Implication – Explain what is happening in the scenario. Indicates what offence, e.g.

– like money
laundering.

1. Ethical risk questions – Identify and provide a risk from the scenario and
provide a safeguard in topic action
Taxation services and audit engagement – both can be provided for non-listed companies
but different teams should be used

2. Risk of Material Misstatement- Risk of material misstatement is the risk that any
misstatements that exist in the financial statements being audited, could be material either
individually or in aggregate.
3. Firm of auditors appoint MLRO
4. Further Audit Procedures – State what should be done and why
5. Report to those charged with governance – things which are ethically wrong, eg
finance director asking auditor to check journals etc.
 Implications of the audit senior’s note ( Money Laundering)
1. Definition of money laundering
2. Placement cash-based business
3. Owner posting transactions
4. Layering electronic transfer to overseas
5. Secrecy and aggressive attitude
6. Audit to be considered very high risk
7. Senior may have tipped off the client
8. Firm may consider withdrawal from audit
9. But this may have tipping off consequences

 Explain the nature of any reporting that should take place

( Money Laundering)
1. Report suspicions immediately to MLRO
2. Failure to report is itself an offence
3. Examples of matters to be reported (identity of suspect, etc.)
4. Audit senior may discuss matters with audit manager but senior responsible
for the report

 Professional scepticism
1. Definition of professional skepticism- Professional skepticism is an attitude
that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence
2. Explain–alert to contradictory evidence/unusual events/fraud indicator (up
to 2 marks)
3. Part of ethical codes
4. Coot Co – evidence is unreliable and contradictory
5. Absence of authorization is fraud indicator
6. Additional substantive procedures needed
7. Management's comments should be corroborated
8. Control deficiency to be reported to management/those charged with
governance
9. Audit junior needs better supervision/training on how to deal with
deficiencies identified
 Explain why a firm of auditors may decide NOT to seek re-
election as auditor
1. Disagreement – In the past over accounting treatments.
2. Lack of integrity – auditor feeling it has the reason to doubt up on
managements integrity e.g. from an unproven suspected fraud
3. Fee level – fee received from the client reached 15% of total income of audit
firm
4. Late payment of fees – Pressure for the firm to do as per the client In order
to receive the outstanding fees
5. Resources – auditor may find that it lacks the resources to carry out an audit
6. Overseas expansion
7. Competence- auditor finding itself not competent enough to carry out the
audit
8. Independence
9. Conflict of interest

 Matters to be included in tender document

1. Outline of the audit firm – An outline of firm should be provided, perhaps including
a brief history and a summary of key information about the firm. Any specialisms
should be mentioned, state if has branches in many countries, as this may prove
useful if any audit work needs to be performed overseas.
2. Audit firm specialism- In telecoms, audit software etc. relevant to client.
3. Client audit requirements – The statutory audit requirement in client’s jurisdiction
should be stated, to confirm that an audit is needed. It should be stated that the
audit must conform to ISAs. Any additional reporting requirements that result from
clients listing should be stated.
4. Outline of audit firm's audit methodology - The tender should outline the audit
stages of an audit, describe the proposed audit approach. Link to scenario.
5. Deadlines – the tender should seek to clarify the timeframe for the audit, and state
that if there are problems with the audit e.g. clients internal control are less reliable
than expected then the audit may take longer. client needs to be prepared for this
possibility.
6. Quality control and ethics – Firm should state its adherence to IESBA’s code of
ethics for professional accountants and to International standards on Quality
Control. This will give client and its ventures capitalist’s investor confidence in the
auditor’s report that would be issued.
7. Fees -
8. Additional services – Tender should also mention of any other non-audit services
which the firm is in position to provide. It should be sated that these services can
only be provided subject to meeting the ethical requirements by which firm is
bound.
9. Client Expectations- client wants audit not to be disruptive, firm may attempt to
manage his expectation here, as a certain degree of disruption is unavoidable. It will
be necessary for example to receive explanations from the employees, including in
accountant, which will take time.
 10. Predecessor auditor – state that the professional clearance from the predecessor
auditor is crucial before proceeding with the audit.
 Acceptance procedures ( Outgoing partner not contacting
back)
ISA requires that Co obtains sufficient information to consider a range of matters before
accepting an audit engagement. One of the matters is considering the integrity of the
owners and management of the client. One such procedure to obtain this information is to
communicate with the outgoing auditor. If the engagement partner is not satisfied that they
have obtained sufficient information and that they have not concluded sufficiently rigorous
procedures to investigate this matter, they should not accept the engagement.

