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+--- Thread: Episode # 2: Adv Auditing Vs Adv Audit & Assurance (/showthread.php?tid=5079)
Episode # 2: Adv Auditing Vs Adv Audit & Assurance - Muhammad Amir - 04-20-2008
Episode # 2 CA Module âFâ F-21 âAdvanced Auditingâ Vs ACCA âProfessional Levelâ P-7 âAdvanced Audit & Assuranceâ.
Look at these papers in the perspectives of paper pattern, assessment criteria and marking scheme.
I am comparing winter (December) 2006 paper of âAdvanced Auditingâ with December 2007 paper of âAdvanced Audit & Assuranceâ.
At the end of the topic I will post the differences between paper pattern, assessment criteria and marking schemes of both bodies.
So lets start with CA Module âFâ âAdvanced Auditingâ paper.
Q.1 ABC & Co. Chartered Accountants have been offered an appointment as the auditor of
prospective financial statements of Alif Limited, which have been prepared in the form
of a projection. These prospective financial statements are prepared to help the
directors of the company to make certain strategic decisions for the expansion of the
company. The volume of sale projected in the said financial statements had never been
achieved by the company in the past.
ABC & Co., Chartered Accountants are also the external auditors of the company.
You, as audit manger, of the firm, are required to prepare a memorandum for the
partner in-charge containing the following
(a) <font color="red"><b>The matters that need to be considered before accepting this engagement.</b></font id="red"> (02)<b>(Engagement matters at this level are out of my apprehension)</b>
(b) The information to be contained in an unmodified <font color="red"><b>audit report on the prospective
financial statements.</b></font id="red"></b>(Unmodified/Modified Audit Reports are already discussed in Module D's Auditing this very basic level concept)</b> (08)
Q.2 While reviewing the directorsâ report of Bay Limited, at the conclusion stage of your
audit, you noted that;
- Contingent liabilities reported in directorsâ report were Rs. 250 million, whereas
the directors have previously agreed to report it in the financial statements as Rs.
525 million. On inquiry, the CFO informed that the directors had agreed with the
view of the auditors to avoid qualification although they still believe that
contingent liabilities should be reported at Rs. 250 million.
- A new plant was reported to be operative only for the half year while you have
sufficient appropriate evidence that the said plant remained in operation for almost
the whole year. However, financial statements do not contain any information
about duration of plantâs operation as it was not required under the law.
What course of action would you take to resolve the issues? (06)
Q.3 Jeem Limited has accumulated tax losses amounting to Rs. 250 million. The
management has recognized a deferred tax asset amounting to Rs. 87.50 million
assuming that there will be sufficient taxable profit in the future. Tax computation of
the company is very complex and involves application of various rules and regulations
which are subject to frequent changes by the government.
Briefly describe the steps that you would take as an auditor in the audit of deferred tax
asset recognized by the management in the above case. (06)
Q.4 You are the member of an audit team formed to conduct audit of Safe General
Insurance Limited, a listed company. <u><font color="red">The engagement partner of your firm has asked
you to prepare a note containing the following;</font id="red"></u>
(a) <font color="red"><b>Threats that potentially affect independence.</b></font id="red"> (04)<b>(Auditors Independance is B.Com or CAT paper 8 level question and it is simply to list down what you have learned from book no scenario situation is examined for this basic question) after all Module 'F' is demanding</b>
(b)<b><font color="red"> Measures to be taken by the engagement partner to form a conclusion on
compliance with independence requirements. </font id="red"> </b> (04)
Q.5 Ahmad & Co. Chartered Accountants have been appointed as auditors of Noon
Limited for the first time. Prior yearsâ financial statements have been audited by an
affiliated firm.
As audit in-charge of the company, you noticed that last yearâs audit report had been
qualified by the previous auditors on the following matters
- Disagreement on capitalization of borrowing costs amounting to Rs. 15 million.
- Inadequacy of records maintained for recording sales, causing non-identification
of related party transactions.
You are planning to carry out certain specific procedures in respect of opening
balances. Your team members consider these procedures unnecessary as previous
yearsâ audits were done by your affiliated firm. They feel that, this audit should not be
considered as an initial audit engagement.
