Audit and Assurance (AA) Sept / Dec 2020 Examiner’s report

Examiner’s report – AA September/December 2020 1

Audit and

Assurance (AA)

Sept / Dec 2020

Examiner’s report

The examining team share their observations from the

marking process to highlight strengths and

weaknesses in candidates’ performance, and to offer

constructive advice for those sitting the exam in the

future.

Contents General comments .............................................................. 2

Section A ............................................................................. 2

Question 1 ........................................................................ 4

Question 2 ........................................................................ 5

Question 3 ........................................................................ 6

Question 4 ........................................................................ 7

Question 5 ........................................................................ 8

Section B ............................................................................. 9

Hart Co ............................................................................. 9

Part (a) – 4 marks ......................................................... 9

Part (b) – 16 marks ..................................................... 10

Part (c) – 5 marks ....................................................... 12

Part (d) – 5 marks ....................................................... 12

Swift Co .......................................................................... 13

Part (a) – 6 marks ....................................................... 13

Part (b) – 14 marks ..................................................... 15

Sagittarii & Co ................................................................ 18

Part (a) – 5 marks ....................................................... 18

Part (b) – 5 marks ....................................................... 19

Part (c) – 5 marks ....................................................... 20

Part (d) – 5 marks ....................................................... 21


General comments

This examiner’s report should be used in conjunction with the published

September/December 2020 sample exam which can be found on the ACCA Practice

Platform.

The Audit and Assurance exam is offered in computer-based (CBE) format. The

model of delivery for the CBE means that candidates do not always receive the

same set of questions. In this report, the examining team provide constructive

guidance on how to answer the questions whilst sharing their observations from the

marking process, highlighting the strengths and weaknesses of candidates who

attempted these questions. Future candidates can use this examiner’s report as part

of their exam preparation, attempting question practice on the ACCA Practice

Platform, reviewing the published answers alongside this report.

• Section A objective test case questions – the key challenge areas for this section in the exam.

• Section B constructed response questions – guidance on how to complete all published CR questions from the sample exam.

There are two sections to the examination and all the questions are compulsory. Section A consists of three OT cases each comprising five OT questions for a total of 30 marks, which cover a broad range of syllabus topics. In Section B candidates are presented with one constructive response question worth 30 marks and two constructive response questions worth 20 marks each; testing the candidates’ understanding and application of audit and assurance in more depth. In order to pass this examination, candidates should ensure they devote adequate time to obtain the required level of knowledge and application.

Section A Candidates preparing for future sessions are advised to work through the past exams which are available and to carefully review how each of the correct answers were derived. Section A questions aim to provide a broad coverage of the syllabus, and future candidates should aim to revise all areas of the AA syllabus, rather than attempting to question spot. Sample questions for discussion The following questions are reviewed with the aim of giving future candidates an indication of the types of questions asked, guidance on dealing with exam questions and to provide a technical debrief on the topics covered by the specific questions selected. Candidates are reminded that there will be a mix of application and knowledge questions in Section A and it is imperative that they ensure their knowledge of the International Standards on Auditing (ISAs), relevant financial accounting and important areas of the syllabus such as auditors’ reports is at an

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appropriate level. Questions may test specific details of examinable documents including ISAs, ACCA’s Code of Ethics and Conduct and the UK Corporate Governance Code, therefore candidates must ensure that they have studied these in sufficient depth. Candidates must also ensure that they have studied all areas of the syllabus. The syllabus includes audit evidence learning outcomes relating to a wide range of specific items, any of which may be examined.

Example of a case scenario

It is 1 July 20X5. You are an audit manager of Brown & Green Co and you are

currently working on the completion stage of the audit of Strawberry Co, a listed

company specialising in the manufacture of smart phone accessories, for the year

ended 31 March 20X5. The draft financial statements of Strawberry Co show

revenue for the year of $500m and total assets of $210m.

You are reviewing the outcome of the audit work documented by your team. You

have become aware of the following two issues:

Issue 1 – Reduction in sales

On 18 March 20X5, the board of directors approved a strategic plan which will help it

increase the sales of smart phone chargers in the future. The strategic plan is to

upgrade Strawberry Co's manufacturing facilities, which will allow it to manufacture

higher quality and technologically advanced products. To fund the planned upgrade,

the company issued equity share capital to the general public in May 20X5, which

generated cash of $4m.

