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effective audit serviceThis article is about audit working papers.

Auditors should prepare and organise their

working papers in a manner that helps

the auditor carry out an appropriate audit

service. The auditor should avoid preparing

or accumulating unnecessary working

papers, and should therefore avoid making

extensive copies of the clients accounting

records. It is worth noting at this stage that

it is neither necessary nor practicable for theauditor to document every matter considered

during the audit.

Audit documentation needs to be

understood for both Papers F8 and P7.

THE AUDITING STANDARDS

ISA 230,Audit Documentation (Revised)1

contains the set of standards that deal with

working papers. These standards2 are as

follows:

The auditor should prepare, on a timely

basis, audit documentation that provides:

a a sufficient appropriate record of the

basis for the auditors report, and

b evidence that the audit wasperformed in accordance with ISAs

and applicable legal and regulatory

requirements.

The auditor should prepare the audit

documentation so as to enable an

experienced auditor, having no previous

connection with the audit, to understand:

a the nature, timing, and extent of the

audit procedures performed to comply

with ISAs and applicable legal and

regulatory requirements

b the results of the audit procedures and

audit working papersrelevant to ACCA Qualification Papers F8 and P7

the audit evidence obtained, and

c significant matters arising during the

audit and the conclusions reached.

In documenting the nature, timing, and

extent of audit procedures performed,

the auditor should record the identifying

characteristics of the specific items or

matters being tested.

The auditor should document discussions

of significant matters with managementand others on a timely basis.

If the auditor has identified information

that contradicts or is inconsistent with

the auditors final conclusion regarding

a significant matter, the auditor should

document how the auditor addressed the

contradictions or inconsistency in forming

the final conclusion.

Where, in exceptional circumstances, the

auditor judges it necessary to depart from

a basic principle or an essential procedure

that is relevant in the circumstances of the

audit, the auditor should document how

the alternative audit procedures performed

achieve the objective of the audit, and,unless otherwise clear, the reasons for the

departure.

In documenting the nature, timing, and

extent of audit procedures performed, the

auditor should record:

a who performed the audit work and the

date such work was completed, and

b who reviewed the audit work and the

date and extent of such review3.

The auditor should complete the assembly

of the final audit file on a timely basis after

the date of the auditors report.

After the assembly of the final audit

file has been completed, the auditor

should not delete or discard audit

documentation before the end of its

retention period.

When the auditor finds it necessary to

modify existing audit documentation

or add new audit documentation after

the assembly of the final f ile has been

completed, the auditor should, regardlessof the nature of the modifications or

additions, document:

a when and for whom they were made,

and (where applicable) reviewed

b the specific reasons for making them,

and

c their effect, if any, on the auditors

conclusions.

When exceptional circumstances arise

after the date of the auditors report that

require the auditor to perform new or

additional audit procedures, or that lead

the auditor to reach new conclusions, the

auditor should document:

a the circumstances encounteredb the new or additional audit procedures

performed, audit evidence obtained,

and conclusions reached, and

c when and by whom the resulting

changes to audit documentation

were made, and (where applicable)

reviewed.


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These standards guide the auditor to produce

audit documentation that is of an acceptable

standard. Understanding and applying thestandards will protect the auditor from

unwelcome and unnecessary litigation. ISA 230

(Revised) is more comprehensive than its

predecessor and is likely to prove very useful.

IMPORTANCE OF WORKING PAPERS

Working papers are important because they:

are necessary for audit quality control

purposes

provide assurance that the work delegated

by the audit partner has been properly

completed

provide evidence that an effective audit

has been carried out

increase the economy, efficiency, andeffectiveness of the audit

contain sufficiently detailed and

up-to-date facts which justify the

reasonableness of the auditors

conclusions

retain a record of matters of continuing

significance to future audits.

AVOIDING UNNECESSARY PAPERS

Before deciding to prepare a particular audit

working paper, the auditor should be satisfied

that it is:

Working papers provide

evidence that an effective,efficient, and economic audithas been carried out. Theyshould therefore be preparedwith care and skill.


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necessary either because it will serve an

essential or useful purpose in support of

the auditors report, or because it will

provide information needed for tax or other

client-related statutory/regulatory purposes

not practicable for the client staff to prepare

the working paper, or for the auditor to

make copies of papers that the client staff

(including internal auditors) have prepared

as part of their normal regular duties.

CONTENT

Each audit working paper must be headed

with the following information:

The name of the client

The period covered by the audit

The subject matter

The file reference4

The initials (signature) of the member of

staff who prepared the working paper, and

the date on which it was prepared

In the case of audit papers prepared by

client staff, the date the working papers

were received, and the initials of theaudit team member who carried out the

audit work

The initials of the member of staff who

reviewed the working papers and the date

on which the review was carried out

Each audit paper should meet the

characteristics of a good working paper, as

detailed later in this article.

PAPERS PREPARED BY CLIENT

Certain working papers required by the auditor

may have already been prepared by client

staff. The auditor should make arrangements,

whenever possible, for copies of these to be

made available to the audit team. If clientstaff prepare working papers which are to be

retained by the auditor, the auditor should

agree the form of the working papers with

client staff at an early stage in the audit, and

include this information in the audit timetable.

When arranging for working papers to

be prepared, the auditor should take care to

ensure that the working papers will give all the

information required. All such working papers

should normally be clearly identified as having

been prepared by the client. The member of

audit staff directly responsible for an audit area

in which working papers prepared by client

staff are included should sign those papers

this will show that they have been checked

and that they can be reviewed by the manager

and the partner, and by subsequent reviewers.

The signature of the audit team member

indicates that the working paper (prepared by

client staff) has been audited.

SOME CHARACTERISTICS OF A GOOD

WORKING PAPER

On the basis of the discussion above, a good

working paper should meet the requirements

of ISA 230 by displaying the following

characteristics:

It should state a clear audit objective,

usually in terms of an audit assertion (for

example, to ensure the completeness of

trade creditors).

It should fully state the year/period end (eg

31 October 2006), so that the working

paper is not confused with documentation

belonging to a different year/period.

It should state the full extent of the test(ie how many items were tested and how

this number was determined). This will

enable the preparer, and any subsequent

reviewers, to determine the sufficiency

of the audit evidence provided by the

working paper.

Where there is necessary reference to

another working paper, the full reference

of that other working paper must be

given. A statement that details of testing

can be found on another working paper

is insufficient.

The working paper should clearly and

objectively state the results of the

test, without bias, and based on thefacts documented.

The conclusions reached should be

consistent with the results of the

test and should be able to withstand

independent scrutiny.

The working paper should be clearly

referenced so that it can be filed

appropriately and found easily when

required at a later date.

It should be signed by the person who

prepares it so that queries can be directed

to the appropriate person.

It should be signed and dated by any

person who reviews it, in order to meet the

quality control requirements of the review.

The reviewer of audit working papers

should ensure that every paper has these

characteristics. If any relevant characteristic

is judged absent, then this should result in

an audit review point (ie a comment by the

reviewer directing the original preparer to

rectify the fault on the working paper).

CONCLUSION

Working papers provide evidence that an

effective, efficient, and economic audit has been

carried out. They should therefore be prepared

with care and skill. They should be sufficiently

detailed and complete so that an auditor

with no previous experience of that audit can

understand the working papers in terms of the

work completed, the conclusions reached, and

the reasoning behind these conclusions.

Notes

1 ISA 230 (Revised) became effective for audits of

financial information for periods beginning on

or after 15 June 2006 . It resulted in conforming

amendments to ISA 200, ISA 330, and ISQC 1.

These conforming amendments are set out in the

appendices to those standards.

2 Those shown in bold in the text of the ISA.

3 Paragraph 26 of ISA 220 establishes the

requirement for the auditor to review the

audit work performed through review of the

documentation, which involves the auditor

documenting the extent and timing of the

reviews. Paragraph 25 of IAS 220 describes the

nature of a review of work performed.

4 Each audit firm has its own file numbering andreferencing system. Within each system, the best

way of numbering working papers is to file them

serially in each section and to cross-reference

them. Where papers are intended to agree with

or support items appearing in the financial

statements, or in other working papers in the

file, the auditor should normally prepare them

so as to make such agreements obvious without

the necessity of further investigation and

reconciliation.


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This article explains why some candidates do not achieve a pass

standard in the Paper F8 exam, and shows how more marks can be

obtained by a better understanding of the requirement verbs used.