You are required to brief your audit team on the following
(a) Reasons for considering this audit an initial audit engagement and the evidence
you will obtain from applying procedures on opening balances. (04)
(b) Audit approach in respect of matters that caused modification of last yearâs audit
report. (06)
Q.6 At the <b><font color="red">planning phase of the audit</font id="red"> (Audit planning is Module D level subject and it should have been discussed at that module in greater depth</b> of Prudent Limited, a listed company, senior auditor
of your team submitted the following information;
- The Board of Directors of the company has recently appointed Mr. Smart as new
chief executive whose remuneration is mostly based on efficiency bonus and
stock options.
- Mr. Smart is reputed as a seasoned business executive and has been a very good
friend of the Chairman of the audit committee.
- Since his joining he has proved to be the main decision maker and the Board
appears to be relying considerably on Mr. Smart and less interested in day to day
operations of the company.
- Boardâs main concern is now the growth in net earnings estimated for the next
year, which Mr. Smart strongly believes, will be 30% at the minimum.
- There are a number of instances of lack of segregation of duties and Mr. Smart
being cost conscious, has allowed the situation to continue.
- There is a big lay off plan in place and employees are expecting such plan
although it has been kept as top secret. This lay off will help the company to
achieve higher growth in earnings.
- Mr. Smart has introduced an employeesâ skill development scheme only for top
management personnels.
(a) Describe the fraud risk factors, if any, that are indicated in the above information. (07)
(b) âManagement is in a unique position to perpetrate fraud because of managementâs ability to directly or indirectly manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. While the level of risk of management override of controls will vary from entity to entity, the risk is nevertheless present in all entities and is a significant risk of material misstatement due to fraudâ.
What are the procedures that an auditor should design and perform to address the
risk of managementâs override of controls? (06)
Q.7 Mr. Kay, the audit partner of JKL & Co. Chartered Accountants, came across the
following matters relating to the trainee students of the firm;
- They freely discuss information of one client with other clients unless client
specifically requests for confidentiality.
- One trainee disclosed some key information of an ex-client to his friends outside
the firm, which probably were used by them for their personal benefit. However,
the trainee himself had not used such information in any way.
- Another trainee supplied certain information to one of the lawyers of the client.
However, he had obtained prior written permission from the said client.
To address the issues relating to confidentiality Mr. Kay decided to hold a training
session for trainee students. As the audit manager, you are required to make a
presentation covering the following points;
(a) <b><font color="red">Principles of confidentiality. (04)</font id="red"></b>
(b) Any breach of such principles with relation to given instances. (03)
© <font color="red"><b>Examples of circumstances when disclosure of information of a client is
considered to be in order.</font id="red"><font color="black">This is very basic level question the answer is that when client is involved in Drug Traficking, in Terrorism Offence or when centeral courts are asked to do so</font id="black"></b> (03)
Q.8 After the completion of field work of the audit of Ray Limited you, as audit in-charge,
have noted the following
- The provision of a material amount against a pending legal suit remained
unresolved between the auditor and Chief Financial Officer (CFO) until a second
opinion from a lawyer was received. Thereafter, liability was booked
appropriately.
- This year, auditors performed extensive audit procedures on revenue account.
- There were a number of minor errors which were corrected on the auditorâs
intimation. However, there were many other similar errors, which remained
uncorrected by the management, being considered immaterial, in aggregate.
- There exists a disagreement between the auditors and the CFO relating to
provision for bad debts of material amount.
- Internal audit department was found efficient and effective.
- Chief Executive by-passes the credit committee frequently and approves credit
sales to some customers.
Which of the above matters may be included in your communication with the
management and audit committee of the company? Explain. (09)
Q.9 While conducting initial meeting with members of your audit team, you have noticed
that they are confused about use of tests of controls in the presence of risk assessment
procedures related to internal controls. They are of the opinion that auditor is not
required to perform tests of operating effectiveness of internal controls in each audit
period. They also believe that auditor can save much time and energy by omitting
substantive tests when tests of controls give sufficient and appropriate evidence that
efficient and reliable controls were in effect through out the period under audit.
