Audit and Assurance Aa Revison Notes 2019

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Audit and Assurance (AA) Revison Notes 2019 unlocked
Audit and Assurance (Oxford Brookes University)
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ACCA
Audit and Assurance
AA
Practice & Revision Notes
For exams in September 2019,
December 2019, March 2020 and
June 2020
ISBN: 9781509780532
BPP Tutor Toolkit Copy

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Contents
Page
Introduction
How to use the Practice & Revision material 4
The examination and syllabus aims 5
Skills bank 9
Knowledge bank 21
Appendix 83
BPP Tutor Toolkit Copy 3

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INTRODUCTION
Introduction
How to use the Practice & Revision material
Step 1 Learn
Until now you have been introduced to the core skills needed to pass this exam. You must now focus on developing
these new skills to address the ultimate test – the exam itself.
Step 2 Practise
Your revision course material will help you to apply this knowledge to the context of the exam-style questions. Using
real exam questions written by the examining team you'll learn the unique exam skills required to achieve success in
each exam. Your revision material consists of:
 Skills bank (in these notes)

This illustrates the main skills needed to pass this exam. We will teach you:
– Effective reading and planning at the start of the exam
– Analysis of a question's requirements
– Disciplined time management
– Tackling mini-case style scenario questions
– Producing an answer that is tailored to the exam scenario
 Knowledge bank (in these notes)

During the Step 1 phase of your studies (Learning phase) you have already gained the knowledge required to
pass the exam. During this phase reinforcement of this knowledge is critical.
To help this reinforcement you will find that the same diagrams contained in your taught course notes are used
here with additional information added if we feel it is necessary.
 Question and answer bank

The Practice & Revision Kit contains:
– Questions that will be covered in class
– Questions you will do during home study following guidance provided by your tutor
– Additional questions for further practice
Step 3 Rehearse
All your skills need to be applied on the day of the exam to deal with a complete exam.
This can be developed through use of mock exams within the Practice & Revision Kit.

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INTRODUCTION
The examination and syllabus aims

The examination
The examination lasts three hours and all questions are compulsory.
Computer-based exams
From exams in June 2019, it will be possible for candidates to sit Applied Skills exams only as a computer-based exam
(CBE). Paper-based exams will no longer be run in parallel.
Exam duration
The syllabus is assessed by a CBE format. With effect from June 2019 for TX and September 2019 for all Applied Skills
exams seeded questions have been removed from CBE exams and the exam duration is 3 hours for 100 marks. Prior
to each exam there will be time allocated for students to be informed of the exam instructions.
For more information on these changes, please visit the ACCA website: www.accaglobal.com
Format of the exam

The exam format will comprise two exam sections.
Section Style of question type Description Proportion of exam, %

A Objective test (OT) case  3 questions  10 marks 30
 Each question will contain 5
OT questions worth 2 marks each
B Constructed Response  1 question  30 marks 70
(Long questions)
 2 questions  20 marks
Total 100
Section A questions will be selected from the entire syllabus. The responses to each question (or subpart in the case of
OT cases) are marked automatically as either correct or incorrect.
Section B questions will mainly focus on the following syllabus areas. but a minority of marks can be drawn from any
other area of the syllabus:
 Planning and risk assessment (syllabus area B)
 Internal control (syllabus area C)
 Audit evidence (syllabus area D)
The responses to these questions are human marked.

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INTRODUCTION
Aims
On successful completion of this exam, candidates should be able to:
A Explain the concept of audit and assurance and the functions of audit, corporate governance, including ethics
and professional conduct.
B Demonstrate how the auditor obtains and accepts audit engagements, obtains an understanding of the entity
and its environment, assesses the risk of material misstatement (whether arising from fraud or other
irregularities) and plans an audit of financial statements.
C Describe and evaluate internal controls, techniques and audit tests, including IT systems to identify and
communicate control risks and their potential consequences, making appropriate recommendations. Describe
the scope, role and function of internal audit.
D Identify and describe the work and evidence obtained by the auditor and others required to meet the objectives
of audit engagements and the application of the International Standards on Auditing (ISAs).
E Explain how consideration of subsequent events and the going concern principle can inform the conclusions
from audit work and are reflected in different types of auditor's report, written representations and the final
review and report.

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Skills bank
This section explains and demonstrates the key skills

required to enable you to maximise your chance of
exam success. Knowledge of the syllabus is insufficient
on its own. Through question practice you will develop a
set of skills that will enable you to pass this exam.

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SKILLS BANK
Key skills required to pass

Our analysis of the examining team's comments on past exams, together with our experience of preparing students for
this type of exam, suggests that to pass Audit and Assurance (AA) you will need to develop a number of key skills.
1 Effective reading
and planning at the
5 Producing a tailored start of the exam
answer to the scenario in
the exam question
2 Quick and
accurate analysis of
4 Tackling mini- a question's
case style requirements
scenario
questions 3 Disciplined time
management to
ensure that all parts of
the question are
answered in the time
allowed
Each of these key skills is analysed on the following pages, with example(s) from past exam questions of the
importance of these skills and how these skills should be applied.

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Skill 1 – Effective reading and planning at the start of the exam
1 Take some time to plan the order in which you will attempt the questions
We recommend that you spend time at the beginning of your exam to carefully read your paper, specifically looking
through the requirements of each exam question (especially in Section B). All of the questions in this exam are
compulsory so there is no choice to make in terms of which questions you will attempt, but you should give some
thought to the order in which you attempt them.
Once you feel familiar with your exam we recommend that you attempt Section A first but please do not rush through
Section A otherwise you will make unnecessary mistakes and lose valuable marks.
When you are ready to begin the longer written questions in Section B, make sure you focus on the requirements of
each of the three questions first so that you can decide the order in which you will attempt them. Once you have
decided this, highlight key verbs such as describe, explain and state, to ensure that you know how many points you
need in your answer. Where the question includes a scenario, you will need to use the information in the scenario; we
recommend that you create a heading for each new area in the constructed response solution box, and briefly note
down any key information from the scenario.
2 Reading Section B scenario based questions
STEP Read the requirements

1 There is no point in wasting time reading through a long scenario before you have identified exactly
what you have been asked to do! See key skill 2 for detailed guidance.
STEP Focus on the longest requirements

2 This will make sure that you concentrate on a manageable amount of the question on your first read
through.
STEP Read the question actively identifying data relevant to each requirement
3 This will ensure that you are actively attacking the question, ie that you are trying to achieve
something, not just passively reading it through. This could involve highlighting points that are
relevant to your answer, and making headings with brief notes in the solution box. In many
questions this will form the basis of an answer plan, and will mean that you do not have to re-read all
of the highlighted points just to remind yourself why you thought they were important in the first place.
In some scenarios numerical information may be included, in which case you should use the reading
and planning time to make relevant observations on this and in some cases calculate ratios that may
be relevant to your answer.

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For example, in the Specimen Exam, Q17 (a) had the following requirement.
(a) In respect of the internal control of Baggio International Co:

(i) Identify and explain SIX deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a test of control Suarez & Co would perform to assess
whether each of these controls, if implemented, is operating
effectively.
In reading the scenario, therefore, you have the following two aims.
 Familiarise yourself with the deficiencies of the sales system set out in the scenario, and
 Think up appropriate internal controls which could address these deficiencies.
Once you have understood the scenario, you will have taken a big step towards another of the key skills that the examining
team demands in this exam, namely the ability to produce an answer tailored to the scenario in the question (see skill 5).
 By analysing the flow of information, you will be able to suggest internal controls that are relevant to the specific
deficiencies in the question.
 Reading the scenario closely will prevent you from falling into 'traps', such as writing about substantive
procedures when the question is clearly asking for tests of control.
Skills practice
When you practise any of the scenario questions from the practice and revision kit, you should always
read the requirement first and then annotate/highlight relevant information in the scenario. You should
then re-read the requirement and number the points you have annotated before you start writing your
answer.

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Skill 2 – Quick and accurate analysis of a question's

requirements
1 Be aware of the verbs used in exam questions

You need to be aware of the meaning of the key verbs used by the examining team; these are reproduced in full in the
BPP Practice & Revision Kit.
You don't need to learn each term precisely but it is important that you appreciate the differences between them, for
example, 'explain' means clarifying an issue or developing a point, whereas 'state' means list out the information/
factors or criteria without needing to give further explanation. Generally speaking the requirement to 'explain' will earn
you 1 mark per point, whereas the requirement to 'state' carries ½ a mark.
For example, here is an extract from Q16 (b) in the Specimen Exam:
EXPLAIN
'(b)Using the minutes provided, identify and describe SEVEN audit

risks, and explain the auditor's response to each risk, in planning
the audit of Milla Cola Co.'
There were a number of audit risks that could have been identified from the scenario but note the level of explanation
required to gain full marks.
Milla has spent $5m updating, repairing and replacing production This would only have scored
machinery. ½ mark for stating the issue
Milla has incurred expenditure of $5m updating, repairing and

replacing machinery used in the production process. There is a risk This would have scored
that such expenditure may not have been correctly accounted for in 1 mark for identifying and
accordance with IAS 16 Property, plant and equipment, and that describing the audit risk
revenue expenditure (for example, expenditure relating to repairs to
the machinery) may have been capitalised as part of the cost of the
machinery. This could mean that both non-current assets and profit
are overstated.
Obtain a breakdown of the $5m costs incurred from management This would have scored
and determine which items relate to capital expenditure and which 1 mark for explaining the
relate to revenue expenditure. Trace the expenditure through to the auditor's response to the audit
nominal ledger and the financial statements to ensure that it has risk
been appropriately classified.
Taking time to consider the exact wording of the requirement will help to produce an answer which is focused and
responds directly to the question set.

