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f8 Practice & Revision Notes 2014-15
f8 Practice & Revision Notes 2014-15
Blank
Contents
Page
Introduction
How to use the Practice & Revision material
Skills bank
11
Knowledge bank
23
Appendices
81
INTRODUCTION
Introduction
How to use the Practice & Revision material
Step 1
Learn
Until now you have been introduced to the core skills needed to pass this paper. You must now focus on developing
these new skills to address the ultimate test the exam itself.
Step 2
Practise
Your revision course material will help you to apply this knowledge to the context of the exam-style questions. Using
real exam questions written by the examiner youll learn the unique exam skills required to achieve success in each
paper. Your revision material consists of:
Step 3
Rehearse
All your skills need to be applied on the day of the exam to deal with a complete exam paper.
This can be developed through use of mock exams within the Practice & Revision Kit, attending a question day at BPP
where a final mock exam is sat in full and feedback provided, or through purchasing a mock exam and online debrief.
Please see our website for further details www.bpp.com.
INTRODUCTION
90% Application
Marks
Section A
Section B
Comprises:
20
Four 10 mark questions. These will tend to test one of the five syllabus areas of the
Study Guide (A, B, C, D or E)
40
Two 20 mark questions. The 20 mark questions will predominantly examine one or
more aspects of audit and assurance from planning and risk assessment, internal
control or audit evidence, although topics from other syllabus areas may also be
included.
40
100
Section A
Section B
Aims
The syllabus aims to test the students ability to:
A
C
D
E
Explain the concept of audit and assurance and the functions of audit, corporate governance, including ethics
and professional conduct, describing the scope and distinguishing between the functions of internal and external
audit.
Demonstrate how the auditor obtains and accepts audit engagements, obtains an understanding of the entity
and its environment, assesses the risk of material misstatement (whether arising from fraud or other
irregularities) and plans an audit of financial statements.
Describe and evaluate internal controls, techniques and audit tests, including IT systems to identify and
communicate control risks and their potential consequences, making appropriate recommendations.
Identify and describe the work and evidence obtained by the auditor and others required to meet the objectives
of audit engagements and the application of the International Standards on Auditing.
Explain how consideration of subsequent events and the going concern principle can inform the conclusions
from audit work and are reflected in different types of audit report, written representations and the final review
and report.
INTRODUCTION
A Q7
External audits
Corporate governance
Professional ethics and ACCA's Code of Ethics and Conduct
A Q5
B Q1a
Internal audit and governance and the differences between external and internal audit
B Q1b
The scope of the internal audit function, outsourcing and internal audit assignments
A Q3
A Q10
B Q5a
A Q6
Internal control
Internal control systems
A Q4
A Q12
B Q6a
A Q2
B Q4a
Audit procedures
B Q2a
A Q1
B Q2b
B Q4b
B Q6b
A Q8
INTRODUCTION
Specimen Paper
A Q11
Going concern
B Q5b
Written representations
Audit finalisation and the final review
B Q3a
Audit reports
A Q9
B Q3b
Skills bank
This section explains and demonstrates the key skills
required to enable you to maximise your chance of
exam success. Knowledge of the syllabus is insufficient
on its own. Through question practice you will develop a
set of skills that will enable you to pass this paper.
10
SKILLS BANK
5 Producing a tailored
answer to the scenario in
the exam question
1 Effective use
of the 15 minutes
reading time at the
start of the exam
2 Quick and
accurate analysis of
a questions
requirements
4 Tackling
multiple choice
questions
3 Disciplined time
management to
ensure that all parts of
the question are
answered in the time
allowed
Each of these key skills is analysed on the following pages, with example(s) from past exam questions of the
importance of these skills and how these skills should be applied.
11
SKILLS BANK
STEP
1
STEP
2
STEP
3
There is no point in wasting time reading through a long scenario before you have identified exactly
what you have been asked to do! See key skill 2 for detailed guidance.
This will make sure that you concentrate on a manageable amount of the question on your first read
through.
This will ensure that you are actively attacking the question, ie that you are trying to achieve
something. This should involve highlighting points that are relevant to your answer and making brief
notes in the margin. In many questions this will form the basis of an answer plan and mean that you
do not have to re-read all of the highlighted points just to remind yourself why you thought they were
important in the first place. In some scenarios, numerical information may be included, and you should
use the reading and planning time to make relevant observations on this and in some cases calculate
ratios that may be relevant to your answer.
