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Kamran-FCCA

Tutor profile

 Kashif Kamran-FCCA
 Owner – for KKDL
 Associated with- PAC (Lahore) / Zivet (India)
 15 years since teaching ACCA
 Expertise – AA, AAA and SBL
 Registered mentor for OBU
 Exceptional pass rate, exam focused teaching
and several nation and international positions

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Social media – like and follow for all updates

 YouTube channel -
https://www.youtube.com/KashifKamran

 Facebook page -
https://www.facebook.com/DLBYKK

 Instagram-
https://www.instagram.com/kashif.kamran/

 LinkedIn- https://www.linkedin.com/in/kashif-
kamran/

Holistic view
of paper &
syllabus
AAA DEC 22 WEBINAR TO
SUCCESS

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Paper has 3 questions divided into two sections

Section B- One of the question

Section A- set at the planning
will be set at completion &
stage of audit (D)
reporting stage (E)
• Q1 • Q2
• 40 technical marks • 20 technical marks
• 10 professional marks • 5 professional marks
• Q3
• 20 technical marks
• 5 professional marks

D- Planning an audit & audit of historical FS

Must
E- Completion & reporting

B- Ethical and professional matters

Frequent C- Quality management & practice management
Syllabus consist F- Other assignments

of seven areas
Knowledge A- Regulatory environment
fillers

Rarely G- Current issues

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Recent updates &

changes
AAA DEC 22 WEBINAR TO SUCCESS

Recent changes
and updates
1. New articles – under syllabus area C and F
2. Current issues – syllabus area G
3. Professional marks
4. The new materiality statement in Q1

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Useful videos &

resources
AAA Dec 22 webinar to success

Time management
https://www.youtube.com/watch?v=9TUnPs-E_ck

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Useful exam tips & techniques

https://youtube.com/playlist?list=PL96SAQ1xR6O4Ke-sAcBnSxQ4Qp3qLPzy4

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Guidance on professional marks

https://youtube.com/playlist?list=PL96SAQ1xR6O5FexNsZFR7Yoi4DRSOhxmY

12

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September 22 webinar
https://youtube.com/playlist?list=PL96SAQ1xR6O5-3UVb_JI2372zaKCxJncp

13

Boost answer quality- follow the RWR process

https://www.youtube.com/watch?v=WULi-KRTVQM

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AAA study strategy for last few weeks

https://www.youtube.com/watch?v=LXlhAoml80I

15

Marking scheme updates

https://www.youtube.com/watch?v=DSMbDrNbi9Y

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Inside Dec 22
AAA webinar to success
By Kashif Kamran- FCCA

17

Agenda
Materiality
calculation and
Day 1- Q1/ Sept 22 with examiner report comment in Q1
Key highlights

Day 2- Q1/ Sept 22 with examiner report Gaining

professional
Day 3- Q2/ Sept 22 with examiner report marks
Examiner
Day 4- Q3/ Sept 22 with examiner report suggestions

Examiner
criticism

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Day 1

19

Q1- Sept 22 exams

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 The materiality calculation & comments including

marking allocation
 Significant risk- how to prioritize them versus
examiner expectations Key aspects
 Giving conclusion for significant risk ( how to do it?) of Q1 to aim
 4 professional marks for communication skills out of
the 10 allocated professional marks at
 How to achieve, other professional marks (6 of them)
, and how to demonstrate them in your answer to
fetch most of them?
 Absorption of case and being clever in utilization
the case within your answer

21

Q1 Requirement

1. Business risk
2. Risk of material misstatement
3. Audit procedure
4. Knowledge testing around auditor
responsibility for laws and regulations

22

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Marking scheme

23

 Up to 2 marks for each business risk (unless indicated

otherwise). Marks may be awarded for other, relevant
business risks not included in the marking guide.

Business risk  In addition, ½ mark for relevant trends or calculations

which form part of the evaluation of business risk (max
3 marks across the whole question)

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 Up to 3 marks for each risk of material

misstatement (unless indicated otherwise). Marks
may be awarded for other, relevant risks not
Risk of material included in the marking guide.
misstatement /  Appropriate materiality calculations and justified
audit risk materiality level should be awarded to a maximum of
3 marks

25

Audit  1 mark per procedures

procedures/

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Auditor
responsibilities for  1 mark per valid point
laws and
regulation

27

Q1 professional marks – holistic view

 Professional marks
 Communication – 4 marks
 Others – 6 marks

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Inside into examiner

report
SEPTEMBER 22 EXAMINER REPORT

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Q1 examiner feedback
 This question was a typical Section A
question set at the planning stage, with
requirements focusing on matters specific
to the planning stage of an audit
engagement, an evaluation of the
significant audit risks, recommending
specific audit procedures in relation to an
investment property and ethical issues.

30

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 Unless specified otherwise, all exhibits should be

considered when carrying out risk evaluations and
candidates should ensure that they carefully read the
partner’s email for any specific guidance in relation to how
the information should be used.
 It is recommended that candidates review all the exhibits
while planning their answers to the question but as Reading
exhibits
mentioned should ensure they take note of any guidance
given by the examining team in terms of which exhibits are
relevant to each requirement. Thus, allowing for more
detailed analysis and focus on specific information where
relevant.
 Candidates are encouraged to spend adequate time
planning and aim to obtain a holistic view and
understanding of the issues present in the question.

31

 Where a candidate prepared an answer tailored to the

scenario and focused on the requirement, high technical
and professional skills marks were obtained.
 This exam requires candidates to demonstrate both
technical knowledge but also, they need to be able to apply
this knowledge to a specific scenario. Generic responses
with speculative risks not evident from the detail provided Q1 general
comments
in the scenario will gain little credit. Candidates should use
the specific information provided within the scenario
demonstrating both knowledge and application of skills to
pass each requirement.
 A minority of candidates continued to use answers which
appear to be taken from past questions and discuss issues
which are not present in the question being attempted.
This will not obtain credit.

32

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Business risk
Q1-SEPT 22 PAPER

33

 In this section of the question, candidates were required to

use the specific information provided in the scenario to
identify and evaluate the significant business risks in relation
to Winberry Co. In the AAA exam, significant risks are
considered to be those which would have a significant
impact on the client business and where there is a
significant probability of these risks occurring, after any
mitigations stated in the information provided.
 Risks that are of a remote likelihood of occurring, already
Business
mitigated against or will have an insignificant impact are not
considered to be ‘significant risks’.
risk
 Candidates are required to identify what is significant in the
context of the specific scenario, demonstrating good
professional judgement and an ability to disseminate the
important information whilst assessing the risks which may
affect the audit.

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 It is pleasing to see many candidates were able to focus on

the risks arising, describing the impact on the business of
Winberry Co.
 For example, many candidates were able to identify the risk
that the insurance claim for damaged property (Exhibit 3)
might not be successful and were able to describe the
impact on the company cashflows for the initial credit.
 Stronger candidates then went on to assess that this risk in Examples for
good answer
the light of the deliberate deactivation of the sprinkler
system, may mean that the insurance claim is unsuccessful.
These candidates not only provided a well thought out
evaluation for the purpose of scoring technical marks, but (business risk)
were also demonstrating the skill of professional scepticism
in recognising the insurance claim might not be successful.
 Credit was also available for the demonstration of
commercial acumen in appreciating the claim was less likely
to be successful given that the fire safety systems had been
overridden as this contributed to the levels of damage
incurred at the warehouse.

35

 A well evaluated risk has in depth analysis.

Candidates writing only a sentence or two are
Business risk unlikely to attain many of the marks available for
each risk

36

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 Some candidates described risks which were not

considered significant for credit. The most common ones
seen by the examining team were currency risks arising
in a proposed expansion overseas, despite being told
that the two countries use the same currency.
 Other weaker responses suggested that food safety
breaches may occur, even though candidates were told
that this risk was mitigated using food safety specialists.
Other candidates remarked that going concern was a Business risk
risk because the company might lose its licence to
operate, even though no information was provided in the
scenario to suggest a licence was required to operate.
 Candidates are not expected to know which industries
are subject to specific licencing arrangements and as
such will be told in a question if the specific industry
requires a licence

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 Overall, in this section many candidates were

able to identify sufficient risks to pass the
requirement. Fewer candidates identified the
risks of the company’ decision to diversify into a
new industry through a joint venture, or the cost
implications relating to the poor performance of
the electric vehicles. Business risk
 These were topics less frequently seen in past
questions and served as a differentiator between
stronger candidates who were able to identify the
risks from the scenario and demonstrate their
professional skills of analysis and evaluation of
the evidence provided.

