Drafting in Full For All Topics

P7
2016-2017
ADVANCE AUDIT & ASSURANCE

EXAM PRACTICE
By: Kashif Kamran-FCCA

Suggested answers_ Exam style writing_Kashif Kamran-FCCA
Contents
1 QUALITY CONTROL.......................................................................................................................................................... 3
1.1.1 June 2013- Q2 Part (a) .................................................................................................................................... 4
2 APPOINTMENT ................................................................................................................................................................ 5
2.1 December 2012- Q3 Part (a) Plant Group............................................................................................................... 6
2.2 December 2014 – Question 4(a) Weston Co .......................................................................................................... 7
2.3 June 2013- Question 3 Part (a) Wexford Company ................................................................................................ 8
2.4 December 2014- Q4 Part (a) TetBury.................................................................................................................... 10
2.5 December 2015..................................................................................................................................................... 11
3 RISK ASSESSMENT ......................................................................................................................................................... 12
3.1 DEC 2012 Q1 ALL PARTS (WITHIN EMAIL)............................................................................................................. 13
3.2 December 2014..................................................................................................................................................... 18
3.3 DECEMBER 2015-Q1 ............................................................................................................................................. 23
4 PROSPECTIVE FINANCIAL INFORMATION ..................................................................................................................... 27
4.1 JUNE 2014- Question 2 ......................................................................................................................................... 28
4.2 June 2012- Q2 Answer plan .................................................................................................................................. 29
4.3 June 2012/ June 2014 ........................................................................................................................................... 30
5 Due diligence review..................................................................................................................................................... 31
5.1 December 2013-Question 2.................................................................................................................................. 32
6 Forensic ......................................................................................................................................................................... 34
6.1 DECEMBER 2011 –Q4............................................................................................................................................ 35
6.2 June 2013/ Q2 Part b ............................................................................................................................................ 36
6.3 June 2015- Q4 (c) .................................................................................................................................................. 38
7 Ethics ............................................................................................................................................................................. 39
7.1 DEC 15 /Q4 – 20 MARKS ....................................................................................................................................... 40
8 Evidence ........................................................................................................................................................................ 42
8.1 Guidance on making procedures / writing evidence ............................................................................................ 43
8.2 June 2013-Question 3 ........................................................................................................................................... 44
8.3 December 2013- Q3 .............................................................................................................................................. 46
8.4 June 2014 –Q3....................................................................................................................................................... 47
8.5 JUNE 2015- Q1 EXTRACTS ..................................................................................................................................... 48
8.6 DECEMBER 2014- QUESTION 2 ............................................................................................................................. 49
9 Reporting....................................................................................................................................................................... 51
9.1 December 2014 –Q5 ............................................................................................................................................. 52
Page 1 of 82
9.2 June 2013 – Q5...................................................................................................................................................... 53

9.3 December 2012-Question 5.................................................................................................................................. 55
10 Group ........................................................................................................................................................................ 56
10.1 Group exam understanding .................................................................................................................................. 57
10.2 Inter-company transactions.................................................................................................................................. 58
10.3 Goodwill – scenario 1 / 2/ 3 .................................................................................................................................. 59
10.4 Non-controlling interest........................................................................................................................................ 61
10.5 Management charge............................................................................................................................................. 62
10.6 Investment in associates....................................................................................................................................... 63
11 ACCOUNTING STANDARDS ....................................................................................................................................... 66
11.1 IAS-10 .................................................................................................................................................................... 67
11.2 IAS-12 .................................................................................................................................................................... 67
11.3 IAS-16 .................................................................................................................................................................... 68
11.4 IAS-17 (IFRS-16 is applicable from 2019) .............................................................................................................. 69
11.4.1 Sale and Leaseback with Finance Lease .................................................................................................... 70
11.5 IAS-20 .................................................................................................................................................................... 71
11.6 IAS-21 .................................................................................................................................................................... 72
11.7 IAS-23 .................................................................................................................................................................... 73
11.8 IAS-24 .................................................................................................................................................................... 73
11.9 IAS-33 .................................................................................................................................................................... 74
11.10 IAS-36 ................................................................................................................................................................ 74
11.11 IAS-37 ................................................................................................................................................................ 75
11.12 IAS-38 ................................................................................................................................................................ 76
11.13 IAS-40 ................................................................................................................................................................ 78
11.14 IFRS-2 ................................................................................................................................................................ 79
11.15 IFRS-5 ................................................................................................................................................................ 80
11.16 IFRS-8 ................................................................................................................................................................ 81
11.17 IFRS-7 / 9 ........................................................................................................................................................... 81
11.18 IFRS-15 .............................................................................................................................................................. 82
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1 QUALITY CONTROL
Page 3 of 82
1.1.1 June 2013- Q2 Part (a)

Evaluate the ethical, professional and quality control issues?
Student guidance: Whenever the verb “Evaluate” is used, student should put conclusion at the end of the answer.
The answer below, related to quality control part only, does not cover ethical and professional issues
Quality control issues:
1. Time pressured
The audit could had been time pressured mainly due to ineffective planning and a proper implementation of
the audit time table. Further the audit could be time pressured due to delay of evidence/ information from
the management which should had been sorted out during the supervision stage of audit. Thus a time
pressured audit could primarily be due to an inadequate supervision of the audit leading to a rush in audit
ultimately compromising the evidence gathered.
2. Planned procedures
The manager has given a wrong instruction to the junior to deviate from the planned procedures considering
director emoluments and share capital as low risk. Such instructions of deviation would set a wrong example
or a culture for the junior to follow in other audits. Further deviation from planning needs a partner approval
which was not taken in the case. Lastly not performing planned procedures would result in improper risk
mitigation and increase overall detection risk for audit
3. Sampling method
The manager instructed the junior to select samples for receivable based upon his judgment. Judgmental
samples increase the overall sampling risk of selecting an inappropriate samples from the given population.
Further, instructing not to follow firm statistical sampling method, is a breach of the firm policies. Lastly,
selecting an inappropriate sample could comprise the sufficiency of the evidence gathered on receivables.
4. Going concern
Junior was given the audit of going concern which is a wrong task allocation. Going concern is an assumption
about the foreseeable future and itself is inherently risky. Use of assumption/ judgments make the particular
area prone to risk of management bias (management showing favorable position). Thus there is a higher
detection risk on going concern audit.
5. Review
The manager didn’t review everything due to lack of time. Manager is responsible to review working papers
of risky areas. Going concern is a risky area and the manager should had reviewed it. Further work review
cannot be performed by junior as they are not technically competent to review work and find weaknesses.
Thus any issues / or problems in going concern and payables must had gone undetected as review was not
performed by the manager
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2 APPOINTMENT
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2.1 DECEMBER 2012- Q3 PART (A) PLANT GROUP

Student guidance: It is an 8 marks requirement so a student should identify 4 matters to be included in the tender
document.
Matters to be included in tender document:
1. Weller& Co profile/outline:
Weller is a part of an international network of firm. The firm specializes in the audit of the telecom industry
and have a separate department dedicated for this industry. Being an international firm, Weller can easily
do the audit of the overseas subsidiary of Plant group.
2. Responsibility of the auditor

Weller is responsible for the audit of the plant group which comprises of a parent company and six
subsidiaries. Weller will be responsible for the individual audit of each company financial statement and
would issue a separate opinion. Further Weller would be responsible to review the consolidation process
and issue a consolidated opinion (reasonable assurance).
3. Client expectations
Cost effective audit:
The internal control would need to evaluated first before any reliance can be put on the strength of the Plant
group governance. This is the first year audit which needs a thorough understanding of the client system and
a proper documentation. Moreover, the first year audit consume more resources and sufficient time is spent
on the audit to reduce the risk to an acceptable level. Thus a cost effective audit is not possible.
Deadline
The proposed deadline of 31 May 2013 is achievable through engaging sufficient resources and spending
reasonable time in the audit.
4. Fees and basis of fees
Fees depends upon lots of factors. Weller & Co should inform the basis of fees to the Plant group management.
Being the first year audit ( as already discussed above), fees would be on the higher side due to more use of
resources, more time spend, high risk , more documentation, more sample size( evidence) etc. Further the
basis of fees will include the amount of work (considering the size of the entity which is a parent company
and six subsidiaries).
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2.2 DECEMBER 2014 – QUESTION 4(A) WESTON CO

4(a) (i) - Student guidance: This is 8 marks requirement, so a student should discuss 4 matters to be included in
tender document apart from fees as mentioned in the requirement.
1. Weston & Co – outline:
Para 1 – same as Weller above (to be taken from case para 1)
2. Responsibility
As the entity is subjected to audit for the first time, Weston & Co should clearly put in their responsibilities
for the attention of management to reduce the expectation gap / or misconceptions. It should be informed to
the management that audit is done on a test basis and the auditor expresses a reasonable assurance on the
financial statements not an absolute assurance. The audit involve looking into material transaction and the
opinion is a reflection of the auditor judgment based upon material transactions only. Auditor has access to
all information and explanation and management is responsible to prepare the FS.
3. Expectations:
Not be too disruptive:
First year audit requires a greater use of professional skepticism in obtaining the knowledge of business and
its systems. Thus there is a high level of disruptions in the first year audit as the auditor has to put several
questions to management for their prompt replies. However, disruptions can be reduced to an acceptable
level by providing management a list of information needed before the start of audit.
Deadline
Four months is a realistic deadline to complete the audit of Jones & Co considering it’s not a very large entity
and was establish just two year ago.
4(a) (ii) Issues in determining fees:
Student note: This is a 6 marks requirement, so a student needs to discuss 3 issues in relation to fees. Each
issue is worth 2 marks
The audit firm should carefully analyze the basis of fees before concluding on the fees to be set for the first
year audit of Jones Co. The audit firm should take into consideration, the size of the business (i.e. a small
company), and its control structure (i.e. one full time accountant means that controls over financial statement
would not be effective and FS would be prone to misstatements) and the use of the accounting package (mean
understanding the system and the use of CAAT in the audit).
Further the audit firm would consider the need to verify the opening balances being the first year audit (and
finding no support from previous year’s limited assurance services as it was performed by unrelated firms)
Jones want the audit fees to be quite low. The audit firm needs to justify Jones that the fees depends upon the
above said basis and the fees should be reasonable to cover the cost of the firm resources and work including
the profit margin.
The fees cannot be linked to Jones Co success as this would result into a contingent fees (self-interest) and
IESBA codes does not permit a contingent fees.
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2.3 JUNE 2013- QUESTION 3 PART (A) WEXFORD COMPANY

Identify the ethical and professional issues in deciding whether to accept the appointment as auditor of Wexford
Company? 10
2 marks for each issue discussed (i.e. maximum 5 issues)
Student note: Please ensure that you are not classifying the issues into professional and ethical categories rather
simply identifying an issue and explaining it. Ethical issues would automatically reflect when you use threats to
objectivity in your answers or terms like conflict of interest or confidentiality issues.
1. Nature of the business

Wexford is a book shop selling stationary items. This is a simple nature of business and for the audit firm it will be
easy to take on the audit of book shop as it does not requires any greater expertise.
2. Small business
Being a small business setup, audit firm would not expect a much larger fee income to flow from the client and the
extent of the work and use of resources would be very minimal in the audit
3. First year audit
The audit firm will need to verify the opening balances in Wexford financial statements as this is the first year audit
as previously the company was exempt from audit.
4. Owner managed audit
The controls at Wexford could be weaker due to the fact it is an owner managed business which could increase the
risk of misstatements in the financial statements. The weaker controls are demonstrated by the fact that the owner
rarely conduct reviews of the financial information, and when every he perform review it’s just a quick review of
sales figure only.
5. Part qualified accountant
The financial statements and book keeping are performed by the part qualified accountant which increases risk of
misstatement in financial statements as the accountant is not technically competent and there could possibly be
some non-adherence to accounting standards.
6. Preparing accounts
Wexford has requested the audit firm to prepare the accounts and do the audit at the same time. This would result
in a self-review threat which will compromise the firm objectivity. However Wexford being a small company, it is
permissible to provide both services with use of separate teams for both the engagements as safeguards.
7. No cash flow statement
Cash flow statements are an integral part of financial statements. It would be a non-compliance with IAS-7 if cash
flow statements are not prepared as part of the financial statements. It is the auditor responsibility to ensure
compliance with applicable standards.
Page 8 of 82
8. Conflict of interest
Wexford is acquiring one of its competitor which is an existing audit client of the audit firm, thus creating a conflict
of interest and confidentiality issues. However, this could be safeguarded by having different teams for both the
clients to reduce the threat of misuse of information or the risk of breach of confidentiality.
9. No reading of the minute
Management refusal to read minutes of the meetings would result into insufficient and inappropriate audit evidence
for the audit firm and would limit the scope of the auditor. Auditor has access to all information and explanation and
the audit firm should discuss this with client before taking on the engagement.
Tutorial guidance: In exam you need 5 to score 10, this is just a guidance on complete scenario, and you can chose
any 5.
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2.4 DECEMBER 2014- Q4 PART (A) TETBURY

Student guidance: This is a Q4, the broader question on ethical and professional issues. The general marking scheme
for a Q4 on ethical and professional issues, is 1.5 marks for explaining each issue and 1 mark for writing in an action.
There are lots of similarities in TetBury scenario with that of Wexford above (June 2011- Q3) as discussed above.
Small company/ owner managed company (same as above- Wexford June 2011-Q3) - you can rewrite almost the
same answer here as the company has same features as of Wexford.
1. Nature of business
Chester & Co need to consider their firm competence/ specialization in auditing financial services before
accepting to take on the audit client.
2. Previous auditor resigned

