Sajid Kapadia F8 AA Introduction Booklet

KnS School of Business Studies
ACCA F8 - Audit & Assurance

Summary Notes by S.K
Index of ACCA F8 Handouts
S. No. Description Page No.

1. ACCA F8 Audit Syllabus 2
2. ACCA F8 Result Analysis of ACCA 8
3. Key Areas of ACCA F8 9
4. Snapshot of an External Audit Process 10
5. Audit Cycle 11
6. Sequence to study ACCA F8 Audit & Assurance 12
7. Basics Concepts of Audit & Assurance # Part 1 13
8. Introduction to Auditing 14
9. Inherent Limitations of an External Audit 16
10. Basic Concepts # Part 2 20
11. Practice Questions 36
12. ACCA F8 Exam - September / December 2021 43
Page 1 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

ACCA F8 Audit and Assurance Syllabus

S. No. Topics
A Audit framework and regulation
1. The concept of audit and other assurance engagements
Identify and describe the objective and general principles of external audit engagements.
Explain the nature and development of audit and other assurance
Engagements.
Discuss the concepts of accountability, stewardship and agency
Define and provide the objectives of an assurance engagement.
Explain the five elements of an assurance engagement.
Explain the level of assurance provided by an external audit and other review engagements and
the concept of true and fair presentation.
Explain the level of assurance provided by an external audit and other review engagements and
the concept of true and fair presentation.
2. External audits
Describe the regulatory environment within which external audits take place.
Discuss the reasons and mechanisms for the regulation of auditors.
Explain the statutory regulations governing the appointment, rights,
removal and resignation of auditors.
Explain the regulations governing the rights and duties of auditors
Describe the limitations of external audits.
Explain the development and status of International Standards on Auditing (ISAs).
Explain the relationship between International Standards on Auditing and national standards.
3. Code of Corporate Governance
Discuss the objectives, relevance and importance of corporate governance.
Discuss the provisions of international codes of corporate governance (such as OECD) that are
most relevant to auditors.
Describe good corporate governance requirements relating to directors’ responsibilities (e.g. for
risk management and internal control) and the reporting responsibilities of auditors.
Evaluate corporate governance deficiencies and provide recommendations to allow compliance
with international codes of corporate governance.
Analyse the structure and roles of audit committees and discuss their benefits and limitations.
Explain the importance of internal control and risk management.
4. Professional ethics and ACCA’s Code of Ethics and Conduct
Define and apply the fundamental principles of professional ethics of integrity, objectivity,
professional competence and due care, confidentiality and professional behaviour.
Define and apply the conceptual framework, including the threats to the fundamental
principles of self-interest, self-review, advocacy, familiarity, and intimidation.
Discuss the safeguards to offset the threats to the fundamental principles.
Describe the auditor’s responsibility with regard to auditor independence, conflicts of interest
and confidentiality.
B Planning and risk assessment
1. Obtaining, accepting and continuing audit engagements
a) Discuss the requirements of professional ethics and ISAs in relation to the acceptance /
continuance of audit engagements.
b) Explain the preconditions for an audit.
c) Explain the process by which an auditor obtains an audit engagement.

d) Discuss the importance and purpose of engagement letters and their contents.
e) Explain the overall objectives and importance of quality management procedures in
conducting an audit.
f) Explain the quality management procedures which should be in place over engagement
resources, engagement performance, monitoring and remediation and compliance with
ethical requirements.
g) Evaluate quality management deficiencies and provide recommendations to allow
compliance with quality management requirements.
2. Objective and general principles

a) Identify the overall objectives of the auditor and the need to conduct an audit in
accordance with ISAs.
b) Explain the need to plan and perform audit engagements with an attitude of professional
scepticism, and to exercise professional judgment.
3. Assessing audit risks
a) Explain the components of audit risk.
b) Describe the audit risks in the financial statements and explain the auditor’s response to
each risk.
c) Define and explain the concepts of materiality and performance materiality.
d) Explain and calculate materiality levels from financial information.
4. Understanding the entity and its environment and the applicable financial reporting
framework
a) Explain how auditors obtain an initial understanding of the entity and its environment and
the applicable financial reporting framework.
b) Describe and explain the nature, and purpose of, analytical procedures in planning.
c) Compute and interpret key ratios used in analytical procedures.
5. Fraud, laws and regulations
a) Discuss the effect of fraud and misstatements on the audit strategy and extent of audit
work.
b) Discuss the responsibilities of internal and external auditors for the prevention and
detection of fraud and error.
Explain the auditor’s responsibility to consider laws and regulations. [2)
6. Audit planning and documentation
a) Identify and explain the need for, benefits of and importance of planning an audit.
b) Identify and describe the contents of the overall audit strategy and audit plan.
c) Explain and describe the relationship between the overall audit strategy and the audit plan.
d) Explain the difference between an interim and final audit.
e) Describe the purpose of an interim audit, and the procedures likely to be adopted at this
stage in the audit.
f) Describe the impact of the work performed during the interim audit on the final audit.
g) Explain the need for, and the importance of, audit documentation.
h) Describe the form and contents of working papers and supporting
documentation.
i) Explain the procedures to ensure safe custody and retention of working papers.
C Internal control
1. Systems of internal control
a) Explain why an auditor needs to obtain an understanding of the components of internal
control relevant to the preparation of the financial statements.
b) Describe and explain the five components of a system of internal control

i) control environment
ii) the entity’s risk assessment process,
iii) the entity’s process to monitor the system of internal control
iv) the information system and communication
v) control activities
2. The use and evaluation of systems of internal control by auditors
a) Explain how auditors record systems of internal control including the use of narrative
notes, flowcharts and questionnaires.
b) Evaluate internal control components, including deficiencies and significant deficiencies in
internal control.
c) Discuss the limitations of internal control components.
3. Tests of controls
a) Describe computer systems controls including general IT controls and information
processing controls.
b) Describe control objectives, control procedures, control activities, direct controls, indirect
controls and tests of controls in relation to:
The sales system;
The purchases system
The payroll system
The inventory system
The bank and cash system
Non-current assets
4. Communication on internal control
a) Discuss the requirements and methods of how reporting significant deficiencies in internal
control are provided to
b) management and those charged with governance.
c) Explain, in a format suitable for inclusion in a report to management, significant
deficiencies within a system of internal control and provide control recommendations for
overcoming these
d) deficiencies to management.
e) Discuss the need for auditors to communicate with those charged with governance.
5. Internal audit and governance and the differences between external audit and
internal audit
a) Discuss the factors to be taken into account when assessing the need for internal audit.
b) Discuss the elements of best practice in the structure and operations of internal audit.
c) Compare and contrast the role of external and internal audit.
6. The scope of the internal audit function, outsourcing and internal audit assignments
a) Discuss the scope of internal audit and the limitations of the internal audit function.
b) Explain outsourcing and the associated advantages and disadvantages of outsourcing the
internal audit function.
c) Discuss the nature and purpose of internal audit assignments including value for money,
IT, financial, regulatory compliance, fraud investigations and customer experience.
d) Discuss the nature and purpose of operational internal audit assignments.
e) Describe the format and content of internal audit review reports and make appropriate
recommendations to management and those charged with governance.
D Audit evidence
1. Assertions and audit evidence
a) Explain the assertions contained in the financial statements about:
b) Classes of transactions and events and related disclosures;
Account balances and related disclosures at the period end.
c) Describe audit procedures to obtain audit evidence, including inspection, observation,
external confirmation, recalculation, re-performance, analytical procedures and enquiry.
d) Discuss the quality and quantity of audit evidence.
e) Discuss the relevance and reliability of audit evidence.
2. Audit procedures
a) Discuss substantive procedures for obtaining audit evidence.
b) Discuss and provide examples of how analytical procedures are used as substantive
procedures.
c) Discuss the problems associated with the audit and review of accounting estimates.
d) Describe why smaller entities may have different control environments and describe the
types of evidence likely to be available in smaller entities.
e) Discuss the difference between tests of controls and substantive procedures.
3. Audit sampling and other means of testing
a) Define audit sampling and explain the need for sampling.
b) Identify and discuss the differences between statistical and non-statistical sampling.
c) Discuss and provide relevant examples of the application of the basic principles of
statistical sampling and other selective testing procedures.
d) Discuss the results of statistical sampling, including consideration of
whether additional testing is required.
4. The audit of specific items
For each of the account balances stated in this sub-capability:
Explain the audit objectives and the audit procedures to obtain sufficient, appropriate evidence
in relation to:
a) Receivables:
i) direct confirmation of accounts
receivable
ii) other evidence in relation to receivables and prepayments
iii) other evidence in relation to current assets and
iv) completeness and occurrence of revenue.
b) Inventory:
i) inventory counting procedures in relation to year-end and continuous
inventory systems
ii) cut-off testing
iii) auditor’s attendance at inventory counting
v) direct confirmation of inventory held by third parties
vi) valuation and
vii) other evidence in relation to inventory.
c) Payables and accruals:
i) supplier statement reconciliations and direct confirmation of accounts
payable
ii) obtain evidence in relation to payables and accruals
iii) other evidence in relation to current liabilities and
iv) purchases and other expenses, including payroll.
d) Bank and cash:

i) bank confirmation reports used in obtaining evidence in relation to
bank and cash
ii) other evidence in relation to bank

and
iii) other evidence in relation to cash.
e) Tangible and intangible non-current assets
i) evidence in relation to non-current assets
ii) depreciation and
iii) profit/loss on disposal.
f) Non-current liabilities, provisions and contingencies:

i) evidence in relation to non-current liabilities and
ii) provisions and contingencies.
g) Share capital, reserves and directors’ emoluments:

i) evidence in relation to share capital, reserves and directors’ emoluments.
5. Automated tools and techniques

a) Explain the use of automated tools and techniques in the context of an audit, including the
use of audit software, test data and other data analytics tools.
b) Discuss and provide relevant examples of the use of automated tools and technqiues
including test data, audit software and other data analytics tools.
6. The work of others
a) Discuss why auditors rely on the work of others.
b) Discuss the extent to which external auditors are able to rely on the work of experts,
including the work of internal audit.
c) Explain the audit considerations relating to entities using service organisations.
d) Explain the extent to which reference to the work of others can be made in the independent
auditor’s report.
7. Not-for-profit organisations
a) Apply audit techniques to not-for-profit organisations.
E Review and reporting
1 Subsequent events
a) Explain the purpose of a subsequent events review.
b) Explain the responsibilities of auditors regarding subsequent events.
c) Discuss the procedures to be undertaken in performing a subsequent events review.
2 Going concern
a) Define and discuss the significance of the concept of going concern.
b) Explain the importance of and the need for going concern reviews.
c) Explain the respective responsibilities of auditors and management regarding going
concern.
d) Identify and explain potential indicators that an entity is not a going concern.
e) Discuss the procedures to be applied in performing going concern reviews.
f) Discuss the disclosure requirements in relation to going concern issues.
g) Discuss the reporting implications of the
3 Written representations
a) Explain the purpose of and procedure for obtaining written representations.
b) Discuss the quality and reliability of written representations as audit evidence.
c) Discuss the circumstances where written representations are necessary and the matters on
which representations are commonly obtained.

4 Audit finalisation and the final review
a) Discuss the importance of the overall review in ensuring that sufficient, appropriate
evidence has been obtained.
b) Describe procedures an auditor should perform in conducting their overall review of
financial statements.
c) Explain the significance of uncorrected misstatements.
d) Evaluate the effect of dealing with uncorrected misstatements.
5 The Independent Auditor’s Report
a) Identify and describe the basic elements contained in the independent auditor’s report.
b) Explain unmodified audit opinions in the auditor’s report.
c) Explain the circumstances in which a modified audit opinion may be issued in the
auditor’s report.
d) Explain the impact on the auditor’s report when a modified opinion is issued.
e) Describe the format and content of key audit matters, emphasis of matter and other matter
paragraphs.
F Employability and technology Skills
1. Use computer technology to efficiently access and manipulate relevant information.
2. Work on relevant response options, using available functions and technology, as would
be required in the workplace.
3. Navigate windows and computer screens to create and amend responses to exam
requirements, using the appropriate tools.
4. Present data and information effectively, using the appropriate tools.

ACCA F8 Result Analysis
S. No. Attempts AA
1 Dec 23
2 September 23
3 June 23
4 March 23
5 Dec 22 40
6 September 22 44
7 June 22 39
8 March 22 44
9 Dec 21 38
1 September 21 39
11 June 21 39
12 March 21 43
13 Dec 20 39
14 September 20 41
15 March 20 36
16 Dec 19 38
17 September 19 36
18 June 19 39
19 March 19 37
20 Dec 18 38
21 September 18 37
Paper Structure

Key Areas of ACCA F8
Basic Concepts of Audit
Materiality & Audit Report
Subsequent Events, Going Concern and Management Representation
Materiality, Fraud and Risk Assessment
Internal Controls and Test of Controls
Audit Evidence and Substantive Procedures
Code of Ethics / ACCA Ethical guidelines / ACCA Code of Conduct
Code of Corporate Governance (C.C.G)
I.T and Other small areas
HOW TO STUDY ACCA F8 ??

Snapshot of an External Audit Process
Inherent Limitation of an Audit
Management External Scope of an Audit Few

A Basic
& TCWG U Auditors Professional Judgment Concepts
D Of
I Professional Skepticism External
T Audit
Levels & Types of Assurance
True & Fair View
Responsibilities
1. Running of the company 1. Conducting an audit of financial statements

2. Implementation of internal controls 2. Expressing an opinion on financial statements
3. Preparation of financial statements 3. Giving recommendation on internal controls to management

Summary Notes by S.K Audit Cycle
2020 2021
B/S Date Date of Report
Dec 31st, 2020 Feb 20th, 2021 AGM Date April 29th, 2021
Financial Year JAN FEB MARCH APRIL
1 2 3

Sequence to study ACCA F8 - Audit & Assurance
S. No. Description
1. Basic concepts of an audit
2. Audit Evidence (ISA 500)
3. Engagement Letter (ISA 210)
4. Working Papers (ISA 230)
5. Materiality (ISA 320)
6. Audit Report (ISA700,701,705 & 706)
7. Subsequent Events (ISA 560)
8. Going concern (ISA 570)
9. Planning an Audit (ISA 300)
10. Audit Risk (ISA 315)
10 (a) - Theoretical part
10 (b) - Practical part
11. Audit Risk (Not for Profit Organization - NPO)
12 Understanding the entity & its environment (ISA 315)
13. Internal Audit Function / Department
14. Using the work of Internal Auditors (ISA 610)
15. Using the work of an Expert (ISA 620)
16. Test of controls (TOCs)
17. Substantive Procedures
17 (a) F/S Assertions
17 (b) Debtors plus ISA 505 (External confirmation)
17 (c) Cash in hand and cash at bank
17 (d) Fixed Assets (tangible and Intangible assets)
17 (e) Trade payables and provisions
17 (f) Operating expenses
17 (g) Inventory / closing stock
18. Analytical Procedures (ISA 520)
19. Management representation (ISA 580)
20. Fraud and Error (ISA 240)
21. Sampling (ISA 530)
22. Interim and final audit
23. Other small areas (e.g. Internal Control & its components)
24. Review Engagement (ISRE 2400)
25. Code of Ethics / ACCA code of conduct
26. I.T (C.A.A.T)
27. Objective Test Questions (OTs)
28. Revision and past papers practice (Topic wise)

Basics Concepts of Audit & Assurance # Part 1
1. Concept of an external audit
2. Concept of an external audit (4 steps of an audit)
3. Scope of an external audit
4. Objective of an external audit
5. Assurance firm and assurance client
6. Audit team hierarchy (structure within an audit firm)
7. Audit Cycle (Class diagram)
8. Concept of professional judgment
9. Concept of professional skepticism
10. Concept of Inherent Limitations of an audit
11. Concept of an assurance engagement
i. Types of Assurance
ii. Levels of Assurance
iii. Contents/Elements of an Assurance Engagement.
12. Responsibility of Management & those charged with Governance.
13. Responsibility of an External auditor
14. Concept of true & fair view in the Audit report
15. Concept of an Internal Control
16. Concept of management letter (M.L)
17. Concept of accountability, stewardship & agency
18. Concept of an external audit report
19. Difference between an external & internal audit.
20. Rights (Powers) and Duties of an External auditor.

‘Introduction to Auditing’

Introduction to Auditing
1.
2. An External Auditor examines/audits the F/S of the company and expresses an independent audit
opinion on those accounts in the form of an Audit Report at the end of an Audit which is addressed
to its Shareholders/Members. (ISA700,701,705 &706)
3. An External auditor complies with the code of ethics (Ethical guidelines) for professional
accountants/auditors issued by International Federation of Accountants (IFAC).
4. An External auditor conducts an audit in accordance with the International Standards of Auditing
(ISA) which determines the scope of an external audit.
5. An External auditor examines/conducts an audit of F/S prepared by the management of the

company. (Finance dept.) and approved by its Board of Directors (B.O.D)
6. An External Auditor can NEVER express an Absolute Level of Assurance in an audit engagement
because there are Inherent Limitations of an audit e.g.
i. The use of testing techniques (Audit is done on a sample basis i.e. (we don’t check every
single item in the F/S) (ISA 530)
ii. The inherent limitations of an Audit & Accounting and Internal control system
operating at the client (e.g. Human errors & collusion between employees via Fraud etc.)
Student Notings

Inherent Limitations of an External Audit
Absolute level of assurance can NEVER be expressed in an External Audit because of inherent
limitations of an audit that affect the auditor’s ability to detect Material Misstatements in the financial
statements.
It can also be said that the auditors can never certify that the accounts are correct, they can only express
a reasonable assurance on the financial statements of the company.
Reasonable assurance is a concept that there are no material misstatements in the financial statements
taken as a whole.
What is Reasonable Assurance……?
These Inherent Limitations of an AUDIT are as follows:
1. External Auditors conduct examination on a test basis i.e. they work on a sample basis and do not
check everything in the F/S. (Sampling to be discussed Later in ISA 530)
2. The fact that most of the audit evidence is persuasive rather than conclusive. (audit evidence
sometimes indicates what is probable, i.e. it’s not certain, ……………because most of the times

evidence is based on estimates and judgments & intentions i.e. External Auditors evaluate the
reasonableness of estimates made by the Management e.g.
i. Provision for doubtful debts

ii. Provision for obsolete stock
iii. Provision for court case / lawsuit
iv. Provision for warranty
3. Audit Report has its own limitation because of its technical language/wordings and standard format
(ISA 700 Revised).
There are Inherent Limitations of an Accounting and Internal Control System operating at the
Client: Examples are:
 Management override of Internal Controls What is Internal Control...?