(a) Briefly discuss why <b><font color="red">tests of controls</font id="red"> <font color="black">(tests of controls at this level of paper are out of my apprehension)</font id="black"></b> are required to be performed when risk
assessment procedures have already been performed. (04)
(b) How does an auditor rely on operating effectiveness of internal controls tested
during previous audits? (04)
© Give your comments on the <font color="red">teamâs understanding about omitting substantive
procedures?</font id="red"> (02)
Q.10 Zay (Pvt.) Limited engaged in construction of industrial buildings has been asked by a
prospective customer to attach summarized financial statements of the company duly
certified by a practicing chartered accountant, with the tender documents.
The Chief Financial Officer (CFO) contacted Abdul Qadir & Company, Chartered
Accountants, who had recently been appointed by the company in place of another
firm of chartered accountants and requested them to issue the required certificate. For
the said purpose, CFO also sent a set of summarized financial statements extracted
from audited financial statements on which previous auditor had issued his audit
report.
(a) Explain whether the firm can <font color="red">accept the engagement.</font id="red"> (03)
(b) <b><font color="red">Briefly describe the main elements of auditorâs report on summarized financial
statements? (07)</font id="red">[/b]
<font color="red"><b>Q.11 Briefly explain the following components of Internal Control System
(a) Entityâs risk assessment process. (04)
(b) Information and Communication. (04)</font id="red">(These 8 marks for this level of question without any scenario-->very very strange)
Enity's Risk Assessment Process is Identifying and Responding to Business Risksand risks arise due to Change in Technology, New Personnel, New Accounting Pronouncements, Changes in Operating Environment, Expended Foriegn Operations and Rapid Growth--> have i scored full four marks
Information and Communication System consists of Infrastructure(Physical and Hardware), Software, People, Procedures and Data, Information And Communication System must do
1)Identify and record all valid transactions
2)Record in timely basis
3)Measure the values properly
4)Record in a proper period
5)Proper Presentation and Disclosure
Have i again scored 4 more marks
(THE END)
So, you have seen this paper and its marking scheme now lets see the criteria of ACCA âProfessional Levelâ P-7 âAdvanced Audit & Assuranceâ paper.
- Muhammad Amir - 04-20-2008
Section A â BOTH questions are compulsory and MUST be attempted
1 Your client, Island Co, is a manufacturer of machinery used in the coal extraction industry. You are currently planning the audit of the financial statements for the year ended 30 November 2007. The draft financial statements show revenue of $125 million (2006 â $103 million), profit before tax of $5·6 million (2006 â $5·1 million) and total assets of $95 million (2006 â $90 million). Your firm was appointed as auditor to Island Co for the first time in June 2007.
Island Co designs, constructs and installs machinery for five key customers. Payment is due in three instalments 50% is due when the order is confirmed (stage one), 25% on delivery of the machinery (stage two), and 25% on successful installation in the customerâs coal mine (stage three). Generally it takes six months from the order being finalised until the final installation.
At 30 November, there is an amount outstanding of $2·85 million from Jacks Mine Co. The amount is a disputed stage three payment. Jacks Mine Co is refusing to pay until the machinery, which was installed in August 2007, is running at 100% efficiency.
One customer, Sawyer Co, communicated in November 2007, via its lawyers with Island Co, claiming damages for injuries suffered by a drilling machine operator whose arm was severely injured when a machine malfunctioned. Kate Shannon, the chief executive officer of Island Co, has told you that the claim is being ignored as it is generally known that Sawyer Co has a poor health and safety record, and thus the accident was their fault. Two orders which were placed by Sawyer Co in October 2007 have been cancelled.
Work in progress is valued at $8·5 million at 30 November 2007. A physical inventory count was held on 17 November 2007. The chief engineer estimated the stage of completion of each machine at that date. One of the major components included in the coal extracting machinery is now being sourced from overseas. The new supplier, Locke Co, is located in Spain and invoices Island Co in euros. There is a trade payable of $1·5 million owing to Locke Co recorded within current liabilities.
All machines are supplied carrying a one year warranty. A warranty provision is recognised on the balance sheet at $2·5 million (2006 â $2·4 million). Kate Shannon estimates the cost of repairing defective machinery reported by customers, and this estimate forms the basis of the provision.
