hello and welcome to this session onacca paper p7: advanced audit and assurance. my name's steve whittenbury and i workas a subject matter expert for bpp learning media here in the uk. today iwant to focus upon a couple of areas that the examining team for p7has identified as possible areas of development for students on the basisthat performance in an exam question set in june 2015 perhaps has led them toconsider that students need little bit of a helping hand in how to answersimilar questions in future. so that's the purpose of this. you may find itquite useful, for example, to have access
to this question in front of you soknowing that you can pause this perhaps pausing, you can find this online it's the june2015 international variant of paper p7 and we're going to be looking atquestion 1. so what we're looking at is this question where it's got threeparticular parts. it is the compulsory section, it's the compulsory question, the firstone this presented on the exam paper and as is traditional it's a 35 mark question. usually that means 31marks of technical content and 4 professional marks which are designed totry and show how well you can understand the importance of writing professionallyfor your audience; structure, terminology,
tone, logic, flow, that sort of thing. idon't want to spend too much on professional marks now because there are plenty ofresources in relation to professional marks and i'd like to focus instead onthe specifics of the technical content in particular parts a and c of thisquestion which were highlighted as particularly unsatisfactory in terms ofstudents performance. overview quickly of the three parts shows us thatpart a for the 6 marks was in relation to an initial audit engagement and the impactthat would have upon the auditors strategy. part b was a bit more traditional where17 marks were rewarded for evaluating audit risks. and then the balance of the marks;8 marks for part c were to look at
specific audit procedures that would berequired for the short-term investments and the disclosure of the earnings pershare figure. as i said before, the first and thirdsections of this question where those that were potentially generating themost concern from the examining team so i'm going to try to focus a little bitmore on those but this will be an overview of issues that relate to allthree parts. so we're going to have a look at them in turn now. so this is part a andpart a asked you to, "discuss matters specific to the planning of an initialaudit engagement which should be considered in developing the auditstrategy". now you will always have to try
and plan every question that you attemptand that will usually start with the mark scheme. the marks for this were 6 marks. now, you weren't to know but in this particular case there were up to 1 anda half marks for each of the points that you could have written meaning that youneeded to only write about 4 things in order to have a good chance ofscoring the full 6 marks. you could probably as a rough rule of thumb in aquestion 1 on this exam paper work on a tariff of 1 and a half marks pergood, well explained point but it isn't always going to be the case so be on thesafe side and split the difference. may be looking for 5 good points and thatmay give you enough to be able to work
with. so when you know that you have got acertain number of things to look out for you then have to ask yourself, 'well what isit that i need to be able to write in respect of this initial engagement?'. now theexamining team is very specific. if you haven't already accessed them in the past, the examiner'sreport that's published after each sitting is absolutely invaluable in working outexactly what it was that the examining team was looking for and unfortunatelysharing with you some of the things that unsuccessful candidates did on theirversion of p7 which may not have led to them being successful in theentire exam, so this is a good case of
you being able to learn and develop andproceed hopefully successfully when it comes to be your turn. one of the commentsthat stuck in my mind whilst reading through this was that, 'candidatessupplied answers that were not relevant'. so it's quite a specific requirement;initial audit engagements, developing the audit strategy. what factors were there that you could have looked at? well i think there were someclues that the scenario was able to generate for you which you couldhopefully have picked out and that would have given you the bare bones of ananswer without going too far into this. for example we know that this is anengagement where the auditor is newly
assigned and so you have no knowledge ofthis client other than what you picked out from a client acceptance, a clientdudiligent perspective so really and truly this new assignment is something that'sgoing to provide its own level of risk, it's something that's going to providesomething that you're going to need to know about. so the strategy is going to have toacknowledge the fact that this is a brand new engagement. secondly, if it's abrand new engagement, if it's a company that's been audited before and we know thatit has, we would expect that there would need to be evidence in relation toopening balances before we can proceed too far into the audit so that we'recomfortable that those opening balances
