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Hi Guys, I have just finished my paper. Was quite a tough one. How did you find the questions? What were your expectations and were you swept way by any of the questions?
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Hi Meldrick
I think iot was a fair paper to be honest. It was there for the taking. Q1a) was the most challenging part as you hard to grind out the marks experially the NCI’s and consolidation of the group companies
It wasnt too bad. I believe candidates who fail this one is to their own doing as the exmainer was very consistent with P7
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Agree, it was tough… Hope for the best..
Good luck to all! Hope we passed 🙂
Hard to stay on track and not slip off from what was asked. Hard to manage time, because so much to write on vague/debatable questions. The non-audit services provided by 3 audit assistants was weird. They are non-audit services, ok. But sort of acceptable. Not much risk for independence, but from an ethical point – the manager’s attitude is wrong. But again, sort of normal and so usual in reality. From my large audit practice (7 years) + 7 years in “real sector” roles – something that certainly done very often. So I don’t know what the examiner wanted to hear.No definitive answer to that.
Performance audit/audit of performance on Q3 was something i must have missed during my study/revision, so went for Q4 and Q5. Q4 and Q5 were reasonable I think.The question with bad quality audit. The one with no subs. events review and audit partner signing off before the FS date. Too many screw-ups with this audit. But what action to take? The audit opinion is signed and issued. Recall it if smth. is seriously wrong?
And finally: in my opinion 30% of success to this exam is your ability to do tons of structured and eligible HANDWRITING – something that not many of us do in real life. Would be so much easier with a keyboard. Esp. cause its all words.
I don’t hunk there’s a requirement to calculate NCI. Broadly, risk of misstatement of goodwill be affected.
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Question 1 asked about audit risks relating to planning of audit strategy.
Is this not different to audit plan?
Therefore in my answer I referred to the timing of the audit, objectives, consistency of accounting policies, communication to component auditors, year end date as one of sub YE was different, goodwill, fair value assumptions…beside consolidation procedures.
Please correct me if I am wrong.It seemed Q1 a) was a P2 question. Never seen that one in the P7 past papers.
The rest of the paper was reasonable.
Got only one question.
What IS the difference between ‘performance audit’ and ‘audit of performance information’?
I screwed it up big time on Q1. Three acquisitions: 1 Jan, 1 Mar, 1 Apr. Group year end 31 July… except that for some reason I had the group year end as 30 June… so all my workings for attributable profit for group year end and materiality were all out. Had to start again when I realised it, by which time we were a good 30 mins into the exam.
Didn’t really recover from that and it all just went downhill from there.
I think Q5 was the lesser of the evils in this exam.
Q4 was my other option although that turned out to be harder than it looked.
All round complete disaster for me.
I started with Q1 (a) but when i discovered that there was not much to say (not that it wasn’t but due to lack of my knowledge) I moved on and finished other questions quite satisfactorily. I’m not sure if I’ll pass.
I have few questions with regards to Question 4, there were 3 sections:
1) Inventory – some F5 stuff related to overhead etc
2) Impairment
3) Warranty provisionWhat is your view about this question? I mean how you attempted this question.
Question 5 (a) was about revenue recognition was an interesting if you notice. Customer is not able to take the delivery or doesn’t want to accept the delivery of items due to construction work but how this machinery ended up in a warehouse? I mean who advised to store these items there and who pays for it? big question mark right?
My answer was on these lines, if customer had placed the order for a machinery, items were delivered on time then even though one of the conditions was that risk is only transferred after acceptance of the delivery, why the seller to be punished for something which was out of his control?
if delivery was delayed then it is serious risk because then customer will later on come up with warehouse bill as well.
My opinion was, if it is seller’s fault means entity being audited then revenue should be reversed if not reversed then qualified opinion ‘except for’ para.
but if it was due to lacking at buyers’ end then no modifications need to done except emphasis of matter para (‘maybe’).
Q4.
Inventories: I wrote about it being a significant risk because the calculation of it was complex, especially since WIP was involved – which is a risk in itself due to the subjective nature of the calculation. Mentioned IAS 2 and for audit evidence needing basically all documentation that went into the calculation – payroll, production schedules and I can’t remember the rest now.