Kate Shannon owns 60% of the shares in Island Co. She also owns 55% of Pacific Co, which leases a head office to Island Co. Kate is considering selling some of her shares in Island Co in late January 2008, and would like the audit to be finished by that time.
Required
(a) <font color="purple"><b>Using the information provided</b>, <b>identify and explain the principal audit risks</b>, and any other matters to be considered when <b>planning the final audit for Island Co</b> for the year ended 30 November 2007.</font id="purple">
Note <b>your answer should be presented in the format of briefing notes to be used at a planning meeting.</b>
Requirement <font color="purple">(a) <b>includes 2 professional marks</b></font id="purple">. (13 marks)
(b) <font color="purple">Explain the principal audit procedures to be performed during the final audit in respect of the estimated warranty provision in the balance sheet of Island Co as at 30 November 2007. </font id="purple"> (5 marks)
© (i) <font color="purple">Identify and describe <b>FOUR quality control procedures</b> that are applicable to the <b>individual audit engagement</b>;</font id="purple"> and (8 marks)
(ii) <b>Discuss TWO problems that may be faced in implementing quality control procedures in a small firm of Chartered Certified Accountants, and recommend how these problems may be overcome.</b> (4 marks)
(30 marks)
2 You are the manager responsible for the audit of Sci-Tech Co, a pharmaceutical research company. You are planning the substantive audit procedures to be used in the forthcoming audit of intangible assets and operating expenses.
Relevant extracts from the financial statements are as follows
The following is an extract from the notes to the draft financial statements
âExpenditure on product development is capitalised as an intangible asset from the point at which it is probable that future economic benefits will result from the product once completed. Any product development costs which do not meet the above criteria are expensed as incurred as research costs. Two products are currently in the development phase Medex, an antiseptic cream; and Flortex, a medicine to reduce the symptoms of fever.
Amortisation of development costs commences with commercial production, the amortisation period being the estimated life span of the product. Currently two products are being amortised over the following periods
1. Plummet Cold Cure five years
2. Blingo Cough Cure three years.â
During the initial planning of the audit, the audit senior made the following note on the working papers
âBio-Cert Co is the main competitor of our client. It appears that Bio-Cert Co is developing a rival product to Flortex. This rival product is expected to be launched in June 2008, six months prior to the expected launch of Flortex.â Sci-Tech Co decided to outsource its payroll function, commencing in June 2007. The service is being provided by ProPay Co, a small local company. All of the accounting records relating to payroll are maintained and kept by ProPay Co. In previous years the audit of salary expenses was performed using a systems based approach with limited substantive procedures. Sci-Tech Co receives funding from governmental health departments, as well as several large charitable donations.
This funding represents on average 25% of the companyâs research and development annual expenditure. The amount of funding received is dependent on three key performance indicator (KPI) targets being met annually. All three of the targets must be met in order to secure the government funding.
Extracts from Sci-Tech Coâs operating and financial review are as follows
KPI target Draft KPI 2007 Actual KPI 2006 Pharmaceutical products donated free of charge to health care charities
1% revenue 0·8% revenue 1·2% revenue Donations to, and cost of involvement with, local community charities
0·5% revenue 0·6% revenue 0·8% revenue
Accidents in the work place
Less than 5 serious accidents per year 4 serious accidents 2 serious accidents In addition to performing the financial statement audit, your firm is engaged to provide an assurance opinion on the KPIs disclosed in the operating and financial review.
Required
(a) <font color="purple">Define âoutsourcingâ and explain the matters to be considered in planning the audit of salary expense.</font id="red">
Note requirement (a) includes<font color="red"> 2 professional marks</font id="purple">. (9 marks)
(b) (i) <font color="purple">Explain the matters you should consider to determine whether capitalized development costs are appropriately recognised</font id="purple">; and (5 marks)
(ii) <font color="purple">Describe the evidence you would seek to support the assertion that development costs are technically feasible</font id="purple">. (3 marks)
© <font color="purple">Describe the audit procedures you should perform to determine the validity of the amortisation rate of five years being applied to development costs in relation to Plummet. </font id="purple"> (5 marks)
(d) (i)<font color="purple"> Discuss why it may not be possible to provide a high level of assurance <b>over the stated key performance indicators</b>; and </font id="purple"> (4 marks)
(ii) Describe the <b>procedures to verify the number of serious accidents</b> in the year ended 30 November 2007. (4 marks)
(30 marks)
Section B â TWO questions ONLY to be attempted
3 You are an audit manager in Webb & Co, a firm of Chartered Certified Accountants. Your audit client, Mulligan Co, designs and manufactures wooden tables and chairs. The business has expanded rapidly in the last two years, since the arrival of Patrick Tiler, an experienced sales and marketing manager.