The article is divided into three sections: an overview of why some

candidates do not pass the Paper F8 exam, an explanation of how to

obtain marks in knowledge and application questions within the exam,

and an overview of how to use requirement verbs to identify the type

of question being asked and, therefore, the style of answer expected by

the examiner.

OVERVIEW OF WHY CANDIDATES DO NOT PASS PAPER F8

The examiner looks at thousands of exam scripts at each exam session.

From that review, general reasons why candidates do not pass Paper F8 can

be identified. In overview, scripts tend to fall into one of three categories:

Bad fail scripts

This category includes papers which score less than 40%. Clear signs of

failure in this category include:

very brief answers to most, if not all questions. In other words, some

of the basic knowledge is known, but there is little or no application

of that knowledge to the scenario

auditingfundamentals

significant lack of understanding of audit procedures and the

audit process. For example, where a question asks for audit

procedures to be listed and explained, a typical answer is check

the ledger providing no indication of which ledger will be checked

or what the ledger is being checked for

lack of exam practice. In a significant minority of scripts, it

appears that candidates have not attempted any mock exams prior

to the real exam. Poor exam technique is identified as:

answering questions in a random sequence (for example,Question 1 Part (a), followed by Question 3 Part (b), followed by

Question 2 Part (c), and so on)

spending far too much time on the first question, leaving little or

no time for the final question

not writing in the required style (eg providing the answer in

one long paragraph rather than splitting the answer up into

individual points)

focusing on theory only with no attempt to use the scenario.

Overall, these scripts are also often too brief, contain insufficient detail,

and show a lack of exam preparation to have any chance of obtaining a

pass standard.

audit and assurance assistance

relevant to ACCA Qualifcation Paper F8


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exam questions. Knowledge questions can be identified in the exam

because they are not linked to a scenario and will normally include the

requirement verbs list or explain.

In general terms, a knowledge question will have the requirement

list with the mark allocation of half a mark per point. Other knowledge

questions will have the requirement explain, where not only a basic

point is expected, but also some explanation of that point. So, for

example, the question list audit procedures on going concern could

have the answer obtain cash flow forecast from directors. However, the

requirement explain audit procedures relating to ensure that the client

is a going concern could have the answer obtain the cash flow forecast

from the directors and review this for indications of cash flow problems in

the next 12 months.

Understanding the question requirement verb is, therefore, critical to

providing the appropriate form of answer.

Application

Application means, literally, applying knowledge to the specific situation

outlined in a question scenario in the Paper F8 exam. This is not a skill

that can be obtained by reading a textbook; application can only be

learned by attempting past exam questions and being shown, within a

teaching environment, how to use knowledge in an exam answer. Try and

think of application as a three-stage process:

1 Read the requirements the key requirement verbs to look for inapplication questions include explain and describe (see Table 2

for more detail). For example, Question 3 in the December 2007

exam had the requirement: Explain the issues which limit the

independence of the internal audit department in Matalas Co.

Recommend a way of overcoming each issue.

The explain requirement verb is saying that there will be one

mark for explaining the issue affecting the independence of the

internal auditor in the context of the scenario, and one more mark

for recommending a way to overcome that issue. To gain the marks,

candidates will have to identify the issue and then show why it

is relevant. In other words, there is half a mark for finding the

issue, half a mark for explaining the issue, and finally one mark for

recommending how the issue can be overcome. The recommend

verb attracts one mark in this situation because it is inherently more

difficult to think of an appropriate recommendation than to identifyan issue from the scenario.

As this question was worth eight marks, this means that four

separate and well-explained points are required to obtain full marks.

2 Find the relevant points (in this case the issues affecting

independence). The question scenario includes plenty of relevant

points to obtain maximum marks. For example, there was the

comment: The chief internal auditor reports directly to the

finance director.

This is an issue affecting independence because the internal

auditor will be reporting on systems implemented or run by the

finance director, who may, therefore, not accept criticism of

those systems.

Marginal scripts

Just below the pass standard, these scripts score 41% to 49%.

Candidates in this category are, to state the obvious, relatively close to

passing. Typical reasons for not passing include:

answering questions correctly, but not including a suff icient number

of relevant points to obtain a pass standard in some questions

having a good knowledge of auditing, but being unable to apply that

knowledge to the scenarios provided in the question

very occasionally, not answering all five questions.

In this marginal category, candidates are close to passing, and will pass

with some improvement in their exam technique, by applying comments

made to the scenario and, in a minority of situations, improving their

knowledge slightly.

Pass standard scripts

By way of contrast, scripts showing a clear pass standard:

are usually well presented, and make appropriate use of paragraphs,

sentences and table formats where appropriate

normally, but not always, Question 1 is attempted first, candidates

having used the 15-minutes reading and planning time at the

beginning of the exam to plan answers to this question

are characterised by candidates clearly having very good knowledge

of auditing, and are able to apply that knowledge to the question,clearly and succinctly. It is likely that these candidates are working

in practice so that the listing, and provision, of explanation for audit

procedures is well understood

are usually fully completed all five questions are attempted, even

though some sections may not be answered that well. A few marks

could normally be obtained from a valid attempt; obviously, no marks

are awarded if the question is not attempted at all.

To summarise, most candidates appear to have the knowledge necessary

to pass the Paper F8 exam. However, application of that knowledge to

specific scenarios within the exam is not always clearly demonstrated,

leading to a marginal or bad fail.

SKILLS REQUIRED TO PASS PAPER F8

There are two separate skills that candidates must master to passPaper F8:

an appropriate knowledge of auditing

the ability to apply that knowledge to the scenarios presented in

the question.

Study, therefore, needs to focus on obtaining these skills although, as

noted above, it is the skill of application that is the hardest to learn.

Knowledge

Knowledge will always feature in the Paper F8 exam primarily in

Question 2, but also in smaller sections of other questions. Knowledge

can be obtained from reading textbooks as well as attempting past


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3 Explain the relevant point in the answer. It must now be shown why

that point applies to the scenario.

The suggest solution and the mark allocation for each point is shown in

Table 1.

In other words in an application question, the answer must show why

each point is relevant to the question requirement, and then it must

provide a viable recommendation. The same process can be applied to

other application-style exam questions.

REQUIREMENT VERBS

Within a Paper F8 exam question, the requirement verbs will guide

candidates as to the format of the answer, with the format changing

depending on whether the question is knowledge or application. To

be clear, application questions will always be preceded by a scenario.

When answering a Paper F8 question, it is, therefore, critical to

identify the type of question first before attempting to plan or write out

an answer.

As far as possible, exam questions will be set using the mark

allocations for different requirement verbs detailed in Table 2.

The list in Table 2 is not complete but provides the rationale

behind the use of requirement verbs in Paper F8. To provide an

appropriate answer to a Paper F8 question, candidates need to identify

the style of the question (either knowledge or application), then usethe requirement verbs to identify the detail needed in each point of

the answer.

CONCLUSION

Many candidates fail Paper F8 because they cannot apply their

knowledge to a specific scenario. The skill of application can be

developed by practising past exam questions and from appropriate

teaching. In the exam, identify the style of question by the use or

absence of a scenario, and carefully consider the requirement verbs used

in that question.

Alan Lewin is examiner for Paper F8

TABLE 1: COMMENT AND MARK ALLOCATION

Comment in solution Mark allocation

The chief internal auditor reports to the Half a mark for

finance director identifying the point

This limits the effectiveness of the internal Half a mark for

audit report, as the finance director will explaining the point

also be responsible for some of the financial

systems that the internal auditor is reporting on

To ensure independence, the internal auditor One mark for providing

should report to an audit committee an appropriate

recommendation

TABLE 2: REQUIREMENT VERBS AND MARK ALLOCATION

Requirement verb Mark allocation

Knowledge-based questions

List/identify (with no supporting Half a mark per point made

scenario found in Question 2

and shorter sub-questions

in other sections of the exam)

Explain Normally half a mark for the point and

half a mark for the explanation of the

relevance of the point (but no scenario)

Application-based questions

List (with in the context of a One mark per point made because

scenario) that point must be specific to

the scenario and can be more difficult

to make, compared to a list

requirement with no scenario

Explain Normally half a mark for identifying

an appropriate point and half a mark

for showing the relevance of thatpoint to a scenario

Recommend Normally one mark per point because

providing a valid recommendation is

more difficult than simply listing or

explaining points

Discuss Up to two marks per point depending

on the quality of the discussion

State Normally one mark per point as in the

context of a list used with a scenario

Many candidates fail Paper F8 because theycannot apply their knowledge to a specifcscenario. The skill of application can be

developed by practising past exam questionsand from appropriate teaching. In the exam,

identify the style of question by the use orabsence of a scenario, and carefully consider the

requirement verbs used in that question.


