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1 F8 Audit & Assurance(INT) Accounting Practise Center(A.P.C) www.globalapc.com

F8 Audit & Assurance[INT]

Sample Note

For Exams in June2015


Content

CORPORATE GOVERNANCE: ............................................................................................. 9

AUDIT COMMITTEE: ........................................................................................................... 9

Corporate governance ........................................................................................................................ 9

ISA 260 ............................................................................................................................................. 12

PILOT PAPER Q3 CG and audit committee: ....................................................................................... 13

Answer to PILOT PAPER Q3[CG and audit committee:]: .................................................................... 14

AUDIT PROCESS: STAGE 1 .............................................................................................. 16

1,Ethics ............................................................................................................................................ 16

5 principles by ACCA Code of Ethics ................................................................................................... 16

Ethical threat to objectivity ................................................................................................................ 17

Safeguards to ethical threats .............................................................................................................. 18

DEC2007 Q2(a) [Ethics]:.................................................................................................................... 19

Answer to DEC2007 Q2(a) [Ethics]: ................................................................................................... 19

DEC2008Q3(a) Ethical Threats .......................................................................................................... 20

Answer to DEC2008Q3(a) Ethical Threats ......................................................................................... 21

June2009 Q5(b) Safeguards .............................................................................................................. 22

Answer to June2009 Q5(b) Safeguards ............................................................................................. 23

2. Precondition: ............................................................................................................................... 24

DEC2010 Q3 Precondition: ............................................................................................................... 25

Answer to DEC2010 Q3 Precondition: .............................................................................................. 25

3. Engagement letter: ....................................................................................................................... 26

June2011 Q2 Engagement Letter ...................................................................................................... 27

Answer to June2011 Q2 Engagement Letter ..................................................................................... 27

4. Rights and duties of auditors: ....................................................................................................... 28


DEC2008 Q2 rights and duties: ......................................................................................................... 29

Answer to DEC2008 Q2 rights and duties: ........................................................................................ 29

5. Audit documentation: .................................................................................................................. 30

Current audit file ................................................................................................................................ 30

Permanent audit file ........................................................................................................................... 31

Standardised working papers ............................................................................................................. 31

Example of audit working paper: ....................................................................................................... 32

DEC2010 Q2 audit documentation ................................................................................................... 33

Answer to DEC2010 Q2 audit documentation .................................................................................. 33

STAGE2 PLANNING THE AUDIT ................................................................................... 34

Audit strategy: ................................................................................................................................. 34

ISA 315 ................................................................................................................................................ 34

Ways that auditors use to understand client’s business: [AEIOU] ...................................................... 36

Audit Plan: ....................................................................................................................................... 37

Risk equation: ..................................................................................................................................... 37

DEC2009 Q3(a) Understand the environment of Client:.................................................................... 38

Answer to DEC2009 Q3(a) Understand the environment of Client: ................................................... 38

June2010 Q2(b) Materiality: ............................................................................................................ 39

Answer to June2010 Q2(b) Materiality:............................................................................................ 39

June2009 Q1(a+b) Audit Strategy Document.................................................................................... 40

Answer to June2009 Q1(a+b) Audit Strategy Document ................................................................... 42

DEC2009 Q1 Audit plan: ................................................................................................................... 44

Answer to DEC2009 Q1 Audit plan: .................................................................................................. 44

June2010:Q1: Audit risks.................................................................................................................. 46

Answer to June2010:Q1: Audit risks ................................................................................................. 48

DEC2011 Q3 Risk assessment ........................................................................................................... 51

Answer to DEC2011 Q3 Risk assessment .......................................................................................... 53


STAGE 3:ASSESS THE INTERNAL CONTROL SYSTEM OF CLIENT’S ENTITY: .. 57

Three important concepts: ............................................................................................................... 57

Sales cycle: .......................................................................................................................................... 58

Purchase cycle: ................................................................................................................................... 61

Payroll Cycle: ...................................................................................................................................... 64

Inventory System ............................................................................................................................. 66

Revenue and capital expenditure system ......................................................................................... 67

June2008 Q1:(only (a&b)) (sales system) ......................................................................................... 68

