HKICPA

Exam Technique Seminar Module C (Section A)

June 2012

Lecturer: Wilson Leung

Seminar handouts

HKICPA QP Module C

Module C (June 2011 Session) 1 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 2 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 3 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 4 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 5 Prepared by Wilson Leung

Case study – HKICPA June 2011

Question 1

Assume that you are Julie, you are going to discuss with Ben the ABC audit

arrangement for 2010. Refer to the facts of above, what independence issue(s)

would you consider for advising Ben for his consideration on whether B & Co

should continue the external auditor relationship with ABC for 2010? And

what safeguard(s) would you recommend to Ben? [10 marks]

WWhhaatt aarree tthhee iinnddeeppeennddeennccee iissssuueess iinn tthhiiss qquueessttiioonn??

Ben Bee and Julie Chan have been the in-charge in the last 3 years – lloonngg aassssoocciiaattiioonn ((ffaammiilliiaarriittyy tthhrreeaatt))

Thomas, the new general manager, is Julie’s uncle – cclloossee rreellaattiioonnsshhiipp ((ffaammiilliiaarriittyy tthhrreeaatt))

Thomas has been reaching out to Julie for assistance on system designs and user implementation testing – pprroovviissiioonn ooff nnoonn--aassssuurraannccee sseerrvviiccee ((sseellff--rreevviieeww tthhrreeaatt))

ssiiggnniiffiiccaanntt??

HHooww wwoouulldd yyoouu eevvaalluuaattee tthheessee tthhrreeaattss iinn yyoouurr aannsswweerr??

ssaaffeegguuaarrddss

((11)) CClloossee rreellaattiioonnsshhiipp [[LLPP 44..22..33..55]]

((22)) PPrroovviissiioonn ooff IITT sseerrvviiccee [[LLPP 44..22..44..22]]

HKICPA QP Module C

Module C (June 2011 Session) 6 Prepared by Wilson Leung

Question 2

Assume that B & Co has been re-appointed as ABC’s external auditor for 2010 and

was not engaged by ABC to assist on system design and implementation.

With respect to the audit of ABC’s financial statements for the year ended 31

December 2010, explain the impact of the SAP implementation on the audit in

terms of (i) audit planning and (ii) IT general controls and application

controls and (iii) data integrity, and outline the appropriate audit procedures.

[12 marks]

WWhhaatt aarree tthhee kkeeyy wwoorrddss iinn tthhiiss qquueessttiioonn??

NNeeeedd ttoo uussee IITT eexxppeerrttss

UUssee CCAAAATT

AAuuddiitt ppllaannnniinngg

((IImmpplleemmeenntt SSAAPP))

IITT ggeenneerraall ccoonnttrroollss

AApppplliiccaattiioonn ccoonnttrroollss

TTeesstt ttoo eennssuurree eeffffeeccttiivveenneessss

DDaattaa iinntteeggrriittyy

DDaattaa iiss aaccccuurraattee ffrroomm oolldd

ssyysstteemm ttoo nneeww ssyysstteemm

AApppprroopprriiaattee aauuddiitt pprroocceedduurreess

HKICPA QP Module C

Module C (June 2011 Session) 7 Prepared by Wilson Leung

Question 3

ABC has a business relationship with over 5,000 local and overseas suppliers.

With respect to the audit of ABC’s financial statements for the year ended 31

December 2009, B & Co arranged accounts payable confirmations. Some of the

confirmation replies from the suppliers indicated that the confirmed balance did

not agree with the suppliers’ record but could be reconciled and explained by ABC.

In April 2010, as instructed by Thomas, the accounts payable team implemented a

new process. They now perform reconciliations to monthly statements from

overseas suppliers, and any variance is properly is properly followed up by the

accounts payable team and approved by Thomas.

(a) Evaluate and explain the risk of material misstatement relating to the

completeness assertion of ABC’s accounts payable as at 31 December

2010. [3 marks]

(b) Suggest the audit procedures you would perform in response to the

assessed risk of material misstatement relating to the completeness

assertion of ABC’s accounts payable as at 31 December 2010.

[7 marks]

5,000 local and overseas suppliers – mmaannyy,, eeaassiillyy wwrroonngg

Differences in the sent confirmation can be reconciled – bbaallaanncceess aappppeeaarr ttoo bbee ccoorrrreecctt

Reconciliations to monthly statements and variance is properly followed up – GGoooodd iinntteerrnnaall ccoonnttrrooll

rriisskk

EEvvaalluuaattee

WWhhaatt pprroocceedduurreess ttoo ppeerrffoorrmm uunnddeerr ssuucchh rriisskk aasssseessssmmeenntt??

HKICPA QP Module C

Module C (June 2011 Session) 8 Prepared by Wilson Leung

Question 4

There are over 100,000 inventory items amounting to over HK$33 million as at 31

December 2010. Management perform a year-end inventory count on 15 and 16

December 2010.

Thomas directly supervises the year-end inventory count with the assistance of

accounting department. Management reconcile the physical count records to

inventory sub-ledger, investigate the difference and correct the sub-ledger balance

as appropriate.