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 AAA DEC 22 WTS ( REVISION PACK) – BY KASHIF KAMRAN-FCCA

DAY 1

Business risk – from AAA perspective

 Identify the statement/ situation in the case- which give rise to business risk
 Why the statement is a business risk/ explain the business risk ( what if analysis?)
 Impact of the business risk on business objective
o Losing customer / customer dissatisfaction
o Losing sales in future / profit is future
o Losing competitive advantages
o Reputation at risk

Examples – of drafting ! by Kashif Kamran – FCCA

Damaged to warehouse

There has been a destruction of Winberry warehouse serving northern customer base and the company has to use its existing
warehouses at alternative location to fulfil customer northern base. This must had increased cost, associated with high
transportation cost and high storage cost at the warehouses. Moreover there could be increase in lead time to serve customers
in northern base and customers might not be satisfied with delay in orders, resulting in loss of sales and profit for the
company. ( risk without impact is useless)

International expansion

The expansion into Farland means that Winberry will be managing operations in a foreign country for the first time. Farland
may have different laws and regulations compared to the company’s home jurisdiction, so there is heightened risk of non-
compliance. Moreover, the social demographics and customer behavior and preference will be different from home country which
could affect the overall sales in initial time period and the company might be more focused on new business in Farland might
result in company losing focus on its existing business.

Joint venture arrangement

The joint venture arrangement has been done first time by Winberry Co. There is possibility of a clash in management styles
and techniques of the two different partners in the joint venture leading to conflict, which may affect the business strategy,
management focus and consequently impact financial performance. These issues heighten the risk of the joint venture
failing to be successful and produce a satisfactory return on the $30 million initial investment

Loan finance

The $125 million expansion into Farland is to be funded by loan finance. The additional debt financing will increase Winberry
Co’s gearing and future interest cost which increases pressure on net profit margins and further pressure on company
cash flow position to pay of loan as per the attached covenants and maintain result to meet interest cover of 3 times. The long
term loan has increased by 560 % (5.6 times) over last year, translates into a high gearing risk already exiting. (1/2 a mark)
= 2.5 mark

Eco-friendly vans

The eco-friendly delivery vans have been noted as causing delays in deliveries to customers , which will cause inconvenience
to Winberry Co’s customers and reputational damage. Winberry Co’s customers value the convenience of grocery delivery
and a four-hour delay would severely negate this perceived benefit. Winberry Co would be likely to lose customers if the delivery
delays continue and therefore sales and profits would suffer.

Email me the rest of the answer : [email protected]

AAA DEC 22 WTS ( REVISION PACK) – BY KASHIF KAMRAN-FCCA

DAY 2
AAA DEC 22 WTS ( REVISION PACK) – BY KASHIF KAMRAN-FCCA

DAY 3
AAA DEC 22 WTS ( REVISION PACK) – BY KASHIF KAMRAN-FCCA

DAY 4
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ROMM
Q1-Sept 22 paper

39

 It is important to notice that the requirement asked for an

evaluation, not simply a list of risks, nor a strategy or
Evaluate the risk procedures to address those risks. The examining team

not state it
are testing whether candidates understand how and why
a risk arises and the implications this has on the financial
statements or the audit itself.

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 Candidates are expected to perform relevant analysis to

support an evaluation of risks of material misstatement
(RoMMs).

 There were 16 technical marks available in this part of the

question in addition to a significant number of
professional skills marks for the analysis. It was
disappointing to see that candidates often achieved
strong marks in this section for the identification of the
RoMMs but fewer obtained the marks for the evaluation
16 marks
of those risks.
 Many candidates are continuing to rely on basic or
generic explanations, which fail to refer to the information
in the scenario. Candidates who refer to the specific
information provide more in-depth answers and are also
able to assess the scale of the risk in the context of the
specific audit client.

41

 Specific marks were available in this requirement

for the calculation and application of materiality
in line with the new syllabus guidance and for the

Materiality
prioritisation of the risks identified.
 Whilst a significant number of candidates
appeared prepared for the new syllabus and
followed the new materiality guidance, very few
attempted to prioritise risks and were unable to
access the professional skills marks for this skill

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 Candidates are expected to initially determine a

materiality threshold for the audit, as would be used in
practice. Three technical marks are available for the
materiality determination.
 Candidates are expected to demonstrate a knowledge
of the appropriate percentage range for the benchmark
instructed by the audit partner (in this question, profit
before tax was to be utilised with candidates expected
to use 5-10% as their range), calculate the monetary
Materiality
amount in respect of the range.
 Candidates must then use their professional
judgement to select an appropriate materiality
threshold given the risk levels which exist in the audit
and provide a brief justification for their choice. Each of
these steps examines a different aspect of
understanding or skills required of an auditor.

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 It was disappointing to note that some candidates

calculated a range appropriately, then failed to justify a
materiality threshold for the audit.
 The examining team will give credit for any reasonable
explanation of the chosen materiality threshold, as the
mark is to recognise that there is the application of
professional judgement and that a candidate can justify
their response. It is not required that candidates select the
identical percentage or figure, or that they provide a
justification identical to that shown in the model answer.
 For example, in this question, some candidates stated the
Materiality
higher end of the range was justified because this was an
existing client, some stated the lower end was more
appropriate due to the accounting errors that the finance
director was making. Alternative answers which were
awarded credit included those who suggested that an
amount in the middle of the range was appropriate,
because whilst this was an existing client, the expansion
into a new market increased the risk. All of these obtained
the mark for justifying the chosen materiality threshold.

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 Candidates were then required to evaluate the

significant risks. In determining which risks are the most
significant, candidates are demonstrating an
understanding of risk, how it arises and how the audit
will focus on those most likely to cause a material
misstatement. Candidates that demonstrated a depth of
evaluation were awarded more credit than those more
generic responses.
 An issue that arises repeatedly is candidates attempting
Evaluation of
to find 8 risks for a 16-mark question and conducting
little or no in-depth analysis of any of them. This will not
risk
be sufficient to attain a pass mark. This means some of
the risks stated in these answers will be speculative or
not significant and, therefore, will not obtain credit.
 This also increases the time pressure for candidates as
they are trying to cover too many risks and these risks
which are identified are often not developed in sufficient
depth to obtain a pass mark.

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 The scenario contained information which gave rise

to six significant risks, of which most candidates
were able to identify at least four. These were asset
impairments of warehouse, misclassification of an
investment, provisions, revenue recognition,
impairment of electric vehicles and control risks

Evaluation of
over data.
 Each of these could be evaluated in the context of
the scenario using the information provided,
ensuring that the underlying accounting treatment
risk
was correct. In this exam, financial reporting
knowledge from the SBR syllabus and previous FR
and FA exams is deemed knowledge.
 The majority of marks available in AAA will be for
the application of the financial reporting knowledge
to the specific audit scenario, not simply for the
knowledge itself.

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 Candidates who identified missing information

that would be needed by the auditors in
assessing the requirement for a provision, for
example, the estimate from legal advisors,
gained credit for professional skill marks by
Gaining
demonstrating professional skepticism and professional
judgement.
 Candidates who demonstrated strong evaluation
marks –
and professional skepticism skills then went on thinking in
to question the integrity of management, as this
information about the fire only came to the right context
attention of the audit team following an internet
search rather than directly from management.

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Gaining professional marks – thinking in right context

Professional skills Irrelevant calculations

marks are available for or those not used in the
the use of appropriate discussion of
calculations in the significant risks will not
evaluation of a risk. be awarded credit.

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 Candidates were awarded professional skepticism

Gaining marks for possible indicators of management bias,
professional such as the need to raise funds for expansion and
marks – thinking the requirement to maintain interest cover at 3 or
in right context higher

49

 It was disappointing to see that very few candidates

attempted any prioritization of the risks as specifically
stated in the requirement.
 Professional skill marks were available to the candidates
who attempted this requirement. Candidates were
expected to identify the most significant risks, and then
provide a brief justification for their choice.
 Candidates can obtain these marks by either ordering Prioritize risk
their answer in priority order and stating this is the case
or by summarizing in a conclusion which risk, or risks
are the most significant.
 Where candidates use this latter method, if a candidate
does not state which one or two risks are the most
significant but simply lists some or all their identified
risks, this will not be sufficient for credit.

