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ACCA

Paper P7

Advanced Audit & Assurance December 2013

Final Assessment – Answers

To gain maximum benefit, do not refer to these answers until you have completed the final assessment questions and submitted them for marking.

PAPER P7: ADVANCED AUDIT & ASSURANCE

2 KAPLAN PUBLISHING

© Kaplan Financial Limited, 2013

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FINAL ASSESSMENT ANSWERS

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1 CEDAR

Key answer tips

From June 2012 onwards only one of the case study questions in the P7 exam will have professional marks. The relevant question will contain four professional marks. These marks are for using the correct format, professional language, and a logical structure and flow within your answer.

Part (a) (i) of this question is typical of the requirements in the first of the case study questions in the real exam. The focus of part (a) is business risk. A business risk is a threat to an ongoing business objective. It is important that you clearly explain the commercial implications for business risks and take note of the combined effects – don’t just look at each factor in isolation.

In part (a) (ii) you must explain the risks of material misstatement in respect of the specific named parts of the financial statements. It is important that you clearly explain the potential impact on the financial statements. This requires good knowledge of the financial reporting standards.

In part (a) (iii) you are required design audit procedures, specifically to test the recoverability of the deferred tax asset. This requires a combination of good knowledge of the financial reporting standards, so that you know what to test, and of how to design audit procedures – the procedures must be sufficiently detailed to provide enough information for an auditor to follow the instruction; a core part of this is to explain the purpose/objectivity of the procedure.

In part (b) you are asked for some social and environmental KPIs and the nature of evidence in relation to these. The KPIs must be measureable, i.e. targets in $ or %. Simply stating “environmentally friendly” is not a KPI. Note the verb “list” in the requirement; keep the points brief. Unusually, a table form would be appropriate here. Also make sure that the KPIs are relevant (and tailored) to Cedar.

Don’t forget to structure your answer with the use of clear headings and short paragraphs.

(a) Briefing Note for Planning Meeting

Subject: Cedar Co – Audit Planning

Introduction

These briefing notes evaluate the business risks for Cedar Co, to be considered when planning the final audit for the year ended 30 June 2013 as well as the risks of material misstatements in Cedar Co’s financial statements. Recommended procedures in respect of the recoverability of the deferred tax asset are also included.

(i) Business Risks

Manufacture and Installation of Meters

Spruce Co manufactures meters for customers, following receipt of a 5% deposit. However, customers do not have to pay the remaining 95% until they have signed off the installation. There is a risk that customers will


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refuse to or be unable to pay for the meter once installed. This is a particular risk as Spruce Co deals with end consumers, who may pose a high credit risk. In addition, once the meter has been installed it may not be possible to use it for another installation, meaning that all the costs of installation have been incurred without any payment being received from customers. Although there is a lower likelihood of such problems arising with building companies, the impact on profit would be greater for these customers as Spruce Co may be installing a number of meters at the same time for one company.

Spruce Co

Spruce Co has not made a profit since acquisition by Cedar Co. This is a drain on resources for the parent company, adversely affecting its own liquidity and resulting in a breach of loan covenants. Cedar Co reduces financing risk by restricting the amount of debt that matures in any one financial year. If the loan is not successfully renegotiated, Cedar Co may not be able to repay any debt maturing in the next few years due to the need to repay this loan earlier than expected.

The acquisition and subsequent difficulties with Spruce Co has damaged Cedar Co’s share price. Further losses may mean that Cedar Co’s share price is damaged further, potentially deterring future investors and in the combined with difficulties obtaining loan finance this may affect both Spruce Co and Cedar Co’s ability to continue to operate as a going concern.

Gas Supply

Cedar Co sources most of its gas from Branchia. Prices of gas are affected by political factors, and it appears that there is some political instability in Branchia meaning that the price of gas from Branchia may fluctuate significantly, increasing costs for Cedar Co and reducing the returns available for investors. There is a further risk that Branchia may refuse to supply Rootland with gas, as it has done with Leafdom. If an alternative supply cannot be secured, this will result in severe financial penalties and is very likely to mean that Cedar Co cannot continue to operate as a going concern.

Price controls

The prices Cedar Co charges for use of its gas transmission and distribution networks are determined in accordance with regulator approved price controls, including incentives and penalty arrangements. If the prices are not agreed at an appropriate level, or unforeseen costs arise, this will significantly impact Cedar Co’s ability to generate an appropriate return for investors. Cedar Co also has an agreement with the regulator, requiring it to replace the gas mains in Rootland. The prices agreed with the regulator incorporate an allowance for capital investment. If the allowance agreed is not sufficient to fund the required capital investment, Cedar Co will not be able to meet this agreement and may be penalised financially as a result, further damaging profit and liquidity.


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Loss of land

A recent change in the laws relating to where wind farms can be built has resulted in losses on land purchased to build wind farms on. If any further rule changes arise, further losses may be incurred damaging Cedar Co’s profit and liquidity further as well as impact on Cedar Co’s reputation if it is unable to demonstrate its commitment to developing new energy sources, which may cause the share price to fall further as investors question the long-term sustainability of Cedar Co.

Supply disruption

Severe weather has caused a loss of supply to customers in recent years. This will damage Cedar Co’s reputation and result in potentially large compensation payments to customers and penalties if they are unable to meet the requirements of the regulator. This again could adversely affect the share price and prevent Cedar Co from obtaining finance needed.

Safety

Recent disasters for other energy companies highlight the catastrophic consequences some of Cedar Co’s assets could have to the surrounding communities if not properly controlled and maintained. If such a disaster were to occur, either unexpectedly or because Cedar Co does not have the funds available to undertake the required capital maintenance, it would significantly damage the share price and Cedar Co’s ability to continue to operate. Smaller breaches of health and safety regulations identified on one of the regular inspections by the regulator, will result in fines and penalties for Cedar Co which will damage profit.

Share Price

Shareholders appear to be quite sensitive to circumstances arising within Cedar Co, with the share price falling dramatically following the breach of loan covenants. Ensuring that the prices agreed with the regulator incorporate sufficient return for shareholders, as well as managing the other risks identified that could affect these returns will be essential for Cedar Co as if shareholders continue to react adversely to such circumstances it will significantly affect their ability to obtain finance from future investors.