Chester & Co should correspond with previous auditor by seeking Juan permission. If the permission is given,
the firm would directly seek from the previous auditor the reasons for resignations. If permission is not
granted, the firm should assess client integrity and should decline the invitation to perform audit
3. Opening balances
The audit firm need to verify the opening balances if the engagement is accepted due to change of the auditor
in adherence with the requirements of ISA-510 opening balances
4. Disagreement on an accounting treatment

The disagreement on accounting treatment demonstrate Juan’s inappropriate behavior towards auditor and
disagreement itself increase the risk of misstatements in the financial statements
5. Alleged non-compliance
The investigation by financial service authority create a negative client image or profile thereby bringing
doubts over client integrity. It would be difficult for Chester to take on a client with negative profile and
recent investigation as it makes TetBury as risky client.
6. Business development advice

Giving business development advice to TetBury would result into advocacy threat as the firm would be
promoting client business interest .However, the business development advice is permissible in this case as
the company is small and owner managed with the use of separate engagement partners for advice and audit
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2.5 DECEMBER 2015

Advertisement
In the recent past, advertisement has come in Sept/Dec ’15 examinations. Whereas earlier to this it came in
December 2010 examination which in now deleted by ACCA from their website.
Suggested Answer- Sept/ Dec ’15 –Q4 (part a – only relating to advertising)
Marking scheme: Again as earlier, mentioned in case of TetBury question above, Q4 on ethical and professional
matters, marking scheme is 1.5 for each issue and 1 mark for each action.
Part a)
An audit firm can place an advertisement in a quality national newspaper as part of increasing the firm clientele or
the firm income. However the advertisement should not bring discredit to the services provided by other firms. In
this advertisement the use of terms like, your accountant charging you too much for poor quality service, most
comprehensive range of service and leading tax team is an evidence that such discredit exist.
Moreover, the audit firm cannot guarantee anything as audit firms only exist to provide assurance to their client.
Guarantee to be cheaper than your existing auditor means that the firm will indulge into the low balling practices in
order to win client. Low balling practices are not allowed as it compromise the audit quality
Offering business advice is an advocacy threat as by providing the business advice the audit firm will be promoting
the client business interest. Advocacy are allowed for non-listed client with separate teams, however in case of listed
client advocacy is are generally prohibited.
Audit firm cannot provide any professional service free of cost as it just not justify the quality of work performed
and the cost of resources used in that particular service.
Lastly, in order for the firm to be a chartered certified accountant at least half the partners should be members of
ACCA which is not the case with Monet. Thus the audit firm is having a false claim of being an ACCA registered firm
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3 RISK ASSESSMENT
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3.1 DEC 2012 Q1 ALL PARTS (WITHIN EMAIL)

Marking scheme
- Each business risk is worth 2 marks (Maximum 6 business risk would give you 12 marks, writing in excess
of 6 business risk would be a waste of time. There are lot more than 6 business risk in the case study so no
need to take illogical assumption finding business risk)
- Each RMM is worth 2 marks ( the examiner wants to explain FOUR RMM, so writing an additional RMM will
not be of any benefit rather a waste of time)
- Ethical issues in general have 1.5 marks per ethical issue, whereas action (i.e. the safeguard) have 1 mark per
action.
Examiner criticism
Business risk (What should a student do?)
- Develop explanation in enough detail for each business risk with a clear implication of each business risk on
business.
- Use financial statement numbers in your answer to justify your implication or business performance.
- Not every business risk could be concluded down to going concern problem
RMM (What should a student do?)
- Clearly mention the misstatement for each risk, i.e. under or overstatement of certain account balance or in
absence of particular account balance , stating that FS could be materially misstated
- Remember just stating accounting rule and saying that if its incorrectly accounted is a risk of material
misstatement would be of no benefit till you have identified the under or overstatement specifically .
- Use financial statements given to identify any RMM
- Use going concern once as RMM , linked to specific issues like liquidity
Tutorial guidance:
The answer below contain more RMM and business risk for student guidance as stated above student needs to stick
to marking scheme in exam paper.
Page 13 of 82
Briefing Note
To: Mia Via, Audit Partner, Foo & Co
From: Audit Manager
Re: Grohl Co- audit planning
Introduction
The purpose of writing this briefing note is to evaluate the business risk and to further explain the risk of material
misstatement and ethical issues to be considered in planning the audit of Grohl Co.
Business Risk
1. Nature of business
The company produces circuit boards which are then supplied to manufacturers of computers and mobile
phones. The company needs to ensure that these circuit boards are up to date and need to incur a consistent
R&D into new or updated circuit boards. If circuit boards are not kept up to date the company can end down
losing the competitive advantage as innovation is a critical success factor for technological businesses.
2. Import of raw material

The company imports raw material which could be costly due to its high transportation cost and could have
a high lead time. Any delay in import due to any factors (e.g. trade restrictions or environmental factors)
could result into a stock out problem for the business which would affect the company production cycle.
Import of raw material is costly due to high transportation cost which keeps pressure on company’s cost of
goods sold and ultimately the profit margin. Currently the operating profit margin has fallen from 7.2%
(2011) to 4% (2012) demonstrating pressure on the margins.
3. Sole supplier
The RM is imported from one overseas supplier. Reliance on a single supplier itself can create lots of risk for
the business such as , high bargaining power of the supplier in this case the supplier can even intimidate the
business by increasing the RM prices whenever he wish to. Further, if the supplier himself liquidates in a
worst case scenario it will result into a huge stock out problem for business as currently there is no
succession planning for alternative supplier.
4. No forward exchange contract

This sound to be an unwise business strategy considering business has a high reliance on import of RM. Any
adverse fluctuations in the exchange rates can bring pressure on company’s COGS and the operating profit
margin. Further any exchange loss can increase company’s overall loss position at the bottom line. Moreover,
adverse fluctuation in exchange rates will keep company’s cash flow position very volatile as well.
5. Export market
Half the goods produced by the company are exported, thus the export market is a critical success factor for
this business. Due to increase competition in the export market, the company seems to be losing its
competitive positioning as the revenue has fallen by 9.4% over the last year. If this trend continues it would
be difficult for company to sustain its revenue position and would ultimately further increase company’s
losses.
Page 14 of 82
6. Domestic market – Product recalled

Domestic market is an equally important market for this business. However sales in domestic market is
dependable on just 20 customers. These customers are currently not satisfied with the products supplied to
them and are returning goods and claiming faults which increases the risk of future retention of these
customers. Any loss of customer would significantly affect company’s revenue which has already fallen by
9.4%.
Further the product recalled by company, would negatively impact on company’s reputation as producer of
circuit board which could ultimately impact on company’s future market share and competitive positioning
7. New regulatory requirement

The company is working on a new production line in order to meet the meet the new regulatory requirement.
However if the production line is not completed as of March 2013, which is the enforcement date of new
regulation the company will be in non-compliance of new regulation which could result into fines and
penalties. Thus capable of affecting Grohl’s reputation.
8. Loan negotiated
The new loan negotiated of $ 30 million (17% of total assets) would increase company’s overall gearing risk
and finance cost for the business. The increase in finance cost would ultimately affect company’s losses.
Further, the new loan taken, if not repaid on time, due to present liquidity problems facing business could
affect company-bank future relationship (and access to further debt finance could be difficult)
9. Liquidity problems
Grohl Co is facing numerous liquidity problems evident from, conversion of OD into long terms finance, cash
balance of $ 130,000, Current ratio of 1.1 and a quick ratio of 0.8. If the liquidity position of the company
continues to worsen in the foreseeable future the company could face a going concern problem / or the
business could find difficulty in continuing its operations.
10. New directors

The new directors would initially have less knowledge of the business and would be less familiar with
business issues and problems. Further these new directors have come into the business at a time when the
business is in a very turbulent phase. Thus if any wrong strategy is made by the new directors it will directly
impact the company’s already detoriated financial performance
11. Financial performance

The company has a worsening financial performance from over the last year, evident by fall in revenue by
9.4%, OPM from 7.2% (2011) to 4% in (2012) and the company has now become loss making. The worsening
financial performance of Grohl Company would dissatisfy the company’s shareholders as they fail to generate
a good return on their equity from this business.
Page 15 of 82
Risk of material misstatement

1. Foreign currency transaction – initial recognition
Foreign currency transactions should be initially recognized by translation using a spot rate or an average
rate where fluctuations are minimal (IAS-21). Thus the management could translate the initial transaction
using an inappropriate exchange rate which could result into under/overstatement of purchases, inventory
valuation and payables.
2. Foreign currency transaction – translation
Payables at the yearend should be retranslated using a closing rate for the recognition of any exchange gain
or losses (IAS-21). If the yearend retranslation was not carried out it could under/ or overstate the payables
or under or overstate the exchange gain or losses.
3. Products recalled and replaced
The Co has contacted the customers for the recall and replacement of the products. However, if a customer
been contacted refuse the replacement of the product and hence wants the cash back then the Company
should recognize a provision in the financial statement. If no such provision is recognized it will understate
the current liabilities, expenses and losses.
4. Corroded copper
Corroded copper should be valued at the lower of cost or net realizable value. The corroded copper could
have a minimal realizable value and being a lower component corroded copper should be valued at it. If the
corroded copper is not recorded at the NRV, it will overstate the inventory and understate the cost of goods
sold.
5. New production line
The new production line is a capital expenditure and the company should capitalize the directly attributable
cost. The finance cost itself is a directly attributable cost as the loan was specifically negotiated for this
production line. However, if the management fails to capitalize the borrowing cost on the new loan it could
understate the non-current assets, whereas if revenue nature items are capitalized as part of new production
line it could overstate the non-current assets.
6. New regulations
The new regulation restricting the use of the old production line is an external condition for impairment
testing of the old production line. If the old production line is not reviewed for impairment (to determine its
recoverable amount) the old production line (non-current asset) could be overstated been currently
recorded at its carrying value.
7. Finance cost –
The finance cost is static as from the last year and could be understated considering the rise the conversion
of an overdraft into long term finance and further the company has negotiated a new loan of $ 30 million.
Page 16 of 82
Ethical issues
The audit manager is being interviewed for the position of financial controller at Grohl Company and is a
good candidate for this position considering his knowledge of the business. If Bob is appointed as a financial
controller it will create familiarity threat and intimidation threat to objectivity.
Firstly, Bob will be familiar with the personnel in the audit team and with the firm methodology for audit.
There would be close connection between people and process of the audit firm. Further, Bob will also be
influencing or can pressurize member of audit team. Thus by virtue of this previous position as audit
manager and current position as FC, Bob is in influencing capacity.
Thus the audit firm in order to continue with audit of Grohl Co need to select an appropriate audit team (the
one which has not worked under Bob as audit manager) and change the way to perform audit for Grohl in
order to mitigate the close connection Bob could have with the personnel and process.
The change of personnel could itself reduce the intimidation as intimidation factor would increase with
existing team who has worked under Bob.
Already the case mention a change of manager for the current year audit itself reflect the change in the audit
team as a safeguard taken.
The suggestion by the board to perform the audit on a contingent fee basis needs to be dealt appropriately
as per the code of conduct. As per IESBA code of conduct , audit engagement can’t be performed on a
contingent fee basis as it create a self-interest threat and compromise objectivity as the auditor is more
focused in audit in achieving the contingent factor.
Thus the audit engagement partner need to clearly inform the board members that the audit fees can’t be on
a contingent basis, clearly stating in the reason. Further, the engagement partner should also clearly justify
the basis of fees to board members to mitigate their concern of high fees and further that the fees has nothing
to do with profit or loss, it relate with work
Conclusion:
Grohl Company is facing numerous business risk as identified above which have already detoriated business
financial performance as evident with fall in sales, profit margin, and a loss making entity. Further, with
problems still in place, and with new directors the future financial performance can face further decline.
Page 17 of 82
3.2 DECEMBER 2014

