F8 – Good summary of chat with tutor on June 7th

TUTOR: So, any questions?

SKULL: Can we use financial statement assertions for both tests of control and substantive procedures???

TUTOR: You use F/S assertions as a list to cover everything that needs to be verified about a figure. TOC’s and SP’s can both help there.

POLAZZOPARDI: Would the Clarity Project be examined much?

TUTOR: I would think that the audit opinions might be asked about.

YVONNE_1: Any chance of ratios coming up on Wednesday?

SKULL: Also, the Clarity Project… Would you explain it a little? How can the examiner ask about it and how are we going to answer it?

TUTOR: YVONNE_1, I think analytical procedures are likely. SKULL… yes, the Clarity Project brings in the most obvious change, which is the wording of qualified opinions. There’s also a new term, “Performance materiality”.

SI80: The wording of qualified opinions should be “material misstatement” in place of “disagreement” and “unable to obtain sufficient appropriate audit evidence” in place of “limitation of scope”. Am I correct?

TUTOR: SI80, you’re spot on.

SI80: What’s “performance materiality”?

TUTOR: Well, you have materiality for the financial statements as a whole. Performance materiality is when you set materiality lower during audit tests in case several errors all work the same way.

POLAZZOPARDI: We don’t need to know the ISA Numbers, do we?

TUTOR: Absolutely not.

BEREANK: Regarding the clarity project. Will we be expected to answer something in a scenario or will we have to compare current changes with old wording?

TUTOR: I don’t think they will examine its history. They’re more interested in the present wording.

POLAZZOPARDI: When it comes to performance materiality, are you setting materiality lower to increase the analytical procedures?

TUTOR: No. An error of $100,000 might be material in the FS. For individual tests you might set $25,000, in case 4 x $25,000 came up the same way.

SI80: Do you think definitions of the new “modified” terms may be a good bet for the short question?

TUTOR: Could be, I think. Fairly simple and the most ‘in your face’ change.

REDROSE: What factors can you consider when relying on an internal audit by the external auditor?

TUTOR: Independence, qualifications, experience, competence.

SKULL: What kind of questions can the examiner ask regarding Going Concern?

TUTOR: Signs about poor GC and how an audit report would be changed. The two main ones have been mentioned. The next one is what to do with deficiencies in internal control. Major deficiencies should be communicated to those charged with governance. All deficiencies should be communicated to management.

SI80: I can name the procedures to determine whether or not an entity is a Going Concern. A good bet for an answer, maybe?

TUTOR: Sure – given the current fire economic climate in many countries. Q.5 in June 08 will be very useful.

SI80: Are ratios still a good bet too? I’m a little out of practice there, I’ve been doing mostly theoretical stuff.

TUTOR: Look at ratios!!! What you say about them matters. For example, don’t say “Receivable days have increased because customers are taking longer to pay”. By definition, receivable days increasing means slower payment. You have to think why: error, deliberate, change in sales mix, poor credit control. Similarly, don’t say GP% is down because mark-up is down.

DILTAWF: What do you think about audit risk?

TUTOR: Tipped to come up, I think – things like components and what the risk factors are in a scenario. It’s been a while since that came up.

ADIL22: Is going concern important?

TUTOR: Could be.

RGITTENS: Could you say something like, decrease in sales, change in suppliers may cause increase in cost of sales?

TUTOR: Yes. You can also say things like more competition, poorer economy, etc.

ADIL22: Sales procedures are not in the book, so how can I do sales procedures?

TUTOR: Look at the new lectures just added in Open Tuition lectures.

SI80: For Going Concern, use COD ICE as your mnemonic. Cash Flow, Other Sources Of Finance, Discussions With Directors, Income level, Customer reliance (reliance on important customer who left), Employee reliance (i.e. reliance on important employee who left).

DILTAWF: What about management representation?

TUTOR: Any question on that would only be smallish.

ADIL22: Is there any difference between sales and receivables audit procedures?

TUTOR: They are connected, obviously, with different assertions for transactions and balances.

LONDONER: To whom should the internal department report where there is no audit committee?

TUTOR: They can only report to the finance director – not great.

SI80: So you’re saying that the IA Department can only report to the Finance Director if there is no audit committee? Am I right in saying this damages independence?

TUTOR: I suppose they might report to the board, but that would be a bit unusual. I can’t see the sales director being interested. And yes.

ADIL22: Can I write the same procedures for both purchases and sales?

TUTOR: No. For example, in receivables valuation is a big issue that’s not in sales. They are connected in the sense that when a sales transaction is made, you debit Receivables and credit sales. NOTE: It is more probable that receivables will come up than payroll.

ADIL22: What procedures should I apply for sales then?

TUTOR: There’s too many to list here, though cash could be a major issue.

SI80: So, is practising 20-mark questions on Audit Software a good bet for CAATs? I’ve done some of those.

TUTOR: I think CAAT is overdue.