(ii) Risks of Material Misstatement

Retranslation of Spruce Co’s financial statements

Spruce Co’s functional and presentational currency is local, and different to the rest of the group. Prior to consolidation, the financial statements must be retranslated, using the rules in IAS 21 The Effects of Changes in Foreign Exchange Rates. The assets and liabilities should be retranslated using the closing exchange rate, income and expenses at the average exchange rate, and exchange gains or losses on the retranslation should be recognised in group equity. This is a complex procedure, therefore inherently risky, and the determination of the average rate for the year can be subjective.


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Revenue Recognition – installing meters deposit paid

Spruce Co takes a non-refundable deposit and sometimes full-payment when taking orders for meters. Revenue will be overstated if it is recognised too early. On receipt of full payment prior to the installation being signed off by a customer, the revenue should be deferred and disclosed as a liability, per IAS 18 Revenue. Liabilities may therefore be understated and profit overstated.

Intra-group transactions

Spruce Co supplies meters to Cedar Co for installation when connecting new towns or villages to the network. The trading transactions between Cedar Co and Spruce Co must be eliminated on consolidation. The risk is that the intra-group elimination is not performed, resulting in overstated revenue and operating expenses at group level (and receivables and payables if any amounts are outstanding at the year end).

In addition, for any items remaining in inventory which contain unrealised profit, a provision for unrealised profit must be made. If this adjustment is not carried out, inventory and group profit will be overstated.

Deferred tax asset

IAS 12 states that a deferred tax asset can only be recognised where the recoverability of the asset can be demonstrated. Unutilised tax losses can be carried forward for offset against future taxable profits, so Cedar Co must demonstrate using budgets and forecasts, that future tax profits will be available within Spruce Co for the losses to be fully utilised. If this cannot be demonstrated then the deferred tax asset recognised should be restricted to the level of future profits that can be measured with reasonable certainty. There is a risk that the deferred tax asset is overstated.

Forward contracts

These contracts are derivative financial instruments. As such, they must be recognised in the statement of financial position at the year end, as a financial asset or a financial liability, depending on whether the terms of the derivative contract are favourable or unfavourable at the reporting date. The financial statement risk is that the derivatives have not been recognised at all, particularly because the contracts were acquired at no cost, so there is no accounting entry when the contract is taken out. A second risk relates to the valuation of the derivative asset or liability. This could be complex to calculate, and if not performed by an experienced specialist, could cause the over or understatement of the financial instrument recognised, and an associated incorrect entry recognised in profit. Finally, IFRS 7 Financial Instruments: Disclosures imposes potentially onerous disclosure requirements in relation to derivative instruments. The risk is that disclosures made in the notes to the financial statements are incomplete.

Land held for development potential

There are indicators that the land could be impaired at the year end. Some land was sold at a loss during the year, and it seems that planning permission for the development of the sites is becoming harder to obtain,


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meaning that the value of the land has fallen. Following IAS 36 Impairment of Assets, an impairment review must be carried out if there are indicators of impairment to an asset. It is likely that land will be overstated in the statement of financial position, and expenses understated, unless an impairment review is conducted and any resulting loss fully recognised. In addition, the losses made on the disposal of land during the year should be separately disclosed in the statement of comprehensive income or a note to the financial statements per IAS 1 (Revised) Presentation of Financial Statements, so there is a risk of inadequate disclosure if this is not done.

Penalties and compensation payments

There are a large number of penalties and compensation payments that Cedar Co may be liable for, as part of the regulator approved price controls, compensation payments for disrupted supply, and potential breaches of health and safety regulations. IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that a provision should be recognised if the company has a probable obligation at the year end which can be measured reliably. If payment is deemed only possible at the year end, then disclosure of the contingent liability should be made in a note to the financial statements. There is a risk that provisions and contingent liabilities are understated.

Going concern

The above issues could indicate that Cedar Co may not continue in operational existence. The potential lack of disclosure of these issues represents a risk of misstatement in the financial statements.

(iii) Principal audit procedures – recoverability of deferred tax asset

– Obtain a copy of Spruce Co’s current tax computation and deferred tax calculations and agree figures to any relevant tax correspondence and/or underlying accounting records.

– Obtain forecasts of profitability and agree that there is sufficient forecast taxable profit available for the losses to be offset against.

– Evaluate the assumptions used in the forecast against business understanding. In particular consider assumptions regarding the growth rate of taxable profit in light of the underlying detrimental trend in profit before tax.

– Assess the time period it will take to generate sufficient profits to utilise the tax losses. If it is going to take a number of years to generate such profits, it may be that the recognition of the asset should be restricted.

– Using tax correspondence, verify that there is no restriction on the ability of Bluebell Co to carry the losses forward and to use the losses against future taxable profits.


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(b) The following table recommends some KPIs and suggests the evidence that should be available in relation to each KPI:

(TUTORIAL NOTE: values included are for illustrative purposes only, KPIs must be SMART and therefore values are necessary but credit will be awarded for the use of SMART KPIs rather than including the same specific values as suggested by this model answer)

KPI Nature of evidence

Social – employees

More than 45% female employees and 25% ethnic minority employees.

Personnel files, starters and leavers documentation.

Staff absentee rates – no more than 5 days of absenteeism in 230 working days.

Payroll records, medical certificates, supporting sick leave.

At least 90% employee satisfaction. A questionnaire/survey of staff or summaries of staff appraisal records.

At least $2.5m of expenditure on staff training and development per annum.

Cash book to verify amount. Also documents authorising the training and outlining the need for the training.

Less than 10% staff turnover per annum.

Personnel files, leavers' documentation from payroll records, exit interview records.

Less than 50 reported accidents on Cedar Co premises per annum.

Accident log book describing the nature of the injury, seriousness, whether emergency services called.

Social – customers

Customer satisfaction rates : at least 95% satisfaction with service provided, quality of installation, advice and support provided in the event of disruption to supply , etc.

Surveys or questionnaires completed by customers after installation of meter, or disruption to supply.

In the event of disruption to supply, affected customers to be visited within 72 hours of disruption.

Logbook/other records kept of deployment of staff to affected areas.

Level of complaints – less than 30 customers who have refused to pay for an installation or have made a formal written complaint each year.

Management log book of complaints received. Sales system could provide evidence of refunds via credit notes issued, or installations not paid for.

Social – wider community

At least 2% of profit to be donated to local charities and a further 1% of profit to national charities each year.

Cash book will show value of any donations. Board minutes should contain evidence of authorisation.


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KPI Nature of evidence

Environmental

At least 30% of annual capital expenditure to relate to investment in or development of renewable energy sources.

Payroll costs for staff involved in research and development/supplier invoices for any construction costs of renewable energy source assets.

