ACCA Paper F8 Auditiing and Assurance F8AA(Int)Mock1 As j08







Teks penuh


Fundamentals Skills Module - Mock 1

Audit and Assurance



Answers & Marking Scheme

Accountancy Tuition Centre Ltd



1 TOPNOTCH4U (a) Sales system report

(1 mark for each weakness, effect and recommendation total of 3 marks per matter. The solution provides a guideline of the detail expected. If less, only award a maximum of ½ mark per element.)

Weakness Potential effect of weakness Recommendation

The detail of the orders placed by customers through the website is taken directly from the web page to the orders file rather than being verified through the product file first.

It is possible that data on the webpage may be altered. In particular the sales price may be lowered by an experienced hacker and this price will then be used as the basis of charging the customer, resulting in lost income.

The web program should be amended so that when the customer accepts the shopping basket order, key data will be transferred from the product data base to the order file. This will ensure that the sales price is the real price and not the price as manipulated by the customer.

Despatch notes are not pre-numbered and only the customer’s copy is authorised by the despatch manager.

This effectively prevents completeness and authorisation checks to be made to ensure all orders despatched are valid, accounted for and entered correctly into the system.

The despatch note used by the despatch manager may be lost and the goods not sent. With the second copy of the note being sent to the accounts department, it is possible that a customer will be charged for goods not received.

Additionally, if the second copy sent to the accounts department is lost, then goods may be sent to customers but no charge made.

Despatch notes should be pre-numbered by the system.

As goods are despatched, the second copy should be authorised by the despatch manager as “goods sent”.

A completeness check can then be carried out by the accounts department as well as a check that each note is authorised.

No completeness or accuracy checks are made when the order data is transferred from the orders file to the legacy system. Errors made when transferring the data may not therefore be identified.

In copying the converted data via the Zip drive there is a possibility that some data may corrupt. The sales report used to update the inventory records may therefore be inaccurate.

Batch total controls should be used to check for the completeness and validity of the data transferred between the two systems.


Weakness Potential effect of weakness Recommendation

The inventory programme is manually updated from the product sales report. There is a risk that the data will not be accurately entered.

The inventory records may not accurately reflect the physical inventory held due to inaccurate sales reports and/or inaccurate data entry from the reports.

Incorrect inventory records may result in orders not being placed to replace low levels of inventory.

Data entered into the inventory system should be validated to ensure its completeness and validity.

A perpetual inventory counting approach should be introduced to ensure that the inventory records accurately reflect the level of inventories held.

The customer’s credit card is charged after despatch of goods to the customer, meaning that goods are already sent to the customer before payment is authorised.

The company will not be paid for goods despatched where the credit company rejects the payment request, thus incurring a bad debt.

The customer’s credit card authorisation should be obtained before the toys are despatched. Ideally this should be done directly after the customer submits their shopping basket and confirmed to the customer.

There is no check to verify the inventory level at the point of customer order nor any formal system to inform customers of a delay in shipping their order.

It is possible that a customer may be charged for their toys, when no toys have been sent/received as the second copy of the despatch note may still be sent to the accounts department.

Customer goodwill will also be lost if the delivery of toys is delayed.

The product database should incorporate an inventory program that informs the customer of the current inventory status (eg In stock, Out of stock, delivery will be made within one week, Only 2 items in stock) and allows the customer to accept, change their order or cancel.

The system will require updating to keep track of ‘out of stock’ orders.

The system does not produce a separate sales invoice for despatch to the customer. A despatch note is produced and the customer’s credit card charged, but no VAT invoice is produced and sent to the customer.

Under most jurisdictions, it is essential that a VAT audit trail is maintained to clearly identify the VAT payable to the authorities. In addition, customers will require an input VAT invoice for their own VAT process. The current system is likely to raise negative comments on a VAT inspection.

The system should be updated to provide a VAT audit trail and a VAT invoice sent to customers.


Weakness Potential effect of weakness Recommendation

Inventory is only counted once a year, at the end of the financial period. No regular reconciliation takes place between items purchased, sold and in inventory. It is possible that items may be dispatched without being recorded or stolen.

Toys that are despatched in excess of the orders or are directly stolen are considered to be an understatement of sales, a direct impact on the financial statements and profit.


