ATC f8 materials f8 AA (int)session00 j08

ATC INTERNATIONAL ACCA PAPER F8 AUDIT AND ASSURANCE (INTERNATIONAL) STUDY SYSTEM No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, editor or publisher This training material has been published and prepared by Accountancy Tuition Centre Limited 16 Elmtree Road Teddington TW11 8ST United Kingdom Editorial material Copyright  Accountancy Tuition Centre (International Holdings) Limited, 2008 All rights reserved No part of this training material may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without permission in writing from the Accountancy Tuition Centre Limited SESSION 00 – CONTENTS Session Page Audit and other assurance engagements 0101 Regulatory environment – statutory audit 0201 Regulatory environment – corporate governance 0301 Professional codes of ethics and conduct 0401 Auditor appointment 0501 Documentation 0601 Planning 0701 Business risk and internal control 0801 Understanding the entity, audit risk and engagement risk 0901 10 Audit materiality 1001 11 Fraud & error, laws & regulations 1101 12 Computer information systems (CIS) 1201 13 Reliance on control effectiveness & substantive testing 1301 14 Audit considerations relating to entities using service organisations 1401 15 Audit evidence 1501 16 Analytical procedures 1601 17 Accounting estimates 1701 18 Using the work of an expert 1801 19 Audit sampling 1901 20 Management representations 2001 21 Computer-assisted audit techniques 2101 22 Non-current assets 2201 23 Inventory 2301 24 Trade receivables 2401 25 Loans, bank and cash 2501 26 Trade payables, accrued expenses and provisions 2601 27 Small businesses and not-for-profit organisations 2701 28 Communications with management and those charged with governance 2801 29 Audit finalisation 2901 30 The auditor’s report on financial statements 3001 31 Going concern 3101 32 Review assignments and reports 3201 33 Internal audit 3301 34 Considering the work of internal audit 3401 (iii) SESSION 00 – CONTENTS Appendices 35 Appendix – Documentation techniques 3501 36 Appendix – Transaction cycles 3601 37 Appendix – Audit programs 3701 38 Appendix – Review programme 3801 39 Appendix – Data sources and records 3901 40 Appendix – Glossary of terms 4001 Index 4101 UPDATING NOTE The IASB reissued IAS ‘Presentation of Financial Statements’ in September 2007 Amendments to the old IAS are mainly to presentation and terminology and have been reflected throughout the study system and question banks Although IAS does not become effective until periods beginning on or after January 2009, earlier adoption is permitted ACCA operates a six month rule in its examinations based on issue date, whereby accounting standards will not be examined until six months have passed from their date of issue Therefore the revised IAS falls to be examined from the June 2008 examinations Whilst these changes only refer to IFRS and are not yet reflected within ISA, terminology has been changed for consistency throughout the F8 materials, e.g when dealing with the “old” IAS terminology used within ISA The main changes can be summarised as follows: Balance sheet Statement of financial position Balance sheet date End of the reporting period (note that end of the reporting period may also be referred to as the “year end” within the study system and question bank) Income statement Cash flow statement Statement of comprehensive income (but see below) Statement of cash flows (IAS is renamed) Events after the balance sheet date renamed) Events after the reporting period (IAS 10 is The Statement of Comprehensive Income basically consists of two elements – an income statement (the same as the old IAS format) plus other comprehensive income comprising, for example, gains on revaluations, cash-flow hedges, translation of foreign operations and actuarial gains (all of which are still analysed within a statement of changes in equity) Effectively, the only element that may be dealt within F8 will be the gains on revaluations Thus the Statements of comprehensive income used throughout F8 are the same as the old IAS Income statements (iv) SESSION 00 – SYLLABUS Introduction This Study System has been specifically written for The Association of Chartered Certified Accountants Paper F8 Examination, Audit and Assurance (International) It provides comprehensive coverage of the core syllabus areas and is designed to be used both as a reference text and interactively with the ATC Learning System to provide you with the knowledge, skill and confidence to succeed in your ACCA studies SYLLABUS Position of the paper in the overall syllabus Paper F8 assumes knowledge and understanding developed by Papers F3 Financial Accounting (FA) and, to some degree, F4 Corporate and Business Law (CL) In particular, the IFRSs examined by Paper F3 could form the basis for questions on the auditing procedures in respect of those IFRSs Candidates who have studied the papers in order (as recommended by the ACCA) will have recently revised their knowledge of F3 IFRS through Paper F7 Financial Reporting (FR) If F7 has not been recently