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CA Education

Test of Competence
Principles of Auditing and
Reporting
Example Exam Paper
(updated for 2010/11 Syllabus)
Solutions
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MCQ SOLUTIONS

1. D Module 7, page 19

2. D Module12, pages 4 – 7

3. D Module 3, page 7 and Module 6, page 7

4. A Module 9, page 8

5. B Module 13, page 13

6. C Module 14, similar examples on pages 19 – 21

7. B Module 3, page 14

8. B Module 9, pages 20 - 22

9. A Module 4, page 6

10. C Module 16, pages 7, 12 – 13

11. D Module 4, page 26

12. B Module 14, page 7

13. A Module 4, page 3

14. C Module 15, pages 17 – 19

15. D Module 5, pages 16 – 19

16. C Module 15, pages 23 and 36

17. C Module 4, page 3

18 A Module 12, pages 11 – 14

19. C Module 2, page 6

20 B Module 8, page 2

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NARRATIVE SOLUTIONS
Question A

Requirement 1
Key responsibilities
The auditor’s statutory responsibilities revolve around the audit report. The key
responsibilities are set out in the Companies Act 2006 (‘CA 2006’), which require the
auditor to:

1. be independent of the company (½ mark).


2. express an opinion (½ mark);
as to whether or not the financial statements give a true and fair view in
accordance with the relevant financial reporting framework (½ mark); and
on the consistency of the directors’ report with the financial statements (½ mark).
3. express the opinion to the company’s shareholders (½ mark).

Matters reported by exception


The auditor is also required by the CA 2006 to form an opinion about several other
matters, which are reported by exception in the audit report (½ mark), sometimes
known as ‘matters implied by silence’.

The auditor must consider whether:


Returns have been received from branches not visited (½ mark);
Accounts agree to underlying records (½ mark);
Proper accounting records have been kept (½ mark);
Information and explanations necessary for the purposes of the audit have been
received (½ mark); and
Directors’ emoluments and other benefit disclosures are complete (½ mark).

Responsibilities on cessation of office


An auditor has a responsibility to deliver a statement of circumstances to the company’s
registered office whenever they cease to hold office (whether this is due to resignation,
removal or by choosing not to accept reappointment) (1 mark).

An auditor of a major audit, who ceases for any reason to hold office, must notify the
Professional Oversight Board (‘POB’) (1 mark). An auditor of a non major audit, who
ceases to hold office before the end of his term of office, must notify the relevant
Recognised Supervisory Body (‘RSB’) (1 mark). The notice to the POB or relevant
RSB must be accompanied by a copy of the statement of circumstances (1 mark). If
there are not circumstances to report the auditor should disclose his reasons for the
cessation of office (1 mark).

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Requirement 2
The statutory rights of the auditor are detailed in the CA 2006. The rights fall into two
main categories – the auditor’s rights to receive information to reach his audit opinion (½
mark) and the auditor’s rights in relation to resolutions and meetings
(½ mark). The CA 2006 states that the auditor:

Rights to receive information


Has a right of access at all times to the books, accounts and vouchers of the
company (½ mark);
May require any director, manager or employee of the company to provide any
information or explanations that the auditor thinks are necessary for the performance
of his duties (½ mark); and
Can obtain from subsidiaries and their auditors such information and explanations as
he may reasonably require (½ mark).

Rights in relation to resolutions and meetings


Has the right to receive copies of all communications relating to any written
resolution proposed to be agreed by a private company (½ mark);
Has the right to receive all notices of any general meeting of the company and to
attend such meetings (½ mark); and
Has a right to be heard at any general meeting on any part of the business of the
meeting which concerns him as auditor (½ mark).

Requirement 3
The auditor can be removed at any time, simply by passing an ordinary resolution
(1 mark).

The auditor has a number of rights to protect against unwarranted dismissal:


On the receipt of the notice to remove the auditor, the company must send a copy to
the existing auditor (½ mark).
The auditor has the right to make written representations (½ mark) to the
shareholders (not exceeding a reasonable length) and may request that these be
circulated to the shareholders (½ mark). If this is not done, then the auditor has a
right to have the representations read out at the meeting (at which his removal is to
be voted on) (1 mark).
The auditor has a right to attend the general meeting/annual general meeting of the
company subsequent to his removal from office, at which his term of office would
otherwise have expired or at which the vacancy caused by his removal is to be filled
(1 mark).
The auditor also has the right to be heard at the meeting on any matter that pertains
to him as an auditor (½ mark).

Once an auditor has been removed from office the company must inform the
Registrar of Companies of the removal (1 mark).

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Requirement 4
The expectations gap is the difference between the understanding that the public has
about the auditor’s responsibilities and the actual responsibilities of the auditor
(1 mark).

Managing the expectations gap


The engagement letter – the auditor clarifies his responsibilities with the directors of
the client company at the start of the engagement by issuing an engagement letter,
which clarifies the terms of the engagement (1 mark). Such a letter will include
details of the responsibilities of the auditor and the scope of the engagement
(1 mark).
The audit report – this report contains an explanation of the auditor’s responsibilities
and a description of the scope of the audit and the basis of the audit opinion
(1 mark) to assist in educating the shareholders on the role of the auditor (½ mark).
It also clearly states that the report is addressed to the shareholders only (½ mark).

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Question B

Requirement 1
Companies Act 2006 – Unqualified opinion
An unqualified audit opinion means that in the opinion of the auditor, the financial
statements do give a true and fair view (1 mark).