(b) Internet sales system

(1 mark for each relevant and FULL point made. If no explanation is given for the test, only award ½ mark. Note that the requirement only refers to recording in the sales module of the legacy system – no marks should be awarded for tests relating to the use of day books, financial statements etc..)

„ In order to establish that the toys despatched are those ordered by the customer, it

will be necessary to test that the data initially entered through the website is correctly captured by the system.

An order should therefore be placed by the auditor using the website and then checked to the orders file agreeing the completeness and accuracy of the data. In obtaining their initial understanding of the control design and implementation, the auditors will have already established the functionality of the website and the transfer of data to the orders file.

„ Access the order file and select a sample of orders. Agree the unit prices to an

authorised price list/file. Check the additions of the order and VAT calculations.

„ Trace each order through to the sales module within the legacy system, agreeing all

details to ensure completeness and accuracy of the data transfer. Agree that the correct accounts have been updated, ie sales, receivables and VAT.

„ Agree the order detail to the despatch note filed in the accounts department. This

will provide evidence of goods having been despatched and that the despatch notes were accurately printed by the system.

„ From the sales module, trace the order details through to a daily product sales

report., ensuring that the date of the report is the day after the order was placed. This tests the completeness, accuracy and validity of the sales report.

„ From the daily sales report, agree that the inventory records have been updated for

the order placed. Completeness and accuracy of updating inventory records for despatch of private customer orders.

„ Agree that the order entry in the sales module of the legacy system has been flagged

to show goods despatched and credit card authorisation obtained.

„ Agree to a credit card statement that the payment (less any agreed charges) has been

received. Trace the total of the credit card statement through to the cash book and bank statement.

Use of CAATS

Whilst not specifically mentioned, award appropriate marks where answers refer to the use of CAATs, eg:

„ Extract complete data files from the orders file and the sales files of the legacy

system. Compare both sets of data using a CAAT to ensure completeness and accuracy of data transfer from the order system to the legacy system.

„ Applying the same procedure, compare the inventory data from the orders file with


„ For each month, using the data from the sales module of the legacy system, compute

the total sales value and reconcile to the credit card companies monthly statement to test for completeness of credit card authorisation.

(c) Commercial customers receivables (1 mark for each FULL and valid point. ½ mark only if lack of explanation /depth. Max of 8 marks.

NOTE 1: As there are only ten commercial balances, procedures should reflect this. If answers are clearly wrote learnt without consideration of the scenario, eg select sample from balances, award no marks.

NOTE 2: As the customers are overseas, award no marks for any comments made on sending second letters etc. There will be insufficient time to do so and the student’s answer will be wrote learnt without application to the scenario. Only award marks if within the specific context of the circularisation being done at the year end to allow time for second letters to be sent

NOTE 3: Some students may take the view that as there are only ten commercial customers, an alternative approach to circularisation should be taken.

An acceptable procedure would be to apply alternative procedures to all balances, eg establish existence, makeup of balance, after date cash received PROVIDED a strong systems approach (manual or CAATs) had been applied and made clear in the answer.

NOTE: Award no marks for any suggestion of using CAATs to select balances etc. As there are only ten balances, this would clearly be inappropriate. CAATs would be appropriate to establish closing balances from initiating records which could then be tested for after date cash. )

„ Consider the timing of the circularisation re reporting deadlines and the audit

timing. As overseas, a longer period of time will be needed to receive replies. The circularisation may therefore need to be carried out at or before the year end.

„ Obtain a list of the commercial customer receivables from the client. Check the

addition of the list and that the total receivables agrees to the general ledger. Check the extraction of the list from the sales ledger to ensure completeness and accuracy of the extraction.

„ Review the list for credit balances. Where the total of credit balances are material,

add back to the receivables balance and to the payables balance to ensure the balances show a true and fair view. Establish the reasons why there are material credit balances or a significant number and consider impact on audit approach (eg may increase audit risk).

„ As there are only ten commercial customers, include all within the circularisation,

unless clearly immaterial. Agree with client that all will be circularised. If client requests any not to be circularised, establish reason as to why (and is reasonable) and include balance for other procedures.

„ Prepare positive , closed circularisation letters (ie those stating the balance due and


„ The letters should be posted independent of the client (to ensure the client is not

able to suppress or directly reply to any ) with the return from customers to be made directly to the auditors to reduce any risk of the client being able to interfere with the letters or replies.

