Acca P7

Notes
ACCA Paper P7 (INT)
Advanced Audit and Assurance
For exams in 2011
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ExPress Notes
ACCA P7 Advanced Audit and Assurance
Contents
About ExPress Notes 3
1. Assurance and Engagements 7
2. Audit Reports 12
3. Audit Risk 17
4. Quality Control 20
5. Auditor’s Liability 24
6. Ethics 27
7. Audit Evidence 30
8. Subsequent Events 33
9. Going Concern 36
10. Group Audits 39
11. Forensic Audits 43
12. Prospective Financial Information 46
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Chapter 1
Assurance Engagements
START
The Big Picture
Paper F8 is called Audit and Assurance. Paper P7 is called Advanced Audit and Assurance.
Clearly, therefore at both levels you are required to have some knowledge of assurance
engagements other than audit engagements which, are of course themselves examples of
assurance engagements.
In fact at both levels, you also have to be prepared to contrast assurance with non-
assurance engagements.
At the Fundamentals Level, the vast majority of questions are based on the audit of limited
liability companies and any examination of assurance engagements was likely to be
knowledge based in terms of general principles.
At this stage in your studies, the Professional Level, it is assumed you are aware of the basic
principles (but they must be revised) and it is much more likely that you will get a practical
question relating to some non-audit engagement.
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KEY TERMINOLOGY

Assurance engagement
The IAASB has provided us with the following definition of an assurance engagement:
“An engagement in which a practitioner expresses a conclusion designed to

enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a
subject matter against criteria.”
Engagement Framework
The IAASB framework distinguishes between assurance engagements and non-assurance

engagements.
Assurance engagements are broken down into:
1. Assurance engagements on historical financial information, which are then sub-

divided into:
(a) Reasonable assurance engagements eg statutory audit; and
(b) Limited assurance engagements eg voluntary audit.
2. Assurance engagements on other information such as reviews of
 VFM audits
 Key Performance Indicators (KPI)
 Internal control and systems
 Due diligence assignments
 Prospective Financial Information (see separate Express note)
Non-assurance engagements are indicated as including:
 Agreed upon procedures

 Review engagements
 Compilation work
Reasonable assurance engagements on historic financial information
This would be a statutory audit with the work involved needing to be conducted in
accordance with ISAs.
Auditor will give an opinion designed to increase the level of confidence for prospective
users of the audited financial statements, with moderate to high assurance normally being
provided.
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Limited assurance engagements on historic financial information
This is more and more being seen as a possible alternative to the statutory audit. As an
example, in the UK there have recently been proposals for the introduction of ‘mini’ audits
for companies falling below the audit exemption threshold.
Whilst there is currently no statutory requirement for such ‘mini audit’, a significant and
increasing number of companies are requesting limited assurance engagements, on an
entirely voluntary basis.
Unlike reasonable assurance engagements, where ‘positive assurance’ may be given, with
limited assurance engagements only ‘negative assurance’ is provided.
A limited assurance engagement involves more limited procedures than are required for a
full statutory audit. In effect, no opinion is offered on the information, although some
assurance is provided as to its reasonableness, with typical wording being as follows:
“Based on our review, nothing has come to our attention that the accompanying financial
statements contain material misstatement.”
KEY KNOWLEDGE
Assurance Engagements Other than Audits or Reviews of

Historical Information

The work involved in such engagements and the approach required, may be similar in many
respects to an audit engagement, albeit the context is different.
ISAE 3000 provides guidance to practitioners for such engagements, the summarised
requirements for which are as follows:
1. Ethical requirements – practitioners should comply with ethical requirements such as

ACCA’s Code of Ethics and Conduct
2. Quality control – the practitioner should implement quality control procedures that
are applicable to the individual engagement.
3. Engagement – the terms of the engagement should be recorded in an engagement
letter, and the practitioner should agree on the terms of engagement with the
engaging party.
4. Planning and obtaining evidence – the practitioner should plan the engagement so
that it will be performed effectively, and should consider materiality and assurance
engagement risk, and sufficient appropriate evidence should be obtained on which to
base the conclusion.
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5. Reporting – the assurance report should be in writing and should contain a clear
expression of the practitioner’s conclusion about the subject matter information.
KEY KNOWLEDGE
Value For Money (VFM) Reviews

VFM involves consideration of the three Es:
1. Economy
2. Efficiency
3. Effectiveness
In many countries such reviews originated in the public sector and in relation to other ‘not-
for-profit’ organisations, where alternative measurements of performance (in the absence of
profit) had to be developed in order to assess the relative success or otherwise of the
organisation. VFM reviews may also of course be requested by commercial companies as
well.
The vast majority of the knowledge required for this type of engagement is regarded by the
P7 examiner as assumed knowledge from your F8 studies.
KEY KNOWLEDGE
Key Performance Indicators