 Human error (typing mistakes).
 Cost/benefit trade off (where it’s not cost feasible to implement controls)
 Practice of fraud and intentional misrepresentation by the management is also an Inherent Limitation for the
Audit. ( to be discussed in ISA 240 )
Because of factors described above, an External audit is NOT a guarantee that the financial statements are
free from material misstatements, i.e. an absolute assurance is not attainable.
Further an audit opinion does not assure the future viability of the entity nor the efficiency or effectiveness
with which management has conducted the affairs of the entity.
Other Limitations of an Audit

Student Notings

Student Notings

BASIC CONCEPTS # Part 2

1. Scope of an external Audit
2. Overall Objectives of an External Auditor
3. Professional Judgment
4. Professional Skepticism
5. True and Fair View
6. Management’s Responsibility
7. Internal Control
8. Standard Audit Report (ISA 700)
9. Management Letter (M.L)
10. Concept of accountability, stewardship and agency
11. Assurance Engagement

1.Scope of an External Audit
Scope of an external audit is determined by the auditor having regard of the following:
1. ISA (International Standards of Auditing)

2. I.F.R.S and I.A.S
3. Local Laws (Companies Act 2017) &
4. Scope defined by
(4-a) Professional bodies like ICAP & ACCA
(4-b) Terms of an audit engagement as per ISA 210
Scope of an Audit covers:

a) Only financial statements and not the whole annual report.
b) Scope of an Audit does not assure the efficiency and effectiveness of management and those charged
with governance.
c) Audit does not assure the future viability of the entity.
d) Audit opinion does not cover an opinion on the Internal Controls of the audit client, however,
external auditor considers internal controls in order to design audit procedure to determine the audit
risk, to express and opinion.
e) Performing audit procedures to obtain sufficient appropriate audit evidence (S.A.A.E ) to verify
financial statements
f) Evaluating the appropriateness of accounting policies and the reasonableness of accounting
estimates made by management
Expected Questions:
1.
2.
2.Objectives of an External Auditor

 To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatements, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements have been prepared, in all material respects, in
accordance with an applicable financial reporting framework (e.g. IFRS and IASs) and relevant
LAWS (Companies Act 2006)
 To report on the financial statements to the shareholders as required by the ISAs, in accordance with
the auditor’s findings during the audit.

3.Professional Judgment
Meaning and importance
An external auditor must take informed decision about the course of action to be followed by him on the
basis of relevant training, knowledge and experience and keeping in view the guidance provided by auditing
and accounting (IFRS) standards. Professional judgment must be exercised throughout the audit and must
be appropriately documented.
Areas / matters where Professional Judgement is used by the External Auditor are :
1.
2.
3.
4.
5.

Expected Questions
1.
2.
3.
4.Professional Skepticism
Meaning and Importance
Professional skepticism includes being alert to, for:

 Audit evidence that contradicts another audit evidence obtained during the audit.
 Information that brings into question the reliability of documents and responses to inquiries to be
used as audit evidence.
 Conditions that may indicate possible fraud.
Maintaining professional skepticism throughout the audit is important to reduce the risk of
 Overlooking unusual circumstances. And
 Using inappropriate assumptions.
Class Examples

Expected Questions
5.True and Fair View

In the audit report, the auditor states whether ‘in his opinion and to the best of his information and
according to the explanation given to him, the accounts are give a true and fair view or not………
TRUE: Information is factual and conforms to reality, not false and is free from error, in addition the
information conforms to required standards and law (IFRS/ IAS and companies act 2017). The accounts
have been correctly extracted from the books and records (e.g. Journal Ledger and Trial Balances) and have
proper supporting documents.
This implies that the financial statements are based upon facts and realities; they are not false or erroneous.
FAIR:
Information is free from discrimination and bias (there should NOT be separate accounting treatments for
the same transaction & events) and
The financial statements should reflect the commercial substance of the company’s underlying transactions
(E.g. treatment of finance Lease as per IFRS 16 (IAS 17) and recording of revenue as per IFRS 15…..)
Class Examples

Expected Questions
6.Management Responsibilities
 Managing the business so as to achieve company objectives.
 Making key business strategies.
 Assessing business risks to those objectives being achieved.
 Safeguarding the company’s assets.
 Keeping proper accounting records.
 Preparing company financial statements.
 Ensuring the company complies with applicable laws and regulations.
It is NOT the responsibility of the auditors of a company to do any of the above.
7. Internal Control
General Examples of Internal Control

8. External Audit Report (ISA 700 REVISED)

Here we are given the understanding of the main source of communication between the auditors and the
shareholders which is nothing but the Audit Report which is also known as the Audit Deliverable given to
the shareholders & the stakeholders at the end of the audit.
It’s not only the main source of communication but also a very condensed form of communication and
carries an important message from the auditor to the shareholders and the stakeholders. Its normally
addressed to the shareholders and signed by the engagement partner in the name of the audit firm or
personal name of the partner, as the case may be.
There are o2 Types of audit opinions 1. Unmodified Opinion 2. Modified Opinion (to be discussed in detail in
future)

Standard Audit Report
INDEPENDENT AUDITOR'S REPORT (As per ISA 700 Revised)

To the Shareholders of Company
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the statement
of financial position as at December 31, 2OX1, and the statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year then ended, and notes to the financial statements,
including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a
true and fair view) of the financial position of the Company as at December 31, 20X1, and (of) its
financial performance and its cash flows for the year then ended in accordance with international
Financial Reporting Standards (IFRS).
Basis for Opinion para (________________________________)

We conducted our audit in accordance with international Standards on Auditing (ISAs). Our responsibilities
under those standards are further described in the Auditors Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with Code of Ethics
for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our
audit of the financial statements, and we have fulfilled our other ethical responsibilities in accordance with
these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Key Audit Matters (ISA 701) ------Significant Matters for the current period
Key audit matters are those matters that, in our professional judgment, were of most significance in our
audit of the financial statements of the current period. These matters
were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with ISA 701, which applies to audits of the financial
statements of listed entities.]

Other Information (ISA 720)
Responsibilities of Management and Those Charged with Governance for the

Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with IFRS and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Company or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with ISAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:
1. Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but NOT for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control.
3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.

4. Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern.
If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Company to cease to continue
as a going concern.
5. Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in
a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine those matters that were
of most significance in the audit of the financial statements of the current period and are therefore the key
audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public-
disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of doing so would reasonably be expected
to outweigh the public interest benefits of such communication.
Report on Other Legal and Regulatory Requirements
[The form and content of this section of the auditor’s report would vary depending on the nature of the
auditor's other reporting responsibilities prescribed by local law or local auditing standards (if any)
Name of Engagement Partner
Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate
Auditor Address
Date of Audit Report ___________
9.Management Letter (Management Report / Internal control weakness letter)

Management letter (M.L.) is usually provided to the directors / TCWG covering internal control
weaknesses identified by External Auditor during the audit, after the completion of the External Audit.
These recommendations are a by-product of External Audit and are considered to be a value-added service
for the audit client.

Key point to remember here is that:
In Management Letter we do not express an opinion on the internal controls of an audit client, we only
notify those materials weaknesses that auditor considers of such importance that must be brought to
management/ TCWG's attention.
Therefore, these weaknesses identified are not a complete list of such items and may include more of such
control weaknesses in actual. M.L can be given at both interim and final stage of an audit.
10.Concept of accountability, stewardship and agency

An audit of a company’s account is needed because in companies, the owners of the business are often not
the same persons as the individuals who manage and control that business
 The shareholders own the company.

 The company in managed and controlled by its directors.
The directors have a stewardship role. They look after the assets of the company and manage them on
behalf of the shareholders. As the shareholders have bought shares in the co. (investment made), they expect
a return from their investment (in the form of dividend and capital gain) and as the Directors are acting as
agents and managing their investment, they are in a position to effect that return.
The relationship between the shareholders and Board of Directors is also an application of general legal
principle of agency, where Agent has a legal duty to act in the best interest of the principal and should be
accountable to principal for everything that he does as an agent.
Second concept of Agency

The External Auditors are also considered to be the agents of the shareholders acting on their behalf i.e.
conducting audit of the financial statements and expressing an independent audit opinion.
It’s a basic legal requirement of all agency and principal relationships that the agent should act in the best
interest of the principal, which in this case is that the auditors must perform their audit work as per
the scope of ISA and express an opinion on the F/S to the shareholders based on the audit
procedures performed.

11.
11. ASSURANCEENGAGEMENTS
ASSURANCE ENGAGEMENTS
Expected Questions on Assurance Engagements
Audit AUDIT RELATED SERVICES

Assurance Engagements
Agreed
Nature of services/ Audit Review Compilation
upon
Assignment Engagement Engagement Engagement
Procedures
High, but not

Types of an absolute Moderate
No
Assurance provided Assurance Assurance is No Assurance is
Assurance is
by the External (i.e. expressed on expressed
expressed
Auditor Reasonable the F/S
assurance)
Report provided by Audit Report Review Factual Collection,

the Auditor & level expressing a Report Finding of classification &
of assurance Positive expressing a procedures, summarization
Level of Negative is reported of the accounting
assurance Level of by the information
assurance practitioner prepared by the
audit client
E.g’s include
preparation of
financial statement
Bank Recons, Sale
Tax Returns and
various reports via
F/S etc.