Answer to June2008 Q1:(only (a&b)) (sales system) ......................................................................... 70

June2011 Q1(Tests of controls (sales system) (a&c) .......................................................................... 71

Answer to June2011 Q1 (a&c) .......................................................................................................... 73

DEC2010 Q1:purchase system (a&b) ................................................................................................ 75

Answer to DEC2010 Q1 .................................................................................................................... 77

DEC2008 Q1(only a&b) Wages system .............................................................................................. 80

Answer to DEC2008 Q1(only a&b) Wages system ............................................................................. 82

June2012 Q1(a) purchase system ..................................................................................................... 84

Answer to June2012 Q1(a) ............................................................................................................... 85

DEC2011:Q1Payroll system (a&c&e) ................................................................................................. 87

Answer to DEC2011 Q1 (a&c&e) ...................................................................................................... 89

DEC2012 Q1(a) inventory system ..................................................................................................... 92

Answer to DEC2012 Q1(a) ................................................................................................................ 94

STAGE 4: PERFORM ACTUAL TESTING ...................................................................... 95

Basic Accounting knowledge recaps ................................................................................................. 97

How to prepare financial statements? ............................................................................................... 97

Format of Financial Statements ......................................................................................................... 97

Double Bookkeeping (6 steps) .......................................................................................................... 100

Controlling the bookkeeping systems .............................................................................................. 119

Control account reconciliations ........................................................................................................ 120


Bank reconciliations ......................................................................................................................... 122

Q June2008 Q3 Analytical Procedures ............................................................................................ 126

Answer to June2008 Q3 ................................................................................................................. 128

Q:DEC2009 Q3(c) non-current assets .............................................................................................. 131

Answer to DEC2009 Q3(c) .............................................................................................................. 131

Q:DEC2010:Q4(c) PPEs (amended) ................................................................................................. 132

Answer to DEC2010:Q4(c) .............................................................................................................. 133

Inventory: (subsequent measurement: cost & NRV) ....................................................................... 135

Q:DEC2009 Q1(e) Inventory ........................................................................................................... 136

Answer to Q:DEC2009 Q1(e) Inventory .......................................................................................... 137

Q: June2010 Q1: (c&d) inventory ................................................................................................ 138

Answer to June2010 Q1: (c&d) .................................................................................................... 139

Q:DEC2011 Q3(c) inventory: ........................................................................................................... 141

Answer to DEC2011 Q3(c): ............................................................................................................. 141

Q: June2009 Q1(d) Receivable: ...................................................................................................... 142

Answer to June2009 Q1(d): ............................................................................................................ 142

Q: June2010 Q3(a): sales and receivables ....................................................................................... 143

Answer to June2010 Q3(a) ............................................................................................................. 143

Q: June2011 Q1(b+d) receivable .................................................................................................... 144

Answer to June2011 Q1(b+d) ......................................................................................................... 144

Cash Cycle ...................................................................................................................................... 146

Bank confirmation letter: ................................................................................................................. 147

Bank reconciliation ........................................................................................................................... 148

Q: Recon ........................................................................................................................................... 149

Cash audit: ........................................................................................................................................ 152

June2010 Q3(c) Cash and cash at bank: .......................................................................................... 153


Answer to June2010 Q3(c) ............................................................................................................. 153

June2010 Q1(d(ii)) provisions:........................................................................................................ 154

Answer to June2010 Q1(d(ii)) ......................................................................................................... 154

DEC2009 Q5(a) payables: ............................................................................................................... 155

Answer to DEC2009 Q5(a) .............................................................................................................. 155

Q: Intangible assets: ....................................................................................................................... 156

Answer for intangible assets: ......................................................................................................... 156

STAGE5: REVIEW/ COMPLETION STAGE ................................................................. 157

ISA 560 Subsequent events[auditors’ job] ...................................................................................... 157

Going Concern ............................................................................................................................... 159

Indications of going concern problems ............................................................................................ 159

Ways to see whether company is still a going concern entity: ......................................................... 160

Written Representation: ................................................................................................................ 161

Contents: Mnemonics: “Briefl”: ....................................................................................................... 161

Accounting policy and estimate: ...................................................................................................... 161