„ Replies will either agree balances or disagree balances. Where disagreement, the

amount disagreed must be analysed and audited. Disagreement will usually be based on cash and/or goods in transit.

„ Where cash in transit, agree subsequent receipt of cash to cash book and through to

the bank statement. Where goods in transit, agree to sales invoice, goods despatch note and entry in inventory records to ensure correct cut-off.

„ Where no replies, apply alternative procedures, eg establish existence of customer

(website, contracts, correspondence); make up of balance (invoices, despatch notes, inventory entries); after date payment received (cash book, bank statement).

(d) Cut-off (1 mark for each valid point. Max of 3 marks. If no example given max of 2 marks)

„ Cut off is a financial statement assertion that basically means that a transaction that

occurred in one period is recorded within that period. A cut-off test gathers substantive evidence that transactions are recorded in the period to which they relate.

„ A cut off test, depending on its direction, provides evidence as to two types of

misstatement, namely:

‰ a misstatement relating to completeness, where an economic event that

occurs in the financial period being audited (i.e. up to and including the cut-off date) is recorded in the related account balance in the subsequent accounting period. (1 mark)

‰ a misstatement relating to validity, where an economic event that occurs

in the period following the period being audited (i.e. after the cut-off date) is recorded in the related account balance in the period being audited. (1 mark)

„ Auditors perform cut-off tests for all major classes of transactions, either at the end

of the financial period or, where substantive evidence is gathered prior to the year end, at an earlier cut-off date.

„ A basic example would be sales and receivables. Despatches made before the year


2 ISAs

(a) Threats to the Fundamental Principles (½ mark identifying plus ½ mark explaining, to include at least two examples, otherwise only ½ mark. Max of 5 marks)

„ Self-interest – may occur as a result of the financial or other interests of members

(including immediate or close family of the member) eg, loans or guarantees, close personal or business relationships, financial interest in a client, gifts and hospitality.

„ Self-review – may arise when a previous judgment needs to be re-evaluated by

individuals responsible for that judgment. Examples include:

‰ providing a service to a client that will then be subject to review as part of

the assurance engagement;

‰ reporting on the operation of systems after being involved in their design

or implementation;

‰ the discovery of a significant error during a re-evaluation of the work

being undertaken by the member.

„ Advocacy – occurs when members promote a position or opinion to the point that

subsequent objectivity may be compromised, eg

‰ commenting publicly on future events in particular circumstances, having

made assertions without detailing the assumptions;

‰ where information is incomplete or advocating an argument which is


‰ promoting shares in a listed audit client or a client seeking to list; ‰ acting as an advocate on behalf of an assurance client in litigation or

disputes with third parties.

„ Familiarity – can arise where members, because of a close relationship, become too

sympathetic to the interests of others. There is a significant risk that professional scepticism will not be applied. Examples include:

‰ a member in a position to influence business decisions, financial (or

non-financial) reporting (e.g. the audit report) having an immediate or close family who is in a position to benefit from that influence (e.g. a director or shareholder);

‰ over-familiarity with the management of the organisation such that

professional judgement could be compromised;

‰ long association with business contacts influencing business decisions; ‰ acceptance of gifts or preferential treatment, unless the value is clearly


„ Intimidation – will occur where members may be deterred from acting objectively

by threats, actual or perceived, direct or indirect. Examples of circumstances that may create intimidation threats include:

‰ threat of dismissal or replacement of the member;

‰ a dominant personality attempting to influence the decision-making


‰ being threatened with litigation;

‰ coming under pressure to reduce necessary work to ensure a reduction in


(b) Controls (½ mark each point, max of 1 mark each element, 5 marks in total)

„ The control environment - sets the tone of an organization, influencing the control

consciousness of its management and employees. It is the foundation for effective internal control, providing discipline and structure.

Strongly relates to how management (and governance) has created a culture of honesty and ethical behaviour, supported by appropriate controls to prevent and detect fraud and error.

„ Risk assessment procedures – how the entity’s management identify business risks

relevant to the financial reporting objectives and how they decide to address those risks and review the results of doing so.

Risks relevant to financial reporting include external and internal events and circumstances that may occur and adversely affect an entity’s ability to initiate, record, process, and report financial data.