Audit
In an audit engagement, the auditor provides a high, but not absolute level of assurance that the
information subject to audit (F/S) is free of material misstatement. This is expressed positively in the
audit report as positive assurance
Review ____________________
In a review engagement, the auditor provides a moderate level of assurance (which is less than
Reasonable Assurance) that the information subject to review (F/S) is free from material
misstatement. This is expressed in the form of negative assurance.
Agreed Upon Procedures ________________________

For agreed upon procedures ,as the auditor simply provides a report of the factual findings
(based on the assignment),no assurance is expressed.Instead users of the report assess for themselves
the procedures and findings reported by the auditor and draw their conclusions from the auditors
work .( Mostly these reports are not shared with General Public )
Compilation Engagement _________________(its called Accountancy Assignment)

In a compilation engagement ,although the users ( company management ) of the compiled
information derive some benefit from the accountants involvement, no assurance is expressed in the
report instead the objective of the assignment is to collect,classify and summarize the financial
information.
1. Meaning of ASSURANCE from an AUDIT perspective
Definition of an Assurance Engagement:

‘It means an engagement in which a practitioner expresses a conclusion designed to enhance the degree
of confidence of the intended users (different stake holders) other than the responsible party (the company
itself) about the outcome of the evaluation or measurement of a subject matter (Financial Statements)
against suitable criteria (e.g. IFRS or any other Reporting Framework.)’
The outcome of the evaluation or measurement of a subject matter is the information that results from
applying the criteria to the subject matter (____) e.g.:
 Checking/ verifying accounting treatments, measurements, presentations and

disclosures as per the International Financial Reporting Standards (e.g. IFRS)
Remember it’s the subject matter (F/S) information about which the practitioner (External Auditor)
gathers sufficient evidence to provide a reasonable basis for expressing a conclusion in an assurance
report. ____________

Absolute Level of Assurance
is NEVER possible……….!
2. TYPES OF ASSURANCE ENGAGEMENT
Under this framework, there are two types of assurance engagements a practitioner is permitted to
perform:
 Reasonable assurance engagement &
 Limited assurance engagement.
Why Absolute Assurance CANNOT be given by the External

auditor……………? IMP
REASONABLE ASSURANCE ENGAGEMENT:
Definition
The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an

acceptable level ……to form the basis for a positive form of expression of the Practitioners (External
Auditors) conclusion in the audit report.
(Common example is an External Audit in which Positive Assurance is expressed in the
audit report by the external auditor)
MODERATE (LIMITED) ASSURANCE ENGAGEMENT:
The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level
that is acceptable in the circumstances of the engagement, but where the risk is greater than for a
reasonable assurance engagement, as the basis to form a negative assurance.
(Common example is a Review Engagement of the F/S for the interim period)
3. Levels of Assurance:
 Positive Level of Assurance (to be discussed via Audit Report)
 Negative Level of Assurance (to be discussed via Review Report)
Positive (reasonable) Assurance:
If a lot of detailed work is performed on the subject matter, the assurance provider can conclude whether
or not the subject matter has been properly prepared.
Positive assurance is a HIGH level of assurance so a high level of reliance can be placed upon it.
Positive assurance however is not a 100% guarantee. (Rem!_________________________________)
An example of positive assurance is given in the statutory audit report on F/S.
‘in our opinion the financial statements give (or do not give) a true and fair view of the
state of the company’s affairs’.

Negative (Moderate) Assurance:
If a smaller amount of work is performed on the subject matter then the assurance provider may only be
able to confirm that ‘nothing has come to light to suggest errors or problems exist’. In other words,
there may be inaccuracies/problems; however, the assurance provider did not come across them! This
is a much lower level of assurance and is known as negative assurance. Obviously less reliance
should be placed on negative assurance
4. Elements / _________of an Assurance Engagement: (REST)
i. Three party relationships (intended user, Responsible party and practitioner)

ii. Subject matter
iii. Suitable criteria
iv. Evidence
v. Assurance Report
An assurance engagement performed by a practitioner will consist of the following elements:
i. Three party relationship. The three parties are the intended user (__________________), the
responsible party and the practitioner (______________).
i. Subject matter . This is the data to be evaluated by the Auditor that has been prepared by the
responsible party. It mostly includes Financial Statements being audited (includes complete set
of account)
ii. Suitable criteria. The subject matter is evaluated or measured against criteria in order to
reach an Opinion on the F/S (i.e IFRS / IAS and other Prevailing local Laws)
i. Evidence. Sufficient and appropriate audit evidence (ISA 500) needs to be gathered by the
external auditor to support the required level of assurance to express an audit opinion on the
F/S via audit report
ii. Assurance report. A written report containing the practitioner's/ auditor’s opinion is issued
to the Intended users (mostly the shareholders), at the end of the audit in an appropriate format
depending upon the nature of assurance engagement. (i.e. Audit report or review report.

Student Notings

ACCA F8 & CA CAF 8 Practice Questions on Basic Concepts
ICAP Questions
S. No. Question Attempt Marks
1 Q.6 (b) ICAP March 2017 6 marks
2 Q.6 (e) ICAP March 2016 3 marks
3 Q.1 ICAP March 2013 8 marks
4 Q.9 (c) ICAP Sep 2020 4 marks
5 Q.1 ICAP Sep 2018 8 marks
6 Q.1 ICAP Sep 2017 5 marks
7 Q.1 (g) ICAP Sep 2015 3 marks
ACCA Question
8 Q.33 (a + b) ACCA 3 + 3 marks

ICAP CAF 8 - March 2017 (6 marks)
Question 6 (b)
Discuss the concepts of stewardship and accountability in the context of a limited company and fair
presentation (true and fair view) in relation to the financial statements.
-------------------------------------------------------------------------------------------------
Answer b:
Stewardship:
The directors have a stewardship role. They look after the assets of the company and manage them on
behalf of the shareholders.
Accountability:
As agent of the shareholders, the board of directors is accountable to the shareholders. The directors
show their accountability to the shareholders by preparing annual financial statements and presenting
them to the shareholders for discussion and approval.
Fair presentation:
Although the phrase ‘true and fair view’ has no legal definition, the term ‘true’ implies free from error,
and ‘fair’ implies that there is no undue bias in the financial statements or the way in which they have
been presented.
In preparing the financial statements, a large amount of judgment is exercised by the directors.
Similarly, judgment is exercised by the auditor in reaching his opinion. The phrases ‘true and fair
view’ and ‘present fairly’ indicate that a judgment is being given that the financial statements can be
relied upon and have been properly prepared in accordance with an appropriate financial reporting
framework.
--------------------------------------------------------------------------------------------------
Question 6 (e)
Briefly discuss the concept of ‘Professional skepticism.
Answer e:
Professional Skepticism:
It refers to an attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of audit evidence.
However, it does not mean that the auditors should disbelieve everything they are told, but they
should view what they are told with a skeptical attitude, and consider whether it appears reasonable
and whether it conflicts with any other evidence.

Question 1
Briefly describe the meaning of Professional judgment. Explain its important in the context of an audit
and identify the key decisions/ areas where an auditor may need to apply Professional Judgment.
Answer:
Professional Judgment:
It means making informed decisions by a professional accountant about the courses of actions that are
appropriate in the circumstances during an audit engagement, in the context of auditing, accounting
and ethical standards and by applying the relevant training, knowledge and experience.
Why Professional Judgment is necessary:

Professional judgment is essential to the proper conduct of an audit. This is because interpretation of
relevant ethical requirement and the ISAs and the informed decision required throughout the audit
cannot be made without the application of relevant knowledge and experience to the facts and
circumstances.
Professional judgment is necessary in particular when taking decisions about:
 Materiality and audit risk

 The nature, timing and extent of audit procedures used to meet the requirements of ISAs and
gather audit evidence.
 Evaluating whether sufficient appropriate audit evidence has been obtained to achieve the
objectives of the auditor.
 The evaluation of management's judgments in applying the entity's applicable financial
reporting framework and accounting policies.
 The drawing of conclusions based on the audit evidence obtained, from the example assessing
the reasonableness of the estimates made by the management in preparing the financial
statements.
------------------------------------------------------------------------------------------------
ICAP CAF 8 - Sept 2020 (4 marks)
Question 9 (c)
Briefly explain any four elements of an assurance engagement.
Answer c:
An assurance engagement performed by a practitioner consist of the following elements:
(i) Three party relationships: An assurance engagement is a three party relationship consist of
practitioner, responsible party and intended users.
(ii) Subject matter: This is the data such as the financial statements that have been prepared by the
responsible party for the practitioner to evaluate.
(iii) Evidence: Information used by the practitioner in arriving at the conclusion on which
their opinion is based. This must be sufficient and appropriate.

(iv) Assurance Report: The report containing the practitioner's opinion. This is issued to the intended
user(s) following the collection of evidence.
--------------------------------------------------------------------------------------------------
ICAP Sept CAF 8 - 2018 (8 marks)

Question 1
A friend of yours has invested in the shares of Ascender Limited. On receiving the company’s annual
report, he made the following comments:
“The auditor has expressed an unqualified opinion. Since the auditor must have arrived at his opinion
after testing majority of the transactions, therefore the financial statements are correct in all respects.
Since no control deficiencies and fraudulent conduct had been reported by the auditor, I can safely
invest further amount of money in the company because there is no risk that I will lose my money due
to fraudulent conduct of management or misrepresentations in the financial statements.”
Required:
Write a letter to your friend to remove his misconceptions related to the audit of financial statements
including brief explanation of your point of view.
Answer:
To: ABC
Dated: 4 September 2018
Subject: Explanation Of Misstatement Related To Audit
I received your comments on the audit report of Ascender Limited and want to clarify that:
The auditor, because of inherent limitation of audit, cannot reduce audit risk to zero. Therefore, auditor
provides a reasonable assurance but not absolute assurance that financial statements are free from
material misstatement.
In order to provide reasonable assurance, auditor plans and performs audit procedures based on the
concept of materiality and assessment of audit risk. Auditor does not aim to examine all or the majority
of transactions. Based on professional judgment about the effectiveness of the selection, auditor applies
audit procedures using 100% selection, specific selection or audit sampling. Thus, selective examination
of specific items does not provide audit evidence about the whole population and conclusion drawn
from a sample may be different if the entire population were subject to the same procedure.
The management is responsible for the internal controls for the preparation of financial statements and
auditor is responsible to obtain understanding of the same in order to design audit procedures. Auditor is
not required to express opinion on effectiveness of internal controls.
Furthermore, the auditor is responsible to provide reasonable assurance not the absolute assurance that
financial statements as a whole are free from material misstatement, whether caused by fraud or error.
As stated above, the principle of materiality will also be applied here in case of misstatement due to
fraud. The objective of a statutory audit (an external audit) is to express an opinion on the truth and

fairness of the view presented by the financial statements. Its objective is not the prevention or detection
of fraud.
The objective of a statutory audit (an external audit) is to express an opinion on the truth and fairness of
the view presented by the financial statements. Its objective is not the prevention or detection of fraud.
Moreover, there is a possibility that despite all due care, the auditor is unable to detect a fraud especially
those involving management override of controls.
I hope above explanations would enhance your understanding regarding auditor’s roles and
responsibilities in the audit of financial statements.
Yours faithfully,
XYZ
--------------------------------------------------------------------------------------------------
ICAP CAF 8 - Sept 2017 (5 marks)

