Plan of attack
If this were the real Audit and Assurance exam and you had been told to turn over and begin, what would be going through your mind?
An important thing to say (while there is still time) is that it is vital to have a good breadth of knowledge of the syllabus because all the questions are compulsory. However, don't panic. Below we provide guidance on how to approach the exam.
Looking through the paper
Section A has 3 objective test cases, each with 5 questions. This is the section of the paper where the examination team can test knowledge across the breadth of the syllabus. Make sure you read these cases and questions carefully. The distractors are designed to present plausible, but incorrect, answers. Don’t let them mislead you. If you really have no idea – guess. You may even be right.
Section B has three longer questions:
Question 16 is a 30-mark internal controls question, with smaller requirements on communication with those charged with governance, CAATs and substantive procedures. Don’t panic – take time to read the scenario and set out a three-column format for your answer.
Question 17 is a 20-mark audit planning question, covering materiality and analytical procedures to identify audit risks. Part (b), with analytical procedures, is tricky but easy marks are available in part (a).
Question 18 is a 20-mark substantive procedures question, requiring you to apply substantive procedures to bank, payables and receivables. Again, easy marks are available in part (a).
Allocating your time
BPP's advice is to always allocate your time according to the marks for the question. However, use common sense. If you're doing a question but haven't a clue how to do part (b), you might be better off re-allocating your time and getting more marks on another question, where you can add something you didn't have time for earlier on. Make sure you leave time to recheck the OTQs and make sure you have answered them all.
Forget about it
And don't worry if you found the paper difficult. More than likely other candidates will too. If this were the real thing you would need to forget the exam the minute you left the exam hall and think about the next one. Or, if it is the last one, celebrate!
Section A
Objective test answers
1 B The management of both Goofy and Mickey should be informed and their consent obtained.
Separate audit teams should be used including audit partners and independent review partners.
Confidentiality agreements should be signed by NAB & Co’s staff, not by the client.
2 C The long association of the audit engagement partner with Goofy represents a familiarity threat as she may not maintain professional scepticism and objectivity. Similarly the audit engagement partner’s daughter being employed by Goofy is also a familiarity threat, although there would not be a need for additional safeguards as a warehouse manager is unlikely to influence the financial
statements.
A self-interest threat arises from the financial interest in Goofy which the audit engagement partner’s daughter will receive if she is awarded a bonus. As an immediate family member of the partner this creates an indirect interest in a client which is not permitted by the ACCA.
A bonus relating to the audit being completed three weeks earlier than last year creates a self-interest threat, as there is a danger NAB & Co will be less thorough in order to achieve the deadline and not risk losing the client as a result of not meeting it.
3 D NAB & Co should contact the existing auditor before accepting nomination, in order to find out whether there are any reasons behind Mickey’s decision to change its auditors about which NAB &
Co should be aware. Once this is done, client screening must be performed.
Ensuring that the existing auditor’s resignation has been properly conducted and issuing an engagement letter are procedures which should be taken after accepting nomination.
4 D Although management are responsible for the prevention and detection of fraud this is not one of the matters included in the agreement obtained by the auditors to establish that the preconditions of an audit exist.
5 C In accordance with ISA 210 Agreeing the terms of audit engagements the expected form and content of any reports must be included. The other items may be included but there is no requirement to do so.
6 A The steps should be undertaken in this order. The objective of the CAAT procedures should be determined first and foremost. The accessibility of the data files must be considered before the scope and nature of the procedures are determined.
7 D Testing orders for unusually large quantities identifies whether any reject controls requiring special authorisation for large orders are effective. Testing orders with fields left blank determines whether controls are in place to prevent orders being placed that can’t be fulfilled due to missing information (ie incomplete delivery address). Testing orders with invalid inventory codes identifies whether controls are in place to ensure that the correct goods are despatched. Finally, orders with correct and complete details should be accepted by the system. This will allow the auditor to inspect the order confirmation to determine whether the order details are transferred accurately into the despatch system.
