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@jax4671 said:
I found question 1 pretty tough, I don’t think I found enough audit risks to meet the 19 marks!I guess if you had 7-9 audit risks, you could still make full marks depending on how far you went in explaining them. Plus, there must have been some marks for saying the components were significant, and of course the 4 professional marks for structure.
@roy234 said:
there was no emphasis of matter para needed in question 5. 17m was material.I think emphasis of matter only comes into play when we want to emphasise a note in disclosure. its not for material stuff
You are correct. There was no EoM needed. An EoM modifies the report and is included when a matter is fundamental to users’ understanding of the FS. The qualified opinion being pronounced by virtue of the misapplication of IFRS 15, this fact is already disclosed in the basis for qualified opinion paragraph, so any EoM would be superfluous here.
Q1: typical P7 question with audit risks to be considered in the planning of a group of companies. No workings required apart from showing the components were all significant to the group. This is not a P2 exam! Points: 58% subsidiary must be reassessed for control as may have been an associate (due to only 2 out of 5 board members being appointed by the Cactus group), non-coterminous year-end for Lilac Co, goodwill may have been improperly calculated (FVs not traced, NCIs wrongly allocated, deferred/contingent consideration may have been overlooked) and impairment analysis may not have been conducted. Other factors included the fact it was a first-time adoption of IFRS which presented challenges for the local accountant and the local auditor may similarly not be experienced with ISAs raising the risk of more audit procedures being required. The brand may also have not been depreciated / impaired. Point b) was about procedures on the brand: discuss if finite life and recalculate depreciation charge, obtain and review sales forecast to determine if impaired, analyse evidence of weak demand on markets, check FV correctly taken from consolidation (appraiser’s report or similar). Point c) working papers must not be shared and the other auditor must perform their own analysis themselves for going concern. No problem to provide advisory services as not auditor to the entity anyway but maintain information barriers between separate teams and must not assume management responsibilities: due diligence possible but management has to decide whether to buy or not.
Question 2: so many things wrong there: no subsequent event review up to date of auditor’s report (in breach of ISA 560): reassess and determine need to issue another audit report (with EoM paragraph). Other information (Chairman’s statement) was not read: do it and assess if inconsistency with financial statements. If need be, reissue report with “other information” paragraph. Audit report improperly dated. Not enough substantive tests may have been performed and controls were not reassessed (just check if they changed) at final stage. Manager completely out of control and should be reported to professional body to face disciplinary action. Assistants shouldn’t have been offering services as this has to be done by more experienced staff and following internal guidelines (cash bonus inappropriate: appraisal must be conducted internally) as well as independence assessment, many risks of self-interest and self-review, especially the part about procedures with an impact on financial statements (inventory counts). Assistants need to be trained and more quality reviews must take place inside the audit firm.
Question 4: lots to say but very little time by then. Warranty provision: check if uncertain timing and amount, must be best estimate of outflows, check if consistent with last year, was reduced by 30% but revenue / PBT stable. Trace to workings provided by management, review correspondence and lawyers’ confirmation to assess whether any claim. Discuss basis for decreasing provision. Inventory: only include direct attributable costs to bring to present location and condition, lower of cost or NRV. Absorption should be on normal activity basis not averages, plus consider if counts were performed. Cast inventory counts to schedules and inventory control ledger. Assess reasonable basis of NRVs (sale prices), and check if reflected. Trace workings for standard costing to sample of invoices including payrolls for direct hours. CGUs: impairment loss wrongly allocated to assets first (should have been against goodwill), consider if consistent basis for inclusion in CGU compared to last year. Review cash flows for reasonableness against budgets and management accounts post year-end, check if discounting is pre-tax and obtain document showing offer as indicate of FV and impairment should be to higher of FV less selling costs and value in use.
Question 5: more tricky in some respect. Part a) was about IFRS 15: control of the goods had not passed to the customer hence improper recognition of revenue as performance obligation is not met. Adjust inventory as well. Implications: FS materially misstated, audit report may have to be qualified (wrong but not pervasive). Explain basis: reference to standard, quantify and explain impact on profit or loss. First check with TCWG if happy to modify as must be given the chance first. Also evaluate management integrity due to finance director giving misleading information: reassess written representation and consider impact on audit report / further procedures. Part b) was about a report in respect of PFI: should have been limited assurance in negative form (not reasonable assurance in positive form), wording too supportive of management may expose audit firm to litigation especially as due to be presented to potential lender, include more disclaimers on liability. Missing date of report. Explicit reference to elements of PFI and period covered should have been made. Some contradictory / unprofessional wording about forecasts likely to be inaccurate.
Overall, it was very fair game and totally in line with previous exams and P7 requirements in general. The only real difficulty was to manage time as there was really a lot to say!