For example, in the Specimen Paper, Q6 (a) had the following requirement:
(a) In respect of the internal control of Garcia International Co:
(i) Identify and explain SIX deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a test of control Suarez & Co would perform to assess if
each of these controls is operating effectively.
12
SKILLS BANK
Familiarise yourself with the deficiencies in the sales system set out in the scenario, and
Think up appropriate internal controls which could address these deficiencies.
If you use this time to understand the scenario then you will have taken a big step towards another of the key skills that the
examiner demands in this paper, the ability to produce an answer tailored to the scenario in the question (see skill 5).
By analysing the flow of information you will be able to suggest internal controls that are relevant to the specific
deficiencies in the question.
Reading the scenario closely will prevent you falling into traps such as writing about substantive procedures
when the question is clearly asking for tests of control.
Skills practice
When you practice any of the scenario questions from the practice and revision kit you should give
yourself around 5 minutes reading and planning time to highlight and annotate the scenario ahead before
you start writing your answer.
13
SKILLS BANK
EXPLAIN
There were a number of threats to independence that could have been identified from the scenario but note the level of
explanation required to gain full marks.
Remys partner has been involved in the audit of Hazard Co for six
years and as such her independence may be impaired. This is
because she may have become too close to the directors and staff at
the client and may not maintain her professional scepticism and
objectivity in relation to the financial statements.
Taking time to consider the exact wording of the requirement will result in a focused answer which satisfies the question
set.
14
SKILLS BANK
Skills practice
In each question you attempt you should spend a minute identifying the verb and planning what structure
your answer should have to ensure you really do explain, discuss, recommend etc.
15
SKILLS BANK
Time allocation
Section A
20
36 minutes
Section B Question 1
10
18 minutes
Section B Question 2
10
18 minutes
Section B Question 3
10
18 minutes
Section B Question 4
10
18 minutes
Section B Question 5
20
36 minutes
Section B Question 6
20
36 minutes
You may find that the multiple choice questions in Section A do not take the whole 36 minutes however you should be
careful not to rush through them in case you misread a requirement or answer a question that is different from the one
which was set!
In Section B each question will be divided into a number of sub-requirements and it is important to identify how much
time you should allocate to each of these. If you over-run by even a few minutes on several requirements on your way
through the paper, you risk putting yourself in the position where you dont have enough time to complete the paper.
Make sure you keep a careful check on timings as you plan your approach to each question. Note time
allocations and stick to them. If you think you have more to say on a particular part, stop when you run out of
time and leave some space in your answer booklet; theres just a chance you may save time later in the
question and will be able to add one or two extra points.
In this paper, time management skills overlap with the other key skills, if you
you should find that it is possible to write good, pass standard answers that are concise, focused and relevant.
It really is true in this exam that, in general less (quantity!) is more (marks!)
Skills practice
When you are practising questions, always work out the time allocations and get into the habit of writing
the answers, to time, just as you will have to do in the exam hall.
16
SKILLS BANK
2.
3.
Read the question again to ensure youre answering the correct question
4.
This systematic check will ensure that you do not throw away marks when you really do know the answer.
report
to
draw
This is testing your knowledge of audit reports. At first sight, it may be tricky to identify the correct answer as there are
so many variations in the options.
17
SKILLS BANK
STEP
1
Never
Firstly, identify any answers that are immediately wrong. In this question, the key thing to think about
how and when an emphasis of matter paragraph is used and the different ways in which an audit
report can be modified.
Remember that an audit opinion is qualified either due to material misstatement or due to insufficient
audit evidence when the degree of severity is deemed to be material but not pervasive. This means
that statement (2) is not correct and so we can discard options A and D from the answers.
STEP
2
STEP
3
This systematic approach helps you to break a question down and work through to find the correct answer logically.
Waste excessive time time spent dithering over a single question could leave you with insufficient time for the
rest of the paper.
2.
Not answering this is a common yet serious error even if you make a wild guess you start with a 25%
chance of success. Your chance of getting the 2 marks if you dont offer an answer is zero!
