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561t Advanced Audit and Assurance - International (AAA - INl)
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ACCA Strategic
Professional

Advanced Audit and

Assurance (AAA)
(International)

Mock Exam 1
(March 2020 Exam)
(amended)
Questions

Time allowed 13 hours 15 minutes

ALL THREE questions are compulsory and MUST be attempted

DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS

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566 Advanced Audit and Assurance - International (AAA - INl)
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ALL THREE questions are compulsory and MUST be
attempted
Question 1
Rick Group
It is 1 July 20X5. You are a manager in the audit department of Atlanta & Co, a firm of Chartered
Certified Accountants. You are working on the audit of the Rick Group (the Group), which has a
financial year ending 30 September 20X5. The Group, a listed entity, offers an internet television
network, with over 10 million subscription members in eight countries.
You are provided with the following exhibits:
An email which you have received from the Group audit engagement partner.
2 Background information and matters relevant to audit planning.
3 Selected financial information from the Group management accounts.
4 An extract from the audit strategy document prepared by Neegan Associates, the
component auditor which audits one of the Group's subsidiaries.
5 Details of the planned acquisition of a new foreign subsidiary, Michonne Co, and a possible
joint audit arrangement.
Required
Respond to the instructions In the email from the audit engagement partner. (l+0 marks)
Note: The split of the mark allocation is shown in the partner's email (Exhibit 1).
Professional marks will be awarded for the demonstration of skill in communication, analysis and
evaluation, professional scepticism and judgement and commercial acumen in your answer.
(10 marks)
(Total• 50 marks)
Exhibit 1 - Email from audit engagement partner

To: Audit manager

From: Carol Morgan, Audit engagement partner
Subject: Audit planning for the Rick Group
Date: 1 July 20X5 Hello
Hello
I have provided you with some information in the form of a number of exhibits which you should
use to help you
with planning the audit of the Rick Group (the Group) for the financial year ending 30 September
20X5. Based on the analysis I have done on this industry, it is appropriate for overall materiality
to be based on the profitability of the group as this is a key focus for investors.
I require you to prepare briefing notes for my own use, in which you:
(a) Using the information in all exhibits, evaluate and prioritise the significant audit risks to be
considered in planning the Group audit. (21 marks)

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(b) Using the information provided in Exhibit It:

(i) Evaluate the extract from the component auditor's strategy, commenting on the
audit strategy responses and ethical matters relating to the issues identified; and
(7 marks)
(ii) Design the principal audit procedures which you will instruct the component auditor
to perform on the sole of property to the Group chief executive officer. (6 marks)
(c) Using Exhibit 5, discuss whether it is appropriate for a joint audit to be performed on
Michonne Co, commenting on the advantages and disadvantages of a joint audit
arrangement. (6 marks)
Thank you

Exhibit 2 - Background Information

The Group started to offer on internet streaming service for films and 1V programmes ten years
ago. The Group's business model is to acquire licences for films and 1V programmes and
customers pay a monthly subscription fee to access them and watch online.

The Group hos a subsidiary in each country in which it offers its subscription service. Atlanta &
Co audits all of the subsidiaries with the exception of Daryl Co, one of the Group's foreign
subsidiaries, which is audited by a local firm called Neegan Associates. All companies within the
Group have the same financial year end, and with the exception of Daryl Co, which reports under
local accounting standards, the Group companies all use IFRS® Standards as their financial
reporting framework.

Matters relevant to audit planning

Following a discussion between the Group audit engagement partner and a representative of the
Group audit committee, several matters were noted as being relevant to the audit planning:

Legal case
In January 20X5, a legal case was initiated against the Group by Glenn Co, a film production
company. Glenn Co claims that the Group hos infringed copyright by streaming a film in specific
countries for which a licence hos not been acquired. The Group insists that the film is covered by
a general licence which was acquired several years ago. The Group finance director is not willing
to recognise the legal claim within the financial statements as he is confident that the claim
against the Group will not be successful, and he does not want to discuss it further with the audit
team, emphasising that there is no relevant documentation available for evaluation at this time.

Daryl Co
Neegon Associates provides the audit service to Daryl Co, one of the Group's foreign subsidiaries.
Daryl Co is one of the Group's larger subsidiaries, it is a listed company in its home jurisdiction,
with total assets of $140 million. Due to internet service issues where Daryl Co is based, a
significant number of customers have cancelled their subscriptions, and the company is projected
to make a loss this year.

Daryl Co is the only subsidiary which does not follow IFRS Standards, as in its local jurisdiction
companies must follow local accounting rules. It uses the some currency as the rest of the Group.

Daryl Co was acquired several years ago, and goodwill of $38 million is recognised in the Group
financial statements in respect of the company.

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Exhibit 3 - Selected financial information
Note Projected to Actual to
30 September 20X5 30 September 20X4
$million $million
Group revenue 980 780
Operating profit 78-4 70-2
'i
Profit before tax 60·1 58-7
Total assets 780 600
Included in totol assets:
Intangible assets - licences 2 580 420
Intangible assets - goodwill 3 13 5 13 5
Number of subscription customers 10, 500,000 8,070,000
Notes
The Group's main source of revenue is from monthly membership fees. Members are billed in
advance of the startof their monthly membership and revenue is recognised when the bill is
sent to the customer, all of whom pay bycredit card.The price of a regular subscription has
remained at $8-20 per month throughout 20X4 and 20X5.Occosionally, the Group offers a
free trial period to new customers. This year, the Group also introduced a new premium
subscription package, which allows customers to odd two family members to their
subscription for on additional fee of $5 per month.
2 The Group acquires content licences per title in order to stream film and TV content to its
subscribers. The contentlicences are each for a fixed time period, varying between three and
five years.The Group capitalises the cost pertitle as an intangible asset.Group policy is to
amortise licences over a five-year period, the finance director justifies this as being 'the
most prudent' accounting treatment.
3 Goodwill arising on business combinations is tested annually for impairment in accordance
with IAS® 3 6 Impairment of Assets. Due to the strong performance of the Group, no
impairment of goodwill hos been recognisedin recent years.
Exhibit It - Extract from component auditor strategy document
The three points below ore on extract from the audit strategy prepared by Neegon Associates in
relation to their audit of Daryl Co. Other sections of the audit strategy, including the audit risk
assessment, have been reviewed by the Group audit team and are considered satisfactory so you
do not need to consider them. Materiality has been set by Neegan Associates, in agreement with
Atlanta & Co, at $1.4million.

Issue identified by Neegon Associates Audit strategy response by Neegon Associates

Payroll Planned audit procedures:
From 1 October 20X4, payroll accounting • Agree the total payroll figure, estimated to be
services are provided to Dory/ Co by Neegan $6 million, from the statement of profit or
Associates as on additional non-audit loss to the payroll reports generated by
engagement. Neegan Associates.
Sole of propert1:1 • No further audit procedures are
Daryl Co sold o small, unused building located considered necessary.
on the coast to the Group's chief executive Planned audit procedures:
officer (CEO) in February 20X5, for $50,000. • Confirm $50,000 is included in receivables
The amount is still outstanding for payment. within current assets.
The Group Cf"O is planning to use the propcrt!J • No further audit procedures are
as a holiday home. considered necessary because the
transaction is not material to the financial
statements, and local accounting rules do
not require disclosure of the transaction.

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Exhibit 5 - Potential new subsldiarii
The Group is planning the acquisition of a new foreign subsidiary, Michonne Co, which is located
in Farland. The negotiations are at an advanced stage, and it is likely that the acquisition will take
place in October 20X5.

The Group's audit committee has suggested that if the acquisition goes ahead, due to the distant
location of the company and the fact that Atlanta & Co has no offices in Farland, a joint audit
could be performed with Michonnc Co's current auditors, Lucille Associates, a small local firm of
Chartered Certified Accountants.

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Question 2

Saul
It is 1 July 20X5. You work in the audit deportment of Soul S Co. The Goodmon Group (the
Group) is on audit client of your firm and the audit for the financial year ended 31 December
20X4 is in the completion stage. The Group, which is not listed, installs and maintains security 'i
systems for businesses and residential customers.
Materiality for the audit of the Group financial statements has been determined to be $400,000.
You are reviewing the audit working papers, and have gathered the following information:
Fraud
The Group finance director has informed the audit team that during the year, a fraud was carried
out by a manager, Mike Traut, in one of the Group's procurement departments. The manager had
raised fictitious supplier invoices and paid the invoiced amounts into his personal bank account.
When questioned by the Group's finance director, Mike Trout confessed that he had stolen
$40,000 from the Group. The finance director asked the audit team not to perform any
procedures in relation to the fraud, as the amount is immaterial. He also stated that the financial
statements would not be adjusted in relation to the fraud.
The only audit evidence on file is a written representation from management acknowledging the
existence of the fraud, and a list of the fictitious invoices which had been raised by the manager,
provided by the finance director. The audit working papers conclude that the fraud is immaterial
and no further work is needed.
Development costs
In August 20X4, the Group commenced development of a new security system, and incurred
expenditure of $600,000 up to the financial year end, which has been capitalised as an intangible
non-current asset. The only audit evidence obtained in relation to this balance is as follows:
• Agreement of a sample of the costs included in the $600,000 capitalised to supporting
documentation such as supplier invoices.
• Cash flow projection for the project, which indicates that a positive cash flow will be
generated by 20XB. The projection has been arithmetically checked.
• A written representation from management stating that 'management considers that the
development of this new product will be successful'.
You are aware that when the Group finance director was asked about the cash flaw projection
which he had prepared, he was reluctant to answer questions, simply saying that 'the
assumptions underlying the projection have been agreed ta assumptions contained in the
Group's business plan'. He provided a spreadsheet showing the projection, but the underlying
information could not be accessed as the file was password protected and the Group finance
director would not provide the password to the audit team.
Trade receivables
Trade receivables recognised in the Group's current assets includes a balance of $500,000
relating to a specific customer, Hamlyn Co. As at 31 December 20X4, the balance was more than
six months overdue for payment. The Group credit controller states that they are confident that
the debt will be recovered in full, however as of 1 July 20X5, the debt had not been repaid.
Required
(a) (i) Discuss the Implications of the fraud far the completion of the audit, and the
actions to be taken b y the auditor. (6 marks)
(ii) In respect af the development costs ONLY:
Comment on the sufficiency and appropriateness of the audit evidence
obtained; and
Recommend the actions to be taken b1,1 the auditor, lncludlng the further
evidence which should be obtained. (6 marks)

