ACCA

Paper F8
Audit and Assurance
Revision Mock Examination
December 2015
Answer Guide
Health Warning!
How to pass

Attempt the examination under exam conditions

BEFORE looking at these suggested answers.
Then constructively compare your answer,
identifying the points you made well and
identifying those not so well made.

How to fail

Simply read or audit the answers congratulating

yourself that you would have answered the
questions as per the suggested answers.

 Interactive World Wide Ltd, July 2015

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of Interactive
World Wide Ltd.

w w w . s t ud yi nt e r a c t i ve . o r g

Section A
Question Answer

See Note

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

10

11.

11

12.

12

Notes:
1.

Answer B is an ICEQ not an ICQ. Answer C sounds possible, but an audit

committee would not be doing something at such a detailed level so the answer
is wrong.

2.

Option 2 uses 3rd party so is best. Option 4 is auditor-generated so is next best.

Option 1 is internal but at least it is written, unlike the oral option 3.

3.

A is a control test, which is exactly what internal audit does. Answers B and D
are subjective, and are also executive internal audit should be checking what
others do, not doing it themselves. Answer C is similar if they implement
something, any future checking of it would create a self review threat.

4.

The other 2 options are general controls.

5.

Independence is a means of obtaining objectivity, not a threat. And Professional

Behaviour is a fundamental ethical principle.

6.

Tests of control involve checking the system, which is what test 1 is doing.
Substantive tests check the info in the FS is correct, which is what test 2 is doing.

w w w . s t ud y i nt e r a c t i v e . o r g

7.

Analytical Procedures are mandatory (ISA 315 and ISA 520) at planning and
finalisation. As a substantive procedure, there are other tests that can be used
instead (e.g. enquiry, inspection). Analytical Procs are not a test of detail
comparing things helps to show they are in the right range, but cannot usually
check accuracy in detail.

8.

This is a fact but also seems to be the common sense answer when relying on
the work of anyone else.

9.

It is the Opinion that is unmodified the Report IS modified (the addition of the
extra paragraph is the modification).

10.

To reduce detection risk, either sampling risk must be reduced (e.g. a bigger
sample size, which is unlikely if materiality is increasing) or non-sampling risk
must be reduced (which would be achieved with better quality audit staff).

11.

An earthquake is a significant non-adjusting event per IAS 10, so it should be

disclosed in the FS. Auditors must check it once it is added, and also extend audit
work up to a new audit report date on or after the new revised FS date.

12.

Directors prepare the financial statements, not the auditors.

w w w . s t ud yi nt e r a c t i ve . o r g

Section B

MARKING GUIDE
Q1, 2, 3, 4 1 mark per valid point in all parts of the question, with mark for valid
points that are unclearly explained.
Q5 As per Q1-4, but with Q5 a well explained audit risk is worth up to 1.5 marks in
part b.
Q6 As per Q1-4, and in part b there are 2 marks for the explanation and 3 marks for
the examples.

Answer 1
TUTOR TIPS
In part a, remember to explain the threats not just state them. As is often the case,
getting enough to pass is not difficult but getting the third threat might require some
thought. Two out of three is enough so do not panic.
In part b, there are 4 marks so aim for a 4 mark answer format. Explaining the
difference between high and low level assurance should not cause a problem, and then
it comes down to whether you realise that the review in the scenario is the low level
assurance assignment.

(a)
(i) Ethical threats
IT System
If the auditors provide advice on a new IT system and that system then produces
the clients financial statements, the auditors would be checking the output of
their own work, leading to a self review threat. They might be unwilling to
highlight mistakes caused by the system they were involved in implementing.
Also, a new IT system is the responsibility of the directors. Too much involvement
by the auditors might create a management threat, leading to shareholders
questioning the gap between the auditors and directors.
Conflict of Interest
It seems that an existing client is a competitor of Alpha, and this could cause
problems if the same firm audits them both. Any opinions/advice required by
Alpha might be detrimental to the existing competitor client (or vice versa) making
it difficult to provide impartial advice to both. There is also a risk of confidential
information from one company finding its way to the other, through the audit firm.

w w w . s t ud y i nt e r a c t i v e . o r g

Review of Interim Accounts

If the auditors review the half year accounts, and then do a full annual audit at
the year end, there is a risk that errors not spotted at the half year are not
reported at the year end because the auditors might not want to highlight what
they missed 6 months earlier (note, whilst this threat exists, it is common for the
same audit firm to do the half year review being a lower detail piece of work, it
would not seem strange for a more detailed mistake to go unnoticed until the year
end).
Fees
With several services being required by this client, the fees might be relatively
high. There is a potential self-interest threat here as the auditors might not be
keen to risk upsetting a client that provides such a high level of reward to the
firm. As such, mistakes in the financial statements might not be highlighted to
avoid arguments with the important client.
(ii)