Issue 2 – Letter from the government environmental agency

Strawberry Co received a letter dated 15 May 20X5, from the government

environmental agency advising that water samples taken from a public lake close to

Strawberry Co's manufacturing site have shown traces of a harmful substance which

is produced during its manufacturing process. The agency has concluded that

Strawberry Co is the source of the contamination and is liable for a fine. The board of

directors has denied any responsibility and have forwarded the case to the

company’s legal advisers.


Question 1

Which of the following statements correctly describes Brown & Green Co's

responsibility in relation to subsequent events occurring between the date

on which the auditor's report is signed and the date on which the financial

statements are issued?

A. Brown & Green Co should obtain sufficient and appropriate audit evidence

and design audit procedures to ensure that all subsequent events are

identified

B. Brown & Green Co should obtain a list of subsequent events from the

directors of Strawberry Co and include these in the written representation

letter

C. Brown & Green Co has no duty to perform any procedures after the date on

which the auditor's report is signed and therefore any subsequent events in

this period will be dealt with in next year's audit

D. Brown & Green Co should discuss any subsequent events they become

aware of with the directors of Strawberry Co to determine whether the

financial statements need amended

The correct answer is D.

This question tests knowledge of ISA 560 Subsequent Events and demonstrates the

importance of having a detailed understanding of the ISAs. While the auditor is not

required to perform specific procedures after the signing of the auditor’s report, if

information comes to light between the signing of the auditor’s report and the date

the financial statements are issued, the auditor is required to discuss the matter with

management and determine whether the financial statements should be amended.

Option A sets out the auditor’s responsibilities in the period between the year end

and the date the auditor’s report is signed.

The auditor is required to obtain written representations in respect of subsequent

events but this would have been obtained prior to the auditor’s report being signed.

Therefore, B is not a valid response.

While the statement in C correctly identifies that the auditor has no duty to perform

subsequent events procedures after the auditor’s report is signed, it is not always the

case that events in this period will be dealt with next year as in certain circumstances

the current year financial statements may be amended.


Question 2

Explain, by choosing the relevant boxes in the statements below, how the

issue of share capital should be treated in the financial statements of

Strawberry Co.

The correct answer is: a non-adjusting event, gives new information about an

event that did not exist at year-end date, to be disclosed in the current year

financial statements.

This question requires an understanding of the accounting treatment of events after

the reporting period which underpins the auditor’s ability to audit subsequent events

and highlights the interaction between IAS® 10 Events after the Reporting Period

and ISA 560. Note the importance of looking carefully at any dates given in the

question. In this case the shares were issued in May 20X5, which was after the year

end. However, the information does not provide evidence of conditions which existed

at the year end and therefore the transaction would be a non-adjusting event. As this


event is material, however, it would be disclosed in the current year financial

statements.

Question 3

The audit team has performed various substantive procedures in order to obtain

sufficient and appropriate audit evidence relating to the potential fine for

environmental damage.

Which TWO of the following are appropriate audit procedures to perform in

respect of the letter from the government environmental agency?

A. Send a letter addressed to the government environmental agency to

confirm the matter

B. Examine post year-end board meeting minutes to identify any reference to

further developments of the case

C. Review the correspondence with the company’s legal advisers to assess

the probable outcome of the case

D. Test the effectiveness of the client's internal control systems in relation to

the prevention of environmental damage

The correct answers are B and C.

Reviewing correspondence with the company’s legal advisers would provide third-

party written evidence regarding the probable outcome of the case. Reviewing post

year-end board minutes would provide written evidence of discussions by directors

regarding any developments which may affect the overall outcome. Both of these

procedures should provide the auditor with substantive evidence to enable them to

determine whether these events have been appropriately recognised in the financial

statements.

Option A would not be appropriate as the auditor does not have the authority to

contact the environmental agency directly. Option D describes a test of control, not a

substantive procedure. The opening statement in the stem of the question indicates

that the procedures which have been carried out, and are therefore relevant, are

substantive procedures. Mixing up substantive procedures and tests of controls is a

common error. Candidates must ensure that they understand the difference and

carefully consider the context set within the scenario or the requirement.