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2 Identify ALL the question's requirements in your answer plan

The question above also shows how the requirements of a question often contain a number of sub-requirements.
You need to make sure that these sub-requirements are clearly identified on the question paper by highlighting or
underlining them, so that your answer is comprehensive and addresses all parts of the requirement.
Failure to answer the whole question is often due to candidates forgetting to address these sub-requirements,
and is a key reason why people fail this exam.
Skills practice
In each question you attempt you should spend a minute identifying the verb and planning what structure
your answer should have. This will help ensure that you really do 'explain', 'discuss', 'recommend' etc.

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Skill 3 – Disciplined time management
The 3 hours that you are given to write your answers breaks down to 1.8 minutes for each available mark and you must
stick to this closely.
Given the format of the exam, you know from the start that your time allocations will be as follows.
Marks Time allocation

Section A (Questions 1 – 15) 30 54 minutes
Section B Question 16 30 54 minutes
You may find that the questions in Section A do not take the whole 54 minutes, but you should be careful not to rush
through them in case you misread a requirement, or answer a question that is different from the one which was set!
In Section B each of the three questions will be divided into a number of sub-requirements, so it is important to identify
how much time you should allocate to each of these. If you overrun by just a few minutes on several requirements as
you make your way through the exam, you risk putting yourself in the position of not having enough time to complete
the exam.
Make sure you keep a careful check on timings as you plan your approach to each question. Note time
allocations and stick to them. Even if you think you have more to say on a particular part, stop when you run
out of time; there's a chance that you may save time later in the question and will be able to add one or two
extra points then.
In this exam, time management skills overlap with the other key skills, if you
 Plan effectively
 Accurately analyse the requirements
 Produce a tailored answer
Then you should find that it is possible to write good, pass-standard answers that are concise, focused and relevant.
It really is true in this exam that, in general, less (quantity!) is more (marks!)
Skills practice
When you are practising questions, always work out the time allocations and get into the habit of writing
the answers, to time, just as you will have to do in the exam hall.

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Skill 4 – Tackling mini-case style scenario questions
Section A is worth 30 marks and comprises three sets of five questions each based on a scenario.
When answering mini-case style scenario questions firstly read the requirements for each of the five sub-questions
relating to the scenario information, then read the scenario presented in the question. Next re-read the requirement
for each sub-question and have a think about what you think the correct answer may be.
Approaching Questions Logically
1 What to do if you know the answer to the question

If you know the answer you should:
1. Locate the correct answer
2. Check the other answers
3. Read the question again to ensure you're answering the correct question
4. Confirm that you have the correct answer
This systematic check will ensure that you do not throw away marks when you really do know the answer.
2 What to do if more than one answer appears plausible

Sometimes more than one option can seem to answer the question. In this case you have to firstly ensure you've read
the requirement carefully, as questions may be phrased in ways that are not what you're expecting. If you still identify
more than one likely option, select the 'most correct' answer. The approach adopted above is useful here too but this
time you have to think through the alternatives a bit more.
For example, Q9 on the Specimen Exam states:
As trade receivables is a material balance, the audit partner has asked

that the audit team carry out a trade receivables circularisation.
Which of the following are benefits of carrying out a trade receivables
circularisation?
(1) It provides evidence from an independent external source
(2) It provides sufficient appropriate audit evidence over all relevant
balance assertions
(3) It improves audit efficiency as all customers are required to respond
(4) It improves the reliability of audit evidence as the process is under
the control of the auditor
 1 and 2
 1, 2 and 4
 2 and 3
 1 and 4
This is testing your knowledge of audit assertions and the trade receivables circularisation. At first sight, it may be tricky
to identify the correct answer as there are so many variations in the options.

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Here are some steps to follow:
STEP Never
1 Firstly, identify any answers that are immediately wrong. In this question, the key thing to think about
is how a receivables circularisation is conducted and the audit evidence it provides.
The trade receivables circularisation provides evidence over the existence, completeness and rights
and obligations of the trade receivable. It does not, however, provide evidence over valuation (just
because the customer agrees that they owe a particular balance, this does not mean that they will pay
it). This means that statement (2) is not correct and so we can discard the first, second and third
options from the answers.
STEP Assess the remaining answers

2 We now need to consider statements (1), (3) and (4), to make sure that we are happy that (1) and (4)
are indeed correct and that (3) is incorrect. The receivable is independent and external to the company
and the process is controlled by the auditor, so (1) and (4) are correct. There is no legal or
professional requirement to respond to the circularisation, so (3) is incorrect.
Having discarded the first, second and third options, we have arrived at the fourth option as the
answer.
STEP Read the question again…

3 Finally, we should re-read the requirement before writing down our answer, in order to ensure we are
answering the correct question. The question could easily have asked: 'Which of the following are
weaknesses of carrying out a trade receivables circularisation' which would have led us to a different
answer!
This systematic approach helps you to break a question down and work through it logically to find the correct answer.
3 What to do if you still don't know the answer…

If you have been through the above steps and can't identify a preferred answer then you have to guess!
 What you SHOULD NOT do

Two main things to avoid:
1. Waste excessive time – time spent dithering over a single question could leave you with insufficient time for the
rest of the exam.
2. Not answering – this is a common yet serious error – even if you make a wild guess you start with a 25%
chance of success. Your chance of getting the 2 marks if you don't offer an answer is zero!
 What you SHOULD do

Having used the three step approaches above to narrow down your possible answers, go with the one that feels right
and move on.
If you have a flash of inspiration later in the exam go back and revisit it – but only if you are sure.

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Skills practice
1. Practise keeping track of the questions you have answered when doing questions from the
Practice and Revision Kit
2. Always check your answers through (if you would have time in the exam) before looking at the
solutions in the back of the book
3. Practise as many mini-case style scenario questions as possible.
4. If you don't know the answer to a question – don't just go to the answer at the back or just guess –
use the three step approach described above.

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Skill 5 – Producing a tailored answer
1 Tailored points
You are expected to apply your theoretical knowledge to the specifics of the question set in the exam. Often tailoring
your answer involves keeping calm and trying to look for clues within the scenario and presenting your answer in
an appropriate format.
2 Answer structure – general

There are no questions in this exam that require lengthy essay-style answers. The overall principle is to communicate
points clearly, but concisely – use headings and write in short paragraphs.
Tabular answers
Many styles of question in this exam can be answered most effectively using a tabular layout, and the examining team
encourages this approach.
Q16 (b), Q16 (d) and Q17 (a) from the Specimen Exam should all be answered in a tabular format. We looked at Q16
(b) earlier in skill 2 and this answer could be presented in a tabular format as follows:
Use of headings helps keep you thinking about the requirements
Audit risk Auditor's response

Milla has incurred expenditure of $5m Obtain a breakdown of the $5m costs incurred
updating, repairing and replacing machinery from management and determine which items
used in the production process. There is a risk relate to capital expenditure and which relate to
that such expenditure may not have been revenue expenditure. Trace the expenditure
correctly accounted for in accordance with IAS through to the nominal ledger and the
16 Property, plant and equipment, and that financial statements to ensure that it has been
revenue expenditure (for example, expenditure appropriately classified.
relating to repairs to the machinery) may have
been capitalised as part of the cost of the
machinery. This could mean that both non-
current assets and profit are overstated.
Matching each properly

explained audit risk with a
relevant auditor's response

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3 Writing for your audience

Frequently in the exam you will be asked as an external auditor to produce a report or letter addressed to the directors
of your client. Alternatively you could be asked to write a report to the Board as an internal auditor. It is important that
your answer reflects your role and the addressee and that appropriate language is used.
For example:
Report Format
INTERNAL AUDIT REPORT

Reports should be headed,
name the preparer, and be Sales system in X Co
dated.
Prepared By: A N Accountant
Date: 10 June 20XX
Use subheadings. The 3-part
Introduction structure used in the external audit
report to management works equally
well in the context of an internal audit
report on system deficiencies.
Deficiency The tone of reports should always be
professional and formal. They should
be written in the third person. No
slang or conversational language
should be used, eg 'the implication of
Implication this deficiency if you were to sit on
it would be….'
Ideally you would present the
Recommendation deficiency, implication and
recommendation in a tabular format
as an appendix to the report/ letter.

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Skills practice
When you attempt questions do not start writing until you have thought out:
 An appropriate structure
 Headings
 The number of points you are aiming to cover
Always review your attempted answer and ensure that you have not included any general points without
relating them to specific points within the question.

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Knowledge
bank

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Contents
Page
1 The concept of audit and other assurance engagements 23
2 Statutory audit and regulation 25
3 Corporate governance 29
4 Internal audit 31
5 Professional ethics and quality control procedures 33
6 Risk assessment 35
7 Audit planning and documentation 39
8 Introduction to audit evidence 41
9 Internal control 43
10 Tests of controls 47
11 Audit procedures and sampling 49
12 Non-current assets 53
13 Inventory 55
14 Receivables 59
15 Bank and cash 61
16 Liabilities, capital and directors' emoluments 63
17 Not-for-profit organisations 65
18 Audit review and finalisation 67
19 Reports 71
20 Appendix: Verbs used in question requirements 83

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The concept of audit and other

assurance engagements
How have the syllabus learning outcomes been examined?