KPIs may be seen as a set of measurements which focus on those aspects of an
organisation’s performance that are most critical for its continued success.
Many companies, frequently in response to shareholder expectations, now publish details of

their KPIs in their annual report. Such KPIs can perhaps be seen as falling into one of two
main categories:
1. Financial – eg accounting ratios based upon the financial statements

2. Non-financial – eg company targets on social and environmental issues
Assurance approach to KPIs will require careful consideration of:
 The definition of the KPI

 The calculation method
 The purpose of the reporting
 Nature of evidence available and source of underlying data
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Possible problems facing the assurance provider will include:
 Lack of precise definitions

 Lack of established systems for the capture and recording of KPI data
 Susceptibility of KPIs to manipulation
KEY KNOWLEDGE
Internal Control and Systems Reviews

This type of work is very closely related to the requirements for auditors to consider the
company’s internal control systems which is comprehensively covered in F8 and therefore
not that likely to feature greatly in P7.
KEY KNOWLEDGE
Due Diligence Assignments

There is very little guidance on this type of engagement.
In an examination situation any question may be in the context of a group audit question, as
in practice such task is often commissioned by the potential buyer of a company.
The potential buyer will be seeking to discover information about the target company and
gain some assurance as to its reliability.
The assurance provider’s procedures are often restricted to making use of analytical review
techniques and enquiry as they attempt to verify the management representations made by
the target company.
The practitioner may also sometimes be asked to offer practical recommendations regarding
the acquisition process.
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Chapter 2
Audit Reports
START
The Big Picture
The one thing all statutory audits of limited liability companies have in common is that at the
end of the day an independent auditor has to issue a report to the shareholders as the
owners of the company.
The auditors must report their opinion in respect of two main issues:
1. Whether the financial statements give a ‘true and fair view’ (or present fairly in all
material respects) the company’s financial position and performance, and
2. Whether the financial statements have been ‘properly prepared’ in accordance with
any relevant professional recommendations and/or statutory provisions.
This is not of course a new topic, as you should previously have studied this area in F8. At
the P7 stage, it is almost certain that any questions that you get in this area will be practical
in nature, with few marks, if any, going for pure knowledge.
Given that the examiner has stated that she is concerned in the auditing paper with testing
candidates’ accounting knowledge, you must anticipate that scenarios will include
accounting treatments whose acceptability or otherwise you will have to be prepared to
discuss.
In the old syllabus audit reports were one of the declared favourite topics of the examiner
and there was a question every time. The current examiner has stated that she
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acknowledges the importance of this syllabus area, but students should not assume that
there will necessarily always be a question in this area. Having said that, experience to date
shows that there is a better than even chance that you will be faced with such a question in
your sitting and this must be seen as a high priority area.
KEY TERMINOLOGY

ISA 700 The Auditors Report on Financial Statements identifies the key elements of the
auditor’s report:
1. Title
2. Addressee
3. Introductory paragraph
4. Statement of responsibilities of management
5. Statement of responsibilities of the auditors
6. Scope paragraph
7. Opinion
8. Auditor’s signature
9. Date of report
10. Auditor’s address
Modified Audit Reports
The standard audit report may be modified, such modification may or may not result in the
auditors giving a qualified opinion. It is important to remember that modification of the
audit report will only be required if there is some material issue.
With a practical type of question always make sure that you use any information available in
the scenario to help you assess materiality in a sensible way, vague references to the fact
that you would ‘consider materiality’ will NOT impress the examiner.
For example, let us say you are given the information that a company’s profit before tax
(PBT) is $1,000,000 and that the company has failed to make provision for a known bad
debt of $150,000. State the obvious by saying that at 15% of PBT the bad debt is material,
in that a standard benchmark would be to consider an item impacting on PBT as being
material if it is in the range of 5% to 10% of such PBT.
It is also important when assessing materiality to remember that this must be considered so
far as the user and not the preparer of financial statements is concerned. A useful working
definition of materiality may be taken as
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‘transactions and other events are likely to be seen as material in the context of a company’s
financial statements if their omission, misstatement or non-disclosure would matter to a
proper understanding of such financial statements on the part of a potential user.’
Modified audit report with unqualified opinion
Sometimes there may be matters relating to the financial statements which, whilst fully and
adequately disclosed within the financial statements, the auditor considers worthy of
bringing to the particular attention of users.
The auditor achieves this by including in the audit report an additional paragraph known as
an ‘emphasis of matter’ paragraph. This paragraph will be ‘self-contained’ and will NOT
otherwise impact on the standard wording of an unmodified report.
Key points to remember in relation to the use of such paragraph are:
 it should have a separate heading