50

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 YouTube channel contain a video on significant risk, watch it

Knowledge on significant here :
risk (ISA315)  https://www.youtube.com/watch?v=qneMQnSE9ik

51

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DAY 2

Conclusion from Day 1 and 2- Q1 of Sept 22 exam

 Time management – 24 mins of RAPT+ 75 mins Writing time

 New changes in Q1 answer :
o Putting date in briefing note ( as given in partner email)
o Giving a para for materiality ahead of your answer for audit risk / or RoMM
o Arranging risk in a priority order- the best is to order them in terms of Quantative materiality
o Giving a conclusion after risk part of answer – defining your basis of significant risk ( conclusion will be
immediately after the risk answer)
 3 technical marks for materiality calculation and commenting
 Marking scheme for business risk / risk of material misstatement (audit risk)
 Professional skill marks
o Communication skill marks – 4 (BRIEFING NOTE)P
 Structure the briefing note is right format as guided in the webinar
 Ensure headings/ sub-headings are used
 Follow the guidance on partner what to do and what not to do
o Other skill marks – 6
 Judgements used - in terms of significant / conclusion
 Analysis – for any calculation / trend used as part of the answer
 Skepticism- when you challenge any statement of management / or question integrity/ or develop
risk around management bias
 Commercial acumen-
 DEVISING A GOOD ROMM ANSWER

Risk of material misstatement

Good answer technique

 Identify the risk statement in case ( copy / paste while you are reading through the case and paste under the
requirement area in your briefing note). With each risk statement put value if available in case ( to judge materiality
/ or significance)
 Once all risk are copied , try to arrange them in order of significance ( take a judgement and use this as basis in your
conclusion to tell examiner how you prioritize them)
 Develop the risk into proper explanation
o Comment on the materiality
o Comment on the accounting treatment
o Do calculation/ or identify any relevant trend which can be used to further enhance answer quality where
possible
o Identify the underlying risk
o Conclude on the impact on financial statement
Warehouse fire
The PPE related to damaged warehouse is $67 million, which is above the materiality threshold . It is the most
significant identified risk in terms of quantitative aspects.
The damage to the warehouse should have triggered an impairment review. Impairment is measured by comparing
the carrying amount of an asset with its recoverable amount. The recoverable amount is the higher of value in use and
fair value less costs to sell the asset.
As the warehouse has been destroyed by the fire, it is likely that the value in use is nil and the fair value less costs to sell
would also have to consider the warehouse in its current condition as the warehouse is badly damaged and the machinery needs
to be completely replaced. The finance director has not carried out an impairment review as he is confident the company’s
insurance policy will cover the cost of reinstating it to its previous condition. This is against the criteria of IAS 36 and
there is a risk that property plant and equipment (PPE) is overstated and the impairment cost is understated.

Investment in LPS Co
Investment in LPS company by Winberry company is $30 million , which is above the materiality threshold.

The investment is a joint venture, because the control of LPS Co is shared between Winberry Co and Durian Co. Joint
venture is a joint arrangement whereby the parties have joint control of the arrangement. Joint venturer recognises its
interest in a joint venture as an investment and shall account for that investment using the equity method.

The finance director has stated that he intends to consolidate the results of LPS Co. The finance director believes that despite
Winberry Co and Durian Co each owning 50% of LPS Co and having equal representation on the board of directors, Winberry
Co’s contribution of knowledge to the joint venture is greater and therefore Winberry should consolidate the investment as a
subsidiary. There is no evidence that Winberry Co holds a right to veto decisions, which is a possible way the finance
director could justify that Winberry Co holds overall control and would be entitled to consolidate LPS Co.

The consolidation of the full results of LPS Co means that , currently Winberry Co’s revenue, operating profit and total assets
are overstated.

Revenue recognition – premium delivery pass

Revenue from premium delivery service total (145, 250 * $60= $8.775 m) , which is clearly above the materiality threshold.
There is a risk arising from Winberry Co recognizing revenue for customers in advance of the satisfaction of the performance
obligation for the annual premium delivery pass, with revenue recognized when the invoice is sent to the customer.

This is leading to early recognition of revenue, i.e. recognizing prior to the company providing a service to its customers.
Revenue is recognized when a performance obligation is satisfied by transferring a promised good or service to a customer. As
the premium delivery pass covers 12 months and the company is providing the service over time, it can be difficult to
determine how much service has been provided and therefore the amount of revenue which can be recognized at a particular
point in time. Thus revenue is overstated and deferred income is understated. Revenue has increased by 64% over the last
year which is a significant rise and could possibly be overstated for other reasons not identifiable from the exhibit.

 Calculation – extra ½ a mark

 Trend identified and used in answer – extra ½ mark

Eco-friendly delivery vans

The eco-friendly delivery vans noted in the internet search total $4million (80 x $50,000) and this meets the threshold of
materiality.
There is a risk, however, that the eco-friendly delivery vans are impaired as the ability of the vans to make deliveries in line with
Winberry Co’s delivery schedules appears to be reduced. Impairment is measured by comparing the carrying amount of an asset
with its recoverable amount. The recoverable amount is the higher of value in use and fair value less costs
to sell the asset.

There is a risk that the value in use is lowered due to the reduced ability of the eco-friendly vans to deliver goods efficiently and
effectively. The fair value less costs to sell of the assets may also be impacted by the delivery range of the vans. There is a risk
that the carrying amount PPE value of the eco-friendly vans is overstated and the impairment expense is understated
Risk of management bias
The company is a listed entity and the shareholders will be looking for a return on their investment in the form of a
dividend payment and there will be pressure for the company to show good financial performance; this is compounded
by the company’s ambitious international expansion plans and the requirement to maintain adequate interest cover to
continue to meet the bank’s covenant. Pressure to return a better performance creates an incentive for management bias which
means that management may use earnings management techniques, or other methods of creative accounting, to create a
healthier picture of financial performance than is actually the case. This creates an inherent risk of material misstatement,
at the financial statement level. Management bias could also have led to some of the accounting treatments suggested
by the finance director, such as the early recognition of revenue from the premium delivery pass, which works to improve the
company’s profit and total assets for the year.

Legal provision
The internet search results show that a legal case was brought against Winberry Co in January 20X5. From the information
provided, it is not possible to determine if the amount involved is material, however, there should be appropriate consideration
as to whether the court case gives rise to an obligation at the reporting date.

a provision should be recognised as a liability if there is a present obligation as a result of past events which gives rise to a
probable outflow of economic benefit which can be reliably measured. The warehouse fire is a known event, so if there has been
harm brought about to people in the local area as result of this, then it is feasible that there is a liability as a result of a past event.
A risk of material misstatement therefore arises that if any necessary provision is not recognised, liabilities and expenses will
be understated.

The fact that the legal claim was not discussed at the meeting with the audit partner may cast doubts on the overall
integrity of senior management, and on the credibility of the financial statements. ( skepticism skill / 1 mark)

Cyber security attack

The recent cyber-security attack could highlight that internal controls are deficient within the company. Even though this
particular problem has now been rectified, if Winberry Co had not properly identified or responded to these cyber-security risks,
there remains the possibility that there could be other areas which are deficient, leading to control risk. The issue also indicates
that the audit committee is not appropriately fulfilling its responsibilities with regards to internal audit which could indicate
wider weaknesses in the company’s corporate governance arrangements and resulting in increasing risk of material
misstatement.
11/19/22, 10:47 AM TestReach

Briefing note

To: Olivia Fig, Audit engagement partner

From:Audit manager

Subject: Winberry Co audit planning

Date: 1 July 20X5

Introduction

The purpose of writing this briefing note is to evalaute the significant business risk and risk of material
misstatement in planning the audit of Winberry company. Further it includes audit procedures on
classification of LPS and the auditor responsbilities for laws and regulations.