Syllabus learning outcomes Example past exam questions
Identify and describe the objective and general principles
of external audit engagements
Explain the nature and development of audit and other
Discuss the concepts of accountability, stewardship and
agency
Define and provide the objectives of an assurance
engagement
Explain the five elements of an assurance engagement
Describe the types of assurance engagement
Explain the level of assurance provided by an external
audit and other review engagements and the concept of
true and fair presentation
Describe the limitations of external audits

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The concept of audit and other

The purpose of external audit Accountability, stewardship and Types of assurance

 To promote confidence and trust in agency
'An assurance engagement is an
financial information Accountability engagement in which a practitioner
 To give an opinion on whether the  Directors are required to prepare expresses a conclusion designed to
financial statements: financial statements for shareholders enhance the degree of confidence of
– Have been prepared in Stewardship the intended users other than the
accordance with an acceptable  Directors account for their responsible party about the
financial reporting framework stewardship of the assets placed outcome of the evaluation or
– Comply with statutory under their control measurement of a subject matter
requirements Agency against criteria.'
 Directors act as agents of  Annual external audit
shareholders
 Half-year review of FS
 External audit addresses the agency
 Going concern review
conflict between shareholders and
directors  Review of effectiveness of IT
systems
 Review of compliance with
corporate governance
requirements
Levels of assurance
Assurance and reports
Reasonable assurance Positive expression:

Eg statutory audit 'in our opinion, the financial statements
present fairly…..'
Concepts in reporting Limited assurance Negative expression:

Eg review of half year accounts 'nothing has come to our attention that causes
Materiality
us to believe that the financial statements do
 Information is material if its omission or not give a true and fair view …….'
misstatement could influence the economic
decisions of users
True and fair
 The auditor reports in terms of whether the
financial statements present fairly in all
material respects (or give a true and fair view) Communication to different
Reasonable assurance stakeholders
 100% assurance is not possible
 Potential investors
 Level of assurance given in statutory audit
 Current and potential lenders
 Employees
 Customers
 Suppliers
 Tax authorities

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Statutory audit and regulation

Describe the regulatory environment within which
external audits take place
Discuss the reasons and mechanisms for the regulation
of auditors
Explain the statutory regulations governing the
appointment, rights, removal and resignation of auditors
Explain the regulations governing the rights and duties of
auditors
Explain the development and status of International
Standards on Auditing (ISAs)
Explain the relationship between International Standards
on Auditing (ISAs) and national standards

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Statutory audit and regulation
The regulatory environment
Statutory regulations Mechanisms for regulation of Development and status of ISAs

Appointment auditors  IAASB produces ISAs, ISAEs and
 Normally annually IFAC/IAASB ISRSs.
 By shareholders resolution  IFAC aims to strengthen the  IAASB pronouncements do not
overrule local laws or regulations
 Directors may appoint in global accountancy profession
particular circumstances: and promote adherence to high-  Where IAASB pronouncements
– First auditors quality standards form part of the regulatory
– Casual vacancy National law and standards framework (eg in UK) they are
Removal  Law establishes: mandatory
 By shareholders resolution – Rights and duties of auditors
 Auditors entitled to: – Eligibility to be auditor
– Notice of resolution  National standards increasingly
– Make written representations harmonised with ISAs
– Speak at shareholders ACCA/the profession
meetings  Education and training
Resignation  Ethical requirements
 May resign at any time
 Written notice to registered office
 Statement of circumstances
Note. throughout these notes the

abbreviation ISA will be used to refer
to the International Standards on
Auditing

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Stages of an external audit

The following diagram illustrates the main steps in the conduct of an external audit. The following chapters expand each
of these steps.
Plan the audit
Understand the entity (including documenting and confirming

the accounting systems and internal control)
Assess risk of material misstatement
Select audit procedures to respond to risk of material misstatement
Where risk assessment Risk assessment does

includes expectation not include expectation
that controls operate that controls operate
effectively effectively
Tests of controls (to confirm expectation)
Unsatisfactory Report
to management
Satisfactory
Restricted Full
substantive tests substantive tests
Overall review of
financial statements
Report to
management
Auditor's
report

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Corporate governance

Discuss the objectives, relevance and importance of
corporate governance
Discuss the provisions of international codes of
corporate governance (such OECD) that are most
relevant to auditors
Describe good corporate governance requirements
relating to directors' responsibilities (eg for risk
management and internal control) and the reporting
responsibilities of auditors
Evaluate corporate governance deficiencies and provide Q2 Section A – Dec 2016
recommendations to allow compliance with international
codes of corporate governance
Analyse the structure and roles of audit committees and Q1 Section A – Dec 2016
discuss their benefits and limitations
Explain the importance of internal control and risk
management
Discuss the need for auditors to communicate with those
charged with governance

lOMoARcPSD|22603572
UK Corporate governance
Definition
 The internal systems by which companies
are directed and controlled
The UK Corporate Governance Code Audit committees

Provides guidance to UK companies as to how they  At least three members
should be directed and controlled.  At least one with recent and relevant
Five headings: financial experience
 Board leadership and company purpose  Monitor the integrity of the financial
– Effective Board statements:
– Board to establish company’s purpose, – Recommendations re the
values and strategy appointment, re-appointment and
– Effective engagement with shareholders removal of external auditors
and other stakeholders – Approve remuneration and terms of
Division of responsibilities external auditor
– Clear division of responsibilities between – Monitor external auditor's
Chairman and Chief Executive Officer independence, objectivity and
(CEO) effectiveness of the audit process
– Requirement to have both executive and – Policy on the engagement of the
non-executive directors external auditor to supply non-audit
 Composition, succession and evaluation services
– Appropriate balance of skills  Review the company's internal control
– Procedures for the appointment of new and risk management systems
directors (nomination committee)  Monitor and review the effectiveness
– Directors should have sufficient time to of internal audit
perform their duties  Monitor arrangements safeguarding
– Induction/training privacy of whistle blowers
– Annual evaluation
– Regular re-election
 Audit, risk and internal control
– Board responsible for risk management
– Board responsible for internal control
systems
 Remuneration
– Sufficient but not excessive, and aligned
with company purpose and values
– Formal policy for fixing remuneration
packages (remuneration committee)
– No director to be involved in deciding their
own remuneration

lOMoARcPSD|22603572
Internal audit

Discuss the factors to be taken into account when
assessing the need for internal audit
Discuss the elements of best practice in the structure and Q3 Section A – Dec 2016
operations of internal audit with reference to appropriate
international codes of corporate governance
Compare and contrast the role of external and internal Q4 Section A – Specimen Exam
audit
Discuss the scope of internal audit and the limitations of
the internal audit function
Explain outsourcing and the associated advantages and
disadvantages of outsourcing the internal audit function
Discuss the nature and purpose of internal audit Q4 Section A – Dec 2016
assignments including value for money, IT, financial, Q16(c) Section B – March/June 2018
regulatory compliance, fraud investigations and customer
experience
Discuss the nature and purpose of operational internal Q5 Section A – Dec 2016
audit assignments
Discuss the responsibilities of internal and external Q17(a) Section B – March/June 2018
auditors for the prevention and detection of fraud and
error

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Assessing the need for internal

audit
Internal audit and corporate Internal audit  Trends or factors that have increased
governance codes risks
It is seen as good corporate governance to  Organisational restructuring or
have an internal audit (IA) function to changes in processes and systems
assess and monitor internal control  Adverse trends noted in monitoring of
policies and procedures. internal control systems
The Board  Unexpected occurrences
 Overall responsibility for analysis of risk
and implementation of controls
The Audit Committee
 Monitor and review effectiveness of IA
 Approve appointment/termination of
appointment of head of IA
 Review and assess IA work plan
 Monitor management responsiveness to Scope and limitations of Outsourcing internal audit
IA reports internal audit
 Meet head of IA at least once a year Advantages
without management Limitations could arise from lack  Increased independence
Internal audit department of:  Relevant skills
 Regular report to audit committee  Independence from activities  Increased reliability
 Direct access to board chairman and audit subject to audit Disadvantages
committee  Independent reporting line  Costs
 Accountable to audit committee  Objectivity  Limited knowledge of specific
 Skills entity
 Ongoing training  Independence issues if provided
 Action taken in response to by external audit firm
Comparison of internal and external audit recommendations
Nature and purpose of internal audit

assignments
External audit Internal audit
 Opinion on  Wide ranging up to employers  Value for money audit (VFM)
Objective
FS in terms of – Economy, efficiency and
true and fair effectiveness
 Information technology audit
 Shareholders Report to  Management/directors  Financial internal audit
 Regulatory compliance audits
 Fraud investigations
 Independent Status  Employee of company or contracted  Customer experience audits
to company  Operational audits
 Required to have Qualification  No requirement

recognised Internal audit reports
qualification
 Format will vary
 May include executive summary
 Findings and recommendations