 it should be positioned AFTER the opinion paragraph
 it must be made clear that the audit opinion is not qualified and so this paragraph
should start with words such as ‘Without qualifying our opinion we draw attention to
....’
Past examiners’ reports have indicated that many candidates have been unclear as to how
and when to make proper use of an emphasis of matter paragraph. It is important,
therefore, that you are totally happy with this aspect of audit reports.
Examples of where the use of such paragraph would be appropriate include:
 where there the financial statements have been prepared on a going concern basis,
but this is dependent upon some significant uncertainty which is fully and adequately
disclosed in the notes to the financial statements
 where there is a material inconsistency between the financial statements and the
Directors’ Report and the adjustment required to remove the inconsistency would
need to be made in the Directors’ Report but the directors are not prepared to make
such adjustment.
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Modified audit report with qualified opinion
According to ISA 700, there are two main circumstances which might give rise to the
auditors deciding that is necessary for them to qualify their audit opinion:
1. Limitation on scope which arises where the auditor has been unable to carry out
some audit work which normally they would have expected to perform and/or where
the circumstances are such that audit evidence which the auditor would normally
expect to be available for some reason does not exist.
2. Disagreement exists between the auditors and client management in relation to
some aspect of the financial statements.
The type of qualified opinion to be given will depend not just on the circumstances as
indicated above, but also on how serious the limitation on scope or disagreement is namely
is it:
1. Material but not pervasive, that is to say that the limitation on scope or disagreement
is confined to one particular aspect of the financial statements, such that the auditor
is able to say that ‘except for’ this matter the financial statements give ‘a true and
fair view etc’.
2. Material and pervasive, that is to say that the nature of the limitation on scope or
disagreement is such that it will impact on the overall view given by the financial
statements. In such situation if it is caused by limitation on scope, the auditor should
give a Disclaimer of Opinion, whereas if it is because of disagreement, they should
give an Adverse Opinion.
The circumstances giving rise to a qualified audit opinion should be described in a separate
paragraph which appears BEFORE the opinion paragraph. Wherever possible, the auditor
should quantify the qualification circumstances as this should make it easier for the reader
to appreciate its significance.

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KEY KNOWLEDGE
Summary Diagram of Approach to Practical Audit Report

Questions

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Chapter 3
Audit Risk
START
The Big Picture
Consideration of risk is to a large extent assumed knowledge, as you will have first come
across this topic in F8.
However, it may be some time since you passed F8 and it is very important to revisit this
topic as it regularly features in P7 examination questions.
At the professional stage, it is unlikely that you will get many, if any, marks simply for
providing definitions but you must have a good working knowledge and understanding of
key terms in order to be able to properly assess the risks in a given scenario and perhaps
explain why they are risks.
An auditor must, as part of his assessment of a client’s internal control systems, consider the
risks to which the client’s business is exposed and the extent to which there maybe some
material misstatement in the client’s financial statements as a consequence of not
identifying and managing such risks in an appropriate manner.
Consideration of risk is as an integral part of a modern day audit.
There have been a number of articles in the Student Accountant in this area which you must
read.
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KEY TERMINOLOGY

AUDIT RISK is very simply the overall risk that the auditor gives an inappropriate audit
opinion in his report.
Eg. if an auditor gave an unqualified opinion, when in fact the company was not a going
concern, then shareholders and others placing reliance on this report in making economic
decisions relating to their dealings with the company might suffer financial loss.
Audit risk is seen as being made up of 3 elements:
AUDIT RISK = INHERENT RISK x CONTROL RISK x DETECTION RISK
The auditor must assess inherent risk and control risk but cannot influence them, they are
what they are. The only element which the auditor can influence directly is detection risk,
which he must do in order to have overall an acceptable level of audit risk.
Inherent risk is the risk that there may be material errors or misstatements in the client’s
financial statements, before giving consideration to any internal controls that may have been
established.
Eg. in a high tech company there is high risk of obsolete inventory which if not recognised
could result in a material overstatement of both profits and asset values.
Control risk is the risk that the client’s internal control systems will fail to prevent or detect
material errors or misstatements.
Eg. if there is not effective segregation of duties then there is a much higher risk of
employee fraud, without the need for collusion, going undetected.
Detection risk is the risk that the auditor’s tests and enquiries will fail to detect material
errors or misstatements in the transactions and balances reflected in the client’s financial
statements.
Eg the detection risk is always greater with a new client because the auditors have had less
time to build up their knowledge and understanding of the client’s business and the risks to
which it is exposed.
Detection risk is seen to include the elements of:
1. Sampling risk – eg. if the auditor selects too small a sample size, it may not be
representative of the population from which it is drawn, resulting in the auditor
reaching an invalid conclusion about that population.
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2. Non-sampling risk – is any other risk that might result in the auditor arriving at the
wrong audit conclusion eg. if client management were to deliberately provide the
auditor with misleading information and explanations.
From an exam point of view it is important not to confuse audit risk with Business Risk.
Business risk is the risk that a company will fail to meet its strategic objectives or that the
policies adopted will be inappropriate. Business risk is to a large extent tied up with the
fundamental accounting assumption of going concern.
Business risk may also be seen as being made up of 3 main elements:
1. Operational risk – eg. shortage of essential raw materials for manufacturing process
2. Financial risk – eg. foreign exchange losses when trading internationally
3. Compliance risk – eg. payment of fines for breach of anti-pollution legislation
It is important to note carefully the question requirement as to what type of risk you have
been asked to consider when analysing a given scenario.
So if the question scenario makes it clear that the company is trading in different currency
zones then:
1. Business risk = foreign exchange losses reduce company’s profitability