„ Information system – consists of the physical and hardware (if IT based)

infrastructure, software (if IT based), people, procedures and data.

It includes the accounting system and consists of the procedures and records established to initiate, record, process, report and maintain accountability which must also be able to deal with errors and incorrect processing.

„ Control activities – the policies and procedures that help ensure that management

directives are carried out, e.g. that actions are taken to address risks that threaten the achievement of the entity’s objectives.

They have various objectives and are applied at various organisational and functional levels. Examples include authorisation, performance reviews, information processing, physical controls and segregation of duties.

„ Monitoring controls – the process to assess the effectiveness of internal control



(a) Financial statement risks (1 mark per valid point. Max of 12 marks)

Client business

„ Okalas operates in the high-tech field of military tank engine production. Inventory

obsolescence through technological change is a high risk area. Values may be overstated.

„ Turnover consists of a small number of very high value contracts (eg currently

tendering for $200m NATO contract). Such “economic dependence” may lead to going concern problems should one (or more) of the contracts fail.

„ Considerable expenditure is made in R & D, to develop up-to-date engines to

maintain the company’s market position. Such expenditure classified as development may not be recoverable, thus there is a risk of impairment and overstatement of the balance.

„ The client faces the risk of high expenditure and investment in technical

development when: (2 points necessary to gain 1 mark)

‰ fierce domestic and overseas competition may force unprofitable

tendering (going concern risk);

‰ failure to deliver engines to the terms of contracts could lead to significant

penalties (understatement of provision for penalties);

‰ the majority of sales are overseas (NATO, Middle-East, Australasia)

subjecting the company to:

– foreign currency exposure;

– potential bad debt problems (understatement of allowance); – political volatility (going concern considerations);


„ Thunderflash – Very recently developed with high development costs, this the

subject of the NATO tender. (1 mark each point, max of 2 marks)

‰ Overall reliability is unclear until the engine has been in operation for a

longer period. There may be future developments or warranty expenses to be incurred (potential understatement of provision).

‰ Development costs may be fairly amortised under IAS 38 Intangible

Assets if it is:

– likely to make future profits;

– commercially and technically viable.


„ Fox – Okalas recently received a $25m warranty claim from a Middle East

government for faulty parts in 30 engines. (1 mark each point, max of 2 marks)

‰ If this matter is not resolved by year-end (likely!) a provision may be

necessary in the year-end financial statements (potential understatement). Also:

– other recently completed contracts may lead to similar claims; – engines in WIP may need rectification work thus NRV needs to

be ascertained.

‰ The client should consider the possibility of counter-claim against Young.

If so, it cannot be offset against the provision and would not be recognised on the balance sheet until it was virtually certain the claim would succeed.

„ Snooper – Development of Thunderflash may render the 20 year old Snooper design

obsolete. Engines and parts may have nil/scrap value (potential overstatement of inventory values).


„ Volatility of contract prices makes measuring NRV against cost difficult. Valuation

is therefore a high-risk area.

„ The continuous inventory-checking is seriously behind schedule for this year and

error incidence is high. Material error could exist between book and actual physical quantities.

„ Internal audit involvement in other audit areas may be reduced, thereby increasing

the risk of errors arising.

(b) Audit work (1 mark per valid point, max of 4 marks per section, 8 in total)

(i) Warranty Claim

„ To assess what amount, if any, of the claim represents a liability, a wholly

substantive approach is required including:

‰ discussion with senior management to obtain:

– full information of the claim; and – their opinion on the most likely liability.

‰ a review of the contract terms to assess whether:

– warranty cover extends to sand clogging; and – any valid disclaimers exist.

„ Assuming some liability exists, the claim must be reviewed and the amounts

confirmed. This will involve: (2 points to obtain 1 mark – max)

‰ establishing what a potential figure for the claim would be;


‰ obtaining legal opinion from the clients’ solicitors as to the reasonableness

(or otherwise) of the client’s calculation;

‰ reviewing all relevant board minutes and correspondence with the Middle

East government to establish the extent of the claim.