Briefing Note:
To:
From:
Re:
Introduction
The purpose of writing this briefing note is identify the business risk and risk of material misstatement facing the
Connolly Company. Further, this note also include, procedures on cold comfort brand as well as ethical issues in
planning the audit of Connolly Company.
Business risk:
Connolly is a listed company
Generally listed companies needs to comply with greater sets of laws and regulations. Moreover the company
operates in a pharmaceutical industry which itself is highly regulated. Thus there is a high exposure of laws and
regulations. Any non-compliance would affect Connolly reputation, losing competitive advantage, facing penalties or
even in a worst case scenario suspension of license
Heavily advertised
Heavy advertisement of brand name is a regular practice of the company which will keep pressure on company’s
profit margin which has already fallen from 24% in 2013 to 20% in 2014. The sales in relevance to this high
advertisement have increased by 5% on a year on year basis. The company need to ensure they are getting the
desired benefit of advertisement into sales realization or growth otherwise it is a waste of resources and a pressure
on operating profit margin
Advertisement is prohibited
There is a potential risk that if Connolly advertisement is run in countries where such advertisement is not allowed
would put the company under a non-compliance risk and that would tarnish company’s reputations and would result
into penalties and damages on the company which cold effect company’s profitability
Competitive market
Being a competitive market, the survival depends on rapid innovation. Rapid innovation is a huge cash drain for
Connolly as already depicted in the financial results that the net cash flow for this year is negative. Rapid innovation
need financial resources and the business should have enough liquidity to manage it. This also keep a constant
pressure on company gearing as there is a constant need of loan finance and the company is already in process or
negotiating an extension of $10m loan finance.
Stringent regulatory requirements
This creates a risk of non-compliance with the stringent regulatory requirements which could ultimately result
into not getting the desired license for production and sale. This would a serious operational blow to the Connolly
Company as all the efforts and resources put down into research and development stage of drugs would go wasted
and the company would not derive any commercial benefit from such drugs. Currently four drugs are under
research and development stage.
Page 18 of 82
Patents
The patents are rigoursly defended for potential infringement creating an overall increase in legal cost for the
business which can keep pressure on company’s operating expenses and operating profit margin. Moreover if
Connolly Company infringe competitor patent would result to reputational loss to Connolly due to a legal battle and
media spotlight
Extension of loan
The extension of loan would increase company gearing risk as well as increase overall finance cost for the business
though the finance is needed for the ongoing research and development of products.
Court case
The ongoing court case and its outcome if against the company would affect Connolly competitive positioning in the
already competitive market. The company would face a damage to its brand image and could possibly effect company
short term sales targets as well
New market
A new market is a diversification strategy on part of business which tough is good at one end but on the other
diversification of business means losing of management focus from other business segments. Initially the
management tries to put resources and effort on new segment that of animal health which might result in losing
focus on the existing business segment/s which could increase some operational problems for business in near short
run. Moreover diversification of business increases business operational expenses thus putting pressure on
operating profit margins.
Out of date accounting and MIS
The management would not be getting up to date information for decision making as MIS is out of date. Thus
company strategic decision making could be inappropriate if adequate and timely information is not produced by
out of date MIS system
Company financial performance
Overall the business performance demonstrated by Connolly Company in terms of growth in revenue is good.
However the business seems to follow a downward trend in its profitability with fall in operating profit margin from
24% to 20%, negative cash flow and a decrease in EPS from 29c to 25c. The ongoing case, further research and
development and an extension of loan could well keep pressure on profitability and cash flow in near short term.
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Risk of material misstatements

Listed company
Being a listed company there is an embedded risk within the financial statements of Connolly that management could
manipulate them to show better position. Thus FS could be material misstated particularly the income statement
which could show higher sales and profit then actual.
Research and development cost
Under IAS-38, the research cost is to be expensed out whereas the development cost is to be capitalized subject to
strict capitalization criteria given therein. The risk could be overstatement of intangible assets, understatement of
expenses and overstatement of profit if the criteria was not followed into the capitalization of development cost.
Already there is an increase in the total of intangible assets recognized this year in comparison to last year
Patents
Under IAS-38 Patent is to be recognized as intangible assets at cost. Once recognized, patents should be amortized
over the period of their duration, and non-amortisation will overstate intangible assets/ profit and understate
operating expenses.
Extension of loan
It also increase risk of management bias is massaging the figures in financial statements to present a favorable
position to bank for loan extension and ensuing that the loan extension is successful. The loan extension is material
to financial statement i.e. $10m/ $200 m which is 5% of total assets.
Court case
The ongoing court case need to be either disclosed as either a contingent liability or a provision should be recognized.
The request by the company to the bank to make $3 million available in event of case against the company is
successful indicates a probable outflow (IAS-37) and hence a provision should be recognized. If provision is not
recognized it will overstate profit as well as understate liability and operating expenses.
Animal health market
The animal health segment has given a 15% contribution into the total revenue thus making it a major operating
segment for business. Under IFRS-8, the company should give a disclosure of results on segmental basis. Lack of
disclosure of disaggregated basis between segments would result into material misstatement
Cold comfort brand
Under IAS-38, the purchased brand has been capitalized at cost of $5 million as intangible assets and is been
amortized over its useful life of 15 years which is a fine accounting treatment. However we need to ensure the
estimation of 15 year useful life to agree to an appropriate amortization otherwise if inappropriately amortized, it
would understate expense, overstate profit and intangible asset as well. $5 million in contrast to total assets is 2.5%,
thus material to financial statement
Out of date accounting system
Being an old accounting system it could affect the way the financial statements are produced and being old might
not be functioning effectively in producing financial statements or the financial reporting standards are not up to
date. This increase the risk of material misstatement in overall financial statement of Connolly.
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Procedures
1. Review the board minutes to the confirm the approval or authorization of the purchase of brand from the
rival company
2. Review the purchase agreement to confirm the cost at which the brand was acquired initially to confirm it
was recognized as intangible at the same value
3. Review the bank statement to confirm the payment made to the rival company of $5 million.
4. Discuss with directors the basis of the useful life of the brand estimated to be 15 years.
5. Recalculate the amortization to confirm accuracy of the amortization charge.
Ethical issues
Our firm has been asked by the bank to provide a guarantee in respect of this loan extension of $ 10 million. This
lead to an advocacy, self-review and self-interest threat to objectivity. The audit firm by giving guarantee to the bank
on loan extension would be promoting Connolly company business interest (i.e. to seek a loan extension) and would
be assuming management responsibility as well. Further, if loan extension is advocated the loan will become a
material part of Connolly balance sheet (i.e. 5%) which will generate a self-review threat later in the audit. Moreover,
if advice is provided it will generate a fee income for the audit firm which along with the audit fee would generate
self-interest of the audit firm if any dependency on client is created.
Thus the audit firm should decline to provide any guarantee on loan extension because loan is material to the
financial statements and being a listed company it is prohibited by the IESBA codes.
Further to the guarantee on loan extension, our firm has been asked to provide advice on the new system. This again
would lead to an advocacy, self-review and self-interest threat. The audit firm by giving advice on the new system
development and implementation will be promoting company’s business interest i.e. the new system and would also
be assuming management responsibility. Further, if the advice on the system is implemented, it will generate a self-
review threat as the audit firm would be reluctant to test the system during the audit. The system includes the
accounting system which itself produces the financial statements which itself in important. Thus, being material to
the financial statements, and the company being listed, it is prohibited by the IESBA codes to offer such advice.
Conclusion
Connolly is facing numerous events and conditions that may have an adverse effect business performance in short
term. The research and development of new product and getting license is essential critical success factor for
Connolly and both have associated risk within them as highlighted above in the evaluation of business risk.
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Learning – How to make effective procedures in P7?

Procedures- cold comfort brand
Note: Procedures – linked to case (facts/ figures / risk) which can help in making procedures
Procedures – In F8 you learn a list of procedures, which accumulates to a total of SEVEN. In the context of P7, the list
of procedures reduce down to mostly FOUR or in rarely down to FIVE as our interaction in P7 is with accounting
matters and only substantive procedures.
1. Review / inspection
2. Discuss / inquiry
3. Analyze/ analytical procedures
4. Recalculate / recalculation
5. Correspond with / confirmation
A good technique to make procedures, linked to case study, is to remember F+F+R. What is FFR? Let’s understand
and apply this?
FFR- stands for Facts, Figures and Risk of material misstatements.
Fact / Figure/ RMM in this case is:
- The company has acquired a cold comfort brand from the rival company at a cost of $ 5 million
- Estimate life of 15 years (Risk of material misstatement )
- Amortized
In order to verify this fact the auditor would need to confirm many things:
- Firstly the board approval of the decision taken to confirm its authorization as decision
- Secondly, the cost incurred i.e. $ 5 million from the source document ( like a purchase agreement )
- Thirdly, the outflow , the payment made ( i.e. the bank statement)
- Estimated life – perhaps the auditor would discuss the basis with the directors
- Amortized- perhaps auditor would recalculate the amortization charged
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3.3 DECEMBER 2015-Q1

To:
From:
Re:
Introduction:
Audit risk
Recent listing – management bias

The recent listing and a planned listed ahead creates a risk of management bias in manipulating results for
showing better performance. Thus Dali Co management could overstate assets/ profit and understate
liabilities/ expenses. Revenue has increased by near 2% and profit by near 6% indicates such risk might
exist.
Recent listing- further applicable standards
The recent listing means that the company now need to comply with additional financial reporting
standards and the new finance director may not be familiar with it , for example IAS-33 and IFRS-8. There
is a risk of incomplete or inadequate disclosures in respect of these standards and thus the FS could be
materially misstated.
Purchases from foreign supplier
Dali Company purchases components from foreign supplier. Such transactions should initially be recorded
using spot rate and further the payables should be re-translated at the yearend using closing rate. The risk
is that inappropriate exchange rates are used resulting in under or overstatement of profit, exchange gain
or losses and liability.
Payment in advance
The revenue needs to be recognized at a point when control is passed to customer. Thus the 30% payment
in advance should be treated as deferred revenue at the point when payment is received. The risk is that
the revenue is recognized too early resulting in overstatement of revenue and profit.
New Non-executive directors
Each of these new non-executive directors will take time to understand the entity and its system & process,
in which span the overall monitoring of controls could be weaker, increasing risk of misstatements in
financial statements.
New finance director
The new finance director is basically responsible for the oversight of the financial statements. However the
decision taken by the new finance director on some of the accounting practices in the case demonstrate
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that he is not very competent on the financial reporting practices which increases the risk of material
misstatements in the financial statements where ever such accounting treatments are wrongly applied.
Cash settled share based payment plan
A liability in respect of the cash settled share based payment plan should be measured at fair value at the
year end with the expense recognized in the statement of profit or loss. Thus no liability has been
recognized in respect of cash settled share based payment plan, therefore overstating profit, understating
expense and liability.
Deferred tax recognition

The revaluation surplus of $3.5 million is 3.9% of the total assets and is material to the statement of
financial position. The revaluation of the manufacturing sites would give rise to a taxable temporary
difference between tax base of an asset and its carrying value and thus a deferred tax liability should be
recognized irrespective whether the asset is to be disposed or not . Thus at present deferred tax liability is
not recognized, which understate the liabilities.
Government grant
The grant is recognized as income over the period necessary to match the grant received with the related
cost which the grant intend to compensate. Thus $2 million grant should be immediately recognized as
income in relation to an expense already incurred. However the remaining $8 million grant will need to be
treated as deferred income over the next 5 years till 2020. The risk is that entire grant is recognized as
income, thus overstating profit and understanding deferred income. The government grant of $ 10 million
is 11.1% of the total assets and is thus material to the statement of financial position
WIP
WIP is a subjective area as it requires assessment of stage of completion. Any are which involve assessment
or subjectivity is inherent by nature and thus WIP could be overvalued if stage of completion is not rightly
determined. Thus inventory could be overstated. The WIP of $ 12 million is 13.3% of the total assets and is
thus material to the statement of financial position.
Warranty provision
Dali Co replaces faulty products free of charge indicates that a provision should be recognized on the best
estimate of future economic outflow. If it is not recognized it will understate operating expense and liability
and overstate profit
Additional information
1. Floatation agreement confirming the number of shares issued as part of listing process
2. WIP inventory valuation report to confirm that the stage of completion of each order for properly
assessed and valued.
3. Grant agreement to confirm the conditions associated with grant
4. Expert report confirming the assumption used to revalue the company’s manufacturing sites
5. Personnel files of the new directors to confirm their qualifications, background and experience.
6. Cash flow forecast to assess the foreseeable future in terms of its liquidity
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7. Board minutes confirming the number of members included within the scheme and its details. /
Further the basis and rationale behind another planned listed in 2016.
Procedures:
Government grant
1. Review the grant agreement confirming the amount of grant received (i.e. $ 10 million) and the conditions
associated with the grant.
2. Review the payroll register to confirm the amount of salaries and wages incurred in deprived areas for the
year ended 31/12/15.
3. Discuss with Dali Co management how they have recognized the amount of the government grant (i.e. $ 2
million and $ 8 million) to confirm that the management has followed the right accounting treatment.
4. Discuss with management their future plans / intentions to continue their manufacturing operations in the
deprived areas by 2020
5. Request a written representation from the management confirming their intentions to continue their
operations in deprived areas by 2020.
WIP
1. Observe the inventory count process at the yearend to confirm completeness of the count undertaken and
adherence to management instructions
2. Analyze the increase in WIP inventory (i.e. 26%) from over the last year and discuss with management the
reason of such a significant increase in WIP inventory at the year end.
3. Review the WIP inventory valuation schedule to identify orders which are older than 3 months for machine
and 1.5 months for smaller equipment and discuss reasons of such old orders still appearing in WIP schedule
with management
4. Discuss with management the process of assigning the stage of completion to each order for material, labor
and overheads.
5. Request a representation letter for confirming the completeness of the WIP inventory and the assessment of
the stage of completion of each order.
6. For a sample of order in WIP confirm the cost allocated to each order by reviewing relevant purchase
invoices, payroll record and overhead absorption schedule.
Conclusion
Thus Dali Company financial statements contains numerous risk of material misstatements. The audit
should be carefully performed with focus on material misstatements identified in order to keep the
detection risk at an acceptable level.
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Learning -
Other issues – student can think of
 Receivable possess the risk of overstatement – due to increase in receivable days [ from 70 to 90]
 Overall weaker working capital position / liquidity issues – need for disclosure
IFRS-15
Under IFRS-15 Revenue from contract with customers, revenue should only recognize as control is passed
either over time or a point in time. Factors indicating a control is passed include transference of physical
asset, transference of legal title or customer accepting significant risk or rewards associated with
ownership of asset.
Revaluation of properties
- The revaluation has been carried out by an external expert. However there are several risks
associated with revaluation such as:
- Though done by an expert determining the market value or fair value of property is subjective
exercise leading to a risk that properties are inappropriately revalued.
- As per IAS-16 all assets in the same class should be revalued, thus it needs to be assured that all
manufacturing sites are revalued. If not it will result is inappropriate revaluation.
- The depreciation expense has not been charged on higher amounts, thus understating operating
expense and overstating non-current asset and profit.
- The revaluation requires disclosure in notes as well, inappropriate or no disclosures itself if a risk
of material misstatements
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4 PROSPECTIVE FINANCIAL INFORMATION
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4.1 JUNE 2014- QUESTION 2

