ACCA Exam-focused Kaplan’s vast classroom experience helps many students pass first time The books are designed to cover the whole syllabus and they reflect how topics are taught in the classroom, focusing on what will be required of you in the exam KAPLAN PUBLISHING UK Student-friendly Using accessible language and engaging formats to help you understand more complex areas, Kaplan simplifies the learning process to make it easier for you to succeed Written by our expert tutors All Kaplan study materials are written by our subject specialists, experienced tutors who teach the paper so they know what works for students and how best to deliver it ADVANCED AUDIT AND ASSURANCE (AAA) Innovative solutions More than just books, our study materials are supported by a wealth of free online resources, including testing and course assessments All accessible from our online learning environment MyKaplan All the resources have been designed to keep you on your study plan and help you pass first time EXAM KIT SEPTEMBER 2019 TO JUNE 2020 SITTINGS Detailed revision plans ACCA THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS ADVANCED AUDIT AND ASSURANCE (AAA) EXAM KIT - VALID FOR SEPTEMBER 2019, DECEMBER 2019, MARCH 2020 AND JUNE 2020 EXAMINATION SITTINGS ACCA Strategic Professional – Options Advanced Audit and Assurance (INT & UK) (AAA) EXAM KIT A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) British Library Cataloguing‐in‐Publication Data A catalogue record for this book is available from the British Library. Published by: Kaplan Publishing UK Unit 2 The Business Centre Molly Millar’s Lane Wokingham Berkshire RG41 2QZ ISBN: 978‐1‐78740‐419‐9 © Kaplan Financial Limited, 2019 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited, all other Kaplan group companies, the International Accounting Standards Board, and the IFRS Foundation expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. Printed and bound in Great Britain. Acknowledgements These materials are reviewed by the ACCA examining team. 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For further information, please visit www.frc.org.uk or call +44 (0)20 7492 2300 P 2 KA PLAN PUBLISHING CONTENTS Page Index to questions and answers P.5 Analysis of past papers P.9 Exam Technique P.11 Paper specific information P.13 UK variant specific information P.15 Kaplan’s recommended revision approach P.16 Kaplan’s detailed revision plan P.20 Section 1 Practice questions – Section A 1 2 Practice questions – Section B 45 3 Answers to practice questions – Section A 109 4 Answers to practice questions – Section B 271 5 Specimen Exam questions 533 6 Answers to Specimen Exam 543 7 References 573 This document references IFRS® Standards and IAS® Standards, which are authored by the International Accounting Standards Board (the Board), and published in the 2018 IFRS Standards Red Book. KA PLAN PUBLISHING P 3 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) Key features in this edition In addition to providing a wide ranging bank of real past exam questions, we have also included in this edition: An analysis of the recent new syllabus examination papers. Paper specific information and advice on exam technique. Our recommended approach to make your revision for this particular subject as effective as possible. This includes step by step guidance on how best to use our Kaplan material (Study Text, pocket notes and exam kit) at this stage in your studies. Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes and exam technique tips from our experienced tutors. Complementary online resources including full tutor debriefs and question assistance to point you in the right direction when you get stuck. You will find a wealth of other resources to help you with your studies on the following sites: www.MyKaplan.co.uk www.accaglobal.com/student Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details. Our Quality Co‐ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions. P 4 KA PLAN PUBLISHING INDEX TO QUESTIONS AND ANSWERS INTRODUCTION The exam format of Advanced Audit and Assurance changed in September 2018. Accordingly any older ACCA questions within this kit have been adapted to reflect the new style of paper and the new guidance. Where questions have been adapted from the original version, this is indicated in the end column of the index below with the mark (A). The marking schemes included are indicative schemes which have been approved by ACCA as being representative of the real exam except where indicated. One question in the kit is not a past exam question and not exam standard but has been included to provide greater syllabus coverage. Note that The specimen paper is included at the end of the kit. KEY TO THE INDEX PAPER ENHANCEMENTS We have added the following enhancements to the answers in this exam kit: Key answer tips All answers include key answer tips to help your understanding of each question. Tutorial note All answers include more tutorial notes to explain some of the technical points in more detail. Top tutor tips For all questions, we 'walk through the answer' giving guidance on how to approach the questions with helpful ‘tips from a top tutor’, together with technical tutor notes. These answers are indicated with the 'footsteps' icon in the index. KA PLAN PUBLISHING P 5 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) ONLINE ENHANCEMENTS Question debrief For selected questions, we recommend that they are to be