studied, candidates are advised to review their knowledge of IFRS as examined by F3 Paper F8 provides the knowledge and understanding of the audit process which is then developed in Paper P7 Advanced Auditing and Assurance (AAA) In addition, they will also understand why an audit is required for Paper P1 Professional Accountant (PA) Aim To develop knowledge and understanding of the process of carrying out the assurance engagement and its application in the context of the professional regulatory framework Objectives On completion of this paper, candidates should be able to: A Explain the nature, purpose and scope of assurance engagements including the role of the external audit and its regulatory and ethical framework B Explain the nature of internal audit and describe its role as part of overall performance management and its relationship with the external audit C Demonstrate how the auditor 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 D Describe and evaluate information systems and internal controls to identify and communicate control risks and their potential consequences, making appropriate recommendations E Identify and describe the work and evidence required to meet the objectives of audit engagements and the application of the International Standards on Auditing (v) SESSION 00 – SYLLABUS F Evaluate findings and modify the audit plan as necessary G Explain how the conclusions from audit work are reflected in different types of audit report, explain the elements of each type of report Overview The Audit and Assurance syllabus is essentially divided into seven areas The syllabus starts with the nature, purpose and scope of assurance engagements, including the statutory audit, its regulatory environment, and introduces professional ethics relating to audit and assurance It then leads into internal audit, including the scope of internal audit as well as the differences between internal audit and external audit The syllabus then covers a range of areas relating to an audit of financial statements These include planning and risk assessment, evaluating internal controls, audit evidence, and a review of the financial statements The final section then deals with reporting, including statutory audit reports, management reports, and internal audit reports Audit framework and regulation (A) Internal audit (B) Planning and risk assessment (C) Internal control (D) Audit evidence (E) Review (F) Reporting (G) (vi) SESSION 00 – SYLLABUS Detailed syllabus A B C D E Audit Framework and Regulation The concept of audit and other assurance engagements Statutory audits The regulatory environment and corporate governance Professional ethics and ACCA’s Code of Ethics and Conduct Internal audit Internal audit and corporate governance Differences between external and internal audit The scope of the internal audit function Outsourcing the internal audit department Internal audit assignments Planning and risk assessment Objective and general principles Understanding the entity and knowledge of the business Assessing the risks of material misstatement and fraud Analytical procedures Planning an audit Audit documentation The work of others Internal control Internal control systems The use of internal control systems by auditors Transaction cycles Tests of control The evaluation of internal control components Communication on internal control Audit evidence The use of assertions by auditors Audit procedures The audit of specific items Audit sampling and other means of testing Computer-assisted audit techniques Not-for-profit organisations (vii) SESSION 00 – SYLLABUS F Review Subsequent events Going concern Management representations Audit finalisation and the final review G Reporting Audit reports Reports to management Internal audit reports Approach to examining the syllabus The syllabus is assessed by a three-hour paper-based examination, consisting of five compulsory questions (no choice) The bulk of the questions will be discursive but some questions involving computational elements will be set from time to time The questions will cover all areas of the syllabus Question will be a scenario-based question worth 30 marks Question will be a knowledge-based question worth 10 marks Questions 3, and will be worth 20 marks each Q1: Q2: Q3: Q4: Q5: Number of marks Scenario based, multi-part question on audit procedures 30 Short knowledge based multi-part question based on ISA and key areas 10 } 20 } Multi-part questions based on the whole syllabus 20 } 20 _ 100 _ There will be 15 minutes of reading time allowed before starting the examination proper The advice from the examiner is to use the majority of this time to read through and think about (plan) Question Additional information Internal audit can be examined within any of the five questions There is no set quantitative element for internal audit Candidates need to be aware that questions involving knowledge of new examinable regulations will not be set until at least six months after the last day of the month in which the regulation was issued The Study Guide provides more