(a) What are the factors and procedures which should be considered in

planning the physical count on existence assertion of ABC’s inventories

as at 31 December 2010?

[7 marks]

WWhhaatt aarree tthhee kkeeyy wwoorrddss iinn tthhiiss qquueessttiioonn??

ppllaannnniinngg

NNoott pprroocceedduurreess wwhheenn aatttteennddiinngg iinnvveennttoorryy ccoouunntt

LLPP 1133..33..33..33

HKICPA QP Module C

Module C (June 2011 Session) 9 Prepared by Wilson Leung

Source: HKICPA Business Assurance Learning Pack

HKICPA QP Module C

Module C (June 2011 Session) 10 Prepared by Wilson Leung

(b) In view of the implementation of “SUCCESS” and change of the

inventory costing method, evaluate and explain the risk of material

misstatement relating to the accuracy and completeness assertion of

ABC’s inventories as at 31 December 2010. [4 marks]

(c) Suggest the audit procedures you would perform in response to the

assessed risk of material misstatement relating to ABC’s inventories as

at 31 December 2010 as described in Question 4(b)?

[7 marks]

Over 100,000 inventory items and inventory count performed on 15 and 16 December – mmoorree lliikkeellyy ttoo oommiitt

Management reconcile the physical count records to sub-ledger – GGoooodd iinntteerrnnaall ccoonnttrrooll

Implementation of a new system – ddaattaa iinnppuutt mmaayy bbee

eenntteerreedd iinnccoorrrreeccttllyy

Change of inventory costing method – NNeeww ccoosstt mmaayy bbee

ccaallccuullaatteedd iinnccoorrrreeccttllyy ((aaccccuurraaccyy))

WWhhaatt aarree tthhee rreellaatteedd aasssseerrttiioonnss iinn QQuueessttiioonn 44((bb))??

AAccccuurraaccyy aanndd ccoommpplleetteenneessss

rriisskkss

HHooww ttoo eennssuurree tthhee ccoossttiinngg iiss ccaallccuullaatteedd ccoorrrreeccttllyy??

HHooww ttoo eennssuurree tthhaatt aallll iinnvveennttoorriieess wwhhiicchh sshhoouulldd

hhaavvee bbeeeenn rreeccoorrddeedd aarree rreeccoorrddeedd??

HKICPA QP Module C

Module C (June 2011 Session) 11 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 12 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 13 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 14 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 15 Prepared by Wilson Leung

HKICPA QP Module C

Module C (June 2011 Session) 16 Prepared by Wilson Leung

Module C (December 2011 Session) 17 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 18 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 19 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 20 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 21 Prepared by Wilson Leung

Case study – HKICPA December 2011

Question 1

Define the entity’s risk assessment process (which is one of the elements of

internal controls) and describe two specific risk assessment processes that Mr.

Kwok should expect DREIT has in place to minimize the risks of premises

collapse, particularly for those caused by the illegal extension built on the

premises. [6 marks]

WWhhaatt aarree tthhee rreeqquuiirreemmeennttss iinn tthhiiss qquueessttiioonn??

Define – “WWhhaatt”” [[LLPP 1111..11..22]]

Describe two specific risk assessments – CCaassee,, aappppllyy!!

WWrroonnggllyy ppuurrcchhaassee aa pprreemmiissee wwiitthh iilllleeggaall eexxtteennssiioonn

RRiisskk aasssseessssmmeenntt

HHooww ttoo kknnooww bbeeffoorreehhaanndd aanndd ssttoopp tthhiiss ffrroomm hhaappppeenniinngg??

RRiisskk??

HHooww??

DDuuee ddiilliiggeennccee bbeeffoorree ppuurrcchhaassiinngg

IInnssppeecctt tthhee fflloooorr ppllaann aanndd ccoommppaarree wwiitthh tthhee

pphhyyssiiccaall ccoonnssttrruuccttiioonn

EEssttiimmaattee ppoossssiibbllee lloosssseess aanndd eennssuurree ssuuffffiicciieenntt

iinnssuurraannccee ccoovveerraaggee

HKICPA QP Module C

Module C (December 2011 Session) 22 Prepared by Wilson Leung

Question 2

Define fraud risk factors and identify four fraud risk factors for the purpose

of DREIT’s audit. [9 marks]

Fraud risks factors: [[LLPP 1100..11..66]]

Incentive or pressure

Opportunity

Rationalization

HHooww ttoo lliinnkk ffrraauudd rriisskkss ffaaccttoorrss ttoo ccaassee??

WWhhaatt eellssee mmaayy iinnddiiccaattee aa hhiigghheerr rriisskk ooff ffrraauudd??

NNuummbbeerrss

AAnnaallyyttiiccaall pprroocceedduurreess!!

Incentive – Remuneration of senior executives is closely linked to the growth rate of distribution per unit

Pressure – Listed company in Hong Kong

Opportunity (breakdown in internal controls) – Inconsistent control system in 50 real estates and leads to high chance of theft

HKICPA QP Module C

Module C (December 2011 Session) 23 Prepared by Wilson Leung

Question 3

DREIT has established an audit committee to comply with the Listing Rules of the

Hong Kong Stock Exchange.