have been brought forward correctly,they represent the right accounting policies or appropriate accounting policiesif they have changed, and there's that no misstatement in those. in essence isa510 about opening balances. again you could have picked up on that because itwas a brand new engagement. i mentioned the outgoing firm of auditism, perhaps thethird thing we could have said as a clew to considering our strategy in relationto this as an initial audit engagement, is a fact that there is an outgoing firmof auditors from whom we can derive an awful lot of information. so we canobtain consent to discuss things with them, we can consider contacting theminto deciding whether there is any
controversy for example. the 3 c's inthis instance: consent, contact and controversy. we might be interested inwhether there have been any modifications in prior years for example, we certainlywould like to get hold of their working papers from the prior years. so they can form part of our audit strategy and they will inform the approach that will thentake once we know that information. fourth and finally you could say thatas a clue, without scratching any further than the surface of the scenario,this is a listed business and it's been listed within the last 12 months andthat in itself means that your audit strategy is going to have to take intoaccount the fact that there may be
greater degrees of skills required,greater depth of analysis, greater risk associated with this engagement. and yourstrategy should be looking to try address that. and that's before we'vegone into any of the more convoluted aspects that the obviously very thoroughexaminer solutions discuss. so i think there are clews that you could havepicked up on; may be where the examining team felt that candidates answers werenot relevant are in respect to some of the other points that i have listed onscreen here. so for example a number of candidates answers discussed whether or not the auditorswere interested in accepting this
engagement. now let's think about thislogically. you've been appointed as auditor, you've gone through the process of decidingwhether you want the work, now you're going to ask as an initial audit engagement, do youwant to work again? surely you've already made that decision soanything that you do when discussing whether you want this engagement issurely redundant and of course in this instance it didn't make the cut becauseit was not relevant to your answer. similarly, in terms of general planningmatters, you were told about the specifics of this being an initial auditengagement. now many candidates wrote things about materiality for example. nowmateriality is important, it's relevant
as far as planning is concerned but it'snot specific to an initial audit engagement. all audits would requirelevels of materiality to be assessed, so including this in your answer again whilsttechnically not inaccurate as a planning matter was not relevant to thisparticular set of circumstances.so it's really important that you are veryspecific in your answer wand you read what the requirement says. one other point thatdid catch my eye in reading through the examiner's report was that for a 6mark requirement some candidates wrote many pages within their answers whichsuggested as this was the first part of the first question in the exam thatcandidates were so keyed up and ready to
impress the examining team with theirscript that actually they couldn't stop themselves, and it's great if you've gotloads to say. chances are that they lure of diminishing returns will play a partand you will end up writing so little that's worth anything for the extra timespent that you have to focus upon the number of marks and therefore the amountof time that makes up of the proportion of the hundred marks available. remember, allocating three hours to thehundred marks means awarding 1.8 minutes worth of time for everymark that you're chasing. so, the moral of the story is, write enough but don'twrite too much because you put yourself
under pressure for the rest of this exam.we're going to have a look at part b now and this is less of a priority for theexamining team purely and simply because it appears that those of you that areattempting this exam under exam conditions generally seem to have thispretty well covered. performance in this was extremely good. we can see from theexamining teams comments the one that i extracted was that there were someexcellent answers to this requirement. it was to evaluate the audit risks to beconsidered in planning the audit of ted and when we talk about the evaluation ofaudit risks it isn't just a case of identifying what they are