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(b) The audit work is now complete, and the Group auditor's report is due to be issued in the
next few days. Materiality for the audit of the Group financial statements hos continued to
be determined to be $400,000. You hove been tasked with reviewing the draft auditor's
report and the following supplementary information which hos been prepared at the end of
the audit:
The audit partner hos concluded that the fraud is immaterial and that all necessary
work has been performed by the audit team.
Further audit procedures were successfully performed on the development costs,
and a conclusion was reached by the audit team that the recognition of the
$600,000 as an intangible asset is appropriate.
A letter was received from Hamlyn Co's administrators on 29 July 20X5, stating that
Homlyn Co is in liquidation, and that its creditors will receive a payment of 10% of
outstanding balances. The audit team hos concluded that $50,000 con remain
recognised as a trade receivable, and that $450,000 should be written off as
irrecoverable. However, the Group refuses to make any adjustment, and the full
$500,000 remains recognised as a trade receivable in the final Group financial
statements.
Draft auditor's report
Based on the above conclusions, the audit supervisor hos drafted the auditor's report
which includes the following extract:
Basis for opinion and opinion
Audit procedures indicate that trade receivables ore overstated by $500,000. For this
reason we consider that the Group financial statements ore likely to be materially
misstated and do not fairly present the financial position and performance of the Group for
the year ended 31 December 20X4.
Emphasis of matter
There ore two matters to which we draw your attention:
A fraud was discovered, as a result of which we hove determined that $40,000 was
stolen from the Group. This does not impact the financial statements but we wish to
highlight the illegal activity which took place during the year.
2 The Group finance director obstructed our audit by refusing to allow access to audit
evidence. He hos also refused to adjust the financial statements in relation to the
material misstatement of trade receivables, which led to the qualified audit opinion
being issued. For this reason, we wish to resign as auditor with immediate effect.
Required
Critically appraise the extract from the proposed auditor's report of the Goodman
Group for the year ended 31 December 20X4.
Note: You are NOT required to re-draft the extracts from the auditor's report.
(8 marks)
Professional marks will be awarded for the demonstration of skill in analysis and
evaluation, professional scepticism and judgement and commercial acumen in your
answer. (5 marks)
(Total = 25 marks)

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Question 3

Moritz
(a) It is 1 July 20X5. You are a manager in Moritz S Co, a firm of Chartered Certified
Accountants which offers a range of services to audit and non-audit clients. Your firm has
been asked to consider a potential engagement to review and provide an assurance report 'i
an prospective financial information (PFI) for Lavenza Co, which is not an audit client of
your firm. Moritz S Co has already conducted specific client identification procedures in
line with money laundering regulations with satisfactory results.
Lavenza Co has approached your firm in order to obtain an independent assurance
opinion on a cash flow forecast which is being prepared for its bankers in support of an
application for an increase in its existing overdraft facility. The following cash flow forecast
has been prepared by the finance director of Lavenza Co for the 12 months ta 30 June
20X6:
Lavenza Co cash flow forecast for the 12 months ending 30 June 20X6
3 months to 3 months to 3 months to 3 months to
30 September 31 December 31 March 30June 20X5
20X5 20X6 20X6
$'000 $'000 $'000 $'000
Operating cash receipts
Cash sales - high street
shops 4,343 4,690 5,065 5,471
Cash sales - online 6,782 7,053 7,335 7,628
Receipts from credit sales
- online 11,987 12,346 12,717 13,099
23,112 24,089 25,117 26,198
Operating cash
payments
Purchases of inventory (10,846) (11,388) (11,730) (12,316)
Salaries (7,254) (7,109) (7,180) (7,384)
Overheads (6,459) (6,265) (6,391) (6,659)
(24,559) (24,762) (25,301) (26,359)
Other cash flows
Initial costs of new high
street shops (2,143) (1,128)
Online marketing
campaign (624) (431) (386) (278)
(2,767) (1,559) (386) (278)
Cash flow for the period {4,214) (2,232) (570) (439)
Opening cash (9,193) (13,407) (15,639) {16,209)
Closing cash (13,407) (15,639) (16,209) (16,648)

The following information is also relevant:

Lavenza Co is a retailer of academic textbooks which it sells through its own network
of book shops and online through its website. The revenue from the website includes
both cash sales and sales on credit to educational institutions. The company has
provided historical analysis from its trade receivables ledger indicating that for sales
made on credit, 10% pay in the month of the sale, 62% after 30 days, 16% after 60
days, 8% after 90 days and the remainder ore irrecoverable debts.
2 The company already has an established presence in large cities with universities but
has seen a decline in its core operations in recent years which has led to a decrease
in revenue and a fall in liquidity. In order to reverse these trends, the company is
planning to extend its operations by opening new shops in small cities with
universities and large colleges.

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 3 Lovenzo Co's management is planning on online marketing campaign targeted at
the university sector which they believe will increase the company's market shore by
approximately 3%.
4 The company hos on existing overdraft facility of $12 million with its bonkers and hos
requested on increase in the facility to $17 million.
Required
(i) Explain the matters to be considered by Moritz & Co before accepting the
engagement to review and report on Lavenza Co's prospective financial
Information; and (6 marks)
(ii) Assuming Moritz & Co accepts the engagement, recommend the examination
procedures to be performed In respect of Lavenza Co's cash flow forecast.
(7 marks)
(b) You hove also been asked to provide on accountant's report for on audit client, Beaufort
Co, which intends to list on the stock market in September 20X5.
Beaufort Co hos been an audit client of Moritz & Co for the last eight years, preparing
financial statements to 31 March each year. Throughout this period, the managing partner
at your firm, Frances Stein, has token personal responsibility for the audit and has
increased the total fee income from the client to the level where it represented 16·2% of
Moritz & Co's total fee income in 20X5 (15·4%: 20X4). In addition to performing the annual
audit, Moritz & Co also provides accounting and bookkeeping services for Beaufort Co. The
accounting and bookkeeping services include the preparation of the monthly payroll for
the client and maintaining all of the financial records of a small, immaterial division of the
company.
The managing director of Beaufort Co, Margaret Shelley, hos asked your firm for
assistance in the preparation of the shore prospectus document which will be used to
support the company's flotation. The contents of the prospectus document will include the
following elements:
Key historical financial information prepared to 31 August 20X5;
Profit forecasts;
A summary of the key risks relating to the client's business; and
A business plan outlining the future prospects of the company and recommending
the shares to investors.
Margaret Shelley hos asked if Mortiz & Co can also provide on accountant's report which
will be included in the prospectus and which will cover each of these elements.
Required
Comment on the ethical and professional Issues arising as a result of Beaufort Co's
planned listing and the services which it has requested from Moritz & Co. (7 marks)
Professional marks will be awarded for the demonstration of skill in analysis and
evaluation, professional scepticism and judgement and commercial acumen in your
answer. (5 marks)
(Total • 25 marks)

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Answers

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576 Advanced Audit and Assurance - International (AAA - INl)
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A plan of attack
If this hod been the real Advanced Audit and Assurance exam and you hod been told to turn over
and begin, what would hove been going through your mind?

An important thing to soy (while there is still time) is that it is vital to hove a good breadth of
knowledge of the syllabus because the question requirements for each question will relate to
diffonant oreo� of the AAA sulloh11�. Howeviar, don't r,onir,. Relow we r,rovide g11idonr,e on how to
approach the exam.

Approaching the answer

It is vital that you attempt all the questions in the exam to increase your chances of passing. The
best way to do this is to make sure you stick to the time allocation for each question - both in
total and for each of the question ports. The worst thing you con do is run over time in one
question and then find that you don't hove enough time for the remaining questions, leading you
to miss out on some of the easier marks in those questions.

Section A consists of one long case-study style question set at the planning stage of the audit.
This may contain detailed information such as extracts from financial statements and audit
working papers. A range of requirements will be set for this question, but will only cover areas
from syllabus areas A to D inclusive.

Question 1 is for 50 marks, all set at the planning stage in the context of a single scenario, here
dealing with the audit of a large group. As it is a very long question, it is important that you break
it down into its component ports as this will make it easier to manage - and enable you to
allocate your time to each of them.

Section B contains two more compulsory questions, and may be set on any area of the AAA
syllabus.

Question 2, for 25 marks, featured a review of audit evidence and a requirement to critique on
auditor's report.

Question 3 offers 25 marks that were mode up of two mini scenarios, one dealing with on
engagement to review prospective financial information, and the other featuring a requirement to
comment on the ethical and professional issues arising in a situation.

Forget about it!

And don't worry if you found the exam difficult. More than likely other candidates will too. If this
were the real thing you would need to forget the exam the minute you left the exam hall and think
about the next one. Or, if it is the lost one, celebrate!

