ACCA P7 lectures Download P7 notes
Since the clarity project in 2009, all ISAs now conform to a standard format:
- Application and other explanatory information
ACCA P7 Lecture Index
1 Rules of Professional Conduct
2 Professional Responsibility and Liability
3 Regulatory Environment
4 Practice Management
5 Audit Process
7 Evaluation and Review
8 Audit of Financial Statements
9 Group Audits
10 The external audit report
11 Audit Related Services (Non Audit Services)
12 Assurance Services
13 Prospective Financial Information (PFI)
14 Internal Audit
15 Outsourced Finance and Accounting Functions
16 Social and Environmental Audits
Fraud and error
Fraud comprises both the use of deception to obtain an unjust or illegal financial advantage and intentional mis-representations affecting the financial statements by one or more individuals among management, employees or third parties.
Fraud is also an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage.
Fraud risk factors are events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud.
Error would be unintentional mistakes in financial statements (including the omission of an amount or disclosure).
When planning the audit, auditors should assess the risk that fraud or error may cause the financial statements to contain material misstatements. Based on this risk assessment, auditors should design their procedures so that they have a reasonable expectation of detecting material misstatements arising from fraud or error.
Responsibility for the prevention and detection of fraud rests with the management and those charged with governance.
They should create a culture of ethics and honesty within the entity.
This culture should be actively reinforced by active oversight by those charged with governance by:
Considering the potential for controls to be over-ridden
Considering other inappropriate practices eg aggressive earnings management
It is more difficult to detect misstatements arising from fraud rather than from error
Fraud can involve sophisticated and well-organised schemes
- Deliberate failure to record transactions
- Intentional mis-representations
- Collusion – particularly at management level
The auditor’s ability to detect fraud depends on a combination of factors
- skill of the fraudster
- frequency and extent of the manipulation
- relative size of the amounts manipulated
- degree of collusion
- seniority of those involved
The auditor should enquire of management about:
Management’s assessment of the risk that the financial statements may be materially misstated due to fraud including:
- Extent, and
- Frequency of these assessments
management’s procedures for identifying and responding to risks of fraud including:
- specific risks identified by management
- risks brought to their attention by others, and
- classes of transactions, account balances or disclosures for which a risk is likely to exist
communications by management with those charged with corporate governance concerning the processes adopted for the identification and response to risks
communications by management with employees concerning their views about business practices and ethics
discussions with the internal auditors
Procedures when there is an indication that fraud or error may exist:
When auditors become aware of information which indicates the existence of fraud or error, they should obtain an understanding of the nature of the event and the circumstances in which it has occurred. They should aim to gain an understanding of the possible effects on the financial statements.
The auditors should document their findings and communicate them to the appropriate level of management. This would usually be the board of directors or the audit committee.
Reporting to third parties
Auditors should also consider whether the matter should be reported to a proper authority in the public interest (e.g. regulatory or enforcement agencies).
If, after obtaining legal advice, the auditors conclude that the matter ought to be reported to an appropriate authority in the public interest, they should notify the directors in writing of their view and, if the entity does not report the matter or is unable to provide evidence that the matter has been reported, they should report it themselves.
Where a suspected or actual instance of fraud casts doubt on the integrity of the directors, auditors should make a report direct to the proper authority in the public interest without delay, informing the directors in advance.
The following matters should be taken into account when deciding whether disclosure is justified in the public interest:
- the extent to which the suspected or actual fraud is likely to affect members of the public
- whether the directors have rectified the matter or are taking, or are likely to take, effective corrective action.
- the extent to which non-disclosure is likely to enable the suspected or actual fraud to recur.
- the seriousness of the matter; and
- the weight of evidence and the degree of the auditor’s suspicion that there has been an instance of fraud.
An audit firm owes a duty of care to their client, the entity.
They may also owe a duty of care to third parties who rely upon the financial statements. In recent years the question of whether the auditor owes a duty of care to third parties has been controversial and the subject of considerable media attention.
An auditor may be liable in tort to a third party where:
- a duty of care exists (legal neighbours/proximity);
- that duty has been breached (ie auditor has been negligent)
- third party has relied on the auditor’s work
- financial loss has been suffered
- the loss suffered was caused by the third party’s reliance on the auditor’s negligent work.