Question 4

Assuming ‘Issue 2’ is a material subsequent event, match the relevant audit

opinion to the following two outcomes.

The correct answer is: Outcome 1: Qualified, Outcome 2: Unmodified with

emphasis of matter.

In outcome 1 the directors have failed to comply with IAS 10. It is probable that

Strawberry Co will receive a fine but this has not been reflected in the financial

statements. On the basis that the financial statements are materially misstated a

modified opinion will be issued. As the misstatement is material but not pervasive a

qualified opinion would be appropriate.

(An adverse opinion would be issued if the misstatement had been material and

pervasive. A disclaimer would be appropriate where the auditor is unable to obtain

sufficient, appropriate evidence and the possible effects on the financial statements

of any undetected misstatements could be material and pervasive.)


In outcome 2 the correct treatment has been adopted by the directors. As this is the

case an unmodified opinion would be appropriate. The emphasis of matter would

draw the user’s attention to the case disclosed in the notes to the financial

statements.

Care should be taken by candidates when considering the use of an emphasis of

matter. In accordance with ISA 706 Emphasis of Matter Paragraphs and Other

Matter Paragraphs in the Independent Auditor’s Report, an emphasis of matter

paragraph refers to a matter appropriately presented or disclosed (as is the case in

outcome 2) that in the auditor’s judgement is fundamental to users’ understanding of

the financial statements. Importantly therefore, it cannot be used as a substitute for a

modified opinion. Suggesting that an emphasis of matter should be used where in

fact a modified opinion is required is a common mistake.

Question 5

The two issues will be included in a written representation from management. All

audit work will be finished by 31 July 20X5. The auditor's report is due to be

signed by Brown & Green Co on 28 September 20X5. Strawberry Co's board plans

to issue the financial statements on 21 October 20X5 which will be followed by an

annual general meeting on 30 October 20X5.

Which of the following would be the most appropriate date for the directors

of Strawberry Co to sign the written representation?

A. 31 July 20X5

B. 28 September 20X5

C. 21 October 20X5

D. 30 October 20X5

The correct answer is B.

In this requirement extra information is provided in addition to the main scenario.

Where this type of information is provided candidates must ensure that they read it

carefully before attempting the question. This question requires candidates to apply

their knowledge of ISA 580 Written Representations. The ISA states that the date of

written representations must be as near as practicable to, but not after the date of

the auditor’s report. The auditor’s report is due to be signed on 28 September 20X5,

therefore this would be the most appropriate date for the directors to sign the written

representation.


Section B

Hart Co

This 30-mark question is based on Hart Co, a company which specialises in the design and construction of customised playgrounds for children. This question tests candidates’ knowledge of the benefits of planning, audit risks and responses, substantive procedures and conflicts of interest.

Part (a) – 4 marks

This is a relatively straightforward knowledge requirement which has been tested in previous exam sessions. It demonstrates the importance of having a detailed understanding of the ISAs, and in this case, ISA 300 Planning an Audit of Financial Statements in particular. For a four-mark knowledge requirement such as this, candidates should aim to provide four well-explained points. It should be noted that the opening statement before the requirement specifically refers to ISA 300 which should provide the context for the response. Care should be taken when reading the requirement to ensure that answer points focus on the right issues. For example, in this session some candidates incorrectly focused their answers on determining the audit approach, gaining an understanding of the client or considering the audit timetable which were not relevant.


Part (b) – 16 marks

With this type of requirement good exam technique is critical. Marks are awarded for identification of audit risks (½ mark each), explanation of audit risks (½ mark each) and an appropriate auditor’s response to each risk (1 mark each). The scenario will typically contain more than the number of risks required, so it is important that candidates plan their time carefully and only attempt to list the required number of points. The first step is to identify the factors which will give rise to an audit risk. This information can be found in the scenario. All of the information in the scenario should be read carefully, including the opening paragraph as this may include information relevant to the identification of audit risks and is often overlooked. For example, in this question the opening paragraph of the scenario refers to the fact that Hart Co is a new client which therefore results in an increased detection risk. Financial accounting knowledge is also important as audit risks will often focus on the accounting treatment used in the financial statements. In Hart Co accounting issues which give rise to audit risks include risks relating to revenue recognition, a warranty and a share issue. Having identified the risk factor the next step is to explain the risk. To do this, candidates need to state the specific area of the financial statements impacted with an assertion (for example cut off, valuation etc.), or, a reference to over/under/misstated, or, a reference to inherent/ control/ detection risk. ‘Misstated’ will only be awarded if it is clear the balance could be either over or understated. For example, if the risk should have been described in terms of an understated balance, then no credit would be awarded if candidates referred to a misstated balance. Candidates cannot hedge their bets by providing both options.


