ACCA P7 (INT) Advanced Audit & Assurance - Study Text - 2010 (Emile Woolf Publishing)
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Answers to practice questions
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(1) Internet operation – quality/non-delivery
Risks Expected controls
resulting in loss of customer orders or
records, or failure to obtain payment
for goods received.
IT service standards.
Breach of Data Protection legislation. Nominated Data Protection Officer.
Data protection procedures and
checks to ensure compliance.
(3) Environmental issues re new sites
Risks Expected controls
Delay in availability of new sites will
impact profitability of the company
Plans showing environmental
analysis and development
assumptions.
Financial capital tied up in new sites
that cannot be built on.
Cash flow forecasts.
Budgets and plans.
If there has been contamination of the
site, there may be a number of
associated risks including:
Costs of clean up
Impairment in the value of assets
Environmental laws or regulations
may have been breached.
Environmental analysis prior to
purchase of sites.
Planning applications.
Local opposition and environmental
cases may affect the reputation of QPS
and also cause problems in achieving
our planned customer base.
Liaison with local residents and
environmental officers.
(4) Social issues re acquisition of Lopay Supermarkets
Risks Expected controls
Negative publicity and damage to
QPS’s reputation through breaches of
employment and health and safety
regulation.
Procedures to ensure adherence to all
required legislation.
Nominated responsibility for
compliance.
Financial risk of compensation
required to customers hit by food
poisoning from Lopay products.
Environmental and health and safety
controls and procedures documented
and monitored.
Escalation of Health and Safety
concerns.
QPS could be fined for breach of
trading standards and other
legislation.
Health and Safety procedures.
Staff training.
Poor practices in Lopay could damage
QPS as a whole and lead to loss of
Clear common procedures for Lopay
and QPS staff.
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(1) Internet operation – quality/non-delivery
Risks Expected controls
customers and financial loss.
Monitoring, supervision and regular
checks of compliance with
procedures.
Training of staff.
Use of QPS staff in Lopay stores to
bring about common practices.
Breach of laws on minimum wages
and of working time directives may
result in the need for provision of
back pay and fines.
Skills of HR staff.
Monitoring of adherence to
minimum wages and working time
directives and review of reports
produced on compliance.
Inability to meet stores standards
arising from high turnover of staff.
Recruitment and retention policies,
with common standards across QPS.
Monitoring and reporting of staff
turnover levels and explanations for
high levels.
Further investigations and impact on financial statements/the audit
(1) Internet operation – quality/non-delivery
Further investigations Impact on financial statements/audit
Review plans for internet use
against actual internet use.
Confirm what investigations
management have carried out on
the delivery problems and level of
complaints. Check whether there
are key areas of concern.
Confirm how inventories are
being controlled for internet
distribution and what measures
have been taken to ensure the
quality and accuracy of deliveries.
Review the impact of complaints
and financial compensation that
has been undertaken and is in the
pipeline.
Problems with deliveries and inventories
may impair profitability.
Significant levels of compensation
required against complaints will also
impact on profitability.
Need to quantify the impact of these
problems and decide how best to reflect
these in the financial statements.
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(2) Internet operation – systems problems
Further investigations Impact on financial statements/audit
Confirm the technical expertise
available for support of the
system.
Check whether there is any
outsourcing of the system. If the
system is outsourced, confirm the
service levels and maintenance
contracts.
Review the performance levels of
the system against planned
performance levels.
The poor systems service may have an
impact on the financial statements
depending on the scale of the problem.
The internet is a key strategy for QPS
and systems problems may result in the
failure of this strategy with customers
moving away from this service.
Need to discuss with management, in
particular, whether the problems will
impact the future provisions for
compensation to customers for problems
in service and security. Also, review
whether there is potential impact on the
going concern basis.
Check whether actual breaches in
confidentiality and security have
been experienced and review any
compensation required for this.
(3) Environmental issues re new sites
Further investigations Impact on financial statements/audit
Site A
Obtain a full understanding of the
environmental issues associated
with the site, including obtaining
written representations from
management. Need to fully
understand the business (ISA 315)
and understand the risks and
controls.
Evaluate whether there is a risk of
misstatement in the accounts. This
will include confirming the length
of time that the site has been
owned by QPS, the checks carried
out before acquisition of the site
including any evidence of
environmental concerns, records
of planning and local discussions
undertaken.
Review minutes of meetings
including board committees,
directors meetings, discussions
with environmental and planning
officers.
There could be misstatements arising
because of the environmental issues.
The value of assets may need to be
written down.
If there are serious contamination
problems for which the company is liable
this could have an impact on the going
concern basis.
Refer to relevant accounting standards
for environmental issues.
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Consider whether the
environmental issues could impact
on the going concern status.