5% reduction in gas emissions year on year

100% of internal energy used to come from renewable sources by 2015.

Cedar Co should maintain records of emissions/source of energy for internal use using specialist equipment.

5% reduction in water, electricity and gas used internally year on year.

Comparison of utilities costs using suppliers bills received. Review of actual to budgeted consumption of water, electricity, etc.

10% reduction in Cedar Co’s carbon footprint, year on year from 2010 to 2015.

Board authorisation of any payments made for carbon offsetting.

At least 50% of all waste to be recycled.

Cash book should show amounts invested in recycling facilities. Observation of the use of recycling facilities.


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Marking scheme Marks

(a) (i) Business Risk Evaluation: Generally ½ mark each risk identified (to a maximum of 4 marks) and up to 1.5 marks for a thorough discussion. • Manufacture and installation of meters • Loan negotiations • Going concern difficulties • Gas supply • Price controls • Loss of land • Supply disruption • Safety • Share price sensitivity

Maximum

11 (ii) Risks of material misstatement:

Generally ½ mark each risk identified (to a maximum of 3 marks) and up to 1.5 marks for a thorough discussion. • Retranslation • Revenue recognition • Intra-group transactions • Deferred tax asset • Forward contracts • Land held for development • Penalties and compensation payments • Going concern disclosure

Maximum 10

(iii) Procedures Generally 1 mark per adequately described procedure

Maximum 4 Professional marks: 1 mark for format, 1 for introduction/conclusion and up to 2 marks for presentation and clarity of explanation

Maximum 4 (b) Social and Environmental Reporting:

Generally ½ mark for each specific and measureable KPI and ½ mark for a relevant type of evidence for each KPI. A maximum of SIX KPIs to be marked

Maximum 6 Total

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2 MANHATTON

Key answer tips

In part (a) you are asked to critically evaluate the work performed to date on the engagement. Make sure to talk about quality control issues as well as ethical issues and recommend actions that need to be taken. Use a logical approach – work through the scenario to discuss each issue in turn.

Part (b) is typical of the completion and reporting questions that appear in the P7 exam.

Matters to consider at the review stage include: materiality, the relevant accounting treatment, whether sufficient appropriate evidence has been obtained and the impact on the audit report.

Remember to describe the evidence you would expect to see on file carefully; you must ensure that you describe the documentation that the audit team should have prepared in order to demonstrate the audit procedures performed and the results of those procedures.

Part (c) requires some basic knowledge and then some common sense suggestions about the difficult of cross-border audits.

(a) Intimidation Threat

The previous audit manager has been removed from the audit following a complaint from the client because they cannot agree on the treatment of a particular matter in the financial statements, and a number of other issues. Unless the ‘other issues’ relate to the way that the previous manager conducted herself professionally, it does not appear appropriate that she has been removed. The complaint made by Jon Preston appears to be an attempt to exercise undue influence over the audit, creating an intimidation threat to objectivity; the audit team may be deterred from acting objectively for fear of having a complaint raised against them, and the consequences of any complaint raised.

The manager should not have been removed. Instead, it should have been explained to the client by a more senior member of the audit team why the accounting treatment of the contingent consideration is inappropriate, and how the audit report will be affected if the financial statements are not corrected. If the Finance Director, Jon Preston, continues to attempt to influence the audit, the matter should be raised with the audit committee.

An independent partner review of the working papers for the audit of the Carrie Group will be necessary.

Access to working papers

Working papers are documents belonging to the audit firm, prepared during the course of an audit solely for the purpose of carrying out their duties as auditor. The decision whether to allow clients to inspect them rests with the audit firm; clients have no right to demand access.



Giving access may increase the risk of litigation, for example if Jon Preston does not agree with the calculation of materiality, and the audit report is subsequently modified. However, allowing access may result in the Finance Director better understanding the need to correct the misstatement, reducing the risk of litigation.

It may be appropriate to refer to the engagement letter, which may state that working papers and other internal documentation created for the purpose of carrying out duties as auditor belong solely to the auditor and will not be provided to the client. If the engagement letter does not include such a clause, it may be appropriate to include one going forward.

However, determination of materiality is the responsibility of the auditor and should not be influenced by the client in any way. The auditor’s determination of materiality is a matter of professional judgement and is affected by the auditor’s perception of the financial information needs of the users of the financial statements.

Written representation

ISA 580 Written Representations states that, on their own, written representations “do not provide sufficient appropriate evidence about any of the matters with which they deal”. Written representations should be obtained to support and corroborate other evidence obtained where no further evidence would reasonably be expected to be available.

The auditor cannot delegate responsibility for obtaining evidence to management nor can they delegate responsibility for their audit opinion.

Obtaining a written representation does not provide a defence for an unmodified audit opinion. The auditor must obtain sufficient appropriate evidence to support their audit opinion.

If the audit firm believes that the financial statements are materially misstated, and the misstatement is not corrected by Carrie Co, the audit opinion should be qualified due to material misstatement (or modified with an adverse opinion, if the misstatement is material and pervasive).

Communicating with those charged with governance

The duty of confidentiality means that we must not disclose information to third parties; the audit committee are those charged with governance of the audited entity, and therefore not a third party.

The auditor is required by ISA 265 Communicating Deficiencies in Internal Control with Those Charged with Governance and ISA 260 Communicating with Those Charged with Governance to communicate significant findings from the audit, including significant deficiencies identified in the internal control system of their client.

Whether or not a deficiency is significant, and therefore requires reporting to those charged with governance, is a matter of judgement. However, in this case the deficiency has resulted in a fraud and is therefore likely to be deemed significant, and must be reported to the audit committee in their capacity as those charged with governance of Carrie Co.



Relying on internal audit

The auditor is required to obtain an understanding of internal control relevant to the audit by ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment, including evaluating the design of those controls and determining whether they have been implemented. The auditor may be able to rely on the internal auditor’s documentation of internal control systems and evaluation of the operating effectiveness of internal controls, but in order to obtain sufficient appropriate evidence the auditor must review internal audit’s work and determine whether it provides sufficient appropriate evidence in order to form an audit opinion.

The auditor does not review internal controls in order to add value to the audit (although the identification of deficiencies and recommendations to improve these is a benefit of an audit, it is a by-product not the purpose of an audit) but in order to evaluate the risk of material misstatement, due to an entity’s internal control system failing to prevent, or detect and correct material misstatements on a timely basis.