 Client not paid previous year audit fees

1. Poor credit control – fees outstanding for more than 12 months suggests
poor credit control, debts should not remain outstanding for so long.
Company suffering poor cash flows may indicate that the balance remains
unrecoverable.
Actions – Credit control procedures at the firm needs to be reviewed to
prevent this situation reoccurring.
2. Independence threat – free audit/loan – the overdue fees for previous year
may mean that the audit has been performed for fee or could effectively be
seen as a loan to the client by the audit firm. Outstanding fees give rise to
self-interest threat and independency is threatened.
Actions – Audit firm should discuss about the fees recoverability with the
audit committee and those charged with governance. If the overdue fees not
paid or a valid payment plan not agreed then the firm should consider
resigning as an auditor.
3. Self-interest in 20X8 report – outstanding fees of 2017 creates threat to
firm’s objectivity and independence because the issue of an unmodified
threat increases their chances of securing outstanding payment of 2017.
Actions- the working papers of 2018 should undergo an independent review
by the quality control reviewer.
4. Non-payment due to financial distress does not necessitate resignation
5. Assess significance of amount outstanding
6. Policy to check prior invoices paid – audit firm should only accept the 2018
audit engagement only after the clearance of outstanding fees.
7. Going Concern – Client having cash flow problems suggests weather the
company is a going concern for the current years audit report.
Actions – Firm should carry out going concern review of the audit working
papers for the current year. And ensure that sufficient audit evidence has
been carried out to support the opinion.

 Difference between audit and limited assurance review

 Audit of Financial Statements Limited Assurance review
Mandatary requirement in some countries, Not usually required by the law
although some small companies below a
certain threshold exempted.
Involves a wide range of procedures Involves narrow range of procedures
involved used to obtain evidence including Including inspection of documents,
both tests of control and substantive recalculation, observation, analytical
procedures. procedures.
Practitioner gives reasonable level of Practitioner gives moderate level of
assurance assurance.
The Wording of the report 'In our opinion The conclusion expressed as ‘Based on the
the financial statements present fairly, in all review performed, nothing has come to our
material respects, the financial position of attention which causes us to believe that the
the company, its financial performance and financial statements do not present fairly, in
its cash flows for the year ended in all material respects, in accordance with
accordance with International Financial International Financial Reporting Standards.'
Reporting Standards (IFRSs).’
Audit report referred to as positive Review engagement report often referred to
statement. as Negative form of opinion
 Matters to Consider (question means following)
1. Materiality of whole receivable / training cost in respect of
revenue net profit net assets etc.
2. Correct Accounting treatment and compare with what is
happening in the question.
3. Related inventory with customer needs to be sold or impaired if
made on specific order to customer.
4. Audit opinion and reason for that opinion if doesn’t amend FS
 Things to prove negligence
1. Duty of care existed
2. This duty was breached
3. Financial loss due to this breach

 Close Business Venture with the audit client

1. Self-interest threat
2. Intimidation threat
3. If enter business arrangement then need to withdraw from audit of
that client
4. Need to do research if project commercially viable or not leading to
expenses.
5. Audit firm should also look independent business will hamper that
independence.
  Matters to consider before accepting the audit engagement
1. Size of the audit firm
2. Relevant expertise
3. Overseas subsidiary – needs to be audited by the retail audit
department – ensure available or not
4. Time pressure – tight deadlines
5. Planned listing – increases risk of manipulation of accounts, as
management may be under pressure to report favorable audits
6. Clearance from previous auditor
7. Reason for qualified report by previous auditor

 Briefing notes
1. By
2. To
3. Date
4. Explanation
5. Conclusion

 Audit evidence
1. Maintenance report to ensure continued efficiency and engineers report
that showing no major operational problems in machine
2. Written representation from management
3.