completed in full exam conditions (i.e. properly timed in a closed book environment). In addition to the examiner’s technical answer, enhanced with key answer tips and tutorial notes in this exam kit, you can find an answer debrief online by a top tutor that: Works through the question in full Points out how to approach the question Discusses how to ensure that the easy marks are obtained as quickly as possible, and Emphasises how to tackle exam questions and exam technique. These questions are indicated with the 'clock' icon in the index. P 6 KA PLAN PUBLISHING INDEX TO QU ES TIO NS AND ANSWE RS Planning and conducting an audit 1 Redback Sports 2 Eagle Group 3 Bassett Group 4 Sunshine Hotel Group 5 Laurel Group 6 Zed Communications Group 7 Vancouver Group 8 Dali 9 Ted 10 Connolly 11 Stow Group 12 Grohl 13 CS Group Page number Question Answer Past exam (Adapted) 1 109 Dec 18 6 124 Sept 18 12 140 M/J 18 (A) 15 151 S/D 17(A) 19 162 M/J 17 (A) 22 172 S/D 16(A) 25 184 M/J 16 (A) 28 194 S/D 15 (A) 31 208 Jun 15 (A) 34 221 Dec 14 (A) 36 233 Dec 13 (A) 39 246 Dec 12 (A) 42 258 Jun 12 (A) 45 271 Dec 18 47 279 Sept 18 50 286 M/J 18 (A) 52 292 S/D 17 (A) 53 297 M/J 17 (A) 55 306 M/J 17 (A) 57 313 M/J 17 (A) 58 318 M/J 16 (A) 60 324 M/J 16 62 331 Jun 15 (A) 63 338 S/D 16 64 344 Jun 15 (A) 66 350 Dec 14 (A) 67 358 Jun 14 (A) 69 366 Jun 13 (A) 70 371 Jun 12 (A) Completion, review and reporting 14 Daley 15 Coram & Co 16 Brearley & Co 17 Basking 18 Magnolia Group 19 Osier 20 Rocket 21 Boston 22 Macau & Co 23 Darren 24 Thurman 25 Adder Group 26 Francis Group 27 Cooper 28 Poodle Group 29 Snipe KA PLAN PUBLISHING P 7 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) Other assignments 30 Jansen & Co 31 Vizsla 32 Rope 33 Hawk 34 Cheetah 35 Sanzio 36 Baltimore 37 Jacob 38 Moosewood Hospital 39 Newman & Co 40 Retriever 41 Lark & Co 42 Squire Professional and ethical considerations 43 Thomasson & Co 44 Weston & Co 45 Dragon Group 46 Tony Group 47 Spaniel 71 377 Sept 18 73 384 M/J 18 75 392 S/D 16 (A) 76 398 Jun 12 (A) 78 403 S/D 17 (A 79 410 S/D 15 (A) 81 417 Dec 13 (A) 83 425 Jun 11 (A) 84 431 M/J 17 85 437 Dec 10 (A) 87 444 Jun 13 89 451 Dec 11 (A) 90 459 Dec 12 (A) 92 467 Dec 18 93 473 Dec 14 (A) 94 481 Jun 09 (A) 96 490 Jun 15 (A) 97 495 Jun 13 (A) 98 502 S18 99 505 S/D 15 101 511 Jun 12 (A) 103 516 Jun 11 (A) 105 522 S/D 15 108 529 N/A UK Syllabus only 48 Krupt 49 Kandinsky 50 Hunt & Co 51 Butler INT Syllabus only 52 Kandinsky 53 Public sector organisations P 8 KA PLAN PUBLISHING ANALYSIS OF PAST PAPERS The table below summarises the key topics that have been tested in the new syllabus examinations to date. Specimen Paper Sept 18 March/ June 17 Sept/ Dec 17 March/ June 18 Sept 18 Dec 18 Regulatory Environment Regulatory framework including corporate governance Money laundering Laws and regulations Professional & ethical considerations Fraud and error Professional liability Quality control & practice management Advertising Tendering Professional appointments Planning & conducting an audit Risk assessment: Audit risk Business risk Risk of material misstatement Planning and materiality Professional scepticism Code of ethics Quality control Group audit situation Audit evidence: Sufficient/appropriate Specific procedures Analytical procedures Related parties Work of experts KAPLA N PUB L ISH IN G P 9 ANSWERS TO SPE C IMEN E XAM : S E CTI ON 6 (ii) Impact on auditor’s report When considering their opinion, the auditor must conclude whether the financial statements as a whole are free from material misstatement. In order to do this, they must consider whether any remaining uncorrected misstatements are material, either on an individual basis or in aggregate. Aggregate materiality position In aggregate, the misstatements have a net effect of $260,000 ($310,000 – $50,000), meaning that if left unadjusted, profit will be overstated by $260,000 and the statement of financial position overstated by the same amount. This is material to profit, at 10.4% of revenue, but is not material to the statement of financial position at less than 1% of total assets. Impact on auditor’s report The misstatements in relation to the share‐based payment scheme and restructuring provision are individually material to the statement of profit or loss and therefore management should be requested to make this adjustment as the statement of profit or loss is materially misstated if the adjustments are not made by management. According to ISA 705 Modifications to the Opinion in the Independent Auditor’s Report, the auditor shall modify the opinion in the auditor’s report when the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement. The type of modification depends on the significance of the material misstatement. In this case, these misstatements in aggregate are material to the financial statements, but are unlikely to be considered pervasive even though they relate to a number of balances in the financial statements as they do not represent a substantial proportion of the financial statements. This is supported by the fact that the adjustment is not material to the statement of financial position and it is therefore unlikely that the auditor will conclude that the financial statements as a whole are misleading. Therefore a qualified opinion should be expressed, with the auditor stating in the opinion that except for the effects of the matters described in the basis for qualified opinion paragraph, the financial statements show