2. Audit risk = overstatement of profit if foreign exchange losses are not properly
recognized
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Chapter 4
Quality Control
START
The Big Picture
This is one of those areas of the syllabus which is partly assumed knowledge from your F8
studies, relating to quality control of an individual audit engagement and partly unique to
P7, relating to quality control procedures for the firm as a whole.
Assumed Knowledge F8
ISA 220 Quality control for audits of historical financial information
New to P7
ISQC 1 Quality control for firms that perform audits and reviews of historical financial
information, and other assurance and related services engagements
Quality control is clearly seen by the examiner as being a very important area and to a
greater or lesser extent has pretty much featured in all exams to date.
When considering ISQC 1, note carefully that this should be applied by ALL professional
firms, irrespective of their size. A small firm of Chartered Certified Accountants clearly will
not have the same resources as a Big 4 firm, but they should both be working to the same
principles.
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One recalls a previous examiner’s report where she was clearly unimpressed by those
candidates who were totally dismissive of small firms and basically suggesting that they
could not possibly produce quality reliable work!!
In studying these 2 standards, you will see that there is, almost inevitably, a certain amount
of overlap between them. In the exam room make sure you consider carefully the scenario
and question requirement to ensure you get the emphasis right in terms of which part of
your knowledge database you tap into!
KEY KNOWLEDGE
ISQC 1 Quality Control for Firms that Perform Audits and

Reviews of Historical Financial Information, and Other
Assurance and Related Services Engagements
ISQC 1 identifies 6 main areas that together go to make up a firm’s system of quality
control:
1. Leadership
2. Ethics
3. Client relationships
4. Engagement performance
5. Human resources
6. Monitoring
Leadership
The whole culture of the firm needs to be based on a recognition that quality is essential in
the performance of all engagements undertaken by the firm, with management leading by
example.
Management must take responsibility for establishing the firm’s quality control procedures
and ensuring that these are successfully communicated to and acknowledged by all staff.
Ethics
The standard highlights the need to establish policies and procedures designed to ensure
that the firm and its staff comply with all relevant ethical requirements.
At least once a year, written confirmation should be obtained from all staff that they meet
any necessary independence requirements in relation to clients with whom they are
involved.
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Safeguards should be in place within the firm to guard against threats to independence eg
rotation of engagement partners.
Client relationships
Proper due diligence procedures should be carried out before acceptance of appointment to
new clients or re-appointment for existing clients.
It is particularly important to have procedures relating to proper consideration of client

integrity, as the firm would not wish to have its own reputation tarnished by association.
Specific consideration should be given to money laundering implications.
Professional etiquette procedures should be properly applied in relation to communication

with any previous professional adviser to the client.
Engagement performance
The firm should establish policies and procedures designed to provide it with reasonable
assurance that engagements are performed in accordance with professional standards and
regulatory and legal requirements, and that the firm issues reports that are appropriate in
the circumstances.
This is an area which very much overlaps with ISA 220, with particular consideration having
to be given to:
 Planning
 Supervision
 Review
Human Resources
The standard requires firms to establish policies and procedures designed to provide it with
reasonable assurance that it has sufficient personnel with the capabilities, competence and
commitment to ethical principles necessary to perform its engagements in accordance with
professional standards and regulatory and legal requirements, and to enable the firm to
issue reports that are appropriate in the circumstances.
In particular policies and procedures should cover:
 Recruitment and performance evaluation