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Question 1

Workbook references. Chopters 6, 7 and 9.

Top tips. Your general approach should be to read the requirement carefully, and then to work
through the question noting down issues (audit risks) as they occur to you.
Part (a) was the standard requirement to 'evaluate' risks - in this case audit risks, which means
that points regarding the audit itself (detection risk) ore valid. It is very important that you do not
limit yourself to just a few exhibits - the question tells you to cover all of them, and you must do
this if you ore to poss this port. It is also noteworthy that AAA requirements in Question One tend
to ask you to priories risks in addition to evaluating them. This does not mean that you need to
eg, rank the risks in order, but rather that your discussion of the risks needs to include a
consideration of their significance for the audit. You will not score well in this question port if you
merely list all of the risks but without writing about their relative importance for the audit.
Port (b)(i) focused on the component auditor's strategy document. This is a novel requirement for
AAA, and requires you to think about the appropriateness of the component auditor's strategy
from the point of view of the group auditor. Port (b) (ii) looks more familiar as it is ofter audit
procedures.
Joint audits, in port (c), ore on area that hove been examined before and which remain topical.
The examining team's comments here ore substantial, but they ore worth reading because they
give you on insight into what candidates actually did when this question come up in their exam,
and offer some information about how to score marks and how to ovoid common pitfalls.
Easy marks, The communication marks here ore valuable, and ore well worth the time it tokes to
get them.
ACCA examiner's comments. This question was a compulsory 50-mork case study consisting of
three ports and focused on the planning phase of the group audit of on existing client. The group
was a listed entity and offered a subscription-based internet streaming service for films and TV
programmes.
With requirement (a), candidates generally performed well on this section of the question, yet it
was disappointing to see candidates focus on what appeared to be rote learnt risks and points
which were not relevant to the question.
A number of candidates discussed the risk of the foreign subsidiaries having different year ends
to the group, yet the question clearly stated all companies within the group hod the some year
end, and no marks were awarded.
General consolidation risks, intercompony eliminations, disclosures required for listed entities
were all deemed speculative risks and did not receive credit. There was no evidence within the
question that the group companies traded with each other or that the group was recently listed
and therefore may not adhere to stock market listing requirements or corporate governance
requirements, for example. Candidates ore advised to use the detail of the specific scenario given
and discuss the risks accordingly to demonstrate application of audit knowledge to a given
scenario.
A further area that demonstrated a lock of application to the scenario surrounded the impairment
of goodwill performed by the group on on annual basis. A number of candidates discussed the
general treatment of goodwill, that it is to be tested for impairment on on annual basis and that
management hod not tested impairment and therefore concluding on the financial statement
impact that goodwill would be overstated. The question clearly referred to the group correctly
performing the annual impairment review but had not recognised impairment due to strong
performance. The key issue here was the indicator of impairment within the foreign subsidiary
and the impact this would have on the impairment review performed.

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Some other common issues noted in candidate answers for Audit Risk included:
• Discussing audit procedures to be performed which did not meet the question requirement
and therefore no credit was awarded. If required, this will normally form a separate
requirement within the question and should be answered where applicable.
• Several candidates discussed the annual incentive and suggested it was a share-based
payment which was incorrect and showed that many candidates had not read the
question carefully enough.
• Several candidates appear to only possess a brief overview of the accounting standards
without sufficient knowledge of the underlying principles. It is disappointing to see, for
example, the accounting rule for IAS 37 Provisions, Contingent liabilities and Contingent
Assets not described sufficiently considering it is one of the easier accounting standards for
candidates to apply.

Overall, candidates would be advised to read the requirement carefully to ensure the answer
given is relevant and not too generic to avoid losing marks, that would be easily achievable.

Candidates that demonstrated good technique in calculating materiality, identifying the audit
risk in the scenario, discussing the relevant accounting treatment and finally the impact the error
will have on the financial statements scored well.

Requirement (b)(J). for seven marks asked candidates to evaluate an extract from the component
auditor's strategy for three issues and to also comment on the ethical issues arising from the
issues identified.

Generally, the responses to the evaluation of the component auditor's strategy were
disappointing.

The question was testing the candidates' knowledge of understanding the difference between the
component audit for the individual subsidiary financial statements compared to that of the
group. There is a significant gap in candidates' learning relating to this.

A number of candidates showed a lack of understanding regarding materiality, and stated that
materiality thresholds are stated within the ISA (International Standards of Auditing), when this is
not correct as there are no set rules as to how the level of materiality should be arrived at, rather
a percentage is applied to a chosen benchmark as a starting point. Many candidates did not
mention the importance of auditor judgement in relation to materiality. Where candidates
referred to the auditor being in breach of the auditing standard in the calculation of materiality,
marks could not be awarded without further development.

A number of candidates were unable to appreciate the difference between the component
financial statements and the group financial statements. A number of candidates referred to the
related party transaction to the group CEO requiring disclosure in the notes to the financial
statements. The key issue here is that the related party transaction is required to be disclosed in
the consolidated financial statements from the group perspective and therefore needed to be
specifically addressed as part of the group audit.

Requirement (b)(II), for six marks asked candidates to design the principal audit procedures
which would be instructed to the component auditor to perform on the sale of the property to the
Group CEO. Overall candidates scored well here, yet there were instances that were
disappointing to note such as significant numbers suggesting procedures to check physical
existence of the property (that had been sold before the year end), or to verify the asset was
remaining in the fixed asset register, again despite the asset being sold to the CEO prior to the
year end.
Candidates that applied good technique to procedures questions, such as stating what
procedure they would perform along with the purpose of the procedures will score well.

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Requirement (c) for six marks asked candidates to discuss the appropriateness of a j oint audit in
relation to a planned acquisition of a new foreign subsidiary and to state advantages and
disadvantages of a joint audit. This requirement should hove scored well, as it was on easier
requirement and was answered well by students who hod learnt the topic area.

However, a number of students appeared to confuse a joint audit with a group and component
audit situations and therefore marks would not be awarded for discussions of discussing
competence of the component auditor and ethical requirements as these were not relevant ta the
requirement.

H®%1·1H:M::iHl�------------------------------
Marks
(a) Audit risk evaluation
Up to 3 marks for each audit risk (unless indicated otherwise).
Marks may be awarded for other, relevant audit risks not
included in the marking guide.
In addition, ½ mark for relevant trends or calculations which
form port of the evaluation of audit risk (max 2 marks).
Appropriate materiality calculations (max 2 marks) and justified
materiality level should be awarded to a maximum of 1 mark.
Analytical review
Reliance on component auditor (2 marks)
Daryl Co - possible impairment
Trends in revenue and revenue recognition (2 marks)
Amortisation of licences
Legal case
Group finance director's attitude (2 marks)
Daryl Co - local accounting rules (2 marks)
Post year-end acquisition of Michonne Co
Maximum 21
(b) (i) Evaluation of Neegan Associates' audit strateg1:1
Up to 1 mark for each issue evaluated:
Pa1,1roll
Further procedures necessary given the materiality
of the payroll
Requirement of ISA 600 that some ethical guidelines
should be applied
Self-review threat from Neegon Associates
providing the service - explained
The service should not hove been provided due to
Daryl Co's listed status

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 Marks
Sale of property
Transaction should be disclosed in Group accounts
and is material by nature
No consideration of whether the profit on disposal
hos been properly determined
Risk thot the transaction is subject to bias given
that company is loss making
Property might not even have been sold, could be
window dressing
No procedures to confirm asset has been removed
from the financial statements or on the
recoverability of the amount outstanding
Conclusion on audit quality
Maximum 7
(ii) Audit procedures on sale of property
Review board minutes to see if the property sole has
been discussed and formally approved by the
company's board
Agree the $50,000 sole price to the legal
documentation relating to the sale of the property
to the Group CEO
Confirm the book value of the property at the date
of disposal to underlying accounting records and
non-current asset register
Confirm that the asset has been removed from the
company accounts at the dote of disposal
Obtain management's determination of profit or
loss on disposal, re-perform the calculation based
on supporting evidence, and agree the profit or loss
is recognised appropriately in the company
statement of profit or loss
Obtain an estimate of the fair value of the property,
for example, by comparison to the current market
price of similar properties
Obtain written representations from company
management that all matters related to this related
party transaction have been disclosed to the Group
management and to the Group audit team
Obtain written representation from the Group CEO
regarding the transaction, to confirm the amount
which is outstanding, and the likely timescale for
payment
Review cash receipts after the reporting date to
confirm whether or not the $50,000 has been
received from the Group CEO
Maximum 6

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 Marks
(c) Joint audit
Up to 1 mark for each relevant point discussed:
Justification In favour of Joint audit
Retain local auditors' knowledge of company
Local auditors' knowledge of local regulations
Atlanta & Co can provide additional skills and resources
Cost effective - reduce travel expenses, local firm likely to
be cheaper
Enhanced audit quality
Possible disadvantages of Joint audit
Employing two audit firms could be more expensive
Problems in allocating work and determining
responsibilities
Auditor liability issues
Recommendation
Maximum 6
Professional marks
Communication
• Briefing note format and structure - use of headings/sub­
headings and on introduction
• Style, language and clarity - appropriate layout and tone of
briefing notes, presentation of materiality and relevant
calculations, appropriate use of the CBE tools, easy to follow
and understand
• Effectiveness and clarity of communication - answer is relevant
and tailored to the scenario
• Adherence to the specific requests made by the audit
engagement partner
Anal11sls and Evaluation
• Appropriate use of the information to determine and apply
suitable calculations
• Appropriate use of the information relating to the sale of the
property to design appropriate audit procedures
• Effective prioritisation of the results of the audit risk evaluation
to demonstrate the likelihood and magnitude of risks and to
facilitate the allocation of appropriate responses
• Balanced discussion of the professional and practical issues
when evaluating working with component auditors in a Group
engagement.