Having used the three step approaches above to narrow down your possible answers, go with the one that feels right
and move on.
If you have a flash of inspiration later in the exam go back and revisit it but only if you are sure.
18
SKILLS BANK
Skills practice
1.
Practice keeping track of the questions you have answered when doing questions from the
Practice and Revision Kit
2.
Always check your answers through (if you would have time in the exam) before looking at the
solutions in the back of the book
3.
4.
If you dont know the answer to a question dont just go to the answer at the back or just guess
use the three step approach described above.
19
SKILLS BANK
Tabular answers
Many styles of question in this paper can be answered most effectively using a tabular layout, and the examiner
encourages this approach.
Q1 (a), Q5 (a) (ii) and Q6 (a) from the Specimen Paper can all be answered in a tabular format. We looked at Q1 (a)
earlier in skill 2 and this answer could be presented in a tabular format as follows:
Use of headings helps keep you thinking about the requirements
Ethical threats
Remys partner has been involved in the audit
of Hazard Co for six years and as such her
independence may be impaired. This is because
she may have become too close to the directors
and staff at the client and may not maintain
her professional scepticism and objectivity in
relation to the financial statements.
20
SKILLS BANK
Introduction
Deficiency
Implication
Recommendation
21
SKILLS BANK
Skills practice
When you attempt questions do not starting writing until you have thought out
an appropriate structure
headings, and
the number of points you are aiming to cover
Always review your attempted answer and ensure that you have not included any general points without
relating them to specific points within the question.
22
Knowledge
bank
23
Contents
Page
24
25
27
Corporate governance
31
Professional ethics
33
Internal audit
35
Risk assessment
37
41
43
Internal control
45
10
Tests of controls
49
11
51
12
Non-current assets
55
13
Inventory
57
14
Receivables
61
15
63
16
65
17
Notfor-profit organisations
67
18
69
19
Reports
73
20
83
21
84
22
85
25
Types of assurance
'An assurance engagement is an
engagement in which a practitioner
expresses a conclusion designed to
enhance the degree of confidence of
the intended users other than the
responsible party about the
outcome of the evaluation or
measurement of a subject matter
against criteria.'
Levels of assurance
Concepts in reporting
Materiality
Reasonable assurance
Eg statutory audit
Positive expression:
'in our opinion, the financial statements
present fairly..
Limited assurance
Eg review of half year accounts
Negative expression:
'nothing has come to our attention that causes
us to believe that the financial statements do
not give a true and fair view .'
audit
26
Communication to different
stakeholders
Potential investors
Current and potential lenders
Employees
Customers
Suppliers
Tax authorities
27
Statutory regulations
Appointment
Normally annually
By shareholders resolution
Directors may appoint in
particular circumstances:
First auditors
Casual vacancy
Removal
By shareholders resolution
Auditors entitled to:
Notice of resolution
Make written representations
Speak at shareholders
meetings
Resignation
May resign at any time
Written notice to registered office
Statement of circumstances
28
Report
to management
Satisfactory
Restricted
substantive tests
Full
substantive tests
Overall review of
financial statements
Report to
management
Auditors
report
29
30
Corporate governance
31
Corporate governance
Definition
32
Audit committees
At least 3 members
At least one with recent and relevant
financial experience
Monitor the integrity of the financial
statements:
Recommendations re the
appointment, re-appointment and
removal of external auditors
Approve remuneration and terms of
external auditor
Monitor external auditors
independence, objectivity and
effectiveness of the audit process
Policy on the engagement of the
external auditor to supply non-audit
services
Professional ethics
33
Professional ethics
Fundamental principles of
professional ethics
Threats
Self-interest
Self-review
Advocacy
Familiarity
Intimidation
Safeguards
Created by the
profession, regulation
or legislation
In the work
environment
Created by the
individual
Confidentiality
Members must not disclose
information obtained in the course of
professional work without permission
from their clients.
Exceptions
Obliged to disclose
By law
By court order
To regulators
34
Integrity
Objectivity
Professional competence and due
care
Confidentiality
Professional behaviour
Permitted to disclose
Public interest
Protect members interests
Engagement letters
Document and confirm auditors
acceptance of the appointment,
objective and scope of audit,
extent of auditors responsibilities
to the client and form of any
reports.