(a)significant business risks

Brainstorming :

Point: loyal and growing customer base

1. cyber-security attack/ data protection legislation/ Winberry Co did not make any reports of the
breach to regulators
2. one of Winberry Co’s five warehouses which completely destroyed/ warehouse serviced the
northern region of Winberry Co’s customer base
3. The vehicles can only travel for 100 miles without requiring recharging, which has left customers
experiencing delays of up to four hours for their groceries.
4. expand into the foreign country of Farland
5. Winberry Co has entered into a joint venture agreement with Durian Co
6. A group of 30 local residents who claim their health was affected by toxic fumes from the huge
fire at Winberry Co’s northern warehouse are bringing action to claim for compensation.
7. advanced negotiations with its current bankers, who are keen to provide loan financing on the
same basis and covenant as the existing loan finance

(b)Evaluate and prioritise the significant risks of material misstatement

Materiality

The materiality on the basis of profit before tax is 5-10%, therefore with a profit of $53 million for
Winbery company, the materiality at the lower end of 5% will be $2.65 million whereas at 10% that is
the higher end it is $ 5.3 million. Considering, this is our existing client and a recurring audit for 20X5,
the materiality level should be kept somewhere in between the low and the high end. There are
several new risk identified for this audit as evident in the exhibit 2 to 4, so it better to keep the
threshold of materiality at 7% which work out to be $3.71 million.

Risk of material misstatement

1. PPE related to damaged warehouse is $67 million ( it is material). there was a fire in one of
Winberry Co’s five warehouses which completely destroyed the premises, (Recoverable amount
? subjective )
2. entered into a joint venture agreement with Durian Co and is investing $30 million in a newly
formed company, Luxury Pet Supplies Co ( material - as per the above threshold) . [Both parties
will have equal voting rights and equal rights to the net assets of LPS Co with profits to be

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shared equally. The investment is expected to take place in August 20X5.] /inance director of
Winberry Co plans to consolidate the results of LPS Co as a subsidiary
3. The premium delivery pass is an annual membership with a fee of $60. This fee is invoiced in
advance and the revenue is recognised in full at the time of invoicing ( 146,250* $60= $8.775
million). So it is material ( above the materiality threshold). Revenue has increased by 64% over
the last year
4. A new fleet of 80 electric vehicles, costing $50,000 each, has caused delivery chaos to Winberry
Co’s loyal customers. ( 80 * 50,000 = $ 4 million ) , it is material
5. Winberry Co does not currently have the funds for this expansion itself but is in advanced
negotiations with its current bankers, who are keen to provide loan financing/ Winbery is a listed
company (risk of management bias) / the interest cover it to be maintained at 3 times
6. A group of 30 local residents who claim their health was affected by toxic fumes from the huge
fire at Winberry Co’s northern warehouse are bringing action to claim for compensation. / erved
a claim against Winberry Co as they believe there were health and safety breaches due to
failings in the sprinkler systems in bringing the fire under control quickly
7. the company’s internal audit team had not properly assessed the risks relating to cyber-security,
(control risk)

Damage warehouse - Fire

Investment in Luxury pet supply (LPS)

Conclusion

The signficant busines risk has been priortize taking into account the business risk affecting the
Winbery customers, as customers are one of the key stakeholder of Winbery company success story.
Other risk not affecting customer are taking in a later order.

The risk of material misstatement are prioritze in order of their signficance above by using the
quantaitive threshold of materiality. The risk related to damaged property at warehouse of $67 million
and the investment of $30 million in pet supply company were considered as two most significant risk
in terms of their quantitive materiality.

(c)audit procedures to be performed in respect of the classification ofthe investment in Luxury Pet
Supplies (LPS) Co.(7 marks)

Winberry Co has entered into a joint venture agreement with Durian Co and is investing $30 million in
a newly formed company, Luxury Pet Supplies Co (LPS Co), representing 50% of the share capital of
the company. The remaining 50% shareholding is owned by Durian Co, a leading national chain of
vets and pet goods suppliers. The contract behind this investment states that Winberry Co and Durian
Co will work together to develop the supply of a range of pet supplies, food, toys and accessories.
This joint venture agreement utilises the established online presence of Winberry Co and their
distribution network, and Durian Co’s existing knowledge of the pet goods supplies market. Both
parties will have equal voting rights and equal rights to the net assets of LPS Co with profits to be
shared equally. The investment is expected to take place in August 20X5.The finance director of
Winberry Co plans to consolidate the results of LPS Co as a subsidiary; the share of the results
attributable to Durian Co is shown as a non-controlling interest. 100% of LPS Co’s revenue from
incorporation is shown separately in the financial information above owing to Winberry Co’s full
compliance with IFRS 8 Operating Segments. The finance director believes that despite Winberry Co
and Durian Co each owning 50% of LPS Co and having equal representation on the board of

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directors, Winberry Co’s contribution of knowledge to the joint venture is greater and therefore
Winberry Co should consolidate the investment

(d)issue referred to in Exhibit 2, discuss Quince & Co’sresponsibilities in relation to Winberry Co’s
compliance with laws and regulations.(7 marks)

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Q2
Q2 - Sept 22 exam paper

53

 Typical question around quality management &

professional issues
 New standards on Quality management (ISQM-1/2) and
ISA-220 (Revised) should be well versed by students
Q2  Each issue is worth 1 mark
 Each action is worth 1 mark

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 Evaluate the quality management and other

professional matters identified during your review in
respect of the planning and performance of the
Forsythia Group audit, and recommend appropriate
actions to be taken. (20 marks)
Requirement
 Professionalmarks will be awarded for the
demonstration of skill in analysis and evaluation,
professional scepticism and judgement, and
commercial acumen in your answer.(5 marks)

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Examiner report –
insights into
examiner criticism
for Q2

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 Magnolia was a quality management question

with a single requirement to evaluate quality
management issues in relation to a group audit.
 Professional skill marks were available for Quality
analysis and evaluation, professional scepticism
and judgement and commercial acumen. management
 It is the first quality management question under (the new
the new suite of quality management standards
and candidates were provided with an article
standard) was
ahead of the session highlighting the main tested first
changes.
time
 Within the question, topics such as identification
of significant components, outsourcing of audit
work and ethical threats such as intimidation and
self-interest were also examined

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 Answers to this question were mixed. Candidates

who answered the question from a practical
approach, applying the principles of quality
management to the scenario scored well.
 The majority of answers, however, were generic and
unapplied, failing to demonstrate an understanding
of how the principles of quality management were Question
potentially breached in the scenario.
overview
 The question covered four specific situations which
had been identified by the engagement quality
reviewer through a review of the audit file. Further
information regarding the audit process was
obtained through discussion with the audit junior
about their experience on the audit.

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 The first issue related to an acquisition made after the

year end. This impacted the time the group chief
finance officer (CFO) had available to engage with the
audit team during the audit.
 In addition to the lack of the availability of the CFO,
the acquisition had only been determined after the
audit planning stage and was, therefore, not included
in the audit plan. Issue -1
 The audit plan had not been updated as a result of Acquisition
this new information and the CFO had dismissed the
acquisition as not being a relevant matter for the
current audit.
 The audit engagement partner agreed with the client
position. As this would have formed a material
subsequent event requiring disclosure, this was
incorrect.

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 Actions that were relevant here, in the pre

issuance stage of the audit cycle, were to obtain
the evidence that would be required to support
the disclosures before the report is issued.
 Candidates who then went on to identify that the
acceptance of the client’s position on this
suggesting that the partner is either
incompetent or too trusting of the client, were
able to obtain professional marks for scepticism
Issue -1
and acumen. Acquisition
 It was pleasing to see that the majority of
candidates were able to identify that the
acquisition was relevant to the audit and why
this was a significant issue. However, fewer
candidates expanded on this conclusion to
suggest further appropriate actions or why the
situation might have arisen.

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 The second issue related to the outsourcing of

revenue recognition in several subsidiaries to
another audit firm, Camellia Associates, without
checking the competence and objectivity of the firm
beforehand.
 Most candidates identified that Camelia Associates
should be assessed for these criteria and their work Issue 2 –
reviewed.
 Fewer candidates questioned the appropriateness
outsourcing
of outsourcing such a material risk area, in particular,
when one of the subsidiaries operated in a specialist
to Camellia
industry. Associates
 The main motivator for the outsourcing was to keep
costs low and candidates were able to obtain
professional skills marks for questioning why the
costs needed to be minimised and whether there
was a self-interest threat at play as a result of
quoting an inappropriately low fee.

