ExP P7

Notes
ACCA Paper P7 (INT)

Advanced Audit and Assurance
For exams in 2010
theexpgroup.com
ExPress Notes
ACCA P7 Advanced Audit and Assurance
Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Assurance and Engagements Audit Reports Audit Risk Quality Control Auditors Liability Ethics Audit Evidence Subsequent Events Going Concern Group Audits Forensic Audits Prospective Financial Information
3
7 12 17 20 24 27 30 33 36 39 43 46
Page | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
theexpgroup.com
ExPress Notes
START About ExPress Notes

We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. Its a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials: The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.
ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows view again of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database
Everybody in the World has free access to ACCAs own database of past exam questions, answers, syllabus, study guide and examiners commentaries on past sittings. This can be
Page | 3
theexpgroup.com
ExPress Notes
an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.
How to get the most from these ExPress notes

For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper.
Your stage in study for each paper Prior to study, e.g. deciding which optional papers to take These ExPress notes ExP recommended course notes, or ExPedite notes Dont use yet ExP recommended exam kit Dont use yet ACCA online past exams
Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Dont make any annotations on the ExPress notes at this stage.
Have a quick look at the two most recent real ACCA exam papers to get a feel for examiners style. Dont use at this stage.
At the start of the learning phase
Work through in detail. Review each chapter after class at least once. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.
Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.
Page | 4
theexpgroup.com
ExPress Notes
Your stage in study for each paper Practice phase
These ExPress notes
ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand.
ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it!
ACCA online past exams
Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them.
Download the two most recent real exam questions and answers. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticisms he or she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow.
The night before the real exam
Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.
Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still dont understand. Its too late now. Avoid looking at them in detail, especially if the notes are very big. It will scare you.
At the door of the exam room before you go in.
Read quickly through the full set of ExPress notes, focusing on areas youve highlighted, key workings, approaches to exam questions, etc.
Leave at home.
Leave at home.
Page | 5
theexpgroup.com
ExPress Notes
Our ExPress notes fit into our portfolio of materials as follows:
Notes
Provide a base understanding of the most important areas of the syllabus only.
Notes
Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses
Notes
Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.
To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.
START About The ExP Group

Born with a desire to be the leading supplier of business training services, the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. Our clients range from multinational household corporate names, through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses.
As well as courses for ACCA and other professional qualifications, our portfolio of
expertise covers all areas of financial training ranging from introductory financial awareness courses for non financial staff to high level corporate finance and banking courses for senior executives. Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions. Full details about us can be found at www.theexpgroup.com and for any specific enquiries please contact us at info@theexpgroup.com.
Page | 6
theexpgroup.com
ExPress Notes
Chapter 1
Assurance Engagements
START The Big Picture

Paper F8 is called Audit and Assurance. Paper P7 is called Advanced Audit and Assurance. Clearly, therefore at both levels you are required to have some knowledge of assurance engagements other than audit engagements which, are of course themselves examples of assurance engagements. In fact at both levels, you also have to be prepared to contrast assurance with nonassurance engagements. At the Fundamentals Level, the vast majority of questions are based on the audit of limited liability companies and any examination of assurance engagements was likely to be knowledge based in terms of general principles. At this stage in your studies, the Professional Level, it is assumed you are aware of the basic principles (but they must be revised) and it is much more likely that you will get a practical question relating to some non-audit engagement.
Page | 7
theexpgroup.com
ExPress Notes
KEY TERMINOLOGY
Assurance engagement The IAASB has provided us with the following definition of an assurance engagement: An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. Engagement Framework The IAASB framework distinguishes between assurance engagements and non-assurance engagements. Assurance engagements are broken down into: 1. Assurance engagements on historical financial information, which are then subdivided into: (a) Reasonable assurance engagements eg statutory audit; and (b) Limited assurance engagements eg voluntary audit. 2. Assurance engagements on other information such as reviews of VFM audits Key Performance Indicators (KPI) Internal control and systems Due diligence assignments Prospective Financial Information (see separate Express note) Non-assurance engagements are indicated as including: Agreed upon procedures Review engagements Compilation work
Reasonable assurance engagements on historic financial information This would be a statutory audit with the work involved needing to be conducted in accordance with ISAs. Auditor will give an opinion designed to increase the level of confidence for prospective users of the audited financial statements, with moderate to high assurance normally being provided.
Page | 8
theexpgroup.com
ExPress Notes
Limited assurance engagements on historic financial information This is more and more being seen as a possible alternative to the statutory audit. As an example, in the UK there have recently been proposals for the introduction of mini audits for companies falling below the audit exemption threshold. Whilst there is currently no statutory requirement for such mini audit, a significant and increasing number of companies are requesting limited assurance engagements, on an entirely voluntary basis. Unlike reasonable assurance engagements, where positive assurance may be given, with limited assurance engagements only negative assurance is provided. A limited assurance engagement involves more limited procedures than are required for a full statutory audit. In effect, no opinion is offered on the information, although some assurance is provided as to its reasonableness, with typical wording being as follows: Based on our review, nothing has come to our attention that the accompanying financial statements contain material misstatement.
KEY KNOWLEDGE Assurance Engagements Other than Audits or Reviews of Historical Information
The work involved in such engagements and the approach required, may be similar in many respects to an audit engagement, albeit the context is different. ISAE 3000 provides guidance to practitioners for such engagements, the summarised requirements for which are as follows: 1. Ethical requirements practitioners should comply with ethical requirements such as ACCAs Code of Ethics and Conduct 2. Quality control the practitioner should implement quality control procedures that are applicable to the individual engagement. 3. Engagement the terms of the engagement should be recorded in an engagement letter, and the practitioner should agree on the terms of engagement with the engaging party. 4. Planning and obtaining evidence the practitioner should plan the engagement so that it will be performed effectively, and should consider materiality and assurance engagement risk, and sufficient appropriate evidence should be obtained on which to base the conclusion.
Page | 9
theexpgroup.com
ExPress Notes
5. Reporting the assurance report should be in writing and should contain a clear expression of the practitioners conclusion about the subject matter information.
KEY KNOWLEDGE Value For Money (VFM) Reviews

