as it has increased by 2.1% over the last year.

The debt to equity ratio has marginally increased from 23.9% to 24.5% during the year. The company took new borrowing
during the year of $50 million which increased the debt to equity ratio. Thus at present the result fail to identify any risk.

Operating profit margin has increased from 4.5% to 6.1%. The other income has increased by 50% over the last year
indicates a possibility that other income could be overstated due to management bias connected with reversal of
provision impairment losses.

Interest cover has increased from 9t to 12.5t because operating profit has increased over the last year and there is a
reduction in finance charge. This seems strange as finance cost may had increased considering a new loan of $50 million.
This finance charge may be understated.

Effective tax rate has fallen from 25% to 19.9%. This indicates a possibility that tax expense could be understated.

Summary

 If a question ask for utilize the AP, then there are 5 marks allocated to it
 To gain the 5 marks, calculate 5 ratio with comparative, no need to show formula or calculation just write the
answer.
 Once 5 ratios results are calculated, under the results, comment on the associated risk identified from these results
by carefully looking at the numerator and denominator and the info provided in the case.
 Not necessarily each results indicates a risk, if that is so, tell examiner that the results fails to indicate a risk.
 Common ratio to be calculated (if you carefully evaluate the past answers of examiner) – includes current ratio, debt
to equity ratio, interest cover, operating profit margin and effective tax rate. However if the data is provided you
can also find, inventory holding period, debtor collection period etc.
 Keep the length of comment to just a sentence or max 2 sentences no more than that

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If a question – does not ask for AP (MARCH 2020-Q1)

 3 mark risk
 2 mark risk
 In addition ½ a mark for any relevant trend/ calculation up to max of 2 marks

If a question ask for AP- Sept 18 Q1

 5 marks specifically for AP

 Remaining marks in question will be split into:
o 3 marks
o 2 marks

4 step model to write a RoMM/ audit risk= MTRI

Q1- How to answer (March 2020-Q1)

Briefing note

To: Carol Morgan, Audit engagement partner

From: Audit manager

Subject/Re: Audit planning for the Rick Group

Introduction:

The purpose of writing this briefing note is to evaluate the audit risk, comment on the audit strategy of the component, audit
procedures on sale of property to group CEO and the advantages and dis-advantages of joint audit.

(a) Audit risk

(b)(i) Audit strategy

(b)(ii) Audit procedures

(c) Joint audit

Conclusion (2 sentences long- sum up of the main findings from a / b and c)

How to get 4 marks?

 Presentation- yellow – 1 mark

 Logical flow- the order of the question a / b / c – 1 mark
 Clarity – how sound your explanation is in the full answer (subjective)

Examiner mention students mostly score 3 out of 4 professional marks

Assignment- lecture 10

 Read the March 2020 Q1 case study – to solve Q1 part a for 24 marks in live class tomorrow

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 10
(BLOCK 3 LECTURE 4)
Objective: March 2020- Q1 part (A)
Q1-50 marks

 46 technical marks
 4 professional mark (briefing note)
 50 marks * 1.95 mins per mark= 97.5 mins (98)
o 1/4th RAPT= 24 minutes
o 3/4th Writing= 76 minutes
Q1- audit risk/ RoMM
Student advice: While reading the case you should focus on FLAGGED issues rather than taking hypothetical
assumption
March 2020

 Rick group
 It is a listed entity
 8 countries

Speculative risk (Don’t do this in exam)

Rick group
Rick group will be exposed to a number of material misstatement particularly the ones related to intercompany
balances or transaction and the different year ends of the subsidiaries. If inter-company balances are not
eliminated then the group FS would be materially misstated (2)
Listed company
Being a listed company, there is a greater risk of management bias in manipulating results to show better
performance to shareholder, thus the fs could be MM. (2)
Listed companies requires greater disclosure in the notes to the FS and if these disclosure are not given the FS
could be MM (2)
8 countries
Operating in different countries means, there is an exchange rate volatility and the transaction should be
recorded at the spot rate and the year end balances should be converted using the closing rate. If the wrong
exchange rate is used, the balances could be under or overstated.

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March 2020- Reading exhibit 2
Flagged issue 1 – annual incentive scheme

 Risk of management bias (self-interest to manipulate results to show better profitability)

 PBT has increased by 2.4% (0.5) over the last year indicate a risk of overstatement of profit exist
 Incentive payment last year are 6590*$1250= $8.2 million (0.5 m for relevant calculation).
 $8.2 million is 13.2% of the PBT thus material to FS (1 mark)
 1+0.5+0.5+1= 3 marks
Flagged issue 2- legal case

 No materiality possible
 Assuming the legal claim has a probable out flow – a provision should be recognized (1). No provision
is recognized, the liability and expenses are understated and profit overstated (1)
 Assuming the legal claim has a possible outflow – a disclosure of a contingent liability should be given
(1). FD don’t want anything to come in the FS for legal claim so disclosure will be omitted, thus FS
will be MM (1)
+ EXTRA

 Attitude of FD ( 2 mark)- potential risk indicator

o The behaviour of the FD is inappropriate – refusal to provide audit tem with relevant info+ refusal
to adjust the FS / custodian to FS
o There is a broader risk with the attitude of FD, that FS could also be MM elsewhere
Flagged issue -3

 Daryl is a significant subsidiary - $140m / $780 million= 17.9% (1)

 Risk of convergence from local accounting standard to IFRS (when preparing consolidated FS), and the
consolidated FS could MM. (1)
 DARYL is audited by another audit firm, which is not the group auditor. This increases the detection risk
for Atlanta, as Atlanta is not directly involved in gathering evidence for this important subsidiary. (2)
+ Extra (Note 3- Goodwill)
Goodwill pertaining to Daryl is $38 million which is 4.9% of the group total assets thus material to the FS. (1).
The management has the right policy in place to test goodwill for impairment each year, however, the
management conclusion of the strong group performance is not right. It is mentioned that Daryl is loss making
and has lost several customer which is a potential indicator for recognizing the impairment for the goodwill
relating to Daryl. (1). Thus currently, no proper impairment review was performed by management, thus the
goodwill is overstated and the profit is overstated. (1)

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Note 1: group revenue
The revenue should be recognized when performance obligation has been met. In the case of Rick group being a
service provider, the revenue should be recognized when services are received by the customers. The group is
recognizing revenue at the time when they bill customer in advance of the services, thus it means that revenue
is too early recorded / recognized when it should be recorded as unearned income. Thus revenue is overstated
and unearned income is understated. (2). Revenue has increased by 25.6% over the last year indicates a potential
overstatement. (0.5m)
Note 2: License
The licenses are $580 million which is 74.4% of the total assets, thus material to the financial statements. The
policy to capitalize licence cost as intangible assets and then amortize them over useful life is correct, however,
the useful life for each license varies from 3 to 5 years, and they should be amortized on their respective useful
life not on a 5 year flat policy taken by FD. Thus amortization expense is wrongly recognized and the amortization
expense is understated and the profit is overstated. (2)
Exhibit 4
Sale of property
Sale of property to the group CEO is material by nature as it is a related party transaction. Related party
transaction requires disclosure in the notes to FS. Currently Daryl complied by local laws by not giving disclosure
however there is a risk that this disclosure could possibly get omitted from the group FS when consolidation is
performed by management. Thus FS could be MM. (2)
Exhibit 5
Planned new subsidiary – 2 mark

 Material by nature (0)

 Event after the BS date Oct 20X5
 Non-adjusting event / disclosure (1)
 If no disclosure is made (0.5)
 FS could be MM (O.5)
Summary

 Top down reading

 Stop –where there is a flagged issue ( think about risk)
 Where possible calculate / comment on materiality
 Where possible comment on accounting treatment
 Focus on find the risk and the impact separately
 Keep in mind the marking scheme
 Remember the cap of 3 marks for materiality/ continue to comment on materiality even if marks are
exhausted
 Find relevant % of increase or decrease or calculation where possible and use them as part of your
answer to a max of 2 marks cap.
 When writing an audit risk answer- specifically mention detection risk
 No classification of risk between inherent and control
 Answer in briefing note format- remember the breakup of 4 marks

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Assignment

 Complete the answer for March 2020 –Q1a

 Scratch- Sept 18 Q1a- Audit risk + analytical procedures (24 marks)
 Scratch- Mar/Jun 19 –Q1a – Risk of material misstatement (20 marks)

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 11
(BLOCK 3 LECTURE 5)
Objective: Business risk understanding and past papers
Understanding business risk from AAA perspective
Business risk

A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect
an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate
objectives and strategies (ISA 315)
Business objective (Critical success factors)

 Profitability
 Reputation
 Market share
 Competitive advantage
 Liquidity
 Stakeholder relationship (banks, suppliers, customers)
Something which adversely impact the business objectives

 Case study
 Internal or external to the business (weakness + threat)

For the purpose of the exam, these risks can usually be thought of in terms of conditions that may prevent a
business from meeting its objectives and might include risks to achieving future profits or cash flows or to
business survival. This is a simplified explanation, but will help you describe the implications of most risks you
come across in the exam. There will be some risks whose explanation is more involved and you can find
examples of these in past exams.