„ To confirm any amounts recoverable by Okalas: (2 points to obtain max of 1 mark)

‰ review any product liability insurance taken out by Okalas which may

wholly or partially cover the liability (even though the insurance company may dispute the claim or Okalas’ management may place too much emphasis on the cover);

‰ establish whether any counter-claim against Young is feasible by

reviewing all correspondence and relevant minutes on the matter;

‰ obtain legal opinion from the clients’ solicitors as to the likelihood and

amounts of recovery.

„ There may be repercussions for other Fox contracts recently completed and for any

Fox engines currently in WIP. Therefore review: (2 points for max of 1 mark)

‰ the client’s procedures for identifying any further claims;

‰ calculations for provisions and NRV of inventory made and assess their


‰ all correspondence and minutes with customers and solicitors concerning

further claims.

„ The situation must be monitored up to the date of the auditor’s report, that is a

pro-active approach to post balance sheet events.

„ Management representations should be obtained (eg regarding the completeness of

disclosure of post balance sheet events and the NRV of current WIP and inventory).

„ Disclosure in the financial statements may be required:

‰ as exceptional gains/losses if the claims concerned crystallise;

‰ as contingent gains/liabilities if the amounts or outcome are still highly

uncertain as at the date of signing the auditor’s report. (It is likely that a reasonable estimate of amount can be made.)

(ii) Inventory

Audit approach

„ Because of the high volume of relatively low value items, we will aim to perform

tests of controls on the accounting and internal control system and use extensive analytical review.


Interim work

„ “Walk-through” checks on the inventory accounting system will be required before

performing tests of controls. The test data programs should be run as soon as possible thereafter.

Inventory checking

„ A meeting should be arranged as soon as possible with the internal audit manager to

ascertain the extent of potential errors in the inventory records, review the

effectiveness of correcting such errors and enquire whether all inventory lines will have been counted at least once by the year-end.

„ We should attend a sample of physical checks to ensure they are being performed to

managements’ instructions and to check a sample of inventory items. Audit software may assist with sample selection.

„ If results are not satisfactory a full year-end physical count may be required.

Warranty claim

„ In conjunction with the audit work on warranty claims, items selected for physical

counts should include those where future warranty provisions could arise.

Substantive work

„ Subject to satisfactory results from tests of controls we will aim to perform

extensive analytical procedures. Audit software may be used to produce data for:

(2 points for max of 1 mark)

‰ inventory ageing, including turnover by product line and product


‰ reconciling opening and closing inventory quantities by accounting for

sales and purchases in the year;

‰ comparing quantities and amounts of inventory in each product category

between this and previous years.

„ Other functions to be performed by audit software: (3 points for max of 1 mark)

‰ casting the inventory ledger to agree to client’s schedules; ‰ identifying inventory items:

– for physical checking;

– for valuation and cut-off tests;

– where standard cost is less than the contract price;

‰ identifying items not counted this year;

‰ identifying items where the quantity held in inventory exceeds the number


Other tests

„ For a sample of inventory items, compare standard cost to the latest purchase

invoice price to ensure that inventory is valued at cost (NRV tests will also be carried out).

„ Perform full cut-off tests taking note of any inventory movement documents at the

year-end physical counts (whether full count or otherwise).

„ Review the make-up of inventory values paying special attention to any variances

from standard cost. Inventory must be valued at the lower of cost and NRV and not at standard cost unless this approximates to cost.


(a) Risks and implications for audit risk (1 mark for each valid point made, max 10)

Inherent and control risks

„ Charities can be viewed as inherently risky because they are often managed by

non-professionals and are highly susceptible to fraud (because of the high levels of cash), although many charities and the volunteers that run them are people of the highest integrity who take a great deal of care over their work.

„ In the case of EduChar, the scenario highlights the lack of a fulltime professional

accountant, it only has a part time bookkeeper and relies on volunteers for fund raising. All of these increase inherent risk.

„ Charities are also at risk of being in violation of their constitutions which is

important where funds are raised from public or private donors who may well object strongly if funds are not applied in the manner expected.

The involvement of a recently retired Chartered Certified Accountant in the

preparation of accounts in the past may lower the auditor’s assessed inherent risk to an extent.

„ However, the audit and accounting regulations are new. This implies a higher

inherent risk as the trustees, bookkeeper, part time ACCA member and auditors have to fully understand the implications of the new regulations on the accounts preparation and audit.