VFM involves consideration of the three Es: 1. Economy 2. Efficiency 3. Effectiveness In many countries such reviews originated in the public sector and in relation to other notfor-profit organisations, where alternative measurements of performance (in the absence of profit) had to be developed in order to assess the relative success or otherwise of the organisation. VFM reviews may also of course be requested by commercial companies as well. The vast majority of the knowledge required for this type of engagement is regarded by the P7 examiner as assumed knowledge from your F8 studies.
KEY KNOWLEDGE Key Performance Indicators

KPIs may be seen as a set of measurements which focus on those aspects of an organisations performance that are most critical for its continued success. Many companies, frequently in response to shareholder expectations, now publish details of their KPIs in their annual report. Such KPIs can perhaps be seen as falling into one of two main categories: 1. Financial eg accounting ratios based upon the financial statements 2. Non-financial eg company targets on social and environmental issues Assurance approach to KPIs will require careful consideration of: The definition of the KPI The calculation method The purpose of the reporting Nature of evidence available and source of underlying data
Page | 10
theexpgroup.com
ExPress Notes
Possible problems facing the assurance provider will include: Lack of precise definitions Lack of established systems for the capture and recording of KPI data Susceptibility of KPIs to manipulation
KEY KNOWLEDGE Internal Control and Systems Reviews

This type of work is very closely related to the requirements for auditors to consider the companys internal control systems which is comprehensively covered in F8 and therefore not that likely to feature greatly in P7.
KEY KNOWLEDGE Due Diligence Assignments

There is very little guidance on this type of engagement. In an examination situation any question may be in the context of a group audit question, as in practice such task is often commissioned by the potential buyer of a company. The potential buyer will be seeking to discover information about the target company and gain some assurance as to its reliability. The assurance providers procedures are often restricted to making use of analytical review techniques and enquiry as they attempt to verify the management representations made by the target company. The practitioner may also sometimes be asked to offer practical recommendations regarding the acquisition process.
Page | 11
theexpgroup.com
ExPress Notes
Chapter 2
Audit Reports

The one thing all statutory audits of limited liability companies have in common is that at the end of the day an independent auditor has to issue a report to the shareholders as the owners of the company. The auditors must report their opinion in respect of two main issues: 1. Whether the financial statements give a true and fair view (or present fairly in all material respects) the companys financial position and performance, and 2. Whether the financial statements have been properly prepared in accordance with any relevant professional recommendations and/or statutory provisions. This is not of course a new topic, as you should previously have studied this area in F8. At the P7 stage, it is almost certain that any questions that you get in this area will be practical in nature, with few marks, if any, going for pure knowledge. Given that the examiner has stated that she is concerned in the auditing paper with testing candidates accounting knowledge, you must anticipate that scenarios will include accounting treatments whose acceptability or otherwise you will have to be prepared to discuss. In the old syllabus audit reports were one of the declared favourite topics of the examiner and there was a question every time. The current examiner has stated that she
Page | 12
theexpgroup.com
ExPress Notes
acknowledges the importance of this syllabus area, but students should not assume that there will necessarily always be a question in this area. Having said that, experience to date shows that there is a better than even chance that you will be faced with such a question in your sitting and this must be seen as a high priority area.
KEY TERMINOLOGY
ISA 700 The Auditors Report on Financial Statements identifies the key elements of the auditors report: 1. Title 2. Addressee 3. Introductory paragraph 4. Statement of responsibilities of management 5. Statement of responsibilities of the auditors 6. Scope paragraph 7. Opinion 8. Auditors signature 9. Date of report 10. Auditors address Modified Audit Reports The standard audit report may be modified, such modification may or may not result in the auditors giving a qualified opinion. It is important to remember that modification of the audit report will only be required if there is some material issue. With a practical type of question always make sure that you use any information available in the scenario to help you assess materiality in a sensible way, vague references to the fact that you would consider materiality will NOT impress the examiner. For example, let us say you are given the information that a companys profit before tax (PBT) is $1,000,000 and that the company has failed to make provision for a known bad debt of $150,000. State the obvious by saying that at 15% of PBT the bad debt is material, in that a standard benchmark would be to consider an item impacting on PBT as being material if it is in the range of 5% to 10% of such PBT. It is also important when assessing materiality to remember that this must be considered so far as the user and not the preparer of financial statements is concerned. A useful working definition of materiality may be taken as
Page | 13
theexpgroup.com
ExPress Notes
transactions and other events are likely to be seen as material in the context of a companys financial statements if their omission, misstatement or non-disclosure would matter to a proper understanding of such financial statements on the part of a potential user. Modified audit report with unqualified opinion Sometimes there may be matters relating to the financial statements which, whilst fully and adequately disclosed within the financial statements, the auditor considers worthy of bringing to the particular attention of users. The auditor achieves this by including in the audit report an additional paragraph known as an emphasis of matter paragraph. This paragraph will be self-contained and will NOT otherwise impact on the standard wording of an unmodified report. Key points to remember in relation to the use of such paragraph are: it should have a separate heading it should be positioned AFTER the opinion paragraph it must be made clear that the audit opinion is not qualified and so this paragraph should start with words such as Without qualifying our opinion we draw attention to ....
Past examiners reports have indicated that many candidates have been unclear as to how and when to make proper use of an emphasis of matter paragraph. It is important, therefore, that you are totally happy with this aspect of audit reports. Examples of where the use of such paragraph would be appropriate include: where there the financial statements have been prepared on a going concern basis, but this is dependent upon some significant uncertainty which is fully and adequately disclosed in the notes to the financial statements where there is a material inconsistency between the financial statements and the Directors Report and the adjustment required to remove the inconsistency would need to be made in the Directors Report but the directors are not prepared to make such adjustment.
Page | 14
theexpgroup.com
ExPress Notes
Modified audit report with qualified opinion According to ISA 700, there are two main circumstances which might give rise to the auditors deciding that is necessary for them to qualify their audit opinion: 1. Limitation on scope which arises where the auditor has been unable to carry out some audit work which normally they would have expected to perform and/or where the circumstances are such that audit evidence which the auditor would normally expect to be available for some reason does not exist. 2. Disagreement exists between the auditors and client management in relation to some aspect of the financial statements. The type of qualified opinion to be given will depend not just on the circumstances as indicated above, but also on how serious the limitation on scope or disagreement is namely is it: 1. Material but not pervasive, that is to say that the limitation on scope or disagreement is confined to one particular aspect of the financial statements, such that the auditor is able to say that except for this matter the financial statements give a true and fair view etc. 2. Material and pervasive, that is to say that the nature of the limitation on scope or disagreement is such that it will impact on the overall view given by the financial statements. In such situation if it is caused by limitation on scope, the auditor should give a Disclaimer of Opinion, whereas if it is because of disagreement, they should give an Adverse Opinion. The circumstances giving rise to a qualified audit opinion should be described in a separate paragraph which appears BEFORE the opinion paragraph. Wherever possible, the auditor should quantify the qualification circumstances as this should make it easier for the reader to appreciate its significance.
Page | 15
theexpgroup.com
ExPress Notes
KEY KNOWLEDGE Summary Diagram of Approach to Practical Audit Report Questions
Page | 16
theexpgroup.com
ExPress Notes
Chapter 3
Audit Risk