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Professional ethics and quality control

procedures

Define and apply the fundamental principles of
professional ethics of integrity, objectivity, professional
competence and due care, confidentiality and
professional behaviour
Define and apply the conceptual framework, including Q1 Section A – Specimen Exam
the threats to the fundamental principles of self-interest, Q11, Q12, Q13 Section A – Sept 2016
self-review, advocacy, familiarity and intimidation
Q16(c) Section B – March/June 2017
Discuss the safeguards to offset the threats to the Q2, Q3, Q5 Section A – Specimen Exam
fundamental principles Q11, Q14 Section A – Sept 2016
Describe the auditor's responsibility with regard to Q15 Section A – Sept 2016
auditor independence, conflicts of interest and Q16(d) Section B – Dec 2016
confidentiality
Q16(a) Section B – Sept/Dec 2017
Discuss the requirements of professional ethics and Q16(a) Section B – Dec 2016
ISAs in relation to the acceptance/continuance of audit
engagements
Explain the preconditions for an audit Q17(a) Section B – Sept/Dec 2017
Explain the process by which an auditor obtains an audit
engagement
Discuss the importance of engagement letters and their
contents
Explain the overall objectives and importance of quality
control procedures in conducting an audit
Explain quality control procedures that should be in Q18(c) Section B – Sept 2016
place over engagement performance, monitoring quality
and compliance with ethical requirements

lOMoARcPSD|22603572
Quality control
Required on an individual audit to ensure
Professional ethics and quality  Audit complies with professional
control procedures standards/legal and regulatory
requirements
 Appropriate audit report is issued
Ultimately the responsibility of the audit
Fundamental principles of engagement partner
professional ethics Quality control reviews
 Integrity  Required for listed audits (where
 Objectivity the firm's independence should also
 Professional competence and due be considered)
care  Reviewer should evaluate
 Confidentiality significant judgements and validity
 Professional behaviour of conclusions reached
Document:
 That firm's required quality control
procedures have been performed
 That there are no unresolved matters
that would render significant
judgements/conclusions
inappropriate
Threats Safeguards Obtaining and accepting new audit
 Self-interest  Created by the engagements
 Self-review profession, regulation Obtaining audit engagements
 Advocacy or legislation
 May use advertising and other forms of
 Familiarity  In the work
promotion
 Intimidation environment
 Must not:
 Created by the – Bring ACCA or profession into
individual disrepute
– Discredit services offered by others
– Be misleading Engagement letters
– Care over references to fees Document and confirm auditor's
Acceptance acceptance of the appointment,
 Before objective and scope of audit,
– Ensure firm is independent, extent of auditor's responsibilities
Confidentiality competent and has adequate to the client and form of any
resources reports.
Members must not disclose
– Obtain references (client) Contents
information obtained in the course of
professional work without permission
– Establish certain preconditions are  Objective of the audit
present  Management's responsibility
from their clients.
– Assess risk for the FS
Exceptions
– Communicate with present auditor  Scope of the audit
 Obliged to disclose – Obtain client's permission
– By law  Form of reports or other
– Decline nomination if refused communication
– By court order – Otherwise request information
– To regulators  Inherent limitations of audit and
that would help decision
internal control  risk that
 Present auditor should
 Permitted to disclose – Obtain client's permission
some material misstatements
– Public interest may remain
– If refused, inform new auditor
– Protect member's interests  Access to documents records
(who should decline
and information
nomination)
 Arrangements for planning and
– Otherwise, discuss relevant
matters performing audit
 After  Expectation of receiving a letter
– Ensure predecessor's of representation
removal/resignation properly  Request for acknowledgement
conducted of receipt of letter
– Ensure appointment properly  Basis of fees
conducted

lOMoARcPSD|22603572
Risk assessment

Identify the overall objectives of the auditor and the need
to conduct an audit in accordance with ISAs
Explain the need to plan and perform audits with an
attitude of professional scepticism, and to exercise
professional judgement
Explain the components of audit risk Q16(a) Section B – Specimen Exam
Q16(a) Section B – March/June 2017
Explain the audit risks in the financial statements and Q16(b) Section B – Specimen Exam
explain the auditor's response to each risk Q18(b) Section B – Sept 2016
Q16(c) Section B – Dec 2016
Q16(b) Section B – March/June 2017
Q17(c) Section B – Sept/Dec 2017
Q17(b) Section B – March/June 2018
Define and explain the concepts of materiality and
performance materiality
Explain and calculate materiality levels from financial
information
Explain how auditors obtain an initial understanding of
the entity and its environment
Describe and explain the nature and purpose of Q16(a) Section B – Sept/Dec 2018
analytical procedures in planning
Compute and interpret key ratios used in analytical Q16(b) Section B – Dec 2016
procedures Q16(b) Section B – Sept/Dec 2018
Discuss the effect of fraud and misstatements on the
audit strategy and extent of audit work
Explain the auditor's responsibility to consider laws and
regulations

lOMoARcPSD|22603572
Professional scepticism
Risk at the assertion level Risk assessment
 Questioning the validity of evidence
A ccuracy (transactions)
 Alertness to contradictory evidence
C ompleteness (transactions/balances)
C ut off (transactions)  Neither the assumption that
A llocation (balances) management is dishonest nor the
C lassification/understandability assumption of unquestioned honesty
Business risk
(transactions/balances) Professional judgement
O ccurence (transactions)  Conditions, events and circumstances that
could adversely affect the entity's ability to  Materiality and audit risk
V aluation (balances)
achieve its objectives (financial risk,  Nature, timing, extent of procedures
E xistence (balances)
R ights and obligations (balances) operational risk and compliance risk)
P resentation (transactions/balances) Significant risks
 Require special audit consideration
Understanding the entity and its Materiality and performance

business environment materiality
Matters to consider Materiality
Audit risk
 Industry, regulatory and other  Information is material if its omission
external factors (See below) or misstatement could influence the
 Nature of the entity decisions of users based on the
 Objectives and strategies and related financial statements
business risks  Amount and nature of the
 Measurement and review of entity's information needs to be considered
financial performance  Calculation is always judgemental
 Internal control  Firms set criteria for guidance, eg:
– ½ to 1% of revenue
– 1 to 2% of total assets
– 5 to 10% of profit before tax
 Impact on audit:
– Nature, timing and extent of
Effect of fraud on misstatements audit procedures
If risk assessment suggests there may be – Whether to seek adjustments
material misstatements arising from fraud – Degree of any auditor's report
the main effects on the audit strategy will modifications
relate to: Performance materiality
 Amount set by the auditor at less
 Assignment and supervision of
than the materiality level for a
personnel
particular class of transactions or
 Consideration of accounting policies account balance.
 Unpredictability in nature, timing and
extent of audit procedures
Analytical procedures in audit planning

 Analysis of relationships to identify
inconsistencies and unexpected
relationships
 Should be applied as risk assessment
procedures
 Include comparisons with;
– Prior periods and budgets
– Industry information
– Predictive estimates
– Ratio analysis
– Relationships between financial and
non-financial information

lOMoARcPSD|22603572
THE AUDIT RISK MODEL

AR = IR x CR x DR
Audit risk Detection risk

The 'risk that the The risk that the auditor's
Inherent risk Control risk
auditor expresses an procedures will not detect a
The susceptibility of an The risk that a misstatement
inappropriate audit misstatement that exists in an
assertion to a misstatement could occur in an assertion
opinion when the assertion that could be
that could be material, either and that could be material,
financial statements material either individually or
individually or when either individually or when
are materially when aggregated with other
aggregated with other aggregated with other
misstated' misstatements
misstatements, assuming misstatements, will not be
that there were no related prevented, or detected and
internal controls. corrected, on a timely basis
by the entity's internal
control.
Sampling risk Non-sampling risk

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Common ratios for use in analytical review

Profitability
Profit before interest and tax (PBIT)
(i) Return on Capital Employed (ROCE) =
Share capital  reserves  NC liabilities
PBIT
(ii) Net profit margin =
Revenue
Revenue
(iii) Asset turnover =
Share capital  reserves  NC liabilities
Gross profit
(iv) Gross margin =
Revenue
Liquidity
CA
(i) Current ratio =
CL
CA  Inventories
(ii) Quick ratio (Acid Test) =
CL
Inventories
(iii) Inventory holding period =  365 days
COS
COS
or  No. of times turnover
Inventories
Trade receivables
(iv) Trade receivables collection period =  365 days
Credit sales
Trade payables
(v) Trade payables payment period =  365 days
Credit purchases
Gearing
Interest bearing debt
(i) Debt/equity =
Share capital and reserves

lOMoARcPSD|22603572
Audit planning and documentation

Identify and explain the need for and importance of Q18(a) Section B – Sept 2016
planning an audit
Identify and describe the contents of the overall audit Q16(c) Section B – Specimen Exam
strategy and audit plan Q17(b) Section B – Sept/Dec 2017
Explain and describe the relationship between the
overall audit strategy and the audit plan
Explain the difference between interim and final audit Q16(d) Section B – Specimen Exam
Describe the purpose of an interim audit, and the
procedures likely to be adopted at this stage in the audit
Describe the impact of the work performed during the Q16(e) Section B – Specimen Exam
interim audit on the final audit
Explain the need for and the importance of audit
documentation
Describe the form and contents of working papers and
supporting documentation
Explain the procedures to ensure safe custody and
retention of working papers

lOMoARcPSD|22603572
Audit planning and documentation
The need for planning

The audit strategy Audit documentation
Planning is required so that the audit will
be carried out in an efficient and and the audit plan ISA 230 Audit documentation states that the
effective manner. auditor shall prepare audit documentation on a
Objectives: timely basis.
 Appropriate attention is devoted to Contents:
important areas of the audit
 Sufficiently complete and detailed to enable
 Potential problems are identified an experienced auditor (with no previous
 The work is completed expeditiously Audit strategy sets out: connection with the audit) to ascertain what
 Proper assignment of work to  Scope work was performed and to support the
assistants
 Financial reporting framework conclusions reached
 Coordination of work done by other
 Locations  Planning, nature, timing and extent of audit
auditors and experts
 Reporting objectives procedures and conclusions drawn
 Facilitating review
 Materiality levels  Reasoning on all significant matters of
 Preliminary identification of: judgement
– Higher risk areas
– Material balances  Permanent file/current file
 Whether auditor plans to perform
tests of controls
 Resources
 Management
Interim and final audit

