hello there and welcome to thispresentation from the acca in relation to acca paperp7 advanced audit and assurance. my name'ssteve whittenbury and i work as a subject matter expertfor bpp learning media in the uk. today i want to try and talk you through aspecific type of question in relation to matters to consider andevidence that you should expect to find within the p7 paper, a fairly frequently occurringtype of question that a lot a candidate's have sometimesstruggled with in the past. lets have a think about what it is we're going totry and talk about
today. i'm going to use a specific recent exam question from december of2013 question 3 part a. this is in relation to a specific event within a company where you are theexternal auditor and you have to try and consider the impact of this event and what it means as faras your ability to still deliver a valid audit opinion. during hispresentation i want to try and talk about the style ofquestion, think a little bit about what the requirements are saying,
try to focus upon what the facts in thescenario actually are, think a bit about what matters we wouldconsider and what evidence we would be looking for, maybe try and give you the opportunityto practice this question yourself so that you can then see how well you goton and then try and focus upon somespecific conclusions that you can use for future questionswhen it's your turn to do it on your own. okay the requirement itself as imentioned to you earlier is a very typical type that we've seenin lots of different p7 exam sittings in
the past matters that you should consider andevidence that you should expect to find. and the basic rationale behind thistype of question is that you are the audit manager and you are reviewing the work that yourteam has done, you have a team of minions who have gone out and done your work and it's now your turn as part of good quality control procedures withinthe firm to explore what they've done to inspect it to make sure that it's upto scratch so that they've done all the
work that they should have done and that they've left no loose ends. sothat's why you're always asking in relation to information presented inthe question, what are the matters that are important and what do they then mean as far as yourability to provide an opinion? have you got all the evidence you needin order to deliver that opinion? this type of question creeps in to the p7exam question a lot and it's really really important thatyou focus on these types of questions to be fully prepared when it's your turn.
okay let's have a think about some of thefacts in relation to this particular scenario.hopefully you've read the scenario already. if you haven't don't forget thisis an online presentation that you can pause you can rewind and you can play again. so ifyou've read through the scenario lets have a quick think about what we know from the information that's presented. weknow that it's in relation to a coal mine and we know that this is a regulatedindustry
where there is a specific regulatormentioned. we also know that this regulatory requirement to have a licensecould be something which is important enough to drawattention to later on. we know that there's been an accident at the ledgehill mine and we know that this happened sixteendays before the reporting date so that it's fairly important that we getthis right particularly when thinking about the events and conditions in existence at the end of the year. we knowthat at least a third of this mine has been permanently closed.
we also know that there will beimprovements required to the mine and as a result those improvements mightrequire the investment of certain sums of money. we also know that there's been somedamage to the landscape above which includes residential properties. we know that there's been a survey commissioned to establish the extent of this damage. we also know that as aresult of this damage residents are being affected andconsequently there's a possibility that there may be extra costs incurredwhich the company has to acknowledge
and reflect appropriately within itsfinancial statements. and all of these are things that we need tobuild into our approach as the external auditor to make sure that they are shown truly and fairly within thefinancial statements on which we will provide our opinion. the final aspect which might perhaps bethe most important aspect is the fact that the company is notgoing to report this to the regulator because it doesn't feel it has to it's made this unilateral decision tonot disclose this
accident to the regulator becausenobody's been hurt. it does beg the question that in the realworld were this to happen there would probably be some kind of news or media interest which might thereforemean that the idea of the company hushing this up is unlikely, but we willhave to park this for the time being and move on to the actual requirement itself. now hopefully you've done this questionbut if you haven't now is the opportunity for you to have a crack at doing it. for this specific part of question 3you will find that there are 14 marks
allocated in the original exam structure. that would be using the 1.8 minutes per mark rationale that we generally tend to work on; 3 hours 100 marks that's the way ittends to work out. you would expect to spend roughly in theregion of about 25 minutes reading, planning, thinking and writing inorder to deliver an answer to this. so if you want to pause now and spend upto 25 minutes attempting an answer i'll assume that you are familiar withwhat the solutions are telling you and that we can then go through it together.
okay let's consider the matters that weneed to consider as part of our role as beingexternal auditors. i think there's a few factors that you can build in and i'm going totry and give you a structure that you can work through when trying to concentrate on questions of this sort in the future. the first and most important thing for yourperspective as the external auditor delivering an opinion on these financialstatements is does this matter? is it material? now weare usually provided with information in questions and this one is no different.