Consideration of risk is to a large extent assumed knowledge, as you will have first come across this topic in F8. However, it may be some time since you passed F8 and it is very important to revisit this topic as it regularly features in P7 examination questions. At the professional stage, it is unlikely that you will get many, if any, marks simply for providing definitions but you must have a good working knowledge and understanding of key terms in order to be able to properly assess the risks in a given scenario and perhaps explain why they are risks. An auditor must, as part of his assessment of a clients internal control systems, consider the risks to which the clients business is exposed and the extent to which there maybe some material misstatement in the clients financial statements as a consequence of not identifying and managing such risks in an appropriate manner. Consideration of risk is as an integral part of a modern day audit. There have been a number of articles in the Student Accountant in this area which you must read.
Page | 17
theexpgroup.com
ExPress Notes
KEY TERMINOLOGY
AUDIT RISK is very simply the overall risk that the auditor gives an inappropriate audit opinion in his report. Eg. if an auditor gave an unqualified opinion, when in fact the company was not a going concern, then shareholders and others placing reliance on this report in making economic decisions relating to their dealings with the company might suffer financial loss. Audit risk is seen as being made up of 3 elements: AUDIT RISK = INHERENT RISK x CONTROL RISK x DETECTION RISK The auditor must assess inherent risk and control risk but cannot influence them, they are what they are. The only element which the auditor can influence directly is detection risk, which he must do in order to have overall an acceptable level of audit risk. Inherent risk is the risk that there may be material errors or misstatements in the clients financial statements, before giving consideration to any internal controls that may have been established. Eg. in a high tech company there is high risk of obsolete inventory which if not recognised could result in a material overstatement of both profits and asset values. Control risk is the risk that the clients internal control systems will fail to prevent or detect material errors or misstatements. Eg. if there is not effective segregation of duties then there is a much higher risk of employee fraud, without the need for collusion, going undetected. Detection risk is the risk that the auditors tests and enquiries will fail to detect material errors or misstatements in the transactions and balances reflected in the clients financial statements. Eg the detection risk is always greater with a new client because the auditors have had less time to build up their knowledge and understanding of the clients business and the risks to which it is exposed. Detection risk is seen to include the elements of: 1. Sampling risk eg. if the auditor selects too small a sample size, it may not be representative of the population from which it is drawn, resulting in the auditor reaching an invalid conclusion about that population.
Page | 18
theexpgroup.com
ExPress Notes
2. Non-sampling risk is any other risk that might result in the auditor arriving at the wrong audit conclusion eg. if client management were to deliberately provide the auditor with misleading information and explanations. From an exam point of view it is important not to confuse audit risk with Business Risk. Business risk is the risk that a company will fail to meet its strategic objectives or that the policies adopted will be inappropriate. Business risk is to a large extent tied up with the fundamental accounting assumption of going concern. Business risk may also be seen as being made up of 3 main elements: 1. Operational risk eg. shortage of essential raw materials for manufacturing process 2. Financial risk eg. foreign exchange losses when trading internationally 3. Compliance risk eg. payment of fines for breach of anti-pollution legislation It is important to note carefully the question requirement as to what type of risk you have been asked to consider when analysing a given scenario. So if the question scenario makes it clear that the company is trading in different currency zones then: 1. Business risk = foreign exchange losses reduce companys profitability 2. Audit risk = overstatement of profit if foreign exchange losses are not properly recognized
Page | 19
theexpgroup.com
ExPress Notes
Chapter 4
Quality Control

