Paper F8

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Study Text

Audit and Assurance
This ACCA Study Text for Paper F8 Audit and
Assurance has been comprehensively reviewed by
the ACCA examining team. This review guarantees
appropriate depth and breadth of content and
comprehensive syllabus coverage.

Audit and Assurance

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ACF8ST14 (HO).indd 1-3

27/05/2014 17:40


S
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PAPER F8
AUDIT AND ASSURANCE

BPP Learning Media is an ACCA Approved Learning Partner – content. This means we
work closely with ACCA to ensure this Study Text contains the information you need to
pass your exam.
In this Study Text, which has been reviewed by the ACCA examination team, we:



Highlight the most important elements in the syllabus and the key skills you need



Signpost how each chapter links to the syllabus and the study guide



Provide lots of exam focus points demonstrating what is expected of you in the exam



Emphasise key points in regular fast forward summaries



Test your knowledge in quick quizzes



Examine your understanding in our practice question bank



Reference all the important topics in our full index

BPP's Practice & Revision Kit and i-Pass products also support this paper.

FOR EXAMS IN DECEMBER 2014 AND JUNE 2015


T
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First edition 2007
Seventh edition June 2014
ISBN 9781 4727 1083 3
(Previous ISBN 9781 4453 9651 4)
e-ISBN 9781 4453 6738 5
British Library Cataloguing-in-Publication Data
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is available from the British Library
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ii


Contents
Page

Introduction
Helping you to pass
Studying F8
The exam paper
Syllabus and study guide


v
vii
xii
xiii

Part A Audit framework and regulation
1
2
3
4
5

Audit and other assurance engagements
Statutory audit and regulation
Corporate governance
Professional ethics
Internal audit

3
17
35
51
83

Part B Planning and risk assessment
6
7
8

Risk assessment

Audit planning and documentation
Introduction to audit evidence

105
135
149

Part C Internal control
9
10

Internal control
Tests of controls

161
185

Part D Audit evidence
11
12
13
14
15
16
17

Audit procedures and sampling
Non-current assets
Inventory
Receivables

Cash and bank
Liabilities, capital and directors’ emoluments
Not-for-profit organisations

217
247
257
275
289
299
317

Part E Review and reporting
18
19

Audit review and finalisation
Reports

Practice question bank
Practice answer bank
Index
Review form

333
351
375
405
461
481


Contents

iii


A note about copyright
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iv


Helping you to pass
BPP Learning Media – Approved Learning Partner – content
As ACCA’s Approved Learning Partner – content, BPP Learning Media gives you the opportunity to use
study materials reviewed by the ACCA examination team. By incorporating the examination team’s
comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning
Media Study Text provides excellent, ACCA-approved support for your studies.

The PER alert
Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three
year practical experience requirement (PER). To help you to recognise areas of the syllabus that you
might be able to apply in the workplace to achieve different performance objectives, we have introduced
the ‘PER alert’ feature. You will find this feature throughout the Study Text to remind you that what you
are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement.
Your achievement of the PER should now be recorded in your online My Experience record.

Tackling studying
Studying can be a daunting prospect, particularly when you have lots of other commitments. The
different features of the text, the purposes of which are explained fully on the Chapter features page, will
help you whilst studying and improve your chances of exam success.

Developing exam awareness
Our Texts are completely focused on helping you pass your exam.
Our advice on Studying F8 outlines the content of the paper, the necessary skills you are expected to be

able to demonstrate and any brought forward knowledge you are expected to have.
Exam focus points are included within the chapters to highlight when and how specific topics were
examined, or how they might be examined in the future.

Using the Syllabus and Study Guide
You can find the syllabus and Study Guide on page xiii of this Study Text.

Testing what you can do
Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can
recall what you have learnt.
We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as
Quick Quizzes at the end of each chapter to test your knowledge of the chapter content.

Introduction

v


Chapter features
Each chapter contains a number of helpful features to guide you through each topic.
Topic list
Topic list

Syllabus reference

What you will be studying in this chapter and the relevant
section numbers, together with ACCA syllabus references.

Introduction


Puts the chapter content in the context of the syllabus as
a whole.

Study Guide

Links the chapter content with ACCA guidance.

Exam Guide

Highlights how examinable the chapter content is likely to
be and the ways in which it could be examined.

Knowledge brought forward from earlier studies

What you are assumed to know from previous
studies/exams.

