*** P7 June 2015 Exam was.. Instant Poll and comments ***

I looked at question 2 b) not only from a fraud and error point of view but from point of view of potential money laundering as criminal concealment – I am probably way of the mark.

As others said, the standards are vital in this exam. Whole range of IAS examined.

Did Q on ethics and in the main talked about ISQC1 as opposed to the normal ethics although there was some objectivity threats.

Q2 a) was challenging – mentioned IFRS13, IAS16, IAS17, Definitely finance lease, new finance asset, new depreciation over 20 years lower of lease rental period and p/l on disposal should be deferred over 20 years.

2nd part was more straightforward with sub being treated incorrectly as an associate.

Challenging paper – dominated by IAS standards.

@Nizar: I also stated about contingent liability as it is possible not probable and extended on the standard…i really hope for a pass…
for q1 part b i also mentioned retranslation of inventory? due to manufacturing is done overseas….aaargh such a bad paper:-(

@Gabriel but could you argue that since the client could repurchase it for the market value at that time, it is an operating lease? Not sure about this but.

finance lease as it also risks and rewards stay with the Group-sale and leaseback agreement

Very time pressured, answered the whole paper but meant sacrificing writing one or two final points on some of the earlier questions. MY HAND HURTS.

Question 1
EPS IAS 33 Knowledge was rusty. Did think it was unusual they were adjusting profit after tax for amortisation and depreciation? is this not manipulating / inflating the earnings figure? I mentioned about bringing in prior year restatement for comparability, given it was not listed previously and this would not have been done – not sure if this was necessary?

Sale and leaseback with repurchase was a little confusing with the “at market” buy back option. But if it were an operating lease they would be massively overstating the profit (through the profit on disposal)? Combining this with depreciation considerations for 3 months being stopped and the finance cost on the £35m loan (in substance) would be very material to the p&l? In substance it just felt to me that they were manipulating their year end profit by selling and leasing, so just played it safe and used IAS 18 / IAS 17 for revenue recognition and leases respectively to conclude it was an operating lease / not to derecognise the assets (£35m Proceeds – £8m profit on D for £27m NBV), adjust the profit on disposal and simply recognise a liability / loan with interest of LIBOR +2%.

UK Variant was a pain as I assumed a 10:11:10 split with 4 professional on the marks (Does not show split in partner email) only to hear it was a 6:17:8 split… Bleak!

Mentioned about cut off being a risk on revenue but forgot to slip in the deferred income issue even after noting it down in my plan! Was quite a few other risks I identified, namely overstatements of assets and income, understatements of expenses…

Referred to ISA 510 items specifically only for first requirement. Hope that was what it was hinting at!

Question 2:
Can’t remember what I wrote for first bit – all I knew my hand was starting to cramp up and fail!

Acquisition in this question was fewer marks than the first part. Expected something to do with consolidations would come up and had IFRS 3, IAS 28, ISA 600 ready and waiting!

Toxic chemical part was a bit hit and miss – will have to wait and see! Referred to ISA 250 and duties relating to non compliance and reporting, along with potential frauds / Money laundering given the shady nature of the warehouse manager – applying professional skepticism. Couple of ethics points on intimidation and confidentiality I noted too.

Question 3:
Professional skepticism was quite nice given the ACCA article. Focused mainly on that being linked with QC and lowering detection risk by obtaining sufficient appropriate evidence thus lowering audit risk. Used each example in turn to apply to hopefully crank up the marks after explaining it.

Question 4:
Some nice ethics, quality control ISQC 1 / ISA 220 stuff to slip in with professional issues too. Followed on nicely from the ACCA technical articles.

Question 5:
Took one look at the comment on construction contracts under IAS 11 and read no further. I assumed this was being replaced by IFRS 15 so what’s the point, there is no way I am even looking at it for my P2 exam let alone P7!?

Thanks for posting such good comments – they make me feel failed even more 🙂

After reading the comments on here, I always wonder why I forgot such easy points in the exam and missed out on several easy marks that could prove vital haha! 🙂

I found this paper to be decent and it went better than expected, I made it my mission to learn both Technical Articles on the ACCA site and was glad I did so, anyone who didn’t would have struggled as almost 30/40% of the paper was based on this.