 Capabilities and competence
 Career development
 Performance evaluation, compensation and promotion
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Monitoring
The firm should establish policies and procedures designed to provide it with reasonable
assurance that the policies and procedures relating to the system of quality control are:
 Relevant
 Adequate
 Operating effectively
 Complied with in practice
 Adequately documented
Such policies and procedures should include an ongoing consideration and evaluation of the
firm’s systems of quality control, including a periodic selection of completed engagements
(cold review).
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Chapter 5
Auditor’s Liability
START
The Big Picture
This is a topic which is only really examinable in P7. It is a little surprising therefore that
questions have not appeared more frequently than they have.
In practice, and how often have we heard the examiner say that P7 candidates need to
demonstrate commercial awareness, professional firms are certainly very much concerned
with their potential liability to clients and others. It is probably fair to say that Professional
Indemnity insurance premiums are one of the more significant expense items on the Income
Statement of an auditing firm.
At the end of the day, this is an auditing and not a law exam, but you do perhaps need to
be aware of the main principles by which a judgement would be arrived at and also of the
key facts and outcome of some of the leading cases, such as the Caparo case.
Our concern is principally with the possibility of civil actions being brought against auditors
for the tort of negligence.
Courts will assess the question of negligence in terms of recognised best practice. It is easy
to see, therefore, that on a question based around a scenario of possible litigation against a
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ExPress Notes

firm of auditors, that significant marks could be available in testing your knowledge and
understanding of:
 IFRS – in relation to whether the auditors were justified in accepting/ not accepting a
particular accounting treatment adopted by the client
 ISA – in relation to whether the auditors did/did not carry out the audit procedures
that would have been considered appropriate in the circumstances
Particular attention should be paid to the determination of whether or not there is a legally
enforceable duty of care in the case of a third party as opposed to a client action.
Although you are taking the international variant of P7, so far as this part of the syllabus is
concerned, we need to consider UK law as the basis of our studies.
KEY KNOWLEDGE
Client Action
If a client company is to bring a successful action against its auditors, and be awarded
anything other than purely nominal damages, then they will have to satisfy the court on all
3 of the following points:
1. DUTY OF CARE
2. NEGLIGENCE
3. CONNECTED LOSS
A legally enforceable duty of care can be established in one of three ways:
i. Under contract – engagement letter would meet this requirement

ii. Under statute – would apply in most countries as in UK
iii. Under common law – expected to act with due skill and care expected of a
competent auditor
Negligence, as already indicated, would be assessed against proper application of

professional standards.
Connected loss means that there must be some clear connection between the loss
suffered by the client and the negligence on the part of the auditor. Auditors will not in
other words be held responsible for a loss which is primarily a consequence of a bad
management decision.
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ExPress Notes

KEY KNOWLEDGE
Third Party Action
For a successful third party action, there will be a need for the claimant to satisfy the court
in respect of the same 3 issues as for a client action, namely:
1. DUTY OF CARE
2. NEGLIGENCE
3. CONNECTED LOSS
In a third party action, negligence and connected loss will be assessed in the same way
as for a client action. However, the contentious area has always been recognising a legally
enforceable duty of care in a situation where there is no direct contractual or fiduciary
relationship between the auditor and the third party.
The current position seems to be that in considering recognition of potential liability to third
parties and whether or not the courts will recognise a duty of care it will take account of the
following:
1. Knowledge of the third party’s interest and potential reliance upon the work of the
auditor, and
2. Proximity of the relationship and whether it was in fact reasonable in the
circumstances for the third party to place reliance upon the auditor’s work in relation
to their dealings with the auditor’s client.
In the Caparo case, the judge held that auditors did not owe a duty of care to individual
shareholders, although he did intimate that a joint action brought collectively by the
shareholders might have been successful.
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ExPress Notes

Chapter 6
Ethics
START
The Big Picture
Ethics is at the heart of the ACCA examination syllabuses featuring to a greater or lesser
extent in over half of the papers that you take on route to qualification as a Chartered
Certified Accountant.
It is unlikely that you will have to deal with any of the ethical theory that was a feature of
P1, but professional ethics as previously studied in both F8 and P1 must be seen as highly
examinable.
In the past an exam question requirement has frequently been along the lines of asking you,
in relation to given scenario, “what ethical, quality control and other issues are involved”.
Whilst not necessarily appearing as a question every time in the real exam, it must be seen
as a key area for your studies.
The fundamental principles of professional ethics as outlined by IFAC have been adopted by
ACCA and must be learned. It is important to appreciate that ACCA have adopted a
principles based approach to ethics so whilst there are specific recommendations in some
areas (which must be learned) if you are faced with a practical question where you are not
aware of any specific guidance having been issued, you must always go back to basics and
apply the fundamental principles.
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ExPress Notes

Of particular importance to the auditor are the provisions relating to auditor independence.
KEY TERMINOLOGY

