hello there, welcome to this session onacca's paper f8: audit and assurance my name's steve whittenbury and i workas a subject matter expert for bpp learning media here in the uk. today i wantto try and take you through a subject which is causing the examiner a littlebit of concern, by illustrating a question from the june 2015 exam paper. question 6, if this is a question you're familiar with, where we're going to tryand look at the role of assertions and substantive procedures. overall this issomething that candidates seem to have been finding difficult and performance isan area of some concern for the examiner, so it's important that if you are goingto be attempting this exam soon you are
prepared because this is one of the coreparts of the syllabus that every if not most acca f8 exams are going to be testing.so, lets have a think about what this session is going to include. today, we'regoing to be looking at the june 15 exam. it's going to be question 6 which ison substantive procedures. and it was a 20 mark requirement within the exam,made up of two parts. the first part, part a, was for 8 marks which was aknowledge-based test looking at assertions and asking for some relevantsubstantive procedures for those assertions. secondly part b was then ascenario-based question asking for 12 marks worth of work in relation tothree separate areas where substantive
procedures were going to be required. now asi've said already the examining team, the examiner in particular, in the examiner'sreport identified that this was an area with which they are unhappy when itcomes to candidates performance in that particular sitting. so the purpose ofthis today is to try and work through what sort of things the examining team waslooking for for that question so that if something similar happens again infuture you are prepared. so, let's get stuck in and have a think about this. we'll start by looking at part a of the question. if for example you're watchingthis and you have access to online acca resources you might find it helpful to havea copy of the question,
possibly even the solutions, open infront of you. remember you can always pause this presentation in order to beable to access this and then we can go through them together. so in terms of part ait was split into two main areas where you were asked to, "identify and explainfour financial statement assertions", and this was important, "that were relevant toclasses of transactions and events for the year under audit". that was for 4 marks,and then for a further 4 marks you were asked in each case, for each of theseidentified assertions, to describe a substantive procedure relevant to theaudit of revenue. now this is going to be again 4 marks. and the general tariffallowed for something of this sort is that
each of the points you make is going toscore up to 1 mark. you might then say, great ihave to write eight things to score my 8 marks here, but of course the thingis that it's up to 1 mark for each of these points and if the detail you putin place is not sufficient you're going to struggle to score morethan half a mark in each case which automatically is putting pressure upon yourability to pass. so, let's think about how we can break this down into the two mainconstituent elements. firstly, we're going to talk about the assertions. and you'll seehopefully that there are a series of assertions that should be corebuilding block knowledge for this paper.
you'll see on screen there's a pneumonic,'acca cover' which we use to try and show you what all of the variousassertions are but remember not all of these assertions are relevant foreverything that happens on a set of financial statements. the best way tothink of these assertions is to consider them ask characteristics, qualities thatthings have to possess in order for them to belong on most financial statements.so much the same way as for you to belong to the acca as a qualified memberyou have to fulfill certain criteria to do with your experience, to do withobviously paying your fees, and also passing all those exams. and if you don'tdo any of those, if you don't satisfy
those criteria, there is a chance youdon't belong and you therefore may not be able to sit on that particular body. now,it's exactly the same with a set of financial statement assertions. if certain itemswithin those statements don't possess certain characteristics, they can't bewithin those financial statements. so we look for evidence which is relevant toproof that things do possess those characteristics, those assertions, andthey therefore then belong. so we can see that if we're going to look at the areas of assertions weneed to make sure that when we're answering this we aren't just writingdown everything we know about assertions. and this is where one of the oldest butmost effective pieces of exam advice
comes into play; read the question. and in this case thequestion was very specific. it was asking for assertions that were relevant totransactions and balances. so anything to do with assets or liabilities is notgoing to score marks for you. secondly you were told that you werelooking for substantive procedures, so had you discussed any tests ofcontrol for example, no matter how valid or well explained they might be, theywould not have been relevant. thirdly we were told that this was especiallylooking at revenue, and whilst you may be able to demonstrate your knowledge ofdouble-entry by being able to talk about
the impact that would have say onreceivables, it wasn't receivables that we were looking at, it was the revenuesystem, recording items of sales revenue. finally you were asked to both identify andexplain. so one can identify something but that's unlikely to score more thanhalf a mark if that. explaining it is where you make it more clear and youshow somebody exactly what goes into that particular assertion. so when youhad all of those added up those are the key things that you were looking for inorder to build into your answer. the next thing for us to then say is, from our list of'acca cover', what do we think are those assertions which are most relevant totransactions and events? and in this
instance you can now see highlighted onthe screen there are up to five of these assertions which we would expect to seeas relevant to these types of transactions and events. and in order to be able to score well what the examiner was looking for was for you to beable to, a, identify them and then, b, be able to explain them and then to be able toprovide a relevant example of those in the contextof revenue. so the five that we have that you could look at could include,'accuracy', 'completeness', 'cut-off'. 'classification' and 'occurrence'. rememberin each of these instances we're looking for evidence of each of these havinghappened.
