*** P7 December 2011 Exam was: Post your comments and vote in Instant Poll ***

Q1 I went on a bit too much about the degree of inherent risk, in regards to there being little info on control risk, relating that to detection and finally audit risk. Did all the usually analytical review ratios, drop in sales, increase in cost of sales, change in GM%, receivable, payables and inventory days, interest cover, etc.
Cut-off errors in inventory, compliance (data protection) for website, income recognition for e-commerce, liquidity, company’s ability to repay its long term borrowings, going concern.
Inspection of lease, who owns, possible related party…revaluation, why?? security for debt perhaps? check revaluation treated correct, moved to revaluation reserve, etc.
£2m change in cash, whereas negative working capex was only £187k? Inspect cashflow statement…

Q2 Waffled on raising points for each, didn’t really get the grasp of where the question was headed?

Q3 run out of time

Q4 Talked about the initial audit in regards to fraud detection, then onto positve versus negative assurance engagements. Clear engagement letter to be prepared, what needs to be done by the auditor, what assurance needs to be expressed (I chose positive as client wanted case evidence and me as a witness), who the enagement is for, users of information. Internal audit dept. could be in on the fraud consider, I needed a full list of controls in place for the company, probably me obtaning by observation.

What was the correct treatment of the share payment plan in q1 please? Thanks

Think the focus is not to immediately accept the view that directors feel that no payment will be due this year based on share price. There is plenty of evidence to prove the downturn in the company’s performance. But we cant yet presume to know whether that information has been absorbed by the market yet. We aren’t told the share price. We must attempt as part as evidence gathering exercise to quantify the likely contingency based on no. of employees who exercised this option, noting the grant date as key and cost of contingency salary payment in event of realising the terms of the scheme. No? I was rushing along; may have mis-read! IFRS X or IAS19 or SSAP17 Employment Benefits.

I started from q1 then q5, q2 and last q3.
spent almost one and a half hour on q1 and kept on explaining the part a. But still I didn’t explain the web site development and gave the conclusion.
Then attempted q5 and did not remember the requirements,then q2; the first part was attempted good but a weak performance in other three issues due to time constraint. I pray to Jesus Christ that he makes me successful in this attempt.

For those who had problems with Q1…i did the following
1) The question spoke about analytical procedures and audit risk…important the question asked for AUDIT RISK AND NOT BUSINESS RISK. Those who did financial statement risk is fine since financial statement risk is a function of audit risk. That is Audit risk = (Financial statement risk) X detection risk
The question had plenty of audits risk not just share base payment (IFRS2) and leases (IAS17)
1) A doubt of Going concern – significant decrease in customers and poor liquidity ratios the acid test ratio was 1:1.04 (if not mistake) while that of the previous period was 1:2.04. the bank overdraft which was around 1.2M (while the maximum amount allowable for the overdraft was 1.5M).
2) Misstatement in cost of sales – revenue decreased significantly while cost of sales remained stable. This doesn’t make sense…. normally a decrease in sales leads also a decrease in cost of sales
3) Trade receivables – another possible misstatement is trade receivables while sales declined significantly, trade receivable increased. This can mean two things: one there is lack of controls or controls are not working properly (ie control risk) of the trade receivable balance is misstated (financial statement risk)
4) PPE – the PPE was revalued by independent expert… however two factors that lead to impairment (IAS 36) are significant decrease in sales and profit before tax. Oak Co had both. This can mean 3 things: a) the independent expert is not that independent
b) the expert lacks experience and competencies
c) the expert valuation is ok but no impairment review was done on PPE
5) Website cost – Intangible assets (ias 38) more specifically interpretation SIC 32 Website costs states that only development costs should be capitalised. This should be capitalised only if it meets the PIRATE criteria. Therefore there is the risks that advertising and planning cost were included in the amount capitalised leading to Overstatement in intangible assets and overstatement in profit before tax.
6) there was also the non separation of long term loans. Loan term loans have remained the same from last period, however the half of the loan term loan is repayable within one year. This means that non current liabilities were overstated while current liabilities were understatement. This non separation of the long term loans can be indication of earnings management.
There was the two other issues of share base payment and leases.
As you can see Q1 was very long and this is only half, we had to do the analytical procedures first.

The exam questions themselves were fine,but the time pressure was massive. I allocated my time for every question and stuck to it, so managed to answer every question, although not 100%. Fingers crossed I managed to get 50%.

Q4 was on fraud and arguments for and against prohibition of providing non-audit services to audit clients.

Q5 – section a) research and development issue, other information issue.
section b) couple of audit report issue – ethical/professional

Good luck to all of you

The careful “cynic” selection of tricky words in q1 part a got me.
Perform ANALYTICAL review…OK APs come to mind but on What? the financial statements, or the adjustments..
oh gee what a sucker. that totally had me. I realized what it was all about but, already too late. Did some bits and moved on to the next. Thankfully did every other part of all other questions. hopefully a pass 🙁 If only I could just put some damned % variances up 🙁

Usually preliminary analytical proc would include:
-Revenue Falling , cost not falling in same ration , obsolete inventory provisions? or lower selling price which also show provision for obsolete inventory
-Operating Cost Would have included operating lease ( wrong treatment)
PBT ratio deteriorating and finance cost remains same even tough we took some od this year, and Fiance CHARGES for LEASE!
Check asset figures for reasonableless , OB+Revaluation+Lease ( if it was to be treated as finance lease – depricaton) shows reasonable asset figures,
Inventory figures and reciables increasing despite the fact that low sales and chances if inventory provisions
-cash depletion (going concern at end)
-Website cost , low sales shows impairment may need to be provided for
only development cost can be capitalized and not web hosting and server rental charges
-no proper lease disclosures ,into long term and short term liability
-lease wrongly treated , pv of minimum lease payments show be around the fv of assets , which was not the case here,
-Company to pay long term loan next year , didn’t speared it in current liabilities and long term liabilities also no cash to pay , bank OD limit at end!
– NO taxes deffer tax or current tax recognized in BS even for the revaluation of ASSET, tax havens?

That i can think of for the time being

Q1 was mainly about audit risk .. it was like wat audit risk will u identify if u perform preliminary review of financial informations and notes

in the last five mins I came back to do the APs, calculate profit and sales % variance..
i found aabout 5 or 6 aud risks but mostly they were general (first year audit, blah)
not really ALL about the matters but I talked about LEASEs, Dev Cost, New Business and Warranties..

I know I missed like 80 percent of the whole thing there 🙁

yes, i thought the Q1 lease was actually operational lease too, and mentioned that in the answer. hope to score some marsk on that

I also stated thought was operating lease due to payments less that 90% of value and also no where near its full EOL. I also mentioned that they had created an asset but could not see the liability for the payments. Did i miss this?
Also with regards to Q?? about checking the work of the expert, it stated that the objectivity and capibilities had already been checked so I went down the route of actual checks on there work, ie, obtain calculation and understand/confirm the workings/assumptions of the calc…. anyone else?