ISA (UK & Ireland) 705 modifications to opinions in the Independent Auditor’s
report For a matter to merit modification of the audit report, it must be material to the
users of the financial statements (½ mark), however some matters may be so serious
that they are considered to be not just material, but pervasive to the financial statements
(½ mark). This concept, is defined in ISA 705 (½ mark) and means that a matter is
fundamental to the financial statements in that it either materially affects a large number
of figures in the financial statements, or it materially affects a few crucial figures in the
financial statements (1 mark). The auditor must use judgement when making the
distinction between material but not pervasive and pervasive (1 mark).

Qualified ‘except for’ opinion


An auditor would give a qualified ‘except for’ audit opinion when the financial statements
are materially but not pervasively misstated (½ mark) or where there was a material but
not pervasive inability to obtain sufficient appropriate evidence (½ mark). The inability to
obtain sufficient evidence is often referred to as a limitation on scope (1 mark).
A limitation on scope arises where the auditor does not have sufficient, appropriate
evidence to form an audit opinion (1 mark). When a limitation on scope is material, the
auditor is saying that the financial statements are true and fair, except for the items
about which the auditor has been unable to obtain enough evidence (1 mark).

Where the financial statements are not free from material misstatement (but not so
material that the financial statements are seriously misleading), a qualified opinion is
given
(1 mark). In the auditor’s opinion, the financial statements give a true and fair view
except for the matter which has resulted in the misstatement (1 mark).

Disclaimer of opinion
When the limitation on scope is pervasive, ie it is so material or fundamental that the
auditor has been unable to obtain sufficient evidence to support their opinion, the
auditor expresses a disclaimer of opinion (1 mark). A disclaimer opinion is interpreted
as the auditor is unable to express an opinion on the financial statements (1 mark).

Adverse opinion
When the effect of a misstatement is so pervasive that the financial statements are, in
the auditor’s opinion, seriously misleading, an adverse opinion is given (1 mark). This
states that, in the auditor’s opinion, the financial statements do not give a true and fair
view (1 mark).

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Emphasis of matter paragraph


Where the financial statements contain specific information which has been
appropriately presented or disclosed (1 mark) but the auditor believes it is fundamental
to the users understanding of the financial statements (1 mark) the auditor will draw the
user’s attention to this in their opinion paragraph (1 mark).

This is referred to as an emphasis of matter paragraph (1 mark). Such a paragraph


does not constitute a qualified audit report under the CA 2006 (1 mark) ie the financial
statements still give a true and fair view in the opinion if the auditors (1 mark).

Requirement 2
Going concern is always pervasive to the truth and fairness of the financial statements
(1 mark).

Impact on the audit opinion


Therefore, the impact on the audit opinion of issues regarding going concern are as
follows:
Where the financial statements are materially misstated in relation to of the going
concern status, the auditor should express an adverse opinion (1 mark).
Where the auditor has insufficient information on which to base his conclusion as to
whether the company is a going concern, he should issue a disclaimer opinion
(1 mark).

Other implications for the audit report


The auditing standards specifically mention that if the directors’ assessment of going
concern covers a period of less than one year from the balance sheet date (ie the
financial year end) then the auditor should request that the assessment is extended
(1 mark).

If the period considered in the directors’ assessment of going concern is less than one
year from the date of approval of the financial statements and this is not disclosed then
the auditors are required to state this in their audit report (1 mark). This would usually
be in the form of an additional narrative statement prior to the audit opinion (1 mark).
The audit report should not be qualified on these grounds alone ie the accounts can still
say that in their opinion the financial statements give a true and fair view (1 mark).

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Marking Schedule Candidate


No.
Principles of Auditing and Reporting,
Example Exam Paper (Web) 2009/10 Marker No.

Question A
Possible Awarded
marks marks
Requirement 1
Auditor independence ½
Express an opinion 1½
Report to shareholders ½
Matters reported by exception 3
Statement of circumstance on leaving office 1
Duty to notify appropriate audit authority 4

Restricted to 10

Requirement 2
Rights to receive information 2
Rights in relation to resolutions and meetings 2

Total 4

Requirement 3
Ordinary resolution 1
Send notice to auditors ½
Make representations in writing/circulate 1
Representations read out 1
Right to attend meeting subsequent to his removal 1½
Inform Registrar 1

Total 6

Requirement 4
Expectations gap – definition 1
Engagement letter 2
Audit report 2

Total 5

Total marks awarded 25

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Marking Schedule Candidate


No.
Principles of Auditing and Reporting,
Example Exam Paper (Web) 2009/10 Marker No.

Question B
Possible Awarded
marks marks
Requirement 1
Unqualified opinion – true & fair view 1
Material/pervasive/matter of judgement 3½
Qualified ‘except for’ opinion
Expressed when material misstatement or material
inability to obtain sufficient appropriate evidence 1
- description of limitation of scope 2
- material limitation of scope – opinion explanation 1
- description of disagreement 1
- not free from material misstatement – opinion
explanation 1
Disclaimer of opinion
- pervasive limitation of scope – disclaimer 1
- unable to give an opinion 1
Adverse opinion
- pervasive disagreement – adverse 1
- does not give a T&F view 1
Emphasis of matter paragraph
- information appropriately disclosed 1
- fundamental to understanding 1
- draw attention in opinion paragraph 1
- referred to as emphasis of matter 1
- not a qualification 1
- still true and fair 1

Restricted to 18

Requirement 2
Always pervasive 1
Material misstatement - adverse 1
Limitation on scope - disclaimer 1

Director assessment extension 1


Less than year from date of approval 3
Restricted to 7

Total marks awarded 25