 Issues to be considered by the audit firm in determining a fee for the

audit.
1. Commercial factors – firm has commercial desire to make a profit
this is achieved by offering a fee which is high enough to make a
profit and low enough to attract business, It must do this without
compromising professional independence or its standard of
quality.
2. Costs – The fee should be linked to the costs incurred. A charged
out rate which is based up on the time spent would be ethical,
fees should be increased if stock exchange listing as more
extensive reporting is imposed. And costs of any travel etc.
3. Low fees – if client suggests that fee quoted below market value
will win the audit its lowballing its allowed but there is ethical risk
that fees will not be sufficient to pay for the work required.
4. Contingent fees – link the fees to the success of the client is to
charge contingent fee. Creates self-interest threat. The threat is
so significant that no safeguard could reduce the risk to an
acceptable level. So such arrangement should not be entered into.
  Audit risks to be considered while planning the audit of client
Development costs  Calculate materiality
 Explain
 Development costs only capitalized when meets the criteria of IAS 38, such as i) p
that future economic benefits will flow , ii) cost can be measured reliably, iii) clien
resources to complete the development.
 Costs not meeting this criteria are expensed to p/l.
Overseas manufacturing  Brings detection risk to inventory, as it will be difficult for the firm to attend inven
overseas at y/e.
 In this case alternative sources of evidence should be consulted.
Website sales  Calculate materiality
 Control risk – danger that website cannot cope with the large increase in sales, w
affect the figures reported in FS.
 Detection risk – website may not leave a significant audit trail (record of changes
the data base).
 Cut off risk – difficult to determine the exact time when performance obligation s
control passed to customers in relation to IFRS 15 Revenue recognition.
 Ecommerce can also represent a business risk as it may expose client to lost sales
reputational damage if it’s website does not operate effectively. Any significant p
this area could affect clients status as a going concern.
License income  Calculate materiality

 Explanation
 Audit plan should ensure that sufficient resources are devoted to this technical ar
Listing soon  Brings risk of manipulation, as management will want to present good FS.so there
incentive to overstate profit and assets
Corporate governance  Too few NED’s , no internal audit department
 Risk that single NED dominating the board and influencing the preparation of FS.
Foreign Exchange  Risk that IAS 21 not followed
 IAS 21 requires all items to be translated into clients functional currency when tra
occurs (historic rate), all monetary balances retranslated at the Y/E at closing rate
 Misstatements may occur in either of these processes leading to over or understa
assets, liabilities, incomes and expenses.
 Use of forward contracts which represents audit risk should be accounted as per
hedge accounting rules must be followed as the team is new these contracts may
desired effects. They may not have appropriate knowledge, will need time to und
things.
Investment portfolio (  Calculate materiality
shares value)  In line with IFRS 9 shares held in short term – should be held at FVTPL( not being
collect contractual cash flows ), if held at cost it is incorrect should be measured a
Rapid Growth  Increase in control risk as systems and people struggle to keep up with both grea
and new type of transaction.
 Lack of proper governance and control structures appears evident in several plac
Earnings per Share  IAS 33 requires both EPS and diluted EPS on the face of the statement of P/L
 EPS calculation based on profit attributable to ordinary shareholders from statem
to calculate it otherwise is a material misstatement
  PBT should not be used and shares used should be weighted average for the year
 This is significant given the new listing.
Profit margins  Rising gross margin and falling operating margin indicates misclassification of exp
between cost of sales and operating expenses.
 Or understatement of cost of sales