Q1 a) with regards to planning an audit, specific matters which relate to an initial engagement should be considered, these include vetting the client, ensuring that management has integrity, contacting the previous auditors and checking the audit file for any issues that arose last year, the firm also needs to spend more time learning about the business and industry to assess the business risks and ultimately how much resourcing and time will be required as a result.

b) with regards to risks, I made use of several IAS/IFRS’s (I knew all IAS’s by heart – atleast 25% of the paper was IAS/IFRS related), the suprising one was IFRS 8 – segmented reporting since the firm generated 25% of it’ revenue from the internet, IAS 32 related to financial instruments for the presentation of the short-term investment, IAS 33 related to EPS, the method they used was flawed, you don’t add back dep and amortisation. IAS 16 relates with depreciation in addition to this IAS 8 deals with any changes in accounting estimates, so a potential adjustment to comparatives could have been required, IAS 38 – Intangibles, amortisation should be done over the UEL of the asset unless it has indefinite life in which case impairment review should be done atleast annually. IAS 24 – related party transaction, since the director and his family had 30% shareholding in the company there is a chance these could have taken place and were not reported.

c.) Procedures for the short term investment included enquiring why market value not used, obtaining written representation for this, checking bank statement / cash book to reconcile the $8m paid for the shares and checking the market value at that date using online information / newspapers,
Procedures for EPS, redoing the calculation, written representation for method used, why is depreciation and amortisation added back, ensuring correct values used for dep and amortisation.

2.
a) This was initially a sale of asset through IAS 16, but then it involved a leaseback in accordance to IAS 17.
b.)Sub treated as an associate, IFRS 3 – Business combinations to demonstrate why it is not a sub and why there is not control, and then IAS 28 – investment in associates to demonstrate significant influence and use of equity method.

c.) Possibility of the hazardous chemicals being a breach of the country’s law, auditor has responsibility to inform relevant bodies, should maintain confidentiality and only report what is needed to, may resign from audit if company is breaking the law, should seek legal advice if going down this route. Intimidation threat by warehouse manager, should whistleblow to the audit committee / those charged with governance. Also generally poor controls as customers in whenever they want and no documentation, increases audit risk, may need to perform more procedures.

3. a) Pro scepticism (she spelt it wrong 😛 “skepticism”) is the attitude that includes having a questioning mind, being aware that circumstances may exist which indicate fraud or error is present and critically evaluating evidence. It is used in the planning stage to ensure that management has integrity, when performing the audit it needs to be used especially if there is a lot of judgemental / subjective matters and when reviewing evidence, looking out for any contradictory info.

b) Check with internal audit head that it is plausible, matters could have changed since last year to indicate that method is not plausible, previous audit team may not have paid enough attention and taken assumptions at face value.

c) Procedures for impairment, recalculate to ensure you get same amount, ensure goodwill figure calculated correctly, ensure same assumptions used as last year, obtain written representation towards the impairment assumptions used.

d.) Steps in forensic audit, interview two staff, interview internal audit and review their findings, try to quantify the potential loss, check bank statements / cash books for evidence, use complex analytical procedures to uncover, document everything and check dates as to when payment was made and contract signed.

4.)
a) Intimidation threat, not extending fee even though more work, cutting corners = lower audit quality as lower sampling size and higher materiality this increases audit risk, firm needs to ensure it reviews the work and has quality control in place as recommended by ISQC 1 / ISA 220.

b) Offshoring can reduce cost but chance of lacking audit quality, overseas staff do not have access to the same as client based team therefore less information on which to do the work. Reputation of firm may also become damaged and staff may not be competent, should check to see that staff are competent and potentially send an audit senior to review their work, if not possible – consider shutting down this operation (overseas operation)

c) Russell has an interest in the company at the date of FS, so he has self-interest, even though the firm has taken a safeguard to keep him out of the audit team, he is advising Lestor and therefore the threat is still present, this could deter objectivity. offering non-audit services could pose a self review threat, offering targets for non audit work given, could damage the reputation of the firm as clients could perceive this as just a form of money making.

— That’s what I remember

Q1i messed up the first bit. I somehow froze and decided to leave a blank space after email introduction. Then i continued mentionung 8 audit risk including ifrs 9 financial instrument, ifrs 7 fi disclosure, ias 33 eps, new audit client detection risk with short isa315 discussion, poor internal control, ias 18 revenue recognition matching of risk and rewards etc., compliance risk since the company is a newly listed entity etc. Then i came back to the first bit also discussing inherent risk of incorrectly recording sales, fx risk etc. Complexity of financial instruments, fi has to be disclosed.

Audit procedures such us obtaining board minutes, recalculating eps keeping an eye on items that may affect eps calculation ie profit attributable to shareholders such as the depr and amortisation adjustment and perhaps possible manipulation on number of shares therefore shareholder list must also be obtained.

Procedures on investment portfolio again board minutes has to be verified for any mention of this investment, check the bank statement, discussion with management re investment strategy, review financial statement for disclosure

Q2

I share the feelings,Snowia!

I also mentioned possiblw overtrading since the revenue has increased significantly by 43 percent but not in proportion with the the cost of sale having staggering 62 percent increase on gross profit.

Q2 part B was not about money laundering i.e. ISA 240 auditor’s responsibility regarding fraud and error.

It was about ISA 250 laws and regulations. i.e. what an auditor is required to do if came across any non compliance.