It appears unlikely that a greater level of reliance on internal audit will be possible. It may be possible to agree additional resource for the audit in order to decrease the timetable next year.

However, this will not reduce the audit fee. A firm being pressured to reduce inappropriately the extent of work performed in order to reduce fees creates a further intimidation threat to objectivity.

Finance Director

Jon Preston appears to be attempting to exert undue influence over a number of areas of the audit. This gives rise to concerns about the integrity and ethical values of management, and may render all representations from him unreliable.

The firm should consider whether it is possible to conduct the engagement effectively with the finance director exerting such pressure on the audit team, and if not (where law and regulation permits), they should withdraw from the engagement.

If they are not permitted to withdraw from the engagement, they should consider the impact on the audit report. It is likely that a disclaimer of opinion will be necessary.

(b) Matters to consider

According to the schedule provided by the client, the cost of investment comprises three elements. One matter to consider is whether the cost of investment is appropriate.

Acquisition-related costs such as legal fees must be expensed in the period in which the costs are incurred. These costs cannot be capitalised per IFRS 3 Business Combinations, and there is a risk that these costs have been capitalised in error, leading to overstatement of the investment, and of goodwill. Legal or professional fees may have been included in the cost of investment under the heading “other” but this will need to be confirmed.



The cash consideration of $30 million is the least problematical component. The only matter to consider is whether the cash has actually been paid. Given that Miranda Co was acquired half way through the year, it seems very unlikely that it has not.

IFRS 3 states that the cost of investment should be recognised at fair value, which means that deferred and contingent consideration should be discounted to present value at the date of acquisition. If the consideration payable on 31 July 2015 and 31 July 2016 has not been discounted, the cost of investment, and the corresponding liability, will be overstated.

The notes to the schedule suggest that the deferred consideration has not been discounted (there is no value included for the contingent consideration). It is possible that the impact of discounting would be immaterial to the financial statements, in which case it would be acceptable to leave the consideration at face value within the cost of investment.

IFRS 3 requires the fair value of any contingent consideration to be accrued. The contingent consideration is currently accounted for as $0 because there is only a 40% chance of it being paid. This treatment is not correct. The fair value of the contingent consideration would be the expected value, which has been correctly determined by the previous audit manager as $6m (40% × $15m) before discounting. This means that the investment and corresponding liability are both understated by £6m which has been determined as material.

As explained in (a) above, the financial statements are materially misstated and if the misstatement is not corrected by Carrie Co the audit opinion should be qualified due to material misstatement (or modified with an adverse opinion, if the misstatement is material and pervasive).

Audit evidence – A copy of the client schedule, cross referenced and agreed to extracts

from legal documentation signed by vendor and acquirer, showing the monetary value and payment dates.

– Extracts from Carrie Co’s bank statement and cash book showing agreement of $30 million paid.

– A copy of board minutes approving the payment. – Recomputation of discounting calculations applied to deferred and

contingent consideration. – A note explaining and confirming that the discount rate used is pre-tax,

and reflects current market assessment of the time value of money (e.g. by reference and comparison to Carrie Co’s weighted average cost of capital).

– Copies of revenue and profit projections for Miranda Co until July 2016, checked for arithmetic accuracy.

– A working paper detailing the key assumptions used in the projections, concluding that the assumptions are comparable with the auditor’s understanding of Miranda Co’s business.

(c) (i) Definition: A transnational audit means an audit of financial statements which are or may be relied upon outside the audited entity’s home jurisdiction for the purpose of significant lending, investment or regulatory decisions.



Relevance: Ten of the Carrie Group subsidiaries are based overseas, and five of them report under a different financial reporting framework to Carrie Co meaning that the group operates in a global business and financial environment. Although all of the subsidiaries are wholly owned, the group will be bound by different laws and regulations in each of the countries it operates in, and users (other than shareholders in this case) outside Carrie Co’s home jurisdiction will be relying upon the financial statements.

(ii) Transnational audit and audit risk – any TWO of the following: Application of auditing standards Although many countries of the world have adopted International

Standards on Auditing (ISAs), not all have done so, choosing instead to use locally developed auditing regulations. In addition, some countries use modified versions of ISAs. This means that in a transnational audit some components of the group financial statements will have been audited using a different auditing framework, resulting in inconsistent audit processes within the group, and potentially reducing the quality of the audit as a whole.

Regulation and oversight of auditors Similar to the previous comments on the use of ISAs, across the world

there are many different ways in which the activities of auditors are regulated and monitored. In some countries the audit profession is self-regulatory, whereas in other countries a more legislative approach is used. This also can impact on the quality of audit work in a transnational situation.

Financial reporting framework

Some countries use International Financial Reporting Standards, whereas some use locally developed accounting standards. Within a transnational group it is likely that adjustments, reconciliations or restatements may be required in order to comply with the requirements of the jurisdictions relevant to the group financial statements (i.e. the jurisdiction of the parent company in most cases). Such reconciliations can be complex and require a high level of technical expertise of the preparer and the auditor.

Corporate governance requirements and consequent control risk

In some countries there are very prescriptive corporate governance requirements, which the auditor must consider as part of the audit process. In this case the auditor may need to carry out extra work over and above local requirements in order to ensure group wide compliance with the requirements of the jurisdictions relevant to the financial statements. However, in some countries there is very little corporate governance regulation at all and controls are likely to be weaker than in other components of the group. Control risk is therefore likely to differ between the various subsidiaries making up the group.




(a) Critical Evaluation of Audit work Generally 1 mark each thoroughly explained point, max 3 marks per area of discussion • Audit manager removal inappropriate • Intimidation threat to objectivity • Involve more senior member of audit team • Inform audit committee • Independent partner review • Working papers belong to auditor • Risk of litigation • Engagement letter • Materiality matter for auditor • Written representations not sufficient • No delegation of responsibility • Qualified opinion • Definition of confidentiality • Communicate significant findings • Fraud, significant, report to audit committee • May be able to rely on Internal Auditor to obtain sufficient

appropriate evidence of internal controls • Evaluate controls to assess control risk • Unlikely to be able to increase reliance • Intimidation threat • Integrity of management questionable • Consider if possible to carry on engagement effectively • Disclaimer of opinion if unable to withdraw

Maximum 11 (b) Matters to consider and evidence

Generally 1 mark each thoroughly explained point. Max 4 matters/4 evidence Matters • Acquisition related costs should be expensed • Cash consideration unproblematic • Deferred and contingent discounted to present value • Contingent consideration expected value • Material misstatement Qualified opinion Evidence • Client schedule cross referenced • Bank statement/cash book • Board minutes • Recomputation discounting • Confirmation of discount rate used • Projections • Assumptions

Maximum 7



(c) Transnational audit (i) Generally 1 mark each thoroughly explained point

• Definition • Relevance: FR framework • Relevance: Laws & regulations • Users will be outside home jurisdiction

Maximum(ii) Generally up to two marks per area and only TWO areas to be

marked • Auditing standards • Regulation and oversight • Financial reporting framework • Corporate governance & control risk

Maximum

3

4

Total

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3 BEAUMONT

Key answer tips

Part (a) and (b) of this question examine some more peripheral syllabus topics, namely: fraud and subsequent events.

