F8 AA (Int)Session00_j09

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ATC

INTERNATIONAL

ACCA

PAPER F8

AUDIT AND ASSURANCE(INTERNATIONAL)

STUDY SYSTEM



No responsibility for loss occasioned to any person acting or refraining from action as a result of anymaterial in this publication can be accepted by the author, editor or publisher.

This training material has been published and prepared by Accountancy Tuition Centre Limited

16 Elmtree Road

TeddingtonTW11 8STUnited Kingdom.

Editorial material Copyright Accountancy Tuition Centre (International Holdings) Limited, 2009.

All rights reserved. No part of this training material may be translated, reprinted orreproduced or utilised in any form either in whole or in part or by any electronic,mechanical or other means, now known or hereafter invented, including photocopyingand recording, or in any information storage and retrieval system, without permission inwriting from the Accountancy Tuition Centre Limited.



SESSION 00 – CONTENTS

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Session Page

Introduction (v)

Syllabus (vii)

Examinable documents (xi)Exam technique (xiv)

1 Audit and other assurance engagements 0101

2 Regulatory environment – statutory audit 0201

3 Regulatory environment – corporate governance 0301

4 Professional codes of ethics and conduct 0401

5 Auditor appointment 0501

6 Documentation 0601

7 Planning 07018 Business risk and internal control 0801

9 Understanding the entity, audit risk and engagement risk 0901

10 Audit materiality 1001

11 Fraud & error, laws & regulations 1101

12 Computer information systems (CIS) 1201

13 Reliance on control effectiveness & substantive testing 1301

14 Audit considerations relating to entities using service organisations 1401

15 Audit evidence 150116 Analytical procedures 1601

17 Accounting estimates 1701

18 Using the work of an expert 1801

19 Audit sampling 1901

20 Management representations 2001

21 Computer-assisted audit techniques 2101

22 Non-current assets 2201

23 Inventory 2301

24 Trade receivables 2401

25 Loans, bank and cash 2501

26 Trade payables, accrued expenses and provisions 2601

27 Small businesses and not-for-profit organisations 2701

28 Communications with management and those charged with governance 2801

29 Audit finalisation 2901

30 The auditor’s report on financial statements 3001

31 Going concern 3101

32 Review assignments and reports 3201



SESSION 00 – CONTENTS

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33 Internal audit 3301

34 Considering the work of internal audit 3401

Appendices

35 Appendix 1 – Documentation techniques 350136 Appendix 2 – Transaction cycles 3601

37 Appendix 3 – Audit programs 3701

38 Appendix 4 – Review programme 3801

39 Appendix 5 – Data sources and records 3901

40 Appendix 6 – Glossary of terms 4001

Index 4101

UPDATING NOTE

The IASB reissued IAS 1 ‘Presentation of Financial Statements’ in September 2007 and hasbeen examinable since June 2008. Amendments to the former IAS 1 were mainly topresentation and terminology and have been updated throughout the Study System andQuestion Banks to reflect the terminology that is used in the ACCA examinations.

However, these changes in terminology have not yet been reflected within InternationalStandards on Auditing (ISAs) and other pronouncements of the International Auditing andAssurance Standard Board (IAASB).

The main differences between the former terminology (retained by IAASB) and the new IFRSterminology (which is examinable) can be summarised as follows:

Balance sheet Statement of financial position

Balance sheet date End of the reporting period (i.e. “year end”)

Income statement Statement of comprehensive income (but see below)

Cash flow statement Statement of cash flows (IAS 7 was renamed)

Events after the balance sheet date Events after the reporting period (IAS 10 wasrenamed)

The Statement of Comprehensive Income consists of two elements – an income statement(the same as the former IAS 1 format) plus other comprehensive income including, forexample, gains on revaluations, cash-flow hedges, translation of foreign operations andactuarial gains (all of which are still analysed within a statement of changes in equity).

Effectively, the only element that may be dealt within F8 will be the gains on revaluations.Thus the statements of comprehensive income used throughout F8 are the same as theformer IAS 1 income statements.



SESSION 00 – SYLLABUS

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Introduction

This Study System has been specifically written for The Association of Chartered CertifiedAccountants Paper F8 Examination, Audit and Assurance (International).