The explanation of the risk must also clearly state the specific area of the financial statements impacted. For example, in respect of the issue relating to the research and development costs capitalised as an intangible asset, only noting ‘assets could be overstated’ would not be awarded credit. An appropriate explanation in this instance would be ‘intangible assets could be overstated’ as only by clearly identifying the specific area impacted by the risk can the auditor devise an appropriate response. In order to correctly explain the risk, candidates must take the time to carefully read the information provided to ensure that they describe risks actually highlighted in the scenario, rather than theoretical risks. For example, in Hart Co the revenue recognition risk relates to the correct treatment of the deposit, however, many candidates thought the risk was that the 75% outstanding balance may not be paid resulting in overstated receivables. There is no indication that recoverability of the balance is a potential issue in the scenario and therefore is not relevant. In addition, a number of candidates explained the issue of the auditors not attending all the WIP counts in terms of inventory being misstated, rather than as a detection risk. Candidates must take the time to carefully read the scenario, noting any dates and other relevant information, to ensure that they correctly understand and describe the audit risks arising. Having identified and explained the risk, the third step is to provide the auditor’s response. An auditor’s response does not have to be a detailed procedure, rather it is an approach the audit team will take. Care must be taken however, to ensure that the approach suggested actually addresses the risk identified. Selecting a suitably experienced audit team or ensuring adequate time is allocated to obtain an understanding of the client would be an appropriate response to the risk arising from a new audit client. A common error is for candidates to confuse the auditor’s response and management’s response. For example, in response to the risk of the directors’ bonus, many candidates focused on whether the bonus should be based on profit and instead suggested it should be based on long-term performance. This is not an auditor’s response and therefore would not be awarded credit. From the audit perspective, the risk is that of manipulation of profits by directors in order to achieve the targets required for the bonus to be paid. Candidates should also consider whether their response is practical within the context of the scenario. Suggesting that the auditor attend all 16 of Hart Co’s inventory WIP counts at the year end would not be feasible or necessary. Future candidates are advised that audit risk is and will continue to be an important element in the syllabus and must be understood. Candidates must ensure that they include adequate question practice as part of their revision on this key topic. Harlem Co from the ‘Sample September/December 2019 Questions’, Peony Co from the ‘Sample March/June 2019 Questions’ and Scarlet Co from the ‘Sample March/July 2020 Questions’ are also all good scenario-based questions on audit risks and responses to practice.


Part (c) – 5 marks

For substantive procedures requirements, one mark is available for each well-described procedure. Candidates should plan their time accordingly. When describing substantive procedures one of the key things to consider is the level of detail provided. Many candidates fail to score well in this type of requirement because their procedures are vague or too brief. For example, in this session many candidates included, ‘review board minutes’ without specifying that this was being done to agree the amounts paid to the directors or ‘obtain written representations’ without specifying that this was for confirmation of completeness of the bonuses. Candidates must also take time to read any information provided and ensure that they tailor their procedures to the scenario rather than simply listing a series of rote-learned tests. In this session many candidates included irrelevant tests such as ‘compare the bonus to prior year’, ‘review for authorisation of the bonus’ or focused on auditing the profit before tax figure rather than the bonus itself. This demonstrates a lack of understanding of the scenario and the purpose of the substantive procedures. Candidates who focused on ‘recalculating the bonus’, ‘agreeing bonus payments to post year-end bank statements/cashbook’, ‘agreeing the bonus to payroll records’ and ‘reviewing the disclosure for compliance with legislation’ were able to gain credit. Take the time to read the question requirements carefully and spend time thinking about what is needed prior to producing an answer.