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student accountant

OCTOBeR 2008

ready to sit paper f8?reLeVaNt to aCCa QUaLifiCatioN paper f8

As you work through the 10 questions in this

article, you will note that some questions, for

example Question 1, provide two options. You

must identify the correct option. Other questions

require a more detailed response, as explained in

the question itself. There are 14 marks available

in total, and the pass standard is seven marks

(50%). By the end of this exercise, you should

have learnt why many relatively easy marks are not

always obtained by candidates sitting the Paper

F8 exam.

QUESTION 1

Which option is the correct response to the

following statement? Explain the purpose of a

management representation letter.

Option A

A management representation letter is addressed

to the auditors of a company, and is written

by the directors of that company at a time

towards the end of an audit. The letter contains

information from management concerning matters

that the auditor may not have been able to

obtain sufficient evidence on from other sources,

such as estimates for provisions, as well as

confirming managements responsibilities for the

financial statements.

Option B

A management representation letter is addressedto the directors of a company, and is written by

the auditors of that company at a time towards the

end of the audit. The letter contains information

on weaknesses in the companys control systems,

identified by the auditor, examples of errors

that could occur because of each weakness,

and recommendations on how to mitigate

those weaknesses.

QUESTION 2

Which of the following audit procedures will

help to confirm the going concern status of

an entity?

Option A

Obtain, cast, and review cash flow forecasts

prepared by management to ensure that the

company has sufficient cash to continue trading.

Option B

Perform cut-off testing on sales and purchases to

ensure sales and purchases have been correctly

recorded in the correct accounting period.

QUESTION 3

State whether the following are tests of control or

substantive procedures in a wages system:

Obtain a sample of clock cards and ensure

they are signed by the shift foreman.

Obtain sample of clock cards and agree hoursworked to hours shown on the wages calculation

sheets in the accounts office. (2 marks)

QUESTION 4

Which of the following audit procedures can be

performed using test data on a wages system?

Option A

For a fictitious employee, enter details of hours

worked and rate of pay to confirm that gross wages

are correctly calculated.

Option B

Extract the data on gross wages from the client

computer; perform a month-by-month analysison the auditors computer to identify any

unusual trends.

QUESTION 5

Audit work on inventory has been completed. The

directors refuse to make an adequate provision for

obsolete stock. Which of the following is a suitable

action for the auditor to take?

Option A

Obtain additional audit evidence from purchase

invoices on the net realisable value of the

disputed stock.

Option B

Obtain a management representation point

confirming managements decision on the provision.

QUESTION 6

State which of the following assertions is not

relevant to account balances at the period end:

valuation and allocation

measurement

completeness.

QUESTION 7

A scenario states that an engagement partner holds

some shares in an audit client, with the question

requirement asking you to identify and explain the

ethical issues and provide a resolution to eachissue. Identify the weaknesses in the following

answer extract: The audit partner must transfer the

shares to his son (who is 15-years-old). There are

three weaknesses to identify.

QUESTION 8

State the weaknesses in the following audit

procedure in a sales system: Check the invoice

agrees to the ledger. There are two marks available.

QUESTION 9

Independence is a fundamental ethical principle

of ACCA. True or false?

QUESTION 10Which option provides a suitable response

to the requirement: List the contents of an

engagement letter?

Option A

An explanation of how the audit fee is determined.

Option B

The letter explains how the fee for the audit is

calculated. This is included to show the client

that fees reflect the experience of the audit staff

assigned to the audit, as well as the time taken on

the audit by each grade of staff.

This article identifies and explains some of the more common errors found in Paper F8,Audit andAssurance exam scripts. Attempt the 10 questions in this article they vary from easy to relativelyhard and list your answers on a separate sheet of paper and then compare and contrast youranswers with the suggested solutions provided in the second half of this article.

top 10 Most CoMMoN MistaKes iN aUdit eXaM aNsWers


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linKed PeRFoRMance oBJectiVes

studying paper f8? did you know that perforManCe oBJeCtiVes 17

and 18 are linked?

QUESTION1:OPTIONA

Coonerror:Confusionbeteenlettersof

eanessananaeentrepresentationletters.

OptionBisactuallyaletterofweakness,which

theauditorwouldusetoexplainweaknessesin

acontrolsystem.Arelatederrorisdefiningthe

contentsofamanagementletterasaletterof

weakness(asinQuestion2Part(a)oftheJune

2008PaperF8exam).

Avoidingthiserrorisrelativelyeasy.Justlook

forthetermrepresentationinthenameofthe

letterasthisidentifiesthefactthatitisaletter

frommanagementtotheauditors.

QUESTION2:OPTIONA

Coonerror:Lacofunerstaninofthe

oinconcernconcept.

Agoingconcernreviewrelatestothefutureofthe

companyensuringitwillremaininexistence

fortheforeseeablefuture.OptionAistherefore

correct,astheseauditproceduresrelateto

thefuture.

OptionBsproceduresrelatetothepastorto

standardauditworkonthefinancialstatements.

Theerrorisavoidedbyrememberingthatthe

termgoingconcernrelatestothefuture,evenifit

appearstorefertothepast.

QUESTION3

Coonerror:Confusionbeteentestsofcontrol

ansubstantiveproceures.

Thefirststatementisatestofcontrol,because

theauditorischeckingthattheforemanhas

signedtheclockcard,presumablytoconfirm

thatthehoursworkedarecorrectlyrecordedon

thecard.

Thesecondstatementisasubstantive

procedure,becausetheauditoriscomparing

detailsbetweentwoseparatedocuments

effectivelyreperformingtheactionsofclientstaff.Avoidthiserrorbycheckingthewordingof

thequestionrequirementcarefully.Iftheexaminer

asksforatestofcontrolthenatestofcontrolis

requiredasubstantiveprocedurewillnotobtain

anymarks.

QUESTION4:OPTIONA

Coonerror:Confusionbeteentestata

anauitsoftare.

OptionAshowstheuseoftestdatainthiscase,

dummydataisenteredintothecomputersystem

tochecktheaccuracyoftheprogrammesbeing

usedtocalculategrosswages.

OptionBisanexampleoftheuseofaudit

softwareobtainingdatafromtheclientscomputersystemsforfurtheranalysisonthe

auditorsowncomputersystems.Thiserroris

bestavoidedbyrememberingthatauditsoftware

isusedtoanalyseclientdata,andthattestdata

isusedonaclientscomputersystem.

QUESTION5:OPTIONB

Coonerror:Repeatinauitproceureshena

clearecisionattheenoftheauitisrequire.

Oneprobleminmanyauditinganswersisthat

candidatesareunwillingtomakeafinaldecision

onanauditissue.OptionAisincorrectbecauseit

involvescarryingoutfurtherauditworkwhenthe

questionclearlystatedauditworkwascomplete.

OptionBisthereforethecorrectanswerasit

providestheauditorwithappropriateevidenceon

thedecisionmadebymanagement.

Thiserrorisavoidedbycheckingthecontext

ofthescenarioorquestion.Wheretheexaminer

placesthequestioncontextattheendofthe

audit,orstatesthatauditworkiscomplete,

thenobtainingmanagementrepresentationsor

proceedingtoissueamodifiedauditreportare

likelytobethemostappropriatewaysforward.

QUESTION6:OPTIONB

Coonerror:Useofolauitinterinolo

Selectingthecorrectanswerhereisrelatively

simpleastheassertionmeasurementwasmade

redundantinthelastrevisionofISA500.While

detailedknowledgeofISAsisnotapre-condition

forpassingthePaperF8exam,answersare

expectedtobetechnicallycorrect.Thereisa

needtoensurecommentsmadedoreflectcurrent

auditterminology,especiallyonkeyissuessuch

asassertions.

QUESTION7

Coonerror:Notexplainincoentsaein

ansersinsufficientetail.

Thethreepointstobemade,forthethreemarks

available,are:

Theanswerextractdoesnotactuallystate

theethicalissuethatis,thatthesharesare

ownedbytheengagementpartner.