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 The third issue was the delegation of audit work on

intangible assets to a junior member of the audit
team. The majority of candidates were able to say
that this was inappropriate due to the complexity of
the area, that the junior was likely to lack
 sufficient knowledge or experience. Fewer
candidates explained why the intangible assets
contained difficult judgements or why this was a Issue 3
higher risk this year (due to this being the first year
in which development costs had been capitalised). intangible
 Additional credit was available for those
candidates who questioned whether the junior
assets
team member had been intimidated by having to
approach the busy CFO for the information, or for
assessing that the evidence obtained did not cover
all the assertions relating to development costs
and was all the evidence was internally generated

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 The final issue in the question was centred

around a subsidiary operating in the agriculture
sector. Several issues arose with respect to this
subsidiary, which was potentially a significant
component, and should have been subject to
more detailed audit procedures.
 Many candidates were able to identify that this
Fourth issue
may be a significant component, however often Yew
by using the wrong benchmark of 10% instead of
15%. company
 Stronger candidates correctly identified that it
was likely to be a significant component for
qualitative reasons and that it was quantitively a
significant component in the previous year, which
suggested failures in the previous audit too.

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 Candidates were then able to score marks for a

conclusion based on their analysis and were
awarded professional skills marks for analysing
the specific details in the scenario to demonstrate
an understanding of the quality issues.

Overall
 This was achieved by explaining why there was
an issue, not simply that there was an issue.
 Credit was also available for questioning why the
issues arose and for recommending actions
conclusion
appropriate to the stage of the audit process, with
stronger candidates stating that the auditor’s
report should not be issued until the issues were
resolved and that sufficient appropriate evidence
on which to base the audit opinion had been
obtained.

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 The performance of candidates in these questions is

broadly in line with past sessions. There continues to be a
gap between candidates capable of demonstrating audit
competence through strong application of knowledge and
concepts to practical scenarios, and those who approach
the examination as a factual exercise and fail to tailor their
answers to the scenarios or do not show professional
scepticism or commercial awareness. Overall
 Practice of past questions will aid candidates in
determining their knowledge gaps and give practice at
suggestion
applying their knowledge to the given scenarios. It is
essential that candidates analyse their answers produced by examiner
in comparison to the scenario specific explanations given
in the model answers. for future
 Candidates are encouraged to develop a wider
appreciation of the significance of risks by reviewing
published auditor’s reports of listed companies where the
auditor produces a key audit matters section. This will
allow candidates to see real world explanations by auditors
of why something was a specific risk to a specific client.

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DAY 3

Drafting an answer – Q2 / Sept 22 exams ( example answer)

Acquisition

-The acquisition of Robin company on 10th June 20X5, is an event after the balance sheet date, as the year end of the group is
31st March 20X5. This is a non-adjusting event as stated in the scenario that the acquisition took place quickly after the year
end that means there is no indication of such event at the year end. (1)

This is a material event/ subsidiary , as Robin is forecasted to increase group revenue by 20%, which is a significant surge
in group profit. (1)

Planning a continuous process, and even though when initial planning took place for the upcoming audit of group for the year
ended 31st March 20X5, the audit team was unaware of this acquisition and so was not included in the planning. (1) However,
as this matter was identified during the performance of the audit, the planning should have been updated for this matter
and the recommended procedures should have been identified which should had been performed on this non-adjusting event.
(1)

The statement issued by the engagement partner, is wrong , as it breach the relevant accounting standards, and as identified
above being a non-adjusting event, it should be disclosed in financial statement for the year ended 31 st March 20X. (1) Moreover,
the statement by the partner refraining the audit team from performing any work on this material non-adjusting event , question
the leadership qualities of the audit partner, and this wrong communication by the partner set a wrong culture in the audit
firm and compromise the quality of the audit. (1)

Because no disclosure is given in the FS for this material non-adjusting event, the FS for the group are materially misstated. The
audit manager should discuss this issue with the CFO to rectify the FS with a disclosure. (1) . However if no disclosure is
given there will be an implication for audit report and the auditor need to issue a qualified opinion (1)

Outsourcing to Camelia

cost reduction do act as trigger to compromise work quality and audit procedures, as in order to reduce cost , and to improve
profitability out of the engagement being carried out, the audit team will be reluctant to gather sufficient appropriate audit
evidence as evident with the delegation of critical area to Camellia associates. (1)

Revenue is a risky area, and it has a presumed fraud risk ( overstatement), thus is a significant area for the FS for the group and
such risky areas should not be outsourced or delegated to any un-connected firm (1). Delegation or outsourcing to un-connected
firm is permissible but only for non-judgmental and non-risky area. (1)

The outsourcing to Camellia is also not appropriate as it consist of revenue not just of significant subsidiaries but also a
subsidiary from the agriculture sector and agriculture is a complex area and questions the decision of audit firm to delegate
work in this regard to Camellia. (1)

The judgement of the audit manager to rely on the evidence on Camellia is wrong , because to rely on the work of an un-
connected firm, the complete criteria to rely on the work should be followed , which includes checking Camellia experience as
an un-connected firm, independence and a review of the working papers for the work performed on revenue (1).

The evidence gathered by Camellia on revenue as stated above is a risky area, so the evidence gathered on risky area should be
reviewed by either manager or partner as a requirement of the relevant quality standards. (1) , However as no review is
carried out , there is a possibility of issues in revenue which can go un-addressed or the could be a possibility that evidence
gathered is not sufficient and appropriate. (1)
Conclusion

- There are several indicators identified in the engagement quality review above, which compromise the overall quality
management of the audit of the group FS, such as, the wrong decision taken by engagement partner on acquisition,
inappropriate conclusions on Yew company as being insignificant, not using the work of an expert in area of agriculture
and involving junior in the audit of intangibles. The actions recommended should be taken as the report is yet to be
issued in order to overcome the quality management issues.

Complete the rest of the answer and email me at : [email protected]

11/21/22, 11:03 AM TestReach

Answer to Q2

Key points

Evaluate - give a conclusion

analysis and evaluation, professional scepticism and judgement, and commercial acumen (3)
auditor’s report is due to be issued next week (ACTION)
year ended 31 March 20X5
financial statements include revenue of $129 million (20X4: $113 million), profit before tax of
$18·6 million (20X4: $23·2 million) and total assets of $465 million (20X4: $460 million).

Quality management and other professional matters/ recommend appropriate actions ( 20

marks)

Acquistion

On 10 June 20X5, the Group acquired another subsidiary, Robin Co, which is forecast to
increase the Group’s total revenue by around 20%.
so did not form part of the audit planning, which took place in January 20X5
The audit engagement partner said that we did not need to perform audit work on any aspect of
the acquisition as, according to the CFO, it will all be accounted for in next year’s financial
statements

Outsourcing to Camelia

pressure to reduce the costs

audit manager arranged for the audit procedures on revenue recognised by several significant
subsidiaries, including a subsidiary in the agricultural industry, to be delegated to Camelia
Associates, an unconnected firm
he audit manager said that we can rely on the evidence obtained by Camelia Associates as they
are a firm of qualified accountants
The audit evidence obtained by Camelia Associates has not been reviewed by the audit
manager or partner.

Intangible assets

I also audited the Group’s intangible assets, which involved evaluating the assumptions
relating to the appriateproness of capitalisation of $1·2 million of development costs in the
year ( Materility for $1.2 ??) is it material or not 6.45% of the PBT / 0.25% of the total asset, it is
material to PBT (1)
I could not discuss this with the CFO and no one else was available ( Skeptical)
I agreed the assumptions, for example, relating to technical feasibility and commercial viability,
to the Group’s business plan and concluded that they were consistent.
This is the first year that development costs have been recognised as an intangible asset in the
Group financial statements
No further evidence has been obtained relating to the development expenditure

Yew company

agriculture industry ( different form the group)

At the audit planning stage, in line with the previous year’s audit, it was not identified as a
significant component.

