ACCA Paper P7 Advanced Audit and Assurance Mock ?· ACCA Paper P7 Advanced Audit and Assurance Mock…

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<ul><li><p>ACCA Paper P7 Advanced Audit and Assurance </p><p>Mock Exam </p><p>Commentary, marking scheme and suggested solutions </p></li><li><p> 2 </p><p>Commentary Tutor guidance on improving performance on the exam paper. </p><p>1 Medix This question was especially time consuming, particularly in part (a). Always make sure that you plan your time at the start of a question and stick to it for each question part. This will allow you to get the easier marks that are available across the whole paper. Part (a) on acceptance focuses on a commonly seen area of P7, testing higher level skills related to judgement, so make sure you justify your conclusions in order to score as many of the 10 marks on offer. In parts (b)(ii) and (c) it is important to explain the risks and not just identify them. The risks should be taken from the scenario, and should not be pre-learned. When writing your answer, you can use the words 'the risk is' in order to signal to the marker that you are addressing the requirement. Part (b)(i) contains some easy marks for auditing concept definitions in a core area of the P7 syllabus. </p><p>2 Murray To answer this question well, some time spent planning would be very advisable prior to launching into your answer. In part (a), remember to consider practical aspects as well as ethical issues and keep in mind the mark allocation you need to make at least six well explained points to achieve the maximum potential marks available, and you should be able to generate these from the clues in the question scenario. In part (b), consider materiality when addressing the issues, and make good use of the information that's been provided to you in the question scenario. Your financial reporting knowledge needs to be strong here and there are ten marks available so again, try to make ten well explained points. Hopefully, part (c) should be fairly straightforward on management letters. </p><p>3 Visean For part (a) remember that matters will cover the issues of risk, materiality and accounting treatment. There is also a heavy emphasis on accounting knowledge. Make sure you deal with all aspects of the information. There is often more than one accounting problem in each part of the question. For part (b) it is essential that you make your points as specific as possible. Generalities will score few marks. It would also be possible to present your answer in a two column format. In this case if you choose to do so you need to take care as there is not always a corresponding piece of evidence for each matter raised. </p><p>4 Carter This question looks at a number of ethical dilemmas. Care must be taken when reading the information to ensure that the key issues are identified. It can be easy to become side-tracked by minor details or basic misunderstandings and end up missing the point of the question. Parts (a) and (d) were probably the easiest, but the easiest marks were the first few in each part of the question and to get these, it was crucial that you kept to your timings for each part. Good answers will require a blend of theory and application, which the examinations team has pointed out as vital for success. </p><p>5 Topper This question deals with auditors' reports. Section (a) of the question starts with basic knowledge of the auditor's report but then challenges you into a discussion as to whether standard auditors' reports are sufficient. To score well you must come up with some advantages, disadvantages and have a conclusion. Section (b) tests detailed knowledge of the type of audit opinion which should be expressed in a series of questions. Candidates frequently struggle with the various modifications of the auditor's report, so if you did too then you should use this as a vital learning exercise. </p></li><li><p> 3 </p><p>Section A </p><p>1 Medix Marking scheme </p><p> Marks (a) Professional, ethical and other issues </p><p>Note. Comments must be derived from the information provided in order to be awarded marks. 12 marks per issue discussed </p><p>Ideas list: Poor reputation of Medix Co Potential advocacy threat from frequent litigation Public interest in the company Potential liability to lender Short timeframe to build business knowledge Aggressive management style Incentive to manipulate financial statements Poor systems and controls Extra work on opening balances (max 1 mark) Need expertise in this regulated industry Fee pressure Creditworthiness Possible management fraud Indicator of money laundering Question competence of previous auditors Max 10 </p><p>(b) (i) Business risk and risk of material misstatement Generally mark per definition and 1 mark per comment </p><p> Business risk leads to specific RoMM Business risk leads to general RoMM Relationship regarding going concern Max 4 </p><p>(ii) Risks of material misstatement breach of planning regulations 2 marks per risk explained ( mark max if only identified and not described): </p><p> Overstatement of tangible non-current assets Overstatement of other