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2013
Audit & Assurance
ACCA F8 (INT)
Exam Kit
emilewoolfpublishing.com
EXAM
ACCA
Paper
KIT
F8 (INT)
Publishing
Sixth edition published by EmileWoolfPublishingLimited CrowthorneEnterpriseCentre,CrowthorneBusinessEstate,OldWokinghamRoad, Crowthorne,BerkshireRG456AW Email:info@ewiglobal.com www.emilewoolfpublishing.com EmileWoolfPublishingLimited,January 2013 Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrieval system,ortransmitted,inanyformorbyanymeans,electronic,mechanical,photocopying, recording,scanningorotherwise,withoutthepriorpermissioninwritingofEmileWoolf PublishingLimited,orasexpresslypermittedbylaw,orunderthetermsagreedwiththe appropriatereprographicsrightsorganisation. Youmustnotcirculatethisbookinanyotherbindingorcoverandyoumustimpose thesameconditiononanyacquirer. Notice EmileWoolfPublishingLimitedhasmadeeveryefforttoensurethatatthetimeof writingthecontentsofthisstudytextareaccurate,butneitherEmileWoolfPublishing Limitednoritsdirectorsoremployeesshallbeunderanyliabilitywhatsoeverforany inaccurateormisleadinginformationthisworkcouldcontain. BritishLibraryCataloguinginPublicationsData AcataloguerecordforthisbookisavailablefromtheBritishLibrary. ISBN: 978-1-84843-295-6 PrintedandboundinGreatBritain. Acknowledgements Thesyllabus,studyguide,examquestionsandanswers(whereindicated)arereproducedby kindpermissionoftheAssociationofCharteredCertifiedAccountants.
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Contents
Page v ix xxi 1 1 8 13 18 27 34 52 56 65 65 81 96 112 138 155 204 215
Section 1 Practicequestions Scenariobasedquestions Auditframeworkandregulation Internalaudit Planningandriskassessment Internalcontrol Auditevidence Review Reporting 2 Answerstopracticequestions Scenariobasedquestions Auditframeworkandregulation Internalaudit Planningandriskassessment Internalcontrol Auditevidence Review Reporting
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3 Mockexamquestions 4 Answerstomockexamquestions
231 237
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Scenario based questions 1 2 3 4 5 DinZeeCo SeeleyCo BlakeCo BStar RedburnCo 1 2 4 5 7 65 68 70 74 76 F8D07 F8J08 F8D08 F8J09 F8D09
Audit framework and regulation 6 7 8 9 10 11 12 13 14 15 Auditprocess Tela&Co Regulatory&professionalrequirements Viswa Fundamentalprinciples Ancients Independenceofexternalauditors Bentfasteners TourexandPudco StarkCo 8 8 9 10 10 10 11 11 12 12 81 82 84 86 88 89 91 91 93 94 F8Dec07 F8D08
Question page
Answer page
Exam
19 20 21
16 16 17
Planning and risk assessment 22 23 24 25 26 27 28 29 30 31 SerenityCo Ajio Hivex Tempest PhonesAnywhere BridgefordProducts ZakCo EuKaRe TyeCo LethamCo 18 18 19 20 21 23 24 25 25 26 112 114 116 118 121 125 129 131 133 135 F8J08 F8D08 F8J09 F8D09
Internal control 32 33 34 35 36 37 38 39 WormwoodEngineering Cliff Porthos Snu FlowersAnytime Receivables Bardwell HaveABiteCo 27 28 29 30 31 32 32 33 138 139 141 143 145 148 149 152 F8D09
Audit evidence 40 41 42 43 44 45 46 47 48 49 50 51 TamCo Flylo Octball SighthillSupermarkets Specs4YouCo Relianceonothers BearsWorld DelphicCo Boulder Analyticalproceduresandmateriality TraceyTransporters Redfern 34 35 35 36 37 38 39 39 40 41 41 42 155 157 159 161 164 166 167 169 171 173 174 176
F8D07
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Question page
Answer page
Exam
52 53 54 55 56 57 58 59 60 61 62 63 64 65 66
WearWraith RocksForever Fizzipop MistiReadCo Externalconfirmations JayneCo Oatley WalshCo MetcalfCo RavensheadEngineering ISA580:WrittenRepresentations ISA620:UsingtheWorkofanAuditorsExpert Samplingmethods TirrolCo ISA500:AuditEvidence
43 44 45 45 46 46 47 48 48 49 50 50 50 51 51
178 180 182 184 186 187 188 191 192 196 197 198 199 200 203 F8J08 F8D08 F8J09 F8J09 F8D09
Review 67 68 69 70 71 CrightonWard OilRakers GreenCo SmithsonCo ZeeDiemCo 52 53 54 54 55 204 206 209 211 213
F8J08 F8D08
Reporting 72 73 74 75 76 77 78 79 80 JonArcCo HoodEnterprises MowbrayComputers MSVCo ISAs510,710and720 Assurance FireflyTennisClub KLECo RhapsodyCo 56 57 58 58 59 60 60 61 62 215 216 218 219 221 223 224 225 228
F8D07
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AIM
To develop knowledge and understanding of the process of carrying out the assurance engagement and its application in the context of the professional regulatory framework.
