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  • ACCA Paper P7 Advanced Audit and Assurance

    Mock Exam

    Commentary, marking scheme and suggested solutions

  • 2

    Commentary Tutor guidance on improving performance on the exam paper.

    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.

    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.

    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.

    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.

    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.

  • 3

    Section A

    1 Medix Marking scheme

    Marks (a) Professional, ethical and other issues

    Note. Comments must be derived from the information provided in order to be awarded marks. 12 marks per issue discussed

    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

    (b) (i) Business risk and risk of material misstatement Generally mark per definition and 1 mark per comment

    Business risk leads to specific RoMM Business risk leads to general RoMM Relationship regarding going concern Max 4

    (ii) Risks of material misstatement breach of planning regulations 2 marks per risk explained ( mark max if only identified and not described):

    Overstatement of tangible non-current assets Overstatement of other assets (max 1 mark) Possible understatement of provision/non-disclosure of

    contingency

    Possible understatement of provision for demolition costs Going concern (max 1 mark) Reference to IAS 36, IAS 37 ( mark each) Max 6

    (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

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    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

    Max 4 Total 35

    Suggested solution

    Briefing notes

    To: Charles Banks From: Gavin Jones Date: June 20X8 Subject: Medix Co

    Introduction

    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.

    (a) Professional, ethical and other issues

    (i) Sign of fraud or money laundering

    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 & Co to seriously consider rejecting the appointment.

    (ii) Legal actions and investigations

    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 & 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.

    (iii) Negative publicity

    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.

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    (iv) Timeframe and resources

    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 & 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.

    (v) Potential liability to bank

    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 & 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.

    (vi) Management bias

    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 & Co will need to be aware of this risk before carrying out any audit work.

    (vii) Potential

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