Stage6: Audit Report: ..................................................................................................................... 163

Content: [TAIRBOS] ........................................................................................................................... 163

Types: ............................................................................................................................................... 163

DEC2011 Q5 subsequent events ..................................................................................................... 164

Answer to DEC2011 Q5 .................................................................................................................. 166

June2010 Q5[Going concern] ......................................................................................................... 169

Answer to June2010 Q5 Going concern .......................................................................................... 171

DEC2010 Q5[written representation]: ............................................................................................ 173

Answer to DEC2010 Q5 .................................................................................................................. 175

CHAPTER3 EXTRAS: ...................................................................................................... 177

1. non audit engagement: .............................................................................................................. 177

Q: DEC2009 Q4: [non audit engagement]: ...................................................................................... 178


Answer to DEC2009 Q4: [non audit engagement]: ......................................................................... 179

2. Non profit making organization: ................................................................................................. 181

Value for Money (VFM) Audit: .......................................................................................................... 181

Difference between internal and external auditors: ........................................................................ 181

Whether internal audit department is needed? .............................................................................. 181

DEC2010 Q4[value for money audit]: ............................................................................................. 183

Answer to DEC2010 Q4 .................................................................................................................. 184

BASIC REVISIONS FOR F8: ........................................................................................... 186

DEC2008 EuKaRe Q4 ....................................................................................................................... 186

Answer to DEC2008 EuKaRe Q4 ...................................................................................................... 187

Dec2007 Q1 Dinzee ........................................................................................................................ 189

Answer to Dec2007 Q1 Dinzee ....................................................................................................... 192

Q: JUNE 2011 Q5 ............................................................................................................................ 195

Answer to JUNE 2011 Q5 ................................................................................................................ 196

© Lesco Group Limited, April 2016

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted, in any form or by any

means, electronic, mechanical, photocopying, recording or otherwise,

without the prior written permission of Lesco Group Limited.


How to study and pass ACCA F8 Audit&Assurance:

You should print this study note out in front of you before watching

any videos.

You should also have 50 blank pages in front of you to copy note from

tutors as well.

You should also be able to answer all questions from the study note.

After completing the tuition study please go to the revision phase and

practise all recommended questions.

Good luck!


Corporate governance:

Audit committee:

Corporate governance

This means to make directors work in the best interest of the company rather

than of their own.

This is based on agency theory, ie, separation of duties between owner and

manager. And in order to make directors work in the best interest of the

company, company has to incur agency costs, ie, salary, corporate governance,

audit fees etc.

Best practices:

1. The board of directors

An effective board of directors should:

● Lead company strategy, with prudent controls and risk management, to

maximise sustainable long term success of company.

● Should meet regularly, with a formal agenda.

● Should detail its membership (including Chairman, CEO, Senior Independent

Director, Committee members) and work in the Annual Report.

● Should ensure Chairman and Non Executive Directors (NEDs) meet without

the Executives, to consider their performance.

● Should ensure NEDs meet without Chairman annually, to consider the

performance of the Chairman.

2. Chairman and Chief Executive Officer

Issues that relate to the Chairman and CEO:

● Should not be the same person.

● Chairman leads Board, and sets agenda for Board Meetings ensuring there is

enough time for important matters and all directors contribute.

● Chairman is key contact for shareholders.

● CEO runs the company.


3. Board composition

● No one person, or group, should be able to dominate the Board.

● Should be an appropriate size, and right balance of skills and experience.

This includes diversity, including by gender.

4. Appointments to the board

● Have objective merit-based criteria for selection of new Board members.

● Oversee induction and training for all directors (likely to be organised by

Chairman, assisted by Company Secretary).

5. Annual performance review

● Board, its committees, and individual directors should have performance

appraised at least annually.

6. Re-election of board members

● At 1st AGM after appointment to Board, and at least every 3 years afterwards,

by shareholders (note, for FTSE 350 companies, all directors are up for

reelection

every year).

● If not annual re-election for all directors, sensible to “retire by rotation” and

avoid potentially losing all the Board in one go.

7. Remuneration of directors

● Significant proportion should be performance-related.

● Should consider industry pay levels.

