acca f8 – audit and...

ACCA F8 – Audit and Assurance Exam technique Michaela Plucarova, PwC’s Academy

www.pwc.com

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Topics

Introduction to the paper and exam structure Exam technique tips

Ø  Planning your answer Ø  Understanding the verbs Ø  Most common errors

Preparation tips

Slide 2 ACCA F8 - Audit and Assurance

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Introduction to the paper and exam structure Basic information Exam structure Worldwide pass rate


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Basic information

q New structure of the exam since Dec 2014 !

q Examiner since June 2010 (Examiner’s Approach published in

Student Accountant, March 2000)

q 3 hours + 15 minutes (reading and planning time)

q All questions have to be answered

ACCA F8 - Audit and Assurance Slide 4

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Basic information


q  Audit theory (technical skills) – what’s the purpose of the

assurance, legal background, the stages of the audit (planning

stage including risk assessment/independence evaluation, audit

evidence – obtained from both test of controls and substantive

audit work, completion activities etc. q  Application of the theory to scenarios (from doer prospective)

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Basic information Exam structure q  Section A - multiple-choice questions - “choose the answer”

8 Q *2 marks = 16 marks

4 Q * 1 mark = 4 marks

ü  Knowledge based questions (“theory”)

q  Section B - scenario based questions - “write the answer”

4 Q * 10 marks = 40 marks

2 Q * 20 marks = 40 marks

100 marks

ü  The bulk of the questions will be discursive

ü  Some questions involve computation from time to time (materiality, ratios)

ü  Scenario based Q: no long questions; they may content more sub-requirements (e.g. 2-3) focused on specific topics (e.g. ‘audit risk‘, ‘completion and auditor’s reports’, ‘control deficiencies’ , ‘ethical issues’, ‘evidence’)


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Basic information

39% Worldwide pass rate


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Exam technique tips

Keys to success Planning your answer Understanding the verbs Most common errors How to pass?


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Keys to success

Knowledge

Time

Verbs


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Planning your answer

•  requirement verbs •  marks allocation •  assign time to finish

to keep the time

How many ideas? How much to write?

Analyze the requirements


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•  requirement verbs •  marks allocation •  assign time to finish to keep the time How many ideas? How much to write?

•  annotate the question paper

•  relate text to requirements

•  monitor number of points identified


Read scenario actively


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•  requirement verbs •  marks allocation •  assign time to finish to keep the time

How many ideas? How much to write?

•  annotate the question paper •  relate text to requirements •  monitor number of points identified

•  gain the maximum from each idea

•  go for easy marks •  state the obvious in

your answers •  use key words and

phrases Will the markers find and understand your ideas?


Present your answer

Read scenario actively


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Understanding the verbs

Marking schemes - > read marking schemes to understand the pattern of marks awarded

Ø  List – typically ½ mark per each listed idea/issue/matter

Ø  Identify and explain - typically 1/2 mark per identification

and another 1 to 1,5 mark per explanation

Ø  Discuss – typically 2 marks per well explained point highlighting

e.g. advantages/disadvantages or benefits/limitations


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Most common errors


Ø Not stating the obvious Ø Too general answers (not using information from the scenario) Ø  Incorrect terminology (use ACCA terminology) Ø Too much or too little in the answers (a wrong analysis of the

verbs in requirements) Ø Not answering all questions/sub-requirements (a wrong time

management) Ø Missing explanations and description of work done (why the audit

procedure is done, how it should be exactly performed,..) Ø Unclear presentation (poor handwriting, mixing different sub-

requirements, references to other answers, long paragraphs without structure and missing subheadings, a wrong format of the answer)

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How to pass?