Site B
Investigate the potential timescale
and financial impact of the delay
and whether this affects the
financial viability of the new store.
Hold discussions with planning
officers.
Consider strategy and planning
assumptions and future cash flow
forecasts.
The problems may affect the valuation of
assets and future cash flow of QPS and
therefore the auditor needs to
understand the impact so that the
financial statements can be reviewed.
(4) Social issues re acquisition of Lopay Supermarkets
Further investigations Impact on financial statements/audit
Need to comply with ISA 250
Consideration of laws and regulations
in an audit of financial statements.
Identify what action management
have already taken to address the
legal concerns, including
notification to the relevant legal
authorities and measures to
ensure future compliance.
Need for provision for back pay and
fines relating to minimum wage and
working time directives.
38 Environmental issues
Introduction
In many countries, legislation and regulation now encompasses environmental
protection as a response by law makers to increasing public pressure for
environmental protection. Such protection might include aspects such as water
industry control, clean air, town and country planning and pollution prevention
and control.
Although there is widespread publicity relating to environmental issues concerning
large multinationals, the financial statements of small and medium-sized enterprises
(SMEs) are not exempt from the potential impact of such issues. The size of an entity
has no direct bearing on whether environmental matters are likely to be significant
to its operations. Small operations are, in principle, as likely to cause environmental
damage as large operations. The issues involved are relevant to entities of all sizes.
Increasing pressures on commercial activities to tackle environmental issues have
arisen from many sources, including:
lobby groups (e.g. Greenpeace)
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financial institutions (e.g. banks are more cautious about risking their reputation
by paying insufficient attention to environmental issues in making lending
decisions and many now pursue so called ‘ethical investment policies’)
supply chain greening (i.e. larger organisations implementing environmental
standards and expecting their suppliers to do likewise)
government action (e.g. taxes on emissions and landfilling)
the accounting, auditing and legal professions (e.g. in the UK the auditing
standards body has issued a discussion paper Environmental issues in the audit of
financial statements).
Implications for businesses
The significance of environmental matters to the financial statements normally
depends on the nature of the reporting entity’s operations.
Some entities may incur environmental obligations as a direct result of their core
business (e.g. mining and extractive industries, chemical manufacturers and waste
management companies). For such organisations, compliance with environmental
laws and regulations should be central to the business.
Other entities may be affected by market issues such as compliance of products with
environmental legislation and customer perception of environmental friendliness.
Examples here include those products containing chemicals or packaging which
may damage the environment.
Businesses may also be affected by the location of their operations (e.g. if they are
holding an interest in land or buildings that have been contaminated by previous
occupants, or if they are considering building on out of town ‘greenfield’ sites).
Organisations may incur the costs of clean-up operations even though they are not
responsible for environmental pollution.
Businesses may also be affected indirectly by environmental issues if they are
dependent on a major customer or supplier whose business is under threat from
environmental pressures. As it is a principle of corporate governance that
management should maintain a sound system of internal control (to safeguard the
shareholders’ investment and the company’s assets), a company exposed to
significant environmental risks might be expected to operate an environmental
management system (EMS).
Why environmental issues cannot be ignored by auditors
The auditor’s duties with regard to the growing body of environmental laws and
regulations are the same as for any other laws and regulations where non-
compliance may materially affect the financial statements of their clients.
In particular, auditors must be alert to the possibility of the nature of a client’s
business having potentially harmful environmental impacts. As part of their
assessment of risk and internal controls, auditors will also require information
concerning existing and proposed regulations and fines or penalties incurred. For
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example, the auditor of a company engaged in waste disposal must be familiar with
the terms of licences under which the company is permitted to dispose of hazardous
substances.
Where an organisation has been subjected to an environmental audit, the statutory
auditor should review the findings of the environmental audit (e.g. as published in
an environmental performance report) and consider whether the risk of material
error in the financial statements is increased.
Impact on the financial statements
At the financial statement level, environmental risks encompass:
the risk of non-compliance with laws/regulations
the risk of compliance costs arising
the possible effects of customers’ views (as they may reject a company’s
products because of the environmental impact of those products).
Environmental issues may have a direct impact on the following:
Provisions (e.g. for site restoration).
Contingent liabilities (e.g. arising from pending legal action).
Actual liabilities (e.g. fines and penalties imposed).
Non-current asset values (e.g. property situated on or near a contaminated site).
The valuation of inventories (where inventories may be slow-moving because of
public attitudes).
Capital or revenue expenditure on clean-up operations.
Product redesign costs.
Going concern, for example, where new or more stringent environmental
legislation (such as that on emissions) threatens product viability, or where the
withdrawal of an operating licence is ‘life threatening’ to the business.