This is one of those areas of the syllabus which is partly assumed knowledge from your F8 studies, relating to quality control of an individual audit engagement and partly unique to P7, relating to quality control procedures for the firm as a whole. Assumed Knowledge F8 ISA 220 Quality control for audits of historical financial information New to P7 ISQC 1 Quality control for firms that perform audits and reviews of historical financial information, and other assurance and related services engagements Quality control is clearly seen by the examiner as being a very important area and to a greater or lesser extent has pretty much featured in all exams to date. When considering ISQC 1, note carefully that this should be applied by ALL professional firms, irrespective of their size. A small firm of Chartered Certified Accountants clearly will not have the same resources as a Big 4 firm, but they should both be working to the same principles.
Page | 20
theexpgroup.com
ExPress Notes
One recalls a previous examiners report where she was clearly unimpressed by those candidates who were totally dismissive of small firms and basically suggesting that they could not possibly produce quality reliable work!! In studying these 2 standards, you will see that there is, almost inevitably, a certain amount of overlap between them. In the exam room make sure you consider carefully the scenario and question requirement to ensure you get the emphasis right in terms of which part of your knowledge database you tap into!
KEY KNOWLEDGE ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements
ISQC 1 identifies 6 main areas that together go to make up a firms system of quality control: 1. 2. 3. 4. 5. 6. Leadership Ethics Client relationships Engagement performance Human resources Monitoring
Leadership The whole culture of the firm needs to be based on a recognition that quality is essential in the performance of all engagements undertaken by the firm, with management leading by example. Management must take responsibility for establishing the firms quality control procedures and ensuring that these are successfully communicated to and acknowledged by all staff. Ethics The standard highlights the need to establish policies and procedures designed to ensure that the firm and its staff comply with all relevant ethical requirements. At least once a year, written confirmation should be obtained from all staff that they meet any necessary independence requirements in relation to clients with whom they are involved.
Page | 21
theexpgroup.com
ExPress Notes
Safeguards should be in place within the firm to guard against threats to independence eg rotation of engagement partners. Client relationships Proper due diligence procedures should be carried out before acceptance of appointment to new clients or re-appointment for existing clients. It is particularly important to have procedures relating to proper consideration of client integrity, as the firm would not wish to have its own reputation tarnished by association. Specific consideration should be given to money laundering implications. Professional etiquette procedures should be properly applied in relation to communication with any previous professional adviser to the client. Engagement performance The firm should establish policies and procedures designed to provide it with reasonable assurance that engagements are performed in accordance with professional standards and regulatory and legal requirements, and that the firm issues reports that are appropriate in the circumstances. This is an area which very much overlaps with ISA 220, with particular consideration having to be given to: Planning Supervision Review
Human Resources The standard requires firms to establish policies and procedures designed to provide it with reasonable assurance that it has sufficient personnel with the capabilities, competence and commitment to ethical principles necessary to perform its engagements in accordance with professional standards and regulatory and legal requirements, and to enable the firm to issue reports that are appropriate in the circumstances. In particular policies and procedures should cover: Recruitment and performance evaluation Capabilities and competence Career development Performance evaluation, compensation and promotion
Page | 22
theexpgroup.com
ExPress Notes
Monitoring The firm should establish policies and procedures designed to provide it with reasonable assurance that the policies and procedures relating to the system of quality control are: Relevant Adequate Operating effectively Complied with in practice Adequately documented
Such policies and procedures should include an ongoing consideration and evaluation of the firms systems of quality control, including a periodic selection of completed engagements (cold review).
Page | 23
theexpgroup.com
ExPress Notes
Chapter 5
Auditors Liability

This is a topic which is only really examinable in P7. It is a little surprising therefore that questions have not appeared more frequently than they have. In practice, and how often have we heard the examiner say that P7 candidates need to demonstrate commercial awareness, professional firms are certainly very much concerned with their potential liability to clients and others. It is probably fair to say that Professional Indemnity insurance premiums are one of the more significant expense items on the Income Statement of an auditing firm. At the end of the day, this is an auditing and not a law exam, but you do perhaps need to be aware of the main principles by which a judgement would be arrived at and also of the key facts and outcome of some of the leading cases, such as the Caparo case. Our concern is principally with the possibility of civil actions being brought against auditors for the tort of negligence. Courts will assess the question of negligence in terms of recognised best practice. It is easy to see, therefore, that on a question based around a scenario of possible litigation against a
Page | 24
theexpgroup.com
ExPress Notes
firm of auditors, that significant marks could be available in testing your knowledge and understanding of: IFRS in relation to whether the auditors were justified in accepting/ not accepting a particular accounting treatment adopted by the client ISA in relation to whether the auditors did/did not carry out the audit procedures that would have been considered appropriate in the circumstances
Particular attention should be paid to the determination of whether or not there is a legally enforceable duty of care in the case of a third party as opposed to a client action. Although you are taking the international variant of P7, so far as this part of the syllabus is concerned, we need to consider UK law as the basis of our studies.
KEY KNOWLEDGE Client Action

If a client company is to bring a successful action against its auditors, and be awarded anything other than purely nominal damages, then they will have to satisfy the court on all 3 of the following points: 1. DUTY OF CARE 2. NEGLIGENCE 3. CONNECTED LOSS A legally enforceable duty of care can be established in one of three ways: i. ii. iii. Under contract engagement letter would meet this requirement Under statute would apply in most countries as in UK Under common law expected to act with due skill and care expected of a competent auditor
Negligence, as already indicated, would be assessed against proper application of professional standards. Connected loss means that there must be some clear connection between the loss suffered by the client and the negligence on the part of the auditor. Auditors will not in other words be held responsible for a loss which is primarily a consequence of a bad management decision.
Page | 25
theexpgroup.com
ExPress Notes
KEY KNOWLEDGE Third Party Action