The fundamental principles of professional ethics as outlined in the IFAC Code of Ethics is a
very important TOPIC. You might like to use TOPIC as a useful mnemonic to help you
remember these principles.
Technical (professional) competence and due care must be exercised by all members at all
times. Members have a responsibility to act in accordance with best practice and to keep
themselves technically up to date.
Objectivity must be demonstrated by not allowing personal interest or influence of others to

effect a member’s professional judgement.
Professional behaviour must be demonstrated by members at all times, in both their private
and business life, so as not to be seen to take any action which might bring the profession
into disrepute.
Integrity requires that members are always honest and do not knowingly allow themselves
to be associated with anything dishonest so far as others are concerned.
Confidentiality requires that under normal circumstances members should at all times
respect confidentiality with regard to a client’s affairs so far as third parties are concerned
and that members should not make use of client information for personal gain.
KEY KNOWLEDGE
Threats to Ethical Behaviour
The ACCA Code of Ethics recognises a number of threats to a member’s ethical professional
behaviour. Whilst such threats apply generally, they are particularly relevant when
considering the question of auditor independence.
It is always worth remembering the following “It will never be sufficient for an auditor to
claim that he was independent in fact, he must always be clearly seen to have been
independent in practice.”
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ExPress Notes

The five threats are:
1. Self-interest - e.g. owning shares in a client company

2. Self-review – e.g. providing accounting services to an audit client
3. Familiarity – e.g. acting as auditor to a company where a close relative is the CEO
4. Intimidation – e.g. continuing to act as auditor to a company which has started legal
proceedings against the audit firm
5. Advocacy – e.g. acting on a client’s behalf in negotiations to raise new finance for
the company
KEY KNOWLEDGE
Safeguards Against Threats
As part of its quality control procedures, a professional firm must establish its own
formalised procedures for the identification and management of such threats. Additionally,
general safeguards may be seen as being:
 Those created by the ACCA e.g. requirement for potential members to complete an
ethics module
 Those created by members themselves e.g. ensuring that CPD requirements are met
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ExPress Notes

Chapter 7
Audit Evidence
START
The Big Picture
Consideration of audit evidence is another of those areas which you have already covered in
F8 and to a large extent therefore is assumed knowledge. As always, however, it is
important to bring up to exam speed again your knowledge of the basics in this area.
It is your use of that basic knowledge which is likely to be different at the P7 stage.
In F8 you were quite likely to be asked what the procedures required were in order to obtain
audit evidence.
In P7 you are more likely to have a scenario whereby you are asked what evidence you
would expect to find in your review of audit working papers as a manager or partner.
In answering the P7 type question therefore, it is important that you do not waste time by
writing about the procedures themselves. Think carefully about the stage in the audit, the
work has been done and you are being asked to consider the output of that work, not the
process.
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ExPress Notes

KEY KNOWLEDGE
Financial Statement Assertions
In the production of financial statements, the client management are in fact making a
number of assertions. The auditors need to obtain audit evidence that these assertions are
reasonable if they are to form an opinion as to whether the financial statements give a true
and fair view and comply with relevant statutory and other obligations in relation to their
form and content.
ASSERTIONS RELATING TO TRANSACTIONS AND EVENTS
 OCCURRENCE
 COMPLETENESS
 ACCURACY
 CUT-OFF
 CLASSIFICATION
ASSERTIONS RELATING TO ACCOUNT BALANCES
 EXISTENCE
 RIGHTS AND OBLIGATIONS
 COMPLETENESS
 VALUATION AND ALLOCATION
ASSERTIONS RELATING TO PRESENTATION AND DISCLOSURE
 OCCURRENCE AND RIGHTS AND OBLIGATIONS

 COMPLETENESS
 CLASSIFICATION AND UNDERSTANDABILITY
 ACCURACY AND VALUATION
KEY KNOWLEDGE
Audit Evidence
In accordance with ISA 500, the auditors must always look to obtain SUFFICIENT
APPROPRIATE audit evidence on which to base their opinion. When considering what is
appropriate audit evidence, this breaks down into whether the evidence is relevant and
reliable.
SUFFICIENT
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ExPress Notes

What will be seen as sufficient is a matter of professional judgement and will be influenced
by such factors as the nature of the business, the size of the business, the auditors’ past
knowledge and experience of that client etc.
RELEVANT
What is relevant will depend upon the nature of the item being tested and the financial
statement assertion being considered.
RELIABLE
In most instances, the auditors will base their opinion upon a variety of evidence rather than
a single source. In considering the comparative reliability of the different forms of evidence
which may be available the following general rules may be applied:
1. Documentary evidence will be more reliable than oral evidence.