This therefore highlights the importance of revising broadly for P7, and practising a broad range of questions.

Part (c) examines ethical and professional considerations, in this case specifically in relation to the provision of internal audit services by the external auditor – ethics and professional issues is often examined in more than one question in the P7 exam, and so it is a topic with which you must be comfortable. Don’t forget to explain each threat, consider threats to all of the fundamental principles as well as professional issues, and discuss any safeguards or actions that may be necessary.

(a) (i) Responsibilities in relation to the detection of fraud.

The external auditor must comply with the requirements of ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. ISA 240 also comments on the responsibilities of those charged with governance and of management.

ISA 240 makes it clear that the primary responsibility for the prevention and detection of fraud rests with both those charged with governance and management of an entity. By establishing a sound system of operational and financial controls, management should reduce opportunities for fraud to take place, and establish a culture which should persuade individuals not to commit fraud due to the likelihood of detection and punishment. In some jurisdictions, codes of corporate governance require specific actions to be taken in respect of internal controls by management. The external auditor may provide recommendations and advice on the improvement of internal controls, but it is not their responsibility to put the recommendations into practice.

The auditor’s responsibility is to consider the risk of material misstatement in the financial statements due to fraud. This means that the auditor is more focused on fraud that impacts on the accounts than on operational fraud which may not cause a material misstatement. A fraud with an immaterial impact may not be detected by audit procedures. Because the external auditor will use sampling techniques based on a level of materiality, not all balances and transactions will be subject to detailed testing, so small frauds are not likely to be detected. This is possibly why the fraud relating to supplier payments has remained undetected.



A similarity is that both management and the external auditor should assess the strength of controls in place within the entity, and in doing so, evaluate the likelihood of a fraud occurring. The auditor will perform this evaluation while planning the audit. Corporate governance codes state that management should continually be monitoring the strength of the entity’s control environment and systems.

(ii) Procedures to quantify the financial loss

• A review of the procedure for processing receipts from customers, to help identify how they were fraudulently processed.

• Trade receivables circularisation and reconciliation, which will enable the auditor to identify any customers who have paid invoices that have not been recorded as paid, or where payment does not appear to have been received.

• A reconciliation of paying-in-slips with records of cash/cheque receipts; if a different member of staff is recording the receipt of cash/cheques, this should identify any payments that have gone missing.

• A review of the terms of any insurance cover that Hoy Co has taken out to cover instances of fraud. Any potential reimbursement will reduce the loss suffered by the company.

• A discussion with management and the police and lawyers (assuming management has reported the fraud) to ascertain if any of the amount stolen could be reimbursed by the cashier, in the event that he/she is prosecuted successfully.

(b) The recall of the jogging stroller after the reporting date is an adjusting event after the reporting date, according to IAS 10 Events After the Reporting Period. This is because the event provides evidence of a condition that existed at the year end, assuming that either affected inventory was in stock at the year end or sales of the strollers had been made by the year end (both of which are likely given that the fault was identified within two months the year end).

Per IAS 10, the financial statements should be adjusted to reflect the financial effects.

• If the strollers are to be repaired and returned to customers, then a provision for the cost of this should be included.

• If the strollers are not going to be repaired, then any inventory held at 31 December 2012 should be written off, and any receivables balances should be provided for in full.

• If any claims for costs/damages are being made by customers, these will also need to be provided for.

Audit procedures could include:

• Enquire of management how the fault was identified, and the potential affect on the reputation of the company, as part of the going concern assessment, i.e. if the fault was identified following injury to a child/parent this could have significant affect on Wiggins Co’s ability to continue to operate.



• Enquire of management of Wiggins Co, when the strollers were manufactured, to establish whether any were in inventory at 31 December 2012, or any had been sold by this date.

• Review inventory listing at 31 December 2012, to establish if any affected strollers are included in inventory at the year end.

• Review sales invoices prior to/after year end to confirm when sales of affected strollers were made.

• Inspect customer correspondence for any claims for costs/damages from customers.

• Obtain confirmation from Wiggins Co’s solicitors of any claims for costs/damages that have been lodged, and ensure that these have been adequately provided for in the financial statements.

• Review any potential note to financial statements which should disclose the non-adjusting event, providing a brief description of the event, and an estimate of the financial effect.

• If the necessary amendments are not made to the financial statements, the audit opinion should be modified due to material misstatement, either with a qualified opinion (if material but not pervasive) or an adverse opinion (if material and pervasive).

(c) Professional and ethical matters

If Beaumont Co is appointed as internal auditor, a self-review threat will be created because of the possibility that the audit team will use the results of the internal audit service without appropriately evaluating those results or exercising the same level of professional scepticism as would be exercised when the internal audit work is performed by individuals who are not members of the firm.

The significance of the threat depends on the:

• The materiality of the related financial statement amounts;

• The risk of misstatement of the assertions related to those financial statement amounts; and

• The degree of reliance that will be placed on the internal audit service.

The engagement should be refused if the external auditor will place significant reliance on the work of the internal audit function.

The firm may accept the internal audit engagement if the work is performed by partners and staff who have no involvement in the external audit.

A self-interest threat may also arise if the fees generated from Pendelton Co represent a large proportion of the revenue for the firm and fear of losing the fees impairs Beaumont Co’s objectivity. An independent partner review should be arranged where there is concern about fee dependence, and the engagement should not be accepted if it would result in undue dependence on the total fees from Pendleton Co.



There is also a threat of the external auditor assuming management responsibilities. If Beaumont’s personnel assume a management responsibility when providing internal audit services, the threat created would be so significant that no safeguards could reduce the threat to an acceptable level. Beaumont’s personnel must not assume a management responsibility when providing internal audit services to Pendleton Co.