Question 1
In response to an audit engagement letter sent to Roof Limited (RL), Mr. Aziz Aslam, the new chief
executive of RL has requested your firm to provide absolute assurance in the audit report.
Required:
Draft an appropriate reply mentioning any four reasons why the above request cannot be complied
with.
Answer:
To CEO, APL.
An auditor cannot obtain absolute assurance because there are inherent limitations in an audit that
affect the auditor’s ability to detect material misstatements. These limitations arise because of the
following:
(i) The use of testing/sampling techniques;

(ii) The limitations that exist in any accounting and internal controls system (for example, the
possibility of collusion);
(iii) The fact that most audit evidence is persuasive rather than conclusive; and
(iv) The work undertaken by the auditor to form an opinion is permeated by judgment.
Further, other limitations may affect the persuasiveness of evidence available to draw conclusions on
particular financial statement assertions (for example, transactions between related parties).
-------------------------------------------------------------------------------------------------

ICAP CAF 8 - September 2015 (3 marks)
Question 1 (g)
Briefly explain with examples, the different levels of assurance that can be provided to an assurance.
Answer g:
Reasonable Assurance:
A high (but not absolute) level of assurance provided by the practitioners conclusion expressed in a
positive form. The reasonable assurance is usually expressed in case of statutory audits.
Limited Assurance:
A moderate level of assurance provided by the practitioners conclusion expressed in a negative form.
The negative form of assurance is usually expressed in case of review engagement.
-------------------------------------------------------------------------------------------------
ACCA F8 (3 +3 marks)
Risk and professional scepticism’
Auditors are required to plan and perform an audit with professional skepticism, to exercise
professional judgment and to comply with ethical standards.
Required:
a. Explain what is meant by ‘professional skepticism’ and why it is so important that the auditor
maintains professional skepticism throughout the audit. (3 marks)
b. Define ‘professional judgment’ and describe two areas where professional judgment is applied
when planning an audit of financial statements. (3 marks)
Answer 33:
a. Professional skepticism
Professional skepticism is an attitude that includes having a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and subjecting audit
evidence to a critical assessment rather than just taking it at face value.
It is important that professional skepticism is maintained throughout the audit to reduce the risks of
overlooking unusual transactions, of over-generalizing when drawing conclusions, and of using
inappropriate assumptions in determining the nature, timing and extent of audit procedures and
evaluating the results of them.
Professional skepticism is necessary to the critical assessment of audit evidence. This includes
questioning contradictory audit evidence and the reliability of documents and responses from
management and those charged with governance.

b. Professional judgment
Professional judgment is the application of relevant training, knowledge and experience in making
informed decisions about the appropriate courses of action in the circumstances of the audit
engagement. The auditor must exercise professional judgment when planning an audit of financial
statements.
Professional judgment will be required in many areas when planning. For example the determination
of materiality for the financial statements as a whole and performance materiality levels will require
professional judgment.
Professional judgment will also be required when deciding on the nature, timing and extent of audit
procedures.

ACCA F8 Exam - September / December 2021

1 - 15 Objective Test Questions (30 marks)
16. This scenario relates to five requirements.

It is 1 July 20X5. You are an audit supervisor with Apricot & Co and have been assigned to the audit of
Peach Co, a soft drinks manufacturer which sells to wholesale customers. You are currently planning
the year-end audit for the year ending 31 August 20X5 and have received the following notes from the
audit engagement partner. Materiality for the draft financial statements has been calculated as
$153,000, which is 5% of profit before tax
Planning meeting notes

A new accounting system was introduced via direct changeover in March 20X5. It had been
successfully tested prior to its implementation and management had such confidence in the new system
that they did not consider it necessary to undertake further testing after implementation.
Peach Co has been developing a new production process which will help to reduce sugar in its drinks
by 50%. Development commenced on 1 November 20X4 and the total amount capitalised was $0.8m.
On 1 May 20X5, the food safety authority approved the process and production of the new reduced-
sugar soft drinks commenced.
Peach Co has inventories of high-sugar drinks costing $227,000 which it can no longer sell in its home
market due to a lack of demand. The directors believe Peach Co can sell the remaining inventories to
an international customer at a price that marginally exceeds cost but Peach Co will be responsible for
all costs relating to the delivery and shipping of the drinks.
Peach Co replaced two items of machinery in its production line to accommodate a change in the type
of bottles used. There were significant staff costs involved in preparing the site for the new machinery
and in testing that the new machinery was operating correctly. These costs have been included within
the wages and salaries expense for the period. Despite the old machinery being sold at a significant loss,
during the year the directors of Peach Co decided to extend the useful lives of plant and machinery by
an average of five years.
A member of the finance team was dismissed by Peach Co in May 20X5 after it was discovered that
they had been fraudulently purchasing non-current assets for personal use. Peach Co started to
investigate the fraud at the beginning of June 20X5 by reconciling all physical assets to the non-current
asset register but will not have completed the reconciliation by the year-end date.
Peach Co entered into a contract on 1 May 20X5 with a new supplier of bottles. Peach Co has
committed to a minimum order quantity of 150,000 bottles per month for a period of 12 months
commencing 1 May 20X5. No costs have been accounted for to date as no amounts are payable for the
first six months. Three equal instalments are then payable across the remainder of the contract term.
Peach Co's previous supplier has launched a legal claim against Peach Co for breach of contract, stating
that Peach Co did not have the right to exit the agreement early. Peach Co's lawyers have indicated that
it is likely to lose the case and have estimated the amount payable to be in the region of S0.3m.
In order to fund the development of the new production process and the purchase of new machinery,
Peach Co obtained an interest-bearing bank loan of $1.2m on 1 March 20X5 repayable over the next

three years in arrears. In order to secure the bank loan. Peach Co agreed to maintain a minimum net
profit margin and meet specific sales targets.
a. Describe EIGHT audit risks, and explain the auditor's response to each risk in planning the audit
of Peach Co. (16 marks)
b. Describe Apricot & Co's responsibilities in relation to the prevention and detection of fraud and
error. (4 marks)
Peach Co has been an audit client of Apricot & Co for the last 15 years. The audit staff of Apricot & Co
and the client staff of Peach Co have always enjoyed a meal together at the start of the final audit. Alan
Edward, the managing director of Peach Co has this year suggested that instead of a meal, all the audit
staff and client staff go away for the weekend to a luxury hotel at Peach Co's expense
Alan Edward has also suggested that the current year audit fee is renegotiated to be based on a
percentage of Peach Co's net profit for the year.
This year, for the first time, Apricot & Co has been approached by Peach Co to help identify potential
acquisition targets. Discussions are currently at an early stage and no work has been undertaken at
present. The total fees in relation to the audit and other work would fall within acceptable levels in line
with ACCAs Code of Ethics and Conduct.
c.
i. Identify and explain TWO ethical threats which may affect the independence of Apricot &
Co's audit of Peach Co: and
ii. For each threat, recommend an appropriate safeguard to reduce the threat to an acceptable
level. (4 marks)
d. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Peach Co's development expenditure.
…………………………………………………………………………………………… (6 marks)
(30 marks)
17.This scenario relates to two requirements.

It is 1 July 20X5. Pomeranian Co is a manufacturer of fizzy drinks and operates across the country.
The company's year end is 30 September 20X5. You are an audit supervisor with Poodle & Co and you
are reviewing extracts from the internal controls documentation in preparation for the forthcoming
audit.
Sales
All new customers of Pomeranian Co are required to pass suitable credit checks. Upon passing the
credit check, customers are set up in the receivables ledger master file and a credit limit is set by the
sales director. The credit limits are only then changed when a customer requests an increase.
Customer orders are processed by Pomeranian Co's sales ordering department and goods are
dispatched from one of the company's warehouses. Sequentially numbered multi-part goods dispatched
notes (GDNs) are completed and a copy is filed in the warehouse when the goods are dispatched.
Copies of the GDNs are sent to the sales ordering department and the finance department on a weekly
basis.
Pomeranian Co's credit controller is currently on maternity leave for six months and no one has taken
over her duties. As part of the month-end procedures, a clerk reconciles the receivables ledger control

account to the receivables ledger and the reconciliations are only reviewed by the financial controller if
there are any unreconciled differences.
Non-current assets
An annual capital expenditure budget is set for each department within Pomeranian Co and is referred
to as part of the approval process. Board approval is required for any capital items costing more than
$0.5m. Capital expenditure below this level can be authorised by the relevant head of department.
Pomeranian Co has a head office and five factories, each of which includes a warehouse. The
company has an internal audit (IA) department which is required. over a three-year cycle, to carry out
a comparison between all the assets recorded on the non-current assets register to those physically
present in each of the company's 11 sites. The programme of visits for the current year means that by
the year end, IA will only have completed this comparison at one factory and one warehouse.
Purchases and inventory

Pomeranian Co maintains a perpetual inventory system in which finished goods and raw materials,
stored in the warehouses, are counted monthly throughout the year rather than just being counted at
the year end. Each of the five warehouse managers are responsible for supervising the inventory
counts at their sites and ensuring that the counting teams are following the issued instructions.
The company calculates the cost of its inventory using standard costs, both for internal management
reporting and for inclusion in the year-end financial statements. The basis of the standard costs was
reviewed by the production department approximately two years ago.
The company has a central purchasing department which is based at its head office. All members of
this department have full access to the supplier master file data and a monthly exception report of any
changes to master file data is automatically generated and then filed by a purchasing clerk.
Sequentially numbered goods received notes (GRNs) are produced by the warehouse department
when goods are received, a copy of which is promptly sent to the purchasing and finance
departments. On receipt of the purchase invoices, the finance clerk matches the invoices to the
relevant purchase order and then passes the documents to the finance director for authorisation prior
to input.
In order to obtain sufficient appropriate audit evidence, an auditor cannot place complete reliance on
an entity's system of internal control. In addition to performing tests of controls, auditors must always
perform some substantive procedures due to the limitations of internal control.
a. Describe the LIMITATIONS of internal control.