Reducing These Threats

IT System
The auditors will need to ensure that anyone who works on the new IT system is
excluded from the audit team, preferably using staff from two different offices for
these two tasks.
Management should accept full written responsibility for the new IT system, and
the audit firms involvement should be restricted to advice and no more, in
particular no involvement in implementation.
Conflicts of Interest
Before accepting this new client, both competitors need to agree to the
arrangement. Two separate audit teams should be used, preferably from two
separate offices of the audit firm. Both audits should be subjected to extra
confidentiality processes to ensure company information cannot transfer between
the teams, and both audits should have a hot review of the audit files by an
independent partner before the audit reports are signed. If any of the above is
not possible, or the companies do not agree, then the new client should not be
accepted.
Review of Interim Accounts
This assignment can be accepted as the risk is perceived to be low. When doing
the final audit, staff should be reminded that the work done on the interim
accounts was less detailed than an audit and that therefore the entire years
figures should be subject to full detailed audit work.
Fees
The total recurring fees from this client should be monitored over time as a
percentage of the firms total revenues. If the total recurring fees are moving
above 10% of the firms total fees, consideration should be taken as to whether
the firm should continue to supply all of the required services.

w w w . s t ud yi nt e r a c t i ve . o r g

(b)

Levels of Assurance
A full year audit of financial statements requires detailed testing (both by law, and
to comply with ISAs). The detailed testing means that the auditor is relatively sure
(i.e. is relatively positive) that the opinion they reach on the financial statements
is appropriate. In other words, they have a high level of assurance (reasonable
assurance).
As a result of this, the opinion that the auditor gives is in positive language stating
that the financial statements are / are not true and fair.
In the scenario, the potential new client also wants their interim financial statements
reviewed. A review is a less detailed assignment similar to an audit, but focussing
only on analytical procedures and enquiries of management, rather than including
the more detailed inspection, observation, recalculation etc. tests of an audit. As
such, less assurance is obtained.
In a review report, this lower level of assurance is given using negative language
based on our limited procedures, nothing has come to our attention to suggest
the figures are not true and fair.

w w w . s t ud y i nt e r a c t i v e . o r g

Answer 2
TUTOR TIPS
In a, ISA 610 is being tested. One part of it is fairly simple reliance on the work
already done by a clients internal audit, where the issues are pretty similar to relying
on any experts work. The higher level issue is the usage of internal audit staff in the
external audit process, a recent change in the ISA which some students might not be
up to date on.
For part b there are some easy knowledge marks, and then all it needs is for students
to identify the public interest nature of the toys problem.

(a)

Reliance on IA work by EA
There is some common ground in the work that internal and external auditors do,
for example in the need to test controls. Internal audit will do this work throughout
the accounting year, so if external audit also needs to test controls they might decide
to rely on the internal auditors work instead. There is nothing to stop them doing
this it is efficient and allows the external auditors to allocate more time to high
areas of audit risk and subjective accounting issues.
However, if such reliance is to be placed, the external auditors will need to assess
the qualifications, experience and independence of the internal audit staff who did
the work, to assess how reliable it is. They will review the documentation recording
the work that was carried out and should repeat a sample of the tests to ensure they
reach similar conclusions. Any reliance on internal audit should be discussed with
the clients audit committee as part of audit planning.
It might also be efficient to use the clients internal audit staff to assist with external
audit work during the actual audit process. However, this creates potential problems
especially with respect to the lack of independence of internal audit staff, so if it is
going to happen the external audit firm must:

Not use internal audit staff on areas that are high audit risk, or where there is a
significant amount of subjectivity and judgment

Not use internal audit staff on areas where they are at risk of auditing work they
have already been involved in as internal auditors

Not use internal audit staff to obtain any 3rd party confirmations

Not use internal audit staff when assessing fraud

Direct, supervise, and review the work of the internal staff that are used

As with reliance in general, any use of internal audit staff in the external audit work
should be agreed with the audit committee in advance.
(b)

Confidentiality
As a general rule, all client information should remain confidential and should not be
disclosed outside the audit team. This is partly to avoid damage to the clients
financial position, but also to ensure the client feels safe in disclosing information to
the auditors otherwise they might choose to hold sensitive information back.

w w w . s t ud yi nt e r a c t i ve . o r g

However, there are exceptions to this rule.