it's a case of, when we talk aboutevaluate, how significant are they? an evaluation might even be trying toprovide a value; what would you prioritize? why would this be seen as asignificant risk as opposed to just a general risk? so this idea of evaluationexpects you to not just identify but also to be able to put more points in. maybean average tariff, if we think about this, a mark and a half? we've generally seen therequirement to identify and explain for example in the past, identification might secure a half amark and a further mark for an ability to actually explain a point further. this idea ofevaluation goes somewhere along the line
because it's a higher level verb and itrequires a bit more. so an answer to a 17 mark question you're probably talkingabout at least 10 good points to be able to score 15 out of the 17, there maybe a few other elements there that you could add in to add extra value to bumpyou up to the full 17 perhaps. so, the approach that generally seems to workfor questions like this where a large scenario is presented and you're expectedto identify and then describe, in this case obviously, evaluate those particularaudit risks present in this scenario is to take a methodical approach and to have alook through each of them in turn. now if you have access to the question you'llsee that it's essentially spread over
two sheets of a4 which you can see ifyou scroll through and scan down almost paragraph by paragraph there are pointsin relation to audit risks that you can pick up on. where might there be somethingwithin the financial statements that we might get wrong, that we might say are okaywhen they perhaps are not. and it's fairly clear cut some of them jump outat you more than others. the fact that it's a new client for example indicates thatit's an extra amount of audit risk. the fact that there is the pressure tomanipulate for example on the basis that it's a listed company and that it's got newshareholders to keep happy. the fact that
this engagement is expecting you tounderstand computer games and the technology revolving around that type oftechnology. the fact that there is a website with a variety of differentincome streams that could be misstated and that therefore you mightmisunderstand. the fact that there are exchange rate issues that could beapplied to those levels of revenue where they may not be accounted for in linewith is 21 for example. the fact that there are different aspects of deferredincome for example in terms of licenses. the fact that there's no internal auditfunction putting pressure upon the internal controls within ted. we're up toseven major areas of audit risk already
and we haven't even turned the page yet. aspects in relation to the investment that are mentioned within the scenario, therecording of the earnings per share and these are quite important because yougonna pick up on those in a subsequent part so identifying those risks wouldhave been key for you to be able to then think how you would address those inpart c. other aspects, a really key part of the information that i can impart toyou is that if financial statement information is presented within aquestion, you should use it. here you can assume that if the calculations havebeen made you can trust them. the idea is that you can pick up on the fact thatthere's a significant rise in revenue
but there's not a significant change inthe operating profit which suggests that maybe certain costs might have beenmiss allocated or placed within the wrong part of the financial statements leading to misstatement maybe for examplewhen comparing gross profit margin over the two years. we could even say that thefact that assets have jumped significantly across the year could beindicative of overstatement. and again these are all areas wherewe're on the lookout for things that could be wrong which we want to try andestablish reasons to determine whether they are wrong or not we thensubsequently would find evidence to back
that up. a good 12 or so issues that wecould have picked up on there and that's without going into great levels ofdetail which hopefully you would have picked up from the examiner solutionsare there for you to learn from. i always say that the examiner solutions are thegold standard answer that no student could ever aim to reproduce on theday of exam but from a learning perspective you can learn lots from them. so, when we come to thinking about these figures you should always be looking totry and quantify by means as say, the specific calculations already made, or tobe able to determine the level of materiality that's mentioned. quick pointabout something which the examining team
did comment on within the examiner'sreport and that is the difference between 'audit risks' and 'business risks'.this was not a question that was after business risks although they are set atthis point in the exam. remember a business risk is about what it is that explains ifyou like problems that a company might experience,things that might mean that it doesn't hit it's goals, it's profit margins, it's objectives.things that get in the way. they are usually issues that might have afinancial impact but we're looking at them as being effectively risks to theway the organization runs its business.