assets (max 1 mark) Possible understatement of provision/non-disclosure of </p><p>contingency </p><p> Possible understatement of provision for demolition costs Going concern (max 1 mark) Reference to IAS 36, IAS 37 ( mark each) Max 6 </p><p>(c) Principal business risks Generally mark each risk identified Up to 1 further mark for significant issues explained: Declining demand for main product and revenue/cash flow implication R+D represents cash drain Lack of management focus on long term strategy Breach of planning risk of facility being shut down and bad publicity Regulated industry and reliance on licence for commercial production Over reliance on scientist Reliance on agents </p></li><li><p> 4 </p><p> Marks Commission payments high risk of fraud Overseas manufacturing plant hard to control and maintain quality High and volatile costs of importing goods Capital expenditure likely in near future Future exposure to fluctuating interest rates Non-compliance with tax regulations fines and penalties Legal action finance director and planning office Weak controls, risk of fraud Owner-managed business Max 11 Up to 4 professional marks for clarity of discussion, style appropriate for audit partner 4 professional marks for format, introduction and conclusion provided </p><p> Max 4 Total 35 </p><p>Suggested solution </p><p>Briefing notes </p><p>To: Charles Banks From: Gavin Jones Date: June 20X8 Subject: Medix Co </p><p>Introduction </p><p>These notes consider the professional, ethical and other issues to be considered in deciding whether to proceed with the appointment as auditor of Medix Co. They also discuss the concepts of business risk and risk of material misstatement, and include a discussion of the business risks facing Medix Co. </p><p>(a) Professional, ethical and other issues </p><p>(i) Sign of fraud or money laundering </p><p>Mick Evans, the current audit partner has informed us that Jon Tate, the owner and managing director of Medix Co has kept two cash books. This requires further investigation but is a possible sign of fraud or money laundering. This offence alone is enough for Mitchell &amp; Co to seriously consider rejecting the appointment. </p><p>(ii) Legal actions and investigations </p><p>Medix Co has recently been subject to two tax investigations, and legal action is presently being taken by both the former finance director and the local planning department. The local planning department has also successfully sued the company previously. The reputation of Mitchell &amp; Co may be damaged by accepting a client who has been subject to so many legal actions and investigations. It is not entirely clear from the previous auditors whether the tax investigations have now been resolved and as a result, there is a risk we could be exposed to an advocacy independence threat if this issue were to recur. </p><p>(iii) Negative publicity </p><p>The local newspaper recently reported on the current and past legal action by the local authorities against Medix Co. This negative publicity is something we may not wish to be associated with. </p></li><li><p> 5 </p><p>(iv) Timeframe and resources </p><p>Given it is now June and Medix Co has a 30 June 20X8 year end, the time frame for planning the audit and gaining a thorough understanding of the business and its processes is tight. Mitchell &amp; Co should ensure there are adequate staff available to complete the work with the necessary industry expertise before accepting this appointment. It should be noted that the previous audit partner has stated that Medix Co like a 'quick audit'. If accepted, we should ensure that our proposed approach causes the least disruption to the client whilst maintaining the necessary levels of documentation and testing required for a quality audit. </p><p>(v) Potential liability to bank </p><p>Medix Co are in the process of negotiating a bank loan, the terms of which will be finalised once the audited financial statements have been viewed by the bank. The bank will be using the audited financial statements as the basis of its decision and relying heavily on our auditor's opinion. It may be sensible to reject the audit engagement as it could expose Mitchell &amp; Co to an unnecessarily high level of liability to the bank, especially given that this is a time-pressured first year audit. However, disclaimers may be sufficient to limit our liability. </p><p>(vi) Management bias </p><p>Medix Co will be aware that the bank is basing their financing decision on the audited financial statements. There is a risk that the company may deliberately misstate the financial statements in order to gain the bank's approval. Mitchell &amp; Co will need to be aware of this risk before carrying out any audit work. </p><p>(vii) Potentially aggressive management style </p><p>The previous finance director is currently taking legal proceeding against Medix Co and the auditors prior to the current practice resigned due to a disagreement over fees. This indicates that management at the company are aggressive and so it may be difficult for Mitchell and Co to form a good working relationship with them. The problem is