Thereisnoexplanationofwhythisisan

ethicalissue.Commentshouldbemade

thattheengagementpartnersindependence

isimpaired;anyactionbythepartnertodecreasetheshareprice(egqualificationof

thefinancialstatements)maynotbetaken

becausethepartnerwouldlosemoney.

Theresolutiontotheconflictisinappropriate

anyshareholdingsbyminorsarestilldeemedto

beconnectedtotheparent(thepartner).

Candidatesmustreadthequestionrequirement

carefullyandensurethatanswersprovidethe

necessary(andaccurate)detail.Toavoidanunclear

answer,think:whatistheissue?,whyisthisan

issue?,andhowcanthisissuebeovercome?.

QUESTION8

Coonerror:Notstatinauitproceuresclearl.

First,itisunclearwhichinvoiceorledgerthe

answerrefersto.Statingsalesinvoiceanddebtors

ledgerwouldatleastshowwhichtransaction

cyclewasbeingtested.

Second,theuseofthewordcheckisunclear

regardingwhatisbeingchecked.Statingthat

theinvoicenumberandsalesamounthavebeen

recordedinthecorrectcustomersaccountinthe

salesledgerprovidesthenecessarydetail.

Lackofnecessaryexplanationisavery

commonerrorinauditinganswers.Toovercome

thisweakness,practiseansweringquestionsto

ensureanswersdocontainthenecessarydetail.

QUESTION9

Coonerror:Confusionrearinfunaental

ethicalprinciples.

Thisstatementisfalse.Anauditorsindependence

canbeaffectedbymanythings,butitisnota

fundamentalprincipleofACCA.Asignificant

minorityofanswersstillrefertothisprinciple.

QUESTION10:OPTIONA

Coonerror:Lacofunerstaninofthe

requireentverblist.

Whentherequirementverblistisusedinan

examquestion(asisoftenthecaseinPaperF8

Question2,forexample),itsimplymeansprovide

alistofpoints,eachworthhalfamark.Option

Bshowsananswertotherequirementlistand

explain,wheresomejustificationforeachpointis

expected.Manycandidatesappeartofeelsafer

providinganexplanation,evenwhenthe

requirementverb

doesnotaskforit.

Theresultissome

wastedtimeinthe

exambecauseonlyhalf

amarkisavailablefor

theanswertoalist

requirementverb,

evenforthelistand

explainstyleanswer

givenasOptionB.

soLUtioNs

HOwmANymARkSdIdyOUgET?

12anover

Verywelldoneperhapsyoushouldconsider

auditingasacareer?

8to11

Goodworkyouarestartingtothinklikean

auditingexamcandidate.

7orless

Beware,youmaywanttoincreaseyourknowledge

andquestionansweringskillsbeforeyouattempt

thePaperF8exam.

Hopefully,youhavenowidentifiedsomeofthe

commonerrorsinPaperF8examscriptsandcan

avoidtheseintheexamitself.

AlanLeinisexainerforPaperF8

CoNCLUsioN


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This article considers the examinersapproach to the Paper F8 examand aims to recognise a change inexaminer with effect from the June2010 exam.

The aim of Paper F8, Audit andAssurance is to develop knowledgeand understanding of the processof carrying out the assuranceengagement and its application in the

context of the professional regulatoryframework. The paper continues tobe practical in application, as well asaiming to ensure that candidates whopass this paper understand the basicsof an audit.

The exam strikes a balance oftechnical knowledge as well as apractical application of this knowledge.The case study Question 1, illustratesthis well and Question 1 from theDecember 2008 exam is a good exampleof technical knowledge being applied.

This syllabus builds on the

knowledge gained in Paper F3,Financial Accounting and thenprepares candidates for Paper P1,Professional Accountantand Paper P7,Advanced Audit and Assurance.

The accounting standards examinedin Paper F3 form the basis ofquestions on how to apply auditingprocedures in respect of thosestandards, and candidates must notbe afraid to bring their accountingknowledge into this paper. Question1e from the December 2009 examdemonstrates this.

The exam will continue to containquestions set in as practical anapplication as possible. I recognisethat it has become more common thatcandidates have not been involved in, orhad exposure to, a real audit.

That aside, this paper is like anyother, and the basic principles mustbe understood. Therefore, applicationquestions will continue to feature

heavily in the exam as they demonstratewhether candidates have understood atopic or just rote learnt it.

It is crucial that candidates practisethe skills required for applicationquestions by working through pastpapers to time and reviewing theexaminer solutions to identify areasfor improvement. Rote learning oftechnical material alone will notresult in exam success; however,practising questions, reading examinerreports and relevant technical articleswill improve the chances of passing

the exam.

Explanatin f capabilitiesPaper F8 focuses on seven capabilities.Table 1 onpage 3 shows how I expecteach of these capabilities to beexamined, and details comments on thetype of questions that could be asked.

Frmat f the examThe exam format will continue inthe same style as the past five examsessions. There are five questions andthey are all compulsory.

Section A contains Question 1 for30 marks and question 2 for 10 marks.Section B contains three questionseach for 20 marks.

All questions require some formof written response. However, afew questions will also require thecalculation and interpretation of somebasic ratios in the context of auditplanning or review.

Qestin 1This question will be a case study andwill always be based on a scenario,and will be broken down into a seriesof subquestions, which will examine arange of audit procedures.

Candidates will need to analyse thescenario to identify the appropriatepoints to make in their answers.Candidates are provided with15 minutes of reading time, and Iwould encourage them to use someof this time reading the scenario and

thinking about the requirements.The subrequirements are usually a

mixture of technical knowledge andscenario specific points. Candidatesare encouraged to spend timeanalysing the requirement in detail,noting whether the requirement is tolist/state/identify/define/explain/describe or discuss as these all requirediffering levels of detail. In addition,it is important to identify whether thequestion requires general knowledgeor the application of this knowledge tothe scenario.

examinersRELEVANT To ACCA QuALFCAToN AER F8

RoTE LEARNNg oF TECNCAL ATERAL ALoNE wLL NoT REuLT N EAuCCE; owEVER, RACTNg QuEToN, REAdNg EANER REoRTANd RELEVANT TECNCAL ARTCLE wLL RoVE TE CANCEoF ANg TE EA.

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The scenario is more likely to bebased on an organisation which is profitmaking rather than nonprofit making.

It is to be assumed that all entities willuse computerbased systems, howeverdetailed knowledge of how to usecomputerassisted audit techniques willnot be expected.

Questions in the past have focusedon areas such as identification ofsystem deficiencies, implications ofthese and recommendations, writing ofmanagement reports, control objectivesand tests of control, substantiveprocedures over income statementand statement of financial positionentries, audit evidence and audit

planning. These areas will all continueto be examined as Question 1 topicsas well as areas such as audit risk,internal audit and assurance. This list isnot exhaustive.

Qestin 2The question for 10 marks, will, as inprevious exams, be a shorter factualquestion. This question will normallybe based on International Standards onAuditing (ISAs), but will also cover otherkey technical areas of the Study Guide.

As with previous exams, there will

normally be two or three requirementscovering different areas, and this allowscandidates to demonstrate their basicknowledge of auditing.

Questions will normally be basedon ISAs. However, answers will obtaincredit if valid points are made. I am not

expecting rote learning of ISAs; rather,an understanding of the key principlesunderlying auditing.

Also, candidates should not worryabout learning ISA numbers, as thereis no credit available for listing theISA numbers.

It is particularly important thatcandidates focus on the requirementsin this question, as if they arerequired to list then their answershould contain brief points, itshould not stretch to pages of text.Many candidates are writing far too

much and this is at the expense ofother questions.

Qestins 3 an 4These questions, each worth 20 marks,will usually be loosely based arounda scenario, and could cover any ofthe topic areas within the Study Guide.The format will be similar to pastexam questions.These scenarios could be based oneither profit or nonprofit markingorganisations such as Question 4 fromthe December 2008 exam, which was

based on a charity.

y A TAT AER F8 CAN E AEd y A CANddATE wo uNdERTANdTE uNdERLyNg TEoRy oF AudTNg ANd CAN ALy TAT TEoRy ToRELATVELy AC AudT TuAToN kNowLEdgE TELF NoT uFFCENTTo A T EA.

approach

These questions will aim to test abalance of technical knowledge, butalso an application of this knowledge to

the given scenario.