a true and fair view. The basis for qualified opinion paragraph should contain a description of the matters giving rise to the qualification This should include a description and quantification of the financial effects of the misstatement. The remaining uncorrected misstatement in relation to the inventory allowance is, individually, immaterial to the financial statements and although management should be encouraged to amend all misstatements, failure to amend the inventory allowance will have no impact on the auditor’s report. It should be emphasised to management that failure to correct the allowance will have an impact on future periods. If management intends to leave uncorrected misstatements, written confirmation of their immaterial nature should be obtained via a written representation. KA PLAN PUBLISHING 561 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) Examiner’s comments This question scenario was set at the completion stage of the audit of Bradley Co, a significant new audit client, with the auditor’s report due to be issued in the next week. Requirement (a) provided some information in the form of a comment made by the audit senior, who indicated that there may have been some problems with the performance of the audit. The concerns raised included the lack of a detailed review of the final version of the financial statements and the chairman’s statement had been discussed with the finance director but no further work had been conducted. The justification for not carrying out these tasks was the conclusion by the audit manager that the audit was relatively low risk. The requirement asked candidates to explain the quality control and other professional issues raised by the audit senior’s comments. Candidates did not perform well on this requirement, which was somewhat surprising as in the past questions on quality control issues have been well attempted. Only a minority of candidates were able to identify that the audit of a significant new client could not be classified as low risk, and that a final review would be needed on the financial statements at the completion stage of the audit. Very few candidates however mentioned that final analytical review is a requirement of ISA 520 Analytical Procedures and even fewer could explain why the final review is so important prior to the issuance of the auditor’s report. In respect of the work performed on the chairman’s statement, few candidates identified that there was a lack of documentation of the work performed, but most at least understood the auditor’s responsibilities in relation to the chairman’s statement. Generally the answers to this requirement were not made relevant to the information given in the scenario and instead mentioned general features of quality control such as the need for supervision and review. This will earn minimal credit, as marks are severely limited when answer points are not related to the scenario. Many answers discussed at length the reporting implications of uncorrected inconsistencies in the chairman’s statement, but discussing this in a lot of detail was not answering the question requirement. Requirements (bi) and (bii) dealt with the evaluation of misstatements and their potential implications for the auditor’s opinion and report. The information was presented as a schedule of proposed adjustments to uncorrected misstatements in relation to three issues – a share‐based payment scheme, a restructuring provision, and slow‐moving inventory. In each case the auditor’s proposed correcting journal was presented, along with an explanation of the audit findings and audit conclusion on the matter. Requirement (bi) asked for an explanation of the matters to be discussed with management in relation to each of the uncorrected misstatements, for nine marks, and requirement (bii) asked candidates to justify an appropriate audit opinion assuming that management does not make the proposed adjustments. Both requirement (bi) and (bii) were not well attempted. Answers were much too brief for the marks available and unfortunately many candidates could not competently demonstrate that they understand the topic of auditors’ reports. Firstly in relation to the share‐based payment, the required financial reporting requirements were not well understood, with most candidates suggesting that a provision should be created rather than an adjustment made to equity, which was disappointing as this detail was actually given in the question. In relation to the restructuring provision, many candidates did not consider the specific requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets in relation to restructuring provisions, and instead applied the general recognition criteria for provisions to the scenario. The slow‐moving inventory was better dealt with, as most candidates could explain that inventory should be measured at lower of cost and net realisable value. On the whole, the only marks that many candidates were awarded in this requirement were for materiality calculations. 