AAA Q& A Notes

16. IFRS 5

defines a discontinued operation as a component of an entity which either has been disposed off or is
classified as held for sale and

- represents either a major line of business or geographical area of operation

- Is part of a single coordinated plan to dispose of a major line of business

IFRS 5 requires specific disclosures in relation to assets held for sale and discontinued operstaions,
including that the assets are recognized as current assets and the results of the disc operation are
presented separately in the statement of profit or loss and the statement of cash flow.

According to IFRS 5, a disposal group of assets should be classified as held for sale where management
plans to sell the assets, and the sale is highly probable. Conditions which indicate that a sale is highly
probable are:

 management is committed to a plan to sell

 the asset is 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 plan will be significantly changed
or withdrawn

Prior to classification as held for sale, the disposal group should be reviewed for impairment in
accordance with IAS 36 Impairment of Assets. This impairment review would require the asset to be
held at the lower of carrying amount and recoverable amount where the recoverable amount is the
higher of value in use or fair value less costs of disposal.

After classification as held forsale, non‐current assets or disposal groups are measured at the lower of
carrying amount and fair value less costs. Depreciation ceases to be charged when an asset is classified
as held for sale.

IAS 8 permits a change in accounting policy where the change is

- Required by a standards or interpretation

- Results in the fs providing reliable and more relevant info about the effects of the transaction

Where the change is due to the req of a new standard, then the method of applying the change set out
in the new std should be followed.
IFRS 16 permits a lessee to either apply IFRS 16 with full retrospective effect or alternatively not restate
comparative info but recognize the cumulative effect of initially applying IFRS 16 as an adjustment to the
opening equity at the date of initial application.

IAS 8 which requires the following disclosures in these circumstances:

 the title of the standard or interpretation causing the change

 the nature of the change in accounting policy

 a description of the transitional provisions, including those that might have an effect on future periods
 for the current period and each prior period presented, to the extent practicable, the amount of the
adjustment: – for each financial statement line item affected, and – for basic and diluted earnings per
share (only if the entity is applying IAS 33)

 the amount of the adjustment relating to periods before those presented, to the extent practicable

 if retrospective application is impracticable, an explanation and description of how the change in

accounting policy was applied.

(b) (i) Auditor’s responsibility for other information presented with the financial statements
ISA 720 The Auditor’s Responsibilities Relating to Other Information requires the auditor to read other
information, defined as financial or non‐financial information included in an entity’s annual report.

The purpose is to consider whether there is a material inconsistency between the other information and
the financial statements or between the other information and the auditor’s knowledge obtained in the
audit. If the auditor identifies that a material inconsistency appears to exist or becomes aware that the
other information appears to be materially misstated, the auditor should discuss the matter with
management and, if necessary, perform other procedures to conclude whether:

(i) A material misstatement of the other information exists

(ii) (ii) A material misstatement of the financial statements exists, or
(iii) (iii) The auditor’s understanding of the entity and its environment needs to be updated.

The auditor does not audit the other information and does not express an opinion covering the
other information.  

ISA 720/ISA (UK) 720 states that a misstatement of the other information exists when the other
information is incorrectly stated or otherwise misleading, including because it omits or obscures
information necessary for a proper understanding of a matter disclosed in the other information.

Implications for completion of the audit

The auditor should discuss with management and the chair the information in the statement which
appears inaccurate or inconsistent. Following these investigations and discussions, the auditor should
then request that any information which is inaccurate, inappropriate or inconsistent is removed or
amended in the chair’s report.
If management refuse to make the changes then the auditor’s request should be escalated to those
charged with governance. If the issue remains unresolved then the auditor should take appropriate
action, including:

 Considering the implications for the auditor’s report and communicating with those charged with
governance about how the auditor plans to address the issues in the auditor’s report; or

 Withdrawing from the engagement, where withdrawal is possible under applicable law or regulation.

Implications for the auditor’s report

If the other information remains uncorrected the auditor would use the Other Information section of
the auditor’s report to draw the users’ attention to the misstatements in the chair’s statement. This
paragraph would include:

 A statement that management is responsible for the other information

 A statement that the auditor’s opinion does not cover the other information and, accordingly, that the
auditor does not express an audit opinion or any form of assurance conclusion thereon

 A description of the auditor’s responsibilities relating to reading, considering and reporting on other
information as required by this ISA, and

 A statement that describes the uncorrected material misstatement of the other information.

As the inconsistency is in the chair’s statement rather than the audited financial statement the audit
opinion is not modified as a result

17. FRAUD

The auditor should approach the comments made by the Group finance director with an attitude of
professional scepticism.

First, further independent investigations should be carried out in order for the auditor to obtain
sufficient and appropriate evidence relating to the amount of the fraud. If the fraud is actually more
financially significant, the financial statements could be materially misstated, but without further audit
evidence, the auditor cannot determine whether this is the case.

Second, the auditor should consider whether reporting is necessary. ISA 240/ISA (UK) 240 The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements requires that when fraud has taken
place, auditors shall communicate these matters on a timely basis to the appropriate level of
management in order to inform those with primary responsibility for the prevention and detection of
fraud of matters relevant to their responsibilities.