Qestin 5This question, for 20 marks, will, asin previous exam sessions, be mainlybased on the topic areas of audit reviewand reporting.

The question format will also besimilar to previous exams.

Candidates are reminded that auditreports in particular represent the onlyoutput for the shareholders after theaudit is completed and, therefore, it isimportant that candidates understand

what an audit report is, how it may bemodified, and when these modificationsare relevant.

CoNCLuoNMy aim is that Paper F8 can be passedby a candidate who understands theunderlying theory of auditing andcan apply that theory to relativelybasic audit situations knowledgeitself is not sufficient to passthis exam. My advice, therefore, isto study the basics of auditing, readexaminers reports on past exams, read

relevant technical articles and thenpractise applying their audit knowledgeto scenarios, as this is the key to beingsuccessful in this exam.

Pami Bahl is examiner for Paper F8with effect from the June 2010 exam

Studying for Paper F8?erfrmance bjectives 17 an 18 are line

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TALE 1: AER F8 CAALTE

Capabilit CmmentExplain the nature, purpose and scope of assurance Questions may focus on the factual areas of the legalor engagements, including the role of the external audit aspects, they may cover the ethical framework in aand its regulatory and ethical framework. scenariobased question. Assurance could feature in any

question in the exam.

Explain the nature of internal audit and describe its role as The work of internal audit could feature in any question inpart of overall performance management and its relationship the exam. However, there may not always be an internal auditwith the external audit. question. It is more likely to appear in Questions 1, 3 or 4.

Demonstrate how the auditor obtains an understanding of Questions in this area will relate to the planning of thethe entity and its environment, assesses the risk of audit. They will normally feature aspects of audit risk, auditmaterial misstatement (whether arising from fraud or other audit planning process, fraud and error as well asirregularities) and plans an audit of financial statements. analytical procedures. These areas are more likely to

appear as scenario based questions, however knowledgebased elements could appear in Question 2.

Describe and evaluate information systems and internal This capability, and the next, will relate to the testing ofcontrols to identify and communicate control risks and their controls, and the collection of audit evidence usingpotential consequences, making appropriate. compliance and substantive testing as appropriate. It isrecommendations. important that candidates understand the difference

between these two types of procedures. Reporting ofrecommendations regarding deficiencies in internalcontrols, or other issues found in an audit, will continue tobe examined in terms of production of management reports.

Identify and describe the work and evidence required to Questions for this capability are likely to focus on themeet the objectives of audit engagements and the application of substantive procedures to either incomeapplication of the International Standards on Auditing. statement or statement of financial position areas (refer to

the Study Guide). This will usually feature in Question 1 as

well as elsewhere in the exam.

Evaluate findings and modify the audit plan as necessary. This area will generally be tested in Question 5 howeverknowledgebased elements could appear in Question 2.

Explain how the conclusions from audit work are reflected Candidates will not be required to draft an entire auditin different types of audit report, explain the elements of report. The emphasis of questions in this area will insteadeach type of report. be on explaining audit reports. If extracts are provided

such as Question 5 December 2007, this will normallyrelate to an explanation of standard terms, or anexplanation of how a standard report can be modified, or(in a limited number of cases) supplying appropriatewording for the modification only. Candidates are also likelyto be required to review a scenario and explain the

implications for the audit report including relevantmodifications. Knowledge of the content of ISAs in the 700series will be expected (where relevant to this paper).Questions will potentially provide extracts of audit reports,and require candidates to identify where ISA guidance hasnot been followed.

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Of central impOrtance tO bOth iSa 315 and iSa 330 iS the recOgnitiOnthat aSSeSSing riSk iS at the cOre Of the audit prOceSS.

In a previous article, the importanceof the concept of audit risk wasconsidered (see Audit Risk byMartyn Jones, in Student Accountant,November 2009). This articleconsiders the requirements ofISA 330, The Auditors Responses toAssessed Risks. The main objectiveof ISA 330 is to give guidanceon how auditors should obtainsufficient appropriate evidenceregarding the assessed risks ofmaterial misstatement by designingand implementing appropriate

responses to those risks. UK and Irishstudents should note that there areno significant differences betweenISA 330 and the UK and Irelandversion of this standard.

Of central importance to bothISA 315 and ISA 330 is the recognitionthat assessing risk is at the core ofthe audit process, and these two ISAsspecify that the auditor is requiredto obtain an understanding of thekey risks (sometimes described assignificant risks) relevant to thefinancial statements. Paragraph 6 of

ISA 330 requires that:The auditor shall design and perform

further audit procedures whose nature,timing, and extent are based uponand are responsive to the assessedrisks of material misstatement at theassertion level.

definitiOnSISA 330 requires that auditorsshould carry out tests of controland substantive procedures, andparagraph 4 of the ISA gives thedefinitions shown in Table 1.

Students often find it quite difficultto comprehend what tests of controland substantive procedures are, toexplain the difference between them,and also to give examples of both. Oneimportant difference between them isthat tests of control are usually short,quick tests which generate either a

yes or a no answer, where yes isfavourable (confirming the operationof an internal control), and no isunfavourable (indicating that an internalcontrol is not operating satisfactorily).

Substantive procedures, however, as thename suggests, are more substantiveand time consuming, requiring moredetailed audit work to be carried out.The following examples, in the contextof a purchases system, should help.

teStS Of cOntrOl eXampleS fOr apurchaSeS SYStemConsider when the auditor reviewsa companys purchases system andinternal controls, and the assertion ofoccurrence (that recorded purchasesrepresent goods and services received

and which pertain to the entity). Anappropriate internal control would bethat purchase orders are raised foreach purchase and are authorised byappropriate senior personnel.

isa 330 andto assessed

releVant tO acca QualificatiOn paper f8

table 1: iSa 330 teStS Of cOntrOl and SubStantiVeprOcedureS definitiOnS

teSt Of cOntrOl SubStantiVe prOcedureAn audit procedure designed to An audit procedure designed to detectevaluate the operating effectiveness of material misstatements at the assertioncontrols in preventing, or detecting level. Substantive procedures compriseand correcting, material misstatements tests of details and substantiveat the assertion level. analytical procedures.

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A test of control would be to examinea sample of purchase orders to ensurethat they have been appropriatelyauthorised, and a yes answer is good,

confirming that the internal controlrequiring authorisation of purchaseorders is working, or alternativelya no answer indicates that theinternal control does not appear tobe working, hence requiring furtheraudit investigation.

Another example of a test of controlfor a purchases system would be toinspect a sample of goods receivednotes to confirm that stores inwardsstaff sign for goods received. Onceagain, a yes answer is positive,confirming that staff have signed

the goods received note, and a noanswer would be negative, requiringfurther audit work to be carried outto determine why the goods receivednote had not been signed. This test ofcontrol would also help to confirm theoccurrence assertion.

SubStantiVe prOcedureS and teStSOf detail OVerVieWISA 330 requires that the auditorshall always carry out substantive

procedures on material itemsirrespective of the assessed risksof material misstatement, andthat the auditor shall design andperform substantive procedures foreach material class of transactions,account balance, and disclosure.According to the IAASB Glossaryof Terms1, substantive proceduresfall into two categories, tests ofdetails and substantive analyticalprocedures (or simply analyticalprocedures, as they are usuallydescribed). ISA 330 says that

auditors must decide when it is mostappropriate to use which type ofsubstantive procedure. Analyticalprocedures are outside the scope ofthis current article, and the examplesgiven below are examples of testsof details.

responsesrisks

Studying Paper F8?po ojvs 17 18 v o s x

Ssv os xs oss o o ss sysSubstantive procedures will invariablytend to involve more work than tests

of control. Consider once again theexample of the purchases system fora manufacturing company and theassertion of existence for accountbalances in the statement of financialposition. Typical tests of detail wouldinvolve some physical verificationof year-end balances outstanding,which would require obtaining andreviewing the closing purchaseledger account balances for a sampleof purchase ledger accounts withselected suppliers. Typically, this couldinclude agreeing the closing balance

figure to the suppliers statement,or even possibly requesting third partyconfirmation by the supplier of theamount outstanding.