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 Marks
Professional scepticism and professional judgement
• Appropriate application of professional judgement to draw
conclusions and make informed decisions following recognition
of unusual or unexpected movements, missing/incomplete
information or challenging presented information as port of the
risk evaluation
• Determination and justification of a suitable materiality level,
appropriately and consistently applied
• Identification of possible management bias and consideration of
the impact on the financial statements and the possible reasons
for management's preference for certain accounting treatments
• Effective application of technical and ethical guidance to
effectively challenge and critically assess how management hos
responded to the legal claim and the adequacy of any provision
or disclosure requirements.
Commercial acumen
• Use of effective examples and/or calculations from the scenario
to illustrate points or recommendations
• Appropriate recognition of the wider implications when
considering entering into a joint audit engagement.
Maximum 10
Total 50

Briefing notes
To: Audit engagement partner
From: Audit manager
Subject: Rick Group - Audit planning
Introduction
These briefing notes ore prepared to ossist with planning the audit of the Rick Group (the Group)
for the financial year ending 30 September 20X5. The notes contain on evaluation of the audit
risks, which should be considered in planning the Group audit. The notes also evaluate the audit
strategy, which hos been prepared by Neegon Associates for the audit of Daryl Co and
recommend further audit procedures to be performed by the component auditors. Finally, the
briefing notes address the issue of a potential joint audit, should a new subsidiary be acquired in
Farland next year.
(a) Audit risk evaluation
Materiality
For the purposes of these briefing notes, the following overall materiality level will be used
to assess the significance of identified risks and as requested, this hos been based on the
profitability of the company.

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 Benchmarks
5-10% of profit before tax; range of $3,005,000-$6,010,000.
This benchmark is only a starting point for determining planning materiality and therefore
professional judgment will need to be applied when determining a final level to be applied
during the course of the audit. This is on existing client, and no significant control issues
hove been noted at the planning stage or in previous audits. Therefore, the overall risk
assessment is deemed to be low so the materiality benchmark of $6million has been set as
an appropriate level at the planning stage. This materiality may need to be revisited during
the audit or at a later stage if information or testing (control or substantive) indicates
potential issues.
Financial analysts
Balances which ore subject to judgment should be considered carefully when assessing
audit risks of the Group. Licences are significant os they are intangible assets representing
74.4% of total Group assets. The audit work will need to ensure that the valuation and that
of the goodwill of Daryl Co, which has seen significant trading issues during the year.
The financial information shows that total revenue is projected to increase by 25·6% this
financial year. This is a significant increase and it could indicate that revenue is overstated.
However, the number of subscription members is projected to increase by 30·1%, so
possibly the increase in revenue is simply as a result of the Group attracting more
customers - but this is o very significant increase and will need to be substantiated.
The audit risks for these areas are considered further in these briefing notes.
Reliance on component auditors
Daryl Co is a significant component of the Group, with its assets equating to 17·9% of the
Group's total projected assets.
Given the materiality of Daryl Co, the Group audit team needs to consider the extent of
reliance which can be placed on the audit of the company conducted by Neegan
Associates. The independence and competence of Neegon Associates will need to be
evaluated by the Group audit team, though presumably as the audit firm already has
experience of Neegan Associates from previous years' audits, this evaluation will already
have been performed. However, independence is threatened by the fact that Neegan
Associates hos been engaged in providing a non-audit service to Daryl Co since 1 October
20X4. This matter is discussed further in the section of the briefing notes dealing with the
component auditor's strategy. Any material misstatements which may remain uncorrected
in Daryl Co will impact on the consolidated financial statements, leading to audit risk at the
Group level.
Daryl Co - possible Impairment
The goodwill of $38million in relation to Daryl Co is material to the Group financial
statements based on the threshold of $6million.
According to IAS 36 Impairment of Assets, goodwill should be tested for impairment
annually, which is the Group's accounting policy. The audit strategy prepared by Neegan
Associates indicates that Daryl Co is loss making this year, which is an indication of
impairment. Therefore, management will need to factor this into their impairment review. As
the Group's performance in the past has been strong, no goodwill impairment has been
recognised, and management may lack experience in dealing with a loss-making
subsidiary as part of their impairment testing. There is also an incentive for impairment
losses not to be recognised, due to the annual incentive scheme which is based on profit.
For these reasons, there is on audit risk that goodwill could be overstated, and expenses
und,arstoted, if onu ner,essoru imroirment loss is not correctlu netermined ond rer,ognised.

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 Trend in revenue
The financial information shows that total revenue is projected to increase by 25·6% this
financial year. However, when looking at revenue per customer per year, this is projected to
fall from $96·65 in 20X't to $93·33 in 20X5. Revenue per customer per month is therefore
projected to fall from $8·05 in 20X't to $7·78 in 20X5. These trends seem to contradict the
introduction of the new premium subscription package, which should bring in additional
revenue per customer. Possibly the premium subscription has not been taken up by many
customers. It is, however, unusuol to see a downwards trend in revenue per customer per
month, given that the price of a regular subscription hos remained the same as in the
previous year, at $8·20 per month. Possibly the figures ore impacted by the free trial
period offered to new customers. These trends will need to be investigated to ensure that
revenue is being measured appropriately and recognised at the correct point in time.
There is also a risk arising from the Group invoicing customers in advance, with revenue
recognised when the bill is sent to the customer. Possibly this could lead to early
recognition of revenue, i.e. recognising prior to the Group providing a service to its
customers. IFRS 15 Revenue from Contracts with Customers requires that revenue is
recognised when a performance obligation is satisfied by transferring a promised good or
service to a customer, and when providing a service over time, it con be difficult to
determine how much service has been provided and therefore the amount of revenue which
can be recognised at a particular point in time. There is therefore a risk of overstatement of
revenue if the requirements of IFRS 15 ore not adhered to.

Amortisation of licences
The licences recognised as intangible assets ore highly material to the Group. Given that
each licence is for a fixed period, it is appropriate to amortise the cost of each licence over
that fixed period in accordance with IAS 38 Intangible Assets, which requires that the cost
of an intangible asset with a finite useful life should be amortised on a systematic basis
over its life.
Therefore, the Group's accounting policy to amortise all licences over a five-year period
may be too simplistic, especially given the significance of the balance to the Group
financial statements. Some of the licences hove a shorter life, and some may be longer,
indicating that the determination of amortisation for the class of assets as a whole may not
be accurate, leading to over or undervaluation of intangible assets and over or
understatement of profit.
The finance director's assertion that the accounting policy is 'the most prudent' is not
appropriate. The accounting policy should be based on the specific, relevant IAS 38
requirements. It could be a means of earnings management, i.e. to minimise the
amortisation charge and maximise profits.

The auditor should also consider whether this issue hos arisen in previous years' audits. The
Group may have changed its estimation technique with regard to amortisation of
intangible assets; if this is the case, the rationale for the change must be understood.

Legal case
In January 20X5, a legal case was brought against the Group. From the information
provided, it is not possible to determine if it is material, however, there should be
appropriate consideration as to whether the court case gives rise to an obligation at the
reporting dote.
According to IAS® 37 Provisions, Contingent Liabilities and Contingent Assets, a provision
should be recognised as a liability if there is a present obligation as a result of post events
which gives rise to a probable outflow of economic benefit which can be reliably measured.
There is therefore an audit risk that if any necessary provision is not recognised, liabilities
and expenses will be understated.
If there is a possible obligation at the reporting date, then disclosure of the contingent
liability should be made in the notes to the financial statements. There is a risk of
inadequate disclosure if the Group finance director refuses to make appropriate disclosure
in the notes - this is an audit risk whether the situation gives rise to a provision or a
contingent liability, as provisions also have disclosure requirements which may not be
complied with.

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 Group finance director's attitude
There may be a further issue related to the legal case regarding the attitude of the Group
finance director, who appears to have dismissed the accounting implications of the legal
case and is reluctant to discuss the matter with the audit team. This could indicate that the
Group finance director is deliberately obstructing the work of the audit team, and perhaps
has something to hide. This indicates a potential wider issue, that the Group finance
director is imposing a limitation on the scope of the audit. The Group audit strategy should
consider this issue, and the audit engagement partner may wish to discuss the issue with
the Group audit committee as a matter of urgency.
This increases the risk that the legal claim will not be recognised appropriately in the
financial statements, and the audit team must approach this issue with a heightened
degree of professional scepticism.
There may be other areas in which professional scepticism should be applied, for instance,
in respect of the amortisation of intangible assets, which will be discussed later in the
briefing notes, and where the Group finance director appears to be using inappropriate
justifications for the Group's accounting treatment of licence fees.
Daryl Co - local accounting rules
This company is the only component of the Group which does not use IFRS® Standards as
its financial reporting framework. Daryl Co's financial statements will be prepared under
local accounting rules and audited by Neegan Associates on that basis. In accordance with
IFRS® 3 Business Combinations, for the purpose of consolidation the Group's accounting
policies must be applied to all balances and transactions which form part of the
consolidated financial statements. There is an audit risk that the Group's policies are not
applied correctly, meaning that the amounts consolidated in respect of Daryl Co are not
recognised, measured or disclosed appropriately.
Post year-end acquisition of Michonne Co
The acquisition of Michonne Co is planned to take place within a month of the reporting
date. It is therefore a significant event which is taking place after the year end and as such,
it falls under the scope of IAS 10 Events After the Reporting Period. According to IAS 10, a
non-adjusting event is an event which is indicative of a condition which arose after the end
of the reporting period, and which should be disclosed if they are of such importance that
non-disclosure would affect the ability of users to make proper evaluations and decisions.
The required disclosure includes the nature of the event and an estimate of its financial
effect or a statement that a reasonable estimate of the effect cannot be made. In addition,
IFRS 3 requires disclosure of information about a business combination whose acquisition
date is after the end of the reporting period but before the financial statements are
authorised for issue.
There is therefore on audit risk that the disclosure in relation to the acquisition of Michonne
Co is not complete or accurate.
(b) (i) Evaluation of component auditor's audit strategy
Audit of payroll
The audit work planned on payroll appears to be limited due to the audit firm,
Neegan Associates, having performed a payroll service for Daryl Co since 1 October
20X'-t. This is not appropriate and will not provide sufficient and appropriate audit
evidence regarding the $6 million payroll expense. Given that payroll is material to
the company's financial statements, based on Neegan Associates' own materiality
threshold of $1·'-t million, further testing will be required.
An ethical threat to auditor's independence is raised by the provision of the payroll
service to the client. There is a significant self-review threat which means that
Neegan Associates is over-relying on the work they have performed on payroll as a
non-audit engagement and are not planning to audit the $6 million at all.
Providing this type of non-audit service might be allowed in the jurisdiction where
Neegan Associates operates. However, according to ISA 600 Special Considerations
- Audits of Group Financial Statements (Including the Work of Component Auditors),