Part (d) – 5 marks

This question tests candidates understanding of ACCA’s Code of Ethics and Conduct. One mark is available for each well explained point so candidates should aim for five points. Again, as for part (a) this requirement is relatively straightforward and an area where candidates should perform well. Key points include informing the competitors and obtaining consent, appointing separate engagement teams for each client, confidentiality agreements and attempts at putting in place physical barriers between each engagement team. This requirement also highlights the range of topics which the exam can cover. Questions on ethics may cover independence, confidentiality and conflict of interest and candidates must be equally prepared for any of these aspects.


Swift Co

This 20-mark question is based on Swift Co, a company which prints books and sells them online as well as supplying books to retailers across the country. This question tests candidates’ knowledge of methods for documenting internal control systems, key controls, and tests of controls.


This is a relatively straightforward knowledge requirement which has been tested in previous exam sessions. Knowledge requirements such as this often have an opening statement, sometimes referenced to an ISA, and this is useful for setting the scene and providing clarification on the aim of the question requirement. It is especially important that candidates understand exactly what the question is asking, especially for knowledge questions, where candidates should be aiming to score full marks. In Swift Co, three methods for documenting systems were provided in a table; narrative notes, flowcharts and questionnaires. The first part of the requirement was a description of the method and 1 mark was available for each method. As the


requirement verb was ‘describe’ candidates need to ensure that they write enough detail in their answers, simply stating ‘list of questions’ for questionnaires is not enough for a description. Candidates therefore need to consider whether they have provided sufficient detail. When describing a given method it is important to think about the words used; for example ‘narrative notes are notes’ does not give any detail on what the method actually is as it is essentially just repeating the same words given in the question and therefore will not gain any credit. An appropriate response for narrative notes would have been ‘a written description of what occurs in the system at each stage’. In this session some candidates misunderstood what flowcharts were confusing a graphic illustration with a graph. Having described the method, the next part of the requirement is to provide an explanation of an advantage. It is important to read the requirement carefully and highlight key parts, in this case that only advantages are required. This session some candidates incorrectly provided disadvantages. The requirement asked for ‘an’ advantage and so only one per method is needed and if well explained would gain 1 mark. Again, it is important to provide sufficient detail in answers. Also, it is important to think about those advantages specific to each method. Providing the same advantages for all three methods is unlikely to gain sufficient credit, as each method and its advantages are different. It is imperative that future candidates ensure that they devote adequate time to learning the knowledge areas of the syllabus as well as practising this style of knowledge question. Other good example questions to practice are Snowdon Co from the ‘Sample March/July 2020 Questions’, Amberjack Co from the ‘Sample September/December 2019 Questions’ and Freesia Co from the ‘Sample March/June 2019 Questions.’



Marks are awarded for identification of key controls (½ mark each), explanation of the key control (½ mark each) and an appropriate test of control for each control (1 mark each). In common with risks questions the scenario will typically contain more than the number of key controls required, so it is important that candidates plan their time carefully and only attempt to list the required number of points. With this type of requirement good exam technique is absolutely critical. Candidates should be prepared to answer questions which cover key controls and tests of control, control deficiencies and recommendations or a combination of both. The exam technique required is similar, however it is vitally important that candidates identify exactly what they are being required to do. This session many candidates did not provide key controls and instead identified controls from the scenario and attempted to turn them into deficiencies along with recommendations, this would have gained no credit. For example, some candidates identified correctly from the scenario that exception reports were produced and reviewed by the payroll manager, but then went on to state in their answer that this was a deficiency as someone else should review the exceptions for better segregation of duties. The first step in tackling a key controls question is to read through the whole scenario in full, this gives an understanding of what the potential answer points are as some key controls are easier to explain than others. Having looked at the whole scenario, candidates should then re-read it, drafting their answer as they go along.