2. Putting the different forms of documentary audit evidence in ascending order of
comparative reliability, they may be seen as:
(i) Client originated and client maintained eg. inventory records
(ii) Third party originated but client maintained eg. supplier invoice
(iii) Evidence obtained directly from third party eg. bank confirmation letter
(iv) Auditor generated eg. any audit working paper detailing audit work
performed and conclusion reached
KEY KNOWLEDGE
Audit Procedures Relating to Audit Evidence
ISA 500 indicates 8 procedures some combination of which may be adopted by auditors in
order to obtain audit evidence:
1. Inspection of records or documents

2. Inspection of tangible assets
3. Observation
4. Enquiry
5. Confirmation
6. Recalculation
7. Reperformance
8. Analytical procedures
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ExPress Notes

Chapter 8
Subsequent Events
START
The Big Picture
This is another of those areas which is assumed knowledge from your earlier F8 studies
which should be seen as a key part of your preparation for P7.
Examiner’s reports at this level have often expressed concern about students lack of
understanding of the basics!!
The attraction of this syllabus area to the examiner has perhaps always been the fact that it
is an area which readily lends itself to a very practical scenario based question and has often
at this level been tied in with a question on audit reporting.

KEY TERMINOLOGY

Subsequent Events
Relate to events occurring or facts emerging after the accounting period end, but before
formal approval of the financial statements by a company’s management.
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ExPress Notes

Adjusting Events
Are those which relate to an item or condition existing at the SOFP date, where the
subsequent events assist in forming an opinion as to the amount properly attributable to
such item or condition, where at the SOFP date there was some doubt about the value.
Eg. making provision at the year end because of the subsequent insolvent liquidation of a
customer, where the amount outstanding at the year end was still unpaid at the time of the
subsequent liquidation.
Non-adjusting Events
Are those which do not alter the year end position, but which would have had a material
impact on the financial statements if they had occurred prior to the year end. Such non-
adjusting events should be communicated by way of notes to the financial statements.
Eg. The destruction by fire shortly after the year end of one of a company’s warehouses.
As auditors we should give careful consideration to those events which at first sight may
appear to be non-adjusting, but which might be seen to impact on going concern, which
could mean that in fact they need to be treated as adjusting events.
KEY KNOWLEDGE
Audit Approach – Proactive Period
Up to the date of signing the audit report , the auditor must be proactive in seeking out
audit evidence relating to subsequent events, in order to consider whether or not the client
has dealt with such events in an appropriate manner.
Typical audit procedures
During the period where best practice requires the auditor to be proactive in relation to
subsequent events typical procedures would include, but not necessarily be restricted to:
 Discussions with management and subsequent review of company procedures for

dealing with subsequent events
 Examining minutes of board and board committee meetings
 Review of management forecasts, budgets and management accounts
 Routine audit work which naturally takes auditor into subsequent period eg. tests
relating to sales and purchases cut-off
 Obtaining management representations
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KEY KNOWLEDGE
Audit Approach – Reactive Period
After signing the audit report, the auditor need only be reactive to subsequent events. In
other words, if there is some late event which if the auditor had known about it earlier
would have impacted on the financial statements and/or the auditor’s opinion thereon, he
must react by taking appropriate action.
What constitutes appropriate action will obviously depend on the actual nature and timing
of events, but might include:
 Discussions with management on their proposed reaction

 Revision/withdrawal of earlier report
 Addressing company AGM/GM
 Seeking further advice
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ExPress Notes

Chapter 9
Going Concern
START
The Big Picture
You will be aware from earlier financial reporting studies, that going concern is one of the
fundamental assumptions underlying the preparation of all general purpose financial
statements.
Appropriate application of this assumption is vital if the financial statements are to give a
true and fair view.
This is of course also an area that you have previously studied from an audit point of view in
F8.
In the current economic climate, with many businesses failing every day this is certainly a
topical issue from an exam point of view and although it is very much assumed knowledge,
it should be seen as an important area for your P7 studies as well.
Examination questions in this area often have an element relating to audit reporting. In
practice, a going concern qualification is perhaps one of the most difficult for an auditor to
give, because of the very real danger that the audit report may become a self-fulfilling
prophesy. Usually when such questions have appeared the examiner has expressed
disappointment with the standard of many candidates’ answers. Going concern
considerations may also apply when dealing with questions relating to audit risk and also
subsequent events.
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KEY TERMINOLOGY

Going concern
The concept of going concern is based upon the assumption that the business will continue
to exist as a viable commercial entity for the foreseeable future, without the need for any
significant cut-back in its present level of activity.
Foreseeable future is normally taken as being a minimum of 12 months from the current
accounting date. If for any reason, management consider a shorter period, then there
should be a note to the financial statements indicating what that shorter period is and
management’s reasons for choosing it.
KEY KNOWLEDGE
Audit Approach
The auditor should always be alert to possible indicators of going concern problems. A
useful starting point for consideration of such indicators may be to relate to the elements of
Business Risk ( = Operational Risk x Financial Risk x Compliance Risk) as considered
previously.
It is important that when risks are identified that the auditor also considers the possibility of
mitigating factors which might counter balance the indicator of possible going concern
problems. See examples in following table:
RISK POSSIBLE INDICATOR POSSIBLE MITIGATING