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Due to cost implications, the consultant was not engaged, and the section of the audit strategy
and audit plan containing instructions relating to the consultant was deleted from the audit files.’
Yew Co has total assets of $60·5 million (20X4: $83 million) and revenue of $6·5 million (20X4:
$6·4 million). TA of the Yew is 13% of the group total asset / Yew revenue is 5% of the group
revenue. A component is significant financially if it is 15% or more or either profit/ total asset or
revenue / however it is significant because it is from another industry.
Moreover there is a fall in total assets of Yew company 27% over the last year

Conclusion

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Q3
Q3- Sept 22 exam paper

69

 (a) Evaluate the assumptions used by management and the

completeness of the cash flow forecast prepared, explaining why
particular assumptions should be challenged and approached with
professional scepticism. (10 marks)
 (b) Explain the audit evidence in respect of the CASH RECEIPTS
included in the cash flow which you would expect to find in your
review of the audit working papers on going concern.(5 marks)
 It is now 1 August 20X5 and you have not been able to obtain
sufficient, appropriate audit evidence to support the assumptions

Requirements
used to prepare the cash flow forecast. In particular, there is no
arrangement in place to sell the Happy Travels publishing range in
January 20X6. The audit assistant proposes to issue an unmodified
audit opinion but to include a Material Uncertainty Related to Going
Concern section within the auditor’s report to highlight the problems
facing the company.
 (c) Discuss the appropriateness of the audit assistant’s proposal
for the auditor’s report.(5 marks)
 Professional marks will be awarded for the demonstration of skill in
analysis and evaluation, professional scepticism and judgement, and
commercial acumen in your answer. (5 marks)

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1 mark per valid point

Marking
Evaluation of assumption scheme
Evidence

Reporting implications

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AAA Sept 22
Examiner report
analysis
By Kashif Kamran-FCCA

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 This 25-mark question was set at the completion and

reporting stage of an audit. As is typical of reporting
questions, this is where the examining team see some of
the strongest and some of the weakest demonstrations of
auditing competence from candidates.
 This was a completion question centred around the going
concern assessment of an audit client in a declining
market.
 Going concern and audit reporting are two areas most
crucial for an auditor to understand but are two of the
areas where overall candidate performance is
Q3 overview
disappointing.
 Candidates often do not demonstrate professional
scepticism when auditing client information involving the
future and often are unable to devise ways to assess the
prospective financial information rather than the more
historical information which is examined at AA. This is
compounded by a reluctance to evaluate opinion options
rather than replicating a knowledge of the types of audit
opinion that is examined already at AA.

73

 Candidates were expected to demonstrate

professional scepticism to challenge the
assumptions supporting the cashflow forecast which
management had used to justify the going concern
basis for the financial statements. Candidates were
expected to evaluate these assumptions, as given in
the cash flow forecast (Exhibit 2) against the specific
business environment (Exhibit 1).
 There were also items omitted from the cash flow Requirement
forecast and candidates should use their
professional judgement to determine any missing
(a)- 10 marks
information such as capital expenditure, tax, or
dividends.
 Candidates who performed well on this
requirement were able to link the assumptions to the
specific business environment, demonstrating
professional scepticism when questioning the basis
of the judgements made by management..

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 These stronger candidates gained credit for both

technical marks for the specific evaluation points as well as
professional skills marks for the demonstration of
professional scepticism by challenging managements’
assumptions with specific explanations. Marks were also
available for the demonstration of commercial acumen
when making this challenge.
 Examples of commercial acumen seen in candidates
answers included questioning whether the bank would
agree to extend a repayment date given the current
performance of the company, whether a higher interest rate Requirement
might be charged by the bank on any extension of
repayment due to the higher default risk the loan would
(a)- 10 marks
carry or questioning management’s assertion that books
two and three in a series would sell more than book one,
given that people generally would read book one in a
series before moving onto a sequel.
 Weaker candidates tended to simply state an assumption
should be challenged without justifying why or made
comments relating to similar past questions which were not
relevant to this specific scenario and forecast

75

 This part of the question was either answered very

well or very poorly. Those candidates who
appreciated they needed to support the assumptions
in the forecast with regard to future cash receipts did
very well, with any valid procedure being awarded
credit.
 Areas which attracted credit included verifying typical
payment patterns for existing customers, quantifying Requirement
the progress on obtaining digital publication rights
from authors, identifying whether any potential buyers
(b)- 5 marks
had expressed an interest in purchasing the Happy
Travels range of books, and obtaining any contracts
signed with digital outlets. Candidates were also
credited for assessing the reliability of the first period
of the forecast with the actual results to date during
the forecast period.

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 A particularly useful approach by candidates was

to take each of the assumptions in the cash flow
being assessed and describing a procedure to
assess whether it was reasonable.
 Weaker candidates who provided generic
procedures not tailored to the scenario obtained
little credit, for example, reference to a written
management representation supporting the Requirement
information or generic reviews of board minutes.
(b)- 5 marks
 These are weak forms of evidence, and the
content of such sources must be specifically
described and appropriate to obtain credit. The
model answer published alongside this
examiner’s report contains examples of specific
content which would attract credit.

77

 It is also important to note that some superficially

similar procedures have very different levels of validity
in this situation.
 For example, comparing customer payment patterns to
historical payment trends and credit terms to help
assess whether the pattern of receipts from customers
settling sales invoices, is valid. Requirement
 Comparing forecast sales receipts to historical sales (b)- 5 marks
levels is not appropriate as we are told that the market
and sales levels have been declining year on year, yet
management are predicting growth this year. This
means last year’s sales are not indicative of the
forecast sales, so the comparison is not appropriate.

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 Professional skills marks attached to this

requirement overlapped with requirement (a)
where professional scepticism was displayed in
relation to the assumptions being tested.
 A further professional skills mark was available for
analysis and evaluation where candidate’s
procedures were relevant to supporting the
assumptions. This did not require the procedures
Requirement
to be correct as that was deemed a technical skill, (b)- 5 marks
but it was given for the appropriate focus of the
procedures.
 Candidates are reminded that reading the
requirement carefully is vital and ensuring that
they are responding to the specific area being
tested or the correct assumption to be verified.

79

 The requirement then moved the candidates forward

in time to the next stage of the audit process.
Candidates should read this additional information
carefully to ensure that they are answering the
requirement completely
 It was disappointing to note that candidates performed
poorly on this requirement. Candidates were told that
sufficient audit evidence had not been obtained to Requirement
allow the auditor to conclude on the appropriateness
of preparing the financial statements on a going
(c)- 5 marks
concern basis.
 The audit assistant had proposed using a material
uncertainty relating to going concern paragraph
(MURGC) as the client management had agreed full
disclosure of the going concern uncertainties in the
financial statements

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 Candidates should have explained that the MURGC

paragraph is used when the audit opinion is unmodified,
and the client has made adequate disclosure of the
uncertainty
 Candidates were expected to assess whether it was
appropriate to propose the unmodified opinion, using the
information in the scenario to make the determination:
The information stated that the auditor could not obtain
sufficient appropriate audit evidence to support the Requirement
assumptions in the cash flow. When the auditor has not
been able to obtain sufficient appropriate audit evidence (c)- 5 marks
over a material aspect of the financial statements there
are two options for the opinion:
 1) a qualified opinion on the basis of the inability to
obtain sufficient appropriate audit evidence where the
issue is material and not pervasive; or
 2) the auditor may provide a disclaimer where no opinion
is issued if the matter is material and pervasive.

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 Stronger candidates received credit for assessing and

justifying whether this matter is pervasive to the
financial statements. As it related to the going
concern of the company, this would generally be
considered pervasive, however this is a matter of
judgement.
 Candidates obtained credit for the act of making that
judgement and the explanations given, and this was Requirement
followed through to the audit opinion marks.
(c)- 5 marks
 Candidates who did not make that judgment obtained
credit for demonstrating that this was an inability to
obtain sufficient appropriate evidence, rather than a
material misstatement but would not gain the credit
available for the assessment of pervasiveness and
the conclusion reached because of that assessment.

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 Some candidates appeared to believe the financial

statement should not have been prepared on the basis
of going concern, concluding instead that a pervasive
misstatement existed. If the auditor had disagreed with
the basis of preparation, rather than concluded that
they had been unable to obtain sufficient appropriate
evidence, this would have been stated in the question.
 These weaker candidates would be recommended to
revise their understanding of the going concern basis
of accounting in IAS1 and the Conceptual Framework. Requirement
 The Conceptual Framework states that “financial (c)- 5 marks
statements are normally prepared on the assumption
that the reporting entity is a going concern and will
continue in operation for the foreseeable future.
Hence, it is assumed that the entity has neither the
intention nor the need to enter liquidation or to cease
trading. If such an intention or need exists, the
financial statements may have to be prepared on a
different basis”.

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 As with the rest of the exam, candidates could only

pass this requirement when the answer was applied
to the specific scenario in the question. A knowledge
of different types of audit reports alone would not gain
sufficient credit to pass this requirement. Requirement
 Professional skills marks associated with this part of (c)- 5 marks
question were awarded for analysis and evaluation in
the context of the scenario and the use of judgement
to determine an appropriate audit opinion.