detailed guidance on the syllabus Examinable documents are listed in the “Exam Notes” section of “student accountant” (viii) SESSION 00 – SYLLABUS The table below has been adapted from the examiner’s article in Student Accountant March 2007 explaining his approach to examining Paper F8 Candidates are well advised to download this article from the ACCA’s website and carefully study the rest of it’s content Objective Examiner’s comment Explain the nature, purpose, and scope of assurance engagements, including the role of the external audit and its regulatory and ethical framework (A) Questions may focus either on the factual areas of the legal aspects of auditing, or on the application of ethical standards in scenario-based questions Explain the nature of internal audit Describe its role as part of overall performance management, and its relationship with external audit (B) The work of internal audit could feature in any question in the exam However, there may not always be an internal audit/review question If internal audit is mentioned, it is most likely to appear in Question 1, as part of a question on audit procedures, or in Question as part of a question on more specialised audit areas Demonstrate how the auditor 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) Questions in this area relate to the planning of the audit They normally feature aspects of engagement risk, or the work of the auditor in establishing the audit plan Describe and evaluate information systems and internal controls to identify and communicate control risks and their potential consequences, and make appropriate recommendations (D) This objective, and the next, relate to the testing of controls, and the collection of audit evidence using compliance and substantive testing as appropriate ISAs make a clear distinction between compliance and substantive procedures, and this split will be followed in exam questions Reporting of recommendations regarding weaknesses in internal controls, or other issues found in an audit, will be examined in terms of the production of a management letter Identify and describe the work and evidence required to meet the objectives of audit engagements and the application of ISAs (E) Questions are likely to focus on the application of substantive procedures to either statement of comprehensive income or statement of financial position areas It is quite likely that both income and statements of financial position will feature in Question with, for example, transaction and asset/liability testing procedures being included in the same question (eg sales and receivables) (ix) SESSION 00 – SYLLABUS Objective Examiner’s comment Evaluate findings and modify the audit plan as necessary (F) This is potentially the most difficult area of the syllabus As many candidates will not have been involved in audits, they will probably be unclear on how to deal with findings or errors which have an impact on the audit plan The overall approach to questions in this area will therefore be to explain the additional testing required as a result of errors being found during the application of audit procedures Explain how conclusions from audit work are reflected in different types of audit report, explaining the elements of each type of report (G) The emphasis of questions in this area will be on explaining reports rather than having to draft them Extracts will normally relate either to an explanation of how a standard report can be modified, or (in a limited number of cases) supplying appropriate wording for the modification only To be clear, candidates will not be expected to provide the wording for an entire audit report (as per ISAs) Knowledge of the content of ISAs in the 700 series will be expected Questions will potentially provide extracts of audit reports, and require candidates to identify where ISA guidance has not been followed (x) SESSION 00 – SYLLABUS Examinable documents International Standards on Auditing [ISAs](Note 1) Number 200 210 230 240 250 260 300 315 320 330 402 500 501 505 510 520 530 540 560 570 580 610 620 700 701 710 720 Title Preface to International Standards on Quality Control, Auditing, Assurance and Related Services Glossary of Terms International Framework for Assurance Assignments Objective and General Principles Governing an Audit of Financial Statements Terms of Audit Engagements Audit Documentation (Revised) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements (Redrafted) Consideration of Laws and Regulations in an Audit of Financial Statements Communications of Audit Matters with Those Charged with Governance Planning an Audit of Financial Statements (Redrafted) Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment (Redrafted) Audit Materiality The Auditor’s Procedures in Response to Assessed Risks (Redrafted) Audit considerations relating to Entities Using Service Organizations Audit Evidence Audit Evidence – Additional Considerations for Specific Items External Confirmations Initial Engagements – Opening Balances Analytical Procedures Audit Sampling and Other Means of Testing Audit of