In some cases, the law will require auditors to disclose matters to a third party.
Examples include suspicions of money laundering, terrorism, treason.
As part of quality monitoring, the ACCA will on occasion require access to client files
and this access must be granted.
The other main example is where the audit firm believes that it is in the public
interest to disclose information. This is a subjective area and the audit firm will take
legal advice before any disclosure.
In the scenario, the clients unwillingness to warn customers that its products might
be dangerous seems like an example where the audit firm might consider it is in the
public interest for a warning to be issued. Normally, a company that knows its
products might cause injury would request customers to return the products and
would advertise a product recall. The audit firm should encourage their client to do
this, but if they continue to try to hide the issue the audit firm might report the client
(e.g. to an industry regulator or association).

w w w . s t ud y i nt e r a c t i v e . o r g

Answer 3
TUTOR TIPS
Another mix of knowledge and application in this question. Other Information (ISA 720)
is another audit standard currently going through change. For any well prepared
student this should not be difficult.
Part b has very few marks for each scenario so the key is to just find three sensible
things to talk about with each story. Focussing on the accounting issue, materiality,
and the audit report outcome would seem the best way to get 3 marks in each case.

(a)

Other Information Auditor Responsibilities

Other information refers to the unaudited information contained in documents
containing the audited financial statements. For example, listed companies usually
issue an annual report with the financial statements, and this report usually includes
a chairmans statement, corporate governance information, social and
environmental disclosures etc.
There is a danger that information in these unaudited documents might be
inconsistent with the information in the financial statements, leading to confusion for
the shareholders (many of whom might not understand that the annual report and
the financial statements are separate items).
Auditors should read all Other Information before signing their audit report. If
anything is found within the other information which is inconsistent with the financial
statements, and the auditor is assured that audit evidence supports the financial
statements being true and fair, the auditor should ask the management and audit
committee to correct the Other Information. If this request is refused, the auditor
should add an Other Matter paragraph to the audit report, under the Opinion
section.
The paragraph should make clear that the opinion is not modified, and should refer
readers to the page in the other information where the inconsistency is located.
If the Other Information is not finalised on the date the auditors are signing the audit
report, then it cannot be read before signing. Instead, the auditors will read it after
the audit report, with any inconsistencies being reported to shareholders at the AGM.

(b)
(i)

Wong
The Net Realisable Value (NRV) of this inventory is $3.3m (selling price less
costs to sell). This is $0.4m below the current carrying value of $3.7m. IAS 2
requires inventory to be held at the lower of cost or NRV, so the inventory is
overstated.
The overstatement is 11.4% of profit which is material.
If this is not amended, the audit report will require a qualified except for
opinion. The non-compliance with IAS 2 will be explained in the Basis
paragraph above the Opinion.

10

w w w . s t ud yi nt e r a c t i ve . o r g

(ii) Chua
This represents a going concern threat to the company. Such threats must be
disclosed in a note to the financial statements by the company, and they seem
to have complied with this requirement (IAS 1). As such the financial
statements are not misstated.
The matter is clearly material since the companys future would surely be in
question if it was subjected to a fine in the range mentioned in the scenario,
given it is almost triple the companys profits.
The audit opinion will not be modified, but this is a very significant issue and
as such an Emphasis of Matter paragraph will be added under the Opinion
section. It will refer shareholders to the disclosure note in the financial
statements, whilst making clear that the audit opinion is not affected.

w w w . s t ud y i nt e r a c t i v e . o r g

11

Answer 4
TUTOR TIPS
In a, account balances could lead to many different assertions. The answer below gives
four assertions as the question asks, chosen because the second part of the question
refers to trade payables (statement of financial position) and these assertions will
therefore link the two parts together. This is not essential but seems like a good tactic
to help answering part b.
In b, substantive testing should alert students to think of exam techniques for
generating ideas in particular AEIOU (5 types of audit procedure). For those who have
practised this in advance, it should not be difficult (thus demonstrating the importance
of practice).

(a)

Assertions
Completeness
This assertion states that all items that the company has at its year end (e.g. assets
and liabilities) have been included within the figures in the financial statements.
Existence
This assertion is the opposite of completeness namely, any assets and liabilities
included in the financial statements at its year end are real as at the year end.
Valuation
All assets and liabilities require a value. On the statement of financial position, items
need to be initially recorded (e.g. an asset at its cost) but after that the values are
often subject to change (e.g. assets are depreciated, or might be revalued) in order
to comply with accounting standards. The valuation assertion states that the values
comply with these issues.
Rights and Obligations (Ownership)
This assertion states that the company has the majority of the rights and obligations
of ownership for all assets and liabilities on its statement of financial position. In
most cases this will mean legally owning the items, but in some cases legal
ownership might not exist (e.g. a finance lease) but the item still gets recognised.