 Business risk- can be in present or in future

 Implication of business risk – profit / cash flow / business survival

In general, you are looking for risks in the information that the examiner has presented to you within the
scenario. You will be asked to evaluate those risks. At this level you will not be credited for defining business
risk, nor will you receive credit for describing what a client could do to mitigate those business risks.

 Never write – definition of business risk

 Never write – risk mitigation

As such, you need to consider how to frame the information which is provided as a business risk. As a general
rule, marks for business risks will be awarded along the following lines:

 For identifying only without meaningful explanation, ½ mark

 For a briefly explained business risk, 1 mark will be awarded, and
 Full marks will only be awarded where a well explained business risk is presented. (2 marks)

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Marks will not be awarded for points that are purely speculative – ie not based on specific information provided
in the question scenario – nor will marks be awarded for business risks that do not impact on the audit.

Examples:

In exam, in Q1 the part a will be to evaluate the business risk and the part b will be to evaluate audit risk or
RoMM. When you are reading the case you have at back of your mind, that you need to find 2 types of risk, one
being business and other being RoMM.

For example- when reading the case you might come across a situation which is equally a business risk as well
as RoMM.

 Inventory holding period has increased from 65 days to 100 days.

(a)Business risk

Inventory

Inventory holding period has increased a lot from last year, means the inventory has become slow moving. This
possibly indicate that demand for company’s product has gone down and that customer are not liking the
company’s product or that the company product has lost its competitive position. This can impact business
revenue which can scale down in months to come and can even adversely impact company market share.(2
marks)

(b) RoMM

Inventory

Inventory holding period has increased a lot from last year, means the inventory has become slow moving. The
slow moving inventory should be valued at lower of cost or NRV. There is a possibility, that inventory is
inappropriately valued, and thus inventory could be overstated. (2 marks)

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March/ June 21 – Q1
Business risk
(A) business risks (10 marks)
1. Approximately 30% of the timber is exported
Export
Pale company exports 30% of its timber, which exposes company to foreign exchange risk and volatility. Further
the export case exposes company to any international trade restriction which could adversely impact on future
exports sales. The volatility in exchange rate if any, could affect the company profitability.
2. the board has recently approved the acquisition of several large areas of tropical rainforest in Farland, a remote
developing country
Farland
This is the first time that the company has expanded to an international location which means that company
initially will have less knowledge of the new country, its laws and regulations etc. This exposes the company to
any risk of non-compliances with the laws and regulations relating to Farland which can increases company
exposure to fines and penalties which could adversely affect company reputation and bring into risk the gold
standard accreditation.
3. A share issue was the only option for funding the international expansion as the company is at the limit of its
bank borrowing agreement.
Bank borrowing
The company is at the limit of bank borrowing which means that the company is highly geared and any possibility
of securing further loan is dim. If no further loans is negotiated it can impact or worsen company liquidity
position as already the cash balance over the last year has gone down by 33.8 %. The worsening liquidity can
bring into doubt any possible repayment of the government grant if condition are not adhered.
4. grant of $20 million to assist Pale Co in its Farland expansion
5. adhere to a number of strict standards. (Gold standard)
Gold standard
The gold standard is very important for Pale to keep it competitive advantage in the timber business. If there is
any issues pertaining to non-compliances with strict standard required for gold accreditation, the company could
lose the gold standard status which could negatively impact pale future sales and profit and potentially results
in losing one of its main customer recently taken on board, Royal.
6. The contract was signed on the basis of Pale Co receiving the Gold Standard accreditation for its timber.
7. Legal case
The legal case recently brought up by the employees claiming that breaches of health and safety guidelines
regularly take place at Pale company. This legal could potentially damage company’s reputation and result in
fines and penalties. Further this issue of non-compliances of health and safety regulations could bring doubt of
continuity of gold standard as for gold standard the business should have adherence to ethical business practices

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8. industrial action at the country’s ports meant no containers of processed timber could be shipped to our export
customers( inventory level has increased)
Industrial action
If the industrial action continues it will affect Pale company future sales and prospects. The customer who buys
from Pale will switch to other competitors due to restrictions on port. Export sales is very important to Pale
making a total contribution of 30% to sales. Further the piling inventory levels by 67% due to restriction at port
means that the warehousing or storage cost of timber will increases for business impacting the business profit
margin.
9. cash levels are depleted this year
Cash levels
The cash levels have gone down over the last year by 33.8% signals liquidity issues for the business. The working
capital seems ineffective as due to industrial action inventory level is piling up and it cant be sold to translate
into cash soon. Thus currently the business is in grieve liquidity issues.

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Business risk
Export
Pale company exports 30% of its timber, which exposes company to foreign exchange risk and volatility. Further
the export case exposes company to any international trade restriction which could adversely impact on future
exports sales. The volatility in exchange rate if any, could affect the company profitability.
Farland
This is the first time that the company has expanded to an international location which means that company
initially will have less knowledge of the new country, its laws and regulations etc. This exposes the company to
any risk of non-compliances with the laws and regulations relating to Farland which can increases company
exposure to fines and penalties which could adversely affect company reputation and bring into risk the gold
standard accreditation.
Bank borrowing
The company is at the limit of bank borrowing which means that the company is highly geared and any possibility
of securing further loan is dim. If no further loans is negotiated it can impact or worsen company liquidity
position as already the cash balance over the last year has gone down by 33.8 %. The worsening liquidity can
bring into doubt any possible repayment of the government grant if condition are not adhered.
Gold standard
The gold standard is very important for Pale to keep it competitive advantage in the timber business. If there is
any issues pertaining to non-compliances with strict standard required for gold accreditation, the company could
lose the gold standard status which could negatively impact pale future sales and profit and potentially results
in losing one of its main customer recently taken on board, Royal.
7. Legal case
The legal case recently brought up by the employees claiming that breaches of health and safety guidelines
regularly take place at Pale company. This legal could potentially damage company’s reputation and result in
fines and penalties. Further this issue of non-compliances of health and safety regulations could bring doubt of
continuity of gold standard as for gold standard the business should have adherence to ethical business practices
Industrial action
If the industrial action continues it will affect Pale company future sales and prospects. The customer who buys
from Pale will switch to other competitors due to restrictions on port. Export sales is very important to Pale
making a total contribution of 30% to sales. Further the piling inventory levels by 67% due to restriction at port
means that the warehousing or storage cost of timber will increases for business impacting the business profit
margin.
Cash levels
The cash levels have gone down over the last year by 33.8% signals liquidity issues for the business. The working
capital seems ineffective as due to industrial action inventory level is piling up and it cant be sold to translate
into cash soon. Thus currently the business is in grieve liquidity issues.

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CONCLUSION- Business risk

 Pick up a problem from case

 Translate or explain the problem – as to how it will impact the business objective adversely whether in
present or in future
 2 mark per business risk
 If any business risk involve any trend or financial results an additional ½ a mark will be gained up to a
max of 2 marks.
Assignment

 Dec 18 Q1
 Dec 17 Q1
 + Tutor will share with you on Whatsapp group links of business risk webinar so that you gain more
practice from past paper

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 12
(BLOCK 3 LECTURE 6)
Objective: Syllabus area D( Audit procedures) + Syllabus area E ( Audit evidence – completion stage of audit)
Student guidance

 Q1- audit procedure (integral topic/ must)- average 5 (min) to 10 (max)

 Evidence- it’s not necessarily that each exam sitting has a question on evidence. Evidence do get tested
in 3 out of 5 exam sittings. Evidence comes for bit higher marks like 15-20 marks on average.
Focus:

 What is the difference between procedures and evidence?

 What is the exam question type? On procedures and evidence?
 How to apply – procedures and evidence to a case study? Is there any rote learning?
 What is the marking scheme?
Procedures:
What is a good procedure?
The following attributes make a procedure good

 Case specific
 Start with an ACTION
 Should have a SOURCE
 Should have an OBJECTIVE/ PURPOSE
 Good Procedure= CASP
ASP

 Action – a procedure cannot start without action

o Review / inspect
o Analyse
o Discuss / Inquire
o Re-calculate
o Observe
o Re-perform
 Source- a procedure should have a source/ or a subject matter
 Purpose- a procedure should have an objective/ why are you performing a procedure
For e.g.
1. Review the loan agreement to confirm the terms and covenants attached with the loan.
2. Analyse the inventory holding period to confirm whether the trend in inventory holding period justify
any slow moving inventory
3. Discuss with finance director the basis of provision recognized in the financial statement to confirm the
reasonableness of the provision recognized
4. Recalculate the amortization expense to confirm that the expense is accurately charged.