MAIN CAPABILITIES
On successful completion of this paper, candidates should be able to: A B C Explain the nature, purpose and scope of assurance engagements including the role of the external audit and its regulatory and ethical framework Explain the nature of internal audit and describe its role as part of overall performance management and its relationship with the external audit Demonstrate how the auditor obtains an understanding of the entity and its environment, assesses the risk of material misstatement (whether arising from fraud or other irregularities) and plans an audit of financial statements Describe and evaluate information systems and internal controls to identify and communicate control risks and their potential consequences, making appropriate recommendations Identify and describe the work and evidence required to meet the objectives of audit engagements and the application of the International Standards on Auditing Evaluate findings and modify the audit plan as necessary Explain how the conclusions from audit work are reflected in different types of audit report, explain the elements of each type of report.
F G
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RATIONALE
The Audit and Assurance syllabus is essentially divided into seven areas. The syllabus starts with the nature, purpose and scope of assurance engagements, including the statutory audit, its regulatory environment, and introduces professional ethics relating to audit and assurance. It then leads into internal audit, including the scope of internal audit as well as the differences between internal audit and external audit. The syllabus then covers a range of areas relating to an audit of financial statements. These include planning and risk assessment, evaluating internal controls, audit evidence, and a review of the financial statements. The final section then deals with reporting, including statutory audit reports, management reports, and internal audit reports.
DETAILED SYLLABUS
A Audit Framework and Regulation 1 2 3 4 B The concept of audit and other assurance engagements Statutory audits The regulatory environment and corporate governance Professional ethics and ACCAs Code of Ethics and Conduct
Internal audit 1 2 3 4 5 Internal audit and corporate governance Differences between external and internal audit The scope of the internal audit function Outsourcing the internal audit department Internal audit assignments
Planning and risk assessment 1 2 3 4 5 6 7 Objective and general principles Assessing the risks of material misstatement Understanding the entity and its environment Materiality, fraud, laws and regulations Analytical procedures Planning an audit Audit documentation
Internal control 1 2 3 4 5 6 Internal control systems The use of internal control systems by auditors Transaction cycles Tests of control The evaluation of internal control components Communication on internal control
Audit evidence 1 2 3 4 5 6 7 The use of assertions by auditors Audit procedures The audit of specific items Audit sampling and other means of testing Computer-assisted audit techniques The work of others Not-for-profit organisations
Review 1 2 3 4 Subsequent events Going concern Management representations Audit finalisation and the final review
Study Guide
A AUDIT FRAMEWORK AND REGULATION 1 The concept of audit and other assurance engagements (a) (b) (c) (d) (e) (f) (g) Identify and describe the objective and general principles of external audit engagements. Explain the nature and development of audit and other assurance engagements. Discuss the concepts of accountability, stewardship and agency. Discuss the concepts of true and fair presentation and reasonable assurance. Explain reporting as a means of communication to different stakeholders. Define and provide the objectives of an assurance engagement. Explain the five elements of an assurance engagement.
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(h)
Explain the level of assurance provided by audit and other review assignments.