It provides comprehensive coverage of the core syllabus areas and is designed to be usedboth as a reference text and interactively with the ATC Learning System to provide you withthe knowledge, skill and confidence to succeed in your ACCA studies.

SYLLABUS

Aim

To develop knowledge and understanding of the process of carrying out the assuranceengagement and its application in the context of the professional regulatory framework.

Relational diagram

This diagram shows the indirect links between this paper and other papers following it.

AAA (P7)

AA (F8)

PA (P1)

FR (F7)CL (F4)

Objectives

On completion of this paper, candidates should be able to:

A Explain the nature, purpose and scope of assurance engagements including the role ofthe external audit and its regulatory and ethical framework

B Explain the nature of internal audit and describe its role as part of overall performancemanagement and its relationship with the external audit

C Demonstrate how the auditor obtains an understanding of the entity and itsenvironment, assesses the risk of material misstatement (whether arising from fraud orother irregularities) and plans an audit of financial statements

D Describe and evaluate information systems and internal controls to identify andcommunicate control risks and their potential consequences, making appropriaterecommendations

E Identify and describe the work and evidence required to meet the objectives of auditengagements and the application of the International Standards on Auditing

F Evaluate findings and modify the audit plan as necessary




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G Explain how the conclusions from audit work are reflected in different types of auditreport, explain the elements of each type of report.

Overview

The Audit and Assurance syllabus is essentially divided into seven areas. The syllabus startswith the nature, purpose and scope of assurance engagements, including the statutory audit,its regulatory environment, and introduces professional ethics relating to audit andassurance. It then leads into internal audit, including the scope of internal audit as well asthe differences between internal audit and external audit. The syllabus then covers a rangeof areas relating to an audit of financial statements. These include planning and riskassessment, evaluating internal controls, audit evidence, and a review of the financialstatements. The final section then deals with reporting, including statutory audit reports,management reports, and internal audit reports.

Audit framework and regulation (A)

Planning and risk assessment (C)

Internal audit (B)

Internal control (D) Audit evidence (E)

Review (F)

Reporting (G)




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Detailed syllabus

A. Audit Framework and Regulation

1. The concept of audit and other assurance engagements

2. Statutory audits3. The regulatory environment and corporate governance4. Professional ethics and ACCA’s Code of Ethics and Conduct

B. Internal audit

1. Internal audit and corporate governance2. Differences between external and internal audit3. The scope of the internal audit function4. Outsourcing the internal audit department5. Internal audit assignments

C. Planning and risk assessment

1. Objective and general principles2. Understanding the entity and knowledge of the business3. Assessing the risks of material misstatement and fraud4. Analytical procedures5. Planning an audit6. Audit documentation7. The work of others

D. Internal control

1. Internal control systems2. The use of internal control systems by auditors3. Transaction cycles4. Tests of control5. The evaluation of internal control components6. Communication on internal control

E. Audit evidence

1. The use of assertions by auditors

2. Audit procedures3. The audit of specific items4. Audit sampling and other means of testing5. Computer-assisted audit techniques6. Not-for-profit organisations

F. Review

1. Subsequent events2. Going concern3. Management representations

4. Audit finalisation and the final review




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G. Reporting

1. Audit reports2. Reports to management3. Internal audit reports

Approach to examining the syllabus

The syllabus is assessed by a three-hour paper-based examination, consisting of fivecompulsory questions (no choice). The bulk of the questions will be discursive but somequestions involving computational elements will be set from time to time.

The questions will cover all areas of the syllabus.

Question 1 will be a scenario-based question worth 30 marks. Question 2 will be a knowledge-based question worth 10 marks. Questions 3, 4 and 5 will be worth 20 marks each.

Numberof marks

Q1: Scenario based, multi-part question on audit procedures. 30Q2: Short knowledge based multi-part question based on ISA and key areas 10Q3: 20Q4: Multi-part questions based on the whole syllabus 20Q5: 20

___

100 ___

There will be 15 minutes of reading time allowed before starting the examination proper.The advice from the examiner is to use the majority of this time to read through and thinkabout (plan) Question 1.

Additional information

Internal audit can be examined within any of the five questions. There is no set quantitativeelement for internal audit.

Regulation issued on or before 30th September annually, will be assessed from June 1st of

the following year to May 31st of the year after. Therefore, examinations in June 2009 andDecember 2009 will be assessed on regulations issued on or before 30 September 2008.