For a successful third party action, there will be a need for the claimant to satisfy the court in respect of the same 3 issues as for a client action, namely: 1. DUTY OF CARE 2. NEGLIGENCE 3. CONNECTED LOSS In a third party action, negligence and connected loss will be assessed in the same way as for a client action. However, the contentious area has always been recognising a legally enforceable duty of care in a situation where there is no direct contractual or fiduciary relationship between the auditor and the third party. The current position seems to be that in considering recognition of potential liability to third parties and whether or not the courts will recognise a duty of care it will take account of the following: 1. Knowledge of the third partys interest and potential reliance upon the work of the auditor, and 2. Proximity of the relationship and whether it was in fact reasonable in the circumstances for the third party to place reliance upon the auditors work in relation to their dealings with the auditors client. In the Caparo case, the judge held that auditors did not owe a duty of care to individual shareholders, although he did intimate that a joint action brought collectively by the shareholders might have been successful.
Page | 26
theexpgroup.com
ExPress Notes
Chapter 6
Ethics

Ethics is at the heart of the ACCA examination syllabuses featuring to a greater or lesser extent in over half of the papers that you take on route to qualification as a Chartered Certified Accountant. It is unlikely that you will have to deal with any of the ethical theory that was a feature of P1, but professional ethics as previously studied in both F8 and P1 must be seen as highly examinable. In the past an exam question requirement has frequently been along the lines of asking you, in relation to given scenario, what ethical, quality control and other issues are involved. Whilst not necessarily appearing as a question every time in the real exam, it must be seen as a key area for your studies. The fundamental principles of professional ethics as outlined by IFAC have been adopted by ACCA and must be learned. It is important to appreciate that ACCA have adopted a principles based approach to ethics so whilst there are specific recommendations in some areas (which must be learned) if you are faced with a practical question where you are not aware of any specific guidance having been issued, you must always go back to basics and apply the fundamental principles.
Page | 27
theexpgroup.com
ExPress Notes
Of particular importance to the auditor are the provisions relating to auditor independence.
KEY TERMINOLOGY
The fundamental principles of professional ethics as outlined in the IFAC Code of Ethics is a very important TOPIC. You might like to use TOPIC as a useful mnemonic to help you remember these principles. Technical (professional) competence and due care must be exercised by all members at all times. Members have a responsibility to act in accordance with best practice and to keep themselves technically up to date. Objectivity must be demonstrated by not allowing personal interest or influence of others to effect a members professional judgement. Professional behaviour must be demonstrated by members at all times, in both their private and business life, so as not to be seen to take any action which might bring the profession into disrepute. Integrity requires that members are always honest and do not knowingly allow themselves to be associated with anything dishonest so far as others are concerned. Confidentiality requires that under normal circumstances members should at all times respect confidentiality with regard to a clients affairs so far as third parties are concerned and that members should not make use of client information for personal gain.
KEY KNOWLEDGE Threats to Ethical Behaviour

The ACCA Code of Ethics recognises a number of threats to a members ethical professional behaviour. Whilst such threats apply generally, they are particularly relevant when considering the question of auditor independence. It is always worth remembering the following It will never be sufficient for an auditor to claim that he was independent in fact, he must always be clearly seen to have been independent in practice.
Page | 28
theexpgroup.com
ExPress Notes
The five threats are: 1. 2. 3. 4. Self-interest - e.g. owning shares in a client company Self-review e.g. providing accounting services to an audit client Familiarity e.g. acting as auditor to a company where a close relative is the CEO Intimidation e.g. continuing to act as auditor to a company which has started legal proceedings against the audit firm 5. Advocacy e.g. acting on a clients behalf in negotiations to raise new finance for the company
KEY KNOWLEDGE Safeguards Against Threats

As part of its quality control procedures, a professional firm must establish its own formalised procedures for the identification and management of such threats. Additionally, general safeguards may be seen as being: Those created by the ACCA e.g. requirement for potential members to complete an ethics module Those created by members themselves e.g. ensuring that CPD requirements are met
Page | 29
theexpgroup.com
ExPress Notes
Chapter 7
Audit Evidence

Consideration of audit evidence is another of those areas which you have already covered in F8 and to a large extent therefore is assumed knowledge. As always, however, it is important to bring up to exam speed again your knowledge of the basics in this area. It is your use of that basic knowledge which is likely to be different at the P7 stage. In F8 you were quite likely to be asked what the procedures required were in order to obtain audit evidence. In P7 you are more likely to have a scenario whereby you are asked what evidence you would expect to find in your review of audit working papers as a manager or partner. In answering the P7 type question therefore, it is important that you do not waste time by writing about the procedures themselves. Think carefully about the stage in the audit, the work has been done and you are being asked to consider the output of that work, not the process.
Page | 30
theexpgroup.com
ExPress Notes
KEY KNOWLEDGE Financial Statement Assertions

In the production of financial statements, the client management are in fact making a number of assertions. The auditors need to obtain audit evidence that these assertions are reasonable if they are to form an opinion as to whether the financial statements give a true and fair view and comply with relevant statutory and other obligations in relation to their form and content. ASSERTIONS RELATING TO TRANSACTIONS AND EVENTS OCCURRENCE COMPLETENESS ACCURACY CUT-OFF CLASSIFICATION
ASSERTIONS RELATING TO ACCOUNT BALANCES EXISTENCE RIGHTS AND OBLIGATIONS COMPLETENESS VALUATION AND ALLOCATION
ASSERTIONS RELATING TO PRESENTATION AND DISCLOSURE OCCURRENCE AND RIGHTS AND OBLIGATIONS COMPLETENESS CLASSIFICATION AND UNDERSTANDABILITY ACCURACY AND VALUATION
KEY KNOWLEDGE Audit Evidence