FAST FORWARD

Summarises the content of main chapter headings,
allowing you to preview and review each section easily.

Examples

Demonstrate how to apply key knowledge and
techniques.

Key terms

Definitions of important concepts that can often earn you

easy marks in exams.

Exam focus points

When and how specific topics were examined, or how
they may be examined in the future.

Formula to learn

Formulae that are not given in the exam but which have to
be learnt.
Gives you a useful indication of syllabus areas that
closely relate to performance objectives in your Practical
Experience Requirement (PER).

vi

Introduction

Question

Gives you essential practice of techniques covered in the
chapter.

Case Study

Real world examples of theories and techniques.

Chapter Roundup


A full list of the Fast Forwards included in the chapter,
providing an easy source of review.

Quick Quiz

A quick test of your knowledge of the main topics in the
chapter.

Practice Question Bank

Found at the back of the Study Text with more
comprehensive chapter questions. Cross referenced for
easy navigation.


Studying F8
The F8 Audit and Assurance exam tests students' knowledge of auditing and assurance theory but also,
very importantly, their ability to apply that knowledge to scenarios that they might well come across in
their auditing careers.
The examining team’s approach interview is available on the F8 area of the ACCA website, along with an
examiner’s analysis interview looking at student performance in various exam sittings, which highlights
how students can improve their performance.
All questions on this paper are compulsory so any topic from across the syllabus could be examined. As
stated above, it is essential that students possess both knowledge of auditing and assurance and the
ability to apply that knowledge to situations that could arise in real life.

1 What F8 is about
The purpose of the F8 syllabus is to develop knowledge and understanding of the process of carrying out
the assurance engagement and its application in the context of the professional regulatory framework.
The syllabus is divided into five main sections:

(a)

Audit framework and regulation
The syllabus introduces the concept of assurance engagements such as the external audit and the
different levels of assurance that can be provided. You need to understand the purpose of an
external audit and the respective roles of auditors and management. This part of the syllabus also
explains the importance of good corporate governance within an entity. The regulatory framework
is also explained, as well as the key area of professional ethics.
Also in the context of the audit framework, we explain the nature of internal audit and describe its
role as part of overall performance management and good corporate governance within an entity.
It is essential that you understand the differences between internal and external audit at this stage.

(b)

Planning and risk assessment
Planning and risk assessment are key stages of the external audit because it is the information
and knowledge gained at this time that determine the audit approach to take. We also develop
further the concept of materiality which was introduced briefly in the first part of the syllabus.

(c)

Internal control
In this part of the syllabus you need to be able to describe and evaluate information systems and
internal controls to identify and communicate control risks and their potential consequences to the
entity's management, making appropriate recommendations to mitigate those risks. We cover key
areas of purchases, sales, payroll, inventory, cash and non-current assets.

(d)

Audit evidence

Audit conclusions need to be supported by sufficient and appropriate audit evidence. This area of
the syllabus assesses the reliability of various types and sources of audit evidence and also
examines in detail the audit of specific items (non-current assets, inventory, receivables, bank and
cash and payables). We also look at the special considerations for the audit of not-for-profit
organisations such as charities, which could come up in a scenario-based question.

(e)

Review and reporting
Towards the end of an external audit, the auditor needs to consider the concept of going concern
and subsequent events which could impact on the financial statements. We also look at the audit
evidence provided by written representations from management and consider the impact of any
uncorrected misstatements on the accounts.

Introduction

vii


This section concludes on the important topic of audit reporting. The outcome of the external audit
is the audit report which sets out the auditor's opinion on the financial statements. This section of
the syllabus looks at the various types of audit report that can be issued and what each of them
means. It also looks at reports to management, which are a by-product of the audit but
nevertheless very important for highlighting deficiencies in internal control to management.

2 What skills are required?
F8 builds on the knowledge and understanding gained from Paper F3 Financial Accounting.
You must possess good technical knowledge of audit and financial reporting but one of the key skills you
will need to is to be able to apply your knowledge to the question.
Section A of the exam will consist of multiple choice questions. These questions can cover any part of the

syllabus, so it is important to gain a precise knowledge of each of the syllabus areas.
Section B of the exam will comprise four 10-mark written questions and two 20-mark questions. It is
important to read the question requirements carefully and make sure that you answer the question set.
Another important skill you will need is to be able to explain key ideas, techniques or approaches.
Explaining means providing simple definitions and including the reasons why these approaches have been
developed. Your explanations need to be clearly focused on the particular scenario in the question.