(b)

12

Substantive Tests for Trade Payables

For a sample of suppliers, obtain direct written confirmation from the suppliers
of their year end balances in order to confirm existence and valuation.

For those suppliers who sent statements to the client, reconcile the clients own
records to the supplier statements at the year end to confirm valuation.

Calculate payables days, preferably on a supplier by supplier basis using audit

software, and compare to prior year figures to identify any balances that appear
out of line with expectations so that they can be further investigated.

Obtain list of year end supplier balances and compare with prior year list to
highlight any missing suppliers in the current year list, to help test completeness.

w w w . s t ud yi nt e r a c t i ve . o r g

Test the casts on the list of year end balances to ensure the total is correctly
valued.

Select a sample of GRNs and trace to purchase invoice and purchase ledger
accounts to test completeness of recording of liabilities during the year.

Select invoices recorded in a sample of purchase ledger accounts and inspect

invoice and GRN to verify the payable exists.

Select a sample of year end balances and inspect cashbook and bank statements
post year end to agree amount paid, to verify valuation and existence of year
end balances.

Review payments post year end in cashbook and bank statements to identify
potential missing year end liabilities, to verify completeness.

w w w . s t ud y i nt e r a c t i v e . o r g

13

Answer 5
TUTOR TIPS
Part a of this question is probably the toughest thing on the exam paper, because of
the mark allocation suggesting 10 separate ideas need to be thought up. Split the
requirement between planning and understanding the business, and this will help but
it remains difficult.
Part b is also difficult because 10 marks suggests 10 audit risks. There are a lot of risks
in the story but not that many more than 10, so students who have not practised might
come up short. The key here is how to explain the risks, ensuring you focus on the risk
of material misstatement (so mention the financial statements) or detection risk.

(a) Reasons for Auditors Understanding a Clients Business

It is easier to identify the risks of material misstatement if the auditor

understands what the company does, and the impact of its activities on its
financial statements.

Understanding the business makes it easier to identify going concern threats and
fraud, the two biggest concerns for most shareholders.

Understand the business makes it easier to assess whether the internal controls
in place are suitable, and therefore whether they are likely to be effective.

Understanding the business allows an auditor to add value to a client by giving

additional advice during the audit.

Reasons for planning an audit

14

As with anything, an audit is more likely to be efficient and effective if it is

planned in advance.

Planning allows the audit firm to identify the need for resources (e.g. staff,
experts, CAATs) well in advance making it easier to ensure they are available
when needed.

Creating an audit plan gives something that can then be used at the end of the
audit to review whether everything that should have been done has been done.

Planning helps to ensure that key audit risks are identified early, so that audit
effort can be focussed at these key issues from the start of the process.

Companies have deadlines to meet in terms of submitting their financial

statements to their shareholders, and without a plan there is a risk the audit will
finish late.

Things that are not planned are at risk of going off course, diverting from what
they should be doing. The plan acts as a form of direction to members of the
audit team.

w w w . s t ud yi nt e r a c t i ve . o r g

(b) Audit Risks

Detection risk is increased because this is a new audit client, meaning the
auditors will have less detailed understanding of the client than they will have in
future years, increasing the risk that material misstatements might not be
detected.

The companys rapid growth means that its control systems might no longer be
suitable for the increased scale of operations, increasing control risk (i.e.
increasing the risk of misstatements not being identified by the systems).

Also, rapid growth tends to cause cashflow pressures (as seen in the scenario)
which could cause going concern threats. If such threats exist, there is a risk that
they are under-disclosed (as required by IAS 1).

This is the companys first audit, so last years figures (i.e. this years opening
balances) are unaudited. This increases the risk on errors in the brought forward
figures feeding into the current year closing figures.

The bank have requested the audit. This puts pressure on the directors to report
healthy figures meaning the risk of manipulation (increased revenue and reduced
expenses) is increased.

The company has work in progress (WIP). The WIP is liquid and will be difficult
to assess in terms of how complete it is, meaning the risk of misstatement of its
completion level is high (and the risk the auditors cannot detect this is also high,
given the technical nature of the clients products).