Audit plan sets out:
Interim audit procedures (before y/e)
 Nature, timing and extent of audit
procedures  Analytical procedures
 For each material class of  Tests of controls
transactions, account balances or  Updating risk assessments
disclosure  Review of relevant internal audit
reports
 Substantive testing (of transactions
in the first part of the year)
Final audit procedures (post y/e)
 Completion of tests of controls and
substantive tests of transactions
started at interim
 Analytical procedures on financial
statements
 Substantive testing of financial
statements

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Introduction to audit evidence

Explain the assertions contained in the financial Q7 Section A – Specimen Exam
statements about classes of transactions and events and Q11, Q15 Section A – Dec 2016
related disclosures; and account balances and related
disclosures at the period end
Describe audit procedures to obtain audit evidence,
including inspection, observation, external confirmation,
recalculation, re-performance, analytical procedures and
enquiry
Discuss the quality and quantity of audit evidence
Discuss the relevance and reliability of audit evidence Q8 Section A – Specimen Exam
Q12 Section A – Dec 2016
Discuss substantive procedures for obtaining audit Q14 Section A – Dec 2016
evidence
Discuss and provide examples of how analytical Q13 Section A – Dec 2016
procedures are used as substantive procedures Q16(a) Section B – Sept/Dec 2018
Discuss the difference between tests of control and
substantive procedures

lOMoARcPSD|22603572
Introduction to audit evidence Quality of evidence
ISA 500 Audit Evidence
Sufficient Appropriate
Quantity – Sufficient to
support the audit opinion
Factors to consider are:

 Risk assessment
Relevant Reliable
 Nature of accounting The evidence
and internal control  External better
gathered must
systems than internal
cover the
 Materiality of the item financial  Internal more
statement reliable when
 Experience gained controls effective
assertions.
during previous audits
Financial  Auditor
Sources of evidence  Results of audit
generated better
statement A nalytical procedures
procedures
than client
assertions E nquiry and confirmation  Source and reliability of generated
I nspection information available
 Documentary
O bservation
better than oral
Recalc U lation
 Original
documents more
reliable than
copies/faxes
Assertions
A ccuracy (transactions)
C ompleteness (transactions/balances)
C ut off (transactions)
A llocation (balances)
C lassification/understandability
(transactions/balances)
O ccurence (transactions)
V aluation (balances)
E xistence (balances)
R ights and obligations (balances)
P resentation (transactions/balances)

lOMoARcPSD|22603572
Internal control

Explain why an auditor needs to obtain an understanding
of internal control relevant to the audit
Describe and explain the five components of an internal
control system; the control environment, the entity's risk
assessment process, the information system, control
activities relevant to the audit and monitoring of controls
Explain how auditors record internal control systems Q16(a) Section B – Sept 2016
including the use of narrative notes, flowcharts and Q16(b) Section B – Sept/Dec 2017
questionnaires
Evaluate internal control components, including
deficiencies and significant deficiencies in internal
control
Discuss the limitations of internal control components
Describe computer system controls including general IT
controls and application controls

lOMoARcPSD|22603572
Internal control
Internal control is 'the process designed and effected by those charged with governance,
management and other personnel to provide reasonable assurance about the achievement of the
entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of
operations and compliance with applicable laws and regulations.' (ISA 315 (Revised), para. 4c)
Internal control systems Computer systems controls

Components of an internal control system
 The control environment
 The entity's risk assessment process
 The information system
 Control activities
 Monitoring of controls
General controls
Application controls
Controls over data centre and network Controls over input
operations  Batch controls
 Operating logs  Range/limit checks
Examples of internal control  Standby arrangements  Existence checks
 Regular backup and secure storage  Check digits
 Segregation of duties
Virus protection/firewalls  Sequence checks
 Physical controls
 Information processing System software acquisition, change Controls over output
 Review (performance) and maintenance
 Test checks
 Authorisation  Physical controls
 Approval of computer-generated
payments
 The entity's risk assessment process  Reconciliations of report totals to
 The information system general ledger accounts
 Control activities
Limitations of internal control Controls over standing data
 Monitoring of controls
 Poor judgement in decision making
Access security  Passwords restricting access to
 Human error
 Passwords amend standing data
 Processes being deliberately circumvented
by employees and others  Dedicated terminals  Regular printouts produced and
 Management overriding controls  Job scheduling reviewed by someone in authority
 The occurrence of unforeseen
Application system acquisition,  Regular lists of amendments,
circumstances
change and maintenance additions and deletions produced
 Testing of new systems and reviewed
 Authorisation, approval and testing of
changes
 Use of standard packages
Use of internal control  Regular review of unauthorised
systems by auditors changes
 Restricted access to application
systems documentation
See on next page

lOMoARcPSD|22603572
Internal control
Use of internal control systems by auditors
Document the system – how?

 Narrative notes
 Flow charts
 Internal control questionnaires (ICQs)
 Internal control evaluation questionnaires (ICEQs)
Document the system – why?
 Identify potential misstatements
 Consider factors that affect the risk of material
misstatements
 Design the nature, timing and extent of further audit
procedures

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Tests of controls

Describe control objectives, control procedures,
activities, key controls and tests of control in relation to:
 The sales system Q17(a) Section B – Specimen Exam (sales)
 The purchases system Q16(b) Section B – Sept 2016 (sales)
 The payroll system
Q16(c) Section B – Sept 2016 (payroll)
 The cash system
 The inventory system Q17 Section B – Dec 2016 (cash receipts)
 Non-current assets Q18(a),(b) Section B – March/June 2017 (various)
(purchases/payables)
Q16(a),(b) Section B – March/June 2018 (payroll)
Q17(a) Section B – Sept/Dec 2018 (cash receipts and
payments)
Discuss the requirements and methods of reporting Q17(a) Section B – Sept/Dec 2018
significant deficiencies in internal control are provided to
management and those charged with governance
Explain, in a format suitable for inclusion in a
management letter, significant deficiencies within an
internal control system and provide recommendations for
overcoming these deficiencies to management
Discuss the need for auditors to communicate with those
charged with governance
Describe the format and content of audit review reports
and make appropriate recommendations to management
and those charged with governance

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 Test that the control Tests of controls  Enquiry

– Is properly designed  Inspection of documents supporting
– Exists, and controls
– Has operated throughout the  Observation of procedures
period  Re-performance of the application of a
 Deviations should be recorded and control
investigated regardless of amounts  Testing of the control activities
involved performed by a computer, possibly
 Assess whether deviations are isolated using data analytics/CAATs
departures or indicate the existence of  Examination of evidence of
errors in accounting records management review
 If results are unsatisfactory
– Preliminary assessment of control
risk is not supported
– Must modify nature, timing and
extent of planned substantive
procedures
Revenue Inventories Payroll
Purchases Revenue and capital Bank and cash

expenditure
Communication of deficiencies in internal control

 No duty to report control deficiencies to shareholders
 ISA 265 Communicating deficiencies in internal control to those
Other communication by the auditor with charged with governance and management requires significant
those charged with governance deficiencies in internal control to be reported to those charged with
governance
 The auditor's responsibilities in relation to FS
audit  Form of communication should be agreed at planning stage
 Planned scope and timing of the audit  Should be prompt and before FS finalised
 Significant findings from the audit eg views on
significant accounting policies  Contents should first be discussed with management
 Statement of compliance with independence  Addressed to audit committee (or board, if no audit committee)
requirements
 Detailed recommendations structured:
– Deficiency
– Implication
– Recommendation
 Caveat
– Not for external use
– Not a complete list

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Audit procedures and sampling

Discuss the problems associated with the audit and
review of accounting estimates
Describe why smaller entities may have different control
environments and describe the types of evidence likely
to be available in smaller entities
Define audit sampling and explain the need for sampling
Identify and discuss the differences between statistical
and non-statistical sampling
Discuss and provide relevant examples of, the
application of the basic principles of statistical sampling
and other selective testing procedures
Discuss the results of statistical sampling, including Q4 Section A – Sept 2016
consideration of whether additional testing is required
Explain the use of computer-assisted audit techniques
and data analytics in the context of an audit
Discuss and provide relevant examples of the use of test Q5 Section A – Sept 2016
data and audit software and other data analytics tools Q17(b) Section B – March/June 2017
Discuss why auditors rely on the work of others
Discuss the extent to which auditors are able to rely on Q18(b) (i) Section B – Specimen Exam
the work of experts, including the work of internal audit
Discuss the audit considerations relating to entities using

service organisations
Explain the extent to which reference to the work of
others can be made in the independent auditor's report

lOMoARcPSD|22603572
Audit procedures and sampling
Computer-assisted
Sampling audit techniques
Audit sampling means the application of audit procedures to less than 100% of the
items within a class of transactions or account balance such that all sampling units
have an equal chance of selection, in order to assist in forming a conclusion
concerning the population from which the sample is drawn [ISA 530].
Sample size
 Required confidence level
 Risk of material misstatement
 Tolerable error
 Expected error
 Population size
 Stratification
Sample selection
 Random
 Systematic
 Haphazard
 Value weighted
Evaluation of results
 Nature and cause of errors?
 Effect on other areas?
 Anomalous?
 Project monetary errors to the population
 If this indicates material error is likely the auditor may:
– Ask management to investigate and make adjustments
– Modify nature timing and extent of further audit procedures
– Consider effect on auditor's report
Audit software Test data