In addition to reporting to management and those charged with governance, ISA 240 requires that the
auditor shall determine whether there is a responsibility to report the occurrence or suspicion to a party
outside the entity. The auditor’s duty to maintain the confidentiality of client information makes such
reporting potentially difficult, and the auditor may wish to take legal advice before reporting externally

18. a) Sale and Leaseback

The auditor needs to consider the correct treatment of the sale and leaseback transaction as required by
IFRS 16 Leases which requires that an assessment should be performed based on the criteria specified in
IFRS 15 Revenue from Contracts with Customers as to whether control of the asset has been retained by
the seller or whether it has passed to the buyer.

Control of an asset is defined by IFRS 15 as the ability to direct the use of and obtain substantially all of
the remaining benefits from the asset. This includes the ability to prevent othersfrom directing the use
of and obtaining the benefits from the asset.

In this case, the lease term of ten years appears short compared to the asset’s remaining life which is
expected to exceed 50 years and given the demand for retail properties for rent in the area, it seems
likely that Clive Co will direct the use of and obtain substantially all of the remaining benefits from the
asset including the potential cash flows in the future.

 should therefore derecognise the property and recognise a right‐of‐use asset based on the
proportion of the previous carrying amount of the asset effectively retained under the terms of
the lease
 In addition, it should recognise a financial liability based on the present value of the lease
payments and any gain or loss arising on the transaction should be recognised in profit or loss
for the year
 A review of surveyor reports on the property to confirm the expected remaining life of the
property.

Evidence expected to be on file:

 A copy of the sale and leaseback agreement reviewed to confirm the key details including in
particular the rights of the lessee and the lessor to control the asset

Agreement of the sale proceeds as per the sale agreement to the cash book and/or bank statement
to confirm the correct calculation of the gain or loss on disposal

 Notes of discussions with management in relation to the transfer of control to confirm whether
the correct treatment of the sale and leaseback arrangement has been determined.

 A copy of any client working papers in relation to the calculation of the right‐of‐use asset to
identify whether the client has recognised the right‐ of‐use asset at the correct amount.

 A review of the board minutes for evidence of management’s discussion of the sale and leaseback
transaction and any evidence in relation to the transfer of control.

 Agreement of the carrying amount of the property to the non‐current asset register to determine
whether the correct amount has been derecognised and whether the gain or loss on disposal has
been recorded correctly.

b) Investment Property

IAS 40 defines an investment property as land and/or buildings held to earn rentals or for capital
appreciation, or both. The fact that the property has not yet been let by the reporting date does not
impact on this classification. The end of owner‐ occupation of the warehouse is evidence of the change
in use to an investment property.

Fair value model is acceptable provided the treatment of any other investment property held by Lifeson
Co is consistent

On transfer of an owner‐occupied property recognised at depreciated historical cost, which has not
been previously impaired, to investment property carried at fair value, IAS 40 requires that any resulting
increase in the carrying amount should be recognised in other comprehensive income as a revaluation
surplus within equity. Thereafter, any further increase in fair value isrecognised in profit or loss for the
year.

Evidence expected to be on file:

 Notes of discussions with management to confirm its intention to hold the property to earn rentals
and for capital appreciation.

 Inspection of title deeds held by Lifeson Co to confirm its ownership of the investment property

 Agreement of the accounting policy to the notes to the financial statements this year and in previous
year, to confirm that the fair value model is to be adopted and is consistent with any other investment
properties held.

Physical inspection of the building by the auditor in order to confirm its general condition and that it is
no longer occupied by Lifeson Co.

 A market valuation of the building by an independent and external auditor’s expert at the date of the
change of use and at the reporting date to determine the respective fair values and the resulting gains.

 Agreement of the carrying amount at the date of the change of use to the non‐current asset register to
confirm the correct amount of the fair value gain.

 Written representations from management confirming the change of use, the relevant date and future
intentions.

c) Asset Impairment

Value in Use – Auditor should consider the calculation of recoverable amount based on value in use is in
line with the requirements of IAS 36. Assess whether the client has used an apporporiate discount factor
to calculate VIU. The auditor should also consider whether Fv less costs to sell exceeds VIU.

Reversal of Imp Loss

IAS 36 requires that increased CA of an asset, such as property, attributable to a reversal of impairmemt
should not exceed the CA of the asset, net of depreciation had no impairment loss been recognized in
the prior years.

Evidence expected to be on file:

 Notes of discussions with management to confirm its intention to hold the property to earn rentals
and for capital appreciation.
 Inspection of title deeds held by Lifeson Co to confirm its ownership of the investment property.

 Board minutes for evidence of management discussion of the change of use and for confirmation of
the date when owner‐occupation ceased.

 Record of the physical inspection of the building by the auditor in order to confirm its general
condition and that it is no longer occupied by Lifeson Co.

 Agreement of the accounting policy to the notes to the financial statements this year and in previous
year, to confirm that the fair value model is to be adopted and is consistent with any other investment
properties held.

 A market valuation of the building by an independent and external auditor’s expert at the date of the
change of use and at the reporting date to determine the respective fair values and the resulting gains.

19. b) Report to those charged with governance

ISA 260 Communication With Those Charged With Governance requires the auditor to communicate
many matters including independence and other ethical issues and the significant findings from the
audit.