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 AAA DEC 22 WTS ( REVISION PACK) – BY KASHIF KAMRAN-FCCA

DAY 4

Drafting techniques – Q3 part (a) evaluation of assumptions in relation to cash flow prepared by management ? -10 marks

Using the information in Exhibits 1 and 2:

(a) Evaluate the assumptions used by management and the completeness of the cash flow forecast prepared (10
marks) / 1 mark each point = 10 valid points / Note: why particular assumptions should be challenged and approached
with professional skepticism.

Cash receipt from customers

 Monthly sales are based on management's forecasts which predict sales growth of 2% in each six month period, is very
optimistic because the auditor has already highlighted in the working papers the result of analytical review for sales
which shows that sale for 20X5 has gone down by 20% which is significantly higher than the decline in sales in previous
two year. (1).
 Full range of digital book and magazine titles will be available from 1 August 20X5, seems too optimistic, as the
management has recently acquired a digital publishing business and expecting that the recent acquisition will start to
work in full flow from 1st August 20X5 which is just a month after where the audit is currently standing seems
inappropriate (1). Further it is not clear whether all the authors have giving permission to Geller to put their books as
part of digital publishing because a permission is required to do so, else the management assumption of forecasted
growth in sales number is unrealistic. (1)
 Closer connections with online retailers will drive an increase in sales seems to be a claim which needs to be
approached with professional skepticism, considering the fact, that the auditor working papers, did concluded that,
management of Geller is not doing any efforts / or expenditures to create close contacts with the online retailers and
the online retailers are giving tough time to the company. (1)
 In addition, management assumes that sales from Chandler Muriel's books will generate income of approximately
$250,000 per six month period need to be approached with higher skepticism, considering the fact that, the audit
working papers concluded that the current sales of the first book published in January 20x5 has only generated a low
sales volume of $135,000 in the seven month up to July 1 20X5 , so a claim of $250,000 in each six months seems to be
on higher side. (1) . Further, the books to be launched in Aug 20x5, and Jan 20x6 later, can boost the sales volume but
this is all based on assumptions and currently the competitor has launched a books for children which is putting
pressure on the sales of book from Chandler Muriel's. (1)
 Lastly, the growth in receipt from customers per six months as per management estimate of 2% is fine till 31 ST March
20X6, however in the last six months to 30TH Sep 20x6, the forecasted growth in receipt in taken as 5%. The auditor
need to be skeptical as this could be an error or might have been done intentionally by management to overstate the
receipts from customers to show a better net cash position. (1)

Receipt from sale of Happy travel

Operating expenses

Interest expense

 The interest expense which is taken at static $125,000 in each six month period seems strange and unusual and should
be approached with a high degree of skepticism as there is a risk of understatement of cash outflow associated with
interest payment. Considering Geller is not very good in liquidity and has a low cash balance of just $78,000 ,
there is a possibility that the company can utilized the undrawn facility of $ 1 million in any six month period
which will increase the interest expenses. (1)

Loan repayment


Completeness of cash flow (1)

 The cash flow prepared by the management for the 2 year period, does not include any information pertaining to the
cash outflow in relation with tax payment, or information relating to, any marketing expenses for the new digital
publishing business or in establishing close contact with online retailers and any incremental expenses for the new
line of business. For all the missing information, the auditor need to be alert/ skeptical, to investigate reasons as to why
such information is not giving in the cash flow forecast.

Conclusion:

There are several assumptions used in the cash flow prepared by Geller management which are too optimistic or unrealistic
and seems that the management has used these assumptions to present a better cash flow forecast, in terms of renegotiation
the loan repayment with the bank, in view of poor liquidity position.

Assumption used in cash flow : (Exhibit 2)

1. Monthly sales are based on management's forecasts which predict sales growth of 2% in each six month period. The
sales growth is anticipated based on several assumptions, including that a full range of digital book and magazine
titles will be available from 1 August 20X5 and that closer connections with online retailers will drive an increase in
sales. In addition, management assumes that sales from Chandler Muriel's books will generate income of
approximately $250,000 per six month period.
2. Management has recently decided to sell the Happy Travels range of books. The estimated sales value of the range is
based on a multiple of the annual sales generated by the range. This is the company's standard basis of calculating
expected sale prices, which Geller Co has used in recent years when they have sold other ranges of books.
Management is confident that a buyer will be found and that the sale will go ahead in January 20X6.
3. Operating expenses, including royalties, are forecast to increase by 1% per six month period, in line with general costs
of inflation.
4. Geller Co has a $5 million loan which is due for repayment on 30 September 20X5. Management has started the
process of renegotiating the repayment terms of this loan, and is confident that the bank will agree to extend the
repayment date to 30 September 20X6.

Exhibit 1 ( going concern)

 Geller Co’s business is significantly impacted by an industry-wide deterioration in demand for printed books and
magazines company has recently acquired a digital publishing business at a cost of $25 million, and management is
confident that Geller Co will soon be able to offer a broad range of digital books and magazines. authors of printed
books will need to give consent for their books to be converted to a digital format. This consent must be obtained
prior to the books being made available for sale on digital platforms.
 There is concern that due to the company’s cash position, there may be delays in making royalty payments to some
authors.
 Analytical procedures show that revenue has declined by 20% this year, accelerating the trend seen in previous years.
In the financial years ended 31 March 20X3 and 31 March 20X4, revenue fell by 10% and 12% respectively.
 The company has recently contracted a very popular author to write a series of three children’s books. The author,
Chandler Muriel. has delivered the first book in the series, which was published in January 20X5. Sales of the book
since its publication have been disappointing, at only $135,000. Management explains that this is due to a rival
company publishing a similar book in December 20X4. Chandler Muriel’s second book is due to be published in August
20X5, and the third in January 20X6.
 Geller Co faces a liquidity problem, having only $78,000 of cash at 31 March 20X5. The company has an overdraft
facility of $250,000 and in addition, agreed undrawn borrowing facilities of $1 million. There is also an existing $5
million unsecured bank loan which is due for repayment on 30 September 20X5.
 Geller Co has made the decision to sell its popular Happy Travels range. This is a range of books aimed at the
student traveller and include maps as well as suggested hostels and activities. Geller Co anticipates significant interest
in the range, with a sale expected in January 20X6
Part b – Explain the audit evidence in respect of the CASH RECEIPTS included in the cash flow (5 marks)/ 1 mark per
evidence = 5 evidence

 Notes of discussion with Geller management confirming:

o justification or reasons why a 5% sales growth in taken in the last six months of the forecasted period ending
30th Sept 20x6 against 2% growth as claim by management. (1)
o their plan as to how they will market the digital publishing business in the foreseeable future to generate more
sales from it. (1)
o any marketing budget allocated to the promotion of digital business and close connection with online retailer
and is this reflected in the cash flow forecast (1)
o the basis that sale of happy travel will be made by Jan 20x6, which seems optimistic considering a down trend
in industry for published books (1)
 copy of the board minutes to confirm the approval of the sale of happy travel range of books and the business rationale
of selling this range.
 Correspondence with any potential buyer interested in buying happy travel range of books and the likelihood of the
sale date and the sale price

It is now 1 August 20X5 and you have not been able to obtain sufficient, appropriate audit evidence to support the
assumptions used to prepare the cash flow forecast. In particular, there is no arrangement in place to sell the Happy
Travels publishing range in January 20X6. The audit assistant proposes to issue an unmodified audit opinion but to include
a Material Uncertainty Related to Going Concern section within the auditor’s report to highlight the problems facing the
company.