Do not be daunted by the length of the scenario, be methodical and keep re-reading the requirement to stay focused. A key control is a control which has been appropriately designed to prevent or detect material misstatement. As such when identifying key controls, it is important that the control described is complete. When attempting questions of this type and identifying key controls, candidates should ask themselves ‘why would the auditor want to place reliance on this particular control’ and ‘what is it about the control which would prevent or detect a material misstatement’. Assessing the information in the scenario in this way will allow candidates to ensure that they are identifying all aspects of the control. For example, Swift Co’s system contained a control relating to monthly supplier statement reconciliations being performed and reviewed by the financial controller. Candidates who simply focused on the preparation of the reconciliations did not gain the identification ½ mark, as the complete control includes the review of the reconciliations to ensure that all differences have been resolved. It is the identification and resolution of these differences which ensures that liabilities are complete and accurate. Similarly, employees having a unique identification number on its own is not a key control. Instead the focus needs to include how the unique number ensures that only genuine employees are paid wages. When identifying key controls, candidates must also think about the relevance of the issue identified to the auditor. This session many irrelevant points were identified from the scenario which were not key controls. Employees being paid by bank transfer is not a key control, conversely if wages are paid in cash this is not in itself a deficiency. How a company chooses to pay its wages and salaries is a business decision, the auditor would only be focused on the key controls surrounding the payment method. Other incorrect answers included goods received notes being sent to the finance department – this is a crucial part of the process but is not in itself a control. Having identified key controls, candidates then need to explain the control. In considering this it is important to think about what the aim of the control is, what potential misstatement is being prevented or detected. The explanation needs to be specific to each control. It is not sufficient to state ‘this will prevent fraud and error’ as all controls aim to prevent or detect fraud and/or error in some way. A clear understanding of specifically how the control will ‘prevent fraud and error’ is needed. For example, in this session the scenario contained a control whereby the finance director reviewed the payments list to supporting documentation prior to authorising. The aim of this control is to ensure that invalid, duplicate or fictious payments are identified. Note how this explanation describes the specific type of fraud or error that the control prevents. The last part of the requirement is for candidates to describe tests of control for each key control identified. To gain the 1 mark available it is imperative that the descriptions of the tests are detailed enough. A test which starts with ‘check’ is unlikely to provide sufficient detail as to how exactly the auditor will test the control. In addition, it must be remembered that tests of controls are procedures carried out by the auditor, therefore candidates need to ensure that they focus on what the auditor should do rather than provide recommendations for management. A useful starting point when considering how to test a control is to consider if there are any documents which can be inspected for evidence that the control is operating. However, when describing the test, it is important to clearly state what document is


being inspected and also for what purpose. In this session the scenario contained a key control of authorisation of purchase orders. In testing this control it is necessary to state that the ‘purchase orders are being inspected’ and in this case that it is ‘for evidence of review by the relevant authoriser’. In addition, in describing tests of controls, tests such as ‘observe’ do not score as well as inspection, enquiry or reperformance procedures. For some controls it is perfectly acceptable for observation to be used as an audit procedure, such as ‘observing the warehouse team when undertaking detailed checks on receipt of goods.’ However, ‘observing the finance director agreeing the payments list to supporting documentation’ will not gain credit as instead ‘the payments list should be reviewed for evidence of the director’s review’ as this provides stronger audit evidence. In Swift Co, ‘observation’ is only an appropriate response in relation to the warehouse department checks on goods received, as for all other controls it would have been possible to perform stronger tests of controls to gather more conclusive evidence on whether the control is operating effectively. Key controls and tests of controls are a key requirement in internal control questions and future candidates must ensure they practice these types of questions in advance of their exam. Snowdon Co from the ‘Sample March/July 2020 Questions’ is a good question to practice.


Sagittarii & Co

This 20-mark question is based on Sagittarii & Co an audit firm due to commence the audit of two clients; Vega Vista Co, a not for profit charitable organisation and Canopus Co, a paint manufacturer. This question tests candidates’ knowledge of substantive procedures and auditor’s reports. Parts (a) – (c) examine substantive procedures for income, restructuring provisions and bank loans. Each requirement is for 5 marks so time allocation should be evenly split. One mark is available for each well-explained procedure therefore candidates should aim to produce five tests for each requirement. As referred to in respect of Hart Co, candidates must strive to understand substantive procedures and apply good exam technique. This includes tailoring procedures to the specific requirements of the question. Additionally, tests must be sufficiently detailed noting clearly which source document should be used. For example, tests such as ‘review disclosures’ would only score ½ mark. To score a full mark the procedure should go on to say, ‘in accordance with accounting standards/relevant legislation’. Also recommending ‘obtain a written representation’ without explaining what for, will not generate any marks.