● Enough to attract, retain and motivate.

● Notice periods no longer than 1 year.

8. Internal control

● Board should ensure a sound system of Controls.


● Annual review of effectiveness of Controls, and report this in Annual Report.

● Audit Committee of at least 3 Independent NEDs.

● Main role is liaison with the internal and external auditors on all matters.

9. Relations with shareholders

● Regular dialogue with shareholders.

● Chairman to ensure shareholder views communicated to Board.

● Communicate with investors and encourage debate through AGM.

● Separate resolutions on each issue.

10. Institutional shareholders

● Should themselves ensure dialogue with directors.

● Should make considered use of their considerable voting power.


ISA 260

ISA 260 Communication with Those Charged with Governance includes issues

such as:

● The auditor’s responsibilities in relation to the financial statement audit

● The scope and timing of the audit

● Significant findings arising on the audit

● Any independence issues

● Possible modifications necessary to the audit report

● Any management representation points requested

● Any suspected or actual cases of fraud.


PILOT PAPER Q3 CG and audit committee:

You are the audit manager in the audit firm of Dark & Co. One of your audit clients

is NorthCee Co, a company specialising in the manufacture and supply of sporting

equipment. NorthCee have been an audit client for five years and you have been

audit manager for the past three years while the audit partner has remained

unchanged.

You are now planning the audit for the year ending 31 December 2007. Following an

initial meeting with the directors of NorthCee, you have obtained the following

information.

(i) NorthCee is attempting to obtain a listing on a recognised stock exchange.

The directors have established an audit committee, as required by corporate

governance regulations, although no further action has been taken in this

respect. Information on the listing is not yet public knowledge.

(b) Explain the actions that the board of directors of NorthCee Co must

take in order to meet corporate governance requirements for the listing

of NorthCee Co. (6 Marks)

(c) Explain why your audit firm will need to communicate with NorthCee

Co’s audit committee for this and future audits. (4 Marks)


Answer to PILOT PAPER Q3[CG and audit committee:]:

(b)

1, audit committee

The management must finish the process of forming an audit committee.

2,CEO&chairman

Most stock exchanges require the separation of these two key roles.

3,intenal audit

Stock exchanges often require that companies have an internal audit department to

review the internal control systems and report to audit committee.

4,non-executive directors

Most stock exchanges require that the main board of directors include

non-executive directors.

5, other information

Some stock exchanges require that annual financial report contains information on

corporate governance.

6, meetings

Establishing procedures to maintain contact with institutional shareholders and any

other major shareholders. The evening reception for shareholders could become a

regular event in this respect.


(c)

1 Objectivity

The audit committee consists of non-executive directors (NEDs), who by definition

are independent of the company and can therefore take an objective view of the

audit report.

2 recommendations

The audit committee can ensure that any recommendations from the auditor are

implemented. The audit committee has independent NEDs who can pressure the

board to taking action on auditor recommendations

3 review reports

The audit committee will have more time to review the audit report and other

communications to the company from the auditor (eg management letters) than the

board. The auditor should therefore benefit from their reports being reviewed

carefully.

4 review work done by auditors

The audit committee also has more time to review the effectiveness and efficiency

of the work of the external auditor than the board. The committee can therefore

make recommendations on the re-appointment of the auditor, or recommend a

different firm if this would be appropriate.


Audit Process: Stage 1

1,Ethics

5 principles by ACCA Code of Ethics

1. Professional behavior

Accountants must comply with all relevant laws and regulations.

There is also a test whereby actions suggested by a third party which would

bring discredit to the profession should also be avoided.

An accountant is required to treat all people contacted in a professional capacity

with courtesy and consideration. Similarly, any marketing activities should not

bring the profession into disrepute.

2. Integrity

Integrity implies fair dealing and truthfulness.

Members can’t lie to others by preparing a material misstated statement or

mislead others by window dress the financial statement.

3. Competence and due care

Pass exams + accumulate experience + stick to standards when doing the work.

4. Confidentiality

Accountants can’t disclose confidential information of client to 3rd party without

approval.

If client is involved in illegal activities like money laundering then accountant is

able to disclose this to 3rd party.