Contents
Managements responsibility
for the FS
Basis of fees
Internal audit
35
Objective
Shareholders
Report to
Management/directors
Independent
Status
Required to have
recognised
qualification
No requirement
36
Advantages
Increased independence
Relevant skills
Increased reliability
Disadvantages
Costs
External audit
Opinion on
FS in terms of
true and fair
Internal audit
Qualification
Internal audit
effectiveness
Information technology audit
Financial internal audit
Regulatory compliance audits
Fraud investigations
Customer experience audits
Operational audits
Risk assessment
37
A ccuracy (trans/disclosure)
C ompleteness (trans/bals/disclosure)
C ut off (trans)
A llocation (bals)
C lassification/understandability
(trans/disclosure)
O ccurence (trans/disclosure)
V aluation (bals/disclosure)
E xistence (bals)
R ights and obligations (bals/disclosure)
Professional scepticism
Risk assessment
Business risk
Professional judgement
Significant risks
Audit risk
(See below)
38
AR
IR
CR
Audit risk
The 'risk that the
auditor expresses an
inappropriate audit
opinion when the
financial statements
are materially
misstated'
DR
Detection risk
Inherent risk
The susceptibility of an
assertion to a misstatement
that could be material, either
individually or when
aggregated with other
misstatements, assuming
that there were no related
internal controls.
Control risk
The risk that a misstatement
could occur in an assertion
and that could be material,
either individually or when
aggregated with other
misstatements, will not be
prevented, or detected and
corrected, on a timely basis
by the entity's internal
control.
Sampling risk
Non-sampling risk
39
(ii)
(iii)
Asset turnover
(iv)
Gross margin
Revenue
Share capital + reserves + NC liabilities
Gross profit
Revenue
Liquidity
(i)
Current ratio
(ii)
(iii)
Inventory turnover
=
or
(iv)
(v)
CA
CL
CA - Inventories
CL
Inventories
COS
COS
Inventories
365 days
Trade receivables
Credit sales
Trade payables
Credit purchases
365 days
365 days
Gearing
(i)
40
Debt/equity
41
Audit documentation
Contents:
Scope
Financial reporting framework
Locations
Reporting objectives
Materiality levels
Preliminary identification of:
Higher risk areas
Material balances
Whether auditor plans to perform
tests of controls
Resources
Management
Analytical procedures
Tests of controls
42
43
Quality of evidence
ISA 500 Audit Evidence
Sufficient
Quantity Sufficient to
support the audit opinion
Factors to consider are:
Financial
statement
assertions
Risk assessment
Nature of accounting
and internal control
systems
Experience gained
during previous audits
Results of audit
procedures
Sources of evidence
A nalytical procedures
E nquiry and confirmation
I nspection
O bservation
Recalc U lation
Assertions
A ccuracy (trans/disclosure)
C ompleteness (trans/bals/disclosure)
C ut off (trans)
A llocation (bals)
C lassification/understandability (trans/disclosure)
O ccurence (trans/disclosure)
V aluation (bals/disclosure)
E xistence (bals)
R ights and obligations (bals/disclosure)
44
Appropriate
Relevant
The evidence
gathered must
cover the
financial
statement
assertions.
Reliable
External better
than internal
Internal more
reliable when
controls effective
Auditor
generated better
than client
generated
Documentary
better than oral
Original
documents more
reliable than
copies/faxes
Internal control
45
Internal control
Internal control is the process designed and effected by those charged with governance,
management and other personnel to provide reasonable assurance about the achievement of
the entitys objectives with regard to reliability of financial reporting, effectiveness and efficiency
of operations and compliance with applicable laws and regulations.'
Control activities
Monitoring of controls
Segregation of duties
Physical controls
Information processing
Review (performance)
Authorisation
See below
46
General controls
Application controls
Access security
Passwords
Dedicated terminals
Job scheduling
Internal control
Narrative notes
Flow charts
47
48
Tests of controls
49
Revenue
Tests of controls
Inventories
Purchases
Enquiry
Inspection of documents supporting
controls
Observation of procedures
Re-performance of the application of a
control
Testing of the control activities
performed by a computer, possibly
using CAATs
Examination of evidence of
management review
Payroll
Deficiency
Implication
Recommendation
Caveat
50
51
Sampling
Computer-assisted
audit techniques
Audit sampling means the application of audit procedures to less than 100% of the
items within a class of transactions or account balance such that all sampling units
have an equal chance of selection, in order to assist in forming a conclusion
concerning the population from which the sample is drawn [ISA 530].