(a) Fraud Generally 1 mark per point of explanation. Max 4 for part i) • Management: primary responsibility • Management: internal control system • Management: culture • Auditor: risk • Auditor: immaterial fraud • Auditor: sampling • Similarity: controls 1 mark for each procedure to max 4

Maximum

8 (b) Wiggins

Generally 1 mark per point of explanation. Max 3 for implications and 3 for procedures. • Adjusting event • Provision for cost of repair • Impairment of inventory/write-down of receivables • Provision for compensation 1 mark for each procedure to max 3

Maximum(c) Beaumont

Generally 1 mark per point of explanation. • Self-review threat • Accept if safeguards • Decline if significant • Self-interest threat • Safeguards • Management threat • Safeguards

Maximum

6

6 ––––

Total

20 ––––



4 JTV

Key answer tips

At least one question in the exam will require you to apply your knowledge to a non-audit engagement, in this case prospective financial information assurance.

Part (a) requires straightforward definitions.

Part (b) requires basic knowledge of the contents of a tender document which you then need to flesh out by applying this knowledge to the specific information given.

Part (c) requires you to perform analytical procedures using the financial information given. P7 is a practical paper, and you must be prepared for this type of question. When describing relevant procedures, you will not be able to pass the requirement without performing calculations of your own. Be sure to include some ratio analysis, but don’t forget simply trends more specific procedures for any figures that can be easily verified, e.g. historic figures.

(a) ‘Prospective financial information’ (PFI)

PFI is financial information based on:

• assumptions about events that may occur in the future; and • possible actions by an entity.

Prospective financial information can be in the form of a forecast, a projection or a combination of both.

A forecast is PFI prepared on the basis of assumptions about future events that management expects to take place and the actions management expects to take at the time the information is prepared (best-estimate assumptions).

A projection is prepared on the basis of:

• hypothetical assumptions about future events and management actions which are not necessarily expected to take place (e.g. when entities are starting up or restructuring); or

• a mixture of best-estimate and hypothetical assumptions.

(b) Matters to be included in tender document

Brief outline of Hive & Co

This should include a short history of the firm, a description of its organisational structure, the different services offered by the firm (such as audit, tax, corporate finance, etc), and the locations in which the firm operates. The document should also state whether it is a member of any international audit firm network.



Specialisms of the firm

Hive & Co should describe the areas in which the firm has particular experience of relevance to JTV Co. It would be advantageous to stress if the firm has any experience in the television or entertainment industry, or if there is an audit/assurance department dedicated to clients in this industry as this emphasises the experience that the firm has relevant to the specific operations of JTV Co. It would of particular importance to explain the firm’s experience in providing business advice to support growing companies, as these are the ongoing services required by JTV which are likely to be of most importance to the company.

Identification of the needs of JTV Co

The tender document should outline the requirements of the client, in this case, the audit of the financial statements of JTV Co, an assurance opinion on the prospective financial information contained within the business plan being submitted to Hatton bank to support a loan application, and advice to develop JTV Co’s corporate strategy. Hive & Co may choose to include here a brief clarification of the purpose and legal requirements of an audit.

Outline of the proposed approach to the engagements

This is likely to be the most detailed part of the tender document. Here the firm will describe how the audit and other engagements would be conducted, ensuring that the needs of JTV Co (as discussed above) have been met.

Audit:

Typically contained in this section would be a description of the audit methodology used by the firm, and an outline of the audit cycle including the key deliverables at each phase of work. For example:

• How the firm would intend to gain business understanding. • Methods used to assess risk and to plan the audits. • Procedures used to assess the control environment and accounting

systems. • Techniques used to gather evidence, e.g. the use of audit software.

The firm should clarify its adherence to International Standards on Auditing, ethical guidelines and any other relevant laws and regulations operating in the jurisdiction relevant to JTV Co. The financial reporting framework used by JTV Co should be clarified.

Assurance engagement:

This part of the tender would explain that the assurance engagement for the prospective financial information will be a limited assurance engagement, providing moderate assurance in the form of a negative assurance opinion.

In addition, this part of the tender document would explain that the procedures for the assurance engagement will be restricted to (primarily) enquiry and analytical procedures, and would not be as detailed as those performed for an audit. The firm should clarify its adherence to International Standards on Assurance Engagements, and the financial reporting framework used to prepare the prospective financial information should be clarified.



Strategy:

The tender would also explain how advice could be given to support the development of JTV Co’s strategy (perhaps reminding JTV that decisions relating to the strategy must be retained by JTV Co, and that Hive & Co can act in a purely advisory capacity only, not take on a management role). It may also be worth explaining that this is not an assurance engagement, and explaining the options for how the team’s findings could be presented, e.g. as a report, informally, as a presentation etc.

Quality control

Hive & Co should emphasise the importance of quality control and therefore should explain the procedures that are used within the firm to monitor the quality of the audit services provided. This should include a description of firm-wide quality control policies, and the procedures applied to individual audits. The firm may wish to clarify its adherence to International Standards on Quality Control.

Communication with management

The firm should outline the various reports and other communication that will be made to management as part of the audit process. The purpose and main content of the reports, and the timing of them, should be outlined. Hive & Co may provide some ‘added value’ bi-products of the audit process. For example, the business risks identified as part of the audit planning may be fed back to management in a written report.

Timing

Hive & Co should outline the timeframe that would be used. The firm may wish to include an approximate date by which the audit opinion would be completed, which should fit in, if possible, with the requirements of JTV Co. If Hive & Co feel that the deadline requested by the client is unrealistic, a more appropriate deadline should be suggested, with the reasons for this clearly explained.

Key staff and resources

The document should name the key members of staff to be assigned to the different engagements, in particular the proposed engagement partners – it may be worth explaining here, the need to have separate teams performing the different engagements, with separate engagement partners. In addition, the firm should clarify the approximate number of staff to be used in the each team and the relevant experience of the key members of the teams. If the firm considers that external specialists could be needed, then this should be explained in this section of the document.

Fees

The proposed fees for each of the engagements should be stated, and the calculation of the fee should be explained, i.e. broken down by grade of staff and hourly/daily rates per grade. In addition, invoicing and payment terms should be described, e.g. if the fees are payable in instalments, the stages when each instalment will fall due.



Engagement letters

It may also be worth explaining that even if Hive & Co is engaged to perform all three engagements, they are separate engagements, and separate engagement letters will need to be signed for each of the engagements awarded.

Extra services

Hive & Co should ensure that any other non-audit services that it may be able to offer to JTV Co are described.