Note: You do not need to refer to the scenario to answer this requirement (4 marks)
b. Identify and explain EIGHT deficiencies in Pomeranian Co's internal control system and provide a
control recommendation to address each of these deficiencies.
(16 marks)
(20 marks)
--------------------------------------------------------------------------------------------------------

18. This scenario relates to five requirements.
It is 1 July 20X5. Danube Co is listed on a stock exchange and sells consumer goods to wholesale
customers. The company has a large head office and 18 warehouses. You are an audit supervisor of
Mississippi & Co and the final audit for the year ended 31 March 20X5 is due to commence shortly.
The draft financial statements show total assets of $198.5m and profit before tax of $56.1 m. The
following three matters have been brought to your attention:
Land and buildings

Danube Co historically recorded all property, plant and equipment (PPE) at cost less accumulated
depreciation. However during the year, management decided to change the accounting policy for land
and buildings from the cost model to the revaluation model. The finance director hired an external
independent valuer to undertake the valuation of all land and buildings, and this took place in July
20X4. Depreciation is calculated monthly on a pro rata basis. Danube Co's year-end balance for PPE
includes land and buildings of $79.2m (20X4 : $64m).
Trade receivables circularisation

Danube Co's year-end trade receivables balance of $9.3m (20X4: $7.7m) has significantly increased
compared to the prior year. Danube Co's receivables ledger is made up of a large number of
customers with balances ranging from $15,000 to $150,000. A positive trade receivables
circularisation has been undertaken by the audit team based on the year-end balances. The majority of
responses from customers agreed to the balances as per Danube Co's receivables ledger at 31 March
20X5, however the following exceptions were noted:
Customer Balance per Danube Co Response from customer

Nile Co $141,102 No response
Congo Co $136,321 $122,189
Provision and receivable arising from the sale of defective goods

In December 20X4 Danube Co sold a number of hoverboards to a customer, Kalama Kids Co. It is
alleged by Kalama Kids Co that these hoverboards are faulty, as there have been a few instances of
the hoverboards overheating and catching fire. As a result, Kalama Kids Co is suing Danube Co for
S3.9m. The court case is due to take place in August 20X5 and management believes that Kalama
Kids Co's claim is likely to be successful. No hoverboards remain in Danube Co's inventory at the
year end.
Danube Co purchased the hoverboards from a supplier, Thames Co. In February 20X5 Danube Co
contacted Thames Co and requested that they reimburse Danube Co for damages which may become
payable as a result of the sale of defective hoverboards. Danube Co is requesting a sum of $3.9m from
Thames Co. The draft financial statements contain a provision of $3.9m in respect of the customer's
claim and a receivable of $3.9m in respect of Danube Co's counter-claim against its supplier.
a. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to Danube Co's land and buildings.
(6 marks)
b. Describe the procedures the auditor should perform in relation to the exceptions noted during the
trade receivables circularisation in respect of Nile Co and Congo Co.
Note: The marks will be split equally between each customer.

(4 marks)

c. Describe substantive procedures the auditor should perform to obtain sufficient and appropriate
audit evidence in relation to the PROVISION and the RECEIVABLE arising from the sale of
defective goods. (5 marks)
The audit engagement partner has determined that the issue relating to the provision and receivable
arising from the sale of defective goods should be communicated as a key audit matter (KAM), in
accordance with ISA 701 Communicating Key Audit Matters in the independent Auditors Report.
d. .
i. Describe the factors which the audit engagement partner would have considered in
determining that this issue is a KAM; and
ii. Describe the content of the KAM section of the auditor's report for Danube Co.
(5 marks)
(20 marks)
(The End)
Answer of ACCA F8 September / December 2021
16. Peach Co
a. Audit risks and auditor’s response
Audit risks Auditor’s response
A new accounting system was introduced in The audit team should undertake detailed
March 20X5 and post implementation testing has testing to confirm that all balances have been
not been conducted. completely and accurately transferred to the
new accounting system.
There is a risk of opening balances on the new
system being misstated and loss of ongoing data if They should perform walkthroughs to
they have not been transferred from the old document the new system and test the controls
system correctly. If the new system is not in place.
operating effectively there is a risk of
misstatement of the accounting records. They should discuss with management any
issues which have occurred since the new
system was implemented
Peach Co has been developing a new production The audit team should discuss with
process and $0·8m was capitalised in the year as management the accounting policy applied,
development expenditure. particularly in respect of identifying the research
and development stages.
IAS ® 38 Intangible Assets requires research
expenditure to be recognised as an expense as A detailed review of the costs capitalised and
incurred and development expenditure capitalised supporting documentation should be carried out
only if strict criteria are satisfied. to determine the nature of the expenditure. Any
development expenditure should then be agreed
There is a risk that research expenditure has been as meeting the relevant criteria for capitalisation
incorrectly classified as development expenditure as set out in IAS 38.
resulting in overstated intangible assets and
understated research expenses. The auditor should discuss the assessment of

the useful life of the product with management
The capitalised expenditure should be amortised and assess its reasonableness. They should also
over the life of the process, commencing when the reperform amortisation calculations to confirm
new process is first brought into use in May 20X5. the amounts are accurate.
There is a risk that amortisation has not been
correctly calculated for the period resulting in
misstated amortisation.
Peach Co holds inventory of $227,000 that it can The audit team should discuss with the
no longer sell in its home market. It believes it can
directors their belief that the inventory can be
be sold to an international customer, but there are sold and should review any agreement with the
significant additional costs that Peach Co will international customer to determine the
incur. likelihood of the sale and the selling price for
the inventory. They should also obtain
There is a risk that the net realisable value (NRV) supporting documentation in respect of the
of the inventory is less than cost and therefore delivery and shipping costs in order to establish
that the inventory is overstated and cost of sales NRV and discuss with management if a write-
understated. down is required.
Peach Co has included in wages and salaries, The audit team should discuss with
significant staff costs involved in the preparation management the accounting treatment applied
of the site for the new machinery and in testing and request that the relevant staff costs are
the new machinery. included in the cost of PPE.
IAS 16 Property, Plant and Equipment states that The audit team should undertake a review of
costs, directly attributable to bringing the asset to the staff costs expensed and the process for
the condition necessary for its intended use, are allocating staff costs to work undertaken to
capitalised as part of the cost of the asset. These confirm the amounts that should be capitalised
directly attributable costs include costs of site as part of the cost of machinery. If an adjusting
preparation and costs of testing. journal is made by management this should be
reviewed for accuracy.
It appears that an incorrect accounting treatment
has been applied in respect of the staff costs
resulting in understated property, plant and
equipment (PPE) and overstated wages and
salaries expense.
The directors extended the useful lives of plant The audit team should discuss with the
and machinery by an average of five years despite directors the rationale for any extensions of
the fact that machinery had been disposed of at a asset lives and reduction of depreciation rates.
significant loss.
The revised useful life of a sample of assets
Under IAS 16 asset lives should be reviewed should be compared to how often these assets
annually, and if the asset lives have genuinely are replaced and any gain or loss on disposal, as
increased, then the resulting decrease in this provides evidence of the useful life of
depreciation may be reasonable. However, the assets.
fact that old items of machinery were sold at a
substantial loss in the period does not support the
decision to increase useful life.
As such, it appears that plant and machinery is