Cut-off testing would also betypically carried out on year-endpurchase ledger balances, whichwould involve obtaining a sampleof pre- and post-year-end goodsreceived notes, and agreeing theseto the matching pre- or post-year-endpurchase invoices, to ensure that onlygoods received before the end of theaccounting period were included. This

test would also help to confirm theassertion of existence.

the main ObectiVe Of iSa 330, the auditOrSreSpOnSeS tO aSSeSSed riSkSiS tO giVe guidance

On hOW auditOrS ShOuld Obtain SufficientapprOpriate eVidence regarding the aSSeSSedriSkS Of material miSStatement bY deSigningand implementing apprOpriate reSpOnSeS tOthOSe riSkS.

Student accOuntant issue 08/2010 02


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aSSeSSing riSk lieS at the cOre Of the auditprOceSS and thiS article haS intrOduced andeXplained SOme Of the terminOlOgY uSed bY

iSa 330, giVing guidance tO auditOrS On hOWtO reSpOnd tO aSSeSSed riSkS. StudentSShOuld trY tO identifY teStS Of cOntrOland SubStantiVe prOcedureS fOr the mainaccOunting SYStemS.

timingISA 330 indicates that the auditor mayperform tests of control or substantiveprocedures at an interim date or at theperiod end. The standard also indicatesthat, in general, the extent of auditprocedures increases as the risk ofmaterial misstatement increases.

OVerall reSpOnSeSISA 330 lists the following overallresponses that may be used by auditorsin order to address the assessedrisks of material misstatement at thefinancial statement level: Emphasising to the audit

team the need to maintainprofessional scepticism.

Assigning more experiencedstaff, those with special skills, orusing experts.

Providing more supervision. Incorporating additional elements

of unpredictability in the selectionof further audit procedures tobe performed.

Making general changes to the nature,timing or extent of audit procedures.

SummarYAssessing risk lies at the core of theaudit process and this article hasintroduced and explained some ofthe terminology used by ISA 330,giving guidance to auditors on how torespond to assessed risks.

In general, tests of control are short,quick audit tests, whereas substantive

procedures will require more detailedaudit work. ISA 330 requires that,irrespective of the assessed risksof material misstatement, theauditor shall design and performsubstantive procedures for each classof transactions, account balanceand disclosure.

Finally, students should tryto identify tests of control andsubstantive procedures for the mainaccounting systems.

reference

1 IAASB Auditing Handbook 2010,Glossary of Terms.

Martyn Jones is assessor forPaper F8

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When an aitor is able to satisfactorilyconcle that the financial statements arefree from material misstatement they expressan nmoifieopinion.

It is one of the most fundamentalconcepts in auditing; auditors are paidto offer an opinion. It is what they do;its their raison dtre. Why then,if the audit opinion is so significant,are audit examiners continuallyunderwhelmed by candidatesappreciation of this topic?

This article, which is relevant toPaper F8 and P7, revisits the basic

principles of forming an audit opinionand looks at how this knowledge shouldbe applied by considering a pastPaper P7 exam question.

the basicsWhen an auditor is able to satisfactorilyconclude that the financial statementsare free from material misstatementthey express an unmodified opinion.The complete form and content ofthe unmodified opinion are presentedin ISA 700, Forming an Opinion andReporting on Financial Statements.

However, auditors typically use one oftwo well-known phrases to reflect theirconclusion, either: The financial statements present

fairly, in all material respects... or The financial statements give a true

and fair view of

moifications to the opinionThere are two circumstances when the

auditor may choose not to issue anunmodified opinion:When the financial statements are not

free from material misstatement orWhen they have been unable to obtain

sufficient appropriate evidence.

In these circumstances the auditorhas to issue a modified version oftheir opinion. There are three types ofmodification. Their use depends uponthe nature and severity of the matterunder consideration.

They are:

the qualified opinion the adverse opinion the disclaimer of opinion.

Guidance as to the usage of the threeforms of modification is provided byISA 705, Modifications to the Opinion inthe Independent Auditors Report. Thishas been summarised in Table 1.

Pervasiveness is a matter thatconfuses many candidates as, once

again, it is a matter that requiresprofessional judgment. In this casethe judgment is whether the matter isisolated to specific components of thefinancial statements, or whether thematter pervades many elements of thefinancial statements, rendering themunreliable as a whole.

The bottom line is that if the auditorbelieves that the financial statementsmay be relied upon in some partfor decision making then the matteris material and not pervasive. If,however, they believe the financial

statements should not be relied upon atall for making decisions then the matteris pervasive.

a matter ofrelevant to acca qalification papers f8 an p7

table 1: giance as to the sage of the three forms of opinion moification

aud Jud u p m

nu Material but NOT Pervasive Material AND PervasiveFinancial statements are Qualified opinion Adverse opinionmaterially misstated (...except for...) (...do not present fairly...)Unable to obtain sufficient appropriate Qualified opinion Disclaimer of opinionaudit evidence (...except for...) (...we do not express an opinion...)

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emphasis of matterEmphasis of matter (EOM) is rarelydealt with satisfactorily in the exam.This is mainly because candidatesbelieve that EOM is linked somehow tomodifications of the opinion. This is notthe case: EOM and modified opinionsare totally separate matters.

The purpose of an EOM paragraph isto draw the users attention to a matter

already disclosed in the financialstatements because the auditorbelieves it is fundamental to theirunderstanding. It is a way of saying tothe users: you know that note in thefinancial statements, the one aboutthe uncertainty surrounding the legaldispute? Well us auditors think itsreally important, so make sure youveread it!.

The usage of EOM paragraphs isdescribed in ISA 706, Emphasis ofMatter Paragraphs and Other Matter

Paragraphs in the Independent Auditors

Report. This identifies three examplesof circumstances when the usage ofEOM is appropriate:when there is uncertainty about

exceptional future events early adoption of new accounting

standards andwhen a major catastrophe

has had a major effect on thefinancial position.

Of course, in all of these examplesthe auditor can only refer back todisclosures already made in the

financial statements. If the directorshavent disclosed a matter as requiredby financial reporting standards,then the auditor may concludethat the financial statements arematerially misstated and modify theopinion instead.

opinion?

Studying Paper F8 or P7?p j 17 d 18

the prpose of an eom paragraph is to raWthe sers attention to a matter alreayisclose in the financial statements becasethe aitor believes it is fnamental totheir nerstaning.

other mattersOther matter paragraphs are usedto refer to matters that have not beendisclosed in the financial statementsthat the auditor believes are significantto user understanding. One usage ofthese paragraphs is where the auditorconcludes that there is a materialinconsistency between the auditedfinancial statements and the other

(unaudited) information containedwithin the annual report and accounts,as required by ISA 720, The AuditorsResponsibilities Relating to Other

Information in Documents ContainingAudited Financial Statements.

application to exam qestionsNow that we have recapped the basicprinciples of audit opinions let usconsider how these may be applied toan exam scenario.

Questions on audit reports in PaperP7 typically fall into two distinct types:

critical appraisal of an audit report thathas already been written; or explanationof how matters will affect an auditopinion. In both cases the principlesaffecting the choice of audit opinion arethe same.

If you face a question of this naturesimplify your task by asking thefollowing questions: Is there a misstatement in the

financial statements (ie a fraudor error)?

Has the auditor gathered sufficientappropriate evidence?

Is/could the matter be material?Does the matter pervade the

financial statements?Does the scenario refer to a

disclosure made in the financialstatements concerning an uncertainfuture event?

Based on this approach you should beable to pinpoint exactly what form ofopinion is appropriate and whether anEOM paragraph is necessary.

As an example, Question 5 in theJune 2009 Paper P7 exam askedcandidates to critically appraise theproposed audit report of Pluto Co

for the year ended 31 March 2009.Relevant extracts from the audit reportare given in Illustration 1. The fulltext may be downloaded from theACCA website.

Please note that the extract isfrom the International version of thesyllabus and refers to InternationalAccounting Standards.

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There is no indication in the auditreport that the auditor considersthe matter pervasive. It should alsobe considered that redundancyprovisions will only affect twoareas of the financial statements:current liabilities and wages/salarycosts. Does misstatement hererender the remainder of the financialstatements unreliable? This is an

unlikely conclusion.It therefore appears unlikely that

an adverse opinion is necessaryin the circumstances. A qualified(except for) opinion would appearmore appropriate.

e (eps)The second issue is that of the EOMparagraph. Ask the question referredto earlier: does the scenario refer toa disclosure made in the financialstatements concerning an uncertainfuture event? Clearly the answer is

no. Therefore an EOM paragraph isnot appropriate.