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Student exam focus – for audit procedures

 In an exam paper the Q1 will ask you to describe/explain or recommend audit procedures on a specific
accounting area which will be given in the case study and that particular accounting area will also be a
specific risk of material misstatement
 Audit procedure = Accounting treatment
o Review
o Recalculate
o Discuss
o Analyse
o Sending a confirmation letter ( third party)
 Criticism- design procedures on deferred tax asset?
o Observe deferred tax asset to confirm………………….. it exist?
o Discuss with management – basis of their calculation
o Recalculate the DTA
o Review the DTA working of the management
o Analyse the increase or decrease in DTA over the last year and discuss reason why it has
increased or decreased.
 Each procedure is worth 1 mark (good procedure = CASP)

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Common audit procedure – and mistakes around them
1. Seek a representation letter
2. Review the Board minutes
3. Agree to financial statement
Seek a representation letter

 They are often requested where management’s intentions can affect the validity of a judgement
 They can also be taken to confirm management intentions
 Should not be used if it is possible to obtain the evidence without need of a written representation.
 Representation is not a substitute of the evidence directly obtained by the auditor
 Representation seek by auditor is the last resort
 A final point on written representations from management, is that where management are not
believed to be reliable, for example they have been showing signs of earnings management and
inappropriate judgements, then written representations are not likely to be a reliable form of
evidence.
Review the board minutes

 Often candidates include this as part of every answer to every requirement without considering
whether it is likely to be discussed at board level or in what detail
 This procedure might be relevant when supporting management’s intentions regarding strategy or
approval regarding major decisions such as acquisitions, but it is not likely to be the case that the
board of directors approve every individual asset purchase
 If it isn’t something the board discuss then candidates won’t be credited for this as a procedure. In
addition, the purpose of reviewing the board minutes will need to be stated in order for any credit
to be awarded.
Agree to financial statements

 This is another area where candidates appear to make a general statement that is often not
appropriate
 financial statements are aggregate figures and do not show every transaction
 To obtain marks for agreeing something to the financial statements it will be necessary that the item
can be seen in the financial statements or the notes and that the specific detail of what is being
agreed is stated

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Practice – past papers on audit procedures
Sept 18- Q1
(b)
Design the principal audit procedures to be used in the audit of the goodwill arising on the acquisition of Lynx Co.
Management’s calculation of the goodwill is shown in Exhibit 4. You do not need to consider the procedures relating to
impairment testing, or to foreign currency retranslation, as these will be planned later in the audit.(6 marks)

Procedures- goodwill (Exhibit 4)

Case- (goodwill)- will contain info/ facts about the goodwill so you need to annotate them carefully because each info/ fact
given to you about goodwill will then be converted to a procedure.

Facts/ info:
 Acquisition of lynx company
 Total consideration of US$351 million
 $80 million was paid
 Contingent consideration of $271
 FV of NCI
 FV of net assets
Procedures
1. Review the board minutes to confirm the approval of Lynx acquisition and the business rationale for acquiring Lynx
Company.
2. Review the legal purchase agreement to confirm the amount of consideration agreed to be paid to Lynx company
in terms of cash consideration and contingent consideration and the basis of contingent consideration.
3. Review the bank statement as on 1st March 20x8 to confirm the cash consideration of $80 million paid
4. Discuss with finance director the basis of concluding on 18% discount factor when the WACC is 10% to confirm
the reasonableness of the judgement used.
5. Recalculate the present value of contingent consideration using the discount factor of 18% to confirm the accuracy
of the present value
6. Recalculate the fair value of non-controlling as on 1 st of March to confirm its accuracy
7. Review the stock market quotations as on the 1st of March to confirm that the right share price has been used to
determine the fair value of non-controlling interest
8. Review the report of Sidewinder company to confirm the reasonableness of the basis used in determining the fair
value of net assets and the uplift of $12 million.

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Dec 18- Q1

(C) Design the principal audit procedures to be used in the audit of the grant received from the government in September
20X8. (6 marks)

 Facts/ info about government grant and then convert them into 6 procedures

Facts/ info:

Redback Sports Co is also involved with a government initiative to help unemployed people have access to sport
facilities. The company received a grant of $2 million in September 20X8, under the terms of which it allows
unemployed people three hours of free access to its facilities per month. By the end of November, 33,900 free
hours of facility use have been provided under this scheme. The government intends the initiative to run for three
years, to promote long-term health of participants.
The grant received of $2 million, the details of which are explained in Exhibit 2, has been recognised in full as
income for the year.

Procedures
1. Review the grant agreement to confirm:
a. The amount of grant received that is $2 million
b. The terms and conditions associated with the grant
2. Review the bank statement to confirm the receipt of $2 million government grant
3. Review the relevant source document used by management to record 33,900 free hours to confirm that
the number of hours reported are correct.
4. Discuss with management the need to spread the income from grant over the three year period as the
grant intends to run for this stipulated time
5. Discuss with management the need to adjust the financial statement to confirm that any associated risk
of material misstatement is mitigated (i.e. currently the income is overstated.)

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Mar/Jun 19 Q1

Design the principal audit procedures to be used in the audit of:

(i) The impairment of the factory, and
(ii) The development cost capitalised in respect of the new packaging. (10 marks)

Impairment of the factory

One of the company’s several factories, used to process fruit and produce fruit juice, was damaged in August 20X8 when a
severe storm occurred. High winds destroyed part of the factory roof, and heavy rain led to flooding and damage to
machinery and processing equipment. The factory has not operated since the storm, and the finance director has performed
an impairment review on the building and plant and equipment; details of the impairment review are given in the extract
from the management accounts (Exhibit 4).

The fair value less costs to sell has been estimated based on the sales proceeds which could be generated from
selling the damaged machinery. The value in use is estimated based on the future sales which could be generated
if the damage to the building is repaired and new machinery is put into the factory.

The company is planning on carrying out the restoration and buying new machinery, at a total estimated
cost of $450,000. This amount has been provided for within current liabilities, with a corresponding
entry accounted for as a prepayment.

1. Review the working of impairment review performed by the finance director to confirm the basis used
in performing the impairment review and the determination of the recoverable amount
2. Agree the carrying amount of the building, plant and equipment used in determining impairment loss to
the fixed asset register as at 31st August 20x8
3. Discuss the basis used by management to estimate the fair value to confirm the reasonableness of fair
value used in recoverable amount calculation
4. Review any quotation received from potential buyers to conform the likely sales proceed which the
management can fetch from the sale of factory to confirm the reasonableness of fair value
5. Discuss with FD that the VIU is calculated taking into account the current condition of the factories.
6. Seek a representation letter from the management on the completeness and accuracy of the
estimates used and their basis in determining the recoverable amount

Read the case= pick up the info/ facts given= covert them into procedures= CASP= 1 mark per procedure

Development cost capitalized

Recently, concern over the level of plastic used in packaging has encouraged food producers to investigate the
use of plastic-free packaging for their products. In July 20X8, the board approved a budget of $400,000 to be
spent on research and development into new packaging for its products. By 28 February 20X9, $220,000 has
been spent, with this amount being paid to ProPack, a firm of packaging specialists, to design and develop a range
of plastic-free bottles, bags and containers. It is anticipated that the packaging will be ready for use in two years’
time at which point the company will introduce it for use across its product range. ProPack is currently testing
prototypes of items which have been developed, with encouraging results.
Development costs in respect of new packaging 220m has been capitalized in full

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Assignment
 MJ19- Development cost
 S/D 19 Q1
 Mar 20 Q1
 S/D 20 Q1
 M/J21 Q1

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 13
(BLOCK 3 LECTURE 7)
Note: This lecture was recorded for my AAA 2021 course, and I am putting it in my Smart course as my Lecture 13,
Block 3 Lecture 7, so focus on this lecture as if its Block 3 lecture 7 (in sequence lecture 13). The presentation style
will be different to the one shared with you as the presentation here is AAA 2021 course and you are using Smart
course presentation but the content remains effective.

Objective: Audit evidence

Audit evidence – is a topic at completion and finalization stage of audit so you will find it in section B of the
paper. Either Q2/ or Q3 you will find this topic.

Past Paper- Recent 6 exam sittings:

EVIDENCE Sept 18 Dec 18 M/J 19 S/D 19 Mar-20 S/D-20
X
Evidence in working Q2b- 9
paper file marks
X
Matters and evidence Q2a- 20
in working paper file marks
Sufficiency of Q2a(ii)(iii)-
evidence/ further 11 marks
evidence
X
Total marks 9 marks 20 marks 11 marks

Prior to Sept 18:

 Dec 16- Q2(25)- Sufficiency and appropriateness of evidence
 Jun 17- Q4(20)- Comment on the matters / explain the evidence in working paper file
Article:
 Completing the audit ( selected paras)
Exam paper – evidence
There are 2 types of questions which comes on evidence which are as follow:

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Type 1: (Regular)
Requirement:
Comment on the matters, and explain the audit evidence you should expect to find in the review of the working
paper file?

 Qs on evidence ( Matter in the case is accounting matter)

 Comment on the matters! (accounting matters)
o Materiality – 1
o Accounting treatment - 1
o Risk of material misstatement (under/overstated)-1
 Audit evidence YOU should expect to find in the review of working paper file?
o File- what you expect to find?
o Working paper = sufficient appropriate audit evidence
o Imagine !

 Evidence – is on documentary form/ tangible form

 For e.g.
Suppose you are a senior who performed work on government grant. After completing you work you
documented your working papers for the review by the manager. You are manager and you are about to review
the WP file for government grant !
Senior – procedures- (Government grant)

1. Review the grant agreement (0.5) which Redback sport co have with government to confirm:
a. The amount of grant received i.e. $ 2 million (0.5)
b. The terms and condition of grant i.e. free access to unemployed people (0.5)
c. The tenure of grant i.e. 3 years (0.5)
2. Review the bank statement as at Sept 20x8 to confirm receipt of $ 2 million from the government
3. Review the report generated by the new system introduced by the management to confirm the accuracy
of 33,900 hours claimed by management provided as free hours.
4. Discuss with Redback management the accounting treatment for grant, making them realize that the
entire $ 2 million should not be recognized as income
5. Discuss with Redback management the proposed adjustment needed to ensure that income is debited
and the deferred income is credited to ensure FS are free from material misstatements.