„ Most small charities have a high level of control risk because formal internal

controls are expensive and are not often in place. This means that donations are susceptible to misappropriation by the volunteer collectors (tamper proof collecting tins should be used).

„ It may not be possible to rely on basic business controls as the bookkeeper is only


Detection risk

„ As the charity is small, it is possible that all transactions will be tested and therefore

sampling risk (the risk that samples are unrepresentative of the populations from which they are drawn) is not present.

„ Detection risk will also be high as this is a new client and thus the auditors will be

unfamiliar with the client.

„ The audit team must contain senior individuals (eg the partner, manager and

supervisor) who are familiar with cash based audits and the legislation surrounding charities.

„ Substantive analytical review may play a critical roll in establishing the

completeness of cash received and expenditure.

Audit risk

„ Audit risk is the product of inherent risk, control risk and detection risk and is the

risk that the auditors will issue an inappropriate audit opinion. This risk can be managed by decreasing detection risk by altering the nature, timing and extent of audit procedures applied.

„ Where inherent risk is high and controls are weak (as is likely here) a greater level

of substantive testing will need to be carried out on areas identified as risky in order to reduce audit risk to an acceptable level.

„ It will be critical to carry out a detailed risk analysis; obtain an in-depth

understanding of the way the charity operates and of the regulations (including the new ones) it operates under.

(b) Audit tests – fund raising events (1 mark per valid point. Note that the requirement specifically deals with fund raising events only.)

„ Attend a selection of fund raising events (eg those expected to raise material

amounts of money) and observe the procedures employed in collecting, counting, banking and recording the cash.

This is effectively confirming and testing the accounting system (initiation through to recording and reporting) and will help provide audit evidence that funds have not been misappropriated and that all income from such events has been recorded (accuracy and completeness).

„ Where sealed collection boxes or tins are used at charity events, agree the control

over the issue and collection of the boxes/tins, eg number allocated to the event, number used, not used and returned (completeness).

„ Ideally, the boxes/tins should be pre-numbered for use over many events. When

used they should be kept for audit inspection and not destroyed.

„ Observe that when opened, the boxes/tines are done so in the presence of two


„ Agree audit count details to the client’s schedules and forward through summary

sheets to final paying in bank slips. Check the additions of all summary schedules. This will provide evidence as to the completeness and accuracy of recording the cash.

„ Trace the bank paying in slips through to the cash book and bank statements,

checking that there is no unusual delay in banking the cash.

„ Re-perform the year end bank reconciliation and agree the rolling forward of the

opening bank balance through the reconciliations carried out each month. (If reconciliations are not done each month, it will be necessary to audit the year end reconciliation as a whole). This also provides evidence as to the completeness of income.

„ Examine the records of bank expenditure for fund raising events (hire of equipment,

entertainers, purchase of refreshments. etc.), trace through to supporting evidence (eg invoices and receipts) and ensure that these have been properly authorised. This provides evidence as to the measurement and accuracy of expenditure.

„ Discuss with event organisers if any expenditure was met directly by paying cash

from the monies collected, without being recorded. Review expenditure of similar past events to identify potential expenditure that has not been recorded. This will provide evidence of completeness of income (eg that income has not been expensed without being recorded).

„ Review the income and expenditure of fund raising events against any budgets that

have been prepared and against similar past events. Investigate any significant discrepancies. This will provide evidence of completeness and accuracy.

„ Ensure that all necessary licences (such as public entertainment and lottery licences)

have been obtained by the trustees for such events in order to ensure that no action is likely to be taken against the charity or volunteers.

„ Obtain representations from the trustees to the effect that there are no unrecorded

liabilities for such events and for the completeness of income – again for completeness of income, expenditure and liabilities.


(a) Responsibilities (1 mark each point, max of 6 marks)

Preparation of financial statements (2 marks )

„ The directors are normally required to prepare the financial statements of the

company using the appropriate law of their country and in accordance with an appropriate accounting framework (GAAP), eg International Financial Reporting Standards (IFRS).

„ The auditors are normally required to report to shareholders on the assertion that the


Fraud and error (2 marks)

„ The directors have the primary responsibility for the prevention and detection of

fraud and error in the financial statements, no matter how immaterial this may be.

„ Auditors have no responsibility for the prevention of fraud within an organisation.

