Final Assessment

ACCA
Paper F8 (INT)
Audit and Assurance
June 2009

Final Assessment – Answers

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

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ACCA F8 (INT) Audit and Assurance

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Final Assessment

ANSWER 1
(a)

Marks

Weakness
•

Management override.

•

Lack of proper consultation or appraisal in respect of acquisition of noncurrent assets.

Consequences
•

Weak control environment may encourage breaches of the control system.

•

Assets surplus to requirements/inappropriate assets acquired/assets for
personal use.

•

Adverse impact on cash flow.


•

Over-gearing.

Weakness
•

No formal policy in respect of obtaining quotes for major items of expenditure.

Consequences
•

Assets may not be acquired on the most favourable terms.

Weakness
•

No physical checks between assets and register.

Consequences
•

Assets may not exist/disposals not recorded.

•

Assets may not be recorded.

•


Assets which need to be written down may not be identified.
14

(b)

(i)

Consequences
•

Unauthorised/incorrect changes may be made, resulting in late
payment and loss of supplier goodwill and/or non-existent suppliers.

•

No evidence of changes which should have been made.

Recommendations
•

All amendments should be recorded on standard forms which should
be authorised by the financial controller and evidenced by signature.
The suppliers' details should have high level password protection,
and the amendments should not be undertaken by the purchase
ledger clerk.

•

Printouts of amendments should be obtained and checked by the

financial controller, and evidenced by signature.

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ACCA F8 (INT) Audit and Assurance
Marks
•

(ii)

Supplier details should be checked, periodically, on a one-for-one
basis independently of the ledger clerk.

Consequences
•

The reconciliation may not be undertaken.

•

Unauthorised payments may not be prevented or detected.

•

Unrecorded liabilities may not be identified on a timely
basis/purchases and payments may not be recorded in the correct
period.


Recommendations

(iii)

•

The reconciliation should be performed independently of the
purchase ledger clerk.

•

It should be reviewed by a responsible official, and signed as
evidence of review.

•

All suppliers' statements should be retained until the completion of
the audit.

Consequences
•

Claims may be made for excessive amounts or expenses which have
not been incurred.

•

Recovery of input VAT could be jeopardised, and excessive
disallowance of such expenditure for Corporation Tax purposes.


Recommendations
•

All expense claims should be on standard claim forms, and
supported by receipts which should be countersigned and cancelled
to prevent resubmission.

•

All employees should be informed, in writing, of the breach in
company procedure.
16
__
30
__

Marking guide – 1 mark per point (1/2 mark if not well explained).

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Final Assessment

ANSWER 2
(a)

Marks


Internal audit function
•

The internal audit function in any entity is part of the overall corporate
governance function of an entity. Corporate governance objectives include
the management of the risks to which the entity is subject that would prevent
it achieving its overall objectives such as profitability. Corporate governance
objectives also include the overarching need for the management of an entity
to exercise a stewardship function over the entity’s assets.

•

A large part of the management of risks, and the proper exercise of
stewardship, involves the maintenance of proper controls over the business.
Controls over the business as a whole, and in relation to specific areas,
include the effective operation of an internal audit function.

•

Internal audit can help management manage risks in relation to fraud and
error, and exercise proper stewardship by:
−
commenting on the process used by management to identify and
classify the specific fraud and error risks to which the entity is subject
(and in some cases helping management develop and implement
that process)
−
commenting on the appropriateness and effectiveness of actions
taken by management to manage the risks identified (and in some

cases helping management develop appropriate actions by making
recommendations)
−
periodically auditing or reviewing systems or operations to determine
whether the risks of fraud and error are being effectively managed
−
monitoring the incidence of fraud and error, investigating serious
cases and making recommendations for appropriate management
responses.

•

In practice, the work of internal audit often focuses on the adequacy and
effectiveness of internal control procedures for the prevention, detection and
reporting of fraud and error. Routine internal controls (such as the controls
over computer systems and the production of routine financial information)
and non-routine controls (such as controls over year-end adjustments to the
financial statements) are relevant.

•

It should be recognised, however, that many significant frauds bypass normal
internal control systems and that, in the case of management fraud in
particular, much higher level controls (those relating to the high level
governance of the entity) need to be reviewed by internal audit in order to
establish the nature of the risks and to manage them effectively.
5

(b)


External auditors: fraud and error in an audit of financial statements
•

External auditors are required by ISA 240 The Auditor’s Responsibility to
Consider Fraud in an Audit of Financial Statements to consider the risks of
material misstatements in the financial statements due to fraud. Their audit
procedures will then be based on a risk assessment. Regardless of the risk
assessment, auditors are required to be alert to the possibility of fraud
throughout the audit and to maintain an attitude of professional scepticism,
notwithstanding the auditors’ past experience of the honesty and integrity of
management and those charged with governance. Members of the
engagement team should discuss the susceptibility of the entity’s financial
statements to material misstatements due to fraud.