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 when performing work on the finonciol information of a component for a group
audit, the component auditor is subject to ethical requirements which ore relevant to
the group audit. Such requirements may be different or in addition to those applying
to the component auditor when performing o statutory audit in the component
auditor's jurisdiction.
Therefore, the IESBA International Code of Ethics for Professional Accountants (the
Code) should be applied. The Code states that for a listed company, a firm shall not
provide accounting or bookkeeping services, including payroll services, which results
in financial information which forms the basis of financial statements on which the
firm will provide an opinion. Therefore, as Daryl Co is listed, the service should not
hove been provided.
There also needs to be discussion of the situation with Neegon Associates and the
management of Daryl Co and the Group, with the objective of ensuring that on
olternotive provider is found for the payroll accounting services.
Sale of property
In the individual financial statements of Dory! Co, under local accounting rules the
sole of property to the Group chief executive officer (CEO) does not need to be
disclosed. However, from the Group perspective, it meets the definition of o related
party transaction under IAS 24 Related Party Disclosures and will need to be
disclosed in the consolidated financial statements. As the transaction would also be
considered to be material by nature, the Group audit teom must therefore provide
instructions to Neegan Associates on the additional audit work to be performed
which will enable sufficient and appropriate evidence to be obtained in respect of the
tronsoction and disclosure. These procedures will be outlined in the next section of
these briefing notes.
The cosh proceeds arising on the sole of the property ore well below the materiality
level determined by Neegon Associates, so this might justify the minimal audit
procedures which hove been planned in relation to the individual financial
statements. However, the procedures do not consider how the profit or loss being
made on the disposal is determined or whether the asset has been properly removed
from the accounting records. The carrying amount of the asset itself may be
material to the financial statements of the company.
There may be an incentive to recognise a higher profit than is appropriate on this
transaction due to trading difficulties encountered by the company during the year,
so the transaction may be at risk of material misstatement with the objective of
maximising the profit recognised.
There is no evidence that the transaction is bona fide - the CEO has not yet paid for
the property and the whole transaction could be an attempt to window dress the
financial statements. Overall, this evaluation has indicated that there ore problems
in how Neegan Associates hos planned the audit of Daryl Co. The audit work, which
is planned will not provide sufficient, appropriate audit evidence in relation to the
issues identified.
Therefore, the Group audit team will need to consider the overall planning of the
audit of Daryl Co and the level of testing they subsequently request that Neegan
Associates carries out to satisfy themselves of the accuracy of the figures presented
in Daryl Co's financial statements for inclusion in the consolidated financial
statements.
(ii) Audit procedures on sale of property
• Review board minutes to see if the property sole has been deliberated, i.e. has
the rationale for the transaction been discussed, and formally approved by
the company's board.
• Agree the $50,000 sale price to the legal documentation relating to the sale of
the property to the Group CEO.

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 • Confirm the carrying amount of the property at the date of disposal to
underlying accounting records and the non-current asset register.
• Confirm that the asset has been removed from the company accounts at the
date of disposal.
• Obtain management's determination of profit or loss on disposal, re-perform
the calculation based on supporting evidence, and agree the profit or loss is
recognised appropriately in the company statement of profit or loss.
• Obtain an estimate of the fair value of the property, for example, by
comparison to the current market price of similar properties and consider the
reasonableness of the transaction and sale price.
• Obtain written representations from company management that all matters
related to this related party transaction have been disclosed to the Group
management and to the Group audit team.
• Obtain written representation from the Group CEO regarding the transaction,
to confirm the amount which is outstanding, and the likely timescale for
payment.
• Review cash receipts after the reporting date to confirm whether or not the
$50,000 has been received from the Group CEO.

(c) Discussion ond justification for a joint audit of Mlchonne Co

In a joint audit, two or more audit firms are responsible for conducting the audit and for
issuing the audit opinion. The main advantage of a joint audit of Michonne Co is that the
local audit firm's understanding and experience will be retained, and that will be a valuable
input to the audit. At the some time, Atlanta & Co can provide additional skills and
resources if necessary.
Farland may have different regulations to the rest of the Group, for example, there may be
a different financial reporting framework. It therefore makes sense for Lucille Associates,
the local auditors, to retain some input to the audit as they will have detailed knowledge of
such regulations.
The fact that the company is located in a distant location means that from a practical
point of view it may be difficult for Atlanta & Co to provide staff to perform the majority of
the audit work. It will be more cost effective for this to be carried out by local auditors.
Two audit firms con also stand together against aggressive accounting treatments. In this
way, a joint audit con enhance the quality of the audit. The benchmarking which takes
place between the two firms raises the level of service quality.
Disadvantages of a joint audit of Michonne Co
The main disadvantage is that for the Group, having a joint audit is likely to be more
expensive than appointing just one audit firm. However, the costs ore likely to be less than
if Atlanta & Co took sole responsibility, as having the current auditors retain an involvement
will at least cut down on travel expenses. Due to the size of the respective firms, Lucille
Associates will probably offer a cheaper audit service than Atlanta & Co.
For the audit firms, there may be problems in deciding on responsibilities, allocating work,
and they will need to work very closely together to ensure that no duties go underperformed,
and that the quality of the audit is maintained. There is a risk that the two firms will not agree
on a range of matters, for example, audit methodology, resources needed and review
procedures, which would make the working relationship difficult to manage.
Problems: could oris:e in terms of linbilitu because both firms: hnve r>rovided the audit
opinion; in the event of litigation, both firms would be jointly liable. While both of the firms
would be insured, they could blame each other for any negligence which was discovered,
making the litigation process more complex than if a single audit firm had provided the
audit opinion.

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 Recommendation
On balance, the merits of performing a joint audit outweigh the possible disadvantages,
especially if the two audit firms can agree on the division of work and pool their expertise
and resources to provide o high-quality audit.

Conclusion
The briefing notes indicate that there are several significant audit risks to be addressed, in
particular, there are risks relating to the foreign subsidiary and relating to the revenue and
the accounting treatment applied to intangible assets. The valuation of the licences
(adequacy of the amortisation policy) and the potential impairment of the goodwill of
Daryl Co may materially affect the profitability forecast for the year. The audit team need
to ensure adequate evidence and question assumptions when considering whether the
valuation of these balances is appropriate. Ensuring the appropriate disclosures and
accounting treatment in respect of the legal claim is also a material item due to the nature
and the apparent reluctance by the finance director to provide details about the nature or
size of the claim. In respect of the component audit firm, there are some concerns over the
adequacy of their audit planning, which will need further consideration in developing the
Group audit strategy. Finally, performing a joint audit on Michonne Co appears to be a
good way to perform a high-quality audit on this new subsidiary.

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Question 2

Workbook references. Chapters 't, 7, 8 and 11.

Top tips. This question is set at the review stage, requiring you to think critically about audit
evidence that has been obtained already.

Part (a)(i) covered a fraud, and may have been tough going. There are plenty of points in the
model answer, however, this question provided a good test of your ability to apply professional
scepticism to this area.

Parts (a)(ii) looked at audit evidence in a specific area, and was a relatively standard
requirement. This is typical of what you could see in your exam, and at this stage in your studies
you should have been able to score reasonably well on this requirement.

Part (b) was the audit report requirement for this exam. Criticising an auditor's report may be
satisfying, but only eight marks ore available for it so you needed to ensure that you did not go
over your allotted time for this question part.

Easy marks. The marks for audit evidence should have been easy to get, provided that what you
wrote was specific enough for the marker to give you the mark. There were also some fairly easy
points to be mode in relation to the auditor's report in port (b).

ACCA examiner's comments. This question was a 25-mark compulsory question which focused
on completion and reporting and was in two sections.

Requirement (a)(i) for six marks, required candidates to discuss the implications of a fraud which
had occurred during the year for the completion of the audit and any actions to be taken by the
auditor. Generally, candidates performed poorly on this requirement with a significant number of
candidates believing that an immaterial fraud would result in the audit opinion being qualified,
which is disappointing.