 Or Client has incurred more operating expenses as it has grown.
Goodwill  Calculate materiality with total assets
 Contingent consideration is significant audit risk, currently recognized at in full as
 As per IFRS 3 business combinations needs to be recognized at fair value at the ac
date
 Needs to be discounted to PV as will not be paid within a year
 Not done so will overstate good will
 Another risk is valuation of identifiable net assets if done by an expert then audit
required to evaluate the expert’s competence capability and objectivity in order t
the work’s appropriateness and needs to be documented.
 IAS 36 Impairment of Assets requires goodwill to be tested for impairment annua
 No mention of this having been done at the Y/E or risk that impairment done as p
 Therefore a risk that goodwill may overstated.
Loan stock  Calculate materiality – total assets
 Premium should be recognised as a finance cost over the period of the loan using
amortized cost method, in line with IFRS 9 Financial Instruments.
 The risk is that this has not been done, and that finance cost are understated.
 Interest cost payable in arrears and there is risk of further understatement of fina
this has not been accrued for.
Subsidiary’s management  Have no prior experience of the consolidation process, so it is possible that the pr
operate inefficiently and that errors will be made.
 So more likely that more audit work will be need to be done on the consolidation
subs results than on the rest of the group.
Government Grant  Materiality- total assets
 In line with IAS 20 grant needs to deduct from the cost of the asset or should be d
some grant left to be spent then that needs to be deferred until the next year – r
not done – overstate profit
 Grant given to be spent on environment but used by the client to upgrade produc
Grants conditions not met –possible that grant will need to be repaid materiality
repaid
New IT System  Represents risk of material misstatement as errors may have been made in transf
data from the old system to the new system and new system is likely to take time
and it is possible for teething problems to lead to a loss of the data.
New finance director  Increases the risk of errors as it deprives the company the accounting skills it may
producing its FS and for the consolidation process.
 Make the audit more difficult as it may not be possible to obtain explanations tha
needed if there is no FD
 The reason for the FD leaving should be ascertained as it is possible that there ha
disagreement over the accounting policies, or even a fraud.
Share options ( Equity  Materiality – profit before tax, and if granted to related parties
settled)  In accordance with share based payment client should recognise the remuneratio
as the employees service are received based on their FV of the share options gran
  Principal risk is that the accounting treatment will be in appropriate
 See calculation how done correct or not
 If recognised full expenses then it is incorrect, IFRS 2 requires the cost to be sprea
vesting period
 Profit understated / overstated material or not
Share based payment ( cash  As per IFRS 2 liability should be measured at FV at the Y/E. and expenses recognis
settled)  Not done so will understate liabilities and overstate profit and risk that sufficient
not made.
Disclosures for listed  First set of financial statements produced since became listed.
companies  Risk that the new finance director will not be familiar with the specific requireme
entities. Risk of incomplete or inaccurate disclosures in respect of standards and
specific to the jurisdiction in which the company is listed.
Payments in advance and  Risk in terms of when part of the revenue generated from the sale of the goods r
revenue recognition under risk that revenue is recognised too early, especially given the risk of management
contract with customers the incentive to overstate revenue and profits as discussed above.
 As per IFRS15 revenue should be recognised as control is passed either at a point
over time.
 Payments in advance treated as a deferred revenue at the point in time when the
received.
 Additional risk created if the person cancel the contract part way, the bespoke w
progress may be worthless and would need to be written off as per IAS 2
 Risk that WIP will be overstated.