Conclusion
Clearly, auditors cannot ignore the impact of environmental issues on the financial
statements of their audit clients. A ‘general awareness’ of the risks is, however, a
minimum requirement.
Where financial statements embody management assertions concerning
environmental matters (e.g. the existence of an environmental liability, the
occurrence of environmental expenditure, the valuation of an environmentally
impaired asset, the completeness of fines and penalties) the auditor must go much
further in order to obtain sufficient appropriate evidence to corroborate these
matters.
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Paper P7 (INT)
Advanced audit and assurance
i
Index
3Es 276
A
ACCACodeofEthicsandConduct 40
Acceptinganewauditappointment 90
Accountingcontrols 117
Accountingestimates 134,190
Accuracy:assertion 161
Actualandthreatenedlitigation 47
Adjustingevents 224
Adverseopinion–materialmisstatements 322
Advertisingandpublicity 95
Advisingclientsinvolvedintake‐overbidsor
share
issues 59
Advocacythreat 43
Agreed‐uponprocedures 21,262
Agreeingthetermsofauditengagements 100
Analyticalprocedures 160,216
extentofuse 166
ISA520 164
natureandpurpose 164
Analyticalproceduresintheauditprocess 165
Applicationcontrols 147,150
Appropriateevidence 158
Arithmeticcontrols 117
Assuranceengagement 18
Assuranceengagement 252
objective 271
reporting 272
types 274
Assuranceengagementsandperformance 275
Assuranceservices 268
Assurance:meaning 18
Attestationengagement 253
Audit 20
Auditcommittee 32
Auditdocumentation 168,249
currentfile 170
formandcontent 169
ISA230 168
permanentfile
169
procedures 159
reliability 159
Auditevidence 156,200
Auditexemptionforsmallcompanies 356
Auditfile 170
Auditofaccountingestimates 190
Auditplan(strategydocument) 126
Auditprocedures 200
Auditreport 304
Auditrisk 107,128,133
Auditriskassessment:asummary 132
Auditriskmodel 128
Audit
sampling 156
Auditsoftware 152
Auditstrategies 104
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Auditstrategyandpractices:development 107
Auditstrategymemorandum 127
Auditstrategy:choice 106
Audittesting 156
Auditworktocheckcompliancewith
IAS10 226
Auditworkingpapers:ownership,
custodyandconfidentiality 172
AuditingPracticesBoard(APB) 26
Auditingprofession 352
Auditingtheconsolidationprocess 246
Auditorindependence 347
Auditor
negligence(lawoftort):makinga
successfulclaim 70
Auditorrotation 350
Auditorworkingpapers 94
Auditor’sevaluationofinternalcontrols 119
Auditor’sliability 67
managing 75
Auditor’sopinion 309
Auditor’sprocedureswherefraudorerroris
suspected 66
Auditor’sresponsibility 308
Auditor’ssignature 310
auditorsareresponsible 31
Auditors’
liability 62,352
Audit‐relatedservices 20,252
Authorisationcontrols 117
Avoidingliability 75
B
Bankandcash 210
Bannermancase 73
Basisformodifiedopinionparagraph 319
BBHvADT(1995) 73
Breachofcontract 68
Businessrisk 132
Businessriskandfinancialstatementrisk 113
Businessriskapproach 107
advantagesanddisadvantages 112
meaning 108
nature 108
Businessriskassessments 274
C
CAATs
advantages 154
disadvantages 153
CandlervCraneChristmas(1951) 71
CaparoIndustriesvDickmanandToucheRoss
&Co(1989) 72
Changesinaprofessionalappointment 90
Chinesewalls 60
Civillegalaction 67
Civilliability 68
Clientbooksandrecords 93
Clientidentificationprocedures 91
Clientscreening
91
Closebusinessrelationships 45
CombinedCode 32
Commercialtransactions 52
Communicatingwiththosecharged
withgovernance 333
Communicationwithcomponentauditors 242
Communicationwithgroupmanagement 249
Comparatives 329
Compilation 21
Compilationengagements 264
Completeness:assertion 160
Complianceaudits 296
Compliancewithlawsandregulations 37
Complyorexplain 31
Component 237
Componentauditor 237,238,242
Computer‐assistedaudit
techniques(CAATs) 144,152,277
Computer‐generatedauditworkingpapers 171
Computersinauditing 144
Conductforprofessionalaccountants 40
Confidentiality 41,56
Confidentialityandmoneylaundering 35
Confidentialityofworkingpapers 57
Confirmation 160
Conflictsofinterest 59
Consolidation
adjustments 248
Consolidation:themainauditprocedures 246