Several candidates discussed the fraud and inferred on internal control issue within the
procurement deportment, but only a minority went on to consider on overall internal control issue
and that internal controls should be reassessed, or substantive testing should be performed.

A number of candidates suggested a list of controls that should be recommended for the
procurement deportment, which did not meet the question requirement and therefore scored no
marks.

Requirement (a){II) for six marks asked candidates to comment on the sufficiency and
appropriateness of audit evidence obtained in respect of development costs capitalised and to
recommend actions to be token by the auditor, including further evidence to be obtained.

Again, the requirement (a)(II) was generally poorly answered by candidates. A significant
number of candidates correctly identified that the evidence on file for the development costs was
not sufficient but missed the point that it could include research costs and went along the angle
of approval of the costs to be capitalised in general.

A significant number of candidates stated the accounting standard rules for capitalisation of
development costs, yet the requirement was not a 'matters to consider and evidence expected to
be on file' requirement and therefore was not relevant to the question and did not receive credit.

Requirement (b) for eight marks asked candidates to critically appraise an extract from the
auditor's report, which had been incorrectly prepared and required amendment.

This requirement was a roll forward from the requirement in 2(o), and not a standalone critique
style question. A number of candidates missed the narrative that two of the three issues had been
resolved, being the audit partner concluding the fraud was immaterial and all necessary work
had now been performed, and that further procedures surrounding the development costs hod
been performed and that is was deemed appropriate that the costs were capitalised correctly.
Candidates that did not focus on the narrative did not realise these two issues should not hove
been included within the report and continued to appraise them incorrectly.

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The majority of candidates were able to correctly identify the format issues within the report such
as the incorrect structure. The wording of the extract suggested on adverse opinion was being
given, and many candidates identified this was incorrect, it being more likely a qualified opinion
was appropriate in the circumstances.
Candidates were not expected to discuss what would or would not be present in a full report.
Where candidates discussed, for example, 'the signature of the partner is missing' or
'responsibilities of the auditor ore missing', this was not relevant to the requirement, which asked
candidates to specifically critique the extract as presented. Discussion of given extracts of
auditor's reports, again, should follow a structured approach and practising questions of this
nature should allow candidates to score strong marks in these requirements.
Candidates would benefit from a more detailed knowledge of ISA 700 Forming an Opinion and
Reporting on Financial Statements, in particular to review the appendices which show real
examples of the auditor's report and typical wording which is appropriate.

H®ii:i·Hd:%:i-■______________________________
Marks
GenerolllJ , up to 1 mark for each relevant point of discussion/action or
further evidence:
(a) ( i) Fraud
• Cannot determine whether fraud is immaterial
without obtaining further evidence
• Insufficient to rely on a conversation between
Group finance director and the alleged fraudster as
a source of evidence
• Group finance director could be involved and
attempting to conceal the true extent of the fraud
• Audit team needs to use professional scepticism in
relation to assertions made about the fraud
• Financial statements could be materially
misstated/Group finance director refusing to adjust
• Auditor should consider reporting responsibilities to
management/those charged with governance
(TCWG)
• Potential to report externally after taking legal
advice
• Consideration of client confidentiality
Maximum 6
(ii) Development costs
• Development costs are material and the audit work
performed is insufficient to determine whether
research costs have been inappropriately capitalised
• Intangible assets could be materiall lJ overstated
and profit overstated
• Agreeing amounts to invoices does not confirm the
nature of the expenditure
• Arithmetically checking the spreadsheet does not
provide assurance on the assumptions which
underpin the projections

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 Marks
• The Group finance director refusing to allow full
access to the spreadsheet increases risk and the
audit team should apply professional scepticism
• Attitude and actions of the Group finance director
should be discussed with TCWG
Reliance an a written representation is not
appropriate
• Further evidence (1 mark for each evidence point
explained)
Maximum 6
(b) Critique of draft auditor's report
• Generally, up to 1 mark for each point explained:
• Combination of opinion and basis for opinion paragraphs
not appropriate
• Headings not correct - should be qualified opinion and
basis for qualified opinion
• Qualified opinion paragraph wording is ambiguous and
needs clarification
• Basis for qualified opinion paragraph should contain
further details on the rationale for the auditor's opinion
• Explanation of proper use of emphasis of matter paragraph
• Fraud is immaterial and not fundamental to users'
understanding
• Not professional to mention fraud in the auditor's report
• Difficulties in the audit should be reported to TCWG, not
to the shareholders in the auditor's report
• Unprofessional and possible libelous wording used in
relation to the Group finance director
• Not appropriate to mention resignation in the auditor's
report - should be discussed with TCWG
Maximum 8
Professional marks
Analysis and evaluatlon
• Effective analysis and identification of issues and omissions in
the draft auditor's report
• Appropriate use of the information to support discussion, draw
appropriate conclusions and design appropriate responses
• Appropriate recommendations in relation to necessary actions
which reflect the stage of engagement
Professional scepticism and judgement
• Effective challenge and critical assessment of the conduct and
extent of the audit work and evidence obtained with appropriate
conclusions
• Appropriate application of professional judgement to draw
conclusions and make informed decisions about the actions
which ore appropriate in the context and stage of the
engagement.
• Demonstration of the ability to probe for further information

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 Marks
Commercial acumen
• Inclusion of appropriate recommendations regarding how Those
Charged with Governance and the audit firm should respond to
the situation
Maximum 5
Total 25

(a) (i) Fraud

If the full extent of the fraud is $40,000, then the audit team is correct to determine
that the fraud is immaterial to the financial statements. However, without performing
further procedures it is not possible to reach that conclusion. There is no auditor­
generated evidence to support the assertion that $40,000 is the total amount of
stolen funds. Relying solely on a conversation between the Group finance director
and the manager who carried out the fraud and a list of invoices provided by the
Group finance director is not acceptable as this evidence is not sufficiently reliable.
Indeed, the Group finance director could be involved with the fraud, and is
attempting to deceive the auditor and minimise the suspected scale of the fraud in
order to deter further procedures being carried out, or investigation or actions being
taken. The auditor should approach the comments made by the Group finance
director with an attitude of professional scepticism, especially given that he has
asked the audit team not to investigate further, which raises suspicion that he may
be covering up the fact that the fraud was on a larger scale than has been made
known to the auditor.
There are two courses of action for the auditor. 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. This is particularly
important given that the Group finance director seems unwilling to make any
adjustment to the financial statements. 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 The
Auditor's Responsibilities Relating to Fraud in on Audit of Financial Statements
requires that when fraud hos token place, auditors shall communicate these matters
on o 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. Given that the Group finance director alerted the
auditor to the fraud, it seems likely that management and those charged with
governance are already aware of the fraud. However, the auditor should consider
whether a formal, written communication is needed.
In addition ta 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.

Tutorial note. Anti-money laundering legislation is likely to impose o duty on

auditors to report suspected money laundering activity. Suspicions relating to fraud
are likely to be required to be reported under this legislation. Therefore, credit will be
awarded for relevant consideration of whether Saul & Co should report the fraud on
this basis.

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 (ii) Development costs
Given that the development costs are material to the Group financial statements,
more audit work should have been carried out to determine whether it is acceptable
that all, or some, of the $600,000 should have been capitalised. There is a risk that
research costs, which must be expensed, have not been distinguished from
development costs, which can only be capitalised when certain criteria have been
met. Currently, there is not sufficient, appropriate audit evidence to conclude that
the accounting treatment is appropriate, and intangible assets could be materially
misstated.
Agreement of amounts to invoice provides evidence of the value of expenditure, but
does not provide sufficient, appropriate evidence as to the nature of the expenditure,
i.e. the procedure is not necessarily an evaluation of whether it is capital or revenue
expenditure.
Performing an arithmetic check on a spreadsheet does provide some evidence over
the accuracy of the calculations but does not provide sufficient, appropriate
evidence on the validity of the projections, and in particular, there is no evidence
that the assumptions are sound. Given that the Group finance director has not
allowed the audit team access to information supporting the spreadsheet and has
refused to answer questions, he may have something to hide, and the audit of the
projection should be approached with a high degree of professional scepticism. The
assumptions may not be sound and may contradict other audit evidence.
The attitude and actions of the Group finance director, which indicate a lack of
integrity, should be discussed with the audit committee, as the committee should be
in a position to discuss the situation with him, with the objective of making all
necessary information available to the audit team.
Finally, there appears to be over-reliance on a written representation from
management. ISA 580 Written Representations states that written representations
should be used to support other audit evidence and are not sufficient evidence on
their own. In this situation, it appears that the representation is the only evidence
which has been sought in regard to the likely success of the new product
development which is inappropriate.
Further evidence should be obtained to distinguish between research costs and
development costs, and to support whether the development costs meet the
recognition criteria in IAS 38 Intangible Assets, and to confirm whether all of the
$600,000 should be capitalised. Further evidence should be obtained, including:
• A discussion with the project manager to obtain their view on the likely launch
date for the new product, anticipated level of demand, any problems foreseen
with completion of the project.
• A further review of a sample of the costs included in the $600,000, including
evaluation of whether the costs are capital or revenue in nature.
• For the sample of costs, review purchase invoices and ensure they are in the
name of the company to confirm the rights and obligations assertion of the
capitalised costs.
• Results of any market research to support the assertion that the new product
will generate future economic benefit.
• A discussion with management to identify how they have incurred
development costs without carrying out any research first.
• Assuming that the Group finance director makes the supporting
documentation, including assumptions, available to the audit team, the
assumptions should be reviewed for reasonableness, with the auditor
considering whether they are in line with business understanding and with
other audit evidence obtained.