(c) Discuss the appropriateness of the audit assistant’s proposal for the auditor’s report. (5 marks)/ 1 mark per valid
discussion = 5 total discussion

 (Exhibit 1 ) Disclosure relating to going concern- Management has confirmed that they will provide full details of the
going concern issues facing Geller Co in the notes to the financial statements

Arguments/ brainstorming

 Unable to obtain evidence ( issue / problem)

 Assistant propose to issue an unmodified audit opinion ? is wrong considering auditor is unable to obtain evidence
 Is it material only or is it material and pervasive ?
 to include a Material Uncertainty Related to Going Concern section within the auditor’s report- its wrong as the auditor
is unable to obtain evidence to support MU

Answer

The auditor was unable to obtain sufficient appropriate audit evidence in relation to the assumption used in preparing the cash
flow forecast including the sale of happy travel. (1). This is a material and a pervasive matter and not just material , because, this
matter relates with unable to find evidence in relation to cash flow affecting the going concern of the company which are the
basis on which FS are prepared and has a significant impact on the overall FS.(1). The assistant comment that unmodified
opinion will be issued is wrong because the auditor is unable to obtain evidence on cash flow which will impact the opinion of
the auditor (1). Considering it is a material and a pervasive matter as discussed above, the auditor will issue a disclaimer of
opinion, mentioning the in the basis of opinion , the reason why the auditor is disclaiming from giving the opinion. (1). Lastly,
the MURGC section to be put in report as a proposed by the audit assistant is wrong as well because the auditor does not have
sufficient appropriate evidence to conclude on material uncertainty. (1)
11/23/22, 12:59 PM TestReach

Answer to Q3:

Professional skill: Professional marks will be awarded for the demonstration of skill in analysis
and evaluation, professional scepticism and judgement, and commercial acumen in your
answer. (5 marks)

Using the information in Exhibits 1 and 2:

(a) Evaluate the assumptions used by management and the completeness of the cash flow forecast
prepared (10 marks) / 1 mark each point = 10 valid points

Note: why particular assumptions should be challenged and approached with professional scepticism.

Assumption used in cash flow : (Exhibit 2)

1. Monthly sales are based on management's forecasts which predict sales growth of 2% in
each six month period. The sales growth is anticipated based on several assumptions,
including that a full range of digital book and magazine titles will be available from 1 August
20X5 and that closer connections with online retailers will drive an increase in sales. In
addition, management assumes that sales from Chandler Muriel's books will generate
income of approximately $250,000 per six month period.
2. Management has recently decided to sell the Happy Travels range of books. The estimated
sales value of the range is based on a multiple of the annual sales generated by the
range. This is the company's standard basis of calculating expected sale prices, which Geller
Co has used in recent years when they have sold other ranges of books. Management is
confident that a buyer will be found and that the sale will go ahead in January 20X6.
3. Operating expenses, including royalties, are forecast to increase by 1% per six month period,
in line with general costs of inflation.
4. Geller Co has a $5 million loan which is due for repayment on 30 September 20X5.
Management has started the process of renegotiating the repayment terms of this loan, and is
confident that the bank will agree to extend the repayment date to 30 September 20X6.

Exhibit 1 ( going concern)

Geller Co’s business is significantly impacted by an industry-wide deterioration in demand for

printed books and magazines
company has recently acquired a digital publishing business at a cost of $25 million, and
management is confident that Geller Co will soon be able to offer a broad range of digital books
and magazines.
authors of printed books will need to give consent for their books to be converted to a digital
format. This consent must be obtained prior to the books being made available for sale on digital
platforms.
There is concern that due to the company’s cash position, there may be delays in making royalty
payments to some authors.
Analytical procedures show that revenue has declined by 20% this year, accelerating the trend
seen in previous years. In the financial years ended 31 March 20X3 and 31 March 20X4,
revenue fell by 10% and 12% respectively.
The company has recently contracted a very popular author to write a series of three children’s
books. The author, Chandler Muriel. has delivered the first book in the series, which was
published in January 20X5. Sales of the book since its publication have been disappointing, at
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11/23/22, 12:59 PM TestReach

only $135,000. Management explains that this is due to a rival company publishing a similar
book in December 20X4. Chandler Muriel’s second book is due to be published in August 20X5,
and the third in January 20X6.
Geller Co faces a liquidity problem, having only $78,000 of cash at 31 March 20X5. The
company has an overdraft facility of $250,000 and in addition, agreed undrawn borrowing
facilities of $1 million. There is also an existing $5 million unsecured bank loan which is due for
repayment on 30 September 20X5.
Geller Co has made the decision to sell its popular Happy Travels range. This is a range of
books aimed at the student traveller and include maps as well as suggested hostels and
activities. Geller Co anticipates significant interest in the range, with a sale expected in January
20X6.

(b) Explain the audit evidence in respect of the CASH RECEIPTS included in the cash flow (5
marks)/ 1 mark per evidence = 5 evidence

It is now 1 August 20X5 and you have not been able to obtain sufficient, appropriate audit evidence to
support the assumptions used to prepare the cash flow forecast. In particular, there is no arrangement
in place to sell the Happy Travels publishing range in January 20X6. The audit assistant proposes to
issue an unmodified audit opinion but to include a Material Uncertainty Related to Going Concern
section within the auditor’s report to highlight the problems facing the company.

(c) Discuss the appropriateness of the audit assistant’s proposal for the auditor’s report. (5
marks)/ 1 mark per valid discussion = 5 total discussion

Disclosure relating to going concern- Management has confirmed that they will provide full
details of the going concern issues facing Geller Co in the notes to the financial statements

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lms.kashifkamran.com 5/16/2023

Attempting the
Section A
question
ADVANCE AUDIT AND ASSURANCE

Important points to
remember in approaching Q1

1.The question is always set at the planning stage of the audit

2.The current date will always be 1 July 20X5, with the year end of the
client being 30 September 20X5.
3.There will be a significant proportion of the marks in respect of the
identification and evaluation of the risks associated with the client
(these may be business risks, risks of material misstatement or audit
risks. On occasion, it may be a combination of risks which the partner
is asking for analysis on).
4.Exhibit 1 will be the partner’s email which will outline the requirements
and what will need to be addressed. The format will always be in the
form of briefing notes to the partner

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What will be
asked?
• At least 20 marks will be attributable to the identification, evaluation or assessment of
the risks in the scenario which will affect the audit plan.
• The remaining 20 marks (remember that there are 10 professional skill marks) will be
based on a selection of ‘other issues’. These may include:
• Ethical and professional issues
• Discussion of actions and/or procedures to mitigate the risks already identified
• Discussion of the auditor’s responsibilities in respect of laws and regulations
(including fraud, money laundering, breaching specialist industry regulations,
licence agreements, etc)
• Other issues, for example, using data analytics, problems assessing non-financial
KPIs, sustainability issues, internal controls, auditing outsourced services, use of
audit experts,
• This is not an exhaustive list of the content of the questions, but will provide candidates
with some guidance as to what they may face in the live exam.

Prioritizing risk
• With the revisions to ISA 315, candidates will have seen requirements
which ask for:
• ‘Evaluation and prioritization of the significant risks of material
misstatement/audit risk’
• Business risks, however, do not require prioritization as the
Examining Team do not assume any industry specific knowledge.

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Types on questions on risk

Type 1 Type 2
• ‘Evaluation and prioritization of the • 2A)
significant risks of material • ‘Evaluate and prioritize the risks of
misstatement/audit risk’ material misstatement to be
considered in developing the audit
strategy and audit plan
• You are NOT required to consider
the risks relating to goodwill
• 2B)
• (i) Justify why goodwill has been
identified as a significant risk of
material misstatement; and
• (ii) Design the audit procedures to
be performed on the valuation of
goodwill’

10

Types on questions on risk

Type 3 Type 4
• ‘Justify why each of the following • ‘Evaluate the business risks to be
issues have been identified as a considered in planning the Group
significant risk of material audit
misstatement:
• a. Goodwill
• b. Inventories
• c. Non-current assets’

11

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Time
management
Q1
This is the key question and the
most challenging for the students

12

Total exam time is 195

minutes

• Q1 is half the paper

• 195/ 2 = 97.5 ( round off 98 minutes)
• 1/4th of the time should always be
given to reading and planning (RAPT)
• 98 minutes/ 4= 24 minutes (RAPT)
• 98-24= 76 minutes is to write the
answer ( that is 1 hour and 16
minutes)

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 Attempting Section A question in AAA Paper – by Kashif Kamran -FCCA

New way of asking question (2B)

Justify why goodwill has been considered or taken as a significant risk ? 3-4 marks
 Justify- the basis / underlying basis used by partner to conclude that goodwill is a significant risk
o Materiality?
o Inherent risk factors like ( complexity/ subjectivity/ estimate/ risk of management bias/
new)
o Subjectivity with impairment – determine the recoverable amount ( involvement estimate)
o Estimate can be used/ subjectivity can be used a risk of management bias – to overstate
profit and assets.