ACCA P7 lectures Download P7 notes
Objectives of an audit
The primary objective of the statutory audit is to give an opinion on the truth and fairness of the financial statements of an entity.
During an audit the auditor will assess the risk attaching to the entity together with an assessment of the internal controls in operation. These procedures will assist the management in reducing risk and improving performance.
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
What are the limitations of the statutory audit?
The auditor will also perform substantive tests on the transactions and balances appearing in the financial statements. In the earlier auditing paper, consideration was given to some of the “easier” audit areas. Let’s look at some of the more exotic areas!
The audit of inventory and construction contracts
Inventory is normally a significant asset of any manufacturing company and is an item that has a direct impact on the profit reported. Therefore inventory is normally a risky and material balance which requires considerable audit effort. The audit of inventory was covered in preparation for the earlier auditing paper, but we need to look again at some of the considerations concerning inventory.
Inventory should be valued at the lower of cost and net realisable value. There are many methods available for the estimation of the cost of an item of inventory. These include FIFO, LIFO, AVCO and standard cost. ( LIFO is no longer an acceptable method!)
Where standard costs are used, what factors would you consider before accepting them as an appropriate basis for the estimation of cost?
A long term contract is generally a contract entered into for the design, manufacture or construction of a single substantial asset, or the provision of a service, where the time taken is such that the contract activity falls into different accounting periods.
The major risks attaching to such contracts are as follows:
the costs incurred to date may be misstated
the stage of completion may not be accurate leading to errors in the profit recognised in the financial statements
estimates of future costs may be inaccurate
invoices issued and cash received to date may be incorrectly calculated
the account receivable may be irrecoverable
During the audit of Mumbai Crafts Ltd, a shipbuilder, you are provided with the following information relating to a long term contract that the entity is involved in:
|Costs to date||$80m|
|Estimated costs to complete||$50m|
|Stage of completion||60%|
|Progress payments received||$71m|
Describe the audit work that you would perform on this contract.
The audit of deferred tax
Auditors should obtain sufficient appropriate audit evidence that the deferred tax provision is correctly calculated.
IAS 12 states that deferred tax should be calculated on a full provision basis.
The following substantive procedures would be performed:
- review the tax computation to identify timing differences at the year end.
- recalculate the timing difference and the deferred tax calculation on each item ensuring that the correct tax rate was used.
- prepare a reconciliation of the tax charge in the statement of comprehensive income.
- check the notes to the financial statements to ensure that the disclosure of deferred tax is fairly presented.
The audit of Statements of Cash Flow
An audit opinion covers the cash flow statement.
The audit work required is as follows:
trace and reconcile all details to the working papers.
obtain or prepare a supporting analysis of items, such as tax payments and dividends paid, that do not already appear in the working papers.
cross check the amount of any items (eg depreciation) that appear elsewhere in the financial statements.
The audit of leases
The auditors should ensure that leased assets are correctly classified in the financial statements. The following procedures would be performed:
- obtain a schedule of leases brought forward from last year
- review the lease agreement for each leased asset to determine whether it is a finance lease or an operating lease.
- confirm to board minutes that each lease was authorised.
- recalculate the interest on each finance lease.
- physically verify the existence of assets held under finance lease.
- recalculate depreciation on leased assets.
- check the notes to the financial statements to confirm that correct disclosure is given regarding leased assets.
And what happens when some customer pays cash and the seller ‘forgets’ to give a receipt?
Have you ever lived in a black-economy environment?
please iam new comer in this site so please i need help on how to find material and ask some question to tutor
what are the different between IFRS 16 and IAS 17 accounting for lease in
No problem, John. You seem to be coping very well
If you want to be sure of getting a response from me, post your questions on the Ask ACCA Tutor page and I shall get back to you – I only rarely look at the ‘recent comments’ section
can you please tell me what are other standards which have recently been updated or reviewed other thn IFRS 15.
None- that I’m aware of – but IAS 17 leases is soon to be replaced by IFRS 16 – not yet examinable but the Exposure draft is examinable – current issues
Considering from January 2015 to 2016, till date, right ?
i can`t find IFRS 15 notes, please help
Why isn’t this on the Ask ACCA Tutor forum?
You’re correct, there is no IFRS 15 update in the P7 notes … but there IS a comprehensive note in the F7 course notes – chapter 24 starting on page 133
Read that and, whilst doing so, think of how you would audit the issue of Revenue from contracts with customers
You mentioned a term when talking about Construction Contracts, relating it back to F6 days. “It doesn’t have to be a 5 or a 10 year project. It could be just a 6 months project or a 3 months project. It just “…..” the year end.
What was that term? I haven’t done F6 so I’m not familiar.
The word is ‘straddles’
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