8 B Options A and D are difficulties relating to test data, not audit software. Option C is incorrect because audit software allows the auditors to test the source files from the originating programme, therefore eliminating the risks of manually reviewing extracted files which may be subject to errors in other systems or tampering.
9 C Sequence checks on sales invoices provide evidence on the completeness of sales.
10 B Where the sample has not provided the auditor with a reasonable basis for forming an audit conclusion, the auditor must tailor the nature, timing and extent of further audit procedures to
achieve the required level of assurance. In this case, further tests of control and/or substantive procedures would be appropriate.
11 D ISA 450 Evaluation of misstatements identified during the audit states that the auditor has a responsibility to accumulate misstatements identified during the audit, other than those that are clearly trivial.
All the accumulated misstatements should be communicated to the appropriate level of management on a timely basis. The auditor must request management to correct the misstatements.
If management refuses to correct some or all of the misstatements, the auditor must obtain an understanding of the reasons for not making the corrections, and take these into account when determining whether the financial statements are free from material misstatement. This may affect the auditor’s opinion if this results in the financial statements being materially misstated, but the refusal to correct the misstatements does not affect the opinion.
The auditor should determine whether uncorrected misstatements are material, both individually and in aggregate.
12 A Audit procedures should focus on determining the extent of research expenditure which has been incorrectly capitalised.
Whilst it is generally important to authorise expenditure the issue is not authorisation or occurrence but its classification.
13 C Research expenditure of $2.1m has been capitalised within intangible assets. This accounting treatment is incorrect, as IAS 38 Intangible assets requires research expenditure to be expensed to profit or loss.
The error is material as it represents 8% of profit before tax ($2.1m/$26.3m).
Management should adjust the financial statements by reversing it from the research expenditure from intangibles and debiting the amount to profit or loss.
If management refuse to make the adjustment, the auditor's opinion will need to be modified. As the error is material but not pervasive, a qualified opinion would seem appropriate.
The basis of opinion section would need to include a paragraph explaining the misstatement and its effect on the financial statements. The opinion paragraph would be qualified 'except for'.
14 C Two months' worth of wages records have been lost and so audit evidence has not been gained in relation to this expense. Wages and salaries for the two month period represent 11% of profit before tax ($1.1m/$10m) and so wages and salaries may be materially misstated.
15 A The auditors should seek alternative audit procedures to audit the wages and salaries account. If no alternative audit procedures are possible, the loss of data would constitute a lack of sufficient appropriate audit evidence.
The auditors will need to modify the auditor's opinion on the basis that they are unable to obtain sufficient appropriate evidence in relation to a material amount in the financial statements. As the two months' salary and wages are not pervasive, a qualified opinion would seem appropriate.
The basis of opinion section would require an explanation of the insufficient audit evidence in relation to wages and salaries. The opinion paragraph would be qualified on the grounds of an inability to obtain sufficient appropriate audit evidence.
Section B Question 16
Text reference. ISA 260 is covered in Chapter 3. Controls over the purchasing system are discussed in Chapter 10.
Reports to management are covered in Chapter 19. Application controls can be found in Chapter 9. Substantive audit procedures relating to bank and cash are set out in Chapter 15.
Top tips. The requirements for this question are typical for question 16 of the F8 paper, with the scenario being about control deficiencies within a particular system. There is a lot to do in this question, so there is a risk of over- running on the time. Make sure you stick to time for each part of the question and move on to the next requirement once the time is up.
Part (b) should be presented in a tabular format for the deficiencies, impacts and recommendations but do note the requirement for a covering letter – this is relatively unusual for this type of question. Note also that there are two presentation marks available, so make sure your covering letter is addressed and dated appropriately and that you use a ruler for the table and headings. These two marks could be the difference between passing and failing. You must ensure that you identify deficiencies from both the purchases system and the payments system – go through the scenario line-by-line and make notes on areas where there are weaknesses. Your recommendations need to be sufficiently detailed and useful to the organisation. Imagine that you are drafting a real report to management to a real client. Saying things like ‘Discuss with management’ or ‘Reconciliations’ will not score many marks.