Part (b)
General procedures
1. Cast the forecast statement of profit or loss
2. Review the consistency of accounting polices used in preparing forecast profit or loss
Specific procedures
3. Analyze the forecasted growth in revenue (i.e. 23% in 2015 and 7% in 2016) and discuss reason for such
growth in revenue with Water Co management.
4. Analyze the number of tickets sold (i.e. 4667 in 2014, 4300 in 2015 and 4600 in 2016) and discuss reason
for such trends in tickets sold with management.
5. Analyze the forecasted increase in operating expenses (i.e.11.5 % in 2015 and 2% in 2016) and discuss
reason for such trends with management
6. Analyze the plausibility of operating expense to revenue (i.e. 81% in 2014, 73% in 2015 and 70% in 2016)
and discuss reason for such declining trend with management
7. Analyze the operating profit margin (i.e. 19% in 2014, 27% in 2015 and 32% in 2016) and discuss the
increasing trend in OPM with the management
8. Analyze the forecasted increase/ decrease in finance cost ( i.e. 18% in 2015 and 5% in 2016) and discuss
reason for such increase/ decrease with management
9. Analyze the interest cover ( i.e. 4 times in 2014, 6 times in 2015 and 7 times in 2016) and discuss reasons
for such improvements in interest cover with management
10. Analyze the profit margin (i.e. 14% in 2014, 22% in 2015 and 26% in 2016 ) and discuss reason for such
increasing trend with management
11. Review any quotations received from potential suppliers to confirm the adequacy of the capital
expenditure
12. Review the CAPEX budget to confirm the adequacy of the planned CAPEX on new projectors and larger
screens.
13. Review the ticket prices charged by competitor to confirm the reasonableness of the ticket prices
14. Analyze the forecasted increase/ decrease in staff cost, depreciation and R&M through the operating
expense breakup and discuss reasons with management
15. Analyze the operating expense breakup to identify any omission of operating expenses and discuss reason
with management
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4.2 JUNE 2012- Q2 ANSWER PLAN

General procedures
1. Cast ……….
2. Review the accounting policies …………………….
Specific procedures
3. Analyze the forecasted growth in revenue ( i.e. 21% ) and discuss reasons for such growth with management
4. Analyze the forecasted increase in operating expenses (i.e.15% ) and discuss reasons for such increase with
management
5. Analyze the plausibility of operating expense with revenue (i.e. 70% in 2012 and 66% in 2013) and discuss
reasons of declining trend with management.
6. Analyze the breakup of operating expenses to identify any omission of expense and discuss reasons with
management
7. Analyze the OPM ………………… and discuss reasons
8. Review the board minutes for the approval of sale of beak retail in Sept 2012.
9. Review any correspondence from the potential buyers to confirm the likelihood of sale in September 2012 /
likely sales price.
10. Recalculate the profit on disposal of beak retail to confirm its adequacy.
11. Recalculate the forecasted finance cost($30m*4% *10/12= $ 1m)
12. Analyze the interest cover / ……. Discuss reason with management
13. Analyze the profit margin /…….. discuss reason with management
14. Review the CAPEX budget to confirm the adequacy of the forecasted increase in PPE.
15. Review the loan correspondence confirming the amount of loan/ markup and the likely advancement in
August 2012.
16. Review the JV agreement confirming the JV arrangement with Kestrel Co.
17. Analyze the current ratio ( i.e. 1.39 in 2012 and 1.13 in 2013) and discuss reasons for worsening ability to
pay with management
18. Review the forecasted cash flow statement to confirm the declining trend in cash and cash equivalent.
19. Analyze the forecasted decrease in cash (i.e. 40%) and discuss reasons for such decline with management
20. Analyze the receivable days / …… discuss reasons with management
21. Discuss any planned issuance of shares with management ( considering a forecasted increase in share
capital)
22. Discuss reasons for static DTL with management ( considering planned CAPEX)
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4.3 JUNE 2012/ JUNE 2014
Matters – before / in agreeing the term of engagement
1. Scope
The audit firm should agree with management the suitable criteria to perform the review of prospective
financial information i.e. ISAE 3400.
2. Deadlines
The audit firm should ensure that the review of PFI is completed within the stipulated deadlines given by the
management
3. Intended users
The audit firm should agree with the management the intended users of the report on PFI
4. Assurance
The audit firm should make it clear to the management that the level of assurance is restricted to moderate
assurance only.
5. Responsibility
The audit firm should clearly segregate the management and auditor responsibility in terms of prospective
financial information i.e. management is responsible to make reliable assumption and auditor is responsible
to review the assumption used.
6. Fees and basis of fees
The auditor should agree the fees and its basis with the management (the basis could the number of
resources to be used / scope of engagement)
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5 DUE DILIGENCE REVIEW
Page 31 of 82
5.1 DECEMBER 2013-QUESTION 2

Part B:
Matters to focus on:
1. Vic and Lou
Vic and Lou are very important for Baltimore in a post-acquisition scenario as they are the one who made
Mizzen successful. Vic and Lou has the technical competence to develop website which is the major source
of income for Mizzen. Thus both these individual are the critical success factor of this acquisition and
Baltimore would not like to lose them.
2. Biz Grow
Biz Grow is the major shareholder of Mizzen Co and as part of likely acquisition Baltimore needs to buy
shareholding from BizGrow. The intention of BizGrow to sell its shareholding would be very important and
any attractive price offered by Baltimore is high likely to be accepted by BizGrow.
3. Employees
Mizzen has only 50 employees and it is likely that most of these employees are skilled possessing technical
competence in line with nature of business. Baltimore would need to retain these 50 employees due to their
skilled nature and experience in developing websites.
4. Nominal rent
In a post-acquisition scenario, the nominal rent would change to market rent which could be much higher
than the nominal rent of $ 1,000. Further, Baltimore needs to decide whether Mizzen will continue to operate
from the premises of BizGrow or should vacate the premises and shift its operations elsewhere.
5. Fixed assets
Baltimore need to consider the depreciation of these fixed assets and to ensure that the assets are not fully
depreciated. If such is the case, Baltimore would need to plan a capital expenditure in near future in terms of
buying new computer equipments etc.
6. Salary expense
As it seems that Baltimore would retain the 50 employees considering they are skilled, there is no likely relief
in the salary expense in future rather it will increase with the future increments / bonuses etc.
7. Bank Balance
The bank balance as per the most recent audited FS is $ 0.5m. However to any information to the contrary it
can be proved is it sufficient or not. Baltimore would be concerned with Mizzen liquidity position and need
to ensure that Mizzen has no liquidity issues before taking on the acquisition decision.
8. Revenue
Revenue is derived from three streams with stream 1 generating 50%, stream 2 contributing 30% and the
stream 3 contributing 20%. Baltimore would be concerned about the future sustainability of revenue from
each of these streams particularly the stream 1 which is 50% of the total income.
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9. Financial performance
The current trends in financial performance is very attractive as Mizzen Revenue and profit are growing at a
very good pace. Baltimore would be more focused on future trends or forecast of revenue and profit in order
to judge the financial sustainability of Mizzen Co.
Additional information
We should obtain the following additional information from the Mizzen Company management:
1. Agreement with BizGrow confirming the tenure of BizGrow investment or shareholding in Mizzen Co.
2. Payroll register confirming the number of employees and the payroll expense
3. Fixed asset register confirming the total number of assets, their cost, and the current book value
4. Bank statement confirming the most latest bank balance
5. Cash flow forecast confirming the future liquidity of Mizzen Co.
6. Rent agreement confirming the nominal rent of $ 1,000
7. Expert report/ correspondence confirming the market rent
8. Sales forecast confirming the future trends in sales and its sustainability
9. FS forecast confirming future trends in profitability includes expenses
10. Audited financial statements to analyze historical trends in financial statements
11. Loan agreement confirming the principal amount of loan and the interest rates
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6 FORENSIC
Page 34 of 82
6.1 DECEMBER 2011 –Q4

Part (a)
Issues:
 Self-review threat – ( Cedar is the auditor of Chestnut) + Different teams

 Self-interest threat – ( Fees = Audit + Forensic)
 Advocacy threat – ( witness in the court) + permissible
 Do we have competence (Do cedar has a forensic audit dept.)
Part (b)
Meeting with Jack:
Cedar & Co would discuss the following matters during the meeting with Jack tomorrow:
- The firm would discuss the suitable criteria of the forensic investigation i.e. ISRS, to confirm to Jack that the
forensic investigation in a no assurance engagement.
- The firm would also discuss with Jack access to evidence during the course of investigation as investigation
is a not a sample based exercise and would need a greater access to evidence
- Further in the meeting the firm would discuss any initial assessment of the amount of loss determined by
the management
- Moreover, the meeting would focus on the whistle blowing process, through which the management was
alerted that such fraud is taking place.
- The meeting would also discuss, loopholes found in internal controls by the management over travel and
entertainment expense which resulted into such a fraud.
- Lastly, the meeting would focus on the deadline for work to be completed by the audit firm including the
fees and basis of fees for the particular engagement
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6.2 JUNE 2013/ Q2 PART B

 Matters to be considered 3 marks
 Steps to be taken in planning 3 marks
 Procedures – amount of claim 6 marks
Matters to consider: (Theft/ insurance claim)
The audit firm would inquire from the audit committee:
- Has such instances of theft from warehouse has happened before or is this this first instance?
- Has the management identified any culprit/s?
- The working supporting the initial assessment of loss arising from theft
- Weaknesses in controls which led to the theft , considering CCTV system in the warehouse
- Has the matter been reported to police dept. for recovery of stolen inventory and lorry?
- Is the insurance policy valid / is it renewed each year?
- Has insurance company already contacted or will be contacted after investigation?
Steps in planning the investigation:
Steps to planning (Any three as marks are 3)
- Scope- The audit firm should be clear with its scope i.e. its responsibilities under forensic investigation which
are clearly given in the ISRS-4400. Further the audit firm should be clear with the scope of investigation to
be conducted at the Retriever group i.e. to determine the amount of loss.
- Timing – The audit firm should be clear with its deadline to complete the engagement.
- Direction- The audit firm should be clear with its direction i.e. the focus area of the investigation (the audit
firm focus is to be on inventory and the lorry which has been stolen)
- Resources – the audit firm will use staff for investigation from its forensic accounting department to ensure
competence.
- Evidence to be gathered – The audit firm should identify the procedures to be performed during the
investigation to gather evidence on the amount of loss due to theft of lorry and inventory.
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Procedures – amount of claim (6 marks)
Claim – insurance company

Cost of inventory stolen xxx
Cost of lorry xxx
Gross claim xxx
Less: recovery by the police (x)
Net claim xxx
Inventory – case (facts)
CCTV
Last inventory count – April 30
Theft- June 1
Lorry stolen –Fact
Procedures:
1. Review the fixed asset register to confirm the cost of the lorry stolen.
2. Watch the CCTV filmed, to determine a preliminary estimate of number of boxes stolen
3. Watch the CCTV filmed, to determine the nature of the inventory stolen ( is it the laptop boxes or the mobile
phone cartons )
4. Reconcile the inventory position from April 30 to June 1, to identify any discrepancies in the reconciled
quantity with the quantity in the warehouse/ inventory system.
5. From the dispatch list as of June 1, correspond with the customers in the dispatch list to confirm whether
they got the goods delivered or not / or review the acknowledge goods dispatch note pertaining to June 1
dispatch.
6. Determine the cost of inventory items by inquiring management ( for the unit cost of laptop and the unit cost
of mobile phone)
7. Calculate the cost of inventory stolen ( Qty stolen * cost per unit)
8. Inquire the audit committee whether any recovery has been made by the police pertaining to number of
boxes stolen or the lorry
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6.3 JUNE 2015- Q4 (C)

- Interrogate the two suspects to confirm the objective or the rationale of such payment been made to
customers before signing of contract/
- Interrogate the two suspects to confirm whether such payments were known to others in the organization
- Inquire Silvio as to how he determined that these two particular sales team members are involved in making
bribe payment
- Review the internal audit report to confirm the weaknesses identified in the cash payment process and how
the bribe payments were identified.
- Inquire the process of authorization of cash payment / who is responsible for approving cash payment to
customers.
- Review the list of new customers added during the year and trace payments made to them to cash book prior
to signing date of contract
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7 ETHICS
Page 39 of 82
7.1 DEC 15 /Q4 – 20 MARKS