-The significant findings from the audit include the auditor’s views about significant qualitative aspects
of the entity’s accounting practices including accounting policies and any circumstances which affect the
form and content of the auditor’s report.

-Also include significant difficulties encountered during audit such as information delays. (The auditor
should report this delay to those charged with governance, detailing its impact on the efficiency of the
audit process together with any resulting increase in the audit fee)

ISA 265Communicating Deficiencies in Internal Control to Those Charged With Governance and
Management requires the auditor to communicate appropriately to those charged with governance
deficiencies in internal control which the auditor has identified during the audit.

The audit working papers include minutes of discussions with management which confirm that
authorisation had not been gained for this expenditure. The lack of authorisation indicates a lack of
management oversight and a serious weakness in control which could allow fraud to occur.
Furthermore, the lack of integrity shown by management in going ahead with the renovation works
without the necessary permission is an example of management override and could be indicative of the
tone set throughout the organisation. This therefore represents a high risk matter and they may wish to
implement controls and procedures to prevent further breaches. The report to those charged with
governance should include full details on this significant deficiency in internal control and should include
recommendations to management in order to reduce the associated business risk.

Long association of audit partner

According to the IESBA International Code of Ethics for Professional Accountants /FRC Ethical Standard,
her long association with the audit client creates both familiarity and self‐interest threats to auditor
independence.
The familiarity threat arises due to the long and potentially close relationship with the staff of Taylor Co
leading to her being too sympathetic to their interests or too accepting of their work.

This in turn gives rise to a self‐interest threat in that her long association and close relationship with the
client create a personal interest which may inappropriately influence her professional judgment or
behaviour.

In order to address these risks, the Code/FRC Ethical Standard requires that an audit partner in a listed
entity should be rotated at least every seven years.

The Code does allow for an engagement partner to serve for an additional year if the required rotation is
not possible due to unforeseen circumstances such as the illness of the intended engagement partner.
In these circumstances, safeguards should be applied such as the independent review of the
engagement which is being performed and this should be communicated to those charged with
governance

20.

b) Audit evidence on the cash flow forecast

 Evidence of agreement of the opening cash position to the cash book and bank reconciliation.

 Reperformance by the audit team of the client’s calculations in preparing the forecast in order to
check its arithmetic accuracy.

 Details of a review of the results of any market research which has been conducted by Daley Co for the
next 12 months in order to assess the potential impact of the new competitor.

 Notes from meetings with management detailing discussion of the key assumptions made by
management in the preparation of the and an assessment of the consistency of the assumptions with
the auditor’s knowledge of the business and with management’s intentions regarding the future of the
co.

 Evaluation by the audit team of previous profit and other financial forecasts and their outcome in
order to assess the consistency of the cash flow forecast with other prospective information prepared by
management.

 A comparison of the cash flow forecast for the period April to June 20X5 with management accounts
for the same period in order to assess the accuracy of the forecast compared to actual data to date.

 Results of analytical review of the items included in the cash flow forecast including, for example, a
detailed review of the breakdown of different categories of expenses in order to identify any items
which may have been omitted.

 A review of correspondence with Daley Co’s lawyers in relation to the legal claims in order to assess
the likelihood of losing the actions, the likely cost and the possibility of further claims arising in the
future.

 Based on the review of legal correspondence, confirmation that the settlement of the legal claims has
been appropriately included in the cash flow forecast.
 A review of correspondence with Daley Co’s bankers and supporting documentation for both the
company’s existing loan facilities and the proposed new loan.

 Minutes of discussions with management in relation to the likelihood of obtaining the new loan.

 Based on these reviews and discussions, a recalculation by the auditor of the finance cost and
confirmation that the finance cost and the receipt of the loan have been accurately reflected in the cash
flow forecast.

c) Implications of non-disclosure of going concern uncertainty on auditor’s report

ISA 705 requires the auditor to modify the opinion in the auditor’s report when they conclude that,
based on the audit evidence obtained, the financial statements as a whole are not free from material
misstatement.

The failure to include disclosures regarding material uncertainties in relation to going concern in Daley
Co’s financial statements represents a material omission which will therefore require a modification of
the auditor’s opinion. In this case, the auditor must exercise professional judgment and assess whether
the absence of this disclosure is material but not pervasive to the financial statements or whether it is
material and pervasive to the financial statements.

Material but not pervasive

A qualified audit opinion on the grounds of material misstatement is appropriate, as the directors have
failed to include required disclosures.