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(b) Critique of auditor's report
Headings and structure
The report should not hove the opinion and basis for opinion combined in one paragraph. The
report should start with the opinion parogroph, which is then followed by the basis for opinion.
In addition to separating out the porogrophs, they should be given oppropriote headings.
According to ISA 705 Modifications to the Opinion in the Independent Auditor's Report,
when the opinion is modified, the heading should be used to denote the type of
modification which is being mode to the opinion - in this case the title 'Qualified opinion'
seems most appropriate. The basis for opinion paragraph should be headed 'Basis for
qualified opinion'.

Qualified opinion
The qualified opinion paragraph should be worded differently. According to ISA 705, when
the opinion is modified the following wording should be used 'except for the effects of the
motter(s) described in the Basis for Qualified Opinion section, the accompanying financial
statements present fairly, in all material respects (or give a true and fair view of)...'.
The draft opinion paragraph uses different wording - in particular, using the phrase 'the
financial statements are likely to be materially misstated' does not indicate that a firm
conclusion has been reached, and could give users of the report some doubt as to the
credibility of the auditor's opinion.

Basis for qualified opinion

This paragraph should contain further information on the reasons for the modification
including a description and quantification of the financial effects of the material
misstatement. In this case, the paragraph should refer to the overstatement of trade
receivables of $450,000, and the overstatement of profit by the same amount. Currently,
the paragraph refers to on overstatement of $500,000, which contradicts the conclusion
based on audit evidence.

Emphasis of matter paragraph

According to ISA 706 Emphasis of Motter Paragraphs and Other Motter Paragraphs in the
Independent Auditor's Report, on emphasis of matter (EOM) paragraph is used when the
auditor considers it necessary to draw users' attention to a matter which is of such
importance that it is fundamental to users' understanding of the financial statements. The
matter discussed in the EOM paragraph must be properly presented and disclosed in the
financial statements.

The draft auditor's report includes on EOM which is being used to discuss two matters,
neither of which ore appropriate for inclusion in an EOM. First, the EOM describes the fraud
which hos taken place during the year. This matter is immaterial in monetary terms and
therefore is not likely to be considered to be fundamental to users' understanding of the
financial statements.
In addition, it is not professional to highlight illegal activity in this way, and it could
increase the risk of litigation from the Group, as this amounts to a breach of
confidentio lity.
Second, the EOM refers to the difficulties encountered in the audit of trade receivables due
to the Group finance director refusing to allow full access to necessary sources of
evidence. This matter should not be reported to shareholders in the auditor's report. The
appropriate method of reporting is to those charged with governance of the Group, as
required by ISA 260 Communication With Those Charged With Governance. ISA 260
requires the auditor to communicate to those charged with governance regarding a range
of matters, including significant difficulties, if any, encountered during the audit.
Related to this, stating that it is the Group finance director personally who is responsible for
the material misstatement and hence the modification of the auditor's opinion is not
professional and could raise further legal problems, for example, the Group finance director
could accuse the audit firm of making false statements or defamation of character.

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 In addition, referring to the potential resignation of the audit firm anywhere in the auditor's
report is not appropriate. This matter should be discussed with those charged with
governance who will then take the matter up with the Group's shareholders.

Question 3

Workbook references. Chapters 2 and 13.

Top tips. This may have been the easiest question in exam, so those who left themselves with
enough time to finish it properly would have benefitted from their prudence.
Part (a) covered the review of a cash flow forecast. Part (i) on acceptance issues was
straightforward in the sense that if you knew the material here then you could have scored well.
Part (ii), on the procedures themselves, was again straightforward. The approach here is
essentially to think about what might have gone wrong with the forecast, and to come up with
procedures to address these points. Your starting point should therefore have been the
information given in the scenario - rather than, for example, any calculations that you might
have made on the basis of the figures.
Part (b) covered ethics, with even the requirement noting that this is a listed entity. The examining
team's report notes that many candidates got the rules wrong here in relation to fees, so we can
expect this area to be tested again before long. Note that an accountant's report is not an
auditor's report, but rather a report that should be given as the result of a non-audit service
(whether this is an agreed-upon procedures service, or includes assurance).
Easy marks. Part (a)(ii) contained some fairly easy marks for your knowledge of a PFI report.
ACCA examiner's comments. This question was a 25-mark compulsory question which focused
on acceptance of an engagement to review a report on prospective financial information (PFI)
and procedures to be performed on the cash flow statement.
Requirement (a)(J) for six marks, required candidates to explain the matters to be considered
before accepting the PFI engagement. This was a requirement where candidates would be
expected to score highly, and overall did achieve good marks. The only noticeable point from
candidate answers related to considerations of client due diligence to be considered as the
question clearly stated this had already been performed, therefore where discussed as a
consideration credit would not be available.
Requirement (o)(Ji) for seven marks required candidates to recommend procedures to be
performed in respect of the cash flow statement. Overall, candidates made a good attempt at the
requirement and scored well. It was disappointing to see a small number of candidates answer
the requirement using only analytical procedures ie calculating trends and ratios as this alone did
not answer the requirement and therefore scored minimal credit.
Requirement (b) for seven marks required candidates to comment on ethical and professional
issues arising from a planned listing of an existing client, and services which had been requested
of the auditor.
Overall, candidates had a reasonable attempt at the ethical issues arising. However, it is
extremely disappointing to see incorrect rules stated for partner rotation and fee levels relating to
a listed entity. It is important for candidates to ensure they hove sufficient knowledge of ethical
guidelines and con apply these guidelines appropriately to a question scenario.
The quality of answers for Question three was generally of a good standard and candidates were
able to demonstrate application of their knowledge to the scenario.

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H®ii:i-fi+H::i-■------------------------------
Marks
(a) Lavenza Co
(i) Matters to consider before accepting the review
engagement
Up to 2 marks for each matter explained:
• Intended use of the cash flow forecast
• Distribution of the information
• Period covered by the cash flow forecast and key
assumptions used
• Scope of the work
• Resources and skills
• Client integrity
• Ethical matters
Maximum 6
(ii) Examination procedures on cash flow forecast
Generally, 1 mark for each specific procedure described:
• Cost the forecast to confirm accuracy
• Confirm consistency of accounting policies with
those used in lost audited financial statements
• Agree opening cash position to cash book and bank
statement
• Discuss key assumptions underlying forecast with
management
• Analytically review cash flow trends comparing with
historical data
• Agree overage collection and payment periods to
recent soles and purchase ledgers
• Recalculate patterns of cash flows based on
management's assumptions
• Perform sensitivity analyses varying key
assumptions
• Agree salaries to latest payroll records
• Obtain and review breakdown of overhead costs
• For sample of overhead costs, review supporting
documentation
• Obtain and review budgets and analyses of costs to
dote for new shops and marketing campaign
• Review board minutes for discussion of new shops
and marketing campaign
• Review outcomes of previous management
forecasts
• Discuss possible cost omissions with preparer, e.g.
finance costs, capitol expenditure, tax payments

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 Marks
• Obtain written representations from management
(with justification)
• Request confirmation from the bank of potential
terms of additional finance to confirm the interest
rote
Consider whether finance charge in forecast cash
flow appears reasonable
Maximum 7
(b) Beaufort Co - ethical issues arising as result of planned
listing
Generally, up to 1 mark for each issue explained:
Long assoclotlon of senior audit personnel
• Familiarity threat - explained
• Rotation with appropriate cooling-off period
Fee dependence
• Self-interest and intimidation threats to auditor -
explained
• Independent pre-issuance review should be performed
and full disclosure mode to TCWG
Provision of bookkeeping and accounting services
• Self-review threat - explained
• Which cannot be reduced to acceptable level following
Beaufort Co's listing on stock market
Share prospectus
• Advocacy threat - explained
• Moritz & Co should decline to assist in preparation of
document and to endorse recommendation to investors to
purchase shores
• Opinion on the financial information should be limited to
confirming that it is properly compiled on basis stated in
document and is consistent with company's accounting
policies
Maximum 7
Professional marks
Analysis and evaluation
• Appropriate use of the information to support discussions and
draw appropriate conclusions
• Appropriate assessment of the ethical and professional issues
raised, using examples where relevant, to support overall
comments
• Balanced discussion of the issues connected to a non-assurance
engagement, resulting in a justified conclusion and proposed
course of action.

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 Marks
Professional scepticism and professional judgement
• Effective challenge and critical assessment of the assumptions
used by management in preparing the cash flow forecast
• Demonstration of the ability to probe for further information in
order to make an assessment of the completeness of the cash
flow forecast.
• Appropriate recommendations and justification of the assurance
procedures to be undertaken in respect of the cash flow forecast
Commercial acumen
• Demonstration of commercial awareness by recognizing wider
issues which may affect the forecast and the assumptions by
management
Maximum 5
Total 25

(a) Lavenza Co
(i) Matters to consider before accepting the review engagement
Before accepting the review engagement to review and provide an assurance report
on Lavenza Co's cash flow forecast, ISAE 3400 The Examination of Prospective
Financial Information identifies a number of matters which need to be considered:

The Intended use of the Information

Moritz & Co must consider, for example, whether the cash flow forecast and
assurance report will be used solely for the purpose of the increase in Lavenza Co's
overdraft facility. If Lavenza Co is planning to use the assurance report for purposes
other than an extension to its current overdraft, for example, to arrange new loan
finance from the company's bank, this must be made clear to Moritz & Co.
Whether the Information will be for general or limited distribution
Moritz & Co needs to consider who will receive the report and potentially rely upon it
as this will impact on the firm's assessment of the risk associated with the
engagement. If the cash flow forecast is intended for general distribution, this will
increase the level of risk for Moritz & Co as a larger audience will rely on it. In this
case, if the information will be used solely in support of the application to the bank
and will not be made available to other parties, this should be confirmed before
accepting the engagement and will reduce the risk of the assignment.
The period covered by the cash flow forecast and the key assumptions used
Moritz & Ca must also consider the period covered by the cash flow forecast and the
key assumptions which have been used in its preparation. Short-term forecasts are
likely to be easier to verify and provide assurance on than longer term projections.
ISAE 3400 states that a prospective financial information (PFI) engagement should
not be accepted when the assumptions used in its preparation are clearly unrealistic
or when the practitioner believes that the PFI will be inappropriate for its intended
use. In the case of Lavenza Co, although the forecast is only for 12 months, the
growth rates assumed in relation to its operating cash receipts may, for example, be
judged to be unrealistic given recent trends in its business and the requested
overdraft facility of $17 million for the next six months may prove to be insufficient.