The Study Guide provides more detailed guidance on the syllabus. Examinable documentsare listed in the “Exam Notes” section of “student accountant” and can be downloaded fromhttp://www.accaglobal.com/students/study_exams/qualifications/acca_choose/acca/fundamentals/aa/examinable .

The table below has been adapted from the examiner’s article in student accountant March2007 explaining his approach to examining Paper F8. Candidates are well advised todownload this article from the ACCA’s website and carefully study the rest of it’s content.




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Objective Examiner’s comment

Explain the nature, purpose, and scope ofassurance engagements, including therole of the external audit and its

regulatory and ethical framework. (A)

Questions may focus either on the factualareas of the legal aspects of auditing, or onthe application of ethical standards in

scenario-based questions.

Explain the nature of internal audit.Describe its role as part of overallperformance management, and itsrelationship with external audit. (B)

The work of internal audit could feature inany question in the exam. However, theremay not always be an internalaudit/review question. If internal audit ismentioned, it is most likely to appear inQuestion 1, as part of a question on auditprocedures, or in Question 4 as part of aquestion on more specialised audit areas.

Demonstrate how the auditor obtains anunderstanding of the entity and itsenvironment, assesses the risk of materialmisstatement (whether arising from fraudor other irregularities), and plans an auditof financial statements. (C)

Questions in this area relate to the planningof the audit. They normally feature aspectsof engagement risk, or the work of theauditor in establishing the audit plan.

Describe and evaluate informationsystems and internal controls to identifyand communicate control risks and theirpotential consequences, and make

appropriate recommendations. (D)

This objective, and the next, relate to thetesting of controls, and the collection ofaudit evidence using compliance andsubstantive testing as appropriate. ISAs

make a clear distinction betweencompliance and substantive procedures,and this split will be followed in examquestions. Reporting of recommendationsregarding weaknesses in internal controls,or other issues found in an audit, will beexamined in terms of the production of amanagement letter.

Identify and describe the work andevidence required to meet the objectivesof audit engagements and the applicationof ISAs. (E)

Questions are likely to focus on theapplication of substantive procedures toeither statement of comprehensive incomeor statement of financial position areas. It isquite likely that both income andstatements of financial position will featurein Question 1 with, for example,transaction and asset/liability testingprocedures being included in the samequestion (eg sales and receivables).




(x)

Objective Examiner’s comment

Evaluate findings and modify the auditplan as necessary. (F)

This is potentially the most difficult area ofthe syllabus. As many candidates will not

have been involved in audits, they willprobably be unclear on how to deal withfindings or errors which have an impact onthe audit plan. The overall approach toquestions in this area will therefore be toexplain the additional testing required as aresult of errors being found during theapplication of audit procedures

Explain how conclusions from audit workare reflected in different types of audit

report, explaining the elements of eachtype of report. (G)

The emphasis of questions in this area willbe on explaining reports rather than having

to draft them. Extracts will normally relateeither to an explanation of how a standardreport can be modified, or (in a limitednumber of cases) supplying appropriatewording for the modification only. To beclear, candidates will not be expected toprovide the wording for an entire auditreport (as per ISAs). Knowledge of thecontent of ISAs in the 700 series will beexpected. Questions will potentiallyprovide extracts of audit reports, andrequire candidates to identify where ISAguidance has not been followed.



SESSION 00 – EXAMINABLE DOCUMENTS

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EXAMINABLE DOCUMENTS

International Standards on Auditing [ISAs](Note 1)

Number Title Study Session

in which coveredPreface to International Standards on Quality Control,Auditing, Assurance and Related Services 2Glossary of Terms App 5International Framework for Assurance Assignments 1

200 Objective and General Principles Governing an Audit ofFinancial Statements 1

210 Terms of Audit Engagements 5230 Audit Documentation (Revised) 6240 The Auditor’s Responsibilities Relating to Fraud in an

Audit of Financial Statements (Redrafted)11

250 Consideration of Laws and Regulations in an Audit ofFinancial Statements

11

260 Communications of Audit Matters with Those Chargedwith Governance

28

300 Planning an Audit of Financial Statements (Redrafted) 7315 Identifying and Assessing the Risks of Material

Misstatement Through Understanding the Entity and itsEnvironment (Redrafted)