Part a)
An audit firm can place an advertisement in a quality national newspaper as part of increasing the firm clientele or
the firm income. However the advertisement should not bring discredit to the services provided by other firms. In
this advertisement the use of terms like, your accountant charging you too much for poor quality service, most
comprehensive range of service and leading tax team is an evidence that such discredit exist.
Moreover, the audit firm cannot guarantee anything as audit firms only exist to provide assurance to their client.
Guarantee to be cheaper than your existing auditor means that the firm will indulge into the low balling practices in
order to win client. Low balling practices are not allowed as it compromise the audit quality
Offering business advice is an advocacy threat as by providing the business advice the audit firm will be promoting
the client business interest. Advocacy are allowed for non-listed client with separate teams, however in case of listed
client advocacy is are generally prohibited.
Audit firm cannot provide any professional service free of cost as it just not justify the quality of work performed
and the cost of resources used in that particular service.
Lastly, in order for the firm to be a chartered certified accountant at least half the partners should be members of
ACCA which is not the case with Monet. Thus the audit firm is having a false claim of being an ACCA registered firm
Part b)
The EP has telephoned the FD of Renoir Co to set up a planning meeting and to remind Jim of the outstanding tax
fees from the previous year. This mean that the EP is fully aware of his responsibilities that is to recover fees from
the client and to have a planning meeting before the start of each year engagement.
Jim has criticize the previous conduct of audit by informing partner of interruption he and his staff faced during the
last year audit. These interruptions could be mitigated if a schedule of information is provided to the client before
the start of the current year audit.
Jim wants guarantee that this year audit will be less intrusive, more efficient and cheaper. The EP should discuss
with Jim that by providing schedule of information we can ensure that audit is less intrusive and more efficient.
However, in terms of providing a cheaper audit as from the last year the EP should carefully discuss the basis of fees
with Jim and justify Jim that the audit fees can only reduce if the basis of the fees so support.
EP should also justify Jim and that an audit firm can only provide assurance to you on the conditions you have set
rather than giving you a guarantee.
Jim will seek an alternative auditor if the three condition set above are not guaranteed by the EP. This is an
intimidation threat as the FD is trying to influence the EP. EP should discuss with Jim that we can only meet his
acceptable conditions raised above and our relationship should continue ahead. If such is not accepted by Jim then
take a legal advice.
Page 40 of 82
Part C)
Monet & Co has recently acquired another audit firm Maar Associates which brings competitive advantage to Monet
& Co in terms of increase in number of clients, resources and income. Acquisition is a decision in line with firm
objective to increase its number of clientele. 2n Pissarro both of which are competitor to one another thus resulting
into conflict of interest and confidentiality issues.
Monet & Co should notify both the competitors of the situation and should seek permission from both to continue
with this arrangement. If permission is given, the firm should allocated two different teams/ partners to each client
along with a confidentiality agreement signed within the team’s members.
Lastly, as the audit firm has a department which specializes in the digital and media publishing it would be better to
choose both teams from the same department for ensuring a better quality of work as this department is competent
of doing such audit. However we should ensure a second partner / independent partner review is performed of the
engagement before signing the audit report.
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8 EVIDENCE
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8.1 GUIDANCE ON MAKING PROCEDURES / WRITING EVIDENCE

Q1- Typically involves recommending procedures on certain accounting matters. Q3 mostly or rarely Q2 involves
matters and evidence on certain accounting matters.
Evidence = 1 MARKS PER EVIDENCE (WITH REASON)
1. Copy of
2. Result of discussion / recalculation
3. Extracts of
4. Disclosure note
5. Draft financial statements
6. Representation letter
7. Confirmation letter
Procedures = 1 MARK PER PROCEDURE (WITH REASON)
1. Review
2. Inquire/ discuss
3. Recalculate
4. Analyze
5. Confirmation to third parties
Matters = 1 MARK PER MATTER
1. Materiality
2. Treatment
3. Risk
Page 43 of 82
8.2 JUNE 2013-QUESTION 3
Distribution license
The final audit for the year ended 31 January 2013 is nearing completion and you are reviewing the audit working
papers. The draft financial statements recognize total assets of $300 million, revenue of $620 million and profit
before tax of $47·5 million
The statement of financial position includes an intangible asset of $15 million, which is the cost of a distribution
license acquired on 1 September 2012. The license gives Setter Stores Co the exclusive right to distribute a popular
branded soft drink in its stores for a period of five years. (5 marks)
Explain the matters and recommend the audit evidence you should expect to find in the working paper file?
Matters
– The amount capitalized as an intangible asset is material to the statement of financial position, representing
5% of total assets.
– According to IAS 38 Intangible Assets, an intangible asset is recognized in the financial statements if it meets
the definition of an intangible asset, if it is probable that future economic benefits will flow to the reporting
entity, and if its cost can be reliably measured. Management should be able to demonstrate the economic
benefit that has been, or is expected to be, derived from the license.
– As the license has a fixed term of five years, it should be amortized over that period. However, it appears that
amortisation has not been charged, as the amount recognized at the yearend is the original cost of the license.
Amortisation of $1·25 million (15 million/5 years x 5/12) should have been charged from 1 September to
the year end.
Evidence
1. A copy of the distribution license, confirming the five-year period of the license, and the cost of $15 million.
2. Copy of the bank statement as evidence of payment made
3. Results of discussion with management regarding the apparent non-amortisation of the license, including
any reasons given for the non-amortisation.
4. Copy of Sales forecast in relation to the soft drink to determine the future economic benefit to be derived
from the license
Page 44 of 82
Assets held for sale

Setter Stores Co owns a number of properties which have been classified as assets held for sale in the statement of
financial position. The notes to the financial statements state that the properties are all due to be sold within one
year. On classification as held for sale, in October 2012, the properties were re-measured from carrying value of $26
million to fair value less cost to sell of $24 million, which is the amount recognized in the statement of financial
position at the year end. (8 marks)
Explain the matters and recommend the audit evidence you should expect to find in the working paper file?
Matters
The properties classified as assets held for sale are material to the financial statements as the year-end carrying
value of $24 million represent 8% of total assets.
Assets can only be classified as held for sale if the conditions referred to in IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations are met. The conditions include the following:
- Management is committed to a plan to sell;
- The assets are available for immediate sale;
- An active programme to locate a buyer is initiated;
- The sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions);
- The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value;
- Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or
withdrawn.
IFRS 5 requires that at classification as held for sale, assets are measured at the lower of carrying value and fair value
less costs to sell. This appears to have been correctly accounted for when classification occurred in October 2012.The
assets should not be depreciated after being classified as held for sale. The risk could be that the asset is wrongly
classified as a non-current asset or further depreciated which could understate profit and overstate expenses.
Evidence
1. A copy of the board minute at which the disposal of the properties was agreed by management.
2. Copy of Marketing literature ( as an evidence that instruction was given to real estate agency for selling the
properties)
3. Copy of correspondences with prospective buyers confirming the buyer intention to buy properties.
4. Copy of management’s calculations on the fair value less cost to sell and assess the validity of any
assumptions used.
5. Copy of client depreciation schedule to confirm that depreciation was charged only up to October 2012
6. Draft SOFP confirming that asset is classified as a current asset
Page 45 of 82
8.3 DECEMBER 2013- Q3

Explain the matters to be considered and the evidence you should expect to find in your review of the working
paper file (14 marks)
Matters to consider (Maximum 7 – Marks 7)
– The mine is recognized at $10 million, representing 5·7% of Dasset Co’s total assets, and therefore material
to the statement of financial position.
– The accident has caused part of the mine to be unusable, which indicates that it has become impaired. IAS 36
Impairment of Assets requires that an impairment review should be conducted when there is an indicator of
potential impairment, and therefore management should have performed a review to determine the
recoverable amount of the mine. If an impairment review has not been performed, and no adjustment made
to the carrying value of the mine, then assets will be overstated and profit overstated.
– There may also be costs to be incurred in making the unusable tunnels safe. These costs should be expensed
as they do not relate to future economic benefit and so do not meet the definition of an asset. There is a risk
that capital and revenue expenses have not been appropriately classified.
– There has also been damage caused to some properties situated above the mine. Dasset Co may need to
recognize a provision in relation to any costs it will suffer in relation to repairing or demolishing the
properties. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should
be recognized if there is a present obligation as a result of a past event, a probable outflow of economic
benefits, and a reliable estimate can be made. If provision is not recognize it will overstate profit and
understate liability
Evidence in the working paper file (Maximum 7 – Marks 7)

1. A copy of the operating license, reviewed for conditions relating to health and safety and for potential fines
and penalties which may be imposed in the event of non-compliance.
2. A copy of board minutes where the accident has been discussed and its future impact on business
3. A copy of reports issued by engineers or other mining specialists confirming the extent of the damage
caused to the mine by the accident.
4. Copy of quotes obtained for work to be performed to make the mine safe and for blocking off entrances to
abandoned tunnels.
5. Copy of specialist report as a confirmation that the undamaged portion of the mine is operational
6. A copy of the surveyor’s report on the residential properties, reviewed for the expert’s opinion as to
whether they should be demolished.
7. Copy of the correspondence entered into with the local residents who have been relocated, to confirm the
obligation the company has committed to in respect of their relocation.
8. Copies of legal correspondence, reviewed for any further claims made by local residents.
9. Copy of extracts of Ledge Hill Mine accident book, for confirmation that no one was injured in the accident.
10. A copy of management’s impairment review, if any, evaluated to ensure that assumptions are reasonable
and in line with auditor’s understanding of the situation.
11. Breakup of operating expense confirming that impairment losses have been recognized as an operating
expense.
Page 46 of 82
8.4 JUNE 2014 –Q3

Cooper Co Factories – 8 MARKS
Matters
- $ 30 Million= 12.5% TA
- The government regulation stipulating the use of chemical is an external indicator for impairment review. If
the management does not perform an impairment review of the plant and machinery used in factories it will
OS the plant and machinery, US the operating expense and OS the profit.
- $ 1 million = 6.67% of the PBT
- The cost incurred on feasibility study to research a replacement chemical is to be expensed out. If the cost is
capitalized it will OS the intangible assets, US expenses and OS profit.
Evidence in working paper file
- Govt regulation confirming …………………..
- Extracts of the FAR……………….
- Results of discussion ……. ( undertaken an impairment review)
- Copy of the board minutes ……. ( research into a new chemical)
- Extracts of the feasibility study ……… ( confirming the study was undertaken)
- Copy of the bank statement ……. ( amount spent on feasibility study)
- Breakup of operating expense …… ( $ 1 million was expensed out )
- Copy of the sales projection ……. ( confirming the 45% contribution of the chemical in total sales)
(ii) Finance director – 7 marks
Matters
- $ 50,000 is trivial to the total assets
- A transaction with a director is important / material by its nature and should be treated as important by the
auditor.
- Being a transaction with director there should be proper disclosures in notes to financial statements. If
adequate disclosure is not given the FS could be MM.
Evidence in working paper file:
- Copy of the company policy (confirming that when assets are sold to employees or directors they are sold at
their CV.)
- Copy of invoice ……. Confirm that the car was sold to FD at $ 50,000
- Disclosure note in the FS …….. confirming the completeness of the disclosure given
- Results of discussion …… confirming her intention to pay / by when
Page 47 of 82
8.5 JUNE 2015- Q1 EXTRACTS

PORTFOLIO OF SHORT TERM INVESTMENT
The treasury management function also deals with short-term investments. In January 2015, cash of $8 million was
invested in a portfolio of equity shares held in listed companies, which is to be held in the short term as a speculative
investment. The shares are recognized as a financial asset at cost of $8 million in the draft statement of financial
position. The fair value of the shares at 31 May 2015 is $6
Recommend procedures – 4 marks

1. Agree the fair value of the shares held as investments to stock market share price listings at 31 May 2015.
2. Confirm the original cost of the investment to cash book and bank statements.
3. Discuss the accounting treatment with management and confirm that an adjustment will be made to
recognize the shares at fair value.
4. Review board minutes to confirm the authorization and approval of the amount invested.
EPS
Recommend procedures- 4 marks

1. Discuss with management the requirements of IAS 33 and request that management recalculates the EPS in
accordance with those requirements.
2. Review board minutes to confirm the authorization of the issue of share capital (the number of shares)
3. Inspect any other supporting documentation for the share issue, such as a share issue prospectus or
documentation submitted to the relevant regulatory body.
4. Recalculate the weighted average number of shares for the year to 31 May 2015.
5. Recalculate EPS using the profit as disclosed in the statement of profit or loss and the weighted average
number of shares.
Page 48 of 82
8.6 DECEMBER 2014- QUESTION 2

Required:
Comment on the matters to be considered, and explain the audit evidence you should expect to find during
your review of the audit working papers in respect of each of the issues described above.
Part a) – Teapot Co (12 marks)

Matters
- $ 27 million representing the Goodwill recognized in SOFP is 6% of the total assets thus material to the SOFP.
- Goodwill is recognized at the same value at the yearend on which it was initially recognized i.e. $ 27 million.
The management should conduct an annual impairment review of Goodwill and it seems that this has not
been performed. Thus the goodwill could be OS if the impairment review is not performed.
- $0.3 million representing the FV adjustment to the book value of property is .49% of the total FV of net assets
thus it is an immaterial matter.
- $ 60 million representing the amount of loan taken is 13.3% of the total assets thus material to the SOFP.
- The premium on the loan i.e. $ 5 million should be amortized on a 20 year period as a component of the
finance cost. If the premium is not amortized it will US the finance cost and overstate the profit.
1. Copy of the board minutes confirming the approval of acquisition of 80% shareholding of the Teapot Co.
2. Copy of the purchase agreement with Teapot Co confirming the acquisition of 80% shareholding and the
purchase consideration of $ 75 million.
3. Copy of the bank statement for payment made to Teapot Co reflecting the purchase consideration
4. Extracts of the shareholding register of Teapot Co confirming the non-controlling interest is 20%
5. Stock exchange quotation as on 1/8/13 confirming the market price/ value of the shares of teapot company
6. Copy of the DD report / expert report confirming the FV on the net assets acquired (i.e.$ 61 million)
7. Copy of loan agreement confirming the principal amount of loan taken and the loan covenants.
8. Results of discussion with management confirming whether the annual impairment review of the goodwill
was undertaken.
9. Results of discussion with management confirming the treatment undertaken for the amortization of
premium
10. Results of recalculation confirming the accuracy of the finance cost.
Part B- Natural disaster