562 KA PLAN PUBLISHING ANSWERS TO SPE C IMEN E XAM : S E CTI ON 6 There seems to be very little knowledge or understanding of ISA 450 Evaluation of Misstatements Identified during the Audit with almost no candidates differentiating between judgmental misstatements and misstatements caused by a breach of International Financial Reporting Standards requirements. The answers in relation to the impact on the auditor’s report were also disappointing. Only the very best candidates considered the aggregate effect of the misstatements in discussing the audit opinion. Many attempted to aggregate the misstatements themselves, coming to the wrong total, even though this had been given in the question. Weaker candidates simply stated that each of the material misstatements would result in a qualified ‘except for’ opinion. Some candidates suggested that the inventory adjustment should be discussed in an Emphasis of Matter or Other Matter paragraph because it was immaterial, clearly demonstrating a complete misunderstanding of when it is appropriate to use these paragraphs. Candidates must learn when an Emphasis of Matter paragraph should be used; it is not a substitute to be used when the candidate cannot decide between a modified and an unmodified audit opinion. Candidates must appreciate that the process of justifying an audit opinion and explaining the implication for the auditor’s report is a core area of the syllabus. It is regularly examined and it should not come as a surprise to see this topic in the exam. The presentation of information in this question was in a new style, but this should not have made the question more difficult, in fact having information presented in the form of journals with totals given should make understanding the question easier. Further the structure of the requirement into two distinct sections should have helped candidates understand that they were being asked to consider the issues first and then to aggregate the effect of the misstatements before assessing the impact on the auditor’s report. Marking scheme (a) Explanation of quality control and other professional issues Generally up to 1 mark for each point explained: – Insufficient audit evidence obtained in relation to legal provision – Possible limitation of scope imposed by management and intimidation threat – Matter is immaterial but the issue is potential understatement of provisions – Further procedures should be performed, necessary to exercise professional scepticism – Audit manager’s instructions are not appropriate and increase detection risk – Analytical review mandatory at the final review stage – Objective to ensure that financial statements consistent with auditor’s understanding – A quick look unlikely to be sufficient – The fact that it is deemed low‐risk does not negate the need for analytical review – Lack of analytical review increases audit risk – Other information must be read with objective of identifying material inconsistencies – Manager to be questioned to see what work has been done and what documentation exists – Likely that chairman’s statement needs to be properly read and audit conclusion documented – Audit manager lacks understanding of ISA requirements – Audit manager may need further training – Time pressure increases detection risk and impacts on the quality of the audit performed Maximum KA PLAN PUBLISHING Marks ––– 10 ––– 563 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) (b) (i) (ii) Total Explain matters to be considered in forming audit opinion Generally 1 mark for each point explained: – ISAs require auditor to understand management’s reason for not adjusting misstatements – ISAs require auditor to communicate impact of unadjusted misstatement on opinion Share‐based payment: – Materiality assessment including appropriate calculation – Fall in share price not valid reason for not recognising expense and credit to equity – Material misstatement due to breach of financial reporting standards, encourage management to make necessary adjustment Provision: – Materiality assessment including appropriate calculation – Provision recognised too early – Material misstatement due to breach of financial reporting standards – Consider if any additional information to explain recognition of provision – Encourage management to make necessary adjustment Inventory allowance: – Materiality assessment including appropriate calculation – Discussion of difference between clearly trivial, immaterial and material items – Misstatement is a matter of judgment – Management should still be encouraged to make adjustment but no impact on audit opinion if not done Maximum Impact on auditor’s report: Generally up to 1 mark per point explained: – Determination of aggregate impact of adjustments and combined materiality – Material misstatement and modified opinion necessary – Discussion and conclusion as to whether opinion should be qualified or adverse – Basis for qualified opinion paragraph to include a description and quantification of the financial effects of the misstatement Maximum ––– 10 ––– ––– 5 ––– 25 ––– 564 KA PLAN PUBLISHING ANSWERS TO SPE C IMEN E XAM : S E CTI ON 6 3 WATERS Walk in the footsteps of a top tutor Top tutor tips Part (a) requires a discussion of the arguments for and against providing non‐assurance services to audit clients. A good discussion should look at both sides of the argument. Matters to consider before accepting an engagement should be straightforward as this question has been asked on many previous exam papers. Think about what might cause the accountancy firm to decline the work e.g. level of risk, insufficient resources. Examination procedures need to focus on assessing the reasonableness of the assumptions used to prepare the forecast. Remember that these transactions have not happened as of yet so you will not be able to inspect invoices, etc. Instead, think about how the client determined