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 The scope of the work
Moritz & Co will need to consider the specific terms of the engogement, the level of
assurance being sought by Lavenza Co and the form of the report required by the
bank. Moritz & Co will need to clearly identify the elements which it is being asked to
report on - for example, is it being asked to report on the cash flow forecast only or
is the firm also being asked to report on accompanying narrative or other PFI. Due to
the uncertainty of forecasts and the inevitable subjectivity involved in their
preparation, Moritz & Co will need to confirm that it is only being asked to provide
negative assurance as to whether management's assumptions provide a reasonable
basis for the cash flow forecast and to give an opinion as to whether it is properly
prepared on the basis of these assumptions.
Resources and skills
The firm needs to consider whether it has sufficient staff available with the
appropriate skills and experience needed to perform the PFI engagement for Lavenza
Co. Moritz & Co should also consider whether it can meet the deadline for
completing the work and whether it will have access to all relevant information and
client staff. Given the company's predicted need for cash in the next six months,
presumably the extended overdraft focility will need to be provided very soon and
this may lead to Moritz & Co being under pressure to meet a tight reporting deadline.
Cllent Integrity
ISQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial
Statements, or Other Assurance or Related Services Engagements requires Moritz &
Co to consider the integrity of Lavenza Co's management in relation to the
acceptance decision. In particular, the firm should consider management's reasons
for appointing a different firm from its auditors and the potential for management
bias in the preparation of a cash flow forecast in support of its required overdraft
facility.
In addition to the matters identified by ISAE 3400 and ISQM 1, Moritz & Co should
also consider the following ethical matters before accepting the review engagement:
Ethical matters
Given that Moritz & Co are not the auditors, the firm's independence from Lavenza
Co will not have been previously considered. In this regard, it is important to ensure
that there are no threats to the firm's objectivity which might prevent it from
accepting the appointment. If the firm is not independent and its objectivity is
compromised, the reliability of the assurance report will be undermined.
Moritz & Co should also consider why the auditors have not been asked to provide
the assurance report on Lavenzo Co's cash flow forecast. In order to provide an
assurance report on PFI, a good understanding of the client ond its business is
required, and the incumbent audit firm will usually hove the requisite knowledge and
understanding. Moritz & Co should therefore consider whether the use of a different
firm creates a risk that the client may be hoping that the firm may not be in a
position to effectively challenge the key assumptions underlying the preparation of
the forecast. When a professional accountant is asked to perform work for a non­
audit client, they should be given permission by the client to contact its auditors in
order to obtain relevant information. If this permission is not given, the appointment
should be declined.
Overall, Moritz & Co must assess the risks associated with the review engagement
and should not accept an engagement when the assumptions are clearly unrealistic
or when the firm believes that the prospective financial information will be
inappropriate for its intended use.

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 (ii) Examination procedures on cash flow forecast
• Cast the cash flow forecast to confirm its mathematical accuracy.
• Confirm the consistency of the accounting policies used in the preparation of
the forecast financial statements with those used in the last audited financial
statements.
• Agree the opening cash position of $9,193,000 to the cash book and the bank
statement.
• Discuss the key assumptions underlying the preparation of the forecast with
management, including:

the predicted growth rates in operating cash receipts of 13·4% over the
year compared to an equivalent growth rate of only 7-3% in operating
cash payments.

the stated collection and payment periods in relation to receivables and

payables.

confirm that the assumptions appear reasonable and are consistent

with the firm's knowledge and understanding of the client.
• Analytically review the forecast trends in cash flows comparing with them with
historical cash flow statements and other forecast data which is available for
the sector and local economy.
• Agree the predicted collection and payment periods to the most recent sales
ledgers and purchase ledgers.
• Recalculate the patterns of cash flows based on management's historical
analysis of credit sales to confirm that the forecast has been properly
prepared on the basis of these assumptions.
• Perform sensitivity analyses on the cash flow forecast by varying the key
assumptions (in particular, in relation to growth rates and payment periods)
and assessing the impact of these variations on the company's forecast cash
position.
• Agree the salary payments to the latest payroll records and cash book
payments analyses.
• Obtain and review a breakdown of the forecast overhead payments and
compare it to historical management accounts and current budgets. Review
the schedule to ensure that non-cash items such as depreciation, amortisation
and bad debts have not been included.
• For a sample of overhead costs, review the supporting documentation such as
invoices and utility bills and agree the amount paid each month to the cash
book.
• Obtain and review budgets and analyses of costs to date for the new shops
and the online marketing campaign ensuring that the forecast includes all of
the budgeted costs and does not include any costs which have already been
incurred. Agree a sample of costs to supporting documentation such as
invoices, quotations and lease agreements.
• Review board minutes for discussion of the new shops and the marketing
compaign.
• Review the outcomes of previous management forecasts and assess their
accuracy compared to actual data.
• Discuss possible cost omissions with the preparer of the forecast, for example,
Lavenza Co's cash flow forecast does not include finance costs, tax payments
and does not include any capital expenditure other than the new shops.

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 • Obtain written representations from management confirming the
reasonableness of their assumptions and that all relevant information hos
been provided to Moritz & Co.
• Request confirmation from the bank of the potential terms of the additional
finance being negotiated, to confirm the interest rote.
• Consider whether the finance charge in the forecast cash flow appears
reasonable.
Tutorial note. Credit will be awarded for relevant numerical analysis of the cash
flaw forecast applied appropriately within the answer.
(b) Beaufort Co - ethical and professional Issues arising Long association of senior audit
personnel

Frances Stein's eight-year tenure as audit engagement partner creates a familiarity threat
for Moritz & Co. The threat arises because using the same senior audit personnel on an
audit assignment over a long period of time may cause the auditor to become too familiar
and too trusting with the client resulting in less professional scepticism being exercised and
the possibility of material misstatements going undetected. According to the IESBA
International Code of Ethics for Professional Accountants (the Code), with listed audit
clients key audit partners must be rotated ofter seven years unless exceptional
circumstances arise. In this case, the Code permits the partner's tenure to be extended for
one further year where this is deemed to be necessary in order to maintain audit quality.
The Code also clarifies that if an existing audit client becomes listed, the length of time
which the partner hos already served on the client is included in the period to be
considered. In the case of Beaufort Co, therefore, Frances Stein has already served as a
key audit partner for the maximum possible period of eight years and following the listing
of the client next year, her appointment must be rotated and she must be replaced by
another audit partner. After this, she may not serve as a key partner on the audit for a
minimum of five further years.
Fee dependence
Over dependence on an audit client for fee income leads to o self-interest and intimidation
threat for the auditor. The self-interest threat arises as the firm will hove a financial interest
in the client due to its dependency on the client and its concern about the impact on its
business if it were to lose the client. In the case of a listed client, the Code states that on
audit firm's independence is threatened and should be reviewed if the total fees from a
single client exceed 15% of its total fee income for two consecutive years. In this case, the
15% limit has been exceeded in both 20X4 and 20X5 and following the listing of the
company's shores in September 20X5, Moritz & Co is required to review its dependence on
the client. If retained as a client, the level of fees should be disclosed to those charged with
governance and it should be discussed whether prior to the audit opinion being issued,
having an independent pre-issuance or post-issuance review performed on the
engagement by on external party or by the firm's professional regulatory body is enough
to mitigate the threat.
Provision of bookkeeping and accounting services
The provision of bookkeeping and accounting services for Beaufort Co creates a self-review
threat for Moritz & Co. The self-review threat arises because the auditor is generating
figures for inclusion in the financial statements on which they will then give on opinion. As a
result, the auditor may be less likely to highlight errors if they ore aware that another
member of the firm hos calculated the figures. For a listed client, the Code states that a
firm is not permitted to provide accounting and bookkeeping services.
Share prospectus
Moritz & Co hos been asked to assist in the preparation of the shore prospectus document
and to provide an accountant's report on financial data, business risks and a business pion
which recommends the shores to investors. Performance of these services for Beaufort Co
would create on advocacy threat for the auditor. The advocacy threat arises because the
auditor is effectively being asked to promote and represent their client's position to the
point where the auditor's objectivity is compromised. The Code prohibits on auditor from

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 acting in this way for on audit client and Moritz & Co should politely decline to assist in the
preparation of the document and to endorse the recommendation to investors to purchase
the shores. It may be possible, however, for the auditor to provide on accountant's report
on some elements of the prospectus. Moritz & Co may be able to provide on opinion on the
financial information if, for example, it limits the form of opinion to stating that it hos been
properly compiled on the basis stated within the document and that this basis is consistent
with the accounting policies of the company.

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601t Advanced Audit and Assurance - International (AAA - IND
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