overstated and depreciation expense understated.
A member of Peach Co’s finance team The audit team should discuss the fraud with
fraudulently purchased assets for personal use. management to understand how the fraud was
detected and corrected. They must understand
The reconciliation of physical assets to the non- the internal controls in place to prevent other
current assets register will be ongoing at the year frauds occurring.
end, hence there is a risk that non-current assets
are overstated as they may include the personal Additional procedures should be performed,
assets purchased. particularly in respect of non-current assets
additions. When testing
Control risk is also increased if the fraud has gone non-current assets, they should obtain a list of
undetected for a period of time. all non-current assets capitalised in the year and
agree the new assets to an authorised purchase
order. They should select an increased sample
of assets from the non-current assets register to
confirm the existence of the assets and that they
are used in the business.
The directors have not accounted for any costs The audit team should review the terms of the
under the new contract for bottles as no amounts contract to understand the amounts payable
are due to be paid until after the year end. and terms of payment. They should review the
goods received not invoiced accrual listing to
There is a risk that the costs incurred to date have ensure that amounts payable to the supplier for
not been recognised and therefore costs and bottles received have been accrued despite not
liabilities are understated and profit is overstated. being invoiced.
A previous supplier has launched a legal claim The audit team should review correspondence
against Peach Co. The claim has not been settled with Peach Co’s lawyer to understand the
but Peach Co’s lawyers believe that they are likely likelihood of the supplier winning the case and
to have to pay an estimated $0·3m. the amount of the payments to be made to
them.
As it appears probable that Peach Co will have to
pay the supplier, a provision is required to comply
with IAS 37 Provisions, Contingent Liabilities
and Contingent Assets. There is a risk that
provisions and expenses are understated if the
company has not recognised a liability in respect
of this legal claim.
Peach Co obtained a new interest-bearing bank The audit team should undertake a review of
loan in the year repayable over three years. the loan agreement to confirm the details and
reperform the company’s calculations to
There is a risk that the loan has not been correctly confirm that the loan has been correctly
allocated between current and non-current classified between current and non-current
liabilities which would give rise to a classification liabilities.
error and liabilities being misstated.
The finance costs should be recalculated and
In addition, the finance costs are paid in arrears agreed to the accruals schedule.
and may not have been correctly accrued at the
year end resulting in understated accruals and
finance costs.
Peach Co has strict covenants in place regarding The audit team should review the loan
the loan. covenants in detail to understand what Peach
Co is required to comply with. They should
A breach of covenants could result in fines and calculate the covenants to understand whether
penalties or mean the loan would be instantly any breaches have occurred and discuss the
repayable. There is an increased risk that the impact of any breaches with management.
existence of covenants gives an
incentive to manipulate key balances by The team should maintain their professional
overstating revenue and profit to ensure scepticism to remain alert to the risk over
covenants are met. revenue recognition and judgements which
affect profit.
b. Auditor’s responsibilities in relation to the prevention and detection of fraud and error
 Apricot & Co must conduct an audit in accordance with ISA 240 The Auditor’s Responsibilities
Relating to Fraud in an Audit of Financial Statements and are responsible for obtaining reasonable
assurance that the financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error.
 Apricot & Co is required to identify and assess the risks of material misstatement of the
financial statements due to fraud.
 The auditor needs to obtain sufficient appropriate audit evidence regarding the assessed risks
of material misstatement due to fraud, through designing and implementing appropriate
responses.
 Apricot & Co must respond appropriately to fraud or suspected fraud identified during the
audit, for example, the fraud regarding the purchase of assets for personal use identified by
Peach Co.
 When obtaining reasonable assurance, Apricot & Co is responsible for maintaining
professional scepticism throughout the audit, considering the potential for management
override of controls and recognising the fact that audit procedures which are effective in
detecting error may not be effective in detecting fraud.
 To ensure that the whole engagement team is aware of the risks and responsibilities for fraud
and error, ISAs require that a discussion is held within the team.
 Apricot & Co must report any actual or suspected fraud to appropriate parties.
c. Ethical threats and appropriate safeguards
Ethical threat Appropriate safeguard

The managing director of Peach Co has this As it is unlikely that the weekend away has an
year suggested that instead of a meal, all the insignificant value, this offer should be politely
audit staff and client staff go away for the declined. The normal meal at the start of the
weekend to a luxury hotel at Peach Co’s audit is likely to be acceptable, particularly if the
expense. audit team pay for themselves.
This represents a self-interest and familiarity
threat. The acceptance of goods and services,
unless trivial and inconsequential in value, is
not permitted as it may make the audit staff
less likely to challenge Peach Co’s assumptions
and explanations.
Peach Co has suggested that the audit fee is Apricot & Co should not agree to the proposed
renegotiated to be based on a percentage of basis for the fees and should communicate with
Peach Co’s net profit. This is a contingent fee those charged with
and leads to a self-interest threat. governance to explain that the audit fee needs to
reflect the level of work and the experience of the
If the audit fee is based on profit the audit team team required to obtain reasonable assurance.
may feel incentivised to allow incorrect
accounting treatments in order to maximise
profits.
Apricot & Co has been approached by Peach Apricot & Co may be able to accept this type of
Co to assist with the identification of work depending on the precise nature and
acquisition targets. provided that adequate safeguards can be put in
place. Care must also be taken not to make
The provision of this type of corporate finance management decisions. Safeguards would
work creates a potential advocacy threat as include using professionals who are not involved
Apricot & Co may be seen to be promoting in the audit to perform the service (e.g. corporate
Peach Co as an investor. In addition, there finance) and having an appropriate reviewer who
may be a self-review threat if the potential was not involved in providing the service review
acquisition is subsequently reflected in the the audit work or service performed
financial statements and the audit team may be
less likely to challenge the figures included.
d.Development expenditure
 Obtain a schedule of capitalised costs within intangible assets, cast it and agree the closing balance
to the general ledger, trial balance and financial statements.
 Select a sample of capitalised costs and agree to invoices, payroll records or other source
documentation in order to confirm that the amount is correct and that the cost relates to the project.
 Discuss with the directors the decision to capitalise the costs from 1 November 20X4 onwards and
assess whether this is based on the project meeting all of the conditions for capitalisation in IAS 38.
 Review a breakdown of the nature of the costs capitalised to identify if any research costs have been
incorrectly included. If so, request that management remove these and include within profit or loss.
 Select a sample of costs recorded as research expenses and development costs and agree to
supporting documentation confirming the date of the expenditure to ensure that costs were
allocated correctly.
 Review market research reports to confirm that there is a market for the new process and that the
selling price is high enough to generate a profit.
 Review feasibility reports as at 1 November 20X4 and discuss with directors their view that the
process was technically feasible at that date.
 Review the budgets in relation to the development project and the cash flow forecast in order to
assess whether Peach Co had access to adequate cash resources to complete the project as at the
date of capitalisation. Agree the budgets to supporting documentation.
 Discuss with the finance director the rationale for the useful life being applied, consider its

reasonableness and agree to supporting documentation.
 Recalculate the amortisation charge and confirm that it covers the period for May to August 20X5.
 Review the disclosures for intangible assets in the draft financial statements in order to confirm that
they are in accordance with IAS 38.
-------------------------------------------------------------------------------------------
17. Pomeranian Co
a. Limitations of internal control
There are limitations in any system of internal control which affects the extent to which the auditor
can place reliance on it. The limitations are as follows:
Human error in the design of or application of an internal control
An entity may have an adequate internal control process over a particular area of the financial
statements. However, human error in applying that control gives rise to an inherent limitation, for
example a staff member may review a bank reconciliation but not identify an error.
There may also be a flaw in the design of internal control whereby there is an error in the design of,
or change to, an internal control which means it does not operate as intended.
Circumvention of internal control
No system of internal control will be completely effective at preventing and detecting fraud and
error. Employees may manipulate deficiencies in an entity’s internal control for personal gain or to
conceal fraudulent activity. This is more likely to be possible where there is collusion between
employees.
Management override of internal control
Management is in a position of power to override an entity’s internal control regardless of the
strength of the system of internal control. Such management override could be to conceal
information or for personal financial gain.
Use of judgement on the nature and extent of controls
Management is responsible for implementing controls which are designed to prevent, detect and
correct material misstatements and safeguard the company’s assets. Professional judgement will be
needed to determine the type and extent of internal controls needed within the company and certain controls
may be absent or ineffective. In particular, systems may be designed to deal with routine transactions and
may therefore be inadequate in respect of non-routine transactions.
b. Control deficiencies and recommendations

Control deficiency Control recommendation
Credit limits set by the sales director are only Credit limits should continue to be set by the
changed when a customer requests an increase. sales director, however these limits should be
reviewed and amended as appropriate on a
If credit limits are not reviewed regularly they regular basis by a responsible official for
could be out of date, resulting in limits being too example the finance director or sales director.
high and therefore sales being made to poor credit
risks or, alternatively, too low and therefore
Pomeranian Co losing potential revenue.
Goods dispatched notes (GDNs) are sent to the The copies of the GDNs should be sent to the

finance department on a weekly basis. finance department on a more frequent basis,
such as daily.
If the finance department does not promptly
receive GDNs, this could result in goods being The finance department should undertake a
dispatched but being invoiced late. This could sequence check of the GDNs to ensure none
result in revenue cut-off issues and understated are missing for processing.
receivables.
The company’s credit controller is currently on During the period of the maternity leave an
maternity leave for six months and no one has alternative member of the finance department
taken over her duties. should be trained in the credit control role (or
a temporary credit controller recruited) and
Therefore, during this period no one has been assigned responsibility for reviewing the aged
responsible for monitoring and chasing ageing receivables listing and following up on any
receivables. This could result in an increased risk overdue customers.
of irrecoverable receivables and lead to customers
not paying their outstanding balances on time, or
at all, leading to reduced cash flows.
The monthly receivables ledger control account The RLCA reconciliations should be
(RLCA) reconciliation is only reviewed by the reviewed by the financial controller on a
financial controller if there are any unreconciled monthly basis, even if there are no
differences. exceptions, and the review should be
evidenced by way of signature on the
The RLCA reconciliation could reconcile but still reconciliation.
contain significant errors as there could be
compensating errors which cancel each other out
or it may have been incorrectly prepared or
manipulated and this would not be identified. If
the reconciliation is not reviewed, then this
significantly reduces its effectiveness
Capital expenditure items below $0·5m are The authorisation level for department heads
authorised by the relevant head of department. should be significantly reduced to a more
appropriate level, such as $25,000. Any sums
$0·5m is a significant sum and although in excess of this should be approved by the
department heads undertake the authorisation board. If this proves too onerous, a capital
process, there is still considerable scope for non- expenditure committee of senior employees
business use or surplus assets being purchased should be established for authorisation of
leading to reduced profits and cash flow for capital items. This committee should report
Pomeranian Co. to the board.
The internal audit department (IA) undertakes IA should review its programme of visits to
physical verification of assets each year. It is assess if additional resources could be
supposed to verify all assets over a three-year devoted to ensure that all 11 sites are visited
cycle, however in the current year IA will only in line with the policy of three years. This
complete the relevant procedures at one factory would ensure that physical verification of all
and one warehouse. assets could be completed more regularly.
During visits any assets which cannot be
The company has five factories and warehouses located should be investigated fully to
and a head office. Therefore, on this basis it will identify where they could be. If they cannot
take over five years to physically verify all 11 sites. be located then they should be written off.
If the non-current assets register is not physically
verified on a regular basis, there is an increased
risk of assets being misappropriated or obsolete
assets still being included in the register, as there is
no check that the assets still exist in good working
order
The warehouse manager at each of the company’s The inventory counts should be supervised by
five sites is responsible for supervising the monthly an independent person, such as a member of
perpetual inventory counts and ensuring that the Pomeranian Co’s IA department.
counting teams are following their instructions.
The warehouse managers may wish to hide