the forecast figures and assess whether that is reasonable. Analytical procedures and inquiries will be the main procedures to use. There may be some documents you can inspect such as quotations for new equipment. In the final part of the question apply your knowledge of auditor’s reports to the assurance report on the forecast to identify the contents of the report. Make sure you address the second element of the requirement which asks for an explanation of the level of assurance provided by the report. (a) Non‐assurance services The issue of auditors providing non‐assurance services to audit clients has been topical for many years, and there are many arguments for and against their outright prohibition. IESBA conducted a review of the Code of Ethics for Professional Accountants (the Code) and made a number of changes to the guidance, tightening the services which can be provided, with a particular focus on public interest entities. The amendments mean that the Code no longer permits the provision of normally prohibited non‐assurance services in emergency situations to public interest clients, such as certain bookkeeping and taxation services. The provisions in the Code relating to management responsibility were strengthened to ensure better understanding of what constitutes a management responsibility. It continues to be emphasised in the Code that auditors must not assume management responsibility when providing non‐ assurance services to audit clients. The Code, while not providing an exhaustive list, sets out a number of examples of activities which may result in management responsibility. A number of new activities have been explicitly added, including being involved in the strategic direction of the company, hiring of personnel and reporting to those charged with governance on behalf of management, and thus effectively making these activities prohibited in line with the Code. KA PLAN PUBLISHING 565 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) There are varying views on whether it is appropriate for auditors to provide non‐ assurance services to their clients. For example, governance regulations in some jurisdictions can be relatively lenient. For example, the UK Corporate Governance Code requires the audit committee to review and monitor the external auditor’s independence and objectivity. This includes the audit committee evaluating and approving the provision of non‐audit services by the audit firm. This assessment would include consideration of whether the audit firm was complying with the relevant ethical guidance. In contrast, the US Sarbanes‐Oxley Act takes a stricter approach and prohibits audit firms from providing other services to audit clients. Those arguing in favour of outright prohibition suggest that this would be a simple way to eliminate the threats to objectivity, which the provision of non‐assurance services to audit clients creates. The IESBA quote states that several threats to objectivity are created when performing such services. A self‐review threat arises when the auditor, in performing additional services for the client, performs work which impacts on the financial statements, meaning that the auditor is reviewing their own figures, or matters over which they have provided guidance or advice. An example could be where the audit firm performs a valuation service on a matter which is material to the financial statements. Depending on the nature of the additional service, an advocacy threat may arise, where the audit firm is perceived to be supporting the interests of their client. This could happen, for example, if the audit firm advises their client in relation to a legal dispute or tax tribunal. In particular, non‐audit services can be very lucrative, leading potentially to a self‐ interest threat. The greater the volume and financial significance of the non‐ assurance services provided, the greater the risk that the auditor will have relationship and economic reasons not to challenge management’s views and positions with the necessary degree of professional scepticism. It has also been argued that outright prohibition would benefit the market and competition within the audit market, allowing smaller audit firms to provide the services which larger firms would no longer be able to offer to their audit clients or conversely allow smaller firms to ascertain a larger proportion of the external audit market. However, there are also many arguments which support auditors providing these additional services. By having the same firm provide the audit and the non‐assurance service, the client benefits in two ways. The audit firm will already possess a good knowledge and understanding of the client and its operating environment, resulting in deeper insight and a better quality service being provided. This will then lead to cost benefits, as the non‐assurance service will be provided in a more efficient way. Audit firms would also argue that participation in services such as due diligence reviews and forensic investigations allows the audit firm to understand their clients’ business and risks better and to obtain insights into management’s objectives and capabilities which are useful in an audit context. This may reduce audit risk. Many non‐assurance services can be safely provided as long as steps are taken to assess potential threats to objectivity, and to adequately address those risks, for example, by the use of separate teams to provide audit and non‐assurance services. However, in the case of public interest entities, such as listed companies, the IESBA has taken the view that no safeguards are available to reduce the risks to an acceptable level in the case of some non‐assurance services and it continues to emphasise that the auditor shall not become involved in activities which result in them assuming any form of management responsibility. 