The key point to note for this requirement is the nature of the entity and the balance being audited as this will have an impact on the type of procedures which will be performed. This question requires substantive procedures in relation to income for a not for profit charity. The charity’s main sources of income are donations and ticket sales for charity events therefore testing sales invoices and goods dispatched notes which may be valid in other circumstances, would not be relevant. This clearly highlights the need to tailor tests to the specifics of the scenario rather than producing lists of rote-learned procedures. In this session however many candidates included procedures such as; ‘agreeing to sales invoices and goods dispatched notes (GDN)’ and ‘cut-off procedures of GDNs around the year end’. These


procedures would not have gained credit as they were not relevant for the charity described in the scenario. Analytical procedures are an important source of evidence when auditing revenue and there are a number of examples which would be relevant in this case for example, comparison of different categories of income with the prior year and investigation of any significant differences. Note should be taken of the details provided in the scenario. In this question, information is given about the sale price of tickets for the festival and the approximate number of people expected to attend. This information can be used to describe a detailed proof in total procedure. Careful thought should be given as to why information has been included in the question and how it can be used to make procedures as specific as possible. The scenario also suggests that completeness and cut-off of income are key risks. Again, this information is there to help, trying to encourage candidates to think about these assertions and focus their procedures accordingly. The treatment of the advance ticket sales by Vega Vista Co would be a key consideration for the auditor to confirm that the income has been recorded in the relevant accounting period. Candidates must ensure that they can distinguish between a substantive procedure and a test of control. Many candidates lose marks in this type of requirement by mixing up these procedures. For example, in this session some candidates provided test of controls such as ‘observing the cash collection at the festival.’ The purpose of the observation is to ensure that the controls over the cash collection are operating effectively, therefore this is not a substantive procedure.


Good exam technique is important for a requirement like this. The key here is to think logically. It is possible to produce a good answer by thinking through the issues which are relevant for any provision, for example whether it should be recognised and if so, at what amount. Having used this as a starting point, procedures can then be designed to address these issues using the information from the scenario to add detail. For example, the information provides a breakdown of the costs included in the provision. Agreement of these to relevant supporting documentation would form the basis of an appropriate test. Other straightforward procedures which gained credit in this session included ‘casting the provision’, ‘reviewing the disclosures for compliance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets/accounting standards’ and ‘agreeing the provision to the financial statements’. The principles for approaching substantive procedures requirements described in respect of part (a) of the question would also be relevant. Careful thought should be given to the nature of the balance and the context of the scenario. For example, at this session some candidates suggested ‘writing to the company’s lawyer for confirmation of the restructuring provision’. While contacting lawyers may be relevant for a provision in respect of a legal claim, the lawyer is unlikely to be able to provide any information relevant to this type of provision. Similarly, ‘comparing the provision for the current year to the prior year’ is unlikely to provide useful evidence when the


balance relates to a ‘one-off’ set of circumstances. Candidates must carefully read the information in the question and tailor their answers accordingly. Again, the level of detail included in the procedure is important. For example, ‘check board minutes’ with little detail of what the minutes are being reviewed for would have gained no credit. To gain the 1 mark available it needs to be clear that ‘the board minutes were reviewed to confirm that the decision to restructure was taken pre year end.’