Sample size
Tolerable error
Expected error
Population size
Stratification
Sample selection
Random
Systematic
Haphazard
Value weighted
Evaluation of results
Anomalous?
Audit software
Computer programs used by the auditor, as part of his auditing
procedures, to process data of audit significance from the entitys
accounting system. Data may be down-loaded from the clients
system to the auditors in order to perform tests on it.
Examples of tests (usually substantive)
Reperformance of calculations
Extraction of samples
Analytical review
52
Test data
Conducting audit procedures by entering data into an
entitys computer system, and comparing the results
obtained with pre-determined results.
Examples of tests (usually tests of controls)
Testing specific controls in computer programs
Test transactions
Integrated test facilities
Audit procedures
and sampling
Examples
Examples
Accounting records
Payroll
Credit control
Data entry/information processing
Auditors responsibilities
Determination of inventory
quantities/condition
Legal opinions
Assess significance of
organisations activities to the
audit
Examples
Allowances to reduce inventory or
receivables to their estimated realisable
value
Depreciation
Provisions
Audit report
Evaluate objectivity/competence
of expert
Evaluate appropriateness of
auditors experts work as
evidence
Data and assumptions
Consistency with other
evidence
Auditors responsibilities
Whether exceptions/unusual
matters resolved
Planning, controlling and recording
Liaise with IA at all stages
Compare own results with those of
IA
Report to management
Auditors Expert
Service organisations
Internal audit
Accrued revenue
3 approaches
53
54
Non-current assets
(ii)
Depreciation
55
Non-current assets
Tangible
Additions
Disposals
Revaluations
Depreciation
Gains/ losses on disposals
Impairments
Intangible
Development expenditure
Remember the IAS 38 criteria that require/permit
capitalisation:
56
Inventory
(ii)
Cut-off
57
Inventory
Quantity x Value
Other evidence
Cut-off
Cut-off is usually tested by
obtaining a sample of GRNs
and GDNs either side of the
year end and then matching
them to purchase/sales
invoices to ensure they have
been included in the correct
account balances(s) (see
below)
58
Valuation
Frequency of counts
Investigation of discrepancies
Updating of records
Continuous inventory
After
GRN
GRN
Included in?
Purchases
Payables
Inventories
Sales
GDN
Included in?
Sales
Receivables
Inventories
Included in?
Purchases
Payables
Inventories
Purchase
Before
GDN
Included in?
Sales
Receivables
Inventories
Sales
Purchase
Year end
59
60
Subject:
Receivables
(ii)
61
Receivables
Direct confirmation
Obtain listing of trade receivables as at the
confirmation date
Agree total to nominal ledger
Review for any obvious omissions/misstatements
by comparing this year's list with last year's
Select a sample of accounts for confirmation
Select the sample including the following balances:
Old, unpaid amounts
Credit balances
Nil balances
Material balances
Letter should be on the client's paper, signed by
the client with a copy of the current statement
attached. It should request that the reply be sent
direct to the auditor and reply paid envelopes
should be sent.
After reasonable period, send 'follow-up' request
Follow up by telephone or fax if there is no reply
No reply:
Confirmation of individual outstanding invoices
Alternative procedures
Agree opening balance on account with last
year's closing balance
Test casts
Verify outstanding items to back up
documentation
Review cash received after year end
Discuss with responsible company official
62
Other evidence
GDNs pre/post year end
Analytical procedures
Correspondence with
customers/liquidators
(ii)
63
A request for a bank confirmation issued on the auditors' own headed paper and
sent to the bank branch with which the client has the prime business
arrangement.
The bank confirmation request should specify:
The names of all entities covered by the request
The bank confirmation request should reach the branch at least two weeks in
advance of the audit confirmation date.