566 KA PLAN PUBLISHING ANSWERS TO SPE C IMEN E XAM : S E CTI ON 6 (b) (i) Before accepting the engagement to examine Waters Co’s prospective financial information, there are several matters to be considered. Ethical matters A significant matter is whether it is ethically acceptable to perform the engagement. The engagement would constitute a non‐assurance service provided to an audited entity which may create self‐interest, self‐review and advocacy threats to independence. Advocacy threat In this case, the advocacy threat may be deemed particularly significant as Hunt & Co could be perceived as promoting the client’s position to the bank. The engagement should only be provided if safeguards can be used to reduce the threat to an acceptable level, which may include: Having a professional accountant who was not involved with the non‐ assurance service review the non‐assurance work performed or otherwise advise as necessary. Discussing ethical issues with those charged with governance of the client. Using separate teams to work on the audit and on the PFI engagement. Assuming management responsibilities The request by the finance director to assist him in presenting the final version of the strategic plan to the board also needs to be considered. The request to be involved in confirming that the plan is consistent with competitors suggests that if the board is not satisfied the company may not move forward with the plan or apply for the bank funding. If the engagement partner is involved, this would likely result in the firm taking on a management responsibility as they are essentially supporting the strategic direction suggested by management. Further, by attending the presentation the partner could be seen to be communicating with the board on behalf of management. Both of these activities are now referenced as management activities in the Code and therefore the firm should advise the finance director that Hunt & Co may be able to perform the review for the purposes of the bank but the firm will not be able to take part in the presentation. Requirements of ISAE 3400 The Examination of Prospective Information As well as ethical matters, ISAE 3400 The Examination of Prospective Information requires that certain matters are considered before the engagement is accepted. Scope of the work Hunt & Co must also consider the specific terms of the engagement. For example, the firm will need to clarify whether the bank has requested an assurance report to be issued, and what exact information will be included in the application to the bank. It is likely that more than just a forecast statement of profit or loss is required, for example, a forecast statement of cash flows and accompanying narrative, including key assumptions is likely to be required for a lending decision to be made. KA PLAN PUBLISHING 567 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) Intended use of the information ISAE 3400 also requires that consideration should be given to the intended use of the information, and whether it is for general or limited distribution. It seems in this case the assurance engagement and its report will be used solely in connection with raising bank finance, but this should be confirmed before accepting the engagement. Period covered by the PFI The period covered by the prospective financial information and the key assumptions used should also be considered. ISAE 3400 states that the auditor should not accept an engagement when the assumptions used are clearly unrealistic or when the auditor believes that the prospective financial information will be inappropriate for its intended use. For example, the assumption that the necessary capital expenditure can take place by September 20X6 may be overly optimistic. Resources and skills The firm should also consider whether there are staff available with appropriate skills and experience to perform the PFI engagement, and the deadline by which the work needs to be completed. If the work on the cinemas is scheduled to be completed by September 20X6, presumably the cash will have to be provided very soon, meaning a tight deadline for the engagement to be performed. (ii) 568 Examination procedures Agreement that the accounting policies used in preparing the forecast statement of profit or loss are consistent with those used in historical financial information and comply with IFRS Standards. The forecast should be cast to confirm accuracy. The time frame of the work to be carried out needs to be discussed with management, with enquiry being made to ascertain how the work can be carried out in such a short period of time, for example, will all cinemas be closed for the period of refurbishment? This will help to confirm the accuracy of the revenue and expenses recognised. Review of market research documents and review of prices charged by competitors showing new technology films to support the assumption regarding increase in price and consumer appetite for the films. Analytical review followed by discussion with management on the trend in revenue, which is