In accordance with ISA 500, the auditors must always look to obtain SUFFICIENT APPROPRIATE audit evidence on which to base their opinion. When considering what is appropriate audit evidence, this breaks down into whether the evidence is relevant and reliable.
SUFFICIENT
Page | 31
theexpgroup.com
ExPress Notes
What will be seen as sufficient is a matter of professional judgement and will be influenced by such factors as the nature of the business, the size of the business, the auditors past knowledge and experience of that client etc. RELEVANT What is relevant will depend upon the nature of the item being tested and the financial statement assertion being considered. RELIABLE In most instances, the auditors will base their opinion upon a variety of evidence rather than a single source. In considering the comparative reliability of the different forms of evidence which may be available the following general rules may be applied: 1. Documentary evidence will be more reliable than oral evidence. 2. Putting the different forms of documentary audit evidence in ascending order of comparative reliability, they may be seen as: (i) Client originated and client maintained eg. inventory records (ii) Third party originated but client maintained eg. supplier invoice (iii) Evidence obtained directly from third party eg. bank confirmation letter (iv) Auditor generated eg. any audit working paper detailing audit work performed and conclusion reached
KEY KNOWLEDGE Audit Procedures Relating to Audit Evidence

ISA 500 indicates 8 procedures some combination of which may be adopted by auditors in order to obtain audit evidence: 1. 2. 3. 4. 5. 6. 7. 8. Inspection of records or documents Inspection of tangible assets Observation Enquiry Confirmation Recalculation Reperformance Analytical procedures
Page | 32
theexpgroup.com
ExPress Notes
Chapter 8
Subsequent Events

This is another of those areas which is assumed knowledge from your earlier F8 studies which should be seen as a key part of your preparation for P7. Examiners reports at this level have often expressed concern about students lack of understanding of the basics!! The attraction of this syllabus area to the examiner has perhaps always been the fact that it is an area which readily lends itself to a very practical scenario based question and has often at this level been tied in with a question on audit reporting.
KEY TERMINOLOGY
Subsequent Events Relate to events occurring or facts emerging after the accounting period end, but before formal approval of the financial statements by a companys management.
Page | 33
theexpgroup.com
ExPress Notes
Adjusting Events Are those which relate to an item or condition existing at the SOFP date, where the subsequent events assist in forming an opinion as to the amount properly attributable to such item or condition, where at the SOFP date there was some doubt about the value. Eg. making provision at the year end because of the subsequent insolvent liquidation of a customer, where the amount outstanding at the year end was still unpaid at the time of the subsequent liquidation. Non-adjusting Events Are those which do not alter the year end position, but which would have had a material impact on the financial statements if they had occurred prior to the year end. Such nonadjusting events should be communicated by way of notes to the financial statements. Eg. The destruction by fire shortly after the year end of one of a companys warehouses. As auditors we should give careful consideration to those events which at first sight may appear to be non-adjusting, but which might be seen to impact on going concern, which could mean that in fact they need to be treated as adjusting events.
KEY KNOWLEDGE Audit Approach Proactive Period

Up to the date of signing the audit report , the auditor must be proactive in seeking out audit evidence relating to subsequent events, in order to consider whether or not the client has dealt with such events in an appropriate manner. Typical audit procedures During the period where best practice requires the auditor to be proactive in relation to subsequent events typical procedures would include, but not necessarily be restricted to: Discussions with management and subsequent review of company procedures for dealing with subsequent events Examining minutes of board and board committee meetings Review of management forecasts, budgets and management accounts Routine audit work which naturally takes auditor into subsequent period eg. tests relating to sales and purchases cut-off Obtaining management representations
Page | 34
theexpgroup.com
ExPress Notes
KEY KNOWLEDGE Audit Approach Reactive Period

After signing the audit report, the auditor need only be reactive to subsequent events. In other words, if there is some late event which if the auditor had known about it earlier would have impacted on the financial statements and/or the auditors opinion thereon, he must react by taking appropriate action. What constitutes appropriate action will obviously depend on the actual nature and timing of events, but might include: Discussions with management on their proposed reaction Revision/withdrawal of earlier report Addressing company AGM/GM Seeking further advice
Page | 35
theexpgroup.com
ExPress Notes
Chapter 9
Going Concern

You will be aware from earlier financial reporting studies, that going concern is one of the fundamental assumptions underlying the preparation of all general purpose financial statements. Appropriate application of this assumption is vital if the financial statements are to give a true and fair view. This is of course also an area that you have previously studied from an audit point of view in F8. In the current economic climate, with many businesses failing every day this is certainly a topical issue from an exam point of view and although it is very much assumed knowledge, it should be seen as an important area for your P7 studies as well. Examination questions in this area often have an element relating to audit reporting. In practice, a going concern qualification is perhaps one of the most difficult for an auditor to give, because of the very real danger that the audit report may become a self-fulfilling prophesy. Usually when such questions have appeared the examiner has expressed disappointment with the standard of many candidates answers. Going concern considerations may also apply when dealing with questions relating to audit risk and also subsequent events.
Page | 36
theexpgroup.com
ExPress Notes
KEY TERMINOLOGY
Going concern The concept of going concern is based upon the assumption that the business will continue to exist as a viable commercial entity for the foreseeable future, without the need for any significant cut-back in its present level of activity. Foreseeable future is normally taken as being a minimum of 12 months from the current accounting date. If for any reason, management consider a shorter period, then there should be a note to the financial statements indicating what that shorter period is and managements reasons for choosing it.
KEY KNOWLEDGE Audit Approach

The auditor should always be alert to possible indicators of going concern problems. A useful starting point for consideration of such indicators may be to relate to the elements of Business Risk ( = Operational Risk x Financial Risk x Compliance Risk) as considered previously. It is important that when risks are identified that the auditor also considers the possibility of mitigating factors which might counter balance the indicator of possible going concern problems. See examples in following table:
RISK OPERATIONAL FINANCIAL COMPLIANCE
POSSIBLE INDICATOR Shortage essential raw materials for manufacturing process Material FOREX losses Numerous fines for breach of anti-pollution legislation
POSSIBLE MITIGATING FACTOR R & D Dept close to finding synthetic alternative New hedging policy New more environmentally friendly manufacturing process about to come on line
Page | 37
theexpgroup.com
ExPress Notes
Specific audit procedures would include: Assessment of current and projected economic environment in which company operates Assessment of state of industry sector in which company operates Review of correspondence files and board minutes for evidence of significant disputes Review of subsequent period cash flow and profit forecasts Discuss management procedures and review and obtain management representations
KEY KNOWLEDGE Audit Report Considerations