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Evidence you should expect to find in working paper file (Government grant)

1. Copy of grant agreement to confirm the amount of grant/ terms of grant and the tenure of grant
2. Copy of bank statement to confirm the receipt of $2 million
3. Copy of the report generated by the new system to confirm …………………………………….
4. Notes of discussion with Redback management to confirm…………………………..
5. Notes of discussion with Redback management to confirm…………………………..
What are other forms of evidence in working paper file?
e.g.
Procedures (Recalculate the amortization expense to confirm it accuracy)
Evidence (Results of recalculation for the amortization expense to confirm its accurate)
Results of (Working paper)
1. Results of observation
2. Results of reperformance
3. Results of analytical procedures
e.g.

 (Procedures) Seek a representation from the management on the completeness of the estimate made in
FS
 (Evidence in WP) Representation from the management to confirm………………….
e.g.

 Review the draft / statement of financial position to confirm that the asset held for sale are classified as
current asset
 (Evidence)
 Draft statement of financial statement to confirm ………………………………………………….

Procedure Evidence in working paper

Review the lease agreement Copy / Extract of the lease agreement
Review the cash book Copy of the cash book
Review the fixed asset register Copy of the fixed register
Analyse the trends in receivable to confirm the Results of analysis to confirm
increase or decrease in receivable over the last year
Observe the inventory count process at the year Results of observation
Discuss with management Notes of discussion
Seek a representation from management Representation from the management
Circularize the confirmation letter to the major Confirmation letter to confirm
customers of the company
Review the draft SOFP/ SOCI / notes to the FS Draft SOFP/ Draft SOCI/ notes to the FS
Review the breakup of capital expenditure to confirm Breakup of _________
revenue element in capital expenditure

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Summary – evidence in working paper file:

1. Copy of
a. Internal audit report
b. Lease agreement
c. Bank statement
d. Sales invoice
e. Loan agreement
f. Cash book
g. Fixed asset register
h. Grant agreement
i. Feasibility study
j. Board minutes
2. Results of
a. Recalculation
b. Analysis
c. Observation
d. Reperformance
3. Notes of
a. Discussion
4. Breakup of
a. Sales
b. Expenses
c. Research and development cost
5. Draft SOFP
6. Draft SOCI
7. Notes to the FS
8. Representation from management
9. Confirmation letters
Evidence in working paper file (1 mark per evidence)

 Case specific!
 Working paper (Copy/results etc. see the list above)
 Purpose

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June 17 Q4 - Exercise (Type 1)
Comment on the matters, explain the evidence you should expect to find in review of working paper file?
Issue 1- Cost of inventory – 7

 Comment on the matter (3)

 Evidence (4)
Issue 2- Impairment – 7

 Comment on the matter (3)

 Evidence (4)
Issue 3- Warranty provision -6

 Comment on the matter (3)

 Evidence (3)

You are the manager responsible for the audit of Osier Co, a jewellery manufacturer and retailer. The final audit
for the year ended 31 March 2017 is nearing completion and you are reviewing the audit working papers. The
draft financial statements recognise total assets of $1,919 million (2016 – $1,889 million), revenue of $1,052
million (2016 – $997 million) and profit before tax of $107 million (2016 – $110 million). Three issues from
the audit working papers are summarised below:

(a) Cost of inventory

Inventory costs include all purchase costs and the costs of conversion of raw materials into finished goods.
Conversion costs include direct labour costs and an allocation of production overheads. Direct labour costs are
calculated based on the average production time per unit of inventory, which is estimated by the production
manager, multiplied by the estimated labour cost per hour, which is calculated using the forecast annual wages
of production staff divided by the annual scheduled hours of production. Production overheads are all fixed and
are allocated based upon the forecast annual units of production. At the year end inventory was valued at $21
million (2016 – $20 million).

Issue 1- Cost of inventory – 7

Comment on the matter (3)
The inventory valuation at the year-end i.e. $ 21 million is 1.09% of the total assets, 19% of the profit and 2% of
the revenue, thus material to the financial statements. (1).
The inventory should be valued at the lower of cost and net realizable value. However in this case Osier is using
a lot of estimate to determine the cost of inventory pertaining to the cost of conversion element. There are lots
estimated used in direct labour cost and production overheard which increases the risk of management bias and
subjectivity in inventory valuation. (1)
Thus the inventory could be overstated if the estimate for cost are not accurate, inventory has already increased
by 5% over the last year (1)

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Evidence

1. Copy of a sample purchases invoices to confirm the purchase cost used in valuation of inventory
2. Notes of discussion with production manager to confirm the basis used in determining the average
production time per unit of inventory
3. Results of recalculation for direct labour cost and production overheads to confirm the accuracy of
management calculation
4. Copy of forecast annual wages to confirm the basis used by management is forecast the annual wages to
confirm its reasonableness
5. Representation from management to confirm the adequacy of estimates used in inventory valauetion
and reason why actual cost is not used.
Read the case- identify the fact- covert them to evidence

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Type 2: Question on evidence

Type 2: (Comes very less often)

Comment on the sufficiency and appropriateness of the evidence obtained by the audit team?
Case study- the evidence obtained by the team will be given? Is that right? Yes
What you have to do?

 Comment- whether it is sufficient/appropriate or not?

 Comment – 1 mark per comment
 Judge whether it is sufficient/appropriate or not?
Rules of sufficiency and appropriateness of evidence?

 Sufficiency – sample size (Quantity)

 Appropriateness- right/correct/ reliable (Quality)
o Junior on a risky area (no)
o Part qualified accountant (no)
o In a rush (no)
o Without the supervision of manager/ manager was absent throughout the audit (no)
o For fixed asset, the existence of the fixed asset was not verified (no)
o Oral evidence (no)
o Management – when evidence from third party was available? (no)
o Context of case- Judge whether it is appropriate or not
Dec 16 Q2 / and March 2020 Q2

March 20 Q2(a)(ii)(iii)
In respect of the development costs and trade receivables:

(ii) Comment on the sufficiency and appropriateness of the audit evidence obtained, and

(iii) Recommend the actions to be taken by the auditor, including the further evidence which should be obtained.
(11 marks)

Development cost

 Comment on the sufficiency and appropriateness of the audit evidence obtained – 1 mark per comment
 Recommend the actions to be taken by the auditor- 1 mark per action
 further evidence which should be obtained- 1 mark per evidence

Trade receivable

 Comment on the sufficiency and appropriateness of the audit evidence obtained

 Recommend the actions to be taken by the auditor
 further evidence which should be obtained
Total 11 marks

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Development cost

In August 20X4, the Group commenced development of a new security system, and incurred expenditure of
$600,000 up to the financial year end, which has been capitalised as an intangible non-current asset. The only
audit evidence obtained in relation to this balance is as follows:

- Agreement of a sample of the costs included in the $600,000 capitalised to supporting documentation such as
supplier invoices.
– Cash flow projection for the project, which indicates that a positive cash flow will be generated by 20X8. The
projection has been arithmetically checked.
– A written representation from management stating that ‘management considers that the development of this
new product will be successful’.

You are aware that when the Group finance director was asked about the cash flow projection which he had
prepared, he was reluctant to answer questions, simply saying that ‘the assumptions underlying the projection
have been agreed to assumptions contained in the Group’s business plan’. He provided a spreadsheet showing
the projection but the underlying information could not be accessed as the file was password protected and the
Group finance director would not provide the password to the audit team.

Development cost

 Comment on the sufficiency and appropriateness of the audit evidence obtained – 1 mark per comment
 Recommend the actions to be taken by the auditor- 1 mark per action
 further evidence which should be obtained- 1 mark per evidence
Development cost
The development is material to the group financial statements it is above the materiality threshold of $400,000,
and considering its material (1) the evidence gathered on development cost in inadequate because of the
following:
-No evidence is gathered on the breakup of research and development cost which was important to identify
how much of the cost should be expensed out (1)
-the underlying basis of cash flow forecast was not evaluated by the audit team rather only an arithmetical
check was performed (1)
-representation from the management was taken too early when evidence from representation is the last resort
and cannot be a substitute of the evidence obtained directly by auditor (1)
Actions
-discuss the matter of no access to password with the group TCWG to ensure that the audit team is provided
with access to password gathering evidence (1)
-discuss with TCWG, the attitude of the finance director, in terms of his reluctance to provide proper
information to team (1)
Further evidence
1. Breakup for $600,000 to confirm the amount related to research cost included the total so it could be
expensed out (1)
2. Notes of discussion with finance directors on the underlying basis used in the cash flow forecast (1)
Knowledge: TCWG- those charged with governance

 Board of director
 Non-executive directors (Committee/ Audit committee)

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Dec 16- Q2- Type 2 evidence

Required:
In respect of each of the three matters described above:

(i) Comment on the sufficiency and appropriateness of the audit evidence obtained;

(ii) Recommend further audit procedures to be performed by the audit team; and

(iii) Explain the matters which should be included in a report in accordance with ISA 265 Communicating
Deficiencies in Internal Controls to Those Charged with Governance and Management .