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ACCA F8 (INT) Audit and Assurance
Marks
•

Auditors should
assessment of
communications
should enquire
process.

•


Auditors should also enquire of management and those charged with
governance about any suspected or actual instance of fraud.

•

Auditors should consider fraud risk factors, unusual or unexpected
relationships, and assess the risk of misstatements due to fraud, identifying
any significant risks. Auditors should evaluate the design of relevant internal
controls and determine whether they have been implemented.

•

Auditors should determine an overall response to the assessed risk of
material misstatements due to fraud and develop appropriate audit
procedures, including testing certain journal entries, reviewing estimates for
bias, and obtaining an understanding of the business rationale of significant
transactions outside the normal course of business. Appropriate management
representations should be obtained.

•

External auditors are only concerned with risks that might cause material
error in the financial statements. External auditors might therefore pay less
attention than internal auditors to small frauds (and errors), although they
must always consider whether evidence of single instances of fraud (or error)
are indicative of more systematic problems.

•


It is accepted that, because of the hidden nature of fraud, an audit properly
conducted in accordance with ISAs might not detect a material misstatement
in the financial statements arising from fraud. In practice, routine errors are
much easier to detect than frauds.

•

Where auditors encounter suspicions or actual instances of fraud (or error),
they must consider the effect on the financial statements, which will usually
involve further investigations. They should also consider the need to report to
management and those charged with governance.

•

Where serious frauds (or errors) are encountered, auditors need also to
consider the effect on the going concern status of the entity, and the possible
need to report externally to third parties, either in the public interest, for
national security reasons, or for regulatory reasons. Many entities in the
financial services sector are subject to this type of regulatory reporting and
many countries have legislation relating to the reporting of money laundering
activities, for example.

make enquiries of management regarding management’s
fraud risk, its process for dealing with risk, and its
with those charged with governance and employees. They
of those charged with governance about the oversight

5
__
10

__
Marking guide – 1 mark per point (½ mark if not well explained).

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Final Assessment

ANSWER 3
(a)

Audit risk
Meaning
‘Audit risk’ is the risk that an auditor forms an inappropriate audit opinion on the
financial statements. It has three components: inherent risk, control risk and detection
risk. The following equation represents the relationship:
Audit risk = Inherent risk × Control risk × Detection risk
Why is it important?
If inherent risk is high, there is greater potential for material misstatement in the
financial statements. This risk of misstatement is reduced if control risk is low, i.e. the
accounting and internal control systems of the enterprise are effective in detecting
and correcting errors arising.
Detection risk is under the control of the auditor and dependent on the assessment of
inherent and control risk. In the audit risk model, detection risk is the balancing figure
to satisfy the ultimate risk accepted.
As the auditor is at risk from non-detection of material misstatements, testing should
be concentrated on the material/high risk items. This results in more efficient use of
resources.

Risk is a principal determinant of the audit approach and materiality. For example:
•

if detection risk is to be rendered low (e.g. because inherent and control risk
are high), this could mean more substantive procedures (e.g. larger samples)
to ensure that the financial statements are not materially misstated

•

if control risk is evaluated as being low (through tests of controls) then, as
expected, the level of substantive procedures will be reduced.

The level of risk affects the nature and timing of audit work as well as its extent. For
example, when risk is increased more reliable evidence should be sought, e.g. more
independent/third party evidence.

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ACCA F8 (INT) Audit and Assurance

(b)

Potential risk

Why a risk

•


Richard Pine, the
new audit
manager, is from
the property and
service client base.

•

Errors in the financial statements may be
missed due to Richard’s non-familiarity with
the Carnes’s business.

•

The Carnes are
expecting ‘another
quick audit’.

•

Richard is likely to need to carry out more
work than usual to become familiar with the
client. This may be interpreted by the
Carnes as mistrust, with the consequence
that they are reluctant to volunteer
assistance.

•


The business is
run and managed
by a husband and
wife team.

•

There is a limited scope for supervisory or
authorisation controls.

•

Those controls in place are likely to be
unreliable due to the risk of management
override.

There has been a
loss of revenue
from the original
farming operations,
which the Carnes
are addressing by
diversification.