Standard information requested
64
Full title of all bank accounts in all currencies, with account numbers and
balances, including nil balances
Full title and dates of closure of all accounts closed during the period
Amount of interest charged during the period if not shown separately on bank
statement
Details of:
Overdrafts and loans repayable on demand
Other loans, specifying dates of review and repayment
Other facilities
Contingent liabilities
Bank interest
Other evidence
Bank reconciliation
(ii)
(ii)
(ii)
65
66
Non-current liabilities
Bank letters
Loan agreements
Finance costs
Provisions
IAS 37 criteria
Subsequent events review
Management representations
Recalculation of estimates
Finance costs
Analytical procedures
Recalculation
Share capital
Share issues
Memo and Articles
Board minutes
Cash book receipts
Reserves
Brought forward figures
Profit/ loss for year
Dividends (board minutes, cash
book payments)
Directors emoluments
Contracts
Board minutes
Cash book payments
Not-for-profit organisations
67
Not-for-profit organisations
Types of not-for-profit
organisations
Charities
Clubs
Societies
Audit evidence
68
Application of
audit techniques
69
Subsequent events
Accounting issue: IAS 10 Events after the reporting
period
Written representations
The auditor should request written
representations:
Management fulfilled its responsibility to
prepare FS, that all transactions have been
recorded and they have approved the FS
Audit procedures
Should be minuted
70
Procedures
Going concern
Audit procedures
Analysing and discussing forecasts with directors
Analysing and discussing latest available interim financial
statements
Reviewing terms of loans agreements
Reading minutes of meetings of shareholders, those charged with
governance and relevant committees for reference to financial
difficulties
Enquiring of the entitys lawyers about the existence of litigation or
claims
Confirming the existence and enforceability of arrangements with
third parties to provide financial support
Considering the entitys plans to deal with unfulfilled orders
Reviewing events after balance sheet date to identify those that
either mitigate or otherwise affect the entitys ability to continue as
a going concern.
Auditors report (chapter 19)
Going concern assumption appropriate but a material uncertainty
exists unqualified opinion with emphasis of matter
Inadequate disclosure qualified or adverse opinion
Going concern assumption inappropriate (and management have
used going concern basis) adverse opinion
Management unwilling to make or extend its assessment may
amount to insufficient evidence and a modified opinion
71
72
Reports
73
Reports
Audit reports
Standard Report
Unmodified opinion
Changes to the
audit reports
Emphasis of
matter paragraph
'Without
qualifying our
opinion .'
(Eg 2)
Other
matters
paragraph
Insufficient or
inappropriate audit
evidence
Material but
not pervasive
Qualified
'except for'
(Eg 5)
74
Material and
pervasive
Disclaimer
'do not express
an opinion'
(Eg 6)
Material misstatement
Material and
pervasive
Adverse
'. do not give
a true and fair view'
(Eg 4)
Going concern
Auditors report
Going concern assumption appropriate but a material uncertainty
exists unqualified opinion with emphasis of matter
Inadequate disclosure qualified or adverse opinion
Going concern assumption inappropriate (and management have
used going concern basis) adverse opinion
Management unwilling to make or extend its assessment may
amount to insufficient evidence and a modified opinion
75
Example 1
Basic Unmodified Report
INDEPENDENT AUDITOR'S REPORT
(APPROPRIATE ADDRESSEE)
Report on the Financial Statements
We have audited the financial statements of ABC company, which comprise the statement of
financial position as at 31 December, 20X1, and the statement or profit or loss, statement of
changes in equity and statement of cash flows for the year then ended, and a summary of
significant accounting policies and other explanatory information.
Management's responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements
in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
Auditors responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with International Standards on Auditing. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor's
judgement, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion the financial statements present fairly, in all material respects, (or give a true and
fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) its financial
performance and its cash flows for the year then ended in accordance with International Financial
Reporting Standards.
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Example 2
Emphasis of matter paragraph
We draw attention to Note X to the financial statements which describes the uncertainty related to the
outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not qualified in
respect of this matter.
Example 3
Qualified opinion due to material misstatement of inventories
Basis for qualified opinion
The companys inventories are carried in the statement of financial position at xxx. Management has not
stated inventories at the lower of cost and net realisable value but has stated them solely at cost, which
constitutes a departure from International Financial Reporting Standards. The companys records
indicate that had management stated the inventories at the lower of cost and net realisable value, an
amount of xxx would have been required to write the inventories down to their net realisable value.