Part (c) is on application controls. This is a notorious area of weakness for F8 students. Make sure you know the difference between application and general IT controls and that the controls you describe are relevant to the scenario in the question.
Easy marks. Part (a) on ISA 260 is knowledge-based for five marks and relatively straightforward. Part (d) asks for substantive procedures for bank and cash. This is worth seven marks and provided your procedures are adequately detailed, you should be able to score well here.
Marking scheme
Marks (a) (i) Up to 1 mark per well explained point
– Assists the auditor and those charged with governance in understanding matters related to the audit
– Obtains information relevant to the audit
– Helps those charged with governance in fulfilling their
responsibility to oversee the financial reporting process 2 (ii) Up to 1 mark for each example matter to be communicated to
those charged with governance 3
(b) Up to 1 mark per well explained deficiency, implication and
recommendation. If not well explained then just give ẵ mark for each.
Overall maximum of 4 marks each for deficiencies, implications and recommendations.
2 marks for presentation: 1 for address and intro and 1 for conclusion.
– No approved suppliers list
– Purchase orders not sequentially numbered
– Orders below $5,000 are not authorised by a responsible official – No application controls over input of purchase invoices
– Purchase ledger manually posted to general ledger
– Saving (deposit) bank accounts only reconciled every two months – Payments to suppliers delayed
Marks (c) Up to 1 mark per well explained application control
– Document counts – Control totals – One for one checking
– Review of output to expected value – Check digits
– Range checks
– Existence checks 4
(d) Up to 1 mark per substantive procedure – Check additions of bank reconciliation – Obtain bank confirmation letter
– Bank balance to statement/bank confirmation – Cash book balance to cash book
– Outstanding lodgements
– Unpresented cheques review – Old cheques write back
– Agree all balances on bank confirmation – Unusual items/window dressing
– Security/legal right set-off
– Review reconciliations for saving (deposit) accounts – Cash counts for significant cash balances
– Review disclosure of bank and cash in financial statements 7 30 (a) ISA 260 requirements
(i) It is important that auditors communicate throughout the audit with those charged with governance for the following reasons:
It assists the auditor and those charged with governance to understand audit-related matters in context and allows them to develop a constructive working relationship.
It allows the auditor to obtain information relevant to the audit.
It assists those charged with governance to fulfil their responsibility to oversee the financial reporting process, thus reducing the risks of material misstatement in the financial
statements.
(ii) Examples of matters that the auditors may communicate with those charged with governance:
The auditor's responsibilities in relation to the audit of the financial statements, including that the auditor is responsible for forming and expressing an opinion on the financial statements and that the audit does not relieve management or those charged with governance of their responsibilities
The planned scope and timing of the audit
Significant deficiencies in internal control
The auditor's views about significant qualitative aspects of the entity's accounting practices, including accounting policies, accounting estimates and financial statement disclosures
Significant difficulties encountered during the audit
Significant matters arising from the audit that were discussed or subject to correspondence with management
Written representations requested by the auditor
Other matters that, in the auditor's professional judgement, are significant to the oversight of
For listed entities, a statement that the engagement team and others in the firm, the firm, and network firms have complied with relevant ethical requirements regarding independence, any relationships between the firm and entity that might affect independence, and safeguards applied to eliminate identified threats to independence or reduce them to an acceptable level (Note: Only three matters were required.)