As always, the type of audit report to be issued will be dependent upon the circumstances and the auditors assessment of materiality of the issues involved. The following table provides a useful summary of the most likely scenarios.
CIRCUMSTANCES Going concern basis used and considered appropriate with no related significant uncertainty Going concern basis used but appropriateness dependent upon some significant uncertainty which is fully and adequately disclosed Going concern basis used but appropriateness dependent upon some significant uncertainty which is either not disclosed at all or inadequately disclosed Going concern basis used but in auditors opinion not appropriate Going concern basis inappropriate but financial statements prepared on acceptable alternative basis which is adequately disclosed None
REPORT IMPLICATIONS
Unqualified opinion but use emphasis of matter paragraph to draw attention to disclosure of significant uncertainty Qualified opinion on grounds of disagreement, probably adverse rather than except for Qualified opinion on grounds of disagreement, probably adverse rather than except for Unqualified opinion but use emphasis of matter paragraph to draw attention to unusual circumstances
Page | 38
theexpgroup.com
ExPress Notes
Chapter 10
Group Audits

By the time you get to taking P7, it is assumed that you have taken/passed P2 and therefore have dealt with all aspects of consolidated accounts from an accounting point of view. Remember the examiner likes to test accounting knowledge in an auditing context. In a scenario based question, you will not be able to comment sensibly on the acceptability or otherwise of a clients proposed accounting treatment unless you have a sound knowledge and understanding of best accounting practice in that area. As part of your preparation for P7 make sure that you revise your accounting knowledge as to what it is that requires an investment to be treated as an associated or subsidiary company and also what are the main adjustments typically required in the preparation of consolidated accounts. The audit of group accounts is another of the topics not previously examinable at F8 and so there is always a good chance that you could get a question in this area. Make sure you have read the examiners article Group audit issues from March 2008 Student Accountant and of course watch out for any new articles in the coming months.
Page | 39
theexpgroup.com
ExPress Notes
KEY TERMINOLOGY
Group auditor The auditor of the ultimate parent company within a group structure. The group auditor is responsible for forming an opinion on the group financial statements so far as concerns the members of the parent company, as well as the parent companys own individual financial statements. Component auditor Components of the group financial statements might include subsidiaries, associates, joint ventures and branches. In some cases as well as being the group auditor, a firm may also audit directly some or all of the components, but frequently a totally different firm of auditors may be involved, these will be the component auditors.
KEY KNOWLEDGE Main Considerations of Group Auditor where Component Auditors are Involved
It is important to remember that whether you are acting as auditor of a single company or as a group auditor where component auditors are involved, the basic principles in relation to the following areas remain the same: acceptance of appointment quality control ethics audit procedures reporting
However, an important additional consideration for the group auditor will be the extent to which, in arriving at his own audit opinion, he is able to place reliance on the consolidated results which have not been audited directly by him but by component auditors.
Page | 40
theexpgroup.com
ExPress Notes
It might help you to remember some of the important considerations if you think in terms of what are my AIMS in this situation. Hopefully this mnemonic will serve as a useful aide memoire for you. Accounting policies (uniformity of) Information (availability of) Materiality Scope and reliability of the work of component auditors Accounting policies Best practice generally requires uniformity and consistency in the application of accounting policies throughout the group. This may be an important area in which to consider the need for making consolidation adjustments, particularly perhaps when dealing with a multinational group. Information As always, the group auditor must look to obtain sufficient appropriate audit evidence on which to base his opinion. Possible problems may arise in this respect for a variety of reasons, particularly perhaps in relation to foreign components, such as different: accounting dates languages legal requirements accounting standards auditing standards reporting requirements
Materiality For the group auditor it will be necessary to consider materiality in a group context. This will be particularly important when considering any qualified opinion given by a component auditor, what is material to the component may not necessarily be material to the group as a whole. Also the group auditor needs to consider carefully, whether matters relating to components which are considered immaterial when looked at individually, should be considered as material when taken collectively with other components.
Page | 41
theexpgroup.com
ExPress Notes
Scope and Reliability of the work of component auditors Basically, the group auditor needs to consider whether the component auditor has carried out the work that the he would have done and to the standards that he would have applied had he had direct responsibility. The group auditor cannot just accept without question the work of component auditors, and before placing reliance upon it should considers factors such as the component auditors: professional qualification experience independence reputation
Page | 42
theexpgroup.com
ExPress Notes
Chapter 11
Forensic Audits

This is the examiners baby!! When the current syllabus was introduced this was the only totally new thing in comparison with the old syllabus. Like any good mother, the examiner is defensive of her children!! At the ACCA Teachers Conference when the new syllabus and examiners were introduced. Lisa Weaver was quite passionate in her justification for its inclusion. This was in the face of a number of questions from the floor, as to whether it was appropriate to include what in practice is such a highly specialised area in a general auditing paper. Needless to say, there was a question on this topic in the Pilot Paper and it has since appeared in real exams and is likely to continue to do so. It is perhaps one of the few areas in P7 where you can anticipate getting marks for being able to provide suitable definitions. Make sure you read the examiners article Forensic Auditing in the September 2008 Student Accountant.
Page | 43
theexpgroup.com
ExPress Notes
KEY TERMINOLOGY
Forensic Accounting Covers a wide range of investigative work which accountants in practice might be asked to carry out. Work is often, but not exclusively, related to investigating alleged fraudulent activity and involves the use of accounting, auditing and investigative skills. Refers to whole process of investigating a financial matter, including potentially acting as an expert witness. Forensic Investigation Is in fact part of forensic accounting and refers to the practical measures adopted to gather evidence in respect of an alleged fraud and present findings to the client and perhaps ultimately to a court of law. Forensic Auditing Refers to the specific procedures adopted in order to obtain evidence and involves the use of audit techniques to this end.
KEY KNOWLEDGE Characteristics of Good Forensic Accountant / Auditor