Matters :
- $ 16 million representing the CV of the property damaged due to natural disaster is 3.5% of the total assets
thus material to SOFP
- The natural disaster is a non –adjusting event which requires proper disclosure in notes to financial
statement. If the adequate disclosure is not given the FS could be materially misstated
- $ 18 million representing the contingent asset is 4% of the total assets thus material to SOFP
- The contingent asset representing the amount claimed from insurance company could not be recognized as
the natural disaster is a non-adjusting event even if the claim is virtually certain. Thus at present the CA and
the DI is overstated.
Page 49 of 82

1. Copy of the board minutes confirming the approval of the decision to demolish the properties in wake of
the natural disaster.
2. Copy of the surveyor report confirming the cost to be incurred on demolishing the properties.
3. Extracts of the FAR confirming the CV of the property i.e. $ 16 million
4. Copy of the correspondence with insurance company confirming the amount claimed from insurance
company and the likelihood of receipt of claim.
5. Result of discussion with management confirming their viewpoint on the removal of contingent assets
recognized as CA/ DI.
6. Disclosure note in the FS confirming the completeness of the disclosure given on the natural disaster
including the damaged caused to property and the amount claim from insurance company.
Part C- Intercompany transactions (6 marks)
Matters
- $ 20 million representing the IC R/P is 4% of the total assets thus material to the SOFP
- The IC R/P should be eliminated on consolidation else the group receivable and payables will be overstated.
- $ 50 million representing the inventory supplied by Marks to Robert is 11% of the total assets thus material
to the SOFP
- Any URP on inventory should be eliminated from the consolidation else the group profit will be overstated.
1. Copy of the agreement b/w Marks and Robert confirming that Marks supplies components to Robert ( either
at cost or profit)
2. Breakup of Marks Co receivable confirming the amount receivable from Robert company is $ 20 million
3. Breakup of Robert Co payables confirming the amount payable to Mark Co is $ 20 million
4. Copy of the consolidation schedule confirming that all intercompany transaction are eliminated on
consolidation ( i.e. IC R /P and URP)
5. Copy of the inventory valuation report confirming the value of inventory held by Robert is $ 50 million.
Page 50 of 82
9 REPORTING
Page 51 of 82
9.1 DECEMBER 2014 –Q5

Verb
- Matters – Materiality + Treatment + Impact on report
- Justify an opinion + an impact on report
Share based payment scheme

The SBPS of $ 300,000 is 12% of the revenue and 0.85% of the total assets. Thus the SBPS is material to the SOCI and
immaterial to the SOFP. The share based payment expense will be recognized over the vesting period of the share
options by taking into account the fair value at the grant date. If the management refuse to recognize an expense as
proposed by the auditor, it will lead down to a qualified opinion as the matter is material to SOCI.
If the management agree to recognize the expense, the auditor would include the matter as a key audit matter,
defining the proposed adjustment and the management response to recognize the expense in SOCI/SOFP.
Provision
Restructuring provision (RP) of $ 50,000 is 2% of revenue and 0.14% of the total assets. Thus the RP is material to
the SOCI and immaterial to the SOFP. The RP should be recognized from the date of the formal announcement to
stakeholders rather from the date the decision was taken in the board meeting. Thus RP recognized should be
reversed. If not reversed, its material to SOCI, would lead down to a qualified opinion.
If the RP is reversed by the management, the auditor would include this in the KAM para, defining the proposed
adjustment and the management willingness to reverse the RP in the SOFP/SOCI.
Allowance for slow moving inventory
Allowance of $ 10,000 is 0.4% of the revenue and 0.03% of the total assets. Thus the allowance is material to the
SOCI (as it is closer to the starting threshold of 0.5% for revenue) and immaterial to the SOFP. The management has
under recognized the allowance by $ 10,000, i.e. it should had been $45,000 instead of $ 35,000. If the further
allowance is not recognized, considering it is material to the SOCI, would lead down to a qualified opinion
If further allowance is recognized by the management, the auditor would include this as a KAM (considering its closer
to the starting threshold of materiality for revenue) and would explain to the SH the proposed adjustment and the
management agreement to resolve it.
(ii)
The aggregate proposed net adjustment in the FS of Bradley Co are $260,000 (i.e. 310,000-50,000). The aggregate
net adjustment is 10.4% of the revenue and 0.74% of the total assets. Thus the aggregate net adjustments are
material to SOCI and not to the SOFP.
The auditor will issue a qualified opinion on the FS of Bradley Co if the proposed net adjustment are refused by the
management. Further the auditor will include a basis of qualified opinion para to highlight the issue and the proposed
adjustment which are not incorporated in the FS of the company. The opinion para will come before the basis of
opinion para in the audit report.
Page 52 of 82
9.2 JUNE 2013 – Q5

Verbs:
- Implication for completion of audit + Adjustment necessary+ procedures+ impact on report
Answer:
The audit senior has left a note for the attention of the manager highlighting several issues found during the course
of the Poodle Group audit. The manager needs to give proper time to each of the issues highlighted by the senior by
having a review of the working papers of each issue, followed by deciding whether further evidence is needed on
these issues or not.
Moreover, the manager needs to discuss these issues with his audit partner, proposed the adjustments and then need
to discuss these issues with those charged with governance. Further the manager needs to ensure that if the issues
remain un-adjusted by TCWG, the audit report is modified accordingly.
Lastly, the audit manager should carefully plan all this execution within the time span of seven days as the audit
report is to be released next week.
Toy Co:
The provision of $0.5 million arising from the ongoing court case is not recorded either in the individual or group FS.
The provision should be adjusted in the group FS by incorporating the following adjustment.
DR: Operating expense $0.5m
CR: Current liabilities $0.5m
The auditor should review the details of the ongoing court case to identify the grounds of the case and the exposure
i.e. $0.5 million. The auditor would also review the local accounting standards to confirm that provision in the Toy
Co FS can only be recorded if the outflow is virtually certain. Further the auditor needs to correspond in writing with
the legal advisor confirming that damages are probable to be paid and hence a provision is to be recognized in group
FS.
The provision of $0.5million is 25% of the group PBT and 0.86% of the group total assets. Thus the provision is
material to the SOCI and immaterial to the SOFP.
Thus if the provision is not recorded it will lead to a qualified opinion on the financial statements of the group.
Trade receivable
Adjustment – write it
The auditor should review the notice from the administrator to confirm that Terrier Co will only be able to pay 10%
of the amount they owed to Poodle. Further, the auditor would re-calculate the bad debt expense i.e.
$1.6m*.90=$1.44 million
Impact – individual (72% of the PBT / 2.4% of the Total assets) + adverse
The aggregate misstatement in the Poodle Group FS are $1.94 million (i.e. $0.5 million+ $1.44 million). The aggregate
misstatement is 97% of the group PBT and 3.3% of the total assets. Thus it is material and pervasive to the SOCI and
material to the SOFP. Thus if both the misstatements are not rectified the auditor will issue an adverse opinion on
the Group FS.
Page 53 of 82
Chairman statement
Adjustment – write it
Procedures
The auditor should reconfirm the actual increase in group revenue i.e. 5.8%. Further the auditor should discuss with
the group chairman the basis of 20% increase in revenue as mentioned by the chairman.
The material inconsistency between the revenue growth shown in the CM statement (i.e. 20%) and the actual
revenue growth shown in SOCI (i.e. 5.8%) should be highlighted for shareholder attention in the other information
paragraph. This para will also include the auditor responsibility towards other information in the financial
statements.
Page 54 of 82
9.3 DECEMBER 2012-QUESTION 5

Verbs
- Actions
The auditor should discuss with Dylan Co TCWG about the records relating to 11 months before the computer virus
attack in August 2012 for revenue, receivable and payroll. Moreover the auditor will discuss, any backups of records
held by the Hendrix or Dylan from where the data could be recovered. Further, the auditor would discuss with the
management whether a computer expert could be involved in retrieving the data in a post virus attack scenario.
If after discussing with management the auditor concludes that there is an inability to obtain evidence due to a
computer virus attack the auditor would consider the impact on the audit report.
As the payroll, revenue and receivables are material to the financial statements the auditor will issue a qualified
opinion due to inability to obtain evidence on Dylan Co FS.
Note- do rest of the drafting yourself, this is just the drafting for “Actions”
Page 55 of 82
10 GROUP
Page 56 of 82
10.1 GROUP EXAM UNDERSTANDING

Group is reflected in Q1 at certain intervals under audit risk or risk of material misstatements. The introduction of
group in a question will not change the way you solve a question on audit risk or RMM. Everything will remain the
same with the only exception that in a group scenario beside the common standards you face in other cases like,
revenue recognition, provision, foreign exchange transactions, research and development etc., which will still be part
of the group scenario you will find some particular group reflection is cases, confined to, goodwill, intercompany
transactions, associates and non-controlling interest (that is the only knowledge a student should have in P7) from
group.
P7 – Group scenarios
Goodwill Non-controlling Intercompany Associates

interest transactions
Initial Separate line Elimination In SOFP-

recognition item in equity investment in
section of SOFP associate is
Annual review shown as NCA
for impairment Each year, the
profit Each year the
attributable to cost of
NCI will increase investment in
the equity associate will
component increase /
SOCI- must decrease with
disclose the share of profit/
profit loss in associate
attributable to in SOFP
NCI as a separate
line item Share of profit/
loss in associate –
separate line
item in SOCI
Page 57 of 82
10.2 INTER-COMPANY TRANSACTIONS
December 2012-Q2
Marks Co supplies some of the components used by Roberts Co in its manufacturing process. At the year end, an
intercompany receivable of $20 million is recognized in Marks Co’s financial statements. Roberts Co’s financial
statements include a corresponding intercompany payables balance of $20 million and inventory supplied from
Marks Co valued at $50 million.
Answer / including the treatment of the intercompany transactions
The intercompany receivables and payables represent 4·4% of Group assets and are material to the consolidated
statement of financial position. The inventory is also material, at 11% of Group assets.
On consolidation, the intercompany receivables and payables balances should be eliminated, leaving only balances
between the Group and external parties recognized at Group level. There is a risk that during the consolidation
process the elimination has not happened, overstating Group assets and liabilities by the same amount.
If the intercompany transaction included a profit element, then the inventory needs to be reduced in value by an
adjustment for unrealized profit. This means that the profit made by Marks Co on the sale of any inventory still
remaining in the Group at the yearend is eliminated. If the adjustment has not been made, then inventory and
Group profit will be overstated.
Page 58 of 82
10.3 GOODWILL – SCENARIO 1 / 2/ 3
June 2012-Q1 CS Group

The most significant event for the CS Group this year was the acquisition of Canary Co, which took place on 1
February 2012. Crow Co purchased all of Canary Co’s equity shares for cash consideration of $125 million, and
further contingent consideration of $30 million will be paid on the third anniversary of the acquisition, if the
Group’s revenue grows by at least 8% per annum. Crow Co engaged an external provider to perform due diligence
on Canary Co, whose report indicated that the fair value of Canary Co’s net assets was estimated to be $110 million
at the date of acquisition. Goodwill arising on the acquisition has been calculated as follows:
Answer / including the treatment a student should know for P7

The client has determined goodwill arising on the acquisition of Canary Co to be $45 million, which is material to the
consolidated financial statements, representing 8·2% of total assets.
The other component of the goodwill calculation is the value of identifiable assets acquired, which IFRS 3 requires
to be measured at fair value at the date of acquisition. This again is inherently risky, as estimating fair value can
involve uncertainty. Possibly the risk is reduced somewhat as the fair values have been determined by an external
firm.
Goodwill should be tested for impairment annually according to IAS 36 Impairment of Assets, and a test should be
performed in the year of acquisition, regardless of whether indicators of impairment exist. There is therefore a risk
that goodwill may be overstated if management has not conducted an impairment test at the year end. If the
impairment review were to indicate that goodwill is overstated, there would be implications for the cost of
investment recognized in Crow Co’s financial statements, which may also be overstated.
December 2012-Q2- FRANCIS GROUP

An 80% equity shareholding in Teapot Co was acquired on 1 August 2013. Goodwill on the acquisition of $27
million was calculated at that date and remains recognized as an intangible asset at that value at the year end. The
goodwill calculation performed by the Group’s management is shown below:
$’000
Purchase consideration 75,000
Fair value of 20% non-controlling interest 13,000
88,000
Less: Fair value of Teapot Co’s identifiable net assets at acquisition (61,000)
Goodwill 27,000
Page 59 of 82
December 2013 –Q1 (Stow group)

The Group’s statement of financial position recognizes goodwill at acquisition of $60 million.
December 2012-Q2- JOVI GROUP

The goodwill relates to each of the subsidiaries in the Group. Management has confirmed in writing that goodwill is
stated correctly, and our other audit procedure was to arithmetically check the impairment review conducted by
management. The Goodwill is shown is SOFP at $ 5.3 million the same value as of the last year. During the year,
revenue from one of the subsidiary has fallen by 25%
Page 60 of 82
10.4 NON-CONTROLLING INTEREST

December 2012-Q2- JOVI GROUP
Two of the Group’s subsidiaries are partly owned by shareholders external to the Group.
Answer/ including the treatment relevant to P7