they are not the same as audit riskwhich is a factor of those financial statements or the audit overall which could leadto us being unable to deliver the right audit opinion. now, there is aconnection between the two. quite often, determining a business risk such asdealing with items that have a very difficult ability to be valued, such asfashion items, that's a business risk because it means that there is a dangerthat you can hold a lot of inventory which is potentially overvalued on thebasis that you are not going to be able to recoup as much because people don'twant it because it's not cool or trendy. the flip side to that then is that youcan identify a corresponding audit risk on
the basis that carrying value of inventory may be significantly affected and an impairment may need to be considered. so there is a connection between the twobut they are most definitely very different and you should ensure that youdo not write about business risks when asked for audit risks and vice versa. so we're going to move on to part c now having looked at the first two parts of thisexam and some of the work you've already done in part b will help you here. because this particular requirement is asking you to recommend principal auditprocedures that you're performing the audit of two things. firstly theportfolio of short-term investments and
secondly the earnings per share figure.it's hopefully something that you would have considered as areas of audit risk.we know that for example the short-term investments do demonstrate a possiblearea where the loss has to be recognized appropriately within the financialstatement and also in terms of the earnings per share figure you've hopefullyalready identified that if that figure's wrong it sends the wrong message out tothe stock market and you would hopefully be able to say that you're workingknowledge of is 33 helps you understand that that actually isincorrect in terms of the way it's currently being presented within thequestion. so our task is to be able to
then think what would we then do on thebasis that we have identified these as areas of concern and we need to find some sortof evidence which is going to help us determine what should be included withinthe financial statements. the process of obtaining that sufficient appropriateaudit evidence is these principal audit procedures. so that's the connection, that'swhere it fits into the process. now, the examining team again highlighted this asan area for development in candidate's performance; "candidates curiously wrotetoo little for the marks available". so that could either be that you arewriting a number of marks a number of points in this to be able to score themarks available.
remember we had eight marks for thesetwo requirements. you can probably fairly easily allocate 4 of those marks to eachrequirement and then suggest that in each case a good, well explained and welldescribed principal audit procedure will score you 1 mark. so you were looking for fourdifferent things for each of these. now of those four different things it'spossible that maybe candidates wrote a sentence if that in relation to each oftheir procedures and may not have actually scored beyond a half a mark,if that, in each case. so you may have walked out of the examthinking i've written eight good procedures, i've got 8 marks, and you may not have even scored the full 4. so that's
where this comment that candidates didnot write enough for the marks available may have come from. they may also nothave written enough comments in total. so, what can you do? firstly we can structureinto these 4 for each of the two different types of areas. let's have a think about sometechniques that we can focus upon as to how we can make our requirementsspecific. now i have a couple of suggestions, which i tend to refer to students whoi teach on face-to-face courses, about how to try and generate ideas and how tocreate relevant audit procedures in such cases and i'm going to try and sharethese with you now. so of these two techniques, the two techniques i've got ihaven't managed to come up, certainly for the
first one, with a particularly catchyname for it. i call it, '4 w's, a h and a d', because i haven't come up withanything else that provides me with a suitable pneumonic. should you find awilling example of this that you can apply to this please contact acca and wecan maybe get some copyright to that. but these 4 w's, a h and a d areillustrations of how you can maybe consider the factors that go intoderiving a really good procedure. so you can see them on the screen and the thingsthat you should include within any audit procedure should say; what it is you'redoing, they should say why you're doing them, it should say how you're doing them, itshould say where you need to go in order
to do that, it should say who or to whomyou need to refer in respect of that particular procedure and it may evenhave to specify relevant types of documentation. now, putting this in terms of aspecific example for each of these that's relevant across the short-terminvestment portfolio and the earnings per share figure, for example, what am i doing?i'm agreeing the fair value of these investments to their stock marketlisting figures. that's explaining what it is i'm doing. why am i doing it? let'sthink of something else. i'm going to read the board minutes. this is a peculiar area,a real favourite of the examining team,
the candidates would put down as arelevant audit procedure: "read board minutes". no marks are awarded if you simplywrite 'read board minutes' because you haven't said why it is you're readingthe board minutes. are you doing it because you've run out of something todo or you just want to pad out the audit so that you don't have to do any realwork? no of course not. you're reading board minutes because you're attempting toestablish exactly what it is the rationale behind acquiring these shareswas, that it was for short-term rather than long-term gain for example. so, when yousay, 'read board minutes', this is a classic example of you having to add to them why it is youare reading them, otherwise it makes no sense