Revaluation of property  Revaluation involves establishing a FV, which can be subjective exercise leading t
risk that the valuation may not be appropriate.
 IAS 16 requires all assets of the class being revalued, risk that this not done only a
upward revaluation done overstating NCA.
 Risk that depreciation has not been calculated on the new higher figure of the pro
Leading to overstatement of NCA and understatement of operating expenses.
 Calculate revaluation gain materiality with respect to assets
 IAS 16 also requires necessary disclosures with respect to revaluation risk that ne
disclosures are incomplete.
Deferred tax recognition  IAS 12 requires deferred tax to be recognised in respect of taxable temporary diff
 finance directors suggestions that deferred tax should not be provided for is inco
representing an error in the FS, understating liabilities
Inventory valuation  calculate materiality
 customer returning goods shows problem with the quality of the goods
 returned goods – NRV is likely to be less than the cost of the item a write off may
necessary to reduce the value of the inventory in accordance with IAS2
 Increase in inventory holding period indicates that inventories have becoming slo
during the year also indicates that inventory is overstated.
Working capital  Calculate operating cycle days
 Then say of the client is struggling to manage its working capital.
 Receivable period increased – client struggling to collect cash from customers, ris
overstatement of receivables and understatement of operating expenses if bad d
recognised.
New client  Detection risk and opening balances risk
Related party  Why is related, related party material by nature
 Must be disclosed in the individual financial statements of the group companies.
risk that if disclosure is inadequate, this will be a material misstatement.
Unreleased profit  If the inventory was recognised as sold to subsidiary at a markup then a provision
unreleased profit must be included. The risk is that it is omitted, which would ove
the inventory and profit.
Mid-year acquisition  State when acquired.
 There is a risk that year end reserves are mistaken for its pre-acquisition reserves
group accounts, which would misstate group reserves.
 Also a risk of the full year statement of profit or loss being consolidated, rather th
months. Assuming profits accrue evenly, calculate if material or not.
Group accounts –  IFRS 3 Business combinations requires extensive disclosures, e.g. in relation to go
Disclosures There is a risk that these are not included in the group financial statements.
Opening Balances  Subsidiary’s prior year FS may not have been audited, or were audited by anothe
There may be therefore misstatements in this year’s opening balances which cou
materially misstate both this year’s FS and the corresponding figures.
Midyear Disposal  Disposed midyear means that for the first eight months of the year it was in the g
results should therefore be consolidated for this period. The risk is that this has n
done correctly, overstating group profit.
Non-controlling Interest  There is an inherent risk that the investments have been classified incorrectly as a
 Risk that group finance team may not have applied appropriate accounting polici
Bonuses and accounting  The existence of profit based bonuses for the director’s represents an inherent ri
estimates manipulation with income and profit bring overstated, and expenses being under
 Crucial that professional scepticism is exercised in this area.
 There is also an audit risk relating to the obligation for the Group to pay the bonu
should be recognised as an accrual at the year end.
 There is a risk that the liability recognised is over or understated in value given th
complexity involved in calculating the bonus payment, the calculation of which is
range of selected targets for different employees.
Dismantling costs  IAS 16 requires dismantling costs to be capitalised as non current assets, and a pr
created against them. Account should be taken of the effect of discounting if this
and a finance charge included in the statement of profit or loss to represent the u
the discount.
 Risk that provision has not been created and assets andliabilities has therefore be
understated and depreciation expenses being understated which would result pr
overstated, also risk that provision not measured in accordance with IAS37 eg inn
discounting.
Consolidation  Subsidiary acquired midyear risk that results have not been consolidated from th
date. If they are included from too early then the profits may be overstated.
 It should be consolidated from the date it was acquired. As per IFRS3 risk that goo
calculated correctly and that the fair value of assets and liabilities have not been
reliably.
Intra group trading  State what trading
 Intragroup trading’s needs to be eliminated
 Risk that inventories containing unresalised profit, which needs to be provided fo
 Risk that this has not been done, potentially overstating revenues, expenses, asse
liabilities.
Group finance director  Relate to the scenario first.
attitude  This could indicate that the Group finance director is deliberately obstructing the
audit team, and perhaps has something to hide.
 The Group audit strategy should consider this issue, and the audit engagement pa
wish to discuss the issue with the Group audit committee as a matter of urgency.
 This increases the risk that the legal claim will not be recognised appropriately in
financial statements, and the audit team must approach this issue with a heighte
of professional scepticism
One subsidiary using local  In accordance with IFRS® 3 Business Combinations, for the purpose of consolidati
accounting standards Group’s accounting policies must be applied to all balances and transactions whic
of the consolidated financial statements.
 There is an audit risk that 16 the Group’s policies are not applied correctly, mean
amounts consolidated in respect of Daryl Co are not recognised, measured or dis
appropriately
Reliance on component  Given the materiality of Daryl Co, the Group audit team needs to consider the ext
auditor reliance which can be placed on the audit of the company conducted by Neegan
 The independence and competence of Neegan Associates will need to be evaluat
Group audit team
 Any material misstatements which may remain uncorrected in Daryl Co will impa
consolidated financial statements, leading to audit risk at the Group level.
Post year-end acquisition of  Relate to scenario
Subsidiary  IFRS 3 requires disclosure of information about a business combination whose ac
date is after the end of the reporting period but before the financial statements a
authorised for issue.
 There is therefore an audit risk that the disclosure in relation to the acquisition o
Co is not complete or accurate