If this is the case how should thematter be dealt with? Well, go throughthe same questions again. First, isthere a misstatement?

This is largely irrelevant to ourunderstanding of the audit opinion;however, the question does dealwith matters where the financialreporting requirements across differentaccounting regimes are broadly similar.The company in the question is alisted company.

illstration 1 (w u

w w, isa 701 w dd w w u )

advr p rg rdgrt but pplct ias 37The directors have not recognised aprovision in relation to redundancycosts and so the recognition criteriaof IAS 37 have not been met. Wedisagree with the directors as we feelthat an estimate can be made We feelthat this is a material misstatement asthe profit for the year is overstated.

In our opinion, the financialstatements do not show a true and fairview of the financial position of thecompany as of 31 March 2009...

eph ttr prgrphThe directors have decided not todisclose the Earnings per share for2009 Our opinion is not qualified inrespect of this matter.

response renancy provisionWe are not going to consider the wholewording, merely the choice of opinion.A more complete response is givenin the model answer, which can beaccessed via the ACCA website.

The first question to ask is whetherthere is a misstatement. The answerto this is clearly yes as the reportconcludes that the directors have

failed to make a provision when theyshould have. This contravenes therelevant accounting framework (IAS 37,Provisions, Contingent Liabilities and

Contingent Assets). The report alsoclearly states that this is considered tobe material to the financial statements.

Next we have to consider whetherthe auditor has been able to gathersufficient appropriate evidence. Onceagain the answer is yes; the auditorhas been able to reach a consideredconclusion on the matter.

At this point we have established

that there is a material misstatement.Therefore, we will have to modifyour opinion. However, the final versionof the modification depends uponwhether the matter is pervasiveor not.

ait reports are a fnamental part of the aiting process anare therefore significant for ait stents at all levels. this Willcontine to be a reglar exam topic. if yo o strggle With theseqestions it is not a goo strategy to sggest every possible form ofopinion hoping that one of them Will be correct.

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The directors have failed to disclosethe EPS for the year. This contravenesboth IAS 33, Earnings per Share and(in the UK) FRS 22, Earnings per share,which require the basic and dilutedEPS to be disclosed in the financialstatements of all listed companies.There is, therefore, a misstatement inthe financial statements.

Next we consider whether the matter

is material. The clarified ISA 320,Materiality in Planning and Performing an

Auditrequires the auditor to considerthe informational requirements ofthe users. EPS is a vital investoranalysis tool and can therefore beconsidered material by nature. Forlisted companies, it is a requirement offinancial reporting standards that EPSis disclosed with prominence in thefinancial statements. There is thereforea material misstatement in thefinancial statements.

Finally the auditor should consider

whether the matter is pervasive tothe financial statements. The lack ofdisclosure of the EPS ratio is unlikelyto render other elements of thefinancial statements unreliable; it is anisolated error.

In this instance a qualified opinionshould be given on the basis ofa material misstatement of thefinancial statements.

application to the paper f8 examThe concepts considered above areequally as relevant to the Paper F8

exam. However, the wording of thequestions to date has been slightlydifferent from the Paper P7 exam. Sofar candidates have been providedwith short scenarios and asked toeither state or explain the effectsof the matters on the audit report.

The approach discussed abovemay be applied in the same way tothese questions.

The matters considered so far (inthe December 2007 and December2009 exams) include: a failure todepreciate non-current/fixed assets,an auditor not being able to attend theyear-end inventory/stock count, and afailure to disclose a contingent liability

in the financial statements.Candidates should also prepare for

questions requiring them to defineor explain the terms referred to above.

This style of requirement isillustrated in Question 2 from the June2009 exam paper.

concling thoghtsAudit reports are a fundamental part ofthe auditing process and are thereforesignificant for audit students at alllevels. This will continue to be a regularexam topic.

If you do struggle with thesequestions it is NOT a good strategyto suggest every possible form ofopinion hoping that one of them willbe correct.

Auditing requires criticalappraisal, the use of professionaljudgement and the ability to offer areasoned opinion.

By asking yourself a series ofsimplified questions you will gothrough a critical thought processthat allows you to come to your ownconclusion and, more importantly, offer

your own opinion.This will undoubtedly allow you to

present an answer that stands out fromthe others.

Simon Finley is an auditsubject specialist at Kaplan Publishing

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RELEVANT TO CAT QUALIFICATION PAPER 8 AND ACCA QUALIFICATION

PAPERS F8 AND P7

2011 ACCA

SPECIFIC ASPECTS OF AUDITING IN A

COMPUTER-BASED ENVIRONMENT

Information technology (IT) is integral to modern accounting and management

information systems. It is, therefore, imperative that auditors should be fully

aware of the impact of IT on the audit of a clients financial statements, both in

the context of how it is used by a client to gather, process and report financial

information in its financial statements, and how the auditor can use IT in the

process of auditing the financial statements.

The purpose of this article is to provide guidance on following aspects of

auditing in a computer-based accounting environment: Application controls, comprising input, processing, output and masterfile controls established by an audit client, over its computer-based

accounting system and

Computer-assisted audit techniques (CAATs) that may be employed byauditors to test and conclude on the integrity of a clients

computer-based accounting system.

Exam questions on each of the aspects identified above are often answered to

an inadequate standard by a significant number of students hence the reason

for this article.

Dealing with application controls and CAATs in turn:

APPLICATION CONTROLS

Application controls are those controls (manual and computerised) that relate

to the transaction and standing data pertaining to a computer-based

accounting system. They are specific to a given application and their objectives

are to ensure the completeness and accuracy of the accounting records and

the validity of entries made in those records. An effective computer-based

system will ensure that there are adequate controls existing at the point of

input, processing and output stages of the computer processing cycle and over

standing data contained in master files. Application controls need to be

ascertained, recorded and evaluated by the auditor as part of the process ofdetermining the risk of material misstatement in the audit clients financial

statements.

Input controls

Control activities designed to ensure that input is authorised, complete,

accurate and timely are referred to as input controls. Dependent on the

complexity of the application program in question, such controls will vary in

terms of quantity and sophistication. Factors to be considered in determining

these variables include cost considerations, and confidentiality requirements

with regard to the data input. Input controls common to most effective

application programs include on-screen prompt facilities (for example, arequest for an authorised user to log-in) and a facility to produce an audit


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2

SPECIFIC ASPECTS OF AUDITING IN A COMPUTER-BASED

ENVIRONMENT

JANUARY 2011

2011 ACCA

trail allowing a user to trace a transaction from its origin to disposition in thesystem.

Specific input validation checks may include:Format checks

These ensure that information is input in the correct form. For example, therequirement that the date of a sales invoice be input in numeric format only not numeric and alphanumeric.

Range checks

These ensure that information input is reasonable in line with expectations. Forexample, where an entity rarely, if ever, makes bulk-buy purchases with a valuein excess of $50,000, a purchase invoice with an input value in excess of

$50,000 is rejected for review and follow-up.

Compatibility checks

These ensure that data input from two or more fields is compatible. Forexample, a sales invoice value should be compatible with the amount of salestax charged on the invoice.

Validity checks

These ensure that the data input is valid. For example, where an entityoperates a job costing system costs input to a previously completed jobshould be rejected as invalid.

Exception checks

These ensure that an exception report is produced highlighting unusualsituations that have arisen following the input of a specific item. For example,the carry forward of a negative value for inventory held.

Sequence checks

These facilitate completeness of processing by ensuring that documentsprocessed out of sequence are rejected. For example, where pre-numberedgoods received notes are issued to acknowledge the receipt of goods intophysical inventory, any input of notes out of sequence should be rejected.

Control totals

These also facilitate completeness of processing by ensure that pre-input,manually prepared control totals are compared to control totals input. Forexample, non-matching totals of a batch of purchase invoices should result inan on-screen user prompt, or the production of an exception report forfollow-up. The use of control totals in this way are also commonly referred toas output controls (see below).

Check digit verification

This process uses algorithms to ensure that data input is accurate. For

example, internally generated valid supplier numerical reference codes, should


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be formatted in such a way that any purchase invoices input with an incorrect

code will be automatically rejected.

Processing controls

Processing controls exist to ensure that all data input is processed correctly

and that data files are appropriately updated accurately in a timely manner.