The Caparo case
The key case is the Caparo Industries case. In 1987, Caparo Industries plc brought an action against two of the directors of Fidelity plc and their auditors, Touche Ross. During 1984, Caparo invested in and eventually acquired control of Fidelity plc. They alleged that the financial statements they had relied upon overstated the profits. The case went to the House of Lords where it was decided that proximity did not exist. The Lords stated that an essential element of proximity is that “the defendant knew that his statement would be communicated to the plaintiff, either as an individual or a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction”. The claim by Caparo Industries was rejected.
The ADT case (1996)
ADT acquired control of Britannia Securities Group who were audited by Binder Hamlyn. Before ADT made a bid, they had a meeting with one of the partners from Binder Hamlyn. At this meeting, the partner was asked if he stood by the results of the 1989 audit. After the take-over, ADT alleged that these financial statements were misstated and sued Binder Hamlyn for £65 million. They believed that the meeting between themselves and the partner created proximity. The judge agreed and Binder Hamlyn were ordered to pay the £65 million in damages together with £40 million in interest.
Limiting auditors’ liability
The auditing profession is concerned about the extent of their liability to third parties. They argue that they are unable to get sufficient insurance cover to meet the level of claims.
The following suggestions have been put forward as possible methods of reducing liability.
Limited Liability Partnership
Incorporation would protect the partners from personal bankruptcy. However, the firm itself could be forced into liquidation. Further, there could be adverse tax implications and the firm would need to publish financial statements and be subject to an audit.
Limited Liability Partnerships (LLPs) would permit the partners to avoid personal liability for the debts of the firm. Legislation has been enacted allowing LLPs in the UK.
It has been suggested that auditors should be able to limit the amount of their liability for an individual audit. The maximum amount could be based on some multiple of the audit fee. This is currently not permitted for audit work by the Companies Act 2006 but it is permitted in other countries such as Germany.
This term is used to describe the difference between the expectations of those who rely upon audit reports, concerning audit work performed, and actual work performed.
The expectation gap arises due to:
lack of competence,
lack of independence, and
lack of education
The profession’s response to accusations of a lack of competence are:
rules on the issue of practicing certificates
post qualification educational requirements (CPE and CPD)
monitoring of audit activity
disciplinary procedures following investigation of apparent audit failures
It may be difficult to separate lack of competence and lack of independence. Technical competence and honesty or independence are clearly inter-related.
Misconduct refers to acts which are likely to bring discredit upon an ACCA member, the ACCA or the profession itself.
Convictions relating to the personal life of members and students such as obtaining money or goods by false pretences, forgery, theft and other offences involving dishonesty amount to misconduct.
The Investigations, Disciplinary and Appeals committees will decide each case on its own merits.
Penalties imposed will reflect the view which the committees take in respect of the individual offences and the seriousness of the matter.
Professional indemnity insurance (PII)
Members or firms who wish to hold an ACCA practising certificate must hold PII and fidelity guarantee insurance (FGI) in respect of all partners, directors and employees.
PII must provide cover in respect of all civil liability incurred in connection with the conduct of the firm’s business. FGI must include cover against any acts of fraud or dishonesty by any partner, director or employee in respect of money or goods held in trust by the firm.
For example, in the UK the lower limit of indemnity on PII in respect of each and every claim shall be:
21/2 times the relevant total income subject to a minimum of 100,000GBP and a maximum of 1.5 million GBP
Insider dealing involves the buying or selling of shares by a person connected with a company who, when doing so, is in possession of specific information which is not generally known but which would be likely, if made public, to have a significant effect on the market price of the shares.
Clearly an auditor is in possession of such information. It would be unethical for an auditor to use that information for personal gain.
A process whereby the proceeds of criminal activity are converted into assets appearing to have a legitimate origin
Usually involves 3 distinct phases
Placement of the funds into legitimate business activity
Transfer of money from business to business ( or place to place ) to conceal its original source
Integration – the money takes on the appearance of having come from a legitimate source
Proceeds of Crime Act 2002 seeks to control money laundering by the creation of 3 categories of criminal activity
Laundering ( maximum 14 years prison and / or fine )
Failure to report ( maximum 5 years prison and / or fine )
Tipping-off ( maximum 5 years prison and / or fine )
The offence of failure to report relates only to individuals acting in the course of business – for example, accountants
No disrespect to you Sir but are we able to get the lecturer for P2, to do the P7 lectures as well?