The auditor will include a ‘Qualified Opinion’ paragraph at the start of the auditor’s report which will
state that the financial statements are presented fairly in all material respects ‘except for’ the absence
of this disclosure. The qualified opinion paragraph will be followed immediately by a ‘Basis for Qualified
Opinion’ paragraph which will give details of the going concern uncertainties in relation to Daley Co and
explain that the financial statements do not adequately disclose these uncertainties

Material and pervasive

Adverse audit opinion on the grounds of material misstatement is appropriate asin the auditor’s opinion
the lack of these disclosures will have a fundamental impact on the users’ understanding of the financial
statements

The auditor will include an ‘Adverse Opinion’ paragraph at the start of the auditor’s report which will
state that the financial statements are not presented fairly in all material respects. followed
immediately by a ‘Basis for Adverse Opinion’ paragraph which will give details of the going concern
uncertainties in relation to Daley Co and explain that in the opinion of the auditor, the omission of key
disclosures in this respect are fundamental and pervasive to the financial statements and therefore
require an adverse opinion

21. b) Loan to a member of the Audit team

According to the IESBA International Code of Ethics for Professional Accountants (the Code) and the FRC
Ethical Standard, a loan to a member of the audit team may create a threat to the auditor’s
independence.
 If the loan is not made under normal lending procedures, and terms and conditions, a self‐interest
threat would be created. The self‐interest threat arises because of the potential personal benefit
derived which may motivate the audit team member to behave in a manner aimed at protecting that
benefit. Such a threat would be so significant that no safeguards could reduce the threat to an
acceptable level. It follows therefore that the audit team member should not accept such a loan or
guarantee.

The Code, however, also states that a loan from an audit client which is a bank or similar institution to a
member of the audit team, which is made under normal lending procedures, is acceptable. In addition,
an intimidation threat to objectivity may arise where a loan is made from the audit client to a member
of the audit team. The threat arises because of a fear that the audit client may, change the terms of the
loan or recall the loan, thus influencing the behaviour of the auditor.

Temporary Staff assignment

Self-review threat

Risk of assuming mgmt. responsibility

According to the Code, an audit firm cannot provide accounting and bookkeeping services (including
payroll) to an audit client which is a public interest entity unless the services relate to matters which are
collectively immaterial to the financial statements. The audit manager should therefore discuss details
of the proposed role of the seconded member of staff with the payroll in order to establish the
significance of the role and its materiality to the financial statements.

23. Global audit reform - The main audit reform proposals center on enhancing auditor independence
and increasing competition

1. Fees – THE IESBA has proposed changes that require audit firms to cease as auditors for public listed
entities if fee dependency continues beyond a specific period. Also proposed that provision of non-audit
services should not affect the audit fee and audit fee should be standalone fee.

2. Provision of other services to audit client – One proposal is to breakup the accountancy firm so that
firms can ony provide audit services or accountancy services but not both , to eliminate the self review
threat.

Another proposal is for the firms to have an organizational split rather than a structural split whereby
the audit division of an accountancy firm is separated from the rest of the org and has its own mgmt.
team, Chief and board.

3. Mandatory firm rotation. Familiarity due to long association with an audit client results in reduced
professional skepticism and objectivity. The Codes of Ethics and corporate governance regulations
require some element of rotation of senior audit personnel or the firm or both.

Benefits of MFR include the new audit firm taking a fresh look at the company which may identify
inappropriate accounting practice wich the previous audit firm had either not identified or had been
reluctant to raise with client due to fear of upsetting the relationship established.

Cons – A higher probability of errors were found in the first year audit due to lack of knowledge of the
client an this caused in reduction of audit quality.
Additional costs were incurred for both the client and the firm. The client need to provide additional
assistance to the incoming audit firm in the first year or two in obtaining understanding of the co.

4 Joint Audits – To overcome the issue of loss of knowledge that arises due to MFR, Joint Audits have
been proposed for PIE. It is when two or more firms are responsible fo the audit with one of the being a
non-big 4 firm. Big firms are Reluctant as they are concerned that smaller firms font have the necessary
skills and competence.

5. State appointed auditor – Instead of the company appointing an auditor, the state should appoint an
auditor for it to reduce the threats of familiarity and conflicts of interest in the process.

6. Increased disclosure by audit firms on how the audit has been performed - A proposal to address
this issue is for auditors to report on audit team composition, time spent on the audit engagement by
each grade of person, the profitability of the engagement to the firm and the level of audit partner
remuneration.

27.

28. a) Revenue
In accordance with IFRS 15 Revenue from Contracts with Customers, revenue is recognised when or as
the performance obligations within the contract are satisfied.

Performance obligations fulfilled over time

Where revenue is recognised over time the revenue recognised should be based on progress towards
the satisfaction of the performance obligation. Darren Co has recognised 100% of the contract profit
even though the contract is not yet complete. The contract period is 15 months, and by the year‐end the
contract has been ongoing for seven months only. Therefore the profit has been recognised too early
and is overstated. Based on the time period in months, it appears that the contract is 7/15 complete,
and therefore profit in the region of $2.3 million ($5 million × 7/15) can be recognised, and that profit is
overstated by $2.7 million. T

Performance obligations fulfilled at a point in time

If the revenue should be recognised at a point in time then the revenue should only be recognised when
the control of the bridge asset is transferred to Flyover Co. T

The audit firm needs to clarify Darren Co’s revenue recognition policy and confirm whether the revenue
should be recognised over time or at a point in time. 

C) Limitation on the scope of the audit

Given the limitation imposed by mgmt., the auditor will be unable to form a conclusion about the
occurrence, completeness, accuracy of the expenses. ISA 705 requires that when mgmt. imposes a
limitation on the scope of the audit, the auditor should request that they remove the limitation.