The directors want to secure a loan of $3 million in order to expand operations, following the design of a completely new range of wooden garden furniture. The directors have approached LCT Bank for the loan. The bankâs lending criteria stipulate the following
âLoan applications must be accompanied by a detailed business plan, including an analysis of how the finance will be used. LCT Bank need to see that the finance requested is adequate for the proposed business purpose. The business plan must be supported by an assurance opinion on the adequacy of the requested finance.â
The $3 million finance raised will be used as follows
Construction of new factory 1,250
Purchase of new machinery 1,000
Initial supply of timber raw material 250
Advertising and marketing of new product 500
Your firm has agreed to review the business plan and to provide an assurance opinion on the completeness of the finance request. A meeting will be held tomorrow to discuss this assignment.
Required
<font color="purple">(a) Identify and explain the matters relating to the assurance assignment that should be discussed at the meeting with Mulligan Co. (8 marks)</font id="purple">
(b) <b>State the enquiries you would make </b> of the directors of Mulligan Co to <font color="purple">ascertain the adequacy of the $3 million finance requested for the new production facility.</font id="purple"> (7 marks)
During the year the internal auditor of Mulligan Co discovered several discrepancies in the inventory records. In a statement made to the board of directors, the internal auditor said
âI think that someone is taking items from the warehouse. A physical inventory count is performed every three months, and it has become apparent that about 200 boxes of flat-packed chairs and tables are disappearing from the warehouse every month. We should get someone to investigate what has happened and quantify the value of the loss.â
Required
© <b><font color="purple">Define âforensic accountingâ and explain its relevance to the statement made by the internal auditor.</font id="purple"> </b> (5 marks)
(20 marks)
4 You are an audit manager in Nate & Co, a firm of Chartered Certified Accountants. You are reviewing three situations, which were recently discussed at the monthly audit managersâ meeting
(1) Nate & Co has recently been approached by a potential new audit client, Fisher Co. Your firm is keen to take the appointment and is currently carrying out client acceptance procedures. Fisher Co was recently incorporated by Marcellus Fisher, with its main trade being the retailing of wooden storage boxes.
(2) Nate & Co provides the audit service to CF Co, a national financial services organisation. Due to a number of errors in the recording of cash deposits from new customers that have been discovered by CF Coâs internal audit team, the directors of CF Co have requested that your firm carry out a review of the financial information technology systems. It has come to your attention that while working on the audit planning of CF Co, Jin Sayed, one of the juniors on the audit team, who is a recent information technology graduate, spent three hours providing advice to the internal audit team about how to improve the system. As far as you know, this advice has not been used by the internal audit team.
(3) LA Shots Co is a manufacturer of bottled drinks, and has been an audit client of Nate & Co for five years. Two audit juniors attended the annual inventory count last Monday. They reported that Brenda Mangle, the new production manager of LA Shots Co, wanted the inventory count and audit procedures performed as quickly as possible. As an incentive she offered the two juniors ten free bottles of âSuper Juiceâ from the end of the production line. Brenda also invited them to join the LA Shots Co office party, which commenced at the end of the inventory count. The inventory count and audit procedures were completed within two hours (the previous yearâs procedures lasted a full day), and the juniors then spent four hours at the office party.
Required
<b><font color="purple">(a) Define âmoney launderingâ and state the procedures specific to money laundering that should be considered before, and on the acceptance of, the audit appointment of Fisher Co. (5 marks)[/</b></font id="purple">
<b>(b) With reference to CF Co, explain the ethical and other professional issues raised. (9 marks) </b>
© <b>Identify and discuss the ethical and professional matters raised at the inventory count of LA Shots Co.</b> (6 marks)
(20 marks)
5 You are the audit manager for three clients of Bertie & Co, a firm of Chartered Certified Accountants. The financial year end for each client is 30 September 2007.