remember, for me to be able to explainthem to you, it's useful for me to think of them in terms of the particular issuesthat we've got where we've got, for example, examples of these. that's what we'relooking for. so, let's think about the specificassertions now in turn and see exactly what we need for each of these. so wherewe've got, for example, these different types of assertions, let's think about thedifferent examples of activities that you would undertake. so for example we'restarting with 'completeness'. we can think of 'completeness' and 'occurrence' almost atthe same time because they are two sides of the same direction if you like. thedirection in this instance is absolutely
crucial. so for completeness we're looking tomake sure that items are not understated. so are they actuallycomplete? so are the financial statements complete? so in terms of a revenue item,we're looking for the direction for this to be able to make sure that we arecomfortable, say for example that if we took a sample of goods dispatched notes thathave been recorded within the year, that we would want to make sure that thefinancial statements were complete in that they were all there. so we wouldtherefore then start at those goods dispatched notes and trace them through toas far through to the destination of those in where they would be recordedwithin those financial statements. that
could be for example making sure thatthey have been matched to invoices. remember you can't just stop at saying 'matchinginvoices' because that sounds more like a test of control, but that they reconcile toitems that are recorded within that sales ledger. so that you then know thatitems that relate to revenue that has actually happened is in there. so things arecomplete and they're not understated. now i mentioned to you it was all about direction andalso in respect of this the direction in relation to occurrence means that items arenot overstated, did they actually occur? for that to happen we would then say ifsomething purports to be within the financial statements that's arevenue item, has that been overstated?
did it actually occur? did we actuallysell that? so we would then take a sample of sales ledger entries and trace themback to see whether or not there was a valid, legitimate sales order and goods dispatched note that we could compare and match them to. again be careful of yourterminology, you're not talking about a test that you'll performance which will be a test ofcontrol, was that actually carried out? we're more interested in actually seeing; could we say, from a selection, a sample, of those sales ledger entries is theresomething which makes sure that gives us evidence that each of them has actuallyoccurred? and then it's the substantive procedure to prove those figures. now those are only two of those but i would say in
this instance of the four that you hadthose two would have been good ones to start with because you could describethe duality of their connection, that one is in one direction and the other is in theopposite direction. the alternatives you have are to think about 'cut-off', 'accuracy' and 'classification'.so for example 'cut-off' focuses upon the time period; are we happy that theserevenue items actually happened in the period that we were discussing? so wemight take a sample of sequential goods dispatched notes that have occurredcrucially towards the end of and into the beginning of the next reportingperiod and then ensured that they have
actually been accounted for within thecorrect reporting period. we could review 'accuracy', items can only exist on thefinancial statement if they are accurate, and in this instance the accuracyreflects the activity. so for a sample of sales invoices make sure that for example thevalue thats recorded is accurately reflecting the actual amount charged, maybe in line with suppliers price list for example. similarly we might look at the'classification' aspects and say, to make sure that items are not carried withinthe wrong part of the financial statements where revenue for examplemight be recognized in current and not deferred income. that could be a test wecould carry out. again to ensure that the
substance of the particular item iscorrect. and it was key that in this instance we focused specifically uponeach of these in turn so that we could then say, i've got an illustration ofwhat that particular assertion means and then i can say an illustration ofthat by means of the revenue system. so, key that we could have a look at that figure and wewould hope that this is something that is important. now, where you are going tobe finding struggles to get your answers correct is in this word 'specificity',which you'll see covered a number of times within documentation that the examiningteam produced after each sitting. be specific in your answers. one suchcomment sticks in my mind having read
through the examiner's report for this sitting, when somebody attempted to explain accuracy as an assertion;"accuracy ensures the amounts in the financial statements are accurate". whilst that may sound perfectly flawless in terms of logic it doesn't tell usanything about how that would actually be undertaken. so you have to make surethat you put a little internal sense check to make sure that things doactually stack up. so when looking at this type of question it's often thatyou'll see tests of your ability to apply core knowledge, such as this, but it's likely that you may also bepresented with a scenario and that