The characteristics and skills required may be seen to include: Ability to identify frauds with minimal information Good knowledge of accounting standards Good knowledge of internal control Good knowledge of evidence Interpretative skills Investigative skills Interview skills Reporting skills Integrity Objectivity
Page | 44
theexpgroup.com
ExPress Notes
KEY KNOWLEDGE Types of Investigation

There are many types of investigation which a professional accountant might be asked to undertake in addition to fraud, amongst the most common being: Matrimonial disputes Partnership disputes Insurance claims Professional negligence claims
KEY KNOWLEDGE Types of Fraud

Just as there are many different types of investigation, there are any number of different types of fraud. Based on the examiners articles you should perhaps consider the most important as being: Corruption Asset misappropriation Financial statement fraud
KEY KNOWLEDGE Conducting an Investigation

The main stages should be seen as covering the following: Acceptance of engagement procedures Planning of the investigation Gathering evidence Reporting Court proceedings
Page | 45
theexpgroup.com
ExPress Notes
Chapter 12
Prospective Financial Information

Another of those areas which you will not have come across at F8, as it is only examinable in P7. Possibility sometimes of gaining a few marks for definitions and also for applying standard client acceptance procedures to this non-audit situation. Prospective financial information (PFI) may be seen as information that is based upon assumptions about possible future events and the actions that may be taken by the company that the information relates to. Major difference as compared to traditional audit work is that procedures consist primarily of making use of analytical review and enquiry. Not examined every time by any means, but comes up on a sufficiently regular basis that it should be seen as an important part of your studies.
Page | 46
theexpgroup.com
ExPress Notes
KEY TERMINOLOGY
Forecast Generally, but not exclusively, prepared for a 12 month period, a forecast is PFI based on management expectations at the time of preparation of both future events and management actions. Projection Generally, prepared for a longer period, often up to 5 years, a projection is PFI based on hypothetical assumptions about future events and management actions, more of a what if approach.
KEY KNOWLEDGE Acceptance Procedures

As with an audit client, normal due diligence procedures, including risk assessment, should be carried out before agreeing to act as the reporting accountant in relation to a PFI engagement. In particular consideration should also be given to the following: Intended uses for and users of PFI Basis for assumptions used Complexity of components of PFI Period covered by PFI Time allowed for work Type of assurance required (should be limited only)
Page | 47
theexpgroup.com
ExPress Notes
KEY KNOWLEDGE Reporting Accountant Procedures

Given nature of engagement, majority of procedures will be restricted to analytical review and enquiry. Particular consideration needs to be given to the following: Ensuring sufficient knowledge of the business Consideration of reasonableness and reliability of management assumptions Ensuring consistency with known information Checking arithmetical accuracy Obtaining management representations
KEY KNOWLEDGE PFI Reporting

Apart from standard reporting content (title etc) it is important to ensure: Statement of management responsibilities Confined to giving limited or negative assurance Caveats regarding inherent limitations of PFI
(end of ExPress Notes)
Page | 48
theexpgroup.com

ExP P7

Enviado por

Dados do documento

Descrição original:

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

ExP P7

Enviado por

Direitos autorais:

Formatos disponíveis

Notes

ACCA Paper P7 (INT)

START About ExPress Notes

How to get the most from these ExPress notes

At the start of the learning phase

Your stage in study for each paper Practice phase

These ExPress notes

ACCA online past exams

The night before the real exam

At the door of the exam room before you go in.

Our ExPress notes fit into our portfolio of materials as follows:

START About The ExP Group

START The Big Picture

KEY KNOWLEDGE Value For Money (VFM) Reviews

KEY KNOWLEDGE Key Performance Indicators

KEY KNOWLEDGE Internal Control and Systems Reviews

KEY KNOWLEDGE Due Diligence Assignments

START The Big Picture

KEY KNOWLEDGE Summary Diagram of Approach to Practical Audit Report Questions

START The Big Picture

START The Big Picture

START The Big Picture

KEY KNOWLEDGE Client Action

KEY KNOWLEDGE Third Party Action

START The Big Picture

KEY KNOWLEDGE Threats to Ethical Behaviour

KEY KNOWLEDGE Safeguards Against Threats

START The Big Picture

KEY KNOWLEDGE Financial Statement Assertions

KEY KNOWLEDGE Audit Evidence

KEY KNOWLEDGE Audit Procedures Relating to Audit Evidence

START The Big Picture

KEY KNOWLEDGE Audit Approach Proactive Period

KEY KNOWLEDGE Audit Approach Reactive Period

START The Big Picture

KEY KNOWLEDGE Audit Approach

RISK OPERATIONAL FINANCIAL COMPLIANCE

KEY KNOWLEDGE Audit Report Considerations

START The Big Picture

START The Big Picture

KEY KNOWLEDGE Characteristics of Good Forensic Accountant / Auditor

KEY KNOWLEDGE Types of Investigation

KEY KNOWLEDGE Types of Fraud

KEY KNOWLEDGE Conducting an Investigation

Prospective Financial Information

START The Big Picture

KEY KNOWLEDGE Acceptance Procedures

KEY KNOWLEDGE Reporting Accountant Procedures

KEY KNOWLEDGE PFI Reporting

(end of ExPress Notes)

Você também pode gostar