•

The loss of revenue from the original
business may threaten the viability of the
farm as a going concern.


•

Although the Carnes are addressing this by
diversification, the process of change also
carries a risk as it involves adapting to new
markets and learning new skills.

The Carnes are
raising organically
fed geese as an
alternative to
turkey.

•

This source of revenue assumes that
customers of the meat distributors used can
be persuaded to change from the traditional
turkey. There is a significant possibility that
this market will not materialise.

•

Organic food supplies for the geese will
carry a higher price tag. There is no
evidence to suggest that John Carnes has
evaluated if this cost can be recouped. It is
possible that, in spite of generating
revenue, the sale of geese may realise no
overall profit.


•

This is a markedly seasonal business.
Income will have ceased before the first
holidaymakers arrive in May, thereby
putting a strain on the servicing of debt.

•

If John Carnes has entered into contracts
for the supply of grazing, this could prohibit
future expansion of holiday/fishing facilities
by restricting the availability of land.

•

As these are the most successful elements
of Golden Pond Fisheries, their curtailment
could threaten the going concern status of
the company.

•

If no such contracts exist, then grazing
revenues could cease at any time – there is
no evidence that such a prospect has been
considered.

•


•

•

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Pastures are being
let for sheep
grazing.

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Final Assessment

Potential risk

Why a risk

•

•

Any such breach of import regulations –
when discovered – will result in severe
penalties, extending to fines, quarantine of
stocks, etc.

•


The consequence would be a loss of
revenue and reputation in the core
business.

•

The importing of alien species will threaten
existing stocks with diseases and parasites
to which they are not resistant.

John Carnes
appears to imply
that blue carp are
to be imported
illegally.

•

The holiday
cottages are a
seasonal business.

•

Cash flow will fluctuate widely over a
12-month period. This places strain on debt
repayment terms.

•


The development
of the holiday
cottages was
financed by
borrowing.

•

Financing a business by way of borrowing
always carries the risk that repayment of
capital and interest could cease in less
successful periods.

•

The provider of finance will want a review of
the financial statements, increasing the risk
of management bias in preparing the
financial statements to show a favourable
position.

•

Accounting records
are maintained on
a PC.

•


The use of a PC, with its associated risks of
data corruption and lack of sufficient
controls, increases the risks regarding the
completeness and accuracy of accounting
records.

•

The amount of
paperwork has
decreased.

•

Audit trail may be lost without hard copies,
increasing the risk that insufficient evidence
will be available.

•

Data has recently
been transferred to
the computer
system.

•

Increased risk of errors due to inaccurate
transfer of data onto the PC.


•

Claire trained as a
bookkeeper 30
years ago.

•

Claire’s bookkeeping training may prove to
be of limited advantage as there has been
a significant amount of change over recent
years. Again, this reduces confidence in the
accuracy of the financial statements.

•

Part-time staff are
employed for six
months of the year
and are paid in
cash.

•

It is important to ensure that these
individuals appear on the payroll, and that
tax and insurance regulations have been
complied with.

•


Insufficient records may be available due to
the cash nature of transactions.

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ACCA F8 (INT) Audit and Assurance

Potential risk

Why a risk

•

•

It will take time to create and adopt a truly
uniform audit approach, and this will
increase the detection risk associated with
all work undertaken.

•

This arises from non-familiarity, and
increases the risk of procedures being
omitted or conducted inefficiently.


•

Mergers of any type always increase the
risk of ‘culture clashes’, and this can reduce
the efficiency of audit work undertaken.

The current audit
firm has resulted
from a merger of
two firms with very
different client
bases from
different parts of
the country.

MARKING GUIDE
(a)

Audit risk

6

(b)

Potential audit risks (1/2 mark for risk, ½ mark for
explanation)

14
__


Total marks available

20
__

ANSWER 4
(a)

It is the directors’ responsibility to assess the company’s ability to continue as a going
concern when they are preparing the financial statements. If they are aware of any
material uncertainties that may affect this assessment, then they are required to
disclose such uncertainties in the financial statements.
The auditor, when performing the going concern review, should determine how well
the directors have performed this assessment and whether they have taken all
relevant factors into consideration.
Auditors should generally look ahead at least one year from the date of the directors’
approval of the accounts, in assessing the validity of the going concern basis.

(b)

•

The auditors will need to satisfy themselves that the going concern
assumption is reasonable.

•

Auditors should not assume that the going concern concept will continue to
apply, but need to regularly conduct a specific examination of the relevant
factors to reach a decision.