Computer programs used by the auditor, as part of his auditing procedures, to process Conducting audit procedures by entering data into an entity's computer
data of audit significance from the entity's accounting system. Data may be system, and comparing the results obtained with pre-determined results.
downloaded from the client's system to the auditor's in order to perform tests on it.
Examples of tests (usually tests of controls)
Examples of tests (usually substantive)  Testing specific controls in computer programs
 Reperformance of calculations  Test transactions
 Extraction of samples  Integrated test facilities
 Analytical review
Audit data analytics
The science and art of discovering and analysing patterns, deviations and inconsistencies, and extracting other
useful information in the data underlying or related to the subject matter of an audit through analysis, modelling
and visualisation for the purpose of planning or performing the audit.
Benefits Examples
 Test whole population rather than samples  Analyse patterns in revenue and costs
 Increase audit efficiency  Trace matching of orders through to invoice
 Improve audit quality  Interrogate journals

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Audit procedures
and sampling
Using the work of others
Internal audit Service organisations Auditor's Expert

It may be possible for the EA to rely on Examples Examples
the work of the IA and thereby reduce  Accounting records  Valuations of land and buildings
the extent of their testing. Where this is  Payroll
the case ISA 610 (Revised) Using the  Determination of inventory
 Credit control quantities/condition
work of internal auditors requires the EA  Data entry/information processing
to evaluate and perform audit  Legal opinions
Auditor's responsibilities
procedures to confirm the IA's work is Auditor's responsibilities
adequate for their purposes.  Assess significance of
organisation's activities to the  Evaluate objectivity/competence
General assessment of expert
audit
 Scope of function
 Assess risk of material  Evaluate appropriateness of
 Organisational status
misstatement and extent of control auditor's expert's work as
 Due professional care
risk evidence
 Independence
 Technical competence  Consider whether information held – Data and assumptions
by client is sufficient – Consistency with other
evidence
Evaluation of internal audit work  If necessary, request service
 Adequacy of technical training and organisation's auditor to perform Unmodified auditor's report
proficiency additional procedures, or visit to  Should not refer to work of an
perform tests of controls expert
 Whether properly supervised,
reviewed and documented Auditor's report
 Sufficiency and appropriateness of  Consider any implications for the
evidence auditor's report
 Whether conclusions are
appropriate and reports consistent
with work performed
 Whether exceptions/unusual Auditing smaller entities
matters resolved Audit of accounting estimates
The problem of control
Direct assistance
Examples  Many controls relevant to large
 The use of the IAs to perform audit
procedures under the direction,  Allowances to reduce inventory or entities neither practical nor
receivables to their estimated realisable appropriate
supervision and review of the EA
value  Likely to have poor segregations of
 Do not use where there are:
 Depreciation duties
– Significant judgements 
 Provisions Management override of controls
– Items with a high assessed risk 
 Accrued revenue Management should instigate
of material misstatement additional authorisation, arithmetical,
Three approaches
– Items which the internal accounting and supervisory controls
auditors have been involved in  Review and test process used by
Audit approach
 EA's to document the competence management
 Unlikely to be able to rely on controls
level of IAs used and who reviewed  Use independent estimate for
the work performed and the extent comparison  Focus will be on substantive
of the review procedures
 Review of subsequent events for
Auditor's report evidence of reasonableness of estimate
 Cannot make reference to work
done by IA

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Non-current assets

Explain the audit objectives and the audit procedures to
obtain sufficient, appropriate evidence in relation to:
Tangible and intangible non-current assets:
(i) Evidence in relation to non-current assets Q7 Section A – Specimen Exam
Q17(b) Section B – Specimen Exam
Q18(b) (i) Section B – Specimen Exam
Q17(a) (i) Section B – Sept 2016
(ii) Depreciation Q6 Section A – Specimen Exam

(iii) Profit/loss on disposal.

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Non-current assets
Evidence on figures in the Evidence on entries in the

statement of financial statement of profit or loss
position  Depreciation
 Gains/losses on disposals
 Impairments
Tangible Intangible
 Additions Development expenditure
 Disposals
 Revaluations Remember the IAS 38 Intangible Assets criteria that
require/permit capitalisation:
 Probable future economic benefits
 Intention to complete and use/sell asset
 Resources adequate and available to complete
and use/sell asset
 Ability to use/sell the asset
 Technical feasibility of completing asset for
use/sell
 Expenditure can be measured reliably

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Inventory

Inventory
(i) Inventory counting procedures in relation to
year-end and continuous inventory systems
(ii) Cut-off
(iii) Auditor's attendance at inventory counting
(iv) Direct confirmation of inventory held by third parties
(v) Valuation
Q18(b) (ii) Section B – Specimen Exam
Q17(a) (ii) Section B – Sept 2016
Q16(d) Section B – Sept/Dec 2018
(vi) Other evidence in relation to inventory

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3rd party confirmations Inventory
Quantity  Value
Other evidence Valuation

Cut-off
 Record basis of valuation used
Cut-off is usually tested by  Test material costs
obtaining a sample of GRNs
and GDNs either side of the – Check to individual invoices
year end and then matching – Ensure FIFO or appropriate
them to purchase/sales basis being used
Year end inventory counting invoices to ensure they have
– Check quantities used in
Before been included in the correct
WIP/FG
 Review working papers for previous year to identify account balances(s) (see
risks and familiarise yourself with the inventories below)  Test labour costs
 Determine arrangements with management in – Check calculations to
advance supporting documentation
 Inventories held by/for third parties – what – Review costing against actual
arrangements have been made? Continuous inventory labour and production
 Review client's inventory count instructions  Review company's procedures  Test application of overheads
 Investigation of differences (where inventory records – Independence of counters – Ensure only production
exist) – Frequency of counts overheads included
 Consider the need for an expert – Ensure all lines covered at – Ensure based on normal levels
 Determine procedures to cover a representative least once per year of activity
selection of inventories – Investigation of discrepancies
During
– Updating of records
 Ensure staff are following the inventory counting
 Attend at least one of the
instructions
company's counts (to observe)
 Test counts from
 Review whole year's results
– Inventories  inventory sheets; and
– From the inventory sheets  inventories. – Extent of counting
– Accuracy of records
 Note damaged, old or obsolete inventories – Reasons for discrepancies
 Review WIP for stage of completion  Perform test counts at the year end
 Inventories held by client for third parties: ensure
excluded from count
 Record the number of the last GRN and the last GDN
 Form an overall impression of inventory levels
 Photocopy inventory sheets
After
 Check sequence of inventory sheets
 Check client's computation of final figure
 Trace own test count items through to final inventory
sheets
 Check replies from third parties
 Inform management of any problems
 Follow up cut-off details
 Ensure necessary adjustments to book inventories
have been made (where records are maintained)

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Year end
Before After
GRN GRN
Purchase
Purchase
Included in? Included in?
Purchases Purchases
Payables Payables
Inventories Inventories
GDN GDN
Included in? Included in?

Sales
Sales
Sales Sales
Receivables Receivables
Inventories Inventories

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Subject:
Receivables

Explain the audit objectives and audit procedures to
Receivables
(i) Direct confirmation of accounts receivable
Q9, Q10, Q13, Q14 Section A – Specimen Exam
(ii) Other evidence in relation to receivables and Q18(a) (iii) Section B – Dec 2016
prepayments
Q18(b) Section B – Sept/Dec 2017
Q16(d) Section B – Sept 2016

(iii) Completeness and occurrence of revenue
Q15 Section A – Dec 2016
Q18(a) (i) Section B – Dec 2016
Q16(e) Section B – Sept/Dec 2018

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Receivables
Statement of financial performance: receivables and prepayments

Statement of profit or loss: revenue, irrecoverable debts expense
Direct confirmation Other evidence

 Obtain listing of trade receivables as at the  GDNs pre/post year end
confirmation date  Analytical procedures
 Agree total to nominal ledger  Correspondence with
 Review for any obvious omissions/misstatements customers/liquidators
by comparing this year's list with last year's
 Select a sample of accounts for confirmation
 Select the sample including the following balances:
– Old, unpaid amounts
– Credit balances
– Nil balances
– Material balances
 Letter should be on the client's paper, signed by
the client with a copy of the current statement
attached. It should request that the reply be sent
directly to the auditor, and paid reply envelopes
should be included
 After reasonable period, send 'follow-up' request
 Follow up by telephone or fax if there is no reply
 No reply:
– Confirmation of individual outstanding invoices
– Alternative procedures:
 Agree opening balance on account with last
year's closing balance
 Test casts
 Verify outstanding items to back up
documentation
 Review cash received after year end
 Discuss with responsible company official

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Bank and cash

Bank and cash:
(i) Bank confirmation reports used in obtaining Q17(c) Section B – March/June 2017
evidence in relation to bank and cash
Q18(b) Section B – Sept/Dec 2018
(ii) Other evidence in relation to bank