Note: The split of the mark allocation is shown against each of the matters above.
Matter 1- asset held for sale

 Comment on the sufficiency and appropriateness of the audit evidence obtained;

 Recommend further audit procedures
 Explain the matters which should be included in a report in accordance with ISA 265
Matter 2- capital expenditure

 Comment on the sufficiency and appropriateness of the audit evidence obtained;

 Recommend further audit procedures
 Explain the matters which should be included in a report in accordance with ISA 265
Matter 3 – payroll expenses

 Comment on the sufficiency and appropriateness of the audit evidence obtained;

 Recommend further audit procedures
 Explain the matters which should be included in a report in accordance with ISA 265

Knowledge- Explain the matters which should be included in a report in accordance with ISA 265

ISA265- Communicating Deficiencies in Internal Controls to Those Charged with Governance and Management.

Explain the matters which should be included in a report in accordance with ISA 265=

 deficiencies in internal control system ( case= 1 mark)

 recommendation of how to overcome it ( 1 mark)
Matter 1- asset held for sale- 9 marks

 Comment on the sufficiency and appropriateness of the audit evidence obtained;

 Recommend further audit procedures
 Explain the matters which should be included in a report in accordance with ISA 265

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You are the manager responsible for the audit of Thurman Co, a manufacturing company which supplies stainless
steel components to a wide range of industries. The company’s financial year ended on 31 July 2016 and you are
reviewing the audit work which has been completed on a number of material balances and transactions: assets
held for sale, capital expenditure and payroll expenses. A summary of the work which has been performed is
given below and in each case the description of the audit work indicates the full extent of the audit procedures
carried out by the audit team.

(a) Assets held for sale

Due to the planned disposal of one of Thurman Co’s factory sites, the property and associated assets have been
classified as held for sale in the financial statements. A manual journal has been posted by the finance director to
reclassify the assets as current assets and to adjust the value of the assets for impairment and reversal of
depreciation charged from the date at which the assets met the criteria to be classified as held for sale. The
finance director asked the audit senior to check the journal before it was posted on the basis of there being no
one with the relevant knowledge to do this at Thurman Co.
The planned disposal was discussed with management. A brief note has been put into the audit working papers
stating that in management’s opinion the accounting treatment to classify the factory as held for sale is correct.
The manual journal has been arithmetically checked by a different member of the audit team, and the amounts
agreed back to the non-current asset register. (9 marks)

Matter 1- asset held for sale- 9 marks

Comment on the sufficiency and appropriateness of the audit evidence obtained (Criticism of the evidence
gathered by team)
The evidence gathered by the audit team on asset held for sales seems inadequate on the basis of the following
comments:
-the planned disposal was only discussed with management which is inadequate alone, as no procedures were
performed on the condition of IFRS-5, or no documents pertaining to asset held for sale was reviewed. (1)
-a brief note is inadequate because, asset held for sale is an extra-ordinary event which requires a detailed
notes, which should give auditor conclusion that the accounting treatment in view of auditor is correct or not
(1)
-the arithmetical check of manual journal is inadequate itself as the manual journal wasn’t check for the
appropriateness of whether the right account balances has been debited or credited. (1)
-agree back the amount to non-current asset register, seems inappropriate as the asset held for sale would no
longer be in non-current asset register rather moved into current assets. (1)
Recommend further audit procedures
1. Review of board minutes for the approval of the sale of factory sites and the business rationale
2. Review the management impairment working to confirm the underlying basis used in determining the
recoverable amount of the factory sites.
3. Reviewed the statement of financial position to confirm that the asset held for sale are indeed classified
as current assets.
4. Review the correspondence with potential buyers to ensure that the factories will be sold in next 12
months/ and further the quotation received from potential buyer.
5. Review tender document floated by the management to sell the factory sites to ensure that sale will be
made in next 12 months

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Explain the matters which should be included in a report in accordance with ISA 265
Manual journal has been posted by the finance director which means that the FD is wasting his time and efforts
on carrying out miscellaneous task which is not the job description of the finance director. (1). The finance
director should not post manual journal rather this should be done by managerial staff in finance department(1)
There is no one with the relevant knowledge to do this at Thurman Co means that the finance department at the
company is incompetent and does not have right resources to carry out the financial task. (1). The company
should induct callibre staff in the finance department as soon as possible (1)
Summary:

 Comment on the SAAE- from the case pick the criticism where the audit team gathered less evidence and
comment on it for 1 mark
 Procedures- link with case/ find further procedure not performed by audit team – each with 1 mark (ASP)
 Matter- communicated ISA265-
o Deficiency – why it is?- 1
o Recommendation – 1

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 13
(BLOCK 3 LECTURE 8)
Objective: Completion and reporting stage (Syllabus- E)

 At the stage of completion examiner expect student to know the following:

o An engagement quality control review performed ( and a question on it – block 2)
o A question on evidence- where the examiner expect that what evidence you will expect to find in
the review of the working paper file / or comment on the sufficiency and appropriateness of
the evidence obtained by the audit (Block 3- lecture 7 – lecture 12)
o Communication to those charged with governance (TCWG)
o Going concern review ( Sep 21 webinar- Day 4 https://youtu.be/P6vddu0WutU)
 at the stage of reporting
o a very good knowledge of audit report- rules of audit report and its application to past paper

Communication with TCWG

 Who are TCWG?

o Who are charged with governance of an organization?
 Executive directors ( Board of directors)
 Non-executive directors ( Audit committee)
Mar/Jun 19 Q2b
Required:
From the information provided above, recommend the matters which should be included in Eddie & Co’s report to
those charged with governance, and explain the reason for their inclusion. (15 marks)

 1 mark per matter – to be included in the report

Property portfolio
 Delay in getting documents from the management despite several reminders
 $11.1 million- materiality? – 4 properties not revalued (versus total assets 2.1% - it is material)
 Accounting treatment – for revaluation
 Not revalued- misstatement (under/ overstated)
 Rectification?
Renovation of car parking
 $13.2m of expense incurred – which is 2.5% of total asset / 90% of PBT (Material)
 Accounting treatment for renovation versus economic benefit
 Risk – operating expenses are overstated / profit is understated / NCA are understated
 Adjustment – recognize the renovation as a capital expenditure
 No authorization of CAPEX form – weaknesses
 Implication of weaknesses on business
 Recommendation to overcome
Bryony
 Bryony has served eight year as an engagement partner – familiarity / self-interest (justify)
 Emergency situation- Mr. Philip was ill (expert in retail)- was not available
 Mr. Bryony can continue for an extended period of 2 years beyond 7 years ( so can serve upto the next year audit)
 Being a listed company and with an extended serving by Mr. Bryony, Eddie and company should ensure that the
audit engagement of Taylor is subjected to additional safeguard like an independent partner review/ proper hot
review before signing the audit report ‘

+ Student note- ill upload my answer on M/J19 on portal/ Whatsapp group / email me your answer

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Dec 16-Q2 (Lecture 12- Block 3 lecture 7)
In respect of each of the three matters described above:
 Explain the matters which should be included in a report in accordance with ISA 265 Communicating
Deficiencies in Internal Controls to Those Charged with Governance and Management

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Audit report

 ISA-570- going concern and the implication for audit report – MuRGC para
 ISA-700®- standard audit report – unmodified report – structure
 ISA-701- Key audit matters ( listed company)
 ISA-705- qualified opinion/ adverse opinion/ disclaimer of opinion ( modified opinion)
 ISA-706- emphasis of a matter para (EOMP)/ Other matter para (OMP)
 ISA-720- Other info para (OIP)/ auditor responsibility for other information

Rules/ regulation for audit report

 In the AAA exam when you read the case study on a question around audit report., carefully read the opening para
to identify whether the company is listed or not listed, because that will make a big difference to your thinking
process.
 There is no difference of rules and regulation or the items in the audit report of a listed company and a non-listed
company with the exception of KEY AUDIT MATTERS , which is an additional item in a listed company report only

2 TYPES OF AUDIT REPORT

Listed company/ Non-listed – Unmodified audit report (Standard report)

1. Unqualified opinion
2. Basis of opinion
3. KAM( for only listed company)
4. Other information para

Modified audit report ( modify – means to change – and change can be negative or positive)
1. Change of opinion- qualified opinion / adverse opinion/ disclaimer opinion
2. If any additional para is inserted to the audit report – (conditional)
a. MuRGC
b. Emphasis of a matter para
c. Other matter para

Understand report – one by one:

Listed Non-listed
Audit report Audit report
 Opinion (Un-qualified)  Opinion (unqualified)
 Basis of opinion  Basis of opinion
 MU relating to going concern  MU relating to going concern
 KAM  EOMP
 Other matter para  Other matter para
 Other information  Other information

 Opinion
o Un-modified report
 Unqualified opinion- everything is true and fair/ there is no issue / or the issue is immaterial
o Modified audit report
 Qualified
 Adverse
 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

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What is the difference between material and material and pervasive?
Immaterial (un-qualified) Material (qualified) Material and pervasive
(adverse/ disclaimer)
Total assets Less than 1% 1-2% and thereafter 60% or more
PBT Less than 5% 5-10% and thereafter 60% or more
Revenue Less than 0.5% ½-1% and thereafter 60% or more