inefficiencies and inventory discrepancies so that
their departments are not criticised. This could
result in inventory count records being inaccurate
as well as an increase in inventory frauds
The company costs its inventory using standard A review of all standard costs currently in use
costs, which are not being kept up to date. should be undertaken by a senior manager in
the production department. Actual costs for
If the standard costs were last reviewed two years materials, labour and overheads should be
ago there is the risk that the costs are misstated as ascertained and compared to the proposed
changes in raw materials and wages costs may not standard costs to ensure they are a close
have been adjusted for. This could result in approximation.
inventory and profits being misstated.
The revised standard costs should be
In addition, for year-end reporting, IAS 2 reviewed by the production director who
Inventories only allows standard costs to be used should evidence this review. At least
for valuation purposes, if they are a close annually, a review of the standard costs
approximation to actual costs, which is unlikely if should be undertaken by the production
the standard costs remain unchanged for a long director to ensure they are up to date.
period of time. Therefore, the inventory cost may
not be in line with IAS 2.
Access to the master file data for suppliers is The monthly exception report of changes to
available to all those in the purchasing department master file data should be reviewed by a
and the monthly exception report of changes to responsible official, who should evidence this
master file data is not reviewed. review. Any unauthorised or unexpected
changes should be investigated and
appropriate action taken.
All members of the purchasing department could The ability to make amendments to master file
amend data and, potentially, add new suppliers to data should be restricted to those required and
the payables ledger system, and as the exception authorised to make changes to this data.
report is not reviewed it is unlikely that this would
be identified. This leads to an increased risk of
fraud as clerks could add fictitious suppliers and
then place fraudulent orders without detection.
Purchase invoices are not agreed to the relevant All purchase invoices should be matched to
goods received notes (GRNs) prior to both the purchase order and the related GRN.
authorisation and input. The details should be agreed prior to the
invoice being authorised and logged in the
This could result in invoices being paid for goods payables ledger.
which were not received, resulting in increased
costs.

18. Danube Co
a. Land and buildings
 Obtain a schedule of all land and buildings, cast and agree to the trial balance and financial
statements.
 Consider the competence and capability of the valuer, by assessing through enquiry their
qualification, membership of a professional body and experience in valuing these types of
assets.
 Review the assumptions and method adopted by the valuer in undertaking the revaluation to
confirm the reasonableness and compliance with principles of IAS 16.
 Agree the schedule of revalued land and buildings to the valuation statement provided by the
valuer and to the non-current assets register.
 Agree all land and buildings on the non-current assets register to the valuation report to ensure
completeness of the land and buildings valued to ensure all assets in the same category have
been revalued in line with IAS 16.
 Recalculate the total revaluation adjustment and agree correctly recorded in the revaluation
surplus.
 Recalculate the depreciation charge for the year and confirm that for assets revalued at July
20X4, the depreciation was based on cost before the revaluation and based on the valuation
after on a pro rata basis.
 For a sample of land and buildings from the non-current assets register, physically verify to
confirm existence.
 For a sample of land and buildings trace back to the non-current assets register and general
ledger to confirm completeness.
 Review the financial statements disclosures relating to land and buildings to ensure they
comply with IAS 16.

b. Exceptions in the trade receivables circularization
Nile Co
 For the non-response from Nile Co, with the client’s permission, the team should arrange to
send a follow-up confirmation request.
 If Nile Co does not respond to the follow up, then with the client’s permission, the auditor
should telephone the customer and ask whether they are able to respond in writing to the
confirmation request.
 If there is still no response, then the auditor should undertake alternative procedures to
confirm the balance owing from Nile Co. These would include detailed testing of the balance
by a review of after date cash receipts and agreeing to sales invoices and goods dispatched
notes (GDN).
Congo Co
 For the response from Congo Co the auditor should investigate the difference of $14,132, and
identify whether this relates to timing differences or whether there are possible errors in the
records of Danube Co.
 If the difference is due to timing, such as cash in transit, details of the difference should be
agreed to post year-end cash receipts in the cash book.
 If the difference relates to goods in transit, then details should be agreed to a pre year-end
GDN.
 The receivables ledger should be reviewed to identify any possible mis-postings as this could be

a reason for the difference with Congo Co.
c. Provision and receivable arising from the sale of defective goods

 Review the correspondence with Kalama Kids Co and establish the details of the claim to
assess whether a present obligation as a result of a past event has occurred.
 Review correspondence with Thames Co, the supplier of the hoverboards, to assess whether
they accept liability for the defect.
 Review correspondence with Danube Co’s legal advisers or, with the client’s permission,
contact the legal advisers to obtain their view as to the probability of either the legal claim
from the customer and the request for reimbursement from the supplier being successful as
well as any likely amounts to be paid or received.
 Discuss with management/enquire of the legal adviser as to whether any other customers of
Danube Co have experienced problems with sales of hoverboards and therefore the likelihood
of any potential future claims.
 Review board minutes to establish whether the directors believe that either claim will be
successful or not.
 Review the post year-end cash book to assess whether any payments have been made to the
customer or cash received from the supplier and compare with the amounts recognised in the
 Discuss with management why they have included a receivable for the claim against the
supplier as this is possibly a contingent asset and should only be recognised as an asset if the
receipt of cash is virtually certain. Consider the reasonableness of the proposed treatment.
 Obtain a written representation confirming management’s view that the lawsuit by Kalama
Kids Co is likely to be successful and the claim against Thames Co is virtually certain and
hence a provision and a receivable are required to be included.
 Review the adequacy of the disclosures of the lawsuit and supplier claim in the draft financial
statements to ensure they are in accordance with IAS 37.
d. Key audit matters
(i) Factors to consider

As Danube Co is listed, a Key Audit Matters (KAM) section will be required in the auditor’s
report. The audit partner would have considered whether the matter was communicated to
those charged with governance as KAM are selected from matters communicated with those
charged with governance. The audit partner would also have considered whether the issue
relating to the claims was an area of higher assessed risk of material misstatement or a
significant risk and as it is an accounting estimate the level of judgement involved. The audit
partner will have also considered whether, in their professional judgement, the matters
regarding the claim and counter-claim were of most significance in the audit of Danube Co’s
financial statements for the year ended 31 March 20X5 therefore requiring significant auditor
attention.
(ii) Contents of KAM section

The KAM section of the auditor’s report should provide a description of the issue. It should
detail why this issue was considered to be an area of most significance in the audit and
therefore determined to be a KAM. It would include a reference to the audit risk of
completeness of the provision and recognition of the receivable and the level of judgement
required in making this assessment. It should also explain how the matter was addressed in the
audit and the auditor should provide a brief overview of the audit procedures adopted as well
as making a reference to any related disclosures.

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KnS School of Business Studies

ACCA F8 - Audit & Assurance

Index of ACCA F8 Handouts

S. No. Description Page No.

2. ACCA F8 Result Analysis of ACCA 8

3. Key Areas of ACCA F8 9

4. Snapshot of an External Audit Process 10

6. Sequence to study ACCA F8 Audit & Assurance 12

7. Basics Concepts of Audit & Assurance # Part 1 13

9. Inherent Limitations of an External Audit 16

10. Basic Concepts # Part 2 20

11. Practice Questions 36

12. ACCA F8 Exam - September / December 2021 43

Page 1 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

ACCA F8 Audit and Assurance Syllabus

Page 2 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

2. Objective and general principles

Page 3 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

d) Bank and cash:

Page 5 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

f) Non-current liabilities, provisions and contingencies:

g) Share capital, reserves and directors’ emoluments:

5. Automated tools and techniques

Page 6 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 7 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 8 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Basic Concepts of Audit

Materiality & Audit Report

Subsequent Events, Going Concern and Management Representation

Materiality, Fraud and Risk Assessment

Internal Controls and Test of Controls

Audit Evidence and Substantive Procedures

Code of Ethics / ACCA Ethical guidelines / ACCA Code of Conduct

Code of Corporate Governance (C.C.G)

I.T and Other small areas

HOW TO STUDY ACCA F8 ??

Page 9 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Inherent Limitation of an Audit

Management External Scope of an Audit Few

True & Fair View

1. Running of the company 1. Conducting an audit of financial statements

Page 10 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Financial Year JAN FEB MARCH APRIL

Page 11 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 12 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 13 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 14 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

5. An External auditor examines/conducts an audit of F/S prepared by the management of the

Page 15 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

What is Reasonable Assurance……?

These Inherent Limitations of an AUDIT are as follows:

Page 16 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

i. Provision for doubtful debts

 Management override of Internal Controls What is Internal Control...?

Other Limitations of an Audit

Page 17 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 18 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

Page 19 of 58 Prepared by M. Sajid Kapadia (ACA, FCCA, APFA)

BASIC CONCEPTS # Part 2