5. Objectivity

When preparing the financial statement, accountant should only focus on

standards not other factors like personal bias, conflict of interest, or the undue

influence of others.


Ethical threat to objectivity

Self interest threat:

The threat that a financial or other interest (eg concern about job security) will

inappropriately influence the professional accountant’s judgement or behaviour.

In other words, this relates to the threat of a conflict of interest.

Self review threat:

The threat that a professional accountant will not appropriately evaluate the

results of a previous judgement made by themselves, or by another individual

within their organisation, but will rely on that judgement as part of a service

they are currently providing.

Advocacy threat:

It occurs if a professional accountant is promoting a client or employer’s position

or opinion to the extent that the accountant’s subsequent objectivity is

compromised.

Familiarity threat:

If the accountant develops too close a relationship with a client or employer (for

example, through length of service) the accountant could become too

sympathetic to the interestsof the client or employer such that their professional

judgement becomes compromised.

Intimidation threat:

When an accountant is deterred from acting objectively by actual or perceived

threats, including attempts to exercise undue influence over the accountant.


Safeguards to ethical threats

Safeguards are actions of other measures designed to eliminate threats or

reduce them to an acceptable level.

There are two broad categories of safeguard:

(a) Safeguards created by the profession, legislation or regulation:

Education, training and experience requirements for entry into the profession

Requirements for continuing professional development

Corporate governance regulation

Professional standards

Professional monitoring and disciplinary procedures

External review by a legally empowered third party (eg an auditor) of the

reports, returns and information produced by a professional accountant

(b) Safeguards in the work environment:

These include complaint systems within employing organisations which enable

staff to draw attention to unprofessional or unethical behaviour. For example,

whistleblowing procedures to help protect employees against threats.


DEC2007 Q2(a) [Ethics]:

2 (a) Explain each of the FIVE fundamental principles of ACCA’s Code of

Ethics and Conduct. (5 marks)

Answer to DEC2007 Q2(a) [Ethics]:

Professional behavior

A professional accountant should Should respect laws and regulations and not do

anything that could discredit the accountancy profession.

Integrity

A professional accountant should be honest in all business and professional

relationships.

Competence and due care

When performing professional services, a professional accountant should show

competence(eg, passing exams and gaining qualifications) and keep up-to-date

with developments in related regulations as well as putting diligence into the work.

Confidentiality

A professional accountant should not use or disclose confidential information of the

client’s entity to the 3rd party without obtaining client permission,eg, to

competitors.

But if there is a legal or professional obligation to do so, eg, when client is involved

in money laundering issues, then the confidential information can be disclosed to

the 3rd party, ie, court.

Objectivity

A professional accountant should be fair and not allow personal bias, conflict of

interest or influence of others to override objectivity.


DEC2008Q3(a) Ethical Threats

You are a manager in the audit firm of Ali & Co; and this is your first time you have

worked on one of the firm’s established clients, Stark Co. The main activity of Stark

Co is providing investment advice to individuals regarding saving for retirement,

purchase of shares and securities and investing in tax efficient savings schemes.

Stark is regulated by the relevant financial services authority.

You have been asked to start the audit planning for Stark Co, by Mr Son, a partner

in Ali & Co. Mr Son has been the engagement partner for Stark Co, for the previous

nine years and so has excellent knowledge of the client. Mr Son has informed you

that he would like his daughter Zoe to be part of the audit team this year; Zoe is

currently studying for her first set of fundamentals papers for her ACCA qualification.

Mr Son also informs you that Mr Far, the audit senior, received investment advice

from Stark Co during the year and intends to do the same next year.

In an initial meeting with the finance director of Stark Co, you learn that the audit

team will not be entertained on Stark Co’s yacht this year as this could appear to be

an attempt to influence the opinion of the audit. Instead, he has arranged a balloon

flight costing less than one-tenth of the expense of using the yacht and hopes this

will be acceptable. The director also states that the fee for taxation services this

year should be based on a percentage of tax saved and trusts that your firm will

accept a fixed fee for representing Stark Co in a dispute regarding the amount of

sales tax payable to the taxation authorities.

Required:

(i) Explain the ethical threats which may affect the auditor of Stark Co.