 Reliance on an auditor’s expert work

1. Evaluation of the work of the auditor expert – re calculation,
auditors assumptions in line with the experts assumptions or not
2. Objectivity Expert must not be connected to the client – should
not be a related party – if so less reliance will be placed on their
work
3. Competence – evaluated considering whether they are members
of any professional body – more experienced expert will be more
reliable
4. Scope of work – scope of work should be agreed such as
objectives methodology and key assumptions. These assumptions
should be agreed with auditor’s understanding of the entity and
its environment. - should be agreed at the start if the expert
deviates from it then their work will be less useful to the auditor.
5. Reliance and Conclusion – auditor considers source data used by
the expert, evaluates the conclusions drawn by the expert and
 whether they are warranted by the evidence obtained. Any
inconsistencies should be investigated.

 Planning Implications on audit of client acquiring subsidiary and group.

1. Individual financial statements
 To understand Canary co and it environment, we must
consider any relevant regulatory factors.eg if its uses the
same financial reporting framework as the group, the
nature of the entity’s operations etc
 Too understand canary’s internal controls, we must
consider its accounting systems as well as any other
controls relevant to the audit. Our understanding of these
controls must be documented in order to build the
knowledge of the entity.
 It will be necessary to perform detailed analytical
procedures on canary at the planning stage. Necessary to
determine planning materiality.
 Need to perform additional procedures on canary’s opening
balances, as these were audited by a predecessor auditor.
 Need to communicate with the predecessor auditor, asking
of there is anything we should be aware of that may
influence our plan.
2. Consolidated Financial statements
 If canary is a significant component, calculate forecast
revenue to group and profit to that of group.
 Consider weather audit evidence obtained for the
individual company is sufficient and appropriate for the
group and perform procedures on matter relevant to the
consolidated accounts.
 Canary company Y/E different from the group. In practice
this will usually be changed soon after the acquisition is
made, If not changed then additional then additional
procedures must be performed on canary financial
information so that its financial statements as a group date
can be consolidated.
 Care must be taken when performing analytical review at a
group level as canary’s figures are only included since the
 acquisition date and will not be comparable with the whole
year figures of the rest of the group.
 New acquisitions introduces new complexities into the
audit, so we must consider that these aspects of the audit
done by staff with appropriate levels of experience.
Evidence Audit Procedures
Physical Inspection Obtain
Evidence of programme to locate a Review
buyer
Confirmation
Copy of board minutes, management
impairment review
Written representation from
management

Audit risk answers  Calculate and conclude on materiality(

M – materiality calculate and 1Mark)
conclude  Briefly describe the relevant financial
F – Financial reporting requirement reporting requirement – note that no
R – relate to scenario credit is awarded for the accounting
I – Impact on financial statements standard names or numbers, only the
accounting treatment. (1 mark)
 Relate the risk in the scenario to the
accounting treatment. (0.5 marks)
 Illustrate the impact of the risk on the
financial statements (0.5 marks) (
understatement/Overstatement, FS
could be materially misstated)
 Including analytical procedures for 0.5
marks

WIP inventory at the year-end is $20 million

which is 10% of the total assets thus material
to the FS (1).WIP should be valued taking into
account the stage of completion for each
order in terms of material, labour and
overhead. (1). The stage of completion is
estimated by the management and is risky as
it could involve management bias. (0.5). Thus
there is a possibility that WIP inventory is
overstated (0.5). The WIP inventory has
already increased by 33% over the last year
which is a lot, indicate the risk of
overstatement. (0.5) [3.5 mark]

Use analytical procedures in  Calculate ratios for this year and prior
identifying risk year
  State fallen or increment
 Provide audit risk for that ratio

The operating margin has increased from 4.5%

in 20X7 to 6.1% in 20X8. The revenue has
fallen by 3.7% whereas the operating
expenses has fallen by 4.5%, whereas other
operating income has increased by 50%. There
is an audit risk that expenses are understated
with reduction in expenses being
proportionately more that reduction in
revenue. (1)

Effective tax rate has fallen over last year,

there is a possibility that tax expense and
liability is understated. (1)
Ethical and professional issues  Comment – Issues – 1 mark per issue
you can write more than one issue
 Why it is an issue? 
 Comment – Action/safeguard – 1
mark per action
Frances eight year tenure as an audit
engagement partner creates a familiarity
threat because the eight year association he
has been with client will make him too familiar
with client and he will lose his skeptical mind-
set and become too sympathetic (Threat+
justify why it is a threat= 0.5+0.5= 1 mark) The
engagement partner should rotate after max
seven year, however in exceptional
circumstances the rotation can be extended
by one year, thus Frances has already served
max 8 years and should immediately be
changed (1 mark per action)
Ethical and professional issues raised  Along with the above , Comment on
and comment on quality on the audit the quality ( 1 mark)