(c) Examination procedures • The arithmetic accuracy of the PFI should be confirmed, i.e. subtotals and

totals should be recast and agreed. • The actual information for the year to 30 November 2012 that is shown

as comparative information should be agreed to the audited financial statements for that year to ensure consistency.

• Balances and transaction totals for the six months to 30 May 2013 should be agreed to general ledger account balances at that date. The net book value of property, plant and equipment should be agreed to the non-current asset register; accounts receivable/payable to control accounts and cash at bank to a bank reconciliation statement.

• Tenders for the new equipment should be inspected to confirm the additional cost included in property, plant and equipment included in the forecast for the period to 30 November 2013 and year ending 30 November 2014 and that it can be purchased with the funds being lent by the bank.

• The additional cost included in intangible assets for the period to 30 November 2013 for the new license should be agreed to relevant contracts/correspondence and that it can be purchased with the funds being lent by the bank.

• No amortization appears to have been included in relation to existing intangibles or the new license (as the statement of financial position value at 30 May 2013 is the same as the value at 30 November 2012, and the statement of financial position value at 30 November 2014 is the same as the value at 30 November 2013), and enquiries regarding this will be necessary as it may necessary to amortize the license (it is likely to have a finite life).

• The reasonableness of all new assumptions should be considered. For example, the expected useful life of the new equipment, the value of sponsorship revenue that can be achieved, the cost of producing additional programmes etc.

• The forecast statement of comprehensive income should be reviewed for completeness of costs associated with the expansion. For example, operating expenses should include salaries of additional personnel required to produce/buy the rights of programmes for the new channel.

• The accounting practices reflected in the forecast should be assessed for consistency with International Financial Reporting Standards (IFRS).

• The adequacy of the loan should be considered. JTV Co is forecast to have no cash in the bank at 30 November 2014. The increase in non-current asset net book value is nearly 50% of the value of the loan ($433,000 from 30 May 2013 to 30 November 2014), and operating costs



are increasing by nearly $1.7m. It may be that additional revenues (approx $2m) will be covering the additional $1.1m needed, but the timing of these cash flows should be considered as liquidity may be a problem.

• The terms of existing borrowings (both non-current and short-term) should be reviewed to ensure that the forecast takes full account of existing repayment schedules. For example, to confirm that only $100,000 of term borrowings will become current by the 30 November 2013 (especially considering that $250,000 are current six months earlier).

Trends should be reviewed and fluctuations explained, for example: • Revenue for the six months to 30 May 2013 is only 47% of revenue for

the period ended 30 November 2012 and so may be understated (if sales are made evenly throughout the year, sales for the period ended 30 May 2013 should be closer to 50% of the sales for the period to 30 November 2012). However, revenue may not be understated if sales are seasonal and the first half of each trading period is traditionally ‘quieter’.

• Forecast revenue for the year ending 30 November 2013 is 33% higher than for 2012. However, forecast revenue for the year ending 30 November 2014 is only 11% higher than for 2013. It may take time for the new channel to be fully operational, and the full revenues achieved from the new channel; revenue in the period to 30 November 2013 may therefore be overstated, as it is unlikely that such an increase can be achieved in the latter six months of the year (especially given the poor performance in the first six months).

• The operating profit margin for the year ended 30 November 2012 was 5.5%; the six months to 30 May 2013 have been loss making but JTV Co is expected to recover these losses and achieve an operating profit margin of 2.5%. Again, it may take time for the new channel to be fully operational, and the full revenues achieved. Revenues may therefore be overstated for the second half of the year ending 30 November 2013.

• The interest expense for the six months to 30 May 2013 is more than for the whole of the period ended 30 November 2012, and nearly half of interest expense for the whole of 2013. Total borrowings have increased so this may not be surprising, but will need to be agreed to relevant contracts for existing borrowings.

• Provisions are static throughout the three year period – enquiries will need to be made regarding what ‘provisions’ relates to and how it has been calculated.

• Payables decrease by over 45% from 30 May 2013 to 30 November 2014. The rationale for decreasing payables will need to be understood, including enquiring what these balances are comprised of.

The reasonableness of relationships between the statement of comprehensive income and statement of financial position items should be considered. For example: • The average collection period at each of the statement of financial

position dates presented is 68, 68, 53 and 54 days respectively (e.g. 385/2064 × 365 = 68 days). The basis for this reduction in receivables days will need to be understood.




(a) Prospective Financial Information 1 mark per point: • Future events that may occur/possible actions • Forecast: expected • Projection: hypothetical

Maximum 3 (b) Tender Document

Generally 1 mark per matter described Ideas • Outline of Hive • Specialisms • Needs of JTV • Outline of engagement: audit • Outline of engagement: assurance • Outline of engagement: strategy • Quality control • Communication • Timing • Resources • Fees • Engagement letter • Extra services

Maximum 8 (c) Procedures

Generally 1 mark for each procedure Maximum 9

–––– Total

20 ––––

5 ÉNERGIE RENOUVELABLES

Key answer tips

Part (a) is a traditional audit question requiring explanation of the matters to be considered and actions to be taken, in relation to a specific area of significance to the audit. Here, the matter to consider is the non-compliance with laws and regulations, which means that as well as considering the impact on the financial statements and the audit report, you must also consider the auditor’s responsibilities in relation to disclosure of such non-compliance to third parties.

Part (b) requires sound knowledge of the technical aspects of audit reporting, and the ability to apply the knowledge to critically appraise an audit report given in the scenario. The best approach to this question is to work through the audit report line by line, identifying and explaining issues in the report as you go. In order to answer questions like this in the exam, you need to be able to recognise the type of modification to an audit report used, and understand when it is appropriate to use each modification. You also need to have an awareness of the wording that would be used for each type of modification. Reporting is a core topic in the P7 syllabus and sound knowledge of this area is key to passing the exam.



(a) Greenhouse gas emissions

Matters to Consider and Actions to Perform

It appears that Énergie has breached the regulations of the Emissions Agreement by misreporting the CO2 emissions for the year ended 31 December 2012 by approximately 25,000 tons. Management has not yet informed the regulator, which indicates a lack of integrity. Although a ‘best estimate’ was made ‘given the information available at the time’, it would still be ethically appropriate to report the revised figures now that better information is available. It would appear that Énergie is attempting to avoid paying a fine by not reporting the matter; failure to disclose knowledge of a misreport could constitute a further breach of regulations.

