Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › Describe audit risks and explain auditors response question
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- November 26, 2021 at 12:53 pm #641699AnonymousInactive
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For section B of this exam, a popular question is ‘Describe EIGHT audit risks and explain the auditor’s response to each risk’.
The ACCA answer examples are very in depth for only a few marks. Does the answer need to be or are ACCA going above and beyond to show a model answer?
Here is an example answer from ACCA:
Audit Risk – Darjeeling Co purchased and installed a new manufacturing line. The costs include purchase price (£2.2m), installation costs (£0.4m) and a five-year servicing and maintenance plan (£0.5m). As per ISA 16 PPE, the cost of an asset includes its purchase price and directly attributable costs only. IAS 16 does not allow servicing and maintenance costs to be capitalised as part of the cost of a NCA, as they are not directly related to the cost of bringing the asset to its working condition. The servicing costs relate to a five-year period and so should be charged to profit or loss over this time. The upfront payment represents a prepayment for five years; as the services are received, the relevant proportion of the cost should be charged to profit of loss. If the service for 20X5 has been carried out, then £0.1m (£0.5m/5) should be charged to profit or loss. Therefore, PPE and profits are overstated and prepayments understated.
Auditor’s Response – Review the purchase documentation for the new manufacturing line to confirm the exact cost of the servicing and that it does relate to a five-year period. Discuss the accounting treatment with the finance director and the level of necessary adjustment to ensure treatment is in accordance with IAS 16.
Is this length of answer necessary? Do you need to identify every possible risk with that one scenario or is one enough. For example would I gain the full 2 marks for this answer:
Audit Risk – Servicing and maintenance plan for five years has been included in PPE. This should instead be charged to prepayments and a portion of this charged to P&L as an expense over this time. Risk of PPE and profits being overstated and prepayments understated.
Auditor’s Response – Discuss accounting treatment with finance director and any necessary adjustment to ensure this has been treated correctly.
Thanks for your help, much appreciated!
November 26, 2021 at 3:23 pm #641705Welcome to my forum!
All ACCA published answers, and especially for the “wordy” exams, are longer and more detailed than any candidate could produce (which is better than the alternative of being too brief!)
Please see my starred post “How to score marks in AA – essential guidance” at the top of the AA forum for guidance: https://opentuition.com/forum/acca-forums/acca-aa-audit-and-assurance-forums
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