Accordingly, cost of sales would have been increased by xxx, and income tax, net income and
shareholders equity would have been reduced by xxx, xxx and xxx, respectively.
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph,
the financial statements present fairly, in all material respects, (or give a true and fair view of) the
financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and its
cash flows for the year then ended in accordance with International Financial Reporting Standards.
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Example 4
Adverse opinion due to material misstatement with a pervasive effect
Basis for adverse opinion
As explained in Note X, the company has included houses built for resale (including related land) at a
cost of $X as non-current assets and depreciated them at a rate of X%, resulting in depreciation of $X.
Under International Financial Reporting Standards, these should have been included as inventory in the
financial statements and no depreciation should have been provided in respect of these. The carrying
value of houses represent 90% of the companys total assets and the companys records indicate that
[explanation of the effect on amounts presented in the financial statements].
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion
paragraph, the financial statements do not present fairly (or do not give a true and fair view of) the
financial position of ABC Company as at December 31, 20X1, and (of) their financial performance and
their cash flows for the year then ended in accordance with International Financial Reporting Standards.
Example 5
Qualified opinion due to inability to obtain sufficient appropriate audit evidence about the carrying
amount of inventory (material but not pervasive)
Basis for qualified opinion
With respect to inventory having a carrying amount of $X the audit evidence available to us was limited
because we did not observe the counting of the physical inventory as at 31 December 20X1, since that
date was prior to our appointment as auditor of the company. Owing to the nature of the companys
records, we were unable to obtain sufficient appropriate audit evidence regarding the inventories
quantities by using other audit procedures.
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion
paragraph, the financial statements present fairly, in all material respects, (or give a true and fair view of)
the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and
its cash flows for the year then ended in accordance with International Financial Reporting Standards.
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Example 6
Disclaimer of opinion due to inability to obtain sufficient appropriate audit evidence about multiple
elements of the financial statements
Basis for disclaimer of opinion
We were not appointed as auditors of the company until after December 31, 20X1 and thus did not
observe the counting of physical inventories at the beginning and end of the year. We were unable to
satisfy ourselves by alternative means concerning the inventory quantities held at December 31, 20X0
and 20X1 which are stated in the statement of financial position at xxx and xxx, respectively. In addition,
the introduction of a new computerised accounts receivable system in September 20X1 resulted in
numerous errors in accounts receivable. As of the date of our audit report, management was still in the
process of rectifying the system deficiencies and correcting the errors. We were unable to confirm or
verify by alternative means accounts receivable included in the statement of financial position at a total
amount of xxx as at December 31, 20X1. As a result of these matters, we were unable to determine
whether any adjustments might have been found necessary in respect of recorded or unrecorded
inventories and accounts receivable, and the elements making up the income statement, statement of
changes in equity and statements of cash flows.
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion. According, we do not express an opinion on the financial statements.
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Appendices
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Author
Member of
the FAU
examining
team
Member of the
audit examining
team
Raymond
Wong
Audit procedures
This article provides you with tips on how to describe audit procedures which are
properly explained and specific to the relevant financial assertion.
Vijaya
Swaminathan
Going concern
This article summarises the responsibilities of auditors and management for going
concern and uses the question Medimade from the June 2010 exam to demonstrate
how to approach questions on this area.
Steve Collings
(Assessor for
Paper F8)
Audit Risk
In this article the F8 examiner, Pami Bahl, aims to identify the most common mistakes
made by candidates on audit risk questions in previous exam sittings, as well as
clarifying how these questions should be tackled in order to maximise marks.
Pami Bahl
(F8 examiner)
Audit Sampling
This article considers the various sampling methods in the context of Paper F8 and
other audit papers.
Steve Collings
(Assessor for
Paper F8)
Subsequent events
This article looks at the audit of subsequent events (events after the reporting period).
Steve Collings
Brian Pine
A matter of opinion
This article looks at the auditors opinion on the financial statements.
Simon Finlay
Martyn Jones
Examiners approach F8
This article considers the examiners approach to the Paper F8 exam and aims to
recognise a change in examiner with effect from the June 2010 exam
Pami Bahl
(New F8
examiner)
Read?
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