we're told that the value of the mine is 10million, were told what it is in relation to the profitsand also the assets of the business. and in this instance we would say thatalthough it's only a third of the mine that we believe to be affected that still demonstrates 18% ofprofits and nearly 2% of assets whichsuggests that in terms of the materiality thresholds that p7 tends to work within these are on theborderline of being quite material to the business. soit does matter
therefore we can't just ignore it. remember if we weren't worried about the materiality aspects we would still recordthis as a non-material potential series of issues and think about whether they, inaggregate with other factors, might be a problem. the next thing after thinking aboutmateriality is to consider the risks that this particular specific scenariopresents and in this instance, forgive the pun,you're going have to dig a little deeper into the scenario in order to pick outall the relevant bits.
we're told for example that the mine hasbeen affected it may therefore as an asset be impaired. we may perhaps have seencertain assets lost within the accident, we knowthat no human assets have been lost but that doesn't mean to say that things such as mine carts and otherequipment might not have been damaged at the same time. we know that the revenues of thebusiness might have been affected for the period of time that the mine was unableto trade, maybe
to some extent fairly significant, so we would expect to see a change in the revenue patterns whichour analytical procedures might perhaps have to consider. we might also have considered and needto fully consider the impact of provisions for this particular business because onthis basis there's a series of areas where our client may have to provide forthings that might include the amount of money to be spent onimprovements, both capital and revenue,
the amount of money that we might haveto spend in terms of relocation perhaps even compensation cost for thedomestic residents affected above and possiblyeven the danger that a regulatory fine might be coming the way of our client who may need toprovide for that as well. now you'll see nestled within theissues that the question has to consider the fact that there's a possibility ofgoing concern being affected and i think it's important that you get thisin context. this is one of only 10 mines that the firm has
but remember this is only one and it's asmall one by contrast to all the others if you think about thesize of profits and think about the size of assets that this one out of ten actually represents.so it may be that the impact of this particular mine having aproblem isn't necessarily going to jeopardize your clients going concern status but whatit does mean is that perhaps if reputation is something which is affected by thisin relation to just one mine
it could be that the rest of the firmhas some potential adverse comments attached to it which might have animpact upon its going concern. so this wouldn't be the first thing i wouldsay that's a matter to consider but it would certainly be something that i wouldwant to include within my answer. the next thing to think about then is if we'vegot these particular risks how do we know that these have been treatedsatisfactorily by our client? the way of ensuring that things arereflected truthfully and fairly within the statements are to ensure their adherence to theaccounting standards
and this is where your ifrs knowledge ofgap is going to be really really important. a lot of candidates do get quite concernedthat they don't necessarily remember what they learnt at p2 for example andthey may feel exposed. i think it's safest to say that in p7 youneed to have a good grounding of each of the various accountingstandards that are introduced at p2 and earlier, you don't need to know them ingreat detail, you won't be asked to present or produce an entire statement of financial position forexample, but what you might be asked to think
about is what does a specific standardrequire you to consider to ensure that it hasn't been misstated.and they're are probably three good ones that you could build into your answer here. is 36 in relation to impairments, is 1 in relation to the presentationof material that is unusual in respect of presenting these specificevents that have occurred during the year and perhaps one that is most commonly seenwithin p7 is is 37 on provisions. have all threeconditions in order to satisfy a provision being metin relation to these facts.