SKULL: Difference between audit planning and audit strategy?

TUTOR: Strategy is high level. For strategy, rely on Tests Of Control and Substantive Procedures. Planning is far more detailed.

NFILKO: SI80, what are the best questions to practice for CAATs?

SI80: Try Q.1, part (d), Pilot Paper. For audit software, try Q4, Dec 07. You can also try this link:
https://www.accaglobal.com/pubs/students/acca/exams/professional_scheme/part2/paper2_6/exam_papers_professional/gbr/2-6gbr_2005_dec_q.pdf

See Question 6.

POLAZZOPARDI: Regarding CAATs and audit software, what is likely to be asked please?

TUTOR: Perhaps use of test data and/or audit programmes relating to a scenario. Also, Advantages/disadvantages.

ADIL22: Which events are adjusting and which events are non adjusting? Can you give me some examples of adjusting and non adjusting events?

TUTOR, TAUSEEF89: Adjusting: gives more evidence of conditions that existed at the period end. An event like a fire is non-adjusting unless in an exceptional scenario. An adjusting event: debtor going bad on Jan 12th. It was obviously bad on Dec 31st, if only we had known. That’s adjusting. Fire in factory on Jan 12th is not adjusting as factory was healthy and well on Dec 31st.

SKULL: What’s an Embedded Audit Facility? In CAAT’s?

TUTOR: Very rare in practice. You could have a reporting module in the accounting software which, for example, keeps track of all large transactions and reports them at year end.

LONDONER: Is the term adverse opinion, or “except for”, still valid? So that, for example, you can say on the grounds that the statement contains misstatement, except for opinion will be given.

TUTOR: “Except for” is still relevant.

TAUSEEF89: What are control procedures?

TUTOR: Authorisation, reperformance, reconciliations, comparisons, matching, control accounts etc.

TAUSEEF89: What is Pervasive, Adverse and Disclaimer?

TUTOR: Pervasive means very material. Therefore “Except for”, is not strong enough. If there is a very serious lack of sufficient appropriate evidence: disclaimer. If a very material misstatement: adverse.

ADIL22: Can a fire have an impact on the audit report?

TUTOR: Going concern perhaps: no factory, no production, no income: no future!

LONDONER: What can u say about what is appropriate evidence and the factors that will affect it?

TUTOR: It’s all to do with risk, materiality and quality of evidence. Less evidence is needed for small, or low risk items etc.

TAUSEEF89: What about Pami Bahl? What kind of examiner is she?

TUTOR: She won’t want to rock the boat. She won’t radically change questions.

SI80: I found Alan Lewin’s last two papers to be really tough.

TUTOR: SI80, by and large, I think the papers are about even. You have to separate your own strengths/interests.

DILTAWF: Will inventory be there?

TUTOR: It could be, but my money (a small amount of it) is on sales.

TAUSEEF89: Will we get a not-for-profit question, and what will it focus on?

TUTOR: Perhaps, but there will be no more than ten marks relating to it. The focus is often on lots of cash (charities), non-professional well-meaning employees, perhaps non-professional managers, and complex rules about the use of income.

DILTAWF: What about the Internal Audit function?

TAUSEEF89: The Internal Audit function features the testing of controls, Risk, substantive testing, fraud, and what ever else the internal auditors are asked by management to do.

KHAN: What should we do for quick revision tomorrow?

TUTOR: Look at the OT tips – that’s as good a guidance as any.

TUTOR: When doing the exam, remember to always try Question One first. Relate your answers to scenario. And try not to use the word “check” as it does not lead you to express enough detail.

NFILKO: How would you manage marks and time with the question?

TUTOR: 1.8 x Marks = Time

SI80: Hang on… Confirm something for me, please. If not “check” then “trace” and “compare” will be good words, right?

TUTOR: Use “compare”, “re-perform”, “reconcile”, “inspect”, “observe”, “agree”… Use anything but “check”. Pretend you are telling a 14-year-old child what to do. Telling him to” check” stuff is a waste of time. You must spell it out. If you type “Check Financial Statements” as an answer, you will score zero.

POLAZZOPARDI: Can the client request that the audit report has to be addressed to the bank, for example?

TUTOR: No, not the audit report. But perhaps another report on cash flow projections.

TUTOR: Remember the following. Pick up clues form scenario and feed on it. The longer the question, the more ammunition you have. Don’t use the word “check” if you can help it. Attempt all the questions. And allocate your time adequately.

DILTAWF: Will you need to do a report on cash flow projections?

TUTOR: You won’t have to do one, but the client could ask for assurance on its budgets.

KUNAL213: What’s best? Revising the chapters or just practising the questions?

TUTOR: Practising questions.

The very best of fortunes to all of you on Wednesday. Bye, all.

NICOYE17: “Performance materiality” relates to the amounts that the auditor would set must be less than the materiality in the financial statement for particular transactions, account balances and disclosure.