Pervasive- if it affect the substantial proportion of the FS (ISA705)

 Substantial proportion- something exceeding 50% (general)
 Examiner concludes on something being pervasive when the % is 60% or more

Disclosures (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 (ISA570)

 The company is a going concern however there are material uncertainties facing the business which
are:
o Disclosed 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 . The opinion will remain un-qualified
o Not disclosed/ or not adequately disclosed 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
Summary
OPINIONS PARAGRAPHS
Type of Unqualified Qualified Adverse Disclaimer MURGC KAM(L) OMP EOMP(NL) OIP
report opinion opinion opinion
Un- √ √ √
Modified
Modified √ √ √ √ √ √

Assignment

 Formulate the answer for M/J19-Q2b

 REVISE the reporting rule

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 14
(BLOCK 3 LECTURE 9)
Objective: Understand reporting rules

 Going concern- reporting rules ( ISA570)

MURGC (ISA570)
Situation 1:
The company is a going concern however there are material uncertainties facing the business which are:
o Disclosed 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 . The opinion will remain un-qualified
o Not disclosed/ or not adequately disclosed 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

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.
o Opinion will be un-qualified
o Add an EOMP to draw attention to the disclosure
 Summary-
o Co is a GC + there are MU+ disclosed = MURGC para/ with an un-qualified opinion (Modified
report)
o Co 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 no 3:
The auditor concludes that the FS should be prepared on breakup because auditor believe that the company is
not a GC, however management disagree with auditor.
o Adverse opinion (modified audit report)

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EOMP (ISA706)

 Primarily EOMP is for a non-listed company with the exception of a situation where a the disclosure
of breakup basis of FS is rightly given in the notes to FS, then in the listed company report an EOMP will
be added.
 EOMP is added to the audit report when:
o The matter is material (Emphasize)
o The matter is correctly disclosed in notes to FS
o Correct disclosure in the notes to FS + is material= EOMP
Examples:
The PBT of a company is $10 million. The company is non-listed

 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
 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
Summary

 Non-listed company
 Disclosure is correct
 Situation 1 the disclosure is material to PBT as it is 50% of the PBT – thus an EOMP will be added / the
opinion will be un-qualified = modified audit report
 Situation 2 the disclosure is 1% of the profit before tax thus its immaterial. The auditor will issue an
un-qualified / un-modifed audit report
When you think about EOMP is exam:

 Remember the exception for listed company

 For non-listed company – clearly read the case, if the case mention there is a disclosure given, confirm
whether it is correct + material to include an EOMP

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KAM (ISA701)

 Key audit matters

 Key= something which is significant
 Audit matter =
o Risky areas in the FS
o Areas involving estimates / subjectivity in the FS
o Significant event, transactions during the year including adjusting and non-adjusting event
o The adoption of a new accounting standard / the change in accounting policy
 Audit matter = is an area of focus during audit
 When you think of a KAM in exam paper- remember KAM=LSP
o Listed company
o Significant matter
o Positive matter
In a listed company, even a significant disclosure other than MURGC and the breakup basis, will be considered
as a key audit matter.
Example:
The PBT of a company is $10 million. The company is Listed

 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
Legal case
Why the matter was considered as KAM Audit approach- how it was addressed
This disclosure of contingent liability was considered as The audit team gathered sufficient appropriate audit
kam because the legal claim filed by the customer is $5 evidence on the legal case by undertaking the following
million which is 50% of the PBT and is an area which audit procedures:
required significant judgement or estimate in terms of its -corresponded with the legal advisor …………………………….
outcome -review the legal case filed by the customer
-discuss with management the updates on the case so far
- reviewed the notes to ensure proper disclosure is given

If this would had been included as EOMP in a non-listed company

Without qualifying our opinion, we draw attention to note no. 11 of the FS where a significant legal case has
been disclosed as a contingent liability.
Example:
At the planning stage of ALPHA company audit which is a listed company, revenue recognition was identified as
a significant risky area. During the course of the audit, the auditor performed substantive procedures on revenue
recognition includes the timings and cut-off procedures and concluded that revenue is rightly recognized.
- Auditor will include revenue recognition in a key audit matter on the auditor (un-modified audit
report)
At the planning stage of ALPHA company audit which is a listed company, revenue recognition was identified as
a significant risky area. During the course of the audit, the auditor performed substantive procedures on revenue
recognition includes the timings and cut-off procedures and concluded that revenue is wrongly recognized
- Wrongly = disagreement= material misstatement= qualified or adverse ( modified audit report)

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Other matter para (ISA706)

 Change of auditor and to inform shareholder that last year audit was performed by another auditor,
mention the name/ the date of audit report and the type of opinion published.
 To be inserted if there is a change of auditor – modified audit report
Other information para – OIP (ISA720)

 In the last few exam sittings examiner has increased focused on testing ISA720 and OIP.
ISA-720- Other info in the document containing the FS

 Document which contain the FS and other info together= annual report
 When the auditor perform audit- the auditor expresses an opinion that , in our opinion the FS give a
true and fair view
 Is the auditor responsible for other information in the document containing the FS?
Q3b- SepDec 20
Required:
(i) Describe the auditor’s responsibilities in relation to the other information presented with the audited
financial statements and comment on the matters arising from the extract from the chairman’s statement;
and (5 marks)
(ii) Assuming no changes are made to the chairman’s statement, evaluate the implications for the completion
of the audit and the auditor’s report. (5 marks)

Answer:

 Auditor responsibilities for other info

o To read other information and to identify whether there is any material inconsistency or not
o Not to express an opinion on other info
o Highlight any material inconsistency identified as a statement in the other information para / or
even if no inconsistency found tell SH , nothing to report
 Comment on the matters arising from the chairman statement
o The chairman statement is very consistent with the financial results of the company and the
claim of the chairman in terms of, revenue growth, profit growth and the rising trend in revenue
from all stream particularly, the scientific stream, is correct.
o However the chairman statement on the recycling is inconsistent with the evidence
gathered by the audit supervisor who claim that not all publishing is recyclable.
 evaluate the implications for the completion of the audit and the auditor’s report. (if no changes
are made to chairman statement)- 5 marks
o if the chairman disagree to correct the statement that all items are recyclable, which contradict
the evidence provided by the audit supervisor:
 the auditor should consider or re-assess the client integrity level at the completion stage
and any potential consequence of this reassessment on the completion stage of audit.
 If the chairman isn’t demonstrating integrity, seeking or relying on the representation of
TCWG will be questionable
 If the inconsistency is not rectified, the auditor will highlight this inconsistency in the
other information paragraph clearly describing what the inconsistency is.
 Further in the other info para, the auditor will mention his responsibilities about
other information so that the shareholders are very clear that auditor do not express an
opinion on other information.
 This will lead to an un-modified audit report
 everything is worth 1 mark

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Auditor responsibility

 read the other information, to identify whether the other information contains any material
inconsistency with the financial statement or not
 for e.g. the chairman mention in the chairman report that the sales has grown by 10%, where actually in
the profit or loss statement the revenue has only grown by 1%
 if there in an inconsistency identified – the auditor will discuss it with TCWG, to ensure it is rectified. If it
is not rectified, it brings into doubt the integrity of the chairman and increase the overall risk exposure
of the audit.
OIP

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

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Summary – Paragraphs
MURGC KAM EOMP OMP OIP
Which L/NL L *L(in ONE L/NL L/NL
company? cases)/ NL
What matter is Co is a GC, there Matter in KAM is Material and a Change of auditor Other info/
included? are MU relating to very broad correct disclosure auditor and
future which are included, risky in the notes management
correctly areas, estimates, except for a responsibilities
disclosed in the significant MURGC for other info
notes transactions, disclosure /
events, disclosure breakup basis
,adoption of a disclosures
new standard etc. *For a listed
company the
break up basis
disclosure will be
reflected in EOMP
Type of audit Modified report Un-modified Modified Modified Un-modified
report

Final list of questions !

 If a matter results in a qualified/ adverse opinion can the matter be reflected in any of the
above paras? NO
 If a matter results in a para above can the matter be reflected in a qualified/ adverse opinion?
NO
 Every para has a unique matter, one matter cannot be reflected in multiple paragraph? TRUE
Additional info: KAM is a static para for listed company, and cannot be omitted. However if the auditor
issues a disclaimer of opinion on a listed company only then, the KAM para will be omitted from the
audit report

Assignments
 Read the exam technique article part 5
 Read ICI report
 Read Santander report
 You should know the order of paragraph
 You should know the wording of report
 Wording + order will help you solve a question on critical appraisal of audit report
Tutor reponbsilites
 Ill share a couple of lectures (pre-recorded) for the practice of past papers on audit report
by Tuesday max.