The statement of financial position correctly discloses the non-controlling interest as a component of equity, as
required by IAS 1 Presentation of Financial Statements. However, the statement of comprehensive income does not
disclose the profit for the year or total comprehensive income for the year attributable to the non-controlling
interest. The FS are not misstated for the inappropriate presentation
Page 61 of 82
10.5 MANAGEMENT CHARGE
June 2014- Q1
Adams Co imposes an annual management charge of $800,000 on each of its subsidiaries, with the charge for
each financial year payable in the subsequent August.
Answer / including treatment relevant to P7
The management charges imposed by the parent company on the subsidiaries represent inter-company
transactions. In the individual financial statements of each subsidiary, there should be an accrual of $800,000 for
the management charge payable in August 2014, and Adams Co’s individual financial statements should include
$2·4 million as a receivable. There is a risk that these payables and the corresponding receivable have not been
accrued in the individual financial statements.
At Group level, the inter-company balances should be eliminated on consolidation. If this has not happened, the
liabilities and receivables in the Group financial statements will be overstated, though there would be no net effect
on Group profit if the balances were not eliminated.
Page 62 of 82
10.6 INVESTMENT IN ASSOCIATES
June 2015- Q2
In January 2015, the Group acquired 52% of the equity shares of Baldrick Co. This company has not been
consolidated into the Group as a subsidiary, and is instead accounted for as an associate. The Group finance
director’s reason for this accounting treatment is that Baldrick Co’s operations have not yet been integrated with
those of the rest of the Group. Baldrick Co’s financial statements recognize total assets of $18 million and a loss for
the year to 31 March 2015 of $5 million.
December 2012-Q2
The associate is a 30% holding in James Co, purchased to provide investment income. The audit team have
not obtained evidence regarding the associate as there is no movement in the amount recognized in the
statement of financial position.
Page 63 of 82
Page 64 of 82
June 2014-Q1
Adams Co also owns 25% of Stewart Co, a company which is classified as an associate in the Group
statement of financial position at a value of $12 million at 31 May 2014. The shares in Stewart Co were
acquired in January 2014 for consideration of $11·5 million.
Answer / including treatment relevant to P7

The investment in the associate recognized in the statement of financial position has increased in value since
acquisition by $0·5 million, presumably due to the inclusion of the Group’s share of profit arising since investment.
There is a disclosure issue, as the Group’s share of post-investment profit of Stewart Co should be recognized in
profit that the profit or loss section of the statement of profit or loss shall include as a line item the share of the
profit or loss of associates accounted for using the equity method. The draft statement of profit or loss and other
comprehensive income does not show income from the associate as a separate line item; it may have been omitted
or netted against operating expenses, and the risk is inappropriate presentation of the income from investment.
Page 65 of 82
11 ACCOUNTING STANDARDS
Page 66 of 82
11.1 IAS-10
Student guidance:
Student should be capable of differentiating between adjusting and non-adjusting events and their respective
treatment in the financial statements. The case below is the only instance where this IAS was tested in P7 past papers.
December 2014- Q2
In September 2014, a natural disaster caused severe damage to the property complex housing the Group’s head
office and main manufacturing site. For health and safety reasons, a decision was made to demolish the property
complex. The demolition took place three weeks after the damage was caused. The property had a carrying value of
$16 million at 31 July 2014.
A contingent asset of $18 million has been recognized as a current asset and as deferred income in the Group
statement of financial position at 31 July 2014, representing the amount claimed under the Group’s insurance policy
in respect of the disaster.
Note: Co year end is July 31.2014
11.2 IAS-12
Student guidance:
Student should be capable of differentiating between taxable temporary differences or deductible temporary
differences and their recognition in the FS. The case below is the only instance where this IAS was tested in P7
past papers. It is not a frequently examined IAS.
Page 67 of 82
December 2015-Q1
The finance director recommended that the company’s manufacturing sites should be revalued. An external
valuation was performed in June 2015, resulting in a revaluation surplus of $3·5 million being recognized in equity.
The finance director has informed the audit committee that no deferred tax needs to be provided in respect of the
valuation because the property is part of continuing operations and there is no plan for disposal.
11.3 IAS-16
Student guidance:
Initial Students should be clear with initial recognition of PPE and revaluation. Particularly revaluation of
PPE, which increase the depreciation charge over PPE, results in taxable temporary difference (Deferred tax
liability) and disclosures. The case pertaining to IAS-16 from past papers are given below:
Initial recognition
All items of PPE should be recorded at cost (which is the purchase price/ import duties/ non-refundable taxes +
directly attributable cost of bringing the asset to tis location and condition i.e. professional fees, site preparation cost,
installation cost , initial delivery and handling charges etc. + cost of dismantling and removing the items and restoring
the site.
Subsequent measurement –
Cost model
Revaluation model – any increase in carrying amount should be recognized as revaluation surplus.
June 2013-Q1
All of the company’s properties were revalued on 1 January 2013 by an independent, professionally qualified expert.
December 2011- Q1
On 30 June 2011 Oak Co’s properties were revalued by an independent expert.
December 2012-Q1-IAS 16/23
Work has recently started on a new production line which will ensure that Grohl Co meets new regulatory
requirements prohibiting the use of certain chemicals, which come into force in March 2013. In July 2012, a loan of
$30 million with an interest rate of 4% was negotiated with Grohl Co’s bank, the main purpose of the loan being to
fund the capital expenditure necessary for the new production line
Page 68 of 82
11.4 IAS-17 (IFRS-16 IS APPLICABLE FROM 2019)

Student guidance
Students should know the criteria of a finance lease classification including sale and lease back treatment in FS. The
scenarios from the past papers are given below including the guidance on finance lease classification and sale and
lease back.
Situations and Indicators of Finance Lease
IAS 17 outlines examples of situations that would normally lead to a lease being classified as a finance lease:
The lease transfers ownership of the asset to the lessee by the end of the lease term.
The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair
value at the date of the option exercisability. It is reasonably certain, at the inception of the lease, that the option
will be exercised.
1. The lease term is for the major part of the economic life of the asset even if the title is not transferred.
2. At the inception of the lease the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset.
3. The leased assets are of such a specialized nature that only the lessee can use them without
major modifications.
Student guidance: Particularly, the condition 3 and 4 are examined in P7 so ensure you apply them to the case as
given below:
December 2011-Q1
On 1 July 2011, Oak Co entered into a lease which has been accounted for as a finance lease and capitalized at $5
million. The leased property is used as the head office for Oak Co’s new website development and sales division. The
lease term is for five years and the fair value of the property at the inception of the lease was $20 million.
Page 69 of 82
11.4.1 Sale and Leaseback with Finance Lease
If the resulting lease is a finance lease, then in fact, the transaction is a loan securitized by the leased asset and seller
/ lessee keeps recognizing the asset. Any excess of proceeds over the carrying amount of the leased asset is deferred
and amortized over the lease term. A sale and leaseback transaction involves the sale of an asset and the leasing
the same asset back. In this situation, a seller becomes a lessee and a buyer becomes a lessor. This is illustrated in
the following scheme:
June 2013-Q3
A sale and leaseback arrangement involving a large property complex was entered into on 31 January 2013. The
property complex is a large warehousing facility, which was sold for $37 million, its fair value at the date of the
disposal. The facility had a carrying value at that date of $27 million. The only accounting entry recognized in respect
of the proceeds raised was to record the cash received and recognize a non-current liability classified as ‘Obligations
under finance lease’. The lease term is for 20 years, the same as the remaining useful life of the property complex,
and Setter Stores Co retains the risks and rewards associated with the asset
JUNE 2015- Q2
In December 2014, a leisure centre complex was sold for proceeds equivalent to its fair value of $35 million, the
related assets have been derecognized from the Group statement of financial position, and a profit on disposal of $8
million is included in the Group statement of profit or loss for the year. The remaining useful life of the leisure centre
complex was 21 years at the date of disposal.
The Group is leasing back the leisure centre complex to use in its ongoing operations, paying a rental based on the
market rate of interest plus 2%. At the end of the 20-year lease arrangement, the Group has the option to repurchase
the leisure centre complex for its market value at that time.
December 2012-Q2
Operating expenses for the year to June 2012 is shown net of a profit on a property disposal of $2 million. Our
evidence includes agreeing the cash receipts to bank statement and sale documentation, and we have confirmed that
the property has been removed from the non-current asset register. The audit junior noted when reviewing the sale
document, that there is an option to repurchase the property in five years’ time, but did not discuss the matter with
management.
Page 70 of 82
11.5 IAS-20
Student guidance:
The cases on government grant from past papers are given below:
June 2012-Q1
Starling Co received a grant of $35 million on 1 March 2012 in relation to redevelopment of its main manufacturing
site. The government is providing grants to companies for capital expenditure on environmentally friendly assets.
Starling Co has spent $25 million of the amount received on solar panels which generate electricity, and intends to
spend the remaining $10 million on upgrading its production and packaging lines.
December 2015-Q1
In July 2015, a government grant of $10 million was received as part of a government scheme to subsidize companies
which operate in deprived areas. Specifically $2 million of the grant compensates the company for wages and salaries
incurred in the year to 31 December 2015. The remaining grant relates to the continued operations in the deprived
area, with a condition of the grant being that the manufacturing site in that area will remain operational until July
2020.
Page 71 of 82
11.6 IAS-21
Two basic questions:
1. What exchange rates shall we use?

2. How to report gains or losses from foreign exchange rates in the financial statements?
Initial recognition
Initially, all foreign currency transactions shall be translated to functional currency by applying the spot exchange
rate between the functional currency and the foreign currency at the date of the transaction.
Subsequent reporting
Subsequently, at the end of each reporting period, you should translate all monetary items in foreign currency
using the closing rate;
Any gain or loss is taken to the P/L immediately
December 2015- Q1
Components used in Dali Co’s manufacturing process are imported from foreign suppliers.
December 2012- Q1
Purchases are denominated in a foreign currency,
Page 72 of 82
11.7 IAS-23
11.8 IAS-24
Related party transactions. If there have been transactions between related parties, disclose the nature of the
related party relationship as well as information about the transactions and outstanding balances necessary for an
understanding of the potential effect of the relationship on the financial statements
Related party trans actions . If there have been transactions between related parties, disclo se the nature of the related party relationship as well as inf ormation abou t the transactio ns and ou tstand ing balances necessary for an understanding of the potential e ffect of the relationship on the financial statements
June 2014- Q3
In October 2013, Cooper Co’s finance director, Hannah Osbourne, purchased a car from the company. The carrying
value of the car at the date of its disposal to Hannah was $50,000, and its market value was $75,000. Cooper Co raised
an invoice for $50,000 in respect of the disposal, which is still outstanding for payment.
Page 73 of 82
11.9 IAS-33
IAS 33 requires EPS to be calculated based on the profit or loss for the year attributable to ordinary shareholders as
presented in the statement of profit or loss.
Extracts from the case study

June 2015 – Question 1
In the case study above, the EPS has been calculated on the adjusted profit before tax whereas it should had been
calculated on the basis of profit before tax for the year.
11.10 IAS-36
Impairment loss
- Loss= when Recoverable amount is less than carrying amount
- Loss should be recognized as an expense
- Adjust depreciation of future period
The following type of assets are reviewed for impairment each year:
- Goodwill
- Intangible asset with an indefinite life
Indicators of impairment could be external or internal e.g. adverse changes in laws, changes in economic
environment, physical damage or asset is idle etc.
Page 74 of 82
Scenario- relating to impairment in past papers!!
December 2013-Q3
On 15 August 2013, there was an accident at the Ledge Hill Mine, where several of the tunnels in the mine collapsed,
causing other tunnels to become flooded. This has resulted in one-third of the mine becoming inaccessible and for
safety reasons, the tunnels will be permanently closed. The company year-end is 31 August and the ledge hill mine
is recognized in the SOFP at $ 10 million. The total assets of the company are $ 175 million.
June 2014- Q3
Cooper Co’s factories are recognized within property, plant and equipment at a carrying value of $60 million. Half of
the factories produce a chemical which is used in farm animal feed. Recently the government has introduced a
regulation stipulating that the chemical is phased out over the next three years. Sales of the chemical are still buoyant,
however, and are projected to account for 45% of Cooper Co’s revenue for the year ending 31 January 2015
11.11 IAS-37
December 2014- Q1
In addition, the company has asked the bank to make cash of $3 million available in the event that an existing court
case against the company is successful. The court case is being brought by an individual who suffered severe and
debilitating side effects when participating in a clinical trial in 2013.
December 2013- Q3
Luckily no one was injured in the accident. However, the collapse caused subsidence which has damaged several
residential properties in a village located above the mine. A surveyor has been commissioned to report on whether
the properties need to be demolished or whether they can be safely repaired.
Page 75 of 82
11.12 IAS-38
Intangible asset will be recognized when:
1. The future economic benefit will flow to the organization
2. Cost can be reliably measured
Criteria to capitalize development cost
Development costs are capitalized only after technical and commercial feasibility of the asset for sale or use
have been established. This means that the entity must intend and be able to complete the intangible asset
and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits.
[IAS 38.57]
Items to be expensed out:

The following items must be charged to expense when incurred:
◦ internally generated goodwill [IAS 38.48]
◦ start-up, pre-opening, and pre-operating costs [IAS 38.69]
◦ training cost [IAS 38.69]
◦ advertising and promotional cost, including mail order catalogues [IAS 38.69]
◦ relocation costs [IAS 38.69]
Intangible asset – can have a finite life or an indefinite life. Finite life intangible assets should be amortized
over its life / indefinite life intangible should be reviewed for impairment.
Licenses
When an agreement confers rights over a period of time it will often be appropriate to recognize revenue over that
time period. This will be the case if the licensor retains significant risks and control over the licensed rights or has
obligations to perform over the license period. In this situation the licensee is in substance paying for a right of use
or for a service that is provided over time.
However, where an assignment of rights for a fixed fee or non-refundable guaranteed fee under a non-cancellable
contract permits the licensee to exploit those rights freely and the licensor has no remaining obligations to perform,
this is, in substance, a sale. Consequently revenue should be recognized for the entire fee when the conditions for
recognizing the sale of goods in are met
Page 76 of 82
Extracts from case study