(6 marks)

(ii) For each ethical threat, discuss how the effect of the threat can be

mitigated.

(6 marks)

Please note: It’s very common for your F8 examiner to use Colum to answer

questions so we use that as well.


Answer to DEC2008Q3(a) Ethical Threats

(i)Ethical threat

(ii)Mitigation of threat

Mr Son, the engagement partner has been

involved with the client for the last nine

years.

This might create familiarity threat to

objectivity due to this long association.

Mr Son should be rotated from being

engagement partner.

He can still contact the client but should not

be in the position of signing the audit

report.

There may be the impression of lack of

independence as Zoe is related to the

engagement partner, a daughter of Mr son

and Zoe could be tempted not to identify

errors in case this prejudiced her father’s

relationship with the client.

To show complete independence, Zoe

should not be part of the audit team.

However, if Mr Son is no longer the

engagement partner then this removes the

ethical threat and Zoe could be included in

the audit team.

However, continued use of client services

could impair its objectivity especially if Mr

Far is not paying a

full fee and therefore receiving a benefit

from the client.

To show independence from the client, Mr

Far could be asked not to use the services of

Stark Co again unless this

is first agreed with the engagement

partner.

The audit team has been offered a balloon

flight at the end of the audit.

Acceptance of gifts from a client, unless of

an insignificant amount, would create a self

interest threat to impair objectivity.

The balloon flight should not be accepted.

Investigation would also be needed to find

out why hospitality was

accepted in previous years.

The firm may try to gain the highest tax

refund for the client and this could tempt the

audit firm to suggest illegal

tax avoidance schemes and this may create

a self interest threat to objectivity.

The audit firm must confirm that assistance

with taxation work is acceptable by law,

and the fee must be based on time and

experience for the job, not the future

outcome(ie, contingent fee)

Representing Stark Co in court could be seen

as an advocacy threat – that is the audit firm

is promoting the position of the client and

this could damage the objectivity of the firm.

To remain independent, the audit firm

should decline to represent the client in

court.


June2009 Q5(b) Safeguards

(b) For the purposes of this section assume from part (a) that the directors have

agreed to value inventory at $15/barrel.

Having investigated the matter in part (a) above, the directors present you with an

amended set of financial statements showing the emergency reserve stated not at

6,000 barrels, but reported as 60,000 barrels. The final financial statements now

show a profit following the inclusion of another 54,000 barrels of oil in inventory.

When queried about the change from 6,000 to 60,000 barrels of inventory, the

finance director stated that this change was made to meet expected amendments to

emergency reserve requirements to be published in about six months time. The

inventory will be purchased this year, and no liability will be shown in the financial

statements for this future purchase. The finance director also pointed out that part

of Tye Co’s contract with the government requires Tye Co to disclose an annual

profit and that a review of bank loans is due in three months. Finally the finance

director stated that if your audit firm qualifies the financial statements in respect of

the increase in inventory, they will not be recommended for re-appointment at the

annual general meeting. The finance director refuses to amend the financial

statements to remove this ‘fictitious’ inventory.

(iii) Discuss the safeguards that the auditors of Tye Co can use in an

attempt to overcome the intimidation threat from the directors of Tye Co.

(4 marks)


Answer to June2009 Q5(b) Safeguards

1 Discuss with audit committee

The situation can be discussed with the audit committee. non-executive

directors who are within the audit committee will be able to discuss the

situation with the finance director and point out clearly the auditor’s

opinion.

They can also remind the directors as a whole that the appointment of

the auditor rests with the members on the recommendation of the audit

committee.

If the recommendation of the audit committee is rejected by the board,

good corporate governance requires disclosure of the reason for

rejection.

2 Obtain second partner review

The engagement partner can ask a second partner to review the working

papers and other evidence relating to the issue of possible fraud.

If this action does not resolve the issue, it does provide additional

assurance that the findings and actions of the engagement partner are

valid.

3 Resignation

If the matter is serious, then the auditor can consider resignation rather

than not being re-appointed.

If the auditors consider to resign then they can normally require the

directors to hold a general meeting to consider the circumstances of the

resignation.

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