9

320 Audit Materiality 10330 The Auditor’s Procedures in Response to Assessed Risks

(Redrafted)8, 9, 13

402 Audit considerations relating to Entities UsingService Organizations

14

500 Audit Evidence 15501 Audit Evidence – Additional Considerations for Specific

Items23 & 29

505 External Confirmations 24510 Initial Engagements – Opening Balances 29520 Analytical Procedures 16530 Audit Sampling and Other Means of Testing 19540 Audit of Accounting Estimates 17560 Subsequent Events 29570 Going Concern 31580 Management Representations 20610 Considering the Work of Internal Auditing 34620 Using the Work of an Expert 18700 The Independent Auditor’s Report on a Complete Set of

General Purpose Financial Statements (Note 2)30

701 Modifications to the Independent Auditor’s Report 30710 Comparatives 29720 Other Information in Documents Containing Audited

Financial Statements29




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International Auditing Practice Statements [IAPSs]

1000 Inter-bank confirmation Procedures (Note 3)1013 Electronic Commerce: Effect on the Audit of Financial

Statements13

1014 Reporting by Auditors on Compliance with InternationalFinancial Reporting Standards

30

International Standards on Assurance Engagements [ISAEs]

Number Title Study Sessionin which covered

3000 Assurance Engagements other than Audits or Reviews ofHistorical Financial Information

2

International Standards on Review Engagements [ISREs]


2400 Engagements to Review Financial Statements (previouslyISA 910)

32

Other guidance

ACCA’s “Professional Codes of Ethics and Conduct”

The UK “Combined Code (of the Committee on Corporate Governance)” as an example of

corporate governance best practice – www.frc.org.uk/combined.cfm

Relevant articles, past examinations and examiner’s reports as published in Student Accountant and on the ACCA’s website – www.accaglobal.com

Notes

(1) Candidates are advised that questions will be based on the principles and good practiceset out in the International Standards on Auditing. Most questions will involve someform of application of knowledge to a specific situation or scenario. Candidates will berequired to understand auditing techniques and know how these techniques apply tospecific situations. Candidates must be able to explain the reasons why the proceduresthey suggest are carried out and what they achieve.

(2) Candidates should be aware of the nature and meaning of the auditor’s report andshould be able to discuss the contents and wording of the auditor’s report. Studentswould not be asked to reproduce the auditor’s report in full in an exam question, butthey may be requested to prepare the explanatory paragraphs for inclusion in the reportparticularly in situations leading to the issue of a modified report.

(3) Candidates will not be examined on the audit of banks. This document is relevant tothe extent that it applies to the confirmation of financial and business relationshipsbetween banks and their non-bank customers.




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International Accounting Standards [IASs]

The accounting knowledge that is assumed for Paper F8 is the same as that examined inPaper F3. Therefore students studying for Paper F8 should refer to the IFRSs listed underPaper F3.


IAS 1 Presentation of Financial Statements General

IAS 2 Inventories 23IAS 7 Statement of Cash Flows (excluding group aspects) Note (1) IAS 8 Accounting Policies, Changes in Accounting Estimates and

Errors29

IAS 10 Events after the Reporting Period 29IAS 16 Property, Plant and Equipment 22

IAS 18 Revenue 23 & 29IAS 37 Provisions, Contingent Liabilities and Contingent Assets 26IAS 38 Intangible Assets (insofar as it relates to research and

development)22

Notes

(1) Statement of cash flows is not referred to in either the Paper F8 syllabus nor theACCA Study Guide for F8.



SESSION 00 – EXAMINATION TECHNIQUE

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EXAMINATION TECHNIQUE

Pre-examination preparation

Read the examiner’s report. Apply the advice given within past reports when doing

practice questions. Far too many students fail because of poor examination technique.

Read the advice given below and apply when attempting questions from the studyquestion bank, revision question bank and any past examination papers you have takenfrom the ACCA students’ website.

Time allocation

Use the majority of the 15 minutes reading time to read through and think about youranswer to Question 1, the scenario based question.

Divide your time in proportion to the marks on offer. To allocate your time multiplythe marks for each question by 1.8 minutes.

A 20 mark question should take you 20 × 1.8 = 36 minutes

Determine how much time to spend on each part of a question. This is particularlyimportant to Paper F8 as each question is likely to have at least 2, but probably 3, oreven 4 sub-requirements.