However, they do have a responsibility to consider the risk of material misstatement arising from fraud and error when planning and performing audit procedures and then on the evaluation and reporting of their work.

Going concern (3 marks)

„ The directors are responsible for ensuring that the company will continue in

operational existence for the foreseeable future and prepare the financial statements in accordance with this assumption (or otherwise with appropriate disclosure).

„ The auditor must consider the appropriateness of management’s use of the going

concern assumption and whether material uncertainties require disclosure. They must consider events and conditions that may cast doubt on the enterprise’s going concern as part of their planning.

„ They must also be alert to such conditions and events as they carry out their audit

and will evaluate management’s assessment for the same period as required by the accounting framework.

(b)(i) Audit report elements (½ mark each point, max of 5 as shown)

„ Statement of auditor’s responsibility: (max 2 marks)

‰ to express an opinion on the financial statements based on their audit; ‰ that the audit was conducted in accordance with ISAs or relevant national

standards or practices;

‰ explains that ISA requires the auditor to comply with ethical

requirements; and

‰ that the audit was planned and performed to obtain reasonable assurance

about whether the financial statements are free of material misstatement.

„ A ‘scope’ paragraph that describes the audit in that: (max 3 marks)

‰ the audit involves the performance of procedures to obtain audit evidence

about the amounts and disclosures in the financial statements;

‰ the procedures selected depend on the auditor’s judgment, including the

assessment of the risks of material misstatement of the financial statements, whether due to fraud or error;

‰ in making risk assessments the auditor considers internal control relevant

to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the


‰ the auditor: (1 mark for min of two points)

– evaluates the appropriateness of the accounting policies used; – assesses the reasonableness of accounting estimates made by

management; and

– assesses the overall presentation of the financial statements.

‰ the audit evidence obtained is sufficient and appropriate to provide a

reasonable basis for the audit opinion.

(b)(ii) Errors and omissions (½ mark for identifying plus ½ mark for explaining. Max 9 marks. Only give ½ mark if no explanations given, with a max of 4)

The draft report contains (at least) the following errors and omissions:

„ No specific mention of the auditor’s responsibility, ie “to express an opinion ….

based on our audit”. This is an essential requirement of ISA 700 and is not referred to in any wording of the draft report.

„ Whilst referring to Auditing Standards, the report does not specify which auditing

standards, eg International Auditing Standards (ISA) or an appropriate national set of standards. By referring to ISAs the user of the financial standards would have a specific set of standards on which to assess the work carried out.

„ The report refers to the “principles” of auditing standards. Under the requirements

of ISA, all auditing standards must be applied, unless inappropriate (eg IAS 2 in the case of a service company without inventory). Using the word “principles” implies that the standards may have been interpreted to suit the client.

„ No reference is made to the fact that ISAs require the auditor to comply with ethical

requirements. Following the ethical principles of the IFAC (eg having integrity, objectivity etc) is an underpinning concept of auditing and it is necessary to convey this to the user of the report (hence the reference to the “independent auditor’s report” within the report title).

„ The reference within the report to “an assessment of ALL the estimates and

judgements made by the directors” implies that immaterial matters were also considered when the auditor only provides reasonable assurance that the financial statements are free from material misstatement. This could mislead the user.

„ No reference is made to the use of the auditor’s judgment, assessment of risk and

consideration of internal control. For example, users may believe that the audit opinion also covers the working of internal control.

„ The reference to the “time available for the audit” implies that time was a limiting

factor and that audit work may have been cut in order to complete the work within the time limit. This would be directly against the requirements of the ISAs.

„ Under ISAs, the auditor must have “planned and performed (the audit) to obtain


„ The disclaimer given by the auditor (“no liability can be accepted by the auditor”) is

highly unusual and is outside of the scope of ISA 700. To give such a disclaimer would require the written consent of the shareholders and agreement with the directors. As many other third parties usually have an interest in the financial statements, most jurisdictions specifically legislate against disclaimers being made by auditors.

„ The statement that the “directors are wholly responsible for the accuracy of the

financial statements” would be more appropriate if given as part of the section on management’s responsibility, rather than within the scope paragraph. In addition the word “accuracy” implies being 100% correct, where as the assertions given by the directors are for the “fair presentation of financial statements that are free from material misstatement”.

„ The auditor’s responsibility relates to the financial statements and not the annual