Highly unlikely – we each have different specialist subjects and I don’t believe that auditing lies within the range of the P2 tutor
Hi P7 Tutor:
1. Are current notes relevant to attempt March 2018?
2. Is any changes in syllabus?
3. Audio and video of lectures does not match. Mean to say, notes pages does not move ahead as you teach next portion.
Please, guide me!
In future, where your question is not directly related to the subject matter of the lecture, please post your question on the Ask ACCA Tutor forum
Pages and lectures don’t match because of new inserts into the notes (or possibly sections of notes extracted)
It should not be beyond the wit of an intelligent mortal to sort out the pairings between notes and lectures!
There has been no change in the syllabus since December 2017 (if that’s what you’re asking) The notes are substantially up-to-date with only very few minor amendments to put through
Are current notes relevant for March 2018? Yes, substantially
Burkina Faso? Of all the places? 🙂
Are these lectures still relevant in 2017?
I have a question regarding the Caparo case, I will think that the proximity test was meant as the Auditor should have known that the Caparo decision to acquire share was based on the Audited F/S.
If the shareholder as a whole sued, will a duty of care exist
Hi, is the video not moving or it’s just audio? Does this mean the lecturer did not write anything on the notes?
Hi, it was never intended to be just audio but I find that there’s little for me to write when I’m in full flow with a P7 topic
Just sit back and let my dulcet tones wash over you 🙂
Where a suspected or actual instance of fraud casts doubt on the integrity of the directors, auditors
should make a report direct to the proper authority in the public interest without delay, informing the
directors in advance.
my question is that , by informing the directors in advance is it not the case of tipping off? auditors tell them in advance that they are going to report there misconducts to the higher authorities?
Tricky area, this. A lot depends upon the strength of the suspicions because you’re about to overstep the confidentiality line using public interest as your justification.
I’m not sure that you can glibly call upon / fall back on “public interest” in every situation where the auditor comes across a suspected fraud
I’d like you to give me a much fuller quote from the text from which you are quoting
In some situations, for example the client is underdeclaring cash receipts and the auditor has proof of this happening, I believe that appropriate action would be to confront the client with your suspicions and evidence and persuade the client that the only realistic future course of action is to confess to the appropriate authorities – in this case the Inland Revenue
If the client refuses to see reason, then point out that it is your professional duty to make the disclosure (Proceeds of Crime Act – I believe)
After that bit of conversation only the most stupid of clients will not cooperate!
it is from the notes itself.
but ya i got your point tell me if i got it right,
it depends on the given scenario in the exam. i think while auditing the best course of action would be to ask the directors/ management to correct or justify their mistakes as it could be unintentional .. but in other cases like whistle-blowing tipping off will be considered as crime.
thank you 🙂
Having re-read the offending note, I could easily see that the directors should not be informed before disclosure to the appropriate authorities!
Where the fraud is by personnel of lower status than directors, then the directors should be informed. But if it’s the directors themselves that are suspected of committing the fraud, then informing them before disclosure could well be tipping-off as well as potentially very dangerous to the continuing existence of the auditor!
I think I’ll re-read the source of that note and check that advanced warning really IS recommended although anomalously I can equally well see that notification should be done
In my earlier response, I started with “Tricky area”
I stand by that comment!
I will require some information on the below
What are the factors which will determine whether or not an auditor is negligent?
forgive me,,but i didnt understand if money laundering offence in respect of ‘failure to report” also apply to management only or to external auditors???
is money laundering offence in respect of ‘failure to report” also apply to external auditors
I am very new to opentuition & so far found it very useful to aid my study. I’d like to ask whether the podcast only covers the lecture partially or fully? With reference to the lecture notes, there are still points about Bribery, etc after Money Laundering.
Thanks for your kind explanation. Have a pleasant day!
Hi welcome to opentuition – let’s all hope that it works for you. When the lectures were recorded, the Bribery Act had not been passed (at least, if it had been passed, it was not yet examinable) Apart from that, there has been so little major change in the syllabus content that I felt that it was not really worth re-recording that lecture and the Act itself is adequately covered in the notes
I don’t believe that there is much else of significance not covered but would appreciate it if you could bring to my attention any other areas that you discover.
am unable to watch it……………………………..?
great lecturer I believe this will help me to pass my exmas