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 BLOCK 3 LECTURE 10

REPORTING

Examiner perspective (March 2019- examiner report)

“Reporting is not an area of the syllabus that is particularly difficult and with a structured approach and an understanding of
opinions and reporting, candidates should be able to score high marks. Candidates would benefit from reading the exam
technique article published (Part-5) on ACCA’s website for detailed guidance on how to approach and answer reporting style
questions.”
Objective:
1. Structured approach
2. Understanding of opinion and reporting
3. Read- the exam technique article part 5 ( how to approach reporting questions)

Structured approach:
1. Types and styles of question which has come on reporting ( watch 2 webinar – recommended+ exam drilling day
3)
2. How to solve a question- (exam drilling session + recommended webinars to watch)
3. Knowing the marking scheme – (exam drilling session)
4. Practice of the past papers ( at least 5-6 questions on reporting)

Understanding of opinions and reporting ( Crisp overview)

Opinions
1. Un-qualified opinion – the misstatement is immaterial/ the problem is immaterial
2. Qualified opinion- material misstatement + unable to obtain sufficient appropriate audit evidence(material)
3. Adverse opinion- pervasive misstatement
4. Disclaimer of opinion - unable to obtain evidence (pervasive)
Unqualified opinion = un-modified audit report
Qualified opinion / Adverse opinion/ Disclaimer of opinion= Modified audit report (change of opinion)

Other aspects of audit report (beside opinions)

Listed company Non-listed company
Material uncertainty relating to going concern para (MuRGC para)
KAM para (only for listed company)
Emphasis of a matter paragraph(non-listed)
Other information paragraph
Other matter paragraph
1. MuRGC para = modified report
2. KAM para = un-modified report
3. EoMP= modified report
4. Other information para= un-modified report
5. Other matter para = modified report

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Modified report – two reasons which makes the report modified

1. Either a change of opinion (qualified / adverse/ disclaimer)

2. Due to insertion of some paragraphs (MuRGC para, Eomp, other matter para)

Looking at the past papers (Type 2 question)

Category 1: June 2017- Q5a

Step 1: understand the requirement / marking scheme

Required:
(i) Comment upon the matter described above and explain the further actions necessary before the auditor’s
report can be signed. (7 marks)
(ii) Discuss the implications for the auditor’s report if no adjustments are made to the financial statements.(5
marks)

7 marks
 Comment on the matter described above ( 1 mark per comment)
o Matter(above)= accounting matter/ treatment
o Comment on accounting treatment:
 Materiality ( 1 mark)
 Treatment (1 mark)
 Impact on the financial statements (under/ overstatement)
 Explain further actions ( 1 mark per action)
o 4 actions before the audit report is issued

5 mark
 Implication for the audit report if no adjustment is made ( 1 mark per comment on implication)

Examiner
 Impact on audit opinion
o Telling examiner the right opinion and justify your choice of opinion
 Impact on the audit opinion and on the report
o Telling the examiner the right opinion and justify your choice of opinion
o Further you will also tell, that the opinion will either lead to- a modified report or an unmodified
report
o Moreover, you will also tell, the structure of things in audit report i.e. telling that opinion should
come first followed by basis of opinion
 Impact on the audit report (June 17)
o Includes both of above
o Firstly, you will tell the right opinion/ justify
o Whether the report will be modified or not
o Structure of report- opinion comes first followed by basis.

June 17- key learnings:

1. Comment on the matters
2. Actions
3. Impact on the audit report

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June 17- answer
Comment on the matter
The two sales transaction totalled $ 17 million is 1.18% of the revenue and 12.23% of the profit before tax, hence
material to the financial statements. (1).
The sales transaction should only be recognized as revenue, only when the contractual terms are fulfilled as per
the contract with the customer, i.e. when the good are finally received and inspected by the two customers are
met ( i.e. the criteria of performance obligation). (1).
As the revenue has been recorded by the finance director, too early, on the basis of dispatch to a third party, the
revenue and profit is overstated. (1)

Further actions before the report is signed:

Knowledge: Actions in a reporting qs, simply means to take actions to resolve the problem with the management,
and if the problem is not resolved then consider the impact on the audit report

1. Discuss with FD, the underlying basis of recording the sales transaction too early and the justification or
the rationale behind such an accounting treatment
2. Inform the FD, of the relevant financial reporting standard, and the right treatment to recognize the
revenue in the financial statements
3. Inform the FD, that if the corrections in not made, the FS are materially misstated and the profit is
overstated
4. Discuss with FD, are there any further sales transaction during the year which has been recorded too
early apart from the two identified by the auditor.

Bottom line: Look at the case- and chose the best action in context of the case.

Impact on the audit report – 5 marks

If no adjustment is made by the FD, the auditor should consider the impact on the audit report as follow:

The two transaction are material to the FS, and if not adjusted will result into a material misstatement of the
financial statements (1). Being a material misstatement, the auditor will issue a qualified opinion. (1). The
qualified opinion will result in a modified audit report. (1). The auditor should include the qualified opinion as
the first para of the audit report followed by the basis of the qualified opinion. (1). In the basis of the qualified
opinion the auditor will highlight the material misstatement resulting from the wrong accounting treatment of
the attention of the shareholders. (1)

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 TYPE 2: CATOGERY 2 (Dec 2014- Q5b)
Step 1: Understand the requirement / marking scheme

Required:
(i) Explain the matters which should be discussed with management in relation to each of the uncorrected
misstatements; and (9 marks)

(ii) Assuming that management does not adjust the misstatements, justify an appropriate audit opinion and explain
the impact on the auditor’s report. (4 marks)

Matters which should be discussed in relation to each of the un-corrected misstatements

Misstatement-1 (3 marks)
 Materiality (1)
 Accounting treatment (1)
 Impact of un-corrected misstatement on FS (under/ overstatement) (1)
 Impact on the audit opinion (1)

Misstatement-2

Misstatement-3

Justify an opinion and the impact on the audit report – 4 marks

 An opinion ( aggregate- single opinion)
 Impact on report
o Either modified or un-modified
o Structure- opinion comes first followed by basis

Dec 2014-

Example drafting – Comment on the matters to be discussed with management in relation to each of the un-
corrected misstatement

Misstatement 2- Restructuring provision

Matters: (3 marks)
The reversal of $ 50,000 provision is 2% of the revenue and 0.14% of the total assets, thus material to the
financial statement. (1).
The restructuring provision should be recognized when a formal announcement is made to the affected
stakeholders which in the case are the employees and the announcement to them was made in Sept 2014. So
the provision should be recognized from Sept 14 rather August 14.(1)
If the management does not adjust the provision, being a material misstatement the auditor will issue a
qualified opinion on the basis of this individual misstatement. (1)

Misstatement 1: Share based payment

Matters: (3 marks)

Misstatement 3: Allowance for inventory

Matters: (3 marks)

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Justify an opinion and impact on report (4 marks)

Step 1: aggregate the misstatement ( answer for the aggregation) – 1 mark

Step 2: Find the materiality of the aggregate misstatement – 1 mark
Step 3: conclude on the opinion (justify an opinion) - 1 mark
Step 4: whether the auditor will issue a modified report or un-modified report – 1 mark

Aggregate misstatement ( net basis not gross basis)

Aggregate misstatements taking into account the net effect on the profit or loss is $ 260,000 (1). The aggregate
misstatements are 10.4% of the revenue and 0.74% of the total assets, thus material to the financial statements.
(1). If the management refuse to adjust the aggregate misstatement, the FS will be materially misstated and the
auditor will issue a qualified opinion(1). This will lead to a modified audit report.(1)

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 TYPE 2 QUESTION: Category 3 (Dec 17- Q5)

Step 1: Understand the requirement / marking scheme

Required:
For each of the matters described above:

(i) Explain the matters which should be discussed with management in relation to each of the uncorrected
misstatements, and

(ii) Assuming that management does not adjust the misstatements identified, evaluate the effect of each on the
audit opinion.
Note: The total marks will be split equally between each matter. (15 marks)

Misstatement -1 – Matters (5 marks)

 Materiality
 Accounting treatment
 Impact on the FS (under/ overstatement)
 Individual impact on the opinion
 Learning the 5th mark (case specific matter)

Misstatement-2 – Matters (5 marks)

 Materiality
 Accounting treatment
 Impact on the FS (under/ overstatement)
 Individual impact on the opinion
 Learning the 5th mark

Misstatement-3- Matters ( 5 marks)

 Materiality
 Accounting treatment
 Impact on the FS (under/ overstatement)
 Individual impact on the opinion
 Learning the 5th mark

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Misstatement -1 (class)- Watch Dec 18 webinar- To see how I wrote a para.