(iii) Other evidence in relation to cash

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Related entries in the

Bank and cash statement of profit or loss
 Bank interest
Bank confirmation letters Other evidence

 Bank reconciliation
Authority to disclose
Banks require the explicit written authority of their customers to disclose the  Attend physical count of cash if
material
information requested:
– An ongoing standing authority, or
– A separate authority each time information is requested.
Bank confirmation process
 A request for a bank confirmation should be issued on the auditor’s own headed
paper, and sent to the bank branch with which the client has the prime business
arrangement.
 The bank confirmation request should specify:
– The names of all entities covered by the request;
– Whether the auditor is requesting 'standard information';
– Details of 'additional information' if so required;
– The date for which the auditor is requesting confirmation (the audit
confirmation date);
– A statement that the bank's response will not create a contractual
relationship between the bank and the auditor;
– A statement requesting the bank to advise the auditor if the Authority is
insufficient to allow the bank to provide full disclosure of the information
requested; and
– A contact name and telephone number.
 The bank confirmation request should reach the branch at least two weeks in
advance of the audit confirmation date.
Standard information requested
 Full title of all bank accounts in all currencies, with account numbers and
balances, including nil balances
 Full title and dates of closure of all accounts closed during the period
 Amounts accrued but not yet charged or credited of:
– Charges
– Interest
 Amount of interest charged during the period if not shown separately on bank
statement
 Particulars of any right of set-off
 Details of:
– Overdrafts and loans repayable on demand
– Other loans, specifying dates of review and repayment
– Other facilities
 Customer's assets held as security
 Customer's other assets held
 Contingent liabilities

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Liabilities, capital and

directors' emoluments

Explain the audit objectives and audit procedures to
obtain sufficient appropriate evidence in relation to:
Payables and accruals
(i) Supplier statement reconciliations and direct Q1, Q2, Q3 Section A – Sept 2016
confirmation of accounts payable
(ii) Obtain evidence in relation to payables, accruals Q18(a) (ii) Section B – Dec 2016
Q16(d) Section B – March/June 2018
(iii) Purchases and other expenses Q16(d) Section B – Sept/Dec 2017
Non-current liabilities, provisions and contingencies

(i) Evidence in relation to non-current liabilities
(ii) Provisions and contingencies Q17(a) (iii) Section B – Sept 2016
Share capital, reserves and directors' emoluments:
(i) Evidence in relation to share capital, reserves and
directors' emoluments Q17(d) Section B – March/June 2017

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Liabilities, capital and

directors' emoluments
 Payables and accruals  Non-current liabilities  Share capital

– Supplier statement – Bank letters Share issues
reconciliations – Loan agreements – Memo and articles
– Analytical procedures – Finance costs – Board minutes
– Subsequent events review  Provisions – Cash book receipts
 Purchases and expenses – IAS 37 criteria  Reserves
– Subsequent events review – Brought forward figures
– Management representations – Profit/loss for year
– Recalculation of estimates – Dividends (board minutes, cash
 Finance costs book payments)
– Analytical procedures  Directors' emoluments
– Recalculation – Contracts
– Board minutes
– Cash book payments

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Not-for-profit organisations

Apply audit techniques to not-for-profit organisations

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Not-for-profit organisations
Types of not-for-profit
organisations
 Charities
 Clubs
 Societies
Comparison with audit of Application of

for-profit organisations audit techniques
Risk factors Audit evidence
 Complexity and extent of regulation  Mainly substantive procedures
 Significance of cash receipts
 Restrictions imposed in the entity's
governing documents
 Sensitivity of certain key statistics
 Need to maintain adequate, but not
excessive resources
Control risk
 Competence, training and qualification
of paid staff and volunteers
 Reliability of accounting
systems/computer systems
 Controls over compliance with laws and
regulations
 Power of trustees

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Audit review and finalisation

Explain the purpose of a subsequent events review
Explain the responsibilities of auditors regarding Q12 Section A – Specimen Exam
subsequent events Q6 Section A – Sept 2016
Discuss the procedures to be undertaken in performing Q7, Q8 Section A – Sept 2016
a subsequent events review Q8 Section A – Dec 2016
Define and discuss the significance of the concept of
going concern
Explain the importance of and the need for going
concern reviews
Explain the respective responsibilities of auditors and Q9 Section A – Dec 2016
management regarding going concern
Identify and explain potential indicators that an entity is
not a going concern
Discuss the procedures to be applied in performing Q17(b) Section B – Sept 2016
going concern reviews Q18(c) Section B – Sept/Dec 2018
Discuss the disclosure requirements in relation to going Q18(d) Section B – Sept/Dec 2018
concern issues
Explain the purpose of and procedure for obtaining
written representations
Discuss the quality and reliability of written
representations as audit evidence
Discuss the circumstances where written representations
are necessary and the matters on which representations
are commonly obtained
Discuss the importance of the overall review in ensuring
that sufficient, appropriate evidence has been obtained
Discuss the procedures an auditor should perform in Q7 Section A – Dec 2016
conducting their overall review of financial statements
Explain the significance of uncorrected misstatements
Evaluate the effect of dealing with uncorrected
misstatements

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Overall review of evidence
Audit review and finalisation
Uncorrected misstatements
 Schedule maintained of errors identified
that have not been corrected by the client
 Consider whether material in aggregate
Subsequent events Written representations

Accounting issue: IAS 10 Events after the reporting The auditor should request written
period representations:
 Adjusting events  provide evidence of conditions  Management fulfilled its responsibility to
that existed at the reporting date prepare FS, that all transactions have been
recorded and they have approved the FS
 Non-adjusting events  indicative of conditions that
arose after the reporting date  On ISA specific disclosures (fraud, laws
and regulations, estimates, going concern,
related parties and subsequent events)
 Appropriate use of accounting policies
Audit procedures
 Review procedures established by client management
 Read minutes of meetings
Procedures
 Read latest available interim accounts, budgets and forecasts
 Agree procedures at early stage (eg letter of
 Enquire of legal counsel concerning litigation and claims engagement)
 Enquire of management as to whether any subsequent events  Discuss letter with client first
have occurred that might affect the financial statements
 Usually signed by senior executive officer
Auditor's duties and senior financial officer on behalf of board
 Up to date of auditor's report  Should be minuted
– Perform procedures  Dated – after all other audit work completed
 After report but before FS issued, if auditor becomes aware of but before signing of the auditor's report
a fact that may materially affect the FS: If the client refuses to sign
– Discuss with management  Auditor should write letter setting out his
– If management does not amend FS, and auditor's report understanding and ask for management
has not been released to the client, express qualified or confirmation.
adverse opinion  If management does not reply, auditor should
 After FS issued, if auditor becomes aware of a fact that follow up to ascertain that his understanding
existed at the date of the auditor's report and, if known then, is correct.
might have caused the auditor to issue a modified report :  If management refuses to provide a
– Discuss with management representation that the auditor considers
– If management issue revised accounts, issue new necessary, this constitutes insufficient
auditor's report, referring to previous report evidence and the auditor should express a
qualified opinion or disclaimer of opinion.
– If management do not take appropriate action, auditor
should take steps to prevent reliance on the report, eg
speak at AGM or resign

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Going concern
Under the going concern assumption, an entity is ordinarily viewed

as continuing in business for the foreseeable future * with neither
the intention nor the necessity of liquidation, ceasing trading or
seeking protection from creditors pursuant to laws or regulations.
* where the foreseeable future  implies at least one year from the
reporting date (year end)
Audit procedures
 Analysing and discussing forecasts with directors
 Analysing and discussing latest available interim financial
statements
 Reviewing terms of loans agreements
 Reading minutes of meetings of shareholders, those charged with
governance and relevant committees for reference to financial
difficulties
 Enquiring of the entity's lawyers about the existence of litigation or
claims
 Confirming the existence and enforceability of arrangements with
third parties to provide financial support
 Considering the entity's plans to deal with unfulfilled orders
 Reviewing events after balance sheet date to identify those that
either mitigate or otherwise affect the entity's ability to continue as
a going concern
Auditor's report (Chapter 19)
 Going concern assumption appropriate but a material uncertainty
exists  unmodified opinion with 'material uncertainty related to
going concern' section
 Inadequate disclosure  qualified or adverse opinion
 Going concern assumption inappropriate (but management have
used going concern basis)  adverse opinion
 Management unwilling to make or extend its assessment  may
amount to insufficient evidence and a modified opinion

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Reports

Identify and describe the basic elements contained in the Q11 Section A – Specimen Exam
independent auditor's report Q9 Section A – Sept 16
Explain unmodified audit opinions in the auditor's report Q15 Section A – Specimen Exam
Q10 Section A – Sept 16
Explain modified audit opinions in the auditor's report Q15 Section A – Specimen Exam
Q18(c) Section B – Specimen Exam
Q18(b) Section B – Dec 2016
Q18(d) Section B – Sept/Dec 2017
Describe the format and content of emphasis of matter
and other matter paragraphs
Discuss the reporting implications of the findings of going Q10 Section A – Dec 2016
concern reviews Q18(d) Section B – Sept/Dec 2018

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Reports
Auditor's reports
Standard Report Changes to the