Consultationprocedures 50
Continuousauditing 279
Index
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Contractlaw 68
Controlactivities 117
Controlactivities(internalcontrols):
categories 117
Controlenvironment 115
evaluating 115
Controlrisk 119,130
Controlsincomputer‐basedinformation
systems 145
Controlsovertheauditors’computer
systems 144
Corporatefinancialadvice 59
Corporategovernance 25,30
Creditcontrolwithinanauditfirm 98
Criminalactivities 33
Criminalliability 67
Currentfile 170
D
Damages 67
Detectionrisk 131
Directreportingengagement 253
Directionofauditstaff 85
Directionaltesting 161
nature 162
Directorsareresponsible 31
Directors’andauditors’responsibilities 31
Disclaimerofopinion–limitationonscope 321
Disclaimersinauditreports 74
Distributionsfollowinganaudit
qualification 342
Duediligence 253
Dutyofcare(lawoftort):
establishingtheexistence 71
Dutyofconfidentiality 56
exception 56
E
E‐commerce 277
E‐commerce‘audit’ 279
Effectivenessofcontrols:assessing 119
Effectivenessofinternalcontrols 114
Electroniccommerce:IAPS1013 151
Electronicdatainterchange(EDI)
systems 150,277
Embeddedauditfacilities 153
Emphasisofmatterparagraph 228,315
Energyaudits 295
Engagementletter 100,256
annualreview 101
content 100
Enquiry 160
Entity’sriskassessmentprocess 116
Environmentalaudits 295,370
Environmentalmatters 363
Environmentalpolicies 368
Environmentalreports 369
Error 64
Estimationuncertainty 190
Ethicalissues 346
Ethicalprinciples 289
Ethicalregulation 24
Evaluatingthetender 98
Eventsafterthereportingperiod 224
Eventsoccurringafterthereporting
period 226
Evidence 156
Existence:assertion 161
Expectationgap 62,304
closing 63
Expert
assessingthework 185
definition 184
theneed 184
Externalbusinessrisks 109
F
Fairpresentation 305
Fairvaluemeasurements:auditof 193
Familiaritythreat 43
Familyandpersonalrelationships 45
Fees 46,96
FinancialActionTaskForceonMoney
Laundering(FATF) 34
Financialaudits 295
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Financialinterest 44
FinancialReportingCouncil 25
Financialstatementassertions 160
Financialstatementrisk 113,133
Fluctuations:investigationsinto 166
Forecast 281
Forensicaccounting 287
Forensicaudits 287,288
Forensicinvestigations 287
Fraud 62,64
Fraudanderror 64
responsibilitiesofmanagement 64
responsibilitiesoftheauditor 65
Fraudinvestigation
288
Fundamentalprinciples 40
FundamentalprinciplesintheIFACCode 40
G
Generalcontrols 145,150
Giftsandhospitality 46
Goingconcernassumption:audit
procedures 231
Goingconcernuncertainty
auditreport 331
dutiesoftheauditor(ISA570) 229
dutiesofthedirectors 229
emphasisofmatter 316
ISA570 229
Groupauditor 237,238
acceptinganappointment 239
responsibilities 238
Groupaudits 236
possibleproblems 236
preliminaries 238
Groupauditsandtheauditofindividual
groupcompanies 236
Groupengagementpartner 237
Groupengagementteam 237
H
HedleyByrnevHeller&Partners(1964) 71
Highlevelapproach 108
Hotreview 86
I
IAASBClarityProject 28
IAPS1010Theconsiderationofenvironmental
mattersintheauditoffinancialstatements 363
IAPS1014Reportingbyauditorson
compliancewithInternationalFinancial
ReportingStandards 313
IAS1Presentationoffinancialstatements 194
IAS2Inventories 195
IAS7Statementofcashflows 195
IAS
8Accountingpolicies,changesin
accountingestimatesanderrors 195
IAS10Eventsafterthereportingperiod 195,224
IAS11Constructioncontracts 195
IAS12Incometaxes 196
IAS16Property,plantandequipment 196
IAS17Leases 196
IAS18Revenue 196
IAS19Employeebenefits 196
IAS20
Accountingforgovernment
grantsanddisclosureofgovernment
assistance 197
IAS23Borrowingcosts 197
IAS24Relatedpartydisclosures 173,197,236
IAS27Consolidatedandseparatefinancial
statements 236
IAS28Investmentsinassociates 236
IAS31Interestsinjointventures 236
IAS32Financialinstruments:Presentation 197
IAS33Earningspershare 197
IAS34Interimfinancialreporting 197
IAS36Impairmentofassets 198
IAS37Provisions,contingentliabilitiesand
contingentassets 198
IAS38Intangibleassets 198
IAS39Financialinstruments:recognitionand
measurement 198
IAS40Investmentproperty 198
IAS41Agriculture 198
IFACCode
ofEthicsforProfessional
Accountants 40