3 How to improve your chances of passing


There is no choice in this paper, all questions have to be answered. You must therefore study the
entire syllabus, there are no short-cuts.



The first section of the paper consists of 12 multiple choice questions, eight of which are worth
two marks each and four of which are worth 1 mark each. These will inevitably cover a wide range
of the syllabus.
Practising questions under timed conditions is essential. BPP's Practice and Revision Kit contains
10 mark and 20 mark questions on all areas of the syllabus.
Questions will be based on simple scenarios and answers must be focused and specific to the
organisation.
Answer plans will help you to focus on the requirements of the question and enable you to manage
your time effectively.
Answer all parts of the question. Even if you cannot do all of the calculation elements, you will still
be able to gain marks in the discussion parts.
Make sure your answers focus on practical applications of management accounting, common
sense is essential!
Keep an eye out for articles as the examination team will use Student Accountant to communicate
with students.

Read journals etc to pick up on ways in which real organisations apply management accounting
and think about your own organisation if that is relevant.

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4 Brought forward knowledge
The F8 syllabus assumes knowledge brought forward from F3 Financial Accounting. It's important to be
comfortable with your financial reporting studies because such aspects are likely to come up in scenariobased questions such as subsequent events. ACCA therefore recommends that you sit papers in order so
you have the knowledge from Paper F7 Financial Reporting which will also be an advantage when taking
Paper F8. However, please note that you do not have to have passed F7 in order to sit F8.

viii

Introduction


5 Answering questions
5.1 Analysing question requirements
It's particularly important to consider the question requirements carefully to make sure you understand
exactly what the question is asking, and whether each question part has to be answered in the context of
the scenario or is more general. You also need to be sure that you understand all the tasks that the
question is asking you to perform.
Remember that every word will be important. If for example you are asked to:
'Explain the importance of carrying out a risk assessment at the planning stage of the statutory audit of

Company X, then you would explain that:


A risk assessment carried out under the ISAs helps the auditor to identify the areas that are
susceptible to material misstatement



The risk assessment forms a basis for designing or performing further audit procedures

You would NOT identify all the audit risks arising in Company X.

5.2 Understanding the question verbs
Important!

The examining team will use the question verbs very deliberately to signal what they require.
Verbs that are likely to be frequently used in this exam are listed below, together with their intellectual
levels and guidance on their meaning.
Intellectual level
1

Define

Give the meaning of

1

Explain

Make clear


1

Identify

Recognise or select

1

Describe

Give the key features

2

Distinguish

2
2

Compare and
contrast
Contrast

2

Analyse

3


Assess

3

Examine

Define two different terms, viewpoints or concepts on the
basis of the differences between them
Explain the similarities and differences between two
different terms, viewpoints or concepts
Explain the differences between two different terms,
viewpoints or concepts
Give reasons for the current situation or what has
happened
Determine the strengths/weaknesses/ importance/
significance/ability to contribute
Critically review in detail

3

Discuss

Examine by using arguments for and against

3

Explore

Examine or discuss in a wide-ranging manner


3

Criticise

3

Evaluate/critically
evaluate

3

Construct the case

3

Recommend

Present the weaknesses of/problems with the actions
taken or viewpoint expressed, supported by evidence
Determine the value of in the light of the arguments for
and against (critically evaluate means weighting the
answer towards criticisms/arguments against).
Present the arguments in favour or against, supported by
evidence
Advise the appropriate actions to pursue in terms the
recipient will understand

Introduction

ix



A lower level verb such as define will require a more descriptive answer. A higher level verb such as
evaluate will require a more applied, critical answer.

5.3 Analysing question scenarios
When reading through the scenario you need to think widely about how the scenario relates to the
underlying themes of the syllabus, and also important content from whatever areas of the syllabus the
question covers:
(a)

Ethics
In questions on ethics, you are likely to be looking out for ethical threats in the current
arrangements, and trying to recommend appropriate responses (for example, ways to reduce the
threats to an acceptable level) that are line with ethical codes.

(b)

Internal control
With internal control questions, you are most likely to be interested in the deficiencies in the
internal control system, and the implications of the deficiencies. From here, you may need to
provide and either recommendations to management on how to eliminate the deficiencies, or
consider the audit risks arising and suggest audit procedures in response to the deficiencies.