You are reviewing the audit seniorâs proposed audit reports for two clients, Alpha Co and Deema Co.
Alpha Co, a listed company, permanently closed several factories in May 2007, with all costs of closure finalised and paid in August 2007. The factories all produced the same item, which contributed 10% of Alpha Coâs total revenue for the year ended 30 September 2007 (2006 â 23%). The closure has been discussed accurately and fully in the chairmanâs statement and Directorsâ Report. However, the closure is not mentioned in the notes to the financial statements, nor separately disclosed on the financial statements.
The audit senior has proposed an unmodified audit opinion for Alpha Co as the matter has been fully addressed in the chairmanâs statement and Directorsâ Report.
In October 2007 a legal claim was filed against Deema Co, a retailer of toys. The claim is from a customer who slipped on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability in the notes to the financial statements, and audit working papers provide sufficient evidence that no provision is necessary as Deema Coâs lawyers have stated in writing that the likelihood of the claim succeeding is only possible.
The amount of the claim is fixed and is adequately covered by cash resources.
The audit senior proposes that the audit opinion for Deema Co should not be qualified, but that an emphasis of matter paragraph should be included after the audit opinion to highlight the situation.
Hugh Co was incorporated in October 2006, using a bank loan for finance. Revenue for the first year of trading is $750,000, and there are hopes of rapid growth in the next few years. The business retails luxury hand made wooden toys, currently in a single retail outlet. The two directors (who also own all of the shares in Hugh Co) are aware that due to the small size of the company, the financial statements do not have to be subject to annual external audit, but
they are unsure whether there would be any benefit in a voluntary audit of the first year financial statements. The directors are also aware that a review of the financial statements could be performed as an alternative to a full audit. Hugh Co currently employs a part-time, part-qualified accountant, Monty Parkes, who has prepared a year end balance sheet and income statement, and who produces summary management accounts every three months.
Required
(a)<b> <font color="black">Evaluate </font id="black"> </b> whether the audit seniorâs proposed audit report is appropriate, and where you disagree with the proposed report, <font color="purple">recommend the amendment </font id="purple"> necessary to the audit report of
(i) Alpha Co; (6 marks)
(ii) Deema Co. (4 marks)
(b) Describe the potential benefits for Hugh Co in choosing to have a financial statement audit. (4 marks)
© With specific reference to Hugh Co, <font color="purple">discuss the objective of a review engagement and contrast the level of assurance provided </font id="purple"> with that provided in an audit of financial statements. (6 marks)
(20 marks)
- Muhammad Amir - 04-20-2008
So you have seen that who are mere rote learners and simply asked to <b>produce lists, describe, define, Explain, Briefly Describe and Briefly Explain</b>, and who have skills to Evaluate as per given scenario, Assess, Identify, Discuss, State, Explain and Describe as per given situation.
Moreover paper Pattern and Marking Scheme is also very important to analyse the difference between these two bodies i am just giving you an example here.
<b>Q.11 Briefly explain the following components of Internal Control System
(a) Entityâs risk assessment process. (04)
(b) Information and Communication. (04)</b>
This is the question of CA Module 'F', I ask from Esteem members that is it a level of question that is expected to be a part Chartered Accountancy Profession's Final Exam and especially for those who can after this exam establish their so called public practice!!!!!!!!!! [0][0]
I am sorry to say that this question is CAT paper 8(Implementing Audit Procedures) Exam level [xx(] , Extent of Professionalism in this paper can be seen from the referred example where Future Practitioners are asked to <b>BRIEFLY EXPLAIN THE FOLLOWING COMPONENTS OF CONTROL SYSTEM</b>.
<b><font color="red">8 Marks on Offer for this question is making things absurd </font id="red"> </b>
This is just one example otherwise....
- hamburg113 - 06-20-2011
Hi,
Good ideal, pls try to keep posting. I like this topic very much and I will digged this one. Tks again.