Statutory audits (a) (b) (c) (d) Describe the regulatory environment within which statutory audits take place. Discuss the reasons and mechanisms for the regulation of auditors. Explain the statutory regulations governing the appointment, removal and resignation of auditors. State the objectives and principle activities of statutory audit and assess its value (e.g. in assisting management to reduce risk and improve performance). Describe the limitations of statutory audits.
(e) 3
The regulatory environment and corporate governance (a) (b) (c) (d) (e) (f) Explain the development and status of International Standards on Auditing (ISAs). Explain the relationship between International Standards on Auditing and national standards. Discuss the objective, relevance and importance of corporate governance. Discuss the need for auditors to communicate with those charged with governance. Discuss the provisions of international codes of corporate governance (such as OECD) that are most relevant to auditors. Describe good corporate governance requirements relating to directors responsibilities (e.g. for risk management and internal control) and the reporting responsibilities of auditors. Analyse the structure and roles of audit committees and discuss their drawbacks and limitations Explain the importance of internal control and risk management. Compare the responsibilities of management and auditors for the design and operation of systems and controls.
Professional ethics and ACCAs Code of Ethics and Conduct (a) Define and apply the fundamental principles of professional ethics of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Define and apply the conceptual framework, including the threats to the fundamental principles of self-interest, self-review, advocacy, familiarity, and intimidation. Discuss the safeguards to offset the threats to the fundamental principles.
(b)
(c)
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(d) (e)
Describe the auditors responsibility with regard to audit independence, conflicts of interest and confidentiality. Discuss the preconditions, requirements of professional ethics and other requirements in relation to the acceptance of new audit engagements. Discuss the process by which an auditor obtains an audit engagement. Explain the importance of engagement letters and state their contents.
(f) (g)
INTERNAL AUDIT 1 Internal audit and corporate governance (a) (b) Discuss the factors to be taken into account when assessing the need for internal audit. Discuss the elements of best practice in the structure and operations of internal audit with reference to appropriate international codes of corporate governance.
Differences between external and internal audit (a) Compare and contrast the role of external and internal audit.
The scope of the internal audit function (a) Discuss the scope of internal audit and the limitations of the internal audit function.
Outsourcing the internal audit department (a) Explain the advantages and disadvantages of outsourcing the internal audit function.
Internal audit assignments (a) (b) Discuss the nature and purpose of internal audit assignments including value for money, IT, best value and financial. Discuss the nature and purpose of operational internal audit assignments including procurement.
PLANNING AND RISK ASSESSMENT 1 Objective and general principles (a) (b) Identify the overall objectives of the auditor. Identify and describe the need to plan and perform audits with an attitude of professional scepticism, and to exercise professional judgment. Explain the need to conduct an audit in accordance with ISAs.
(c)
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Assessing the risks of material misstatement (a) (b) Explain the components of audit risk. Explain the risks of material misstatement in the financial statements.
Understanding the entity and its environment (a) (b) Explain how auditors obtain an initial understanding of the entity and its environment. Describe risk assessment procedures for the identification and assessment of the risks of material misstatement.
Materiality, fraud, laws and regulations (a) (b) (c) (d) (e) Define and explain the concepts of materiality and performance materiality. Explain and calculate materiality levels from financial information. Discuss the effect of fraud and misstatements on the audit strategy and extent of audit work. Discuss the responsibilities of internal and external auditors for the prevention and detection of fraud and error. Explain the auditors responsibility to consider laws and regulations.
Analytical procedures (a) (b) Describe and explain the nature and purpose of analytical procedures in planning. Compute and interpret key ratios used in analytical procedures.
Planning an audit (a) (b) (c) (d) (e) (f) Identify and explain the need for planning an audit. Identify and describe the contents of the overall audit strategy and audit plan. Explain and describe the relationship between the overall audit strategy and the audit plan. Explain the difference between interim and final audit. Describe the purpose of an interim audit, and the procedures likely to be adopted at this stage in the audit. Describe the impact of the work performed during the interim audit and the final audit.
Audit documentation (a) (b) Explain the need for and the importance of audit documentation. Describe the contents of working papers and supporting documentation.
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(c)
Explain the procedures to ensure safe custody and retention of working papers.
INTERNAL CONTROL The following transaction cycles and account balances are relevant to this capability: