Revision f8 Notes

ACCA
Audit and Assurance

Paper F8
Practice & Revision Notes
ISBN: 9781472764669
Blank
2
Contents
Page
Introduction
How to use the Practice & Revision material 4
The examination paper and syllabus aims 5
Analysis of past papers 6
Skills bank 11
Knowledge bank 23
Appendices 81
3
INTRODUCTION
Introduction
How to use the Practice & Revision material
Step 1 Learn
Until now you have been introduced to the core skills needed to pass this paper. You must now focus on developing
these new skills to address the ultimate test – the exam itself.
Step 2 Practise
Your revision course material will help you to apply this knowledge to the context of the exam-style questions. Using
real exam questions written by the examiner you’ll learn the unique exam skills required to achieve success in each
paper. Your revision material consists of:
Skills bank (in these notes)

This illustrates the main skills needed to pass this paper. We will teach you how to:
– Use your reading time effectively
– Analyse the question’s requirements
– Manage your time
– Produce well-constructed numerical and discussion answers
– Produce tailored answers that are relevant to the specifics of the question
Knowledge bank (in these notes)

During the Step 1 phase of your studies (Learning phase) you have already gained the knowledge required to
pass the exam. During this phase reinforcement of this knowledge is critical.
To help this reinforcement you will find that the same diagrams contained in your taught course notes are used
here with additional information added if we feel it is necessary.
If you feel that your knowledge level is weak at the Step 2 phase we recommend you purchase the i-Learn CD
from BPP Learning Media.
Question and answer bank

The Practice & Revision Kit contains:
– Questions that will be covered in class
– Questions you will do during home study following guidance provided by your tutor
– Additional questions for further practice
Step 3 Rehearse
All your skills need to be applied on the day of the exam to deal with a complete exam paper.
This can be developed through use of mock exams within the Practice & Revision Kit, attending a question day at BPP
where a final mock exam is sat in full and feedback provided, or through purchasing a mock exam and online debrief.
Please see our website for further details www.bpp.com.
4
INTRODUCTION
The examination paper and syllabus aims

The examination paper
The examination is a three hour paper with 15 minutes reading and planning time. All questions are compulsory. Some
questions will adopt a scenario/case study approach. All questions will require some form of written response although
questions on planning or review may require the calculation and interpretation of some basic ratios.
100% Discussion
10% Knowledge 90% Application
Format of the Exam Marks

Section A Comprises 8 two mark and 4 one mark multiple choice questions. 20
Section B Comprises:
Four 10 mark questions. These will tend to test one of the five syllabus areas of the 40
Study Guide (A, B, C, D or E)
Two 20 mark questions. The 20 mark questions will predominantly examine one or 40
more aspects of audit and assurance from planning and risk assessment, internal
control or audit evidence, although topics from other syllabus areas may also be
included.
100
Time pressure warning
Section A Section B
Aims
The syllabus aims to test the student’s ability to:
A Explain the concept of audit and assurance and the functions of audit, corporate governance, including ethics
and professional conduct, describing the scope and distinguishing between the functions of internal and external
audit.
B Demonstrate how the auditor obtains and accepts audit engagements, 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.
C Describe and evaluate internal controls, techniques and audit tests, including IT systems to identify and
communicate control risks and their potential consequences, making appropriate recommendations.
D Identify and describe the work and evidence obtained by the auditor and others required to meet the objectives
of audit engagements and the application of the International Standards on Auditing.
E Explain how consideration of subsequent events and the going concern principle can inform the conclusions
from audit work and are reflected in different types of audit report, written representations and the final review
and report.
5
INTRODUCTION
Analysis of past papers

Below provides an overview of the syllabus and details of when each element has have been examined. Further details
are included in the relevant chapter of the knowledge bank.
Specimen Paper
Audit framework and regulation

The concept of audit and other assurance engagements A Q7
External audits
Corporate governance
Professional ethics and ACCA's Code of Ethics and Conduct A Q5
B Q1a
Internal audit and governance and the differences between external and internal audit B Q1b
The scope of the internal audit function, outsourcing and internal audit assignments A Q3
Planning and risk assessment

Obtaining and accepting audit engagements
Objective and general principles
Assessing audit risks A Q10
B Q5a
Understanding the entity and its environment
Fraud, laws and regulations
Audit planning and documentation A Q6
Internal control
Internal control systems A Q4
A Q12
The use and evaluation of internal control systems by auditors
Tests of control B Q6a
Communication on internal control
Audit evidence
Financial statement assertions and audit evidence A Q2
B Q4a
Audit procedures B Q2a
Audit sampling and other means of testing A Q1
The audit of specific items B Q2b
B Q4b
B Q6b
Computer-assisted audit techniques
The work of others A Q8
Not-for-profit organisations
6
INTRODUCTION
Specimen Paper
Review and reporting

Subsequent events A Q11
Going concern B Q5b
Written representations
Audit finalisation and the final review B Q3a
Audit reports A Q9
B Q3b
7
8
Skills bank
This section explains and demonstrates the key skills

required to enable you to maximise your chance of
exam success. Knowledge of the syllabus is insufficient
on its own. Through question practice you will develop a
set of skills that will enable you to pass this paper.
9
10
SKILLS BANK
Key skills required to pass

Our analysis of the examiner’s comments on past exams, together with our experience of preparing students for this
type of exam, suggests that to pass F8 Audit and Assurance you will need to develop a number of key skills.
1 Effective use
of the 15 minutes
5 Producing a tailored reading time at the
answer to the scenario in start of the exam
the exam question
2 Quick and
accurate analysis of
4 Tackling a question’s
multiple choice requirements
questions
3 Disciplined time
management to
ensure that all parts of
the question are
answered in the time
allowed
Each of these key skills is analysed on the following pages, with example(s) from past exam questions of the
importance of these skills and how these skills should be applied.
11
SKILLS BANK
Skill 1 – Effective use of the 15 minutes reading time at the

start of the exam
1 Take some time to plan the order in which you will attempt the questions
All of the questions in this paper are compulsory so there is no choice to make in terms of which questions you will
attempt, but you should give some thought to the order in which you should attempt them.
Section A comprises multiple choice questions so you would be better to spend your reading time concentrating on the
longer questions in Section B. Focus particularly on questions which include a scenario. The scenarios are likely to
contain some detailed narrative about a client company and its systems or it may also include some numerical
information. To answer these types of questions successfully you will need to use the information in the scenario so
make sure you read the requirements and then spend your reading and planning time annotating key information from
the scenario.
2 Reading scenario based questions
STEP Read the requirements

1 There is no point in wasting time reading through a long scenario before you have identified exactly
what you have been asked to do! See key skill 2 for detailed guidance.
STEP Focus on the longest requirements

2 This will make sure that you concentrate on a manageable amount of the question on your first read
through.
STEP Read the question actively identifying data relevant to each requirement
3 This will ensure that you are actively attacking the question, ie that you are trying to achieve
something. This should involve highlighting points that are relevant to your answer and making brief
notes in the margin. In many questions this will form the basis of an answer plan and mean that you
do not have to re-read all of the highlighted points just to remind yourself why you thought they were
important in the first place. In some scenarios, numerical information may be included, and you should
use the reading and planning time to make relevant observations on this and in some cases calculate
ratios that may be relevant to your answer.
For example, in the Specimen Paper, Q6 (a) had the following requirement:
(a) In respect of the internal control of Garcia International Co:
(i) Identify and explain SIX deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a test of control Suarez & Co would perform to assess if

each of these controls is operating effectively.
12
SKILLS BANK
In reading the scenario, therefore, you have two aims:

Familiarise yourself with the deficiencies in the sales system set out in the scenario, and
Think up appropriate internal controls which could address these deficiencies.
If you use this time to understand the scenario then you will have taken a big step towards another of the key skills that the
examiner demands in this paper, the ability to produce an answer tailored to the scenario in the question (see skill 5).
By analysing the flow of information you will be able to suggest internal controls that are relevant to the specific
deficiencies in the question.
Reading the scenario closely will prevent you falling into “traps” such as writing about substantive procedures
when the question is clearly asking for tests of control.
Skills practice
When you practice any of the scenario questions from the practice and revision kit you should give
yourself around 5 minutes reading and planning time to highlight and annotate the scenario ahead before
you start writing your answer.
13
SKILLS BANK
Skill 2 – Quick and accurate analysis of a question's

requirements
1 Be aware of the verbs used in exam questions

You need to be aware of the meaning of the key verbs used by the examiner; these are reproduced in full in the BPP
Practice & Revision Kit.
You don’t need to learn each term precisely but it is important that you appreciate the difference between them, for
example, ‘explain’ means clarifying an issue or developing a point, whereas ‘state’ means list out the information/
factors or criteria without needing to give further explanation. Generally speaking the requirement to ‘explain’ will earn
you 1 mark per point whereas the requirement to ‘state’ carries ½ a mark.
For example, here is an extract from Q1 (a) in the Specimen Paper:
“(i)Explain the ethical threats which may affect the independence of

EXPLAIN
Remy & Co in respect of the audit of Hazard Co; and

(ii) For each threat explain how it might be reduced to an acceptable
level.”
There were a number of threats to independence that could have been identified from the scenario but note the level of
explanation required to gain full marks.
Rotation of audit partner This would have scored ½

Remy’s partner has been involved in the audit of Hazard Co for six mark for stating your point
years.
Remy’s partner has been involved in the audit of Hazard Co for six This would have scored
years and as such her independence may be impaired. This is 1 mark for explaining your
because she may have become too close to the directors and staff at point
the client and may not maintain her professional scepticism and
objectivity in relation to the financial statements.
Hazard Co is a listed entity and as such the ACCA’s Code of Ethics This would have scored
and Conduct recommends that engagement partners rotate off an 1 mark for applying your point
audit after five years. Consideration should be given to appointing to Hazard Co
an alternative audit partner.
Taking time to consider the exact wording of the requirement will result in a focused answer which satisfies the question
set.
14
SKILLS BANK
2 Identify ALL the question’s requirements in your answer plan

The question above also shows how the requirements of a question often contain a number of sub-requirements.
You need to make sure that these sub-requirements are clearly identified on the question paper by highlighting or
underlining them so that your answer is comprehensive and addresses all parts of the requirement.
Failure to answer the whole question is often due to candidates forgetting to address these sub-requirements
and is a key reason why people fail this paper.
Skills practice
In each question you attempt you should spend a minute identifying the verb and planning what structure
your answer should have to ensure you really do “explain”, “discuss”, “recommend” etc.
15
SKILLS BANK
Skill 3 – Disciplined time management
Although the examining team have reduced the element of time pressure in this paper there is still a lot to do in the
three hours!
The three hours that you are given to write your answers breaks down to 1.8 minutes for each available mark and you
must stick to this closely.
Given the format of the exam, you know from the start that your time allocations will be as follows:
Marks Time allocation

Section A 20 36 minutes
Section B Question 1 10 18 minutes
You may find that the multiple choice questions in Section A do not take the whole 36 minutes however you should be
careful not to rush through them in case you misread a requirement or answer a question that is different from the one
which was set!
In Section B each question will be divided into a number of sub-requirements and it is important to identify how much
time you should allocate to each of these. If you over-run by even a few minutes on several requirements on your way
through the paper, you risk putting yourself in the position where you don’t have enough time to complete the paper.
Make sure you keep a careful check on timings as you plan your approach to each question. Note time
allocations and stick to them. If you think you have more to say on a particular part, stop when you run out of
time and leave some space in your answer booklet; there’s just a chance you may save time later in the
question and will be able to add one or two extra points.
In this paper, time management skills overlap with the other key skills, if you
Make effective use of the reading time
Accurately analyse the requirements, and
Produce a tailored answer
you should find that it is possible to write good, pass standard answers that are concise, focused and relevant.
It really is true in this exam that, in general less (quantity!) is more (marks!)
Skills practice
When you are practising questions, always work out the time allocations and get into the habit of writing
the answers, to time, just as you will have to do in the exam hall.
16
SKILLS BANK
Skill 4 – Tackling multiple choice questions
Section A is worth 20 marks and comprises 8 two mark and 4 one mark multiple choice questions.
Approaching Questions Logically
1 What to do if you know the answer to the question

If you know the answer you should:
1. Locate the correct answer
2. Check the other answers
3. Read the question again to ensure you’re answering the correct question
4. Confirm that you have the correct answer
This systematic check will ensure that you do not throw away marks when you really do know the answer.
2 What to do if more than one answer appears plausible

Sometimes more than one option can seem to answer the question. In this case you have to firstly ensure you’ve read
the requirement carefully, as questions may be phrased in ways that are not what you’re expecting. If you still identify
more than one likely option, select the “most correct” answer. The approach adopted above is useful here too but this
time you have to think through the alternatives a bit more.
For example, Q9 on the Sample Paper states:
An emphasis of matter paragraph is used in an audit report to draw

attention to a matter affecting the financial statements.
Which TWO of the following are correct in relation to an Emphasis of Matter
Paragraph in the Auditor’s Report?
(1) It is used where there is significant uncertainty.
(2) It constitutes a qualified opinion.
(3) The audit report is referred to as an unmodified report.
(4) The matter is deemed to be fundamental to the users understanding of
the financial statements.
A 1 and 2
B 1 and 4
C 1 and 3
D 2 and 4
This is testing your knowledge of audit reports. At first sight, it may be tricky to identify the correct answer as there are
so many variations in the options.
17
SKILLS BANK
Here are some steps to follow:
STEP Never
1 Firstly, identify any answers that are immediately wrong. In this question, the key thing to think about
how and when an emphasis of matter paragraph is used and the different ways in which an audit
report can be modified.
Remember that an audit opinion is qualified either due to material misstatement or due to insufficient
audit evidence when the degree of severity is deemed to be material but not pervasive. This means
that statement (2) is not correct and so we can discard options A and D from the answers.
STEP Assess the remaining answers

2 We now need to consider statements (3) and (4) as this will differentiate answers B and C. For
statement (3), the inclusion of an emphasis of matter paragraph in the auditor’s report DOES mean
that the report is modified because it has been changed in some way. This means that statement (3)
is not correct and so answer C cannot be correct. Finally we need to verify that statement (4) IS
correct and this true because the emphasis of matter paragraph aims to bring significant issues to
users’ attention so that they can fully understand the financial statements.
Having discarded answers A, C and D, we have arrived at answer B.
STEP Read the question again…

3 Finally, we should re-read the requirement before writing down our answer to ensure we are
answering the correct question. The question could easily have asked: “Which TWO of the following
are incorrect” which would have led us to a different answer!
This systematic approach helps you to break a question down and work through to find the correct answer logically.
3 What to do if you still don’t know the answer…

If you have been through the above steps and can’t identify a preferred answer then you have to guess!
What you SHOULD NOT do

Two main things to avoid:
1. Waste excessive time – time spent dithering over a single question could leave you with insufficient time for the
rest of the paper.
2. Not answering – this is a common yet serious error – even if you make a wild guess you start with a 25%
chance of success. Your chance of getting the 2 marks if you don’t offer an answer is zero!
What you SHOULD do

Having used the three step approaches above to narrow down your possible answers, go with the one that feels right
and move on.
If you have a flash of inspiration later in the exam go back and revisit it – but only if you are sure.
18
SKILLS BANK
Skills practice
1. Practice keeping track of the questions you have answered when doing questions from the
Practice and Revision Kit
2. Always check your answers through (if you would have time in the exam) before looking at the
solutions in the back of the book
3. Practice as many multiple choice questions as possible.
4. If you don’t know the answer to a question – don’t just go to the answer at the back or just guess –
use the three step approach described above.
19
SKILLS BANK
Skill 5 – Producing a tailored answer
1 Tailored points
You are expected to apply your theoretical knowledge to the specifics of the question set in the exam. Often tailoring
your answer involves keeping calm and trying to look for clues within the scenario and presenting your answer in
an appropriate format.
2 Answer structure – general

There are no questions in this exam that require lengthy essay-style answers. The overall principle is to communicate
points clearly, but concisely – use headings and write in short paragraphs.
Tabular answers
Many styles of question in this paper can be answered most effectively using a tabular layout, and the examiner
encourages this approach.
Q1 (a), Q5 (a) (ii) and Q6 (a) from the Specimen Paper can all be answered in a tabular format. We looked at Q1 (a)
earlier in skill 2 and this answer could be presented in a tabular format as follows:
Use of headings helps keep you thinking about the requirements
Ethical threats Safeguards to reduce the threat

Remy’s partner has been involved in the audit Hazard Co is a listed entity and as such the
of Hazard Co for six years and as such her ACCA’s Code of Ethics and Conduct
independence may be impaired. This is because recommends that engagement partners rotate
she may have become too close to the directors off an audit after five years. Consideration
and staff at the client and may not maintain should be given to appointing an alternative
her professional scepticism and objectivity in audit partner.
relation to the financial statements.
Matching each threat to the

safeguard by using this
structure means you can cut
out all the 'linking' words
20
SKILLS BANK
3 Writing for your audience

Frequently in the exam you will be asked as an external auditor to produce a report or letter addressed to the directors
of your client. Alternatively you could be asked to write a report to the Board as an internal auditor. It is important that
your answer reflects your role and the addressee and that appropriate language is used.
For example:
Report Format
INTERNAL AUDIT REPORT

Reports should be headed,
name the preparer, and be Sales system in X Co
dated.
Prepared By: A N Accountant
Date: 10 June 20XX
Use subheadings. The 3-part
Introduction structure used in the external audit
report to management works equally
well in the context of an internal audit
report on system deficiencies.
Deficiency The tone of reports should always be
professional and formal. They should
be written in the third person. No
slang or conversational language
should be used. For example 'the
Implication implication of this deficiency if you
were to sit on it would be….'
Ideally you could present the
Recommendation deficiency, implication and
recommendation in a tabular format
as an appendix to the report/ letter.
21
SKILLS BANK
Skills practice
When you attempt questions do not starting writing until you have thought out
an appropriate structure
headings, and
the number of points you are aiming to cover
Always review your attempted answer and ensure that you have not included any general points without
relating them to specific points within the question.
22
Knowledge
bank
23
Contents
Page
1 The concept of audit and other assurance engagements 25
2 Statutory audit and regulation 27
3 Corporate governance 31
4 Professional ethics 33
5 Internal audit 35
6 Risk assessment 37
7 Audit planning and documentation 41
8 Introduction to audit evidence 43
9 Internal control 45
10 Tests of controls 49
11 Audit procedures and sampling 51
12 Non-current assets 55
13 Inventory 57
14 Receivables 61
15 Bank and cash 63
16 Liabilities, capital and directors’ emoluments 65
17 Not–for-profit organisations 67
18 Audit review and finalisation 69
19 Reports 73
20 Appendix A: Relevant articles/study support videos 83
21 Appendix B: Verbs used in question requirements 84
22 Appendix C: Specimen paper 85
24
The concept of audit and other
assurance engagements
How have the syllabus learning outcomes been examined?

Syllabus learning outcomes Example past paper questions
Identify and describe the objective and general principles
of external audit engagements
Explain the nature and development of audit and other
Discuss the concepts of accountability, stewardship and
agency
Define and provide the objectives of an assurance
engagement
Explain the five elements of an assurance engagement
Describe the types of assurance engagement
Explain the level of assurance provided by an external Q7 Section A – pilot paper
audit and other review engagements and the concept of
true and fair presentation
Describe the limitations of external audits
25
The concept of audit and other
The purpose of external audit Accountability, stewardship and Types of assurance

To promote confidence and trust in agency
'An assurance engagement is an
financial information Accountability engagement in which a practitioner
To give an opinion on whether the Directors are required to prepare expresses a conclusion designed to
financial statements: financial statements for shareholders enhance the degree of confidence of
– Have been prepared in Stewardship the intended users other than the
accordance with an acceptable Directors account for their responsible party about the
financial reporting framework stewardship of the assets placed outcome of the evaluation or
– Comply with statutory under their control measurement of a subject matter
requirements Agency against criteria.'
Directors act as agents of Annual external audit
shareholders
Half-year review of FS
External audit addresses the agency
Going concern review
conflict between shareholders and
directors Review of effectiveness of IT
systems
Review of compliance with
corporate governance
requirements
Levels of assurance
Assurance and reports
Reasonable assurance Positive expression:

Eg statutory audit 'in our opinion, the financial statements
present fairly…..’
Concepts in reporting Limited assurance Negative expression:

Eg review of half year accounts 'nothing has come to our attention that causes
Materiality
us to believe that the financial statements do
Information is material if its omission or not give a true and fair view …….'
misstatement could influence the economic
decisions of users
True and fair
The auditor reports in terms of whether the
financial statements present fairly in all
material respects (or give a true and fair view) Communication to different
Reasonable assurance stakeholders
100% assurance is not possible
Potential investors
Level of assurance given in statutory
Current and potential lenders
audit
Employees
Customers
Suppliers
Tax authorities
26
Statutory audit and regulation

Describe the regulatory environment within which
external audits take place
Discuss the reasons and mechanisms for the regulation
of auditors
Explain the statutory regulations governing the
appointment, rights, removal and resignation of auditors
Explain the regulations governing the rights and duties of
auditors
Explain the development and status of International
Standards on Auditing (ISAs)
Explain the relationship between International Standards
on Auditing (ISAs) and national standards
27
Statutory audit and regulation
The regulatory environment
Statutory regulations Mechanisms for regulation of Development and status of ISAs

Appointment auditors IAASB produces ISAs, ISAEs and
Normally annually IFAC/ IAASB ISRSs.
By shareholders resolution IFAC aims to strengthen the IAASB pronouncements do not
global accountancy profession overrule local laws or regulations
Directors may appoint in
particular circumstances: and promote adherence to high- Where IAASB pronouncements
– First auditors quality standards form part of the regulatory
– Casual vacancy National law and standards framework (eg. in UK) they are
Removal Law establishes: mandatory
By shareholders resolution – Rights and duties of auditors
Auditors entitled to: – Eligibility to be auditor
– Notice of resolution National standards increasingly
– Make written representations harmonised with ISAs
– Speak at shareholders ACCA/ the profession
meetings Education and training
Resignation Ethical requirements
May resign at any time
Written notice to registered office
Statement of circumstances
Note: throughout these notes the

abbreviation ISA will be used to refer
to the International Standards on
Auditing
28
Stages of an external audit
The following diagram illustrates the main steps in the conduct of an external audit. The following chapters expand each
of these steps.
Plan the audit
Understand the entity (including documenting and confirming

the accounting systems and internal control)
Assess risk of material misstatement
Select audit procedures to respond to risk of material misstatement
Where risk assessment Risk assessment does

includes expectation not include expectation
that controls operate that controls operate
effectively effectively
Tests of controls (to confirm expectation)
Unsatisfactory Report
to management
Satisfactory
Restricted Full
substantive tests substantive tests
Overall review of
financial statements
Report to
management
Auditor’s
report
29
30

Discuss the objectives, relevance and importance of
corporate governance
Discuss the provisions of international codes of
corporate governance (such 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 benefits and limitations
31
Definition
The internal systems by which companies
are directed and controlled
The UK Corporate Governance Code Audit committees

Provides guidance to UK companies as to how they At least 3 members
should be directed and controlled. At least one with recent and relevant
5 headings: financial experience
Leadership Monitor the integrity of the financial
– Effective Board statements:
– Clear division of responsibilities between – Recommendations re the
Chairman and Chief Executive Officer appointment, re-appointment and
(CEO) removal of external auditors
– Requirement to have non-executive – Approve remuneration and terms of
directors external auditor
Effectiveness – Monitor external auditor’s
– Appropriate balance of skills independence, objectivity and
– Procedures for the appointment of new effectiveness of the audit process
directors (nomination committee) – Policy on the engagement of the
– Directors should have sufficient time to external auditor to supply non-audit
perform their duties services
– Induction/ training Review the company’s internal control
– Annual evaluation and risk management systems
– Regular re-election Monitor and review the effectiveness
Accountability of internal audit
– Board responsible for risk management Monitor arrangements safeguarding
– Board responsible for internal control privacy of whistle blowers
systems
Remuneration
– Sufficient but not excessive
– Formal policy for fixing remuneration
packages (remuneration committee)
Relations with shareholders
– Open dialogue
– Use of AGM to communicate with
shareholders
32
Professional ethics

Define and apply the fundamental principles of Q5 Section A – pilot paper
professional ethics of integrity, objectivity, professional
competence and due care, confidentiality and
professional behaviour
Define and apply the conceptual framework, including Q1(a) Section B – pilot paper
the threats to the fundamental principles of self-interest,
self-review, advocacy, familiarity and intimidation
Discuss the safeguards to offset the threats to the Q1(a) Section B – pilot paper
fundamental principles
Describe the auditor’s responsibility with regard to
auditor independence, conflicts of interest and
confidentiality
Discuss the requirements of professional ethics in
relation to the acceptance of new audit engagements
Explain the preconditions for an audit
Explain the process by which an auditor obtains an audit
engagement
Justify the importance of engagement letters and their
contents.
33
Enforcement of the ACCA Code
Professional ethics
In countries (such as the UK) where
regulation and monitoring of audit is
delegated to professional bodies such
as ACCA, there is an obligation to:
Check that members are qualified
Fundamental principles of and eligible to carry out audits
professional ethics Monitor members’ conduct and the
Integrity standard of their work
Objectivity Take regulatory action against
Professional competence and due members who do not meet
care requirements
Confidentiality ACCA disciplinary structures:
Professional behaviour Monitoring unit
Professional conduct department
Disciplinary committee
Threats Safeguards Obtaining and accepting new audit

Self-interest Created by the engagements
Self-review profession, regulation Obtaining audit engagements
Advocacy or legislation
May use advertising and other forms of
Familiarity In the work
promotion
Intimidation environment
Must not:
Created by the – Bring ACCA or profession into
individual disrepute
– Discredit services offered by others Engagement letters
– Be misleading
Document and confirm auditor’s
– Care over references to fees
acceptance of the appointment,
Acceptance
objective and scope of audit,
Before extent of auditor’s responsibilities
– Ensure firm is independent, to the client and form of any
competent and has adequate reports.
Confidentiality resources Contents
Members must not disclose – Obtain references (client)
Objective of the audit
information obtained in the course of – Establish certain preconditions are
Managements’ responsibility
professional work without permission present
for the FS
from their clients. – Assess risk
Scope of the audit
Exceptions – Communicate with present auditor
– Obtain client’s permission Form of reports or other
Obliged to disclose communication
– By law – Decline nomination if refused
– Otherwise request information Inherent limitations of audit and
– By court order internal control risk that
– To regulators that would help decision
Present auditor should some material misstatements
– Obtain client’s permission may remain
Permitted to disclose Access to documents records
– Public interest – If refused, inform new auditor
(who should decline and information
– Protect member’s interests
nomination) Arrangements for planning and
– Otherwise, discuss relevant performing audit
matters Expectation of receiving a letter
After of representation
– Ensure predecessor’s Request for acknowledgement
removal/resignation properly of receipt of letter
conducted Basis of fees
– Ensure appointment properly
conducted
34
Internal audit

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
Compare and contrast the role of external and internal Q1(b) Section B – pilot paper
audit
Discuss the scope of internal audit and the limitations of
the internal audit function
Discuss the responsibilities of internal and external
auditors for the prevention and detection of fraud and
error
Explain outsourcing
Explain the advantages and disadvantages of outsourcing
the internal audit function
Discuss the nature and purpose of internal audit Q3 Section A – pilot paper
assignments including value for money, IT, financial,
regulatory compliance, fraud investigations and customer
experience
Discuss the nature and purpose of operational internal
audit assignments
35
Assessing the need for internal
audit
Internal audit and corporate Internal audit Trends or factors that have increased
governance codes risks
It is seen as good corporate governance to Organisational restructuring or
have an internal audit (IA) function to changes in processes and systems
assess and monitor internal control Adverse trends noted in monitoring of
policies and procedures. internal control systems
The Board Unexpected occurrences
Overall responsibility for analysis of risk
and implementation of controls
The Audit Committee
Monitor and review effectiveness of IA
Approve appointment/termination of
appointment of head of IA
Review and assess IA work plan
Monitor management responsiveness to Scope and limitations of Outsourcing internal audit
IA reports internal audit
Meet head of IA at least once a year Advantages
without management Limitations could arise from lack Increased independence
Internal audit department of: Relevant skills
Regular report to audit committee Independence from activities Increased reliability
Direct access to board chairman and audit subject to audit Disadvantages
committee Independent reporting line Costs
Accountable to audit committee Objectivity Limited knowledge of specific
Skills entity
Ongoing training Independence issues if provided
Action taken in response to by external audit firm
Comparison of internal and external audit recommendations
Nature and purpose of internal audit

assignments
External audit Internal audit
Opinion on Wide ranging up to employers Value for money audit (VFM)
Objective
FS in terms of – Economy, efficiency and
true and fair effectiveness
Information technology audit
Shareholders Report to Management/directors Financial internal audit
Regulatory compliance audits
Fraud investigations
Independent Status Employee of company or contracted Customer experience audits
to company Operational audits
Required to have Qualification No requirement

recognised Internal audit reports
qualification
Format will vary
May include executive summary
Findings and recommendations
36
Risk assessment

Identify the overall objectives of the auditor and the need
to conduct an audit in accordance with ISAs
Explain the need to plan and perform audits with an
attitude of professional scepticism, and to exercise
professional judgement
Explain the components of audit risk Q10 Section A – pilot paper
Explain the audit risks in the financial statements and Q5(a) Section B – pilot paper
explain the auditor’s response to each risk
Explain how auditors obtain an initial understanding of
the entity and its environment
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
Explain the auditor’s responsibility to consider laws and
regulations
Describe and explain the nature and purpose of
analytical procedures in planning
Compute and interpret key ratios used in analytical
procedures
37
Professional scepticism
Risk at the assertion level Risk assessment
Questioning the validity of evidence
A ccuracy (trans/disclosure)
Alertness to contradictory evidence
C ompleteness (trans/bals/disclosure)
C ut off (trans) Neither the assumption that
A llocation (bals) management is dishonest nor the
C lassification/understandability assumption of unquestioned
Business risk honesty
(trans/disclosure)
O ccurence (trans/disclosure) Conditions, events and circumstances that Professional judgement
V aluation (bals/disclosure) could adversely affect the entity’s ability to
Materiality and audit risk
E xistence (bals) achieve its objectives (financial risk,
operational risk and compliance risk) Nature, timing, extent of procedures
R ights and obligations (bals/disclosure)
Significant risks
Require special audit consideration
Understanding the entity and its Materiality and performance

business environment materiality
Matters to consider Materiality
Audit risk
Industry, regulatory and other Information is material if its omission
external factors (See below) or misstatement could influence the
Nature of the entity decisions of users based on the
Objectives and strategies and related financial statements
business risks Amount and nature of the
Measurement and review of entity’s information needs to be considered
financial performance Calculation is always judgemental
Internal control Firms set criteria for guidance, e.g.:
– ½ to 1% of revenue
– 1 to 2% of total assets
– 5 to 10% of profit before tax
Impact on audit:
– Nature, timing and extent of
Effect of fraud on misstatements audit procedures
If risk assessment suggests there may be – Whether to seek adjustments
material misstatements arising from fraud – Degree of any auditor’s report
the main effects on the audit strategy will modifications
relate to: Performance materiality
Amount set by the auditor at less
Assignment and supervision of
than the materiality level for a
personnel
particular class of transactions or
Consideration of accounting policies account balance.
Unpredictability in nature, timing and
extent of audit procedures
Analytical procedures in audit planning

Analysis of relationships to identify
inconsistencies and unexpected
relationships
Should be applied as risk assessment
procedures
Include comparisons with;
– Prior periods and budgets
– Industry information
– Predictive estimates
– Ratio analysis
– Relationships between financial and
non-financial information
38
THE AUDIT RISK MODEL
AR = IR x CR x DR
Audit risk Detection risk

The 'risk that the The risk that the auditor's
Inherent risk Control risk
auditor expresses an procedures will not detect a
The susceptibility of an The risk that a misstatement
inappropriate audit misstatement that exists in an
assertion to a misstatement could occur in an assertion
opinion when the assertion that could be
that could be material, either and that could be material,
financial statements material either individually or
individually or when either individually or when
are materially when aggregated with other
aggregated with other aggregated with other
misstated' misstatements
misstatements, assuming misstatements, will not be
that there were no related prevented, or detected and
internal controls. corrected, on a timely basis
by the entity's internal
control.
Sampling risk Non-sampling risk
39
Common ratios for use in analytical review
Profitability
Profit before interest and tax (PBIT)
(i) Return on Capital Employed (ROCE) =
Share capital reserves NC liabilities
PBIT
(ii) Net profit margin = =
Revenue
Revenue
(iii) Asset turnover =
Share capital + reserves + NC liabilities
Gross profit
(iv) Gross margin =
Revenue
Liquidity
CA
(i) Current ratio =
CL
CA - Inventories
(ii) Quick ratio (Acid Test) =
CL
Inventories
(iii) Inventory turnover = 365 days
COS
COS
or No. of times turnover
Inventories
Trade receivables
(iv) Trade receivables days = 365 days
Credit sales
Trade payables
(v) Trade payables days = 365 days
Credit purchases
Gearing
Interest bearing debt
(i) Debt/equity =
Share capital and reserves
40
Audit planning and documentation

Identify and explain the need for and importance of
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 Q6 Section A – pilot paper
procedures likely to be adopted at this stage in the audit
Describe the impact of the work performed during the
interim audit on the final audit
Explain the need for and the importance of audit
documentation
Describe the form and contents of working papers and
supporting documentation
Explain the procedures to ensure safe custody and
retention of working papers
41
Audit planning and documentation
The need for planning

The audit strategy Audit documentation
Planning is required so that the audit will
be carried out in an efficient and and the audit plan ISA 230 Audit Documentation states that the
effective manner. auditor shall prepare audit documentation on a
Objectives: timely basis.
Appropriate attention is devoted to Contents:
important areas of the audit
Sufficiently complete and detailed to enable
Potential problems are identified an experienced auditor with no previous
The work is completed expeditiously Audit strategy sets out: connection with the audit to ascertain what
Proper assignment of work to Scope work was performed and to support the
assistants conclusions reached
Financial reporting framework
Coordination of work done by other
Locations Planning, nature, timing and extent of audit
auditors and experts; and
Reporting objectives procedures and conclusions drawn
Facilitating review.
Materiality levels Reasoning on all significant matters of
Preliminary identification of: judgement
– Higher risk areas
– Material balances Permanent file/current file
Whether auditor plans to perform
tests of controls
Resources
Management
Interim and final audit

Audit plan sets out
Interim audit procedures (before y/e)
Nature, timing and extent of audit
procedures Analytical procedures
For each material class of Tests of controls
transactions, account balances or Updating risk assessments
disclosure Review of relevant internal audit
reports
Substantive testing (of transactions
in the first part of the year)
Final audit procedures (post y/e)
Completion of tests of controls and
substantive tests of transactions
started at interim
Analytical procedures on financial
statements
Substantive testing of financial
statements
42
Introduction to audit evidence

Explain the assertions contained in the financial Q4(a) Section B – pilot paper
statements about classes of transactions and events,
account balances at the period end and presentation and
disclosure
Describe audit procedures to obtain audit evidence,
including inspection, observation, external confirmation,
recalculation, re-performance, analytical procedures and
enquiry
Discuss the quality and quantity of audit evidence
Discuss the relevance and reliability of audit evidence Q2 Section A – pilot paper
Discuss substantive procedures for obtaining audit
evidence
Discuss and provide examples of how analytical
procedures are used as substantive procedures
Discuss the difference between tests of control and Q2(a) Section B – pilot paper
substantive procedures
43
Introduction to audit evidence Quality of evidence
ISA 500 Audit Evidence
Sufficient Appropriate
Quantity – Sufficient to
support the audit opinion
Factors to consider are:

Relevant Reliable
Risk assessment The evidence
External better
Nature of accounting gathered must
than internal
and internal control cover the
systems financial Internal more
Materiality of the item statement reliable when
assertions. controls effective
Experience gained
Financial Sources of evidence during previous audits Auditor
generated better
statement A nalytical procedures Results of audit
than client
assertions E nquiry and confirmation procedures
generated
I nspection Source and reliability of
O bservation Documentary
information available
Recalc U lation better than oral
Original
documents more
reliable than
copies/faxes
Assertions
A ccuracy (trans/disclosure)
C ompleteness (trans/bals/disclosure)
C ut off (trans)
A llocation (bals)
C lassification/understandability (trans/disclosure)
O ccurence (trans/disclosure)
V aluation (bals/disclosure)
E xistence (bals)
R ights and obligations (bals/disclosure)
44
Internal control

Explain why an auditor needs to obtain an understanding
of internal control relevant to the audit
Describe and explain the five components of an internal Q12 Section A – pilot paper
control system; the control environment, the entity’s risk
assessment process, the information system, control
activities relevant to the audit and monitoring of controls
Explain how auditors record internal control systems
including the use of narrative notes, flowcharts, internal
control questionnaires and internal control evaluation
questionnaires
Evaluate internal control components, including
deficiencies and significant deficiencies in internal
control
Discuss the limitations of internal control components
Describe computer system controls including general IT Q4 Section A – pilot paper
controls and application controls
Explain the importance of internal control and risk
management
45
Internal control
Internal control is the process designed and effected by those charged with governance,
management and other personnel to provide reasonable assurance about the achievement of
the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency
of operations and compliance with applicable laws and regulations.'
Internal control systems Computer systems controls

Components of an internal control system
The control environment
The entity’s risk assessment process
The information system
Control activities
Monitoring of controls
General controls
Application controls
Controls over data centre and network Controls over input
operations Batch controls
Operating logs Range/limit checks
Examples of internal control Standby arrangements Existence checks
Regular backup and secure storage Check digits
Segregation of duties
Virus protection/firewalls Sequence checks
Physical controls
Information processing System software acquisition, change Controls over output
Review (performance) and maintenance
Test checks
Authorisation Physical controls
Approval of computer-generated
Segregation of duties payments
The entity’s risk assessment process Reconciliations of report totals to
The information system general ledger accounts
Control activities
Limitations of internal control Controls over standing data
Monitoring of controls
Poor judgement in decision making
Access security Passwords restricting access to
Human error
Passwords amend standing data
Processes being deliberately circumvented
by employees and others Dedicated terminals Regular printouts produced and
Management overriding controls Job scheduling reviewed by someone in authority
The occurrence of unforeseen
Application system acquisition, Regular lists of amendments,
circumstances
change and maintenance additions and deletions produced
Testing of new systems and reviewed
Authorisation, approval and testing of
changes
Use of standard packages
Use of internal control Regular review of unauthorised
systems by auditors changes
Restricted access to application
systems documentation
See below
46
Internal control
Use of internal control systems by auditors
Document the system - how?

Narrative notes
Flow charts
Internal control questionnaires (ICQs)
Internal control evaluation questionnaires (ICEQs)
Document the system - why?
Identify potential misstatements
Consider factors that affect the risk of material
misstatements
Design the nature, timing and extent of further audit
procedures
47
48
Tests of controls

Describe control objectives, control procedures, activities Q6(a) Section B – pilot paper
and tests of control in relation to:
The sales (revenue) system
The purchases system
The payroll system
The cash system
The inventory system
Revenue and capital expenditure (non-current assets)
Discuss and provide examples of how the reporting of
significant deficiencies in internal control and
recommendations to overcome those significant
deficiencies are provided to management
49
Test that the control Tests of controls Enquiry
– Is properly designed Inspection of documents supporting
– Exists, and controls
– Has operated throughout the Observation of procedures
period Re-performance of the application of a
Deviations should be recorded and control
investigated regardless of amounts Testing of the control activities
involved performed by a computer, possibly
Assess whether deviations are isolated using CAATs
departures or indicate the existence of Examination of evidence of
errors in accounting records management review
If results are unsatisfactory
– Preliminary assessment of control
risk is not supported
– Must modify nature, timing and
extent of planned substantive
procedures
Revenue Inventories Payroll
Purchases Revenue and capital Bank and cash

expenditure
Communication of deficiencies in internal control

No duty to report control deficiencies to shareholders
ISA 265 Communicating deficiencies in internal control to those
Other communication by the auditor with charged with governance and management requires significant
those charged with governance deficiencies in internal control to be reported to those charged with
governance
The auditor’s responsibilities in relation to FS
audit Form of communication should be agreed at planning stage
Planned scope and timing of the audit
Should be prompt and before FS finalised
Significant findings from the audit e.g. views
on significant accounting policies Contents should first be discussed with management
Statement of compliance with independence
requirements Addressed to audit committee (or board, if no audit committee)
Detailed recommendations structured:
– Deficiency
– Implication
– Recommendation
Caveat
– Not for external use
– Not a complete list
50
Audit procedures and sampling

Discuss the problems associated with the audit and
review of accounting estimates
Describe why smaller entities may have different
control environments and describe the types of
evidence likely to be available in smaller entities
Define audit sampling and explain the need for
sampling
Identify and discuss the differences between statistical
and non-statistical sampling
Discuss and provide relevant examples of, the Q1 Section A – pilot paper
application of the basic principles of statistical
sampling and other selective testing procedures
Discuss the results of statistical sampling, including
consideration of whether additional testing is required
Explain the use of computer-assisted audit techniques
in the context of an audit
Discuss and provide relevant examples of the use of
test data and audit software for the transaction cycles
and balances included in the syllabus
Discuss why auditors rely on the work of others
Discuss the extent to which auditors are able to rely Q8 Section A – pilot paper
on the work of experts, including the work of internal
audit
Discuss the audit considerations relating to entities
using service organisations
Explain the extent to which reference to the work of
others can be made in audit reports
51
Audit procedures and sampling
Computer-assisted
Sampling audit techniques
Audit sampling means the application of audit procedures to less than 100% of the
items within a class of transactions or account balance such that all sampling units
have an equal chance of selection, in order to assist in forming a conclusion
concerning the population from which the sample is drawn [ISA 530].
Sample size
Required confidence level
Risk of material misstatement
Tolerable error
Expected error
Population size
Stratification
Sample selection
Random
Systematic
Haphazard
Value weighted
Evaluation of results
Nature and cause of errors?
Effect on other areas?
Anomalous?
Project monetary errors to the population
If this indicates material error is likely the auditor may:
– Ask management to investigate and make adjustments
– Modify nature timing and extent of further audit procedures
– Consider effect on auditor’s report
Audit software Test data

Computer programs used by the auditor, as part of his auditing Conducting audit procedures by entering data into an
procedures, to process data of audit significance from the entity’s entity’s computer system, and comparing the results
accounting system. Data may be down-loaded from the client’s obtained with pre-determined results.
system to the auditor’s in order to perform tests on it.
Examples of tests (usually tests of controls)
Examples of tests (usually substantive) Testing specific controls in computer programs
Test transactions
Reperformance of calculations
Integrated test facilities
Extraction of samples
Analytical review
52
Audit procedures
and sampling
Using the work of others
Internal audit Service organisations Auditor’s Expert

Examples Examples
If the external auditor can rely on the
work conducted by the internal auditor, Accounting records Valuations of land and buildings
the volume of detailed work undertaken Payroll Determination of inventory
by the external auditor may be reduced. Credit control quantities/condition
When the external auditor intends to use Data entry/information processing
Legal opinions
specific internal audit work, the external Auditor’s responsibilities
auditor should evaluate and perform Auditor’s responsibilities
Assess significance of
audit procedures to confirm that it is organisation’s activities to the Evaluate objectivity/competence
adequate for the external auditor’s audit of expert
purposes. (ISA 610 Using the work of Evaluate appropriateness of
Assess risk of material
internal auditors) auditor’s expert’s work as
misstatement and extent of control
General assessment risk evidence
Scope of function Consider whether information held – Data and assumptions
Organisational status by client is sufficient – Consistency with other
Due professional care evidence
Independence If necessary, request service
organisation’s auditor to perform Unmodified audit report
Technical competence
additional procedures, or visit to Should not refer to work of an
perform tests of controls expert
Evaluation of internal audit work
Audit report
Adequacy of technical training and
Consider any implications for the
proficiency
auditor’s report
Whether properly supervised,
reviewed and documented
Sufficiency and appropriateness of
evidence
Auditing smaller entities
Whether conclusions are
appropriate and reports consistent Audit of accounting estimates
The problem of control
with work performed Examples Many controls relevant to large
Whether exceptions/unusual Allowances to reduce inventory or entities neither practical nor
matters resolved receivables to their estimated realisable appropriate
Planning, controlling and recording value Likely to have poor segregations of
Liaise with IA at all stages Depreciation duties
Compare own results with those of Provisions Management override of controls
IA
Accrued revenue Management should instigate
Report to management additional authorisation, arithmetical,
3 approaches
Consider whether to include any accounting and supervisory controls
weaknesses/irregularities Review and test process used by
Audit approach
discovered by IA management
Unlikely to be able to rely on controls
Use independent estimate for
Audit report Focus will be on substantive
comparison
Cannot make reference to work procedures
Review of subsequent events for
done by IA evidence of reasonableness of estimate
53
54
Non-current assets

Explain the audit objectives and the audit procedures
relating to:
Tangible and intangible non-current assets:
(i) Evidence in relation to non-current assets and Q6(b) Section B – pilot paper
(ii) Depreciation
(iii) Profit/ loss on disposal Q2(b) Section B – pilot paper
(iv) The related profit or loss section (income

statement) entries.
55
Non-current assets
Evidence on figures in the Evidence on entries in the

statement of financial statement of profit or loss
position Depreciation
Gains/ losses on disposals
Impairments
Tangible Intangible
Additions Development expenditure
Disposals
Revaluations Remember the IAS 38 criteria that require/permit
capitalisation:
Probable future economic benefits
Intention to complete and use/sell asset
Resources adequate and available to complete
and use/sell asset
Ability to use/sell the asset
Technical feasibility of completing asset for
use/sell
Expenditure can be measured reliably
56
Inventory

Explain the audit objectives and the audit procedures in
relation to:
Inventory
(i) Inventory counting procedures in relation to year-
end and continuous inventory systems
(ii) Cut-off
(iii) Auditor's attendance at inventory counting
(iv) Direct confirmation of inventory held by third parties
(v) Valuation
(vi) Other evidence in relation to inventory.
57
3rd party confirmations Inventory
Quantity x Value
Other evidence Valuation

Cut-off
Record basis of valuation used
Cut-off is usually tested by Test material costs
obtaining a sample of GRNs
and GDNs either side of the – Check to individual invoices
year end and then matching – Ensure FIFO or appropriate
them to purchase/sales basis being used
Year end inventory counting invoices to ensure they have
– Check quantities used in
Before been included in the correct
WIP/FG
Review working papers for previous year to identify account balances(s) (see
risks and familiarise yourself with the inventories below) Test labour costs
Determine arrangements with management in – Check calculations to
advance supporting documentation
Inventories held by/for third parties – what – Review costing against actual
arrangements have been made? Continuous inventory labour and production
Review client’s inventory count instructions Review company's procedures Test application of overheads
Investigation of differences (where inventory records – Independence of counters – Ensure only production
exist) – Frequency of counts overheads included
Consider the need for an expert – Ensure all lines covered at – Ensure based on normal levels
Determine procedures to cover a representative least once per year of activity
selection of inventories – Investigation of discrepancies
During
– Updating of records
Ensure staff are following the inventory counting
Attend at least one of the
instructions
company's counts (to observe)
Test counts from
Review whole year's results
– Inventories inventory sheets and
– From the inventory sheets inventories. – Extent of counting
– Accuracy of records
Note damaged, old or obsolete inventories. – Reasons for discrepancies
Review WIP for stage of completion Perform test counts at the year end
Inventories held by client for third parties: ensure
excluded from count
Record the number of the last GRN and the last GDN
Form an overall impression of inventory levels
Photocopy inventory sheets
After
Check sequence of inventory sheets
Check client’s computation of final figure
Trace own test count items through to final inventory
sheets
Check replies from third parties
Inform management of any problems
Follow up cut-off details
Ensure necessary adjustments to book inventories
have been made (where records are maintained).
58
Year end
Before After
GRN GRN
Purchase
Purchase
Included in? Included in?
Purchases Purchases
Payables Payables
Inventories Inventories
GDN GDN
Included in? Included in?

Sales
Sales
Sales Sales
Receivables Receivables
Inventories Inventories
59
60
Subject:
Receivables

Explain the audit objectives and audit procedures
in relation to:
Receivables
(i) direct confirmation of accounts receivable Q4(b) Section B – pilot paper
(ii) other evidence in relation to receivables and
prepayments, and
(iii) the related profit or loss section (income statement)
entries
61
Receivables
Statement of financial performance: receivables and prepayments

Statement of profit or loss: revenue, irrecoverable debts expense
Direct confirmation Other evidence

Obtain listing of trade receivables as at the GDNs pre/post year end
confirmation date Analytical procedures
Agree total to nominal ledger Correspondence with
Review for any obvious omissions/misstatements customers/liquidators
by comparing this year's list with last year's
Select a sample of accounts for confirmation
Select the sample including the following balances:
– Old, unpaid amounts
– Credit balances
– Nil balances
– Material balances
Letter should be on the client's paper, signed by
the client with a copy of the current statement
attached. It should request that the reply be sent
direct to the auditor and reply paid envelopes
should be sent.
After reasonable period, send 'follow-up' request
Follow up by telephone or fax if there is no reply
No reply:
– Confirmation of individual outstanding invoices
– Alternative procedures
– Agree opening balance on account with last
year's closing balance
– Test casts
– Verify outstanding items to back up
documentation
– Review cash received after year end
– Discuss with responsible company official
62
Bank and cash

Explain the audit objectives and the audit procedures in
relation to:
Bank and cash:
(i) Bank confirmation reports used in obtaining
evidence in relation to bank and cash
(ii) Other evidence in relation to bank, and
(iii) Other evidence in relation to cash.
63
Related entries in the
Bank and cash statement of profit or loss
Bank interest
Bank confirmation letters Other evidence

Bank reconciliation
Authority to disclose
Banks require the explicit written authority of their customers to disclose the Attend physical count of cash if
material.
information requested:
– An ongoing standing authority, or
– A separate authority each time information is requested.
Bank confirmation process
A request for a bank confirmation issued on the auditors' own headed paper and
sent to the bank branch with which the client has the prime business
arrangement.
The bank confirmation request should specify:
– The names of all entities covered by the request
– Whether the auditor is requesting 'standard information'
– Details of 'additional information' if so required
– The date for which the auditor is requesting confirmation (the audit
confirmation date);
– A statement that the bank's response will not create a contractual
relationship between the bank and the auditor
– A statement requesting the bank to advise the auditor if the Authority is
insufficient to allow the bank to provide full disclosure of the information
requested; and
– A contact name and telephone number.
The bank confirmation request should reach the branch at least two weeks in
advance of the audit confirmation date.
Standard information requested
Full title of all bank accounts in all currencies, with account numbers and
balances, including nil balances
Full title and dates of closure of all accounts closed during the period
Amounts accrued but not yet charged or credited of:
– Charges
– Interest
Amount of interest charged during the period if not shown separately on bank
statement
Particulars of any right of set-off
Details of:
– Overdrafts and loans repayable on demand
– Other loans, specifying dates of review and repayment
– Other facilities
Customer’s assets held as security
Customer’s other assets held
Contingent liabilities
64
Liabilities, capital and
directors’ emoluments

Explain the audit objectives and audit procedures in
relation to:
Payables and accruals
(i) Supplier statement reconciliations and direct
confirmation of accounts payable,
(ii) Obtain evidence in relation to payables, accruals
and
(iii) Purchases and other expenses.
Non-current liabilities, provisions and contingencies

(i) Evidence in relation to non-current liabilities
(ii) Provisions and contingencies.
Q2(b) Section B – pilot paper
Share capital, reserves and directors’ emoluments:

(i) Evidence in relation to share capital, reserves and
directors’ emoluments and
(ii) The related profit or loss section (income
statement) entries
65
Liabilities, capital and
directors’ emoluments
Payables and accruals Non-current liabilities Share capital

– Supplier statement – Bank letters Share issues
reconciliations – Loan agreements – Memo and Articles
– Analytical procedures – Finance costs – Board minutes
– Subsequent events review Provisions – Cash book receipts
Purchases and expenses – IAS 37 criteria Reserves
– Subsequent events review – Brought forward figures
– Management representations – Profit/ loss for year
– Recalculation of estimates – Dividends (board minutes, cash
Finance costs book payments)
– Analytical procedures Directors’ emoluments
– Recalculation – Contracts
– Board minutes
– Cash book payments
66

Apply audit techniques to small not-for-profit
organisations
67
Types of not-for-profit
organisations
Charities
Clubs
Societies
Comparison with audit of for- Application of

profit organisations audit techniques
Risk factors Audit evidence
Complexity and extent of regulation Mainly substantive procedures
Significance of cash receipts
Restrictions imposed in the entity's
governing documents
Sensitivity of certain key statistics
Need to maintain adequate, but not
excessive resources
Control risk
Competence, training and qualification
of paid staff and volunteers
Segregation of duties
Reliability of accounting
systems/computer systems
Controls over compliance with laws and
regulations
Power of trustees
68
Audit review and finalisation

Explain the purpose of a subsequent events review
Explain the responsibilities of auditors regarding
subsequent events
Discuss the procedures to be undertaken in performing a Q11 Section A – pilot paper
subsequent events review
Define and discuss the significance of the concept of
going concern
Explain the importance of and the need for going
concern reviews
Explain the respective responsibilities of auditors and
management regarding going concern
Identify and explain potential indicators that an entity is
not a going concern
Discuss the procedures to be applied in performing Q5(b) Section B – pilot paper
going concern reviews
Discuss the disclosure requirements in relation to going
concern issues
Explain the purpose of and procedure for obtaining
written representations
Discuss the quality and reliability of written
representations as audit evidence
Discuss the circumstances where written representations
are necessary and the matters on which representations
are commonly obtained
Discuss the importance of the overall review of evidence
obtained
Discuss the procedures an auditor should perform in
conducting their overall review of financial statements
Explain the significance of uncorrected misstatements
Evaluate the effect of dealing with uncorrected Q3(a) Section B – pilot paper
misstatements
69
Overall review of evidence
Audit review and finalisation
Uncorrected misstatements
Schedule maintained of errors identified
that have not been corrected by the client
Consider whether material in aggregate
Subsequent events Written representations

Accounting issue: IAS 10 Events after the reporting The auditor should request written
period representations:
Adjusting events provide evidence of conditions Management fulfilled its responsibility to
that existed at the reporting date prepare FS, that all transactions have been
recorded and they have approved the FS
Non-adjusting events indicative of conditions that
arose after the reporting date On ISA specific disclosures (fraud, laws &
regulations, estimates, going concern,
related parties and subsequent events)
Appropriate use of accounting policies
Audit procedures
Review procedures established by client management
Read minutes of meetings
Procedures
Read latest available interim accounts, budgets and forecasts
Agree procedures at early stage (e.g. letter of
Enquire of legal counsel concerning litigation and claims engagement)
Enquire of management as to whether any subsequent events Discuss letter with client first
have occurred that might affect the financial statements
Usually signed by senior executive officer
Auditor’s duties and senior financial officer on behalf of board
Up to date of auditor’s report Should be minuted
– Perform procedures Dated – after all other audit work completed
After report but before FS issued, if auditor becomes aware of but before signing of the auditor’s report
a fact that may materially affect the FS: If the client refuses to sign
– Discuss with management Auditor should write letter setting out his
– If management does not amend FS, and audit report has understanding and ask for management
not been released to the client, express qualified or confirmation.
adverse opinion If management does not reply, auditor should
After FS issued, if auditor becomes aware of a fact that follow up to ascertain that his understanding
existed at the date of the audit report and, if known then, might is correct.
have caused the auditor to modify the report : If management refuses to provide a
– Discuss with management representation that the auditor considers
– If management issue revised accounts, issue new necessary, this constitutes insufficient
auditor’s report, referring to previous report evidence and the auditor should express a
qualified opinion or disclaimer of opinion.
– If management do not take appropriate action, auditor
should take steps to prevent reliance on the report, eg
speak at AGM or resign
70
Going concern
Under the going concern assumption, an entity is ordinarily viewed

as continuing in business for the foreseeable future * with neither
the intention nor the necessity of liquidation, ceasing trading or
seeking protection from creditors pursuant to laws or regulations.
* where the foreseeable future implies at least one year from the
reporting date (year end)
Audit procedures
Analysing and discussing forecasts with directors
Analysing and discussing latest available interim financial
statements
Reviewing terms of loans agreements
Reading minutes of meetings of shareholders, those charged with
governance and relevant committees for reference to financial
difficulties
Enquiring of the entity’s lawyers about the existence of litigation or
claims
Confirming the existence and enforceability of arrangements with
third parties to provide financial support
Considering the entity’s plans to deal with unfulfilled orders
Reviewing events after balance sheet date to identify those that
either mitigate or otherwise affect the entity’s ability to continue as
a going concern.
Auditor’s report (chapter 19)
Going concern assumption appropriate but a material uncertainty
exists unqualified opinion with emphasis of matter
Inadequate disclosure qualified or adverse opinion
Going concern assumption inappropriate (and management have
used going concern basis) adverse opinion
Management unwilling to make or extend its assessment may
amount to insufficient evidence and a modified opinion
71
72
Reports

Identify and describe the basic elements of the
auditor’s report
Explain unmodified audit opinions in the auditor’s report
Explain modified audit opinions in the audit report Q3(b) Section B – pilot paper
Describe the format and content of emphasis of matter Q9 Section A – pilot paper
and other matter paragraphs
Discuss the reporting implications of the findings of going
concern reviews
73
Reports
Audit reports
Standard Report Changes to the

Unmodified opinion audit reports
Unmodified opinions with Modified on matters that do affect

additional communication the auditor's opinion
Emphasis of Other
matter paragraph matters
'Without paragraph Insufficient or Material misstatement
qualifying our inappropriate audit
opinion ….' evidence
(Eg 2)
Material but not Material and

Material but Material and pervasive pervasive
not pervasive pervasive Qualified Adverse
Qualified Disclaimer 'except for' '…. do not give
'except for' 'do not express (Eg 3) a true and fair view'
(Eg 5) an opinion'
(Eg 4)
(Eg 6)
74
Going concern
Auditor’s report
Going concern assumption appropriate but a material uncertainty
exists unqualified opinion with emphasis of matter
Inadequate disclosure qualified or adverse opinion
Going concern assumption inappropriate (and management have
used going concern basis) adverse opinion
Management unwilling to make or extend its assessment may
amount to insufficient evidence and a modified opinion
75
Example 1
Basic Unmodified Report
INDEPENDENT AUDITOR'S REPORT

(APPROPRIATE ADDRESSEE)
Report on the Financial Statements
We have audited the financial statements of ABC company, which comprise the statement of
financial position as at 31 December, 20X1, and the statement or profit or loss, statement of
changes in equity and statement of cash flows for the year then ended, and a summary of
significant accounting policies and other explanatory information.
Management's responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements
in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with International Standards on Auditing. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor's
judgement, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion the financial statements present fairly, in all material respects, (or give a true and
fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) its financial
performance and its cash flows for the year then ended in accordance with International Financial
Reporting Standards.
76
Report on Other Legal and Regulatory Requirements
[Form and content of this section of the auditor's report will vary depending on the nature of the auditor's
other reporting responsibilities.]
[Auditor's signature]
[Date of the auditor's report]
[Auditor's address]
Example 2
Emphasis of matter paragraph
We draw attention to Note X to the financial statements which describes the uncertainty related to the
outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not qualified in
respect of this matter.
Example 3
Qualified opinion due to material misstatement of inventories
Basis for qualified opinion
The company’s inventories are carried in the statement of financial position at xxx. Management has not
stated inventories at the lower of cost and net realisable value but has stated them solely at cost, which
constitutes a departure from International Financial Reporting Standards. The company’s records
indicate that had management stated the inventories at the lower of cost and net realisable value, an
amount of xxx would have been required to write the inventories down to their net realisable value.
Accordingly, cost of sales would have been increased by xxx, and income tax, net income and
shareholders’ equity would have been reduced by xxx, xxx and xxx, respectively.
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph,
the financial statements present fairly, in all material respects, (or give a true and fair view of) the
financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and its
cash flows for the year then ended in accordance with International Financial Reporting Standards.
77
Example 4
Adverse opinion due to material misstatement with a pervasive effect
Basis for adverse opinion
As explained in Note X, the company has included houses built for resale (including related land) at a
cost of $X as non-current assets and depreciated them at a rate of X%, resulting in depreciation of $X.
Under International Financial Reporting Standards, these should have been included as inventory in the
financial statements and no depreciation should have been provided in respect of these. The carrying
value of houses represent 90% of the company’s total assets and the company’s records indicate that …
[explanation of the effect on amounts presented in the financial statements].
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion
paragraph, the financial statements do not present fairly (or do not give a true and fair view of) the
financial position of ABC Company as at December 31, 20X1, and (of) their financial performance and
their cash flows for the year then ended in accordance with International Financial Reporting Standards.
Example 5
Qualified opinion due to inability to obtain sufficient appropriate audit evidence about the carrying
amount of inventory (material but not pervasive)
Basis for qualified opinion
With respect to inventory having a carrying amount of $X the audit evidence available to us was limited
because we did not observe the counting of the physical inventory as at 31 December 20X1, since that
date was prior to our appointment as auditor of the company. Owing to the nature of the company’s
records, we were unable to obtain sufficient appropriate audit evidence regarding the inventories
quantities by using other audit procedures.
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion
paragraph, the financial statements present fairly, in all material respects, (or give a true and fair view of)
the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and
its cash flows for the year then ended in accordance with International Financial Reporting Standards.
78
Example 6
Disclaimer of opinion due to inability to obtain sufficient appropriate audit evidence about multiple
elements of the financial statements
Basis for disclaimer of opinion
We were not appointed as auditors of the company until after December 31, 20X1 and thus did not
observe the counting of physical inventories at the beginning and end of the year. We were unable to
satisfy ourselves by alternative means concerning the inventory quantities held at December 31, 20X0
and 20X1 which are stated in the statement of financial position at xxx and xxx, respectively. In addition,
the introduction of a new computerised accounts receivable system in September 20X1 resulted in
numerous errors in accounts receivable. As of the date of our audit report, management was still in the
process of rectifying the system deficiencies and correcting the errors. We were unable to confirm or
verify by alternative means accounts receivable included in the statement of financial position at a total
amount of xxx as at December 31, 20X1. As a result of these matters, we were unable to determine
whether any adjustments might have been found necessary in respect of recorded or unrecorded
inventories and accounts receivable, and the elements making up the income statement, statement of
changes in equity and statements of cash flows.
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion. According, we do not express an opinion on the financial statements.
79
80
Appendices
81
82
Appendix A: Relevant articles/study support videos
Articles/study support videos that provide further insight into the F8 syllabus
are available on the ACCA website at:
http://www.accaglobal.com/uk/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f8/technical-
articles.html
The attached list of articles/ study support videos has been compiled to provide you with some structure during the
home study phase of your revision and includes the most recent, or more important, articles/ study support videos.
Article Author Read?

The audit of wages Member of
This article helps candidates identify significant deficiencies in internal control and the FAU
recommend internal controls. It considers a typical wages system and the procedures examining
that should be undertaken during the interim and final audit stages. team
The control environment of a company Member of the
This article provides candidates with a more detailed appreciation of the auditor’s need audit examining
to evaluate the effectiveness of a company’s control environment. team
ISA 315 (Revised) Raymond
This article reminds us about the different elements of an entity’s internal control Wong
system and the need for the external auditor to consult with the internal audit function in
order to get a better understanding of the entity’s internal control system.
Audit procedures Vijaya
This article provides you with tips on how to describe audit procedures which are Swaminathan
properly explained and specific to the relevant financial assertion.
Going concern Steve Collings
This article summarises the responsibilities of auditors and management for going (Assessor for
concern and uses the question Medimade from the June 2010 exam to demonstrate Paper F8)
how to approach questions on this area.
Audit Risk Pami Bahl
In this article the F8 examiner, Pami Bahl, aims to identify the most common mistakes (F8 examiner)
made by candidates on audit risk questions in previous exam sittings, as well as
clarifying how these questions should be tackled in order to maximise marks.
Audit Sampling Steve Collings
This article considers the various sampling methods in the context of Paper F8 and (Assessor for
other audit papers. Paper F8)
Subsequent events Steve Collings
This article looks at the audit of subsequent events (events after the reporting period).
Specific aspects of auditing in a computer based environment Brian Pine
This article provides guidance on auditing in a computer based accounting
environment.
A matter of opinion Simon Finlay
This article looks at the auditor’s opinion on the financial statements.
IAS 330 and responses to assessed risk Martyn Jones
Examiner’s approach F8 Pami Bahl
This article considers the examiner’s approach to the Paper F8 exam and aims to (New F8
recognise a change in examiner with effect from the June 2010 exam examiner)
83
Appendix B: Verbs used in question requirements
Advise To counsel, inform or notify
Analyse Examine in detail the structure of
Calculate/compute To ascertain or reckon mathematically
Compare and contrast Show the similarities and/or differences
Define Give the exact meaning of
Describe Communicate the key features of
Discuss To examine in detail by argument
Distinguish Highlight the differences between
Evaluate To appraise or assess the value of
Explain Make clear or intelligible/state the meaning of
Identify Recognise, establish or select after consideration
Interpret Process information to explain its meaning
Justify To produce reasons in support of
List State short pieces of information on separate lines
Prepare To make or get ready for use
Recommend To advise on a course of action
Summarise To express the most important facts of
84
Appendix C: Specimen paper
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
BPP House, Aldine Place, London W12 8AA
Tel: 0845 0751 100 (for orders within the UK)
Tel: +44 (0)20 8740 2211
Fax: +44 (0)20 8740 1184
www.bpp.com/learningmedia
104

Revision f8 Notes

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Revision f8 Notes

Загружено:

Авторское право:

Доступные форматы

ACCA

Audit and Assurance

How to use the Practice & Revision material 4

The examination paper and syllabus aims 5

Analysis of past papers 6

Skills bank (in these notes)

Knowledge bank (in these notes)

Question and answer bank

The examination paper and syllabus aims

10% Knowledge 90% Application

Format of the Exam Marks

Time pressure warning

Analysis of past papers

Audit framework and regulation

Planning and risk assessment

Review and reporting

This section explains and demonstrates the key skills

Key skills required to pass

Skill 1 – Effective use of the 15 minutes reading time at the

2 Reading scenario based questions

STEP Read the requirements

STEP Focus on the longest requirements

(a) In respect of the internal control of Garcia International Co:

(i) Identify and explain SIX deficiencies;

(ii) Recommend a control to address each of these deficiencies; and

(iii) Describe a test of control Suarez & Co would perform to assess if

In reading the scenario, therefore, you have two aims:

Skill 2 – Quick and accurate analysis of a question's

1 Be aware of the verbs used in exam questions

“(i)Explain the ethical threats which may affect the independence of

Remy & Co in respect of the audit of Hazard Co; and

Rotation of audit partner This would have scored ½

2 Identify ALL the question’s requirements in your answer plan

Skill 3 – Disciplined time management

Marks Time allocation

Skill 4 – Tackling multiple choice questions

Approaching Questions Logically

1 What to do if you know the answer to the question

2 What to do if more than one answer appears plausible

An emphasis of matter paragraph is used in an audit report to draw

Here are some steps to follow:

STEP Assess the remaining answers

STEP Read the question again…

3 What to do if you still don’t know the answer…

What you SHOULD NOT do

What you SHOULD do

Skill 5 – Producing a tailored answer

2 Answer structure – general

Use of headings helps keep you thinking about the requirements

Ethical threats Safeguards to reduce the threat

Matching each threat to the

3 Writing for your audience

INTERNAL AUDIT REPORT

How have the syllabus learning outcomes been examined?

The purpose of external audit Accountability, stewardship and Types of assurance

Assurance and reports

Reasonable assurance Positive expression:

Concepts in reporting Limited assurance Negative expression:

How have the syllabus learning outcomes been examined?

The regulatory environment

Statutory regulations Mechanisms for regulation of Development and status of ISAs

Note: throughout these notes the

Plan the audit

Understand the entity (including documenting and confirming