(b) Purchasing and payments system
ABC Auditors Any Street Any Town AB1 2YZ 1 June 20X3 Board of Directors
Fox Industries Ltd Trading Estate Any Town AB1 3DE
To the Board of Directors, Fox Industries Ltd,
Financial statements for the year ended 30 April 20X3
Please find enclosed in an Appendix to this letter the report to management detailing deficiencies in internal control found within the purchases and payments system during our recent external audit. This details only the significant deficiencies identified during our audit. If more extensive procedures on internal control had been carried out, we might have identified and reported more deficiencies.
This report to management is solely for the use of Fox Industries Co. It must not be disclosed to a third party, or quoted or referred to, without our consent. No responsibility is assumed by us to any other person.
Yours faithfully, ABC Auditors Appendix
Deficiency Implication Recommendation
Purchase orders are not reviewed by a second person before the order is sent out unless the amount is greater than $5,000.
Orders can be made for unauthorised goods up to a value of $5,000.
All orders should be reviewed before the order is placed and signed off and dated as authorised by a more senior team member. Delegated levels of authority should be in place.
The purchase order clerk chooses the supplier based on the supplier who can deliver the goods fastest.
Goods of poor quality could be ordered or a higher price may be paid for goods from particular suppliers.
An approved suppliers list should be in place so that the company knows exactly who the supplier is and how much the goods cost.
Purchase orders are not sequentially numbered.
Purchase orders can be lost and there is no way of keeping track of unfulfilled orders.
Purchase orders should be sequentially numbered and multi-part. Order forms should be filed in sequential order and reviewed on a weekly basis to flag any unfulfilled orders for chasing up.
Purchase invoices are not matched back to the purchase order before being input onto the system.
Invoices for incorrect amounts and incorrect goods may be entered onto the system and paid for.
Purchase invoices should be matched back to the purchase order to ensure they tally up before being input onto the system. A copy of the order should be attached to the invoice and filed away.
Deficiency Implication Recommendation The purchase ledger clerk
does not use any application controls over the input of purchase invoices to the ledger.
The lack of application controls increases the risk of errors being made during the input of invoices to the ledger. This could result in misstatements in the financial statements and also errors in amounts paid to suppliers and a consequent loss of goodwill.
There should be some application controls in place over the input of invoices to the system, such as control totals and document totals.
The purchase ledger clerk posts the purchase ledger to the general ledger manually.
Errors may be made during the posting process as it is done manually.
The system should be set up so that the purchase ledger is posted automatically to the general ledger. A reconciliation between the two should be performed each week by the purchase ledger clerk and this should be signed off and dated as reviewed by the finance director.
Deposit accounts are not reconciled on a timely basis, only every two months.
Unreconciled differences may go unnoticed for a long period of time. The length of time between reconciliations may also increase the risk of fraud being perpetrated by
employees.
Deposit accounts should be reconciled at the same time as the current account.
All reconciliations should be signed off and dated to evidence review by a more senior person, with all differences fully investigated and resolved on a timely basis.
Payment to suppliers is delayed for as long as possible.
Prompt payment discounts are not taken advantage of and suppliers may not look favourably on the company if it takes too long to pay and therefore may refuse credit later on, if the company is viewed as unreliable.
Suppliers should be paid as soon as possible to take advantage of early settlement discounts and to promote and maintain good relations with suppliers.
The finance director
authorises the total amount of the payment list, without a review of the detail.
Unauthorised amounts may be missed as the finance director does not see the detail of the payments on the list. This opens the company up to the risk of fraud and error.
The finance director should review the detailed list of payments and query any amounts and supplier names that appear erroneous or suspicious. The review should be evidenced by the finance director’s signature and date.
(Note: only four deficiencies were required.) (c) Application controls
Daily reconciliation between purchase ledger and general ledger by the purchase ledger clerk, which should be reviewed and signed and dated as reviewed by the finance director
Control totals agreeing the amount per purchase day book, purchase ledger and general ledger totals Agreement of amounts on purchase invoices back to the purchase orders
Document counts of the number of invoices entered onto the system
One-for-one checking of output from the system against the original invoices to ensure completeness and accuracy of input