June 2015- Question 1
In some countries Ted Co’s products are distributed under licenses which give the license holder the exclusive right
to sell the products in that country. The cost of each license to the distributor depends on the estimated sales in the
country to which it relates, and licenses last for an average of five years. The income which Ted Co receives from the
sale of a license is deferred over the period of the license. At 31 May 2015 the total amount of deferred income
recognized in Ted Co’s statement of financial position is $18 million.
June 2013 - Q1
The development costs relate to a new range of organic cosmetics.
December 2014 –Q1
Four new drugs are in the research and development phase.
It is common in the industry for patents to be acquired for new drugs
Another success in 2014 was the acquisition of the ‘Cold Comforts’ brand from a rival company. Products to
alleviate the symptoms of coughs and colds are sold under this brand. The brand cost $5 million and is being
amortized over an estimated useful life of 15 years.
December 2011-Q1
A significant amount has been invested in the new website, which is seen as a major strategic development for the
company. The website has generated minimal sales since its launch last month, and advertising campaigns are
currently being conducted to promote the site.
December 2011- Q5
Yew Co’s statement of financial position recognizes an intangible asset of $12·5 million in respect of capitalized
research and development costs relating to new aircraft engine designs. However, market research conducted by
Yew Co in relation to these new designs indicated that there would be little demand in the near future for such
designs. Yew Co has a cash balance of only $125,000 and members of the management team have expressed concerns
that the company is finding it difficult to raise additional finance.
June 2014- Q3
Cooper Co has started to research a replacement chemical which is allowed under the new regulation, and has spent
$1 million on a feasibility study into the development of this chemical.
June 2013- Q3
The statement of financial position includes an intangible asset of $15 million, which is the cost of a distribution
license acquired on 1 September 2012. The license gives Setter Stores Co the exclusive right to distribute a popular
branded soft drink in its stores for a period of five years.
Page 77 of 82
11.13 IAS-40
What is investment property?
The investment property is a land, a building (or a part of it), or both, held for the following specific purposes:
 To earn rentals;
 For capital appreciation; or
 Both.
When to recognize investment property?
The rules for recognition of investment property are essentially the same as stated in IAS 16 for property, plant and
equipment, i.e. you recognize an investment property as an asset only if 2 conditions are met:
1. It is probable that future economic benefits associated with the item will flow to the entity; and
2. The cost of the item can be measured reliably.
Investment property shall be initially measured at cost, including the transaction cost.
The cost of investment property includes:
 Its purchase price and

 Any directly attributable expenditure, such as legal fees or professional fees, property taxes, etc.
Subsequent measurement
1. Fair value model- gain or loss on re-measurement to FV shall be recognized in profit or loss account
2. Cost model – same principle as of IAS-16
June 2014- Q1 case study

The company is cash-rich, and surplus cash is invested in a large portfolio of investment properties, which generate
rental income. The Group’s accounting policy is to measure investment properties at fair value. Beard Co’s draft
statement of financial position recognizes assets of $28 million at 31 May 2014, of which investment properties
represent $10 million.
The investment properties are material to both Beard Co’s individual financial statements, representing 35·7% of its
total assets, and also to the Group’s financial statements, representing 9·3% of Group assets.
According to IAS 40 Investment Property, an entity can use either the fair value model or the cost model to measure
investment property. When the fair value model is used the gain is recognized in profit or loss. The draft consolidated
statement of profit or loss and other comprehensive income includes the investment property revaluation gain as
other comprehensive income rather than as profit or loss, and therefore the gain is not presented in accordance with
IAS 40. (See the presentation in the question)
Page 78 of 82
December 2014- Q3
Faster Jets Co is an airline company and is a new audit client of Brown & Co. You are responsible for the audit of the
financial statements for the year ended 30 November 2014. The draft financial statements recognize revenue of $150
million and total assets of $250 million.
(a) During the year, Faster Jets Co purchased several large plots of land located near major airports at a cost of $12·5
million. The land is currently rented out and is classified as investment property, which is recognized in the draft
financial statements at a fair value of $14·5 million. The audit partner has suggested the use of an auditor’s expert to
obtain evidence in respect of the fair value of the land.
11.14 IFRS-2
December 2015- Q1
In March 2015, a cash-settled share-based payment plan was introduced for senior executives, who will receive a
bonus on 31 December 2017. The amount of the bonus will be based on the increase in Dali Co’s share price from
that at the date of the flotation, when it was $2·90, to the share price at 31 December 2017. On the advice of the
newly appointed finance director, no accounting entries have been made in respect of the plan, but the details
relating to the cash-settled share-based payment plan will be disclosed in the notes to the financial statements.
December 2014-Q5
A share-based payment scheme was established in January 2014. Management has not recognized any amount in
the financial statements in relation to the scheme, arguing that due to the decline in Bradley Co’s share price, the
share options granted are unlikely to be exercised. The audit conclusion is that an expense and related equity figure
should be included in the financial statements.
December 2011- Q1
Oak Co established an equity-settled share-based payment plan for its executives on 1 January 2011. 250 executives
and senior managers have received 100 share options each, which vest on 31 December 2013 if the executive
remains in employment at that date, and if Oak Co’s share price increases by 10% per annum. No expense has been
recognized this year as Oak Co’s share price has fallen by 5% in the last six months, and so it is felt that the condition
relating to the share price will not be met this year end.
Page 79 of 82
11.15 IFRS-5
Knowledge
IFRS-5 specifies two main requirements to initially classify asset(s) as held for sale. Firstly, the asset(s) must be
available for immediate sale in its (their) present condition. Secondly, the sale must be highly probable
Five conditions of a highly probable sales transaction (IFRS 5.8):

1. The appropriate level of management is committed to the selling plan;
2. The asset(s) are being actively marketed;
3. The assets are on the market at a price that is reasonable in relation to their estimated Current fair values;
4. Completion of the sales transaction is expected within one year from the initial date of classification; and
5. Significant changes to or a withdrawal from the selling plan are unlikely
The asset held for sale- should be classified as a current asset, no further depreciated and recorded at lower of the
carrying value of the FV less cost to sell
June 2011- Q1
The second issue concerns one of Bill Co’s specialist divisions, which trades under the name ‘Treasured Homes’ and
which deals exclusively in the redevelopment of non-industrial historic buildings such as castles and forts.
These buildings are usually acquired as uninhabitable ruins, and are then developed into luxury residences for
wealthy individuals. The management of Bill Co decided last week to sell this division, as although it is profitable, it
generates a lower margin than other business divisions. ‘Treasured Homes’ operates separately from the rest of the
business, and generates approximately 15% of the total revenue of the company. In a board minute dated 1 June
2011, it was noted that ‘interest has already been expressed in this division from a potential buyer, and it is hoped
that sale negotiations will soon commence, leading to sale in August 2011. There is a specific office building and
some other tangible assets that will be sold as part of the deal. These assets are recorded at $7·6 million in the
financial statements. No redundancies will be necessary as employees’ contracts will transfer to the new owners.’
June 2013 – Q3
Assets held for sale

Setter Stores Co owns a number of properties which have been classified as assets held for sale in the statement of
financial position. The notes to the financial statements state that the properties are all due to be sold within one
year. On classification as held for sale, in October 2012, the properties were re-measured from carrying value of $26
million to fair value less cost to sell of $24 million, which is the amount recognized in the statement of financial
position at the year end. (8 marks)
Page 80 of 82
11.16 IFRS-8
December 2014- Q1
In January 2014, Connolly Co began to sell into a new market – that of animal health. This has been very successful,
and the sales of veterinary pharmaceuticals and grooming products for livestock and pets amount to approximately
15% of total revenue for 2014.
11.17 IFRS-7 / 9
June 2015- Q1 case
The treasury management function also deals with short-term investments. In January 2015, cash of $8
million was invested in a portfolio of equity shares held in listed companies, which is to be held in the short
term as a speculative investment. The shares are recognized as a financial asset at cost of $8 million in the
draft statement of financial position. The fair value of the shares at 31 May 2015 is $6 million.
June 2012-Q1
To help finance the acquisition, Crow Co issued loan stock at par on 31 January 2012, raising cash of $100
million. The loan has a five-year term, and will be repaid at a premium of $20 million. 5% interest is payable
annually in arrears. It is Group accounting policy to recognize financial liabilities at amortized cost.
December 2014- Q2
A loan of $60 million was taken out on 1 August 2013 to help finance the acquisition. The loan carries an
annual interest rate of 6%, with interest payments made annually in arrears. The loan will be repaid in 20
years at a premium of $5 million.
June 2012-Q2
A loan of $8 million was taken out in October 2011, carrying an interest rate of 2%, payable annually in
arrears. The terms of the loan have been confirmed to documentation provided by the bank.
Suggested answers:
Loan stock
Crow Co has issued loan stock for $100 million, representing 18·2% of total assets, therefore this is material to the
consolidated financial statements. The loan will be repaid at a significant premium of $20 million, which should be
recognized as finance cost over the period of the loan using the amortized cost measurement method according to
IFRS 9 Financial Instruments.
A risk of misstatement arises if the premium relating to this financial year has not been included in finance costs. In
addition, finance costs could be understated if interest payable has not been accrued. The loan carries 5% interest
per annum, and six months should be accrued by the 31 July year end, amounting to $2·5 million. Financial liabilities
and finance costs will be understated if this has not been accrued.
Portfolio of equity shares

The cost of the portfolio of investments represents 6% of total assets and is material to the statement of financial
position. The fall in value of the portfolio of $2 million represents 25% of profit before tax, and is therefore material
to the statement of profit or loss.
The investment portfolio is recognized at cost, but this is not the correct measurement basis. The investments should
be accounted for in accordance with IFRS 9 which requires financial assets to be classified and then measured
subsequent to initial recognition at either amortized cost or at fair value through profit or loss. Speculative
Page 81 of 82
investments in equity shares should be measured at fair value through profit or loss because the assets are not being
held to collect contractual cash flows.
It seems that the current accounting treatment is incorrect in that assets are overstated, and it is significant that the
draft profit for the year is overstated by $2 million.
11.18 IFRS-15
Management considers that the design work will be significant, the customer is required to pay a 30% payment in
advance, which is used to fund the design work. The remaining 70% is paid on delivery of the machine to the
customer. Typically, a machine takes three months to build, and a smaller piece of equipment takes on average six
weeks.
Refer to Q1- December 2015 Dali Co- we already did for the audit risk in class.
Page 82 of 82

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P7

ADVANCE AUDIT & ASSURANCE

By: Kashif Kamran-FCCA

9.2 June 2013 – Q5...................................................................................................................................................... 53

1.1.1 June 2013- Q2 Part (a)

2.1 DECEMBER 2012- Q3 PART (A) PLANT GROUP

2. Responsibility of the auditor

2.2 DECEMBER 2014 – QUESTION 4(A) WESTON CO

2.3 JUNE 2013- QUESTION 3 PART (A) WEXFORD COMPANY

1. Nature of the business

2.4 DECEMBER 2014- Q4 PART (A) TETBURY

2. Previous auditor resigned

4. Disagreement on an accounting treatment

6. Business development advice

2.5 DECEMBER 2015

3.1 DEC 2012 Q1 ALL PARTS (WITHIN EMAIL)

2. Import of raw material

4. No forward exchange contract

6. Domestic market – Product recalled

7. New regulatory requirement

10. New directors

11. Financial performance

Risk of material misstatement

3.2 DECEMBER 2014

Risk of material misstatements

Learning – How to make effective procedures in P7?

3.3 DECEMBER 2015-Q1

Recent listing – management bias

Deferred tax recognition

4 PROSPECTIVE FINANCIAL INFORMATION

4.1 JUNE 2014- QUESTION 2

4.2 JUNE 2012- Q2 ANSWER PLAN

4.3 JUNE 2012/ JUNE 2014

Matters – before / in agreeing the term of engagement

5 DUE DILIGENCE REVIEW

5.1 DECEMBER 2013-QUESTION 2

6.1 DECEMBER 2011 –Q4

 Self-review threat – ( Cedar is the auditor of Chestnut) + Different teams

6.2 JUNE 2013/ Q2 PART B

Procedures – amount of claim (6 marks)

Claim – insurance company

6.3 JUNE 2015- Q4 (C)

7.1 DEC 15 /Q4 – 20 MARKS

8.1 GUIDANCE ON MAKING PROCEDURES / WRITING EVIDENCE

8.2 JUNE 2013-QUESTION 3

Assets held for sale

8.3 DECEMBER 2013- Q3

Matters to consider (Maximum 7 – Marks 7)

Evidence in the working paper file (Maximum 7 – Marks 7)

8.4 JUNE 2014 –Q3

8.5 JUNE 2015- Q1 EXTRACTS

Recommend procedures – 4 marks

Recommend procedures- 4 marks

8.6 DECEMBER 2014- QUESTION 2

Part a) – Teapot Co (12 marks)

Part B- Natural disaster

Evidence in working paper file:

9.1 DECEMBER 2014 –Q5