If mgmt. refuses, communicate to those charged with governance including the implications of the
matter and impact on the audit opinion. They should also be informed that in accordance with ISA 210,
the auditor my not be able to continue with the engagement in the future if mgmt. continues to impose
the limitation on the scope of the auditor’s work and the auditor believes that it may result in them
disclaiming their opinion.

D) Other info- The key performance indicators (KPIs) included in an integrated report are by definition
‘other information’ according to ISA 720. Other information is defined as financial and non‐financial
information included in a document containing audited financial statements and the auditor’s report.
The requirement of ISA 720 is that the auditor shall read the other information, in order to identify any
information contained within any of the financial or non‐financial information in the annual report that
is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by
the auditor in the course of performing the audit.

The auditor must use professional judgment to determine if this is a material inconsistency. Assuming
that thisis deemed to be a material inconsistency, the auditor should consider whether the financial
statements or the other information should be amended.

The auditor may seek legal advice if management refuses to amend the KPI to remove the material
inconsistency. All of the matters affecting the auditor’s report should be discussed with those charged
with governance.

If management refuse to change the other information, then the auditor’s report should provide a
description of the inconsistency in the ‘Other Information’ section of the report.

31.
32. Borrowing Cost
IAS 23 , BC that are directly attributable to the acquisition, construction and production of a qualifying
asset should be capitalized as part of the cost the asset. The capitalization should be ceased when
substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are
complete.

The new area should be depreciated from the date when the asset is in the location and condition
necessary for it to be capable of operating Intended by the mgmt .

Evidence.

1. Breakdown of the elements of capitalized costs reviewed to ensure all items are eligible for
capitalization.
2. Agreement of a sample of capitalized costs to supporting documentation.
3. Copy of the loan agreement, confirming the amount borrowed, date of cash receipt, interest
rate.
4. Documentation to verify that extension was complete and ready for use on…
5. Recalculation of the bc, depreciation and cv of the extension and agreement of al figures to the
draft fs.
6. Confirmation that addition PPE is disclosed in the notes to FS.

Assets Held for Sale.

According to IFRS 5 Assets can be held for sale only if the conditions if IFRS 5 are met. There is a risk that
assets have been inappropriately classified if the above conditions are met.

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 sellAn impairment review should take place at the year end, to ensure that
there is no further impairment of the properties to be recognized. The assets should not be depreciated
after being classified as held for sale, therefore audit procedures should confirm that depreciation has
ceased from October 20X1.

Disclosure is needed in the notes to the financial statements to include a description of the non‐current
assets classified as held for sale, a description of the facts and circumstances of the sale and its expected
timing, and a quantification of the impairment loss.

Evidence

1. Copy of the board meeting at which the disposal was agreed by mgmt..
2. Details of the active prog to locate a buyer, eg instruction given to real estate agent.
3. Written representation from mgmt. that asset will be sold within 12 months
4. Subsequent events review to confirm if any properties are sold in the period after year end.
5. Details of any imp review conducted by mgmt. at the year end.
6. A copy of the client’s depreciation calculations, to confirm that depreciation was charged up to
October 20X1 but not after the reclassification of the assets as held for sale

20.

I) Auditor’s responsibilities for Initial Engagements

The auditor must obtain sufficient appropriate evidence that the

1. opening balance do not contain misstatements that materially affect the current period’s f/s
2. prior period’s closing balance have been brought forward correctly to the current period or have
been restated, if appropriate.
3. appropriate accounting policies are consistently applied or changes in ac policies have been
properly accounted for and adequately disclosed.

If this evidence cannot be obtained, the auditor’s report should contain a qualified opinion or a
disclaimer of opinion.

If the Opening balance contain misstatements that could materially affect the current period’s
financial statements, the auditor should inform the client’s management and the predecessor
auditor. If the effect of the misstatement is not properly accounted for and disclosed, a qualified
or adverse opinion will be expressed.

If the current period’s acc policies have not been consistently applied to the opening balances
and the change not accounted for properly and disclosed, a q or a opinion will be expressed
 If the prior period’s auditor’s report is modified, the auditor should consider the effect on this
current year’s Fs. If the modification remains relevant and material to the current period’s
accounts then the current period’s auditor’s report should also be modified.

An OTHER MATTER paragraph should be included in the auditor’s report in the case of prior
period’s fs have not been audited at all or have been audited by another auditor.
This is irrespective of whether or not they are materially misstated and does not relieve the
auditor of the need to obtain sufficient appropriate evidence on opening balance.

2) Matters to consider when relying on an auditor’s expert

1. Independence- The auditor must evaluate whether the expert is independent of the client and must
enquire whether they have interests or relationship which may threaten the independence

Eg He should not be connected to the Co. or be related parties of anyone who has influence over its FS.

2. Competence- Auditor must evaluate competence of the expert for eg by considering whether they
are a member of any professionl bodies. Their relevant experience should also be considered.

3.Scope of work- The auditor should agree the scope of the work with the expert, include its objectives,
how it will be used, methodology and any key assumptions to be used. These assumptions should agree
to the auditor’s understanding o the entity and its environment.