The company uses standard costing for its inventory. There is a risk that they
are overstating production overheads to be absorbed, either accidentally (it is
not a simple process) or on purpose to inflate current year profits for the bank.

Overseas suppliers exist, meaning it is likely that some purchases are in foreign
currency. Purchases, payables and inventory are all at risk of misstatement if the
wrong exchange rates have been used when retranslating this.

There is evidence that some inventory is at risk of being sold cheaply and that
might lead to its NRV being less than cost. IAS 2 requires inventory to be stated
at the lower of those two figures, meaning a risk of overstated inventory exists.

Sales figures might be overstated because sales staff get a sales-related bonus,
so they have a clear incentive to inflate figures for their own personal gain and
the scenario suggests that sales staff are indeed inclined to cheat.

Receivables are at risk of overstatement. The sales staff get a sales related bonus
so might be selling to bad credit risks purely to improve their bonus as collection
from customers does not seem to be their problem.

w w w . s t ud y i nt e r a c t i v e . o r g

15

Answer 6
TUTOR TIPS
Part a is a standard report on control deficiencies, but take care to note that the third
part requires tests of control. Control tests are done by an auditor to see if the
recommended improvements (the middle column of the answer) are working. Control
tests should come from AEIOU, but would normally be EIO (enquiry, observation,
inspection), perhaps using test data to assist.
For part b, with 5 marks available it seems sensible for 2 marks to be the explanation
and 3 marks for the examples. Try thinking both test data and audit software examples
to help with ideas.
(a)

Points for inclusion in a report to management

Deficiency

Recommendation

Test of Control

There is no review of
amendments to credit limits
once these have been
processed on the system.

An exception report should be

produced weekly detailing all
changes made to credit limits.
This should be reviewed by the
chief
accountant
and
evidenced by their signature to
ensure that all amendments
are for valid business reasons.

Inspect signature of chief

accountant on list of
amendments.

The chief accountant should

review the credit ratings and
references obtained before
giving written authority to
accept new customers.

Inspect form/email where

chief accountant has given
written authority.

A
daily
print
out
of
unprocessed orders should be
produced and followed up by
the warehouse supervisor.

Enquire
of
warehouse
supervisor as to whether
these orders are followed
up.

Invalid amendments could

be made, leading to the
supply of goods to noncredit worthy customers,
causing financial loss to the
company.
Authority to enter new
customers onto the system
is only given orally with no
review of the credit ratings
and references obtained.
Un-creditworthy customers
could be entered onto the
system and not detected
until their invoices are not
paid.
There is no responsibility
assigned for dealing with
shortfalls on the orders
when
they
are
being
selected in the warehouse.

16

w w w . s t ud yi nt e r a c t i ve . o r g

Delivery of part complete

orders and non-delivery of
parts of orders will lead to
loss of customer goodwill
and subsequent loss of
revenue.
There are no procedures to
ensure that back orders are
fulfilled when the goods
become available.
Delay in fulfilling customer
orders will again lead to loss
of customer goodwill and
affect future income.
When back orders are
accepted the goods which
are not available are not
immediately recorded.
There may be significant
delays in fulfilling these
orders.

(b)

The system should produce a

daily list of items that have
come into inventory for which
there are current back orders.
The sales ledger clerk should
contact the customer to ensure
that the goods are still required
and then process the order in
the normal manner.

Enquire of sales ledger

clerk as to whether this
process happens.

The
computer
should
automatically
generate
purchase requisitions for goods
that have been requested but
are not available. A supervisor
should
review
these
requisitions
and
place
a
purchase order where the
goods have not already been
ordered.

Use test data to place

sample orders for goods
that are known not to be
available, to see if a
purchase requisition is
automatically generated.

CAATs
Computer assisted audit techniques comprise test data and audit software. Test data
is where auditors test if computerised controls are working by putting in fake
transactions designed to make the documented controls happen. For example:

Placing fake orders designed to try to breach the computerised credit limits of
customers, to test whether the limits work

Trying to order inventory which is known not to exist to test whether system
genuinely checks inventory is available before accepting orders.

Audit software involves using computer programs written to assist the audit process,
in particular to help with substantive testing. For example:

Selecting samples, especially from very large populations of data

Reperforming calculations, such as calculations of doubtful debt provisions

Comparing the cost and NRV data of inventory to verify the lower of the two has
been used in the valuation

Reorganising inventory and receivables by age to allow for older items to be

highlighted and tested in more detail for obsolescence

Detailed analytical procedures, such as inventory days per product and

receivables days by customer

w w w . s t ud y i nt e r a c t i v e . o r g

17