PASS

Exam technique

Application of skills

Technical skills

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Step by step approach to two types of questions Audit Risks Audit issue and Type of Audit Report


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Audit Risks

You will be given •  Minutes from the meetings with Company’s representatives – a basis

for your analysis •  Financial extracts might be given – basic ratio analysis expected •  Combination of both (analytics/ratios and minutes)

Typical requirements •  Explain the audit risk and auditor’s response


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Audit Risks Business vs Audit Risk

Necessity to differentiate:

-  Business risk > anything which may prevent the Company to reach its objectives

“Put yourself into the shoes of management” -  Audit risk > risk that auditor issues inappropriate opinion

“Put yourself into the shoes auditor”


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Audit Risks Audit risk & Risk of material misstatement

Ø Risk that FS are materially misstated

Ø  Identify -> state the impact on the financial statements

Ø Use the formulation “There is a risk that balance XY is over/

understated”

Ø On a top of it there is additional risk of not detecting this

misstatement (detection component of audit risk)

Slide 19

ACCA F8 - Audit and Assurance

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Audit Risks Examples

Business risk Ø  Company operating in fast technologically developing industry -> in case the Company falls behind

with development there is a threat of loss of market share, customers and revenue decrease.

Ø  Company sells good to the customers (for credit) and the customers pay with the delays- > Company may have a problem to collect cash on time - > liquidity issue

Audit risk Ø  Company operating in fast technologically developing industry -> in case the Company falls behind

with development there is a threat that the Company will be left with unsalable inventory. There is a risk that Company will not follow requirements of IAS 2 Inventory and will not value the inventory in lower of cost or NRV. Inventory may be overstated.

Ø  The Company sells good to the customers (for credit) and the customers are not credible - > Company may have a problem to collect cash on time. There is an audit risk the receivables value is overstated and the provision for bad debts understated.

Ø  There is a pressure from management to complete the audit in short time period -> this may increase detection risk because auditor will have less time to perform audit procedures and may overlook material misstatement. Or Auditor accepted a new engagement > this may increase detection risk because the auditor doesn’t have experience with this client (may not be aware of all risks/issues/a higher risk the auditor overlook material misstatement)


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Audit Risks Question 1 Dec 14 (Section B – Q 2 Seagull)

Extract from the scenario

…….

The finance director has informed your audit manager that he expects increased inventory levels at the

year end. He also notified your manager that one of Eagle’s key customers has been experiencing

financial difficulties. Therefore, Eagle has agreed that the customer can take a six-month payment

break, after which payments will continue as normal. The finance director does not believe that any

allowance is required against this receivable.

…..

Required:

Explain FIVE audit risks, and the auditor’s response to each risk, in planning the audit of Eagle Heating Co. (Total: 10 marks)


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•  Calculate time available and time to finish - > 10 marks * 1.8 min/mark - > approx. 18 minutes -> make a note, when you have to finish

•  Requirements - How much to write / how many risks? ü Explain FIVE audit risks

-> 1 audit risk = 1 mark ü Explain auditor’s response to EACH identified risk

-> 1 response = 1 mark


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•  Start reading and annotate the text immediately (highlight the audit risks)

•  Check a number of the audit risk identified in the scenario and compare with the requirements

•  Start writing Audit risk # 1 and assign immediately appropriate Auditor’s response

•  Recommended format of presentation:


Audit Risk Auditor’s response

1. 1.

2. 2.

…. ….

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The finance director has informed your audit manager that he expects

increased inventory levels at the year end. He also notified your

manager that one of Eagle’s key customers has been experiencing

financial difficulties. Therefore, Eagle has agreed that the customer can

take a six-month payment break, after which payments will continue as

normal. The finance director does not believe that any allowance is

required against this receivable.


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Audit Risk Auditor’s Response

1. A key customer of Eagle has been experiencing financial difficulties and Eagle has agreed a six-month payment break. Finance director does not believe an allowance is required. If the customer is experiencing difficulties, there is an increased risk that the receivable is not recoverable and hence is overvalued. 2. ………………..

1. Discuss with the finance director why he feels an allowance is not required. Review whether any general allowance for uncollectable accounts is sufficient to cover the amount of this receivable. If the six-months payment break has now ended, review after date cash receipts for this customer to assess whether any payments have been made 2. ………………..