3) Difficulties in measuring and reporting Social and Environmental Performance

1. Setting KPIs - Performance is defined by setting KPIs but this process is not straightforward. If it is
decided that S&E performance is to be considered in terms of stakeholders affected by the co’s
performance, then they need to decide which stakeholders are most important and which aspects of
co’s operations are of interest to them.

2. Quantification - It is difficult to quantify KPIs in monetary terms. As a result of the complexity of the
social and natural environments, a qualitative approach may be more faithful to the reality, but this
forgoes the possibility of measurement.

Also difficulties in quantifying performance.

3.Systems and controls – For S&E performance, there may not be a reliable systems and controls over
the processing of relevant info.

4. Lack of Standards- There is no single set of standards on reporting S&E performance that all co’s have
to apply, but rather a variety of reporting practices based on different situations of diff entities. Makes it
diff to compare performance between companies and year-on-year comparison if targets change.

23.

1)
  Assets Held for Sale Criteria
1. Mgmt is committed to a plan to sell
2. Assets are available for immediate sale in their present condition
3. An active program exists to locate a buyer
4. Sale is highly probable, within 12 months of reclassification
 Measure the assets at the lower of carrying value and FV less costs to sell.
 If reclassification took place mid year, am impairment review should be conducted.
 Depreciation should have ceased from when the reclassification took place

2) Sale and leaseback

When Asset is sold but control still remains with the company, the cash received is considered
effectively as a secured loan and is to be accounted for as a financial liabl in accordance with IFRS 9. Not
a lease under UFRS 16.

The FL is recognized at FV of the Consideration received, The liab should then be held at amortized cost,
being amortized over _ years. This would result in other income being recognized in the statement of
P&L.

Depreciation should also be charged over _ years. Amount recognized should be based on CA of __.

As the lease is for __ years, the effect of discounting is likely to be material. The liab should be
recognized at its present value, with the fecct of discounting being recognized as a finance cost in future
periods.

24.

1) Why auditors should presume that there are risks of Fraud of Revenue

1. Companies are under pressure, particularly in listed companies to achieve certain performance
targets, the achievement of those targets often affects their job security and compensation. They
include measures of revenue growth, providing an incentive for mgmt. to use earnings mgmt.
techniques.

2. In some companies there may be incentive to undesratate revenues, to reduce profits and therefore
company taxation charges. Most common in private companies

3. Revenue recognition can also be a judgemental area. Eg- the recognition o frevenue on long term
contracts and provision of services. They require estimating the percentage of work completion at the
end of the period, increasing scope for mgmt. to manipulate reported results.

4. RR can also be a complex issue. Some sales have multiple elemens, such as sale of goods and the
separate sale of related maintenance contract and warranties. This added complexity increases the risk
of manipulation
5. MM through manipulation of revenue recognition can be readily achieved by recording revenue in an
earlier period or later acc period or by creating fictitious revenue.

6. In some industries like retail, a high proportion of revenue will be in cash which increases the theft of
cash and consequent manipulation of recorded revenue to conceal this crime.

Not always high risk While revenue recognition in general may be considered a high risk area, it is not
always the case. Companies with simple revenue streams or a low volume of transactions may be
considered at low risk of fraud through revenue manipulations. Auditor’s Responsibility Relating to
Fraud in an Audit of Financial Statements permits the rebuttable of the fraud risk presumption for
revenue recognition. One example of simple revenue streams would be where a company leases
properties for fixed annual amounts over a fixed period of time. If this is the case, the reasons for not
treating revenue as a high fraud risk area must be fully documented by the auditor.

ii) Legal Dispute

The creation of provision and their reversal is a commonly used creative accounting technique. This is a
potentially high-risk area of the audit. The reversal would increase the profit for the year end by ____,
which is _% of profit. This is material and should be treated with skepticism.

In accordance with IAS 37, a provision is recognized if _______. There should be audit evidence on the
prior year file concerning the appropriateness of the original amount recorded.

It would be prudent to review the evidence held on the prior year audit fileto assess the quality of the
evidence. One would expect to find some documentary evidence from legal experts. Mgmt assumptions
and written representation are unlikely to be considered appropriate evidence in a matter where legal
expertise is rqd.

The audit manager should contact the client and request confirmation from Mr Smith’s opinion fom the
legal experts, along with any relevant documents from legal proceedings or agreements reached with e
x employee. If the client is unable to provide any further doc, the provision should be reinstated in full.
This should be noted in the summary of proposed adjustments and sent to clientalong with a request to
amend all the adjustments.

c) Interim Financial info performed by independent auditor of the entity. The key elements of the
review are enquiry and analytical procedures which do not lead to reasonable assurance.

26)

1) Contract Loss- The contract has become onerous as it contains unavoidable costs which exceed the
economic beefits expected from it.

In accordance with IFRS15, costs should only be recognized as assets they are expected to be recovered.
The irrecoverable portion must be provided for in line with IAS 37. This will reduce profit before tax and
assets.

Possible Penalties. – The contract will be completed two months later which may result in penalties
being incurred being incurred by the co. These should be provided for in accordance with IAS 37.
2) Discontinued Operation- The sale meets IFRS 5’s requirements as it is an independent bz division
which can be distinguished operationally and for financial reporting purposes. Its results should be
presented separately as a discontinued operation on the face of the SOPL. Comparatives will also need
to be restated.