•

This will involve an overall review of financial factors, preferably before the
client’s year end, in order to establish whether there are factors which cast
doubt on the going concern basis.

•

If there are, further investigation is required.

(i)

Issues to consider (only ten were required)
Issues that the audit manager should have considered when assessing
whether or not Caffyn is a going concern are as follows:

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•

Has the company been relying heavily on short-term finance?

•

Does the company’s market share seem to be declining?

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Final Assessment

(ii)

•

Does the company have sufficient funds to meet loan and capital
repayments due in the next 12 months?

•

Is the company collecting its debts without problems?

•

Are there any contingent events or post balance sheet events which
affect the company’s going concern status?

•

Does the company rely heavily on one or two major suppliers who
are experiencing difficulties?

•

Has the company any unauthorised short-term borrowings?

•

Has the company been denied credit by any suppliers?


•

Has the company tried to restructure its debts?

•

Has the company been experiencing significant staffing problems,
with loss of key staff?

•

Has the company lost any key suppliers/customers which has
significantly affected its business?

Types of evidence
Types of evidence that the audit manager should have considered during her
going concern review are as follows:
•

Budget, forecast and actual information for the period in question and
whether or not the budgeting/forecasting details were accurate.
Clearly, if the information provided were very inaccurate, then future
information produced by the same system is unlikely to be reliable.
The auditor would also review the systems to assess how well these
are kept up to date.

•

The systems that exist to provide the directors with warnings of future

risk areas and potential problems and whether these are satisfactory.

•

The directors’ plans to address the current borrowing problems.

•

Discussions with the company’s lawyers to assess whether there are
any legal issues surrounding the company’s viability/ability to
continue.

•

Discussions with the company’s bank to determine whether the
directors’ plans for addressing the financial problems are viable and
realistic.

•

The existence of obligations and guarantees to any other
organisations which could result in Caffyn’s bankruptcy.

MARKING GUIDE
(a)

Auditors responsibility – going concern

(b)


(i)

Issues to consider – 1 mark each

10

(ii)

Evidence – 1 mark each

5
__

Total marks available

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5

20
__

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ACCA F8 (INT) Audit and Assurance

ANSWER 5
(a)


For an audit, the auditor will provide a positive assurance about the truth and fairness
of the accounts. Although auditors cannot give absolute assurance on audited
financial statements, the work carried out and the level of evidence obtained during
the audit work should be sufficient to allow them to provide a high level of assurance
that the financial statements are free from material misstatements.
In contrast, the negative assurance will provide limited assurance but provide some
comfort to the intended user. In most cases, the auditor will be able to identify any
material anomalies/errors or at least highlight risks in particular areas. The conclusion
is of the type 'nothing has come to our attention' and the users must make up their
own minds about the validity of the report and, if in doubt, might want to undertake
more enquiries themselves.

(b)

Mercury
Conclusion
Unqualified if note to accounts adequate.
Qualified if note inadequate and the directors refuse to amend.
Reason
Significant uncertainty is likely to have a very great impact therefore should be
disclosed adequately to inform the users of the financial statements.
If disclosure is not adequate it is potentially misleading the user of the financial
statements.
Effect on report
If disclosure is adequate, an Emphasis of Matter paragraph should be included
drawing users’ attention to the note. Specific statement that report is not qualified in
this respect (e.g. validity of going concern).
If disclosure is inadequate and the directors refuse to amend, an Except For
Disagreement opinion should be issued.


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Final Assessment
Pluto
Conclusion
Qualified.
Reason
Limitation in scope of work, as evidence reasonably expected to be available is not
available.
Material as 28% of profit would have to be expensed if not capitalised.
Effect on audit report
Describe limitation in Basis of Opinion paragraph.
Except for any adjustments that might have been found to be necessary had
sufficient evidence been obtained.
In respect alone of the limitation on audit work relating to non-current assets in the
course of construction:
•

All information and explanations considered necessary for the audit not
obtained.

•

Proper accounting records not maintained.

Neptune
Conclusion

Qualified.
Reason
Disagreement over accounting treatment.
Material and probably pervasive as profit is turned into a loss.
Effect on audit report
Adverse opinion/accounts do not give a true and fair view.
Reason and amounts involved stated in opinion paragraph.
MARKING GUIDE
(a)

Differences between positive and negative assurance

(b)

Qualifying for audit report (up to 5 marks each; 1 mark
for conclusion, 2 for reason, 2 for effect if well
explained)

Total marks available

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5

15
__
20
__

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