now in terms of talking about the specificsof bits of evidence that we should be workingtowards, the evidence that we're looking for is the next thing. have our team done the bit that theyshould have done in order to satisfy ourselves that these standards have been dealt withappropriately and the way they are reflected in the financial statements is true andfair. this is where you now as the reviewer are checking through the work that your minions have done to make sure
that it matches up with what you believeis enough for you then to say to the person above who's the partner who's going tosign off and say that the accounts show a true and fair view. this is where audit evidence becomesimportant. so for example you might want to have a look about what impact regulatory problems mightface obtaining a copy of the regulatorylicense that the mine possesses to establish what sort of minimum servicerequirements there are,
what sort of penalties or fines there might be inrelation to things going wrong would be the first thing that you would lookfor. next you would try and establish the degree of non-disclosure andwhether or not that might attract any kind of fines. we might have to consider where we getthe details in relation to the damage, the impact, the cost. this is wheresome sort of surveyor's report some sort of information supporting whatwe know about this particular accident to clarify the fact that we're dealingwith facts and not supposition. we then need to try and get some idea fromperhaps correspondence with solicitors
or representations from directors orforecasts or bills or something of that sort which provides us with an indication ofhow much money it's going to cost in future to deal with the fact that we've gotchanges to the mine in terms of the impairments we've got to do some remedial work tothe ground above we got to pay for the cost of relocatingmembers of the public and we've also maybe got to think aboutfurther problems in relation to associated fines that might come our way. we might want to try andestablish, we're told
that there were no accidents in relationto members of staff being injured, but it might not be a bad idea for us toverify that by means of an accident book or other health andsafety records that might be present. finally in order to try and address theissues in concerning the evidence that's available to us in terms ofgoing concern we might want to try and seek managementrepresentations that would give an indication that thecompany is considered still a viable going concern we might want to review board minutesfor this purpose possibly even obtain
copies are forecasts or prospective financial information thatsupports where we believe this particular business is going and that it does have a future. okay that's the sort of issues that youshould have considered when trying to put together an answer.how well did you do? well the marking rubric that theexamining team supplies after each sitting is usually very comprehensive and you'dexpect for a question of this sort if you've fully developed a point
within a context of a well arguedsentence with a beginning a middle and an end that you'd usually get a mark for each of the pointsthat you'd raised. so in this instance you'll probably find that a well balanceanswer would have needed about fourteen things in order to score the 14 marks, and i think judging by the things thatwe've just talked about you could probably have found 14 things fairly easily. don't forget though that your knowledge ofthe standards is always going to be and you have no way of guaranteeing that this sort ofthing will be replicated.
another thing which i think is quiteimportant for you to draw out when trying to consider how well you got on is to think a bit about the role thatthe examining team plays. now, as you've picked up my name's steve and this is a digging context so we have to talk aboutdigging, my children are very much into minecraftat this time that this particular question was set, minecraft was very much thepopular thing for kids of that age to get involved in. so as a man called steve i've got to dig deeper and play the minecraft card at this stagehere and i think this is a key part of
what the examining teams comments fedback. through the examiner's reports that you can get access to online that suggested that candidates started wellbut didn't dig deep enough they didn't go further than justconsidering the fact that the mine was impaired or they didn't go beyond the fact that there was a going concern issue and i think to get a full thorough set of marks you've got to explorefully and you've got todig as deep as you can into the scenario
and think about all the various aspectsthat could be affected by the situation as presented. the examining team did point out withintheir comments that as well as not digging deep into the scenario a lot of candidates displayed some poorfinancial knowledge some poor financial reporting awarenesseven, for example illustration of something that the examining team mentioned in the report was that candidates wrote that thereshould be a provision for lost revenue which is plainly crazy,
similarly also audit evidence that wassuggested by candidates was of not sufficient quality, forexample suggesting simply that there should be discussions with management or thatitems should be properly disclosed, neither of those is done in enough detailin order to score or attract adequate marks. so unless you write fully and thoroughlyyou won't score the marks you need to survive. okay i want to try and finishoff by thinking about conclusions that you can draw from this hopefullyhaving attempted this question yourself
and from this presentation you can takeon further. there are i think a number of issues thatyou can draw out when trying to think about an approach for a matters to consider and evidence to belooking out for that you can build for any other subsequenttype of this question that you attempt in future. materiality; how much does this matter? what are the risks presented, what parts of the financial statements could be affected?
what do the standards tell us about howthey should be represented? and then what sort of evidence should webe looking for in order to make sure that this has beenattractively and appropriately treated within the way wedo what we do. finally in terms of that evidence i alsowant to try and get you to remember that there are certain things that theexamining team is looking out for that if you want to write say that somethingis of sufficient caliber and quality in terms of your answer you can't just say, 'check that this hasbeen disclosed', 'obtain managment
representations', 'read board minutes', those alone are notgoing to be enough. what you want to be saying is; whatyou're doing, why you're doing it, how you're doing it, where you have to goin order to do it, who you might have to speak to in orderto do it and what kind of documentation you're looking for. there are six things that you couldbuild in, not every procedure will have that but you would expect evidence and procedures toreflect those.
finally the most important message i canleave you with after having considered materiality, risks, standards and evidence is to thinkabout reflection and the role that plays in how you canlearn from your own performance every time you do a question. think about what you wrote, what was good and try and do more of it, think about what you wrote which wasn'tenough and do even more of that next time and think about the comments that theexamining team have made within their reports
so that you can then build a little bit moreon those for the next time you do it. so there's a few suggestionsfor you for when you're going to do p7. all that remains forme to do is to wish you the very best of luck when it's your turn to do p7 and i hope you can bear in mind some of these thoughts when you actually go through it and do it yourself. thanks for your timetoday i wish you the very best of luck. bye now.
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