Disposal Group- The assets of the division are a disposal group under ifrs5. Recognized as held for sale
where the assets are available for sale in their present condition, sale is highly probable and these
conditions are met before the year end.

Difficult to identify RPT

 Related party Transactions are difficult to identify because management themselves may not be
aware of what constitutes a RPT and may therefore not disclose all RPTs to auditor.
 They may deliberately attempt to conceal RPT’s for eg because they are being used to
manipulate FS. This is particularly difficult to for the auditor to address as knowledge of RPT
comes largely from representations made by mgmt.
 IAS 24 requires a degree of subjective judgement in deciding who ia relative party.
 Acc systems are not set up to identify RPT separatelt from transactions in the normal course of
business.

27) Trading
Revenue declined by _. But COS declined by _. The two are not in line , which indicates possible
overstatement of cost of sales. Any misclassification of costs casts doubts over the efficacy of the
internal control. This increase In IC risk may mean that substantive testing will be reqd.

Finance cost. - Finance cost has risen by __. Interest bearing debt at the year end is ____ against which
the finance cost is only __. This implies an interest rate of________ which is very low.

Taxation- The tax charge has fallen by ___ and looks low. The implied tax rate is signifactly lower
than_.The charge in the statement of p&l does not agree with the liab in BS., so there must be some
misstatement. The amount is material to the profit at _.

Revaluation- If revaluation gives rise to Rev Reserve, the statement of p&l should include a revaluation
gain. If not, it is material misstatement which could be argued to be pervasive.

Risks of revaluation

- They may have revalued assets selectively whereas it is reqd to revalue all assets within a class.
Extensive disclosures are rqd in the notes to FS and there is a risk that these have not been
made.
- It is possible that the depreciation may not have been remeasured at the point of revaluation
leading to an understatement of expenses.

Risk of assets being overstated.

LeasesNew assets are acquired under leases. There is a risk that these are not correctly classified, or that
any right-of-use assets have not been recognized at cost.

Development Costs

Risk of capitalizing internally generated brands, which is prohibited by ias 38. Only development costst
are capitalized and research costs to be expensed. Given that operating expenses have fallen by , it is
highly unlikely that research costs have been expensed.

Criteria for development costs

- Claim that there Is a market for the product

- Have the financial resources to complete the product. (The liquidity position may cast doubt
over its ability to complete the development)

Liquidity

Receivables days increase – Could be due to poor credit control. Could indicate the presence of
irrecoverable receivables not provided for, which would further reduce assets and profit were provision
to be made for them

Inventory days increase – Sign of inventory obsolescence, particularly given the competition. If net
realizable value is lower than cost, write-downs maybe may be reqd which could affect both assets and
profit.

Payables days rise – Sign f cash flow difficulties. Could damage supplier relationships, leading to interest
charges or lost discounts.
Currently dependent on overdraft. If O is withdrawn, may be virtually impossible fir it to be a going
concern, Further info needed for overdraft Limit.

Solvency

Gearing ratio increase. Makes it harder to raise finance in future and it appears unlikely that bank would
agree to renew the bank loan again which would again affect going concern. Further info reqd regarding
the terms of the loan, and in particular payment date.

Going concern

Risk that co. would not make sufficient disclosure of the doubts of that exost over the going concerb, It
is also possible that the fs would have to be prepared under aan alternative ssumption to going concer
eg the liquidation basis but this would only be clear if sufficient evidence is obtained.

New client risk

Detection risk is increased as we will lack cumulative understanding of the bz and itsenvironment. Must
focus on developing this understanding at the planning stage.

Ethical Issues

1. Conflict of interest. Advising both parties of an acquisition negotiation They should be informed
of the conflict and we should seek consent to the arrangement. If decline, engagement should
not be accepted. If agreed, safeguards – 1. Using separate engagement teams separated by info
barriers. 2.Signing confidentiality agreements by employees
2. Self review- In relation to due-diligence, as in we will be performing procedure on th fs which we
have already audited, SG-
1. Separate eng teams
2. Review by an independent professional accountant

3. Advocacy – Providing advice on financing raises AT, If the firm is asked to represent the client’s
interest to any potential lenders.

4. Mgmt role- Advising or recommending a particular form of finance could be seen as playing a
mgmt role. Mitigate the threat by making it clear that any decisions rests with the
client’dsmgmt. and we are providing advice only.

36) Professional Skepticism

- It is defined in ISA 200 as an attitude that includes a questioning mind, being alert to conditions that
may indicate a possible misstatement due to error or fraud and critical assessment of the audit
evidence.

- ISA 200 requires auditors to plan and perform the audit with PS, recognizing that circumstances may
exist which cause the FS to be materially misstated. Imp to use PS at all stages of audit

- Being alert to contradictory audit evidence and assess judgements and assumptions critically and
without bias and being ready to challenge mgmt. when necessary.
- ISA 240 also refers specifically to PS, stating that auditor that maintain PS throughout audit recognizing
the possibility of material m could exist due to fraud or error.

- The Application of PS is closely aligned with maintain objectivity, and it is diff to remain sufficiently
skeptical when certain threats to objectivity are present. The exercise of PS should work to reduce audit
risk by ensuring the audit evidence obtained, has been critically evaluated and based on reliable info.