Stick strictly to this time allocation.

The first marks on each sub-requirement are likely to be the easiest to gain. So don’t betempted to spend more time on one part (eg because you know more about that topic)instead of getting on with the next part.

Instruction v content

Before attempting a question, and in order to impress the marker, you need tounderstand what the examiner requires.

Requirements (and parts thereof) specify an “instruction” and the “content” called for.

Instructions

“Describe” = set out the characteristics of “Consider” = examine carefully/give attention to “State” = express in words “Explain” = make plain, clarify, elucidate “Discuss” = examine critically, give ideas on “Suggest” = propose/put forward “List” = make a list/catalogue of like thinks “Calculate” = make a calculation Others – “identify”, “comment”, “contrast”, “conclude”, “give” Pre-fix “briefly” = a warning not to go into too much depth.




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Content

(Audit) work (Audit) tests (Manual) procedures

(Further) investigations (Further) action

What would you do?

Call for actions

“Ideas list”

− inspect/observe/review

− obtain

− enquire/ask− circularise

− analyse/compare

− calculate/compute Controls = control procedures

“Ideas lists”

ISA 315 - risk assessment procedures, control environment + control activities

Application controls v IT controls

− Completeness

− Accuracy

− Validity

− (existence)

How? – calls for explanation.

Reasons (why?) – calls for justification. Think “because … /due to ….”

Matters/factors = “things” of relevance that you would take account of whenmaking a decision

Specified techniques eg CAATs, analytical procedures

Arguments against/limitations/weaknesses – use “negative” words like “no”, “poor”,“difficult”

Arguments for/advantages/benefits – use “positive” words like “good”, “easy”

Other contents call for specified knowledge eg criteria/circumstance

General question approach

Familiarisation

Read the requirements carefully to identify

Instructions e.g. “outline, discuss...” Content e.g. “the audit tests, the advantages ...” Vehicle/format e.g. “report, memo, letter...”.

Do not answer the question you think the examiner should have asked in preference tothe question printed on the exam paper.




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Do not write everything you know about a topic and hope the examiner will select thepoints which are relevant to the question. This “scatter gun” tactic is a waste ofvaluable time and you may receive no marks.

Plan your answer – the markers always look for evidence of thought before writing.

Make brief notes of your starting point, areas to cover and finish.

Read any scenario within a question quickly to identify company name, key dates (egyear end), nature of business, performance.

Read through again slowly and actively, ie

highlighting key points, or noting implications in the margin, and noting points on a plan of your answer.

Draw together your technical knowledge and the points from the scenario. Do this bythinking and rearranging your plan, before you write up your answer.

Plan your answer

Recall the technical knowledge you have learned relating to the content from therequirements and your quick read of the scenario.

Identify key headings from the requirement or your plan around which to structureyour answer when you write it up.

Use the mark allocation to decide how many points you need to address. As a general

guide work to

1 mark per relevant point clearly expressed and explained (eg point, explain,example). Remember that you must give reasons why particular actions are takenand not just say “do it”, eg do not say “inspect purchase invoice” without sayingexactly what you are inspecting on the invoice and why (always refer to aparticular assertion).

Whilst 1 mark per sentence, is often used by candidates as a guideline, if thatsentence is not relevant to the question or does not “add value” no marks will begiven.

Ensure that each sentence you write contains a relevant point. Avoid fitting asmany points as possible into one sentence!

Present your answer

A structured answer with clearly identifiable and separable points is always preferableto a continuous flow of text. Indicates that you have planned your answer.

Use headings, indentation and bullet points to give your answer structure and to makeit more digestible for the marker.




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Write effectively in a style which responds to the examiner’s requirements (eg start withactions for audit work and tests). Maintain a sentence structure and keep sentencesshort and succinct.

Try to achieve a good standard of English.

Avoid playing ‘hunt the answer’ – it is in there somewhere, good luck (to the marker) infinding what you want!

NEVER seek to write an “essay” nor provide an answer just in note form.

Review past examination papers of the examiner to appreciate their style and howthey expect you to structure your answer. The examiner wants candidates to pass, buthe cannot pass them if they do not help themselves. Examination technique is halfthe battle to pass this paper.

GOOD LUCK!




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F8 AA (Int)Session00_j09

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