scenario is what we see now when we moveonto hawthorne enterprises in part b. so you can move to the part b if you've gotthe question paper in front of you and we can see some of the comments andconcerns that we might have from previous versions of the audit sothat we can then address them. and in the scenario you're told about threespecific areas and an allocation of 12 marks between each of these three areassplit three, four and five respectively, for talking about the fact that supplierstatements have not been undertaken and reconciliations of those have not beenundertaken. so your task is to then say, i need to find some way of reconciling thesupplier statements in order to ensure
that i can be happy that there aresubstantive procedures that helped me to agree these balances. secondly the bankreconciliation had a series of errors in the previous year and we need to makesure that if the bank reconciliation is being carried out correctly that thoseerrors can't happen. thirdly, that there's a receivables balance.we're told that the circulation cannot occur and we need to find other ways ofbeing able to verify these balances. so your task inthis case now was to again be able to describe what you felt were suitablesubstantive procedures in each of these three cases and to provide suitableexamples. now, if you've read through the
model answers that the examining team supplied,they are perfectly adequate, you don't need me to repeat them for you. butperhaps putting a little bit of flesh on the bones as to why they are there;remember these are substantive procedures, they're not tests of control. soyou can't be using any evidence that you could collect by means a test of control;is a test that should be operating actually operating? you can't use any ofthose because they won't score you any marks. so you're looking for substantiveprocedures. the good news is, when starting with the supplier statementreconciliations, this entire process is fairly substantive anyway. the process ofagreeing what a supplier says they are
owed compared to what you say you have accrued for or what you think you actually do owe, that process is agreeing tosubstantive values. and that is usually a good way to start. so a nice simple starting figurewould be to take those supplier statements and to reconcile them for a sample tothe figure that's carried within the purchase ledger. now of course you've got other things you have to say and perhaps in your head you'll then say, well on the assumption thatthat works fine, i dont need to do anymore. but remember this is thinking aboutreal world situations, and there's a chance that these things may notreconcile in which case you have to ask yourself, well what if these figuresdon't agree? you can then suggest
alternative techniques to be able toconsider, well what happens if for example we know that there may bediscrepancies because we believe that we paid some money and the supplier hasn'treceived that? the supplier may believe that you owe more than you actuallybelieve you do. it's likely in this case for it to be because of items that arein transit; either items of inventory or other items that have been purchased thatare in transit and haven't yet been recorded as received but a liabilitystill exists as far as the supplier is concerned. or if in instances where youthink you've paid money but the supplier hasn't received that, the cash is in transit.you have to think of this in terms of
the logical way that businesses dobusiness. and that's what would have served youvery well in this instance. secondly, with the bank reconciliation. now this is onearea where the temptation would have been to re-perform tests of control. atest of control would be, for example, that the bank reconciliation has been completedand has been signed off and authorised as having been completed. but of coursewe're not doing tests of control in this case, we're doing substantive procedures. so we want to look at all of the constituent elements of that bankreconciliation and trace it back to items that we can verify to ensurethat the figures are correct. in that
instance we might start by looking atthe reconciliation and suggest arithmetical checks to ensure that allthe items add up. we might verify balances that have been recorded, so wecould quite easily conclude that a test that provides us with evidence that say,for example, the bank reconciliation gives us a bank statement figure. doesthat agree? great, big tick. one more point. is there agreement with what the cashbook requires? that figure agrees to the bank reconciliation figure? great. wethen know that there's going to be timing differences. so what are thoseconstituent elements of timing differences? they're likely to be eitheritems that we believe we have banked as
items of income that have not yet hit thebank statement, or items where we believe we've recorded a payment but that paymenthas not yet been recorded within the bank statement. so again we can trace thesethrough to their logical end position and obtain samples of these to ensurethat they have actually been included and they deserve to be included. remember,go back to these assertions; does something belong on the financialstatements? does something deserve to exist within those financial statements? if so, ifthe evidence provides you with that, then that's fine. if not, the auditor willobviously investigate further and determine whether there is any form ofmisstatement. finally we were asked to