Part (c) – 5 marks

In this part of the question, two important pieces of information are provided; the company has repaid a number of loans and has taken out a new loan during the year. This information should be used to generate ideas for audit procedures. The key is to think practically about these two events, the impact they would have on the financial statements and then the evidence which would be available. If the loan is repaid, the balance outstanding will have to be settled by the company and the repayment will be recorded in the company’s cash book and bank statement. By reviewing the cash book and bank statement the auditor should be able to confirm the amount repaid. Other relevant practical issues include the possibility of early settlement charges which may have been imposed by the lender. Correspondence with the bank would be available setting out the charges. This information can then be compared to the expense recorded in the statement of profit or loss to confirm whether the correct amount has been recognised. The same logical thought process can be used to generate ideas relating to the new loan. It is the year-end balance which is in the financial statements, but this will be made up of $4.8m initially received, plus interest less any capital repaid. In this case the question states that the quarterly instalment of $150,000 includes interest. By considering each of these issues, appropriate substantive procedures can be derived. For example, the initial loan proceeds can be agreed to the cash book and bank statement, and the split of the loan repayment between capital and interest can be recalculated. The scenario also states that it is a ten-year loan which means that part of the loan will be a current liability and part will be a non-current liability. As part of the review of the disclosure of the loan the auditor will need to confirm that the split between current and non-current liabilities is correct. The model answer shows other relevant procedures. Using the information in the scenario will ensure that answers are focused on the right issues and avoids inappropriate procedures being included. In this session candidates who failed to do so included procedures on auditing the opening balances, which would have been audited in the prior year, and in relation to going concern. Other common inappropriate tests included ‘discussing with management why they were obtaining new loans’ ‘bank reconciliation procedures’ or ‘comparing the loans to the prior year’ when the scenario made it clear that there have been significant changes in the loans from the prior year. Others included a procedure reviewing board minutes for authorisation of the loans. This is a test of controls and not a substantive procedure.


Good examples to practice are, Encore Co in the ‘Sample March/July 2020 Questions’, Spadefish Co from the ‘Sample September/December 2019 Questions’, Hyacinth Co from the ‘Sample March/June 2019 Questions’, Jasmine Co from the ‘Sample September/December 2018 Questions’ and Gooseberry Co from the ‘Sample March/June 2018 Questions’.

Part (d) – 5 marks

This style of requirement regularly features in the AA exam. Marks are awarded for a discussion of the issue (1 mark), assessment of the materiality of the issue (1 mark), a description of the type of modification (up to 2 marks) and the resultant impact on the auditor’s report (1 mark). The starting point with this type of requirement is to identify the issue. This should be relatively straightforward as the details will be provided in the additional information. In this case the issue presented relates to costs incorrectly included within the restructuring provision. It is important that candidates include a discussion of the issue as set out in the requirement. Many candidates do not attempt this part and therefore cannot be awarded the 1 mark available for this. In order to be awarded the mark for discussing the issue however, candidates should not just re-write the fact from the question but need to explain what the impact is. In this case this would include an explanation that the restructuring provision included costs which were not allowed under IAS 37 (½ mark), and that without adjustment provisions and expenses would be overstated and profit understated (½ mark). The effect of the issue on the auditor’s report depends on an evaluation of materiality and ½ mark is awarded for the calculation itself with a further ½ mark for the conclusion on the materiality of the issue. Care must be taken in a question like this where there are two companies involved to ensure that the calculation is based on the relevant information for the correct company. Unfortunately, in this session many candidates incorrectly used Vega Vista Co’s income figure of $0.8m rather than Canopus Co’s equity and liabilities/ total assets balance of $11.6m. When considering the type of modification, answers must clearly state the opinion to be issued (i.e. unmodified opinion or modified opinion). In this instance, as the error represents 2.3% of total assets a modified opinion will be issued. If the opinion is to be modified, the type of modified opinion which is appropriate should then be identified (i.e. qualified opinion, adverse opinion, disclaimer of opinion) and whether this is due to a material misstatement or due to an inability to obtain sufficient and appropriate audit evidence. In respect of Canopus Co there is a material misstatement due to non-compliance with IAS 37. The impact is material but not pervasive therefore a qualified opinion is appropriate. It should also be remembered that a modified opinion will affect the basis for opinion paragraph. For example, it will include an explanation of why the opinion is modified. The model answer shows the key points which should be included. Answers should not list all possible options in a scatter gun approach as this simply wastes time.


Auditor’s reports are a core area of the syllabus and knowledge of the ISAs in this area is imperative. Good questions to practice are, Encore Co in the ‘Sample March/July 2020 Questions’, Jasmine Co from the ‘Sample September/December 2018 Questions’, and Gooseberry Co from the ‘Sample March/June 2018 Questions’.

Audit and Assurance (AA) Sept / Dec 2020 Examiner’s report

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Transcript of Audit and Assurance (AA) Sept / Dec 2020 Examiner’s report