Summary: (Issue which compromise quality)-

comment on quality
1. Leadership role= partner
2. Ethical issues
3. Engagement team= size + competence of
team 4. Engagement performance = direction
+ supervision + review
Evaluate deficiency in Internal  Evaluate (Why) the deficiency- 1 mark
control ( Fraud)  How it contributed to the fraud – 1
mark
  Recommendation- 1 mark
Auditors opinion ( 3 kinds  Unmodified
 Modified
only)
 Qualified
Critically appraise( 1 mark per  To critically appraise candidates
should consider each piece of
mistake and correct information and assess whether it
treatment) is correct or incorrect, describing
why and how to amend it as
necessary.
Matters to consider before accepting  The intended use of the information
the review engagement  Whether the information will be for
general or limited distribution
 The period covered by the cash flow
forecast and the key assumptions
used
 The scope of the work
 Resources and skills
 Client integrity
 Ethical matters

Matters to consider in the report to  Any document asked if provided late
those charged with governance effect of it in the efficiency of the
(matters and reasons why to include) audit work performed and any
increased fee for it
 Incorrect accounting standards-
provide correct treatment and
materiality should be included
because it will impact the form and
content of the audit report.
 Internal controls weak – high risk of
fraud – lack of integrity shown by the
management, and indicative of the
tone set throughout the organistion-
The report to those charged with
governance should include full details
on this significant deficiency in
internal control and should include
recommendations to management in
order to reduce the associated
business risk.
 Long association of partner (7+1
)years allowed and in 1 last year
independent review of the
engagement should be performed and
to should be communicated toTCWG
Ethical questions  Identify, why it is issue, explain each
 of the issues why it is an issue 1 mark
for each issue then recommend
safeguard.

 Auditor attending loan meeting with the bankers

 Attending a meeting with the bank would give rise to an advocacy threat as we would be
perceived as promoting the interests of our client and confirming the client’s
assertions in negotiations. (1 mark)

 In addition, this may give rise to legal proximity exposing the firm to potential litigation. (1
mark)

 Attending the meeting may result in the firm being perceived to support the acquisition of
Red Co. As these are decisions which should be taken by management we could be
perceived as taking on a management role.
(1 mark)
 Self-review threats may also arise when we later audit the finance and acquisition in the
financial statements of the group as we may be reluctant to highlight errors or are less
sceptical about the values in the subsidiary as we have provided the due diligence work. (1
mark)

Safeguards

Assuming a management responsibility can be avoided if the directors confirm in

writing that they are responsible for any decision regarding the acquisition. (1 mark)

The firm should decline to attend the meeting with the bank. (1 mark)

The self-review threat can be reduced by having an independent partner review the
audit work prior to signing the auditor’s report. (1 mark)

The intimidation threat should be reported to those charged with governance.

Business risk
a risk that the business will not be able to achieve its organizational goal and strategies.

Risk of material misstatement (RoMM)

‘The risk that a material misstatement exists in figures or disclosures within the financial
statements prior to audit’ (IAASB – glossary of terms)

ROMM risks questions – inherent and control risks

Audit risk
‘the risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated. Audit risk is a function of material misstatement
and detection risk’ (IAASB – glossary of terms)

Audit risks questions – ROMM risks and detection risk

 Examples of detection risk could include a recent appointment as the auditor,

inexperience in a client’s new market or time pressure for the audit.
We are newly appointed auditors of the client and, as such, do not have the same level of
understanding of the client’s business and controls as we would for an existing client. As such, we
may fail to recognise certain RoMMs or may apply inappropriate procedures due to this lack of
understanding

In addition, we have not audited the opening balances, so there is a risk that the opening balances
may be incorrect or inappropriate accounting policies have been used.

 That decision to hold the brands with an indefinite life is a judgement call on
behalf of management – judgements are subjective and therefore are a source of
inherent risk

 Impairment ( brand with indefinite life )

Risk 1– Management’s judgement that the brands have an indefinite life may be incorrect

Risk 2 – Management may not have reviewed the useful life of the brands in the reporting period to
ensure that the assumption of indefinite life is still correct

Risk 3 – The impairment review may not be accurate as the assumptions used by management may
not be appropriate as the calculation is complex and judgemental.

Qualified opinion Misstatement which is material

but not pervasive.
Basis for opinion paragraph after the opinion paragraph
Key audit matters Key audit matters are selected from
matters communicated with Those
Charged with Governance.