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Audit issue and Type of Audit Report

You will be given: •  Short description of the audit issues identified during the audit,

figures for materiality calculation •  1-3 short descriptions of audit issues Typical requirements: •  Discuss the issue (what is the problem) •  Explain the procedures / steps to form conclusion •  Describe the impact on the audit report


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Mark allocation (usually given to each scenario) §  One mark for well explained issue §  One mark for well described correct accounting treatment §  One mark for materiality calculation §  One mark for evaluation of the impact on the audit report §  One mark per well explained type of modification §  One mark per well described audit procedure (if it is required)


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Approach (following marks allocation)

1.  Issue - discuss/explain the problem 2.  Accounting treatment - treatment suggested by the accounting

standard; presentation & disclosure has to materially correct as well 3.  Materiality – calculation; state whether the matter is material 4.  Impact - material or pervasive 5.  Apply to scenario – adjustment needed? Impact on opinion? 6.  Modification - opinion / report 7.  Reason - modification


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Audit issue and Type of Audit Report June 2011 (a part of Q # 5)


You are the audit manager of Daffy & Co. The following additional issues have arisen during the course of the audit of Minnie Co. Profit before tax is $10m.

(i) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is $2·5m and the element charged to land only is $0·7m.

(4 marks)

(ii) Minnie Co’s computerised wages program is backed up daily, however for a period of two months the wages records and the back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these two months are $1.1m. (4 marks)

(iii) Minnie Co’s main competitor has filed a lawsuit for $5m against them alleging a breach of copyright; this case is ongoing and will not be resolved prior to the audit report being signed. The matter is correctly disclosed as a contingent liability. (4 marks)

Required:

Discuss each of these issues and describe the impact on the audit report if the above issues remain unresolved.

Note: The mark allocation is shown against each of the issues above. Audit report

extracts are NOT required.

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Audit issue and Type of Audit Report June 2011 Q # 5 (answer plan for issue (i))

4 marks = 4 points need to be explained Depreciation

1. Issue – Non-compliance with IAS 16 (PPE) – depreciation should be only be charged on buildings

not on land

2. Accounting treatment – depreciation from the land should be cancelled

3. Materiality calculation - the error represents 7% of PBT ($ 0.7 m / $ 10 m)

4. Impact is considered as material but not pervasive - if management doesn’t change FS, the qualified

audit opinion considered necessary

5. The opinion paragraph would be qualified “except for” because of material disagreement


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Audit issue and Type of Audit Report Full answer for issue (i)

ü  Depreciation has been provided on the land element of property, plant and equipment and this is

contrary to IAS 16 Property, Plant and Equipment, as depreciation should only be charged on

buildings > 1 mark

ü  The error is material as it represents 7% of profit before tax (0·7m/10m) and hence management

should remove this from the financial statements. > 1 mark

ü  If management refuse to amend this error then the audit report will need to be modified. As

management has not complied with IAS 16 and the error is material but not pervasive then a qualified

opinion would be necessary. > 1 mark

ü  A basis for qualified opinion paragraph would need to be included explaining the material

misstatement in relation to the provision of depreciation on land and the effect on the financial

statements. The opinion paragraph would be qualified ‘except for’ – due to material misstatement > 1

mark


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Preparation tips

Resources Approach to home study and revision


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Practice past exams questions and examiner’s reports

Start from the latest and work backwards http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/past-exam-papers.html


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Read technical articles

Start by reading the most recent articles http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles.html


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Further ACCA resources


Self study guides http://www.accaglobal.com/gb/en/student/your-study-options/choosing-to-self-study.html

ACCA Learning community https://www.accalearningcommunity.com/ ACCA - F8 Audit and Assurance aims and updates http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f8.html

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Approach to home study / revision

Study syllabus topics •  from study text •  from technical articles

Question practice •  analyze the requirements •  plan the answers on your own •  assess quantity / quality

•  check suggested solution and marking scheme •  read examiner’s comments


Good luck with your exams...

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Michaela Plucarova PwC’s Academy [email protected]

acca f8 – audit and...

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