Unmodified opinion (Eg 1) auditor's report
Unmodified opinions with Modified on matters that affect the

additional communication auditor's opinion
Emphasis of Other matter

matter paragraph paragraph
'Our opinion is (Eg 7) Insufficient or Material misstatement
not modified in inappropriate audit
respect of this evidence
matter ….'
(Eg 6)
Material but Material and
Material but Material and not pervasive pervasive
not pervasive pervasive Qualified Adverse
Qualified Disclaimer 'except for' '…. do not give
'except for' 'do not express (Eg 2) a true and
(Eg 4) an opinion'
fair view'
(Eg 5)
(Eg 3)

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Going concern
Auditor's report
 Going concern assumption appropriate but a material uncertainty
exists  unmodified opinion with 'material uncertainty related to
going concern' section
 Inadequate disclosure  qualified or adverse opinion
 Going concern assumption inappropriate (but management have
used going concern basis)  adverse opinion
 Management unwilling to make or extend its assessment  may
amount to insufficient evidence and a modified opinion

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Example 1
Unmodified Auditor's Report With Unmodified Opinion (listed entity)
INDEPENDENT AUDITOR'S REPORT

To the Shareholders of ABC Company [or Other Appropriate Addressee]
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial
position as at 31 December 20X1, and the statement of comprehensive income, statement of changes in equity and
statement of cash flows for the year then ended, and notes to the financial statements, including a summary of
significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view
of) the financial position of the Company as at 31 December 20X1, and (of) its financial performance and its cash flows
for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those
standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our
report. We are independent of the Company in accordance with the International Ethics Standards Board for
Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are
relevant to our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in
accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
financial statements of the current period. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with ISA 701.]
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with
IFRSs and for such internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic
alternative but to do so.
Those charged with governance are responsible for overseeing the Company's financial reporting process.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.

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As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism
throughout the audit. We also:
 Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control.
 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
 Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on
the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast
significant doubt on the Company's ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on
the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may
cause the Company to cease to continue as a going concern.
 Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,
and whether the financial statements represent the underlying transactions and events in a manner that
achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of
the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our
audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the financial statements of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because
the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such
communication.
Report on Other Legal and Regulatory Requirements
[The form and content of this section of the auditor's report would vary depending on the nature of the auditor's other
reporting responsibilities prescribed by local law, regulation, or national auditing standards. The matters addressed by
other law, regulation or national auditing standards (referred to as 'other reporting responsibilities') shall be addressed
within this section unless the other reporting responsibilities address the same topics as those presented under the
reporting responsibilities required by the ISAs as part of the Report on the Audit of the Financial Statements section.
The reporting of other reporting responsibilities that address the same topics as those required by the ISAs may be
combined (ie included in the Report on the Audit of the Financial Statements section under the appropriate
subheadings) provided that the wording in the auditor's report clearly differentiates the other reporting responsibilities
from the reporting that is required by the ISAs where such a difference exists.]

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The engagement partner on the audit resulting in this independent auditor's report is [name].
[Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate for the particular
jurisdiction]
[Auditor Address]
[Date]
Example 2
Qualified opinion due to material misstatement of inventories
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the
accompanying financial statements present fairly, in all material respects, (or give a true and fair view of) the financial
position of the Company as at 31 December 20X1, and (of) its financial performance and its cash flows for the year then
ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for Qualified Opinion
The company's inventories are carried in the statement of financial position at xxx. Management has not stated
inventories at the lower of cost and net realisable value but has stated them solely at cost, which constitutes a
departure from IFRSs. The company's records indicate that had management stated the inventories at the lower of cost
and net realisable value, an amount of xxx would have been required to write the inventories down to their net
realisable value. Accordingly, cost of sales would have been increased by xxx, and income tax, net income and
shareholders' equity would have been reduced by xxx, xxx and xxx, respectively.
Key Audit Matters
In addition to the matter described in the Basis for Qualified Opinion section we have determined the matters described
below to be the key audit matters to be communicated in our report.

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Example 3
Adverse opinion due to material misstatement with a pervasive effect
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our
report, the accompanying financial statements do not present fairly (or do not give a true and fair view of) the financial
position of ABC Company as at 31 December 20X1, and (of) its financial performance and its cash flows for the year
then ended in accordance with IFRSs.
Basis for Adverse Opinion
As explained in Note X, the company has included houses built for re-sale (including related land) at a cost of $X as
non-current assets and depreciated them at a rate of X%, resulting in depreciation of $X. Under International Financial
Reporting Standards, these should have been included as inventory in the financial statements and no depreciation
should have been provided in respect of these. The carrying value of the houses represent 90% of the company's total
assets and the company's records indicate that … [explanation of the effect on amounts presented in the financial
statements].
Key Audit Matters
Except for the matter described in the Basis for Adverse Opinion section, we have determined that there are no other
key audit matters to communicate in our report.

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Example 4
Qualified opinion due to inability to obtain sufficient appropriate audit evidence about the carrying amount of
inventory (material but not pervasive)
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section of our
report, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view of) the
financial position of ABC Company as at 31 December 20X1, and (of) its financial performance and its cash flows for
the year then ended in accordance with IFRSs.
Basis for Qualified Opinion
With respect to inventory having a carrying amount of $X the audit evidence available to us was limited because we did
not observe the counting of the physical inventory as at 31 December 20X1, since that date was prior to our
appointment as auditor of the company. Owing to the nature of the company's records, we were unable to obtain
sufficient appropriate audit evidence regarding the inventories quantities by using other audit procedures.
Key Audit Matters
In addition to the matter described in the Basis for Qualified Opinion section we have determined the matters described
below to be the key audit matters to be communicated in our report.

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Example 5
Disclaimer of opinion due to inability to obtain sufficient appropriate audit evidence about multiple elements of
the financial statements
Disclaimer of Opinion
We were engaged to audit the financial statements of ABC Company (the Company), which comprise the statement of
financial position as at 31 December 20X1, and the statement of comprehensive income, statement of changes in
equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary
of significant accounting policies.
We do not express an opinion on the accompanying financial statements. Because of the significance of the matters
described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on these financial statements.
Basis for Disclaimer of Opinion
We were not appointed as auditors of the company until after 31 December 20X1 and thus did not observe the counting
of physical inventories at the beginning and end of the year. We were unable to satisfy ourselves by alternative means
concerning the inventory quantities held at 31 December 20X0 and 20X1 which are stated in the statement of financial
position at xxx and xxx, respectively. In addition, the introduction of a new computerised accounts receivable system in
September 20X1 resulted in numerous errors in accounts receivable. As of the date of our auditor's report,
management was still in the process of rectifying the system deficiencies and correcting the errors. We were unable to
confirm or verify by alternative means accounts receivable included in the statement of financial position at a total
amount of xxx as at 31 December 20X1. As a result of these matters, we were unable to determine whether any
adjustments might have been found necessary in respect of recorded or unrecorded inventories and accounts
receivable, and the elements making up the income statement, statement of changes in equity and statement of cash
flows.
Key Audit Matters
In addition to the matter described in the Basis for Disclaimer of Opinion section we have determined the matters
described below to be the key audit matters to be communicated in our report.
Example 6
Emphasis of matter paragraph
Emphasis of Matter
We draw attention to Note X of the financial statements, which describes the effects of a fire in the company's
production facilities. Our opinion is not modified in respect of this matter.
Key Audit Matters

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Example 7
Other matter paragraph
Other Matter
The financial statements of ABC Company for the year ended 31 December 20X0 were audited by another auditor who
expressed an unmodified opinion on those statements on 31 March 20X1.

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Appendix

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Appendix: Verbs used in question requirements

Advise To counsel, inform or notify
Analyse Examine in detail the structure of
Calculate/compute To ascertain or reckon mathematically
Compare and contrast Show the similarities and/or differences
Define Give the exact meaning of
Describe Communicate the key features of
Discuss To examine in detail by argument
Distinguish Highlight the differences between
Evaluate To appraise or assess the value of
Explain Make clear or intelligible/state the meaning of
Identify Recognise, establish or select after consideration
Interpret Process information to explain its meaning
Justify To produce reasons in support of
List State short pieces of information on separate lines
Prepare To make or get ready for use
Recommend To advise on a course of action
Summarise To express the most important facts of

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Audit and Assurance (AA) Revison Notes 2019 unlocked

Audit and Assurance (Oxford Brookes University)

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Copyright © IFRS Foundation

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How to use the Practice & Revision material 4

The examination and syllabus aims 5

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 Skills bank (in these notes)

 Knowledge bank (in these notes)

 Question and answer bank

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The examination and syllabus aims

Format of the exam

Section Style of question type Description Proportion of exam, %

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This section explains and demonstrates the key skills

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Key skills required to pass

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Skill 1 – Effective reading and planning at the start of the exam

2 Reading Section B scenario based questions

STEP Read the requirements

STEP Focus on the longest requirements

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(a) In respect of the internal control of Baggio International Co:

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Skill 2 – Quick and accurate analysis of a question's

1 Be aware of the verbs used in exam questions

'(b)Using the minutes provided, identify and describe SEVEN audit

Milla has incurred expenditure of $5m updating, repairing and

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2 Identify ALL the question's requirements in your answer plan

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Skill 3 – Disciplined time management

Marks Time allocation

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Skill 4 – Tackling mini-case style scenario questions

Approaching Questions Logically

1 What to do if you know the answer to the question

2 What to do if more than one answer appears plausible

As trade receivables is a material balance, the audit partner has asked