Impairment: I wrote about it being correct to have the impairment review as per IAS36 since there was the indicator that the outlets may not be worth their carrying amount anymore and the $9m impairment recognised should be apportioned in full against goodwill to start with, then the remainder to the outlets on the proportional basis of which outlets’ sales have dropped the most. I’m right about the goodwill first, but I’m not sure about the rest of it. For evidence I wrote about verifying the drop in sales by outlet and documentation on the methology of calculating the impairment.
Warranties: I wrote about IAS37 allowing provisions for warranties for returned goods although it wasn’t particularly material to the financial statements. For evidence I think I said stuff about documentation on the basis that the provision is made and the value of actual returns to compare against the provision.
That’s the gist of my answer at least. How did you approach it?
Q5.
My argument was that actual contract with the buyer would have to be scrutinised to ascertain at which point the seller’s obligation had been completed under IFRS 15, and therefore revenue recorded.
The director was saying that the obligation was fulfilled on delivery… but it seemed that the contract said that the consignment had to be inspected by the customer first, which suggested to me that the revenue had been recorded before it should have been and if so then an emphasis of matter para should go in the report if not resolved.
Inevntories – pretty much like it. It is very subjective and evidence on same lines as you did.
Impairment – I think treatment was wrong because recoverable value was only 123.5 i.e. 125 – 1.5 so there is $4.5 million difference which was material to PBT. This should be adjusted if management doesn’t adjust then opinion needs to be qualified.
Evidence – Get copy of offers which they have received from potential buyers
Salesforecast figures (I don’t remember, why? maybe to calculate the management’s forecast to establish value in use etc.).I actually didn’t mention anything about goodwill impairment apportionment to CGU – due to time pressure it just skipped my mind 🙂
Warranties – I wrote something similar as you did.
@Fidget said:
Q5.which suggested to me that the revenue had been recorded before it should have been and if so then an emphasis of matter para should go in the report if not resolved.
Yeah due to $17m being material to FS therefore emphasis of matter was definitely needed even if we agree that revenue stays in SPoL. I think I missed it, can’t remember exactly now, seems blurred. I prepared P7 in 3 days’ time everything looks blurred to me therefore I’m so confused 😛
i guess the report was qualified with except for para since 17m was material to the FS
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!
in question 5 part 2 the report for PFI gave reasonable assurance which was wrong since forecasts can only provide negative assurances.
in audit risk question there were three common risks with all acquisitions. these were related to time apportionment of the consolidation of the income statement since all acquisitions were mid year.
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
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That was answer too, put that the performance obligation had not been satisfied as the conditions of the contract had not been met
@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.
I found question 1 pretty tough, I don’t think I found enough audit risks to meet the 19 marks!
@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.
Question 1 killed me, I’m glad I started with it as it took me the 1st 15 mins to read and digest it! This is what I put, probably wrong!
Q1 a) Risks, adopted IFRS first first time, brands should not be recognised as an intangible asset so potential mis-statement (???), accounting policies may not be aligned, outnumbered on one of the boards, control issue, reliance on the work of the other auditors.
I kept confusing myself on the numbers to work out materiality, I ran out out time so missed intra company balances, think there was some forex that would need translating.
b) can’t remember the procedures I put
c) potential intimidation threat as they were asking us to recommend acquisitions, what if it went wrong? Did we have the skills to carry out the work, professional competence threat. The audit committee should not be asking us to write working papers for going concern, transfer of management responsibility.
Q2 quite a bit in here, staff clearly needed training and were not well led by the audit manager, who should attend a formal discussion with partner. Professional behaviour threat, assistants were acting for themselves (bonus) not in the interest of the company or audit firm. Self interest through fee dependency, firm would be doing audit, forensic investigation and now training on IFRS. Quality review at end of engagement was not adequate enough as these would have been picked up before audit report signed. Self review threat as they created the inventory count procedure and would of been part of the test of controls.
Q3 quite liked this one as I work in the public sector. Performance audit, review of operations to make sure that they are value for money, audit of performance info, review of the KPIs to make sure that they are reliable and an accurate statement.
Q4 I was seriously running out of time and couldn’t think, I tried to 1st assess materiality, was the accounting treatment right and then what I would expect to see on the audit file to support the information in the financial statements.
Think I have definitely scored below 50 on this one, so expect to be back in September!
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