think about the receivables balance, andthis is of some concern because it having more than doubled. so our task isto then be able to say well, we know specifically what we're looking for inthis case; existence and valuation are the two main areas. so is there a possibility thatwith this massive increase, is it real? is it true? is it likely that these itemsmight perhaps have been overstated in some way and that's what led to thefigure being so much bigger? valuation is also going to be important on the basisof what we believe as a true valuation of what we think is the sum of moneythat we're going to receive for that
particular transaction. now the crucialthing that was mentioned in here was that circulation, the banking answer forany student when writing a set of substantive procedures, was not to beallowed. and if i'm honest i believe the reason for the examining team writingthat they did not want circulation to be included was to try and weed out those scriptswhere candidates have simply read: "substantive procedures, receivables". great,i'll talk about circulation, job done, 5 marks, i'm sorted. and of courseanybody writing in this would have not scored well at all. so what other testsfor existence in valuation can you
perform that are substantive proceduresto verify receivables? we can certainly look at items which we believe, withinthose receivables balances, we could question as to whether they actually doexist. items that have gone beyond a certainage for example suggests that if they remained unpaid for that long there are either relating to a disputeor they're relating to a company that perhaps is unable to pay; the 'can't payor won't pay' scenario. we may also wish to seek out correspondence that providesfurther evidence for the existence and possibly valuation. a debt may exist, acompany may be happy to pay but is
unwilling or unable to pay the fullamount. so you can verify that by means of a substantive test to review itemsof correspondence relevant to certain parts of that receivables balance togive you evidence and comfort that those figures are correct. we may also have a look at any evidence thatwe've got. remember you as an auditor for the financial statement audit are ableto undertake a peculiar form of time travel where you can review what'shappened essentially in the future by comparison to the financial statementfigures that you're reviewing. your task to be able to, as a substantive procedure, review items andtransactions that have been received in
the new year to see whether or not, if, thefinancial statements showed that there was a sum of money due and would have beenpaid by the new year. in that new year have those figures actually beenreceived? if they have then it gives us comfort that that was something that thecompany was allowed to expect and therefore did exist. any other areasthat we might look at for substantive procedures could focus for exampleon any evidence of disputes between clients and your client rather and theircustomers and possibly even consideration of the amount of debtsbeing collected as to whether they've made the headlines in the most recentboard meeting. and again, reading board
minutes will be a really useful formof evidence gathering technique that you can use. key thing to remember when talkingabout board minutes is, had you simply written, "read board minutes", you haven'texplained why you're doing it. you haven't explained what the purpose ofthis particular task is and there's a chance it will notlook particularly meaningful. so again remember this term that the examining team had in,'specificity'. make sure you're making your procedures as specific as possible. okaythat's a quick whistle stop tour of june 2015's exam questions 6, but i hope it'sgiven you a little bit of a flavour of getting under the skin of thatparticular type of question and
remember the whole point about this wasto be able to say if something similar appeared in an exam remember, with 4sittings a year, there's an enormously bigger chance, at least double, of thatparticular figure coming up and that particular challenge coming up. so i'd hopethis is useful to provide you with some ideas and pointers as to how tounderstand assertions better, how to be able to explain better, how to provideexamples and then also how to respond when a specific situation such as theone at hawthorne enterprises comes up and you can then write answers that are going to ace you as much of those twenty marks as possible and speed you on your way to a pass in thisexam. okay time for me to go. i'm very
grateful for your time and attentionduring this and if you have any more queries about this you should make sure that you consultyour tutor or consult your local representative of acca to be able toaddress any of those learning issues that you might have. up until now it'sreally for me to just say thank you again and to wish you the very best ofluck in your forthcoming exams. bye now.
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