Audit procedures for Goodwill Impairment

- The assumptions used in the impairment test should be confirmed as agreeing with the auditor’s
understanding of the bz based on current year’s risk assessment.
- Confirm that theimpairement review includes goodwill relating to all bz combinations
- Develop an independent estimate of the impairment loss and compare it to that prepared by
mgmt..
- Check the arithmetic accuracy of the calculations used in the impairment calculations.
- Obtain an understanding of the controls over mgmt.’s process of performing the impairment
test.

44)

37. a) Inventory

IAS 2 requires inventory to be measure at the lower of cost and NRV. If the NRV is 0, then an expense of
____ will be incurred reducing both profit and assets by the same amount. ISA 580 states that a written
representation itself is not considered sufficient appropriate evidence. Further evidence must be
obtained. The FD’s claim that inv can be recycled would need to be supported by evidence that NRV of
this recycled NRV is not less than _.

Further procedures,

1. Making enquiries with operations director to ascertain whether or not the materials could be
recycled.
2. Obtains documentary evidence of the costs of recycling together with potential selling price of
RM.

Provisions

This area is not material to Net assets but could become so in combination with any other immaterial
misstatements detected.

The verbal confirmation that the case will probably be paid Is not sufficient, and written confirmation
from the lawyers is required. The FD’s refusal to provide the evidence may constitute a limitation on the
scope of the audit if the evidence cannot be obtained elsewhere and throws into question mgmt’s
integrity.

1. Review correspondence with lawyers for evidence regarding outcome of the legal case
2. Review board minutes for evidence about the claim

Current Assets
A loan to director is material in nature, irrespective of the monetary value. In line with IAS 24, FD is a key
mgmt. personnel and thus a related party. The FS must disclose the loan principal amount, the amount
outstanding at YE together with the terms of the loan. If loan is not disclosed, there is a MM in respect
of IAS 24. Audit opinion should be qualified. It is possible that interest payment has not been made
accrued for.

1. Review the written terms of the loan with FD to confirm the interest rate and any other
conditions
2. Review list of controls to see whether interest has been accrued

b) Property – A move from recognizing properties at cost to FV would be acceptable inline with IAS 16,
as long as it is applied across an entire class of assets. The AC should be aware of benefits and
drawbacks of this. B- More relevant info on the value of properties and quicker recognition of FV gains in
FS. D- The need to remeasure FV at each period end.

Asset register – The delay in receiving the asset register would have impaired audit efficiency and
potentially results din greatest costs and fees. The fact that the issue was discussed last year with AC
and no change is seen this year Suggests control failure.

44)

Performance Audit – Refers to when the practitioner provides assurance to magmt with regard to the
effective functioning of the operational activity or an agreed component of operations.

Audit of Performance Information – Refers to when the practitioner provides assurance to specific
performance measures published by the reporting entity. The specific assurance objectives may differ
between engagements but will normally be in relation to the accuracy of the reported measures.

General Procedures for Performance measures

- Document the systems that are in place for recording the info relevant to PM, noting the key
controls that should operate to ensure accuracy of info that is captured, recorded, and reported
- Obtain an understanding of the level of scrutiny of PM by senior mgmt. including their
frequency of the reviews, level of detail that is provided.
- Calculations of the Pm should be obtained. Recalculate them by the audit team to ensure
mathematical accuracy.
- PM should be analytically reviewed against historic performance levels to identify any significant
fluctuations in reported Performance levels.

45) Assessing audit quality

 1) Materiality- It is not appropriate that the Materiality level was determined at th planning stage and
was not reviewed or adjusted since. ISA 320 requires auditors to determine materiality for the FS as a
whole at the planning stage of the audit, and to revise it as the audit progress as necessary where new
facts and info become available which impact materiality. Review should have taken place and this
should be documented in the working papers

Audit of PPE.- The machine should have been physically verified. Without a physical inspection, the audit
team would be unaware of the problems such as damage to the machine or obsolescence which
indicates impairment.

Relying on distribution co. to provide evidence on the existence and use of asset is not app. ISA 00 states
that evidence obtained directly by auditor is more reliable. The external confirmation should be
corroborate evidence obtained directly by the auditor.

The relationship btwn the two companies should be understood and evidence eeds to be obtained to
confirm whether or not they are related parties, as this would impact the extent to which the external
confirmation could be relied upon.

Inventory Count – The audit team should have discussed the discrepancies with the mgmt.. ISA 501
requires auditors to evaluate mgmt’s instructions and procedures for recording and controlling the
results of the entity’s physical invemtory counti6ng.

Training nneed to be provided for audit staff to ensure they understand their role in an inventory count.

The issues in inventory count performance could represent significant control deficiency and should be
raised with those charged with givernance in accordance with ISA 265.

WP REVIEW- ISA 220 requires the engt partner shall through a review of audit documents and discussion
with engmt tem be satisfied that sufficient appropriate evidence has benn obtained to support the
conclusion reached for the auditor’s report to be issued.

Reviews should happens on a timely basis throughout the audit to enable problems to be solved at an
app time. Reviews should also be hierarchical.

2)