The audit firm should encourage the management of Énergie to disclose the misreport. There will obviously be reluctance to do this due to the bad publicity which would follow any fine. However, the auditors should try to explain to management the reasons why they should disclose, and hopefully convince management that this would be the ethically correct way to proceed.

If management still refuse to make a disclosure, the firm should consider their duty of confidentiality. Both IFAC and ACCA recognise that information discovered while performing a professional engagement must not be disclosed without proper and specific authority to do so, or unless there is a legal or professional right or duty to disclose. The firm must be very careful to consider whether it has a right or duty to disclose.

ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements may provide relevant guidance in this situation. In this case, the misreport constitutes a non-compliance with law and regulations, and the auditor may have a statutory right or duty to report the situation to the appropriate authority.

In the absence of any requirement to report the situation to the appropriate authority, the firm should consider if there is a necessary disclosure in the public interest. This is a difficult and subjective decision, as there is little guidance on what is meant by ‘public interest’, and it would be hard to decide who exactly the recipient of any disclosure should be. In deciding whether to disclose in the public interest, the auditors should consider the reasons for the client’s unwillingness to disclose, the seriousness of the matter i.e. the likelihood of harm being caused, and the relevant laws and regulations.

Before making any disclosure, the firm should obtain information and evidence regarding the misreport, e.g. when the fault with the old monitoring system was identified, how it was identified, how the revised figure was calculated, etc.

As a last resort, the firm could consider resigning from the audit. The firm could then circularise a ‘statement of circumstances’ which would describe the reason for the resignation, including details of the misreport and the lack of management integrity.



The firm should also consider the impact on the financial statements. IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires an entity to recognise a provision if:

• a present obligation has arisen as a result of a past event

• payment is probable ('more likely than not'), and

• the amount can be estimated reliably.

Énergie misreported the CO2 emissions during the year ended 31 March 2013 and is liable for a fine as a result. Therefore, at 31 March 2013 a present obligation exists as the result of a past event. The firm would need to review the Emissions Agreement, and also any reports of past action taken by the regulatory to establish the likelihood of a fine, or obtain confirmation from Énergie’s solicitors of the likelihood of a fine being imposed. However, on face value it appears probably that a fine would be imposed as Énergie reported the emissions knowing that the monitoring system was faulty. At $100 a ton, Énergie would be fined $2.5m (25,000 × $100); the amount can be estimated reliably, and therefore a provision should be made for the fine.

$2.5m is not material by value at 2.8% of profit ($2.5m/$90m) and 0.8% ($2.5m/$320m) of total assets.

However, according to ISA 320 Materiality in Planning and Performing an Audit, judgements about materiality need to consider the information needs of the users and the nature of a misstatement. A breach of laws and regulations relating to emissions is likely to be material to the shareholders of the company (by nature) as they take such breaches very seriously and it is important to their decision making. Especially given that Énergie is one of the largest emitters of carbon dioxide and when a $2.5m fine would be the largest ever imposed to date.

The provision and related disclosures would therefore be material by nature, and the auditor should request that the directors of Énergie amend the financial statements.

(b) Draft Audit Opinion

The title of the opinion paragraph states that it is an “unmodified opinion as the misstatement is immaterial”. For the sake of clarity it may be better just to entitle the paragraph “Opinion” rather than go into the reason for the opinion in the title, i.e. remove the word “unmodified” and “as the misstatement is immaterial”. ISA 700 Forming an Opinion and Reporting on Financial Statements requires the auditor’s report to include a section with the heading “Opinion”.

A basis for modification paragraph has been included; however, the opinion is unmodified. ISA 705 Modifications to the Opinion in the Independent Auditor’s Report requires a basis for modification paragraph to be included when the auditor modifies the opinion on the financial statements. If the auditor has not modified their opinion, this paragraph is not necessary. The inclusion of such a paragraph where the opinion is unmodified is likely to confuse the reader. Either the paragraph should be removed, or the opinion should be modified.



In this case, the opinion should be modified. A material (but not pervasive) misstatement has arisen – the failure to recognise a provision for and the lack of disclosure of a fine for misreporting greenhouse gas emissions, which as explained in (a), above, is material by nature. A qualified ‘except for’ opinion due to material misstatement should be given. The opinion should state that “except for the effects of the matter described, the financial statements present fairly in all material respects”...

In addition, the basis for modification paragraph should specify the type of modification made to the opinion. The paragraph should be entitled “Basis for Qualified Opinion”.

If there is a material misstatement of the financial statements, the auditor must include in the basis for modification paragraph a description and quantification of the financial effects of that misstatement.

The current basis for opinion paragraph explains the misreporting of emissions to the regulator. Instead, the paragraph should explain the misstatement in the financial statements (failure to recognise a provision for a fine) and include the omitted disclosure (unless prohibited by law or regulation), which will include an explanation of the misreporting of emissions to the regulator. ISA 705 Modifications to the Opinion in the Independent Auditor’s Report states that a clear description of all of the substantive reasons for any modification to the opinion should be included in the report, including, where practicable, an estimate of the financial effect. The proposed audit report partially explains the material misstatement but does not go into sufficient detail. Specifically no estimate of the financial effect has been provided. Quantification of the amount of the omitted provision must be available. Other detail of the provision should also be provided, such as the timing of the probable cash outflow.

The paragraph ends with an observation that profits are overstated as a result of the non-recognition of the provision. There should also be a comment on the impact on the statement of financial position, in which liabilities are understated. The effect should be quantified, as discussed above.

Emphasis of matter paragraph

The emphasis of matter paragraph should not be used to highlight situations where the directors have decided not to include a matter in the financial statements. The paragraph is reserved for use to explain issues such as significant uncertainties or going concern issues and its use in this situation is entirely inappropriate.




(a) Matters to consider and actions to perform: generally 1 mark per point • Breach of laws and regulations • Disclosure needed • Confidentiality • Public interest disclosure • Understand misreport • Resign from audit • Assess need for provision • Review Emissions Agreement • Materiality • Request FSs to be amended

Maximum 10 (b) Audit opinion Generally 1 mark per point

• Title “Opinion” • For clarity • Basis for modification unnecessary if unmodified • Qualified opinion – material misstatement • “Except” for wording • Basis for Qualified Opinion • Describe & quantify • Explain misstatement in FSs not misreport • All substantive reasons for modification • Insufficient detail • Quantify full effect on FSs • Emphasis of matter inappropriate

Maximum

10 ––––

Total

20 ––––

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