and awards no marks. how are you going to dosomething? let's say we're going to confirm the share purchases byreconciling these two items included within the bank statements. then we canactually say how it is we're going to do this. if i'm going to agree that the figure'sbeen paid, it's a bit vague and airy fairy, but if i perhaps say i'm going to refer to thebank statements to ensure that these figures agree, that's a bit morespecific and the 'how i'm doing it' has been ticked. next we might need to thinkabout where we would go. the 'where' could include maybe going and visiting thetreasury department to assess the levels of control in relation to thesetransactions to possibly obtain levels
of documentation and to discuss thingswith them. similarly the 'to whom you might need tospeak to' it might be that we would wish to clarify with management that the short-term purchase of these wasappropriate. finally in terms of documentation we mayobtain draft copies of the financial statements and review the levels ofdisclosure in relation to earnings per share to ensure they match up with theminimum requirements of is 33 in relation to what the earnings per sharecalculation should be. so each of these instances, you're not necessarily goingto find that any one procedure ticks the
box of all six, i'm certainly yet to find one thatcovers all six simultaneously, but there's a number of these that could beblended and i think the key thing now is to highlight this is an area where youcan start to practice producing your own procedures so that you can see how thiscould be applied. the second area that we might findin relation to this is when talking about a more familiar looking collection,which is 'a, e, i, o and u'. no you'll see on screen the 5 vowels used as a pneumonic fordemonstrating techniques that could be used within procedures in order toobtain good audit evidence. and i've listed them on
screen here. they relate to analyticalprocedures, enquiry, inspection, observation and the one that's a bit ofa cheat, recalculation. the whole point of a pneumonic is that it'smemorable and most people generally tend to remember recalculation because it's a bitof a cheat. but in this instance maybe we could apply each of these to be able tohelp us to rerive suitable audit procedures such that for example wemight use analytical procedures to verify materiality levels to determinewhether for example the loss in value of these short-term investments doesdemonstrate a material misstatement, in which case we need to proceed. we mightenquire with management surrounding the
methodology that they've used forextracting information to calculate their earnings per share figure and thenin so doing we've established exactly whether or not they've followed is 33.we might inspect the documentation supplied in relation to the share issue.we know that the number of shares is relevant to the calculation of earningsper share and if there's been a share prospectus created it might besomething that we could inspect which gives us an indication of the likelynumber of shares that will have been created, hence giving us an idea abouthow many more shares there might be during the year. remember it's an averagefigure that is 33 requires. now
observation doesn't lend itselfnecessarily well to this scenario but a classic case for the auditors procedurefor thinking about observation is to observe an inventory count beingundertaken to ensure that count instructions are being adhered to, to ensure that the right types ofcontrols in place are actually occurring. and then finally in terms of recalculation,classic illustration here from this scenario, you would recalculate what youfeel the earnings per share should be using what you believe the correctedfigures are because this gives you then something to say, that
we believe the figure should bex, currently it is y. it therefore then needs to be corrected. and in each ofthese cases they can be imaginatively applied given the situation. nowunderstandably, when discussing principal audit procedures for anything carriedwithin a set of financial statements, you need to understand the supportingfinancial statement itself in terms of how it's created, you need to understandthe financial reporting standards. so your knowledge of these is going to becertainly brought out. and it's no surprise that the examining team wouldpick on certain items that could be perceived to be slightly morechallenging, earnings per share and
short-term investments for example beingtwo such illustrations. so do yourself a favour, always consider in relation to theapproach that you take, think about how significant it is in terms ofmateriality, know the standard to determine what should be there, understand what currently is there anddetermine whether or not that demonstrates a risk and then think aboutwhat you would do to try and collect evidence you need to verify thosefigures. so hopefully this is proving to be a useful approach for thinking aboutquestions where principal audit procedures are required.
overall, this question was one that theexamining team felt candidates needed to spend a bit of time thinking aboutbecause it strikes me that if this has been flagged as an area for developmentthe acca will no doubt decide to examine it on future sittings. so do yourself a favor, be prepared. you can expect a scenario that lookslike this and you can expect a number of risks, but certainly they're not going to make upmore than half the marks available. so you have to be able to sore the restby having good, sound technical knowledge and skills in order to be able to applythem, and that's what i hope you've been provided with today. not much more for meto say now other than to thank you very
much for your time, to thank you forwatching today and i wish you the very best of luck when it comes to be yourturn to passing p7, and i'm sure that's what you going do. so thanks for your time. bye now.
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