The processing controls for a specified application program should be

designed and then tested prior to live running with real data. These may

typically include the use of run-to-run controls, which ensure the integrity of

cumulative totals contained in the accounting records is maintained from one

data processing run to the next. For example, the balance carried forward on

the bank account in a companys general (nominal) ledger. Other processing

controls should include the subsequent processing of data rejected at the point

of input, for example:

A computer produced print-out of rejected items. Formal written instructions notifying data processing personnel of the

procedures to follow with regard to rejected items.

Appropriate investigation/follow up with regard to rejected items. Evidence that rejected errors have been corrected and re-input.Output controls

Output controls exist to ensure that all data is processed and that output is

distributed only to prescribed authorised users. While the degree of output

controls will vary from one organisation to another (dependent on the

confidentiality of the information and size of the organisation), common

controls comprise: Use of batch control totals, as described above (see input controls). Appropriate review and follow up of exception report information to

ensure that there are no permanently outstanding exception items.

Careful scheduling of the processing of data to help facilitate thedistribution of information to end users on a timely basis.

Formal written instructions notifying data processing personnel ofprescribed distribution procedures.

Ongoing monitoring by a responsible official, of the distribution of output,to ensure it is distributed in accordance with authorised policy.

Master file controlsThe purpose of master file controls is to ensure the ongoing integrity of the

standing data contained in the master files. It is vitally important that stringent

security controls should be exercised over all master files.

These include:

appropriate use of passwords, to restrict access to master file data the establishment of adequate procedures over the amendment of data,

comprising appropriate segregation of duties, and authority to amend

being restricted to appropriate responsible individuals

regular checking of master file data to authorised data, by anindependent responsible official


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processing controls over the updating of master files, including the use ofrecord counts and control totals.

COMPUTER ASSISTED AUDIT TECHNIQUES (CAATs)

The nature of computer-based accounting systems is such that auditors may

use the audit client companys computer, or their own, as an audit tool, to

assist them in their audit procedures. The extent to which an auditor may

choose between using CAATs and manual techniques on a specific audit

engagement depends on the following factors:

the practicality of carrying out manual testing the cost effectiveness of using CAATs the availability of audit time the availability of the audit clients computer facility the level of audit experience and expertise in using a specified CAAT the level of CAATs carried out by the audit clients internal audit function

and the extent to which the external auditor can rely on this work

There are three classifications of CAATs namely:

Audit software Test data Other techniquesDealing with each of the above in turn:

Audit software

Audit software is a generic term used to describe computer programs designedto carry out tests of control and/or substantive procedures. Such programs

may be classified as:

Packaged programs

These consist of pre-prepared generalised programs used by auditors and are

not client specific. They may be used to carry out numerous audit tasks, for

example, to select a sample, either statistically or judgementally, during

arithmetic calculations and checking for gaps in the processing of sequences.

Purpose written programs

These programs are usually client specific and may be used to carry out testsof control or substantive procedures. Audit software may be bought or

developed, but in any event the audit firms audit plan should ensure that

provision is made to ensure that specified programs are appropriate for a

clients system and the needs of the audit. Typically, they may be used to

re-perform computerised control procedures (for example, cost of sales

calculations) or perhaps to carry out an aged analysis of trade receivable

(debtor) balances.

Enquiry programs

These programs are integral to the clients accounting system; however they

may be adapted for audit purposes. For example, where a system provides forthe routine reporting on a monthly basis of employee starters and leavers,


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this facility may be utilised by the auditor when auditing salaries and wages in

the clients financial statements. Similarly, a facility to report trade payable

(creditor) long outstanding balances could be used by an auditor when

verifying the reported value of creditors.

Test data

Audit test data

Audit test data is used to test the existence and effectiveness of controls built

into an application program used by an audit client. As such, dummy

transactions are processed through the clients computerised system. The

results of processing are then compared to the auditors expected results to

determine whether controls are operating efficiently and systems

objectiveness are being achieved. For example, two dummy bank payment

transactions (one inside and one outside authorised parameters) may be

processed with the expectation that only the transaction processed within theparameters is accepted by the system. Clearly, if dummy transactions

processed do not produce the expected results in output, the auditor will need

to consider the need for increased substantive procedures in the area being

reviewed.

Integrated test facilities

To avoid the risk of corrupting a clients account system, by processing test

data with the clients other live data, auditors may instigate special test data

only processing runs for audit test data. The major disadvantage of this is that

the auditor does not have total assurance that the test data is being processed

in a similar fashion to the clients live data. To address this issue, the auditormay therefore seek permission from the client to establish an integrated test

facility within the accounting system. This entails the establishment of a

dummy unit, for example, a dummy supplier account against which the

auditors test data is processed during normal processing runs.

Other techniques

This section contains useful background information to enhance your overall

understanding.

Other CAATs include:

Embedded audit facilities (EAFs)

This technique requires the auditors own program code to be embedded

(incorporated) into the clients application software, such that verification

procedures can be carried out as required on data being processed. For

example, tests of control may include the reperformance of specific input

validation checks (see input controls above) selected transactions may be

tagged and followed through the system to ascertain whether stated controls

and processes have been applied to those transactions by the computer

system. The EAFs should ensure that the results of testing are recorded in a

special secure file for subsequent review by the auditor, who should be able to

conclude on the integrity of the processing controls generally, from the resultsof testing. A further EAF, often overlooked by students, is that of an analytical


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review program enabling concurrent performance of analytical review

procedures on client data as it is being processed through the automated

system.

Application program examination

When determining the extent to which they may rely on application controls,

auditors need to consider the extent to which specified controls have been

implemented correctly. For example, where system amendments have

occurred during an accounting period, the auditor would need assurance as to

the existence of necessary controls both before and after the amendment. The

auditor may seek to obtain such assurance by using a software program to

compare the controls in place prior to, and subsequent to, the amendment

date.

SummaryThe key objectives of an audit do not change irrespective of whether the audit

engagement is carried out in a manual or a computer-based environment. The

audit approach, planning considerations and techniques used to obtain

sufficient appropriate audit evidence do of course change. Students are

encouraged to read further to augment their knowledge of auditing in a

computer-based environment and to practise their ability to answer exam

questions on the topic by attempting questions set in previous ACCA exam

papers.

Brian Pine is examiner for CAT Paper 8


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RELEVANT TO ACCA QUALIFICATION PAPERS F8 AND P7

2011 ACCA

Clarity auditing standardsTo enhance the application of auditing standards in exam questions,

candidates must familiarise themselves with the clarity auditing standards.The International Auditing and Assurance Standards Board (IAASB) hascompleted its comprehensive project to enhance the clarity of all of its

International Standards on Auditing (ISAs) in 2009 for improvingunderstandability of auditing standards, and all the new clarity auditing

standards are now examinable. This also affects the Hong Kong Standards onAuditing (HKSAs).

The full set of clarity auditing standards features 39 documents, which include:

a new International/Hong Kong Standard on Auditing on communicatingdeficiencies in internal control ISA/HKSA 265 (Clarified), CommunicatingDeficiencies in Internal Control to those Charged with Governance and

Management

35 clarity ISAs/HKSAs a clarified international/Hong Kong standard on quality control ISQC 1/

HKSQC 1, Quality Controls for Firms that Perform Audits and Reviews of

Financial Statements, and Other Assurance and Related Services Engagements a revised glossary of terms a revised preface to the International/Hong Kong Standards on Quality

Control, Auditing, Review, Other Assurance and Related Services.

ISA/HKSA 265 (Clarified),

Among the clarified auditing standards, ISA/HKSA 265 (Clarified) is acompletely new standard.

It deals with the auditors responsibility to communicate appropriately to those

charged with governance and management deficiencies in internal control that

the auditor has identified in an audit of financial statements.

When auditors plan for an audit, they are required to perform risk assessment

through understanding internal controls, and also test for the appropriatenessof design of internal controls and whether they are implemented. When controlreliance strategy is adopted, auditors are required to perform tests of controls

to gather audit evidence on the operating effectiveness of controls.

During both processes, auditors might identify deficiencies in internal controls.In accordance with ISA/HKSA 265 (Clarified), deficiency exists when a

control is designed, implemented or operated in such a way that it is unable toprevent, or detect and correct, misstatements in financial statements on atimely basis; or a control necessary to prevent, or detect and correct

misstatements in the financial statements on a timely basis is missing. It isequivalent to a deviation from an internal control.


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It is common in practice and in exam questions to identify and explain