forecast to increase by 22.9% and 7% in the years to 30 April 20X7 and 20X8 respectively. Consider the capacity of the cinemas and the number of screenings which can take place to assess the reasonableness of projected revenue. Analytical review of the composition of operating expenses to ensure that all expenses are included at a reasonable amount. In 20X6, operating expenses are 80.7% of revenue, but this is forecast to reduce to 73.4% in 20X7 and to 69.8% in 20X8, indicating understatement of forecast expenses. KA PLAN PUBLISHING ANSWERS TO SPE C IMEN E XAM : S E CTI ON 6 Review the list of operating expenses to ensure that any loss to be recognised on the disposal of old equipment has been included, or that profit on disposal has been netted off. Quotations received from potential suppliers of the new technology should be reviewed to verify the amount of the capital expenditure and therefore that depreciation included in the forecast statement of profit or loss appears reasonable. Recalculation of depreciation expense and confirmation that depreciation on the new technology has been included and correctly calculated and agrees to the forecast statement of financial position. Recalculation of finance cost to ensure that interest payable on the new bank loan has been included, with confirmation of the rate of interest to bank documentation. Review of capital expenditure budgets, cash flow forecasts and any other information to accompany the forecast statement of profit or loss for consistency, and confirmation that the amount planned to be spent on the cinemas can be met with the amount of finance applied for as well Waters Co’s own cash balance. (iii) Report on prospective financial information ISAE 3400 contains requirements on the content of a report on prospective financial information, stating that it should contain, in addition to a title, addressee and being appropriately signed and dated: – Identification of the prospective financial information. – A reference to the ISAE or relevant national standards or practices applicable to the examination of prospective financial information. – A statement that management is responsible for the prospective financial information including the assumptions on which it is based. – When applicable, a reference to the purpose and/or restricted distribution of the prospective financial information. – An opinion as to whether the prospective financial information is properly prepared on the basis of the assumptions and is presented in accordance with the relevant financial reporting framework. – Appropriate caveats concerning the achievability of the results indicated by the prospective financial information. Level of assurance In terms of the assurance level, the report will include a statement of negative assurance as to whether the assumptions provide a reasonable basis for the prospective financial information. This is a lower level of assurance than that given in an audit of historical financial information. The assurance provided is limited due to the future orientation of the information subject to review, and because the nature of the investigative procedures performed are less detailed and substantive in nature. KA PLAN PUBLISHING 569 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) 570 Examiner’s comments The scenario centred on Waters Co, an audit client, that had approached your firm to provide a report on prospective financial information which would be used by the company’s bank in making a significant lending decision. The amount advanced would be used to upgrade the cinemas operated by Waters Co and a forecast statement of profit or loss was provided in the scenario, along with some of the assumptions used in its preparation by management. Requirement (bi) asked candidates to explain the matters to be considered by the audit firm before accepting the engagement to report on the prospective financial information. The quality of answers here was quite good, with almost all candidates making a reasonable attempt to discuss relevant matters including ethical issues, resource availability, the scope of the engagement and the nature of the assumptions used in the forecast. Where candidates scored less well on this requirement it was often due to lack of application to the scenario. A minority of answers amounted to little more than a bullet point list, often posed as questions (e.g. 'are there any ethical matters to consider', 'who is the report for', 'why is the report needed'), and while these are matters to consider the lack of any application to the scenario limits the amount of credit that can be awarded. Requirement (bii) asked for examination procedures to be used in respect of the forecast statement of profit or loss, assuming the engagement is accepted. This was also quite well attempted by many candidates, who used the information provided to generate specific and relevant enquiries and other procedures. Weaker answers tended to write very vague comments which were not tailored to the scenario or explained, or were just incorrect, such as. 