Accounting Estimates Subsequent Events Going Concern Management Representations Considering the Work of Internal Auditing Using the Work of an Expert The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements (Note 2) Modifications to the Independent Auditor’s Report Comparatives Other Information in Documents Containing Audited Financial Statements Study Session in which covered App 1 11 11 28 10 8, 9, 13 14 15 23 & 29 24 29 16 19 17 29 31 20 34 18 30 30 29 29 (xi) SESSION 00 – SYLLABUS International Auditing Practice Statements [IAPSs] 1000 1013 1014 Inter-bank confirmation Procedures (Note 3) Electronic Commerce: Effect on the Audit of Financial Statements Reporting by Auditors on Compliance with International Financial Reporting Standards 13 30 International Standards on Assurance Engagements [ISAEs] Number Title 3000 Assurance Engagements other than Audits or Reviews of Historical Financial Information Study Session in which covered International Standards on Review Engagements [ISREs] Number Title 2400 Engagements to Review Financial Statements (previously ISA 910) Study Session in which covered 32 Other guidance ACCA’s “Professional Codes of Ethics and Conduct” The UK “Combined Code (of the Committee on Corporate Governance)” as an example of corporate governance best practice – www.frc.org.uk/combined.cfm Relevant articles, past examinations and examiner’s reports as published in Student Accountant and on the ACCA’s website – www.accaglobal.com Notes (1) Candidates are advised that questions will be based on the principles and good practice set out in the International Standards on Auditing Most questions will involve some form of application of knowledge to a specific situation or scenario Candidates will be required to understand auditing techniques and know how these techniques apply to specific situations Candidates must be able to explain the reasons why the procedures they suggest are carried out and what they achieve (2) Candidates should be aware of the nature and meaning of the auditor’s report and should be able to discuss the contents and wording of the auditor’s report Students would not be asked to reproduce the auditor’s report in full in an exam question, but they may be requested to prepare the explanatory paragraphs for inclusion in the report particularly in situations leading to the issue of a modified report (3) Candidates will not be examined on the audit of banks This document is relevant to the extent that it applies to the confirmation of financial and business relationships between banks and their non-bank customers (xii) SESSION 00 – SYLLABUS International Accounting Standards [IASs] The accounting knowledge that is assumed for Paper F8 is the same as that examined in Paper F3 Therefore students studying for Paper F8 should refer to the IFRSs listed under Paper F3 Number Title IAS IAS IAS IAS Presentation of Financial Statements Inventories Statement of Cash Flows (excluding group aspects) Accounting Policies, Changes in Accounting Estimates and Errors Events after the Reporting Period Property, Plant and Equipment Revenue Provisions, Contingent Liabilities and Contingent Assets Intangible Assets (insofar as it relates to research and development) IAS 10 IAS 16 IAS 18 IAS 37 IAS 38 Study Session in which covered General 23 Note (1) 29 29 22 23 & 29 26 22 Notes (1) Statement of cash flows is not referred to in either the Paper F8 syllabus nor the ACCA Study Guide for F8 (xiii) SESSION 00 – EXAMINATION TECHNIQUE EXAMINATION TECHNIQUE Pre-examination preparation Read the examiner’s report Apply the advice given within past reports when doing practice questions Far too many students fail because of poor examination technique Read the advice given below and apply when attempting questions from the study question bank, revision question bank and any past examination papers you have taken from the ACCA students’ website Time allocation Use the majority of the 15 minutes reading time to read through and think about your answer to Question 1, the scenario based question Divide your time in proportion to the marks on offer To allocate your time multiply the marks for each question by 1.8 minutes A 20 mark question should take you 20 × 1.8 = 36 minutes Determine how much time to spend on each part of a question This is particularly important to Paper F8 as each question is likely to have at least 2, but probably 3, or even sub-requirements Stick strictly to this time allocation The first marks on each sub-requirement are likely to be the easiest to gain So don’t be tempted to spend more time on one part (eg because you know more about that topic) instead of getting on with the next part Instruction v content Before attempting a question, and in order to impress the marker, you need to understand what the examiner requires Requirements (and parts thereof) specify an “instruction” and the “content” called for Instructions “Describe” = set out the characteristics of “Consider” = examine carefully/give attention to “State” = express in words “Explain” = make plain, clarify, elucidate “Discuss” = examine critically, give ideas on “Suggest” = propose/put forward “List” = make a list/catalogue of like thinks “Calculate” = make a calculation Others – “identify”, “comment”, “contrast”, “conclude”, “give” Pre-fix “briefly” = a warning not to go into too much depth (xiv) SESSION 00 – EXAMINATION TECHNIQUE Content (Audit) work (Audit) tests (Manual) procedures (Further) investigations (Further) action        What would you do? Call for actions Controls = control procedures − − − − − − “Ideas list” inspect/observe/review obtain enquire/ask circularise analyse/compare calculate/compute “Ideas lists” ISA 315 - risk assessment procedures, control environment + control activities Application controls v IT controls − − − − Completeness Accuracy Validity (existence) How? – calls for explanation Reasons (why?) – calls for justification Think “because … /due to ….” Matters/factors = “things” of relevance that you would take account of making a decision when Specified techniques eg CAATs, analytical procedures Arguments against/limitations/weaknesses – use “negative” words like “no”, “poor”, “difficult” Arguments for/advantages/benefits – use “positive” words like “good”, “easy” Other contents call for specified knowledge eg criteria/circumstance General question approach Familiarisation Read the requirements carefully to identify Instructions e.g “outline, discuss ” Content e.g “the audit tests, the advantages ” Vehicle/format e.g “report, memo, letter ” Do not answer the question you think the examiner should have asked in preference to the question printed on the exam paper (xv) SESSION 00 – EXAMINATION TECHNIQUE Do not write everything you know about a topic and hope the examiner will select the points which are relevant to the question This “scatter gun” tactic is a waste of valuable time and you may receive no marks Plan your answer – the markers always look for evidence of thought before writing Make brief notes of your starting point, areas to cover and finish Read any scenario within a question quickly to identify company name, key dates (eg year end), nature of business, performance Read through again slowly and actively, ie highlighting key points, or noting implications in the margin, and noting points on a plan of your answer Draw together your technical knowledge and the points from the scenario Do this by thinking and rearranging your plan, before you write up your answer Plan your answer Recall the technical knowledge you have learned relating to the content from the requirements and your quick read of the scenario Identify key headings from the requirement or your plan around which to structure your answer when you write it up Use the mark allocation to decide how many points you need to address As a general guide work to mark per relevant point clearly expressed and explained (eg point, explain, example) Remember that you must give reasons why particular actions are taken and not just say “do it”, eg not say “inspect purchase invoice” without saying exactly what you are inspecting on the invoice and why (always refer to a particular assertion) Whilst mark per sentence, is often used by candidates as a guideline, if that sentence is not relevant to the question or does not “add value” no marks will be given Ensure that each sentence you write contains a relevant point Avoid fitting as many points as possible into one sentence! Present your answer A structured answer with clearly identifiable and separable points is always preferable to a continuous flow of text Indicates that you have planned your answer Use headings, indentation and bullet points to give your answer structure and to make it more digestible for the marker (xvi) SESSION 00 – EXAMINATION TECHNIQUE Write effectively in a style which responds to the examiner’s requirements (eg start with actions for audit work and tests) Maintain a sentence structure and keep sentences short and succinct Try to achieve a good standard of English Avoid playing ‘hunt the answer’ – it is in there somewhere, good luck (to the marker) in finding what you want! NEVER seek to write an “essay” nor provide an answer just in note form Review past examination papers of the examiner to appreciate their style and how they expect you to structure your answer The examiner wants candidates to pass, but he cannot pass them if they not help themselves Examination technique is half the battle to pass this paper GOOD LUCK! (xvii) SESSION 00 – EXAMINATION TECHNIQUE (xviii) ... IFRS as examined by F3 Paper F8 provides the knowledge and understanding of the audit process which is then developed in Paper P7 Advanced Auditing and Assurance (AAA) In addition, they will also... Effectively, the only element that may be dealt within F8 will be the gains on revaluations Thus the Statements of comprehensive income used throughout F8 are the same as the old IAS Income statements... interactively with the ATC Learning System to provide you with the knowledge, skill and confidence to succeed in your ACCA studies SYLLABUS Position of the paper in the overall syllabus Paper F8 assumes