(a) To what extent can the establishment of an effective audit committee

improve DREIT’s corporate governance in the context of external

auditing, financial reporting and internal control? [8 marks]

aaddvvaannttaaggeess

Present your answer into: [LP 2.4.1]

External auditing

Financial reporting

Internal control

TToo wwhhaatt eexxtteenntt ccaann …… aauuddiitt ccoommmmiitttteeee …… iimmpprroovvee??

Source: HKICPA Business Assurance Learning Pack

HKICPA QP Module C

Module C (December 2011 Session) 24 Prepared by Wilson Leung

(b) Describe some ways to gauge the effectiveness of DREIT’s audit

committee. [6 marks]

HHooww ttoo mmeeaassuurree tthhee eeffffeeccttiivveenneessss ooff aann aauuddiitt ccoommmmiitttteeee??

HHooww??

DDeessccrriibbee ssoommee wwaayyss ttoo ggaauuggee ……

Improve quality of financial reporting – mmeemmbbeerrss ooff

aauuddiitt ccoommmmiitttteeee nneeeedd ffiinnaanncciiaall eexxppeerrttiissee

Improve quality and efficiency of the external auditor – ffrreeee ccoommmmuunniiccaattiioonn ttoo tthhee eexxtteerrnnaall aauuddiittoorrss

Increase public confidence – ccoommppoossiittiioonn ooff tthhee bbooaarrdd

mmuusstt bbee bbaallaanncceedd

Increase public confidence – NNoonn eexxeeccuuttiivvee ddiirreeccttoorrss

mmuusstt bbee iinnddeeppeennddeenntt

WWhhaatt ddooeess iitt mmeeaann bbyy eeffffeeccttiivvee??

HKICPA QP Module C

Module C (December 2011 Session) 25 Prepared by Wilson Leung

Question 4

Assume that Mr. Kwok’s estimate of losses to DREIT following the premises

collapse is material for audit purposes but the Manager of DREIT has refused to

adjust the financial statements. Against such circumstances of the case, assume that

any misstatements are not likely to be pervasive to DREIT’s financial statements.

(a) Identify and discuss the most appropriate form of audit opinion.

[7 marks]

(b) Assume that you are Mr. Kwok and have decided to modify the audit

opinion. Write a draft report comprising the report title, the basis of

opinion, the qualified opinion and the report issuer sections ONLY.

[8 marks]

WWhhaatt iiss tthhee iissssuuee iinn tthhiiss QQuueessttiioonn??

mmiissssttaatteemmeennttss

QQuuaalliiffiieedd oorr aaddvveerrssee??

nnoott ppeerrvvaassiivvee

QQuuaalliiffiieedd ooppiinniioonn

HHooww ttoo ssccoorree 77 mmaarrkkss??

DDrraafftt …… ssppeecciiffiicc 44 sseeccttiioonnss!!

CCaassee ssppeecciiffiicc

HKICPA QP Module C

Module C (December 2011 Session) 26 Prepared by Wilson Leung

Question 5

The tenancy of Mr. Kwok’s CPA practice office will expire in November 2011.

Mr Kwok has been offered by DREIT a two-year tenancy in one of its prime

commercial premises at a monthly rent of HK$10 per square foot with an

initial three-month rent-free period. [6 marks]

RReenntt aann ooffffiiccee ffrroomm tthhee cclliieenntt ppaayyiinngg aa cchheeaapp mmoonntthhllyy rreennttaall

WWhhaatt iiss tthhee iissssuuee iinn tthhiiss QQuueessttiioonn??

GGiiffttss aanndd hhoossppiittaalliittyy

AAPPPPLLYY ccoonncceeppttuuaall ffrraammeewwoorrkk

CCiittaattiioonn:: CCooddee ooff EEtthhiiccss

FFaacctt:: RReenntt aann ooffffiiccee ffrroomm tthhee cclliieenntt ppaayyiinngg aa

cchheeaapp mmoonntthhllyy rreennttaall

IISSSSUUEE:: GGiiffttss aanndd hhoossppiittaalliittyy

TThhrreeaattss:: SSeellff iinntteerreesstt tthhrreeaatt

SSiiggnniiffiiccaanntt?? NNaattuurree –– HHKK$$1100 iiss ffaarr bbeellooww mmaarrkkeett rraattee VVaalluuee –– CCoouulldd bbee ssiiggnniiffiiccaanntt

IInntteenntt –– DDoouubbttffuull

SSaaffeegguuaarrddss:: TToooo ssiiggnniiffiiccaanntt,, nnoo ssaaffeegguuaarrdd.. RReejjeecctt..

HKICPA QP Module C

Module C (December 2011 Session) 27 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 28 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 29 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 30 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 31 Prepared by Wilson Leung

HKICPA QP Module C

Module C (December 2011 Session) 32 Prepared by Wilson Leung

Five tips in writing Module C exam

1. Read the requirements first before you read the case

2. Budget your time properly

3. Plan your answer based on key words in the question. Your answer should relate to marks

4. Follow the “standard + apply” approach

5. Don’t forget to use numbers when given – analytical procedures !

Good luck!!!