'obtain representations', 'agree forecast to audited financial statements', 'check whether assumptions are realistic', 'perform analytical procedures'. KA PLAN PUBLISHING ANSWERS TO SPE C IMEN E XAM : S E CTI ON 6 Marking scheme (a) (b) Discussion on non‐assurance services Generally 1½ marks for each point of discussion: – IESBA Code has been amended to restrict the provision of non‐ assurance services especially to public interest entities in emergency situations – Examples – bookkeeping and tax no longer allowed services – Code contains enhanced guidance on management responsibilities – Examples – involvement in recruitment and strategic direction of the company – Different approaches used in different jurisdictions, e.g. UK comply or explain approach, US legislative approach – Arguments against provision are based on threats to objectivity, e.g. self‐review threat, advocacy threat, self‐interest threat (1 mark each explained with relevant example) – Arguments in favour of provision focus on audit firms’ enhanced understanding of client, and the firms being in the best position to offer the services to their clients – Safeguards may be used to reduce threats to an acceptable level in some situations Maximum (i) Matters to consider before accepting the engagement Up to 1½ marks for each matter explained: – Independence – types of threats raised – Appropriate safeguards – Request for assistance with presenting the strategic plan is a management responsibility – No safeguards can reduce threat to an acceptable level – Competence and time frame – Elements to be included in the application and intended use – Key assumptions and time period covered Maximum (ii) Examination procedures 1 mark for each described procedure. Also allow 1 mark for relevant analytical procedures used in the explanation of procedures. – Agreement that the accounting policies used in preparing the forecast information are consistent with those used in historical financial information – The forecast should be cast to confirm accuracy – Review of capital expenditure forecasts – Quotations received from potential suppliers of the new technology should be reviewed – The time frame of the work to be carried out needs to be discussed with management – Review of market research documents and review of prices charged by competitors – Analytical review followed by discussion with management on the trend in revenue – Revenue is forecast to increase by 22.9% and 7% in the years to 30 April 20X7 and 20X8 respectively – Analytical review of the composition of operating expenses – In 20X4, operating expenses are 80.7% of revenue, but this is forecast to reduce to 73.4% in 20X7 and to 69.8% in 20X8 – Recalculation of depreciation expense and agreement to forecast statement of financial position – Recalculation of finance cost to ensure that interest payable with confirmation of the rate of interest to bank documentation Maximum KA PLAN PUBLISHING Marks ––– 8 ––– ––– 7 ––– ––– 6 ––– 571 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) (iii) Total Content of the report ½ mark for each relevant content element identified (up to 2 marks) and up to 2 marks for discussion of the level of assurance provided. – Content elements: reference to relevant ISAE or national standards statement of management responsibility reference to purpose and distribution of report opinion on basis of assumptions and application of relevant financial reporting framework caveats on achievability of results – Assurance is based on negative assurance – Assurance limited by future orientation of the subject matter and nature of procedures used Maximum ––– 4 ––– 25 ––– 572 KA PLAN PUBLISHING Section 7 REFERENCES The Board (2018) IFRS 15 Revenue From Contracts with Customers. London: IFRS Foundation. The Board (2018) IFRS 16 Leases. London: IFRS Foundation. KA PLAN PUBLISHING 573 A A A : ADV ANCED A UD I T A ND A SSURAN CE ( IN T & UK) 574 KA PLAN PUBLISHING ACCA Exam-focused Kaplan’s vast classroom experience helps many students pass first time The books are designed to cover the whole syllabus and they reflect how topics are taught in the classroom, focusing on what will be required of you in the exam KAPLAN PUBLISHING UK Student-friendly Using accessible language and engaging formats to help you understand more complex areas, Kaplan simplifies the learning process to make it easier for you to succeed Written by our expert tutors All Kaplan study materials are written by our subject specialists, experienced tutors who teach the paper so they know what works for students and how best to deliver it Innovative solutions AUDIT AND ASSURANCE (AA) More than just books, our study materials are supported by a wealth of free online resources, including testing and course assessments All accessible from our online learning environment MyKaplan All the resources have been designed to keep you on your study plan and help you pass first time ACCA EXAM KIT SEPTEMBER 2019 TO JUNE 2020 SITTINGS Detailed revision plans THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS AUDIT AND ASSURANCE (AA) EXAM KIT - VALID FOR SEPTEMBER 2019, DECEMBER 2019, MARCH 2020 AND JUNE 2020 EXAMINATION SITTINGS ... A catalogue record for this book is available from the British Library. Published by: Kaplan? ?Publishing UK Unit 2 The Business Centre Molly Millar’s Lane Wokingham Berkshire RG41 2QZ ISBN: 978‐1‐78740‐419‐9 ©? ?Kaplan? ?Financial Limited, 2019 ... Please consult your appropriate professional adviser as necessary. Kaplan? ? Publishing Limited, all other Kaplan? ?group companies, the International Accounting Standards Board, and the IFRS Foundation expressly ... Paper specific information P.13 UK variant specific information P.15 Kaplan? ??s recommended revision approach P.16 Kaplan? ??s detailed revision plan P.20 Section 1 Practice questions – Section A