 Extrapolation of the misstatement ( $0.35m/$4.5m* $125 million= $9.72 million)- 1 m

 Materiality of the extrapolated misstatement – 0.38% of profit, 0.017% of the revenue and .025% of the
total assets. ( immaterial currently but if taken in the context of the total fixed assets it could be
material)- 1 m
 Failure of the accounting system ( weaknesses in internal control system)- case specific – 1 m
 Currently due to the failure, the dep expense for vehicles is understated and the vehicles are overated
by $ 9.72m ( impact on FS)
 Being immaterial currently ( on the basis of the vehicles only) ,there will be no impact on the audit
opinion (un-qualified opinion- individual misstatement)- 1 m

Misstatement -2 (assignment)

Misstatement- 3(class)- 5 marks

 The value of the misstatement- ( which is the provision under-recorded) is $56,360 m / 12* 3%= $ 141
million- 1 mark
 Materiality of $ 141 million- 0.25% of revenue, 5.52% of the profit, and 0.37% of total assets, thus it’s
material to the FS- 1 mark
 That due to under recording of provision, the liability is understated and the profit is overstated. (
impact on FS)- 1 mark
 That evidence found, that refund levels are same and the new system is in the early stage. (case specific
matter)
 If no adjustment is made, qualified opinion will be issue because it is a material misstatement (
individual basis)- 1 mark

Knowledge: change in accounting estimate is permissible/ provided the basis of change are reasonable but in
this case auditor dis-agree with the basis of change in accounting estimate. (IAS-8)

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 Summary of key learnings

1. Requirements of the reporting question is very important to understand before a student attack on the
answer.
2. In the reporting question, the examiner at times ask for:
a. Impact on the audit opinion
b. Impact on the audit report
c. Impact on the opinion and the audit report
3. Be very particular in a reporting question about whether the examiner is asking for – writing actions or
not. If asked for to write actions, be assure that you know how to write action in context of rhe case
4. Any calculation performed in a reporting question to identify the value of the misstatement will fetch
you 1 mark
5. If the examiner ask for aggregate misstatement, then only show the examiner aggregate misstatement
and the aggregate opinion, else not.
6. While doing aggregation, remember aggregation is on net basis not gross basis i.e. DR minus CR.
7. When the examiner ask for comment on the matter to be discussed with management in relation to
each of the un-corrected misstatement- remember the general breakdown / and also think of any case
specific matter to be added. ( just like Dec 17-Q5)
a. General breakdown includes:
i. Materiality
ii. Treatment
iii. Impact on the FS
iv. Impact on opinion of the individual misstatement
8. Everything in reporting question is worth 1 mark
9. Please watch the 2 recommended webinars reporting by the tutor ( Dec 18/ Dec 19)

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 [email protected]
AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 16
(BLOCK 3 LECTURE 11)
Objective: Practice of past papers –reporting

 Critical appraisal of the audit report

 A question on going concern
Recommended webinars:

Latest M/J21 Q3 on reporting- (is a must)

Day 3 Sep 21 webinar -https://www.youtube.com/watch?v=dDqz2pk4mP0

Critical appraisal of audit report

-Jun 21 Day 5 - https://www.youtube.com/watch?v=XJ_Uk60LmjA

Going concern

 Dec 2020- Day 5- https://www.youtube.com/watch?v=GjS7hIJoQ8U

 Sep 21- Day 4 - https://www.youtube.com/watch?v=P6vddu0WutU

Critical appraisal of audit report

Recent papers: (Sept 18- Jun 21)

 March 2020
 Mar/Jun 2019

Jun19- Q2a

Required:

Critically appraise the extract from the draft auditor’s report for the year ended 31 March 20X9.
 Within the extracts given
 Identify where the audit report is wrong- justify what is wrong and suggest the correction
 You should know the order of paragraphs in audit report
 You should know the language of the report
 1 mark per appraisal
Note: You are NOT required to re-draft the extracts from the auditor’s report. (10 marks)

Read the mind of AAA marker

‘Critically appraise’ means consider each piece of information and assess whether it is correct or incorrect
describing why and how to amend it as necessary.

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June19-Q2a
Brainstorming –critical appraisal
1. Title of report contains the directors which is wrong
2. Opinion should come first followed by basis (wrong structure)
3. Basis of opinion para does not include the name of company ( so the name of company given is wrong)
4. ISA- but the jurisdiction was not mentioned ( it should be written as applicable in _________ )
5. Ethical requirement- but the ethical standard were not specified/ even the jurisdiction was not
specified
6. In opinion – the auditor refer to only 3 components of the FS not all five
7. IFRS was used as an abbreviation – full form was not given
8. Applicability/ jurisdiction of IFRS ( like as applicable in ……………) was not given
9. The MURGC was wrongly included- because the disclosure of MU was not given , thus opinion should be
modified
10. Opinion is wrong- because- opinion should be either qualified or adverse because no disclosure was
given.
11. The basis of opinion will only change, mentioning the reasons of issuing either a qualified or adverse
opinion
12. The other information is wrong –as the matter reflected in other information does not meet the
definition of matter which comes in other information
13. The matter reflected in other info meets the definition of a key audit matter , being a listed company the
matter should be reflected in KAM , mentioning why it was considered as kam and how it was
addressed in audit
14. KAM would be placed right after the basis of opinion para.

Student guidance
 Read one standard report on google drive so you know the language and order
 Open a question on critical appraisal and identify the weaknesses
 Justify why it is a weakness and how to amend it
 1 mark per appraisal.

Answer
Title
Title of report also address the directors of Kilmister Company which is wrong , as the title of the audit report is
only addressed to shareholder. (1)

Basis of opinion
The structure of the report is wrong as, opinion para comes first followed by the basis of opinion paragraph.
Currently it is the vice versa. (1)

Further the basis of opinion paragraph includes the name of Kilmister Company which is wrong as the basis of
opinion para does not refer to the company name, the name of company is only used in opinion paragraph (1)

Moreover, the applicability of ISA was not mention, which is wrong. Every time the auditor mention any standard
it is important to mention the applicability or the jurisdiction where they are applicable (1)

The basis of opinion mention ethical requirement as a very general word, rather the ethical requirement should
be specified by reference to the particular code of conduct and the jurisdiction in which its applicable (1)

Opinion

MURGC

Other info

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Assignment- critical appraisal
1. Read ICI report
2. Complete Jun 19 Q2a
3. Do Mar 20 Q2b

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LECTURE 16 (BLOCK 3 LECTURE 11) –PART 2
OBJECTIVE: Going concern
Dec 13 Q5 Dec 15 Dec 18
Identify and explain the 6 marks 9 marks 10 marks( using analytical
matters which cast doubt on review where appropriate)
the going concern status of
_________________Co
Explain the audit evidence 8 marks 6 marks (Procedures) 9 marks (same as of Dec 13)
you should expect to find in
your file review in respect of
the cash flow forecast.
implications for the audit 6 marks 6 marks
report

In a question on going concern student should be strong in the following areas:

1. Matters which cast doubt on the GC status of the company – 2 mark per matter
2. Procedures/ evidence – 1 mark
3. Implication for the audit report – versus going concern ( Lecture 9 Block 3)- 1 mark per valid point
Going concern matter which may cast doubt – each matter identified from case and explained is worth 2 marks
Dec 18 Q2 as an example:
Using analytical review where appropriate,(upto 3 marks for this)

 Ratio – 1 mark per ratio

 % change – 0.5 marks
Matter which may cast doubt = 2 marks (involve a ratio +1 )= 3 marks
Matter which may cast doubt = 2 marks (involve a % change +0.5)= 2.5 marks
2 mark matter – without AR
Major new competitor

A major new competitor has moved in to Daley Co’s market in October 20X8, this could be a big threat to the company market
share and revenue in the foreseeable future and could bring doubt on the company ability to continue as a going concern if
the company fail to sustain its market share or revenue or there is a significant blow to its revenue from the major
competitor. (2)

3 mark matter – with ratio

Current ratio
The current ratio has fallen down from 2.4 in 20x7 to 1.6 in 20X8. (1). The fall in current ratio indicate liquidity
problems for the company even though the current ratio is still above 1.5 which is sound but the fall over the last
year is very drastic. If the same trend continues in the foreseeable future the company can have a much lower
current ratio which might question the company ability to pay its short terms obligation on time(2).
2.5 mark matter – with % change

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Implication for audit report
Dec 13- 6 marks

 No note given! (disagreement with management) – adverse opinion (modified report)

 (Dec 13) Brief note is given! (disagreement with management)- qualified opinion (modified report)
 Detailed note given (no disagreement) = added a para MURGC (modified report) + unqualified
opinion
Dec 18- 6 mark

 No note given! (disagreement with management) – adverse opinion (modified report)

Dec 13 – 6 marks

In respect of the note on going concern to be included in Burford Co’s financial statements, discuss the
implications for the audit report and outline any further actions to be taken by the auditor.

 Discuss the implication (audit report)

 Further action to be taken ( action are taken to resolve a problem and if the problem is not resolve the
last action itself is implication for audit report)

Actions
 Communicate with audit committee, to reinforce the need to give a detailed disclosure of the material
uncertainties in the notes to FS for providing a true and fair view to shareholders (1)
 Further discuss with audit committee, and it is the duty of audit committee to provide open and
transparent info to the shareholder and a brief note will be against it. (1)
 Moreover, inform audit committee, that if they continue with their stance of issuing a short note in notes,
this will constitute a disagreement and will have implication on audit report (1)

Implication for the audit report

 If the audit committee fail to put a detail note even after above actions are taken, the auditor will consider
the likely impact of this on the audit opinion and on the audit report. (1)
 Considering a brief note is given which is better than no notes, the matter will be considered as material
only, (1) due to the fact that some sort of a note is given, the auditor will issue a qualified opinion on the
financial statements. (1)
 The qualified opinion will result in an modified audit report (1), and the auditor will put a basis for
qualified opinion after the qualified opinion para, informing shareholders of the reason why a qualified
opinion is given. (1)

Note: Explain the impact on audit opinion / explain the impact on audit report.

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Wrap up/ final word- reporting

 Concentrate on Block 3 lecture 9/ 10 / 11 – reporting

 Read one standard audit report – ICI company
 Read all recommended articles
 Watch the previous webinars on reporting recommended (optional)
 Practice- Sept 18 onwards !!

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