compounded by the fact that the company is owner-managed. </p><p>(viii) Internal systems and controls </p><p>The current auditors have said they have found internal controls at Medix Co weak. Mitchell and Co would therefore not be able to rely on internal controls or carry out a controls-based audit. A fully substantive approach would be necessary and we should consider whether we have sufficient resource as this is always a more time-consuming approach than a controls-based audit. </p><p>(ix) Opening balances </p><p>As per ISA 510 Initial audit engagements opening balances, opening balances need to be verified for all new audit clients. Detailed procedures will need to be carried out at Medix Co due to the weak internal control environment and the possible incompetence of the current auditor who ignored a potential money laundering indicator. It is worth noting that Medix Co is the only audit client of the current auditor. </p><p>(x) Fees </p><p>The current auditor has indicated that Medix Co may pressure us to keep the audit cost as low as possible. We should only accept the audit engagement if the company are willing to pay us a reasonable fee, especially given the extra work that will be required for such a high risk assignment. </p><p>There is a chance that Medix Co will be unable to pay their audit fees as the company appears to be experiencing cash flow difficulties. If such a self-interest threat to our independence arises we will be unable to continue as auditors. </p></li><li><p> 6 </p><p>(b) (i) Business risk and risk of material misstatement </p><p>Business risk is the risk inherent to the company in its operations and includes all risks facing the business that adversely affect the achievement of its objectives. </p><p>Risk of material misstatement is the risk of material misstatement in the financial statements and includes any non-compliance with IFRS. </p><p>In response to business risk, management institute a system of controls. These will include controls to mitigate against the risk that the financial statements are materially misstated, which is an aspect of business risk. </p><p>Business risks and their associated controls could affect specific or more general parts of the financial statements. For example, the use of sales agents has been identified as a specific business risk at Medix Co. The associated risk of material misstatement is that sales are overstated. A more general business risk that will affect all areas of the financial statements is the weak control environment at Medix Co. </p><p>If a business risk materialises, the going concern basis of the financial statements could be affected, especially if the risk affects the continued existence of the business. For example, at Medix Co there is a business risk that licences may not be granted for the laser surgical instruments. If the licence was refused and the company carries on experiencing cash flow problems, there is a risk that the financial statements could be incorrectly prepared on a going concern basis. </p><p>(ii) Risks of material misstatement breach of planning regulations </p><p>Tangible non-current assets overstated. From the press cutting, it appears that the local authority aims to close the R&amp;D building before year end. There is therefore a risk that the building is overvalued on the statement of financial position. Under IAS 36 Impairment of assets, the directors at Medix Co should carry out an impairment review if there is any indication assets are impaired. If the carrying amount exceeds the recoverable amount (the higher of fair value less costs to sell and value in use), the building should be impaired and the impairment loss recognised as an expense. </p><p>The recoverable amount of the building is likely to be lower than the carrying value if it cannot be used as intended. If the local authority is successful and the building is shut down, the recoverable amount is likely to be nil. This is because the building has no value in use, cannot be used for trading, and has no market value as it will probably be demolished. </p><p>Other assets overstated. Any other tangible assets within the building (such as laboratory equipment) are likely to have a carrying value that exceeds their value in use and should also be tested for impairment. The risk of material misstatement is that their value is overstated on the statement of financial position. </p><p>Possible understatement of provision/non-disclosure of contingency. The press cutting indicates the local authority may once again take legal action against Medix Co and so this raises the question of whether a provision needs to be made against being sued. IAS 37 Provisions, contingent liabilities and contingent assets states that a provision should only be recognised if: </p><p> An entity has a present obligation (legal or constructive) as a result of a past event </p><p> A transfer of economic benefits will probably be required to settle the obligation </p><p> A reliable estimate can be made of the amount of the obligation </p><p>If the local authority...</p></li></ul>

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