(c)

Audit procedures
If you are asked to suggest tests of controls or substantive procedures relating to a particular
account balance, transaction or event, first identify the relevant financial statement assertion. Look
in the scenario for potential sources of audit evidence. You should call on your knowledge of the

standard audit procedures to apply, but always make sure that the procedures you suggest are
relevant to the scenario.

(d)

Financial analysis
Where a question requires you to perform financial analysis and calculate ratios, read the scenario
first for any clues as to the kind of overarching issue that is affecting the company. These clues
may enable you to choose the relevant ratios to calculate. Always keep in mind what the ratios
mean: remember what figures make up each ratio, so as to identify possible reasons for
fluctuations/sources of misstatement.

(e)

Modified audit opinions
If you are presented with uncorrected misstatements or events which may have an impact on the
auditor’s report, first consider how material the misstatement or event is in the context of the
financial statements as a whole. You will need to take into account the nature of the company’s
business, as well as any quantitative measures given (assets, revenue or profit) to make this
assessment. It will not suffice to identify the appropriate audit opinion – you must justify it.

5.4 Tackling multiple choice questions
Multiple choice questions (MCQs) are now part of the F8 exams. Of the total marks available in the exam,
the MCQs comprise 20 percent.
The MCQs in your exam contain either two possible answers (1 mark questions) or four possible answers
2 mark questions). You have to choose the option that best answers the question. The three incorrect
options are called distractors. There is a skill in answering MCQs quickly and correctly. By practising
MCQs you can develop this skill, giving you a better chance of passing the exam.
You may wish to follow the approach outlined below, or you may prefer to adapt it.


x

Introduction


Step 1

Skim read all the MCQs and identify what appear to be the easier questions.

Step 2

Attempt each question – starting with the easier questions identified in Step 1. Read the
question thoroughly. You may prefer to work out the answer before looking at the options,
or you may prefer to look at the options at the beginning. Adopt the method that works
best for you.

Step 3

Read the options and see if one matches your own answer. Be careful with numerical
questions as the distractors are designed to match answers that incorporate common
errors. Check that your calculation is correct. Have you followed the requirement exactly?
Have you included every stage of the calculation?

Step 4

You may find that none of the options matches your answer.


Re-read the question to ensure that you understand it and are answering the
requirement




Eliminate any obviously wrong answers



Consider which of the remaining answers is the most likely to be correct and select
the option

Step 5

If you are still unsure make a note and continue to the next question

Step 6

Revisit unanswered questions. When you come back to a question after a break you often
find you are able to answer it correctly straight away. If you are still unsure have a guess.
You are not penalised for incorrect answers, so never leave a question unanswered!

After extensive practice and revision of MCQs, you may find that you recognise a question when you sit
the exam. Be aware that the detail and/or requirement may be different. If the question seems familiar read
the requirement and options carefully – do not assume that it is identical.

Introduction

xi


The exam paper

Format of the paper
The exam is a three-hour paper consisting of twelve multiple choice questions (MCQs) and six compulsory
written questions. You also have 15 minutes for reading and planning.
The MCQs will comprise of eight 2-mark questions, and four 1-mark questions. They will examine topics
from across the F8 syllabus.
Of the written questions, questions 1 to 4 will be worth 10 marks. Questions 5 and 6 will be worth 20
marks each.
The 10-mark questions cover all topics in the syllabus, most likely with each question focusing on one
single syllabus area. These questions will either take the form of a short scenario, or knowledge-based
requirements.
Each of the 20-mark questions will cover multiple syllabus areas. They will be predominantly focused on
planning and risk assessment (syllabus area B), internal control (syllabus area C) and audit evidence
(syllabus area D). However, the audit framework and regulation (syllabus area A) and review and reporting
(syllabus area E) can also feature.
The majority of the questions will be discursive but some questions involving computational elements
could be set from time to time.

xii

Introduction


Syllabus and Study Guide
The F8 syllabus and study guide can be found below.

Introduction

xiii



xiv

Introduction


Introduction

xv


xvi

Introduction


Introduction

xvii


xviii

Introduction


Introduction

xix



xx

Introduction


Introduction

xxi


xxii

Introduction


P
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Audit framework and
regulation

1


2