FACTOR
OPERATIONAL Shortage essential raw R & D Dept close to finding
materials for manufacturing synthetic alternative
process
FINANCIAL Material FOREX losses New hedging policy
COMPLIANCE Numerous fines for breach of New more environmentally
anti-pollution legislation friendly manufacturing
process about to come on
line
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ExPress Notes

Specific audit procedures would include:
 Assessment of current and projected economic environment in which company

operates
 Assessment of state of industry sector in which company operates
 Review of correspondence files and board minutes for evidence of significant
disputes
 Review of subsequent period cash flow and profit forecasts
 Discuss management procedures and review and obtain management
representations
KEY KNOWLEDGE
Audit Report Considerations
As always, the type of audit report to be issued will be dependent upon the circumstances
and the auditor’s assessment of materiality of the issues involved. The following table
provides a useful summary of the most likely scenarios.
CIRCUMSTANCES REPORT IMPLICATIONS

Going concern basis used and considered None
appropriate with no related significant
uncertainty
Going concern basis used but Unqualified opinion but use emphasis of
appropriateness dependent upon some matter paragraph to draw attention to
significant uncertainty which is fully and disclosure of significant uncertainty
adequately disclosed
Going concern basis used but Qualified opinion on grounds of
appropriateness dependent upon some disagreement, probably adverse rather than
significant uncertainty which is either not except for
disclosed at all or inadequately disclosed
Going concern basis used but in auditor’s Qualified opinion on grounds of
opinion not appropriate disagreement, probably adverse rather than
except for
Going concern basis inappropriate but Unqualified opinion but use emphasis of
financial statements prepared on acceptable matter paragraph to draw attention to
alternative basis which is adequately unusual circumstances
disclosed
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ExPress Notes

Chapter 10
Group Audits
START
The Big Picture
By the time you get to taking P7, it is assumed that you have taken/passed P2 and therefore
have dealt with all aspects of consolidated accounts from an accounting point of view.
Remember the examiner likes to test accounting knowledge in an auditing context.
In a scenario based question, you will not be able to comment sensibly on the acceptability
or otherwise of a client’s proposed accounting treatment unless you have a sound
knowledge and understanding of best accounting practice in that area.
As part of your preparation for P7 make sure that you revise your accounting knowledge as
to what it is that requires an investment to be treated as an associated or subsidiary
company and also what are the main adjustments typically required in the preparation of
consolidated accounts.
The audit of group accounts is another of the topics not previously examinable at F8 and so
there is always a good chance that you could get a question in this area.
Make sure you have read the examiner’s article ‘Group audit issues’ from March 2008
Student Accountant and of course watch out for any new articles in the coming months.
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ExPress Notes
KEY TERMINOLOGY

Group auditor
The auditor of the ultimate parent company within a group structure. The group auditor is
responsible for forming an opinion on the group financial statements so far as concerns the
members of the parent company, as well as the parent company’s own individual financial
statements.
Component auditor
Components of the group financial statements might include subsidiaries, associates, joint
ventures and branches. In some cases as well as being the group auditor, a firm may also
audit directly some or all of the components, but frequently a totally different firm of
auditors may be involved, these will be the component auditors.
KEY KNOWLEDGE
Main Considerations of Group Auditor where Component

Auditors are Involved
It is important to remember that whether you are acting as auditor of a single company or
as a group auditor where component auditors are involved, the basic principles in relation to
the following areas remain the same:
 acceptance of appointment
 quality control
 ethics
 audit procedures
 reporting
However, an important additional consideration for the group auditor will be the extent to
which, in arriving at his own audit opinion, he is able to place reliance on the consolidated
results which have not been audited directly by him but by component auditors.
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ExPress Notes

It might help you to remember some of the important considerations if you think in terms of
what are my AIMS in this situation. Hopefully this mnemonic will serve as a useful aide
memoire for you.
Accounting policies (uniformity of)
Information (availability of)
Materiality
Scope and reliability of the work of component auditors
Accounting policies
Best practice generally requires uniformity and consistency in the application of accounting
policies throughout the group. This may be an important area in which to consider the need
for making consolidation adjustments, particularly perhaps when dealing with a multi-
national group.
Information
As always, the group auditor must look to obtain sufficient appropriate audit evidence on
which to base his opinion. Possible problems may arise in this respect for a variety of
reasons, particularly perhaps in relation to foreign components, such as different:
 accounting dates
 languages
 legal requirements
 accounting standards
 auditing standards
 reporting requirements
Materiality
For the group auditor it will be necessary to consider materiality in a group context. This will
be particularly important when considering any qualified opinion given by a component
auditor, what is material to the component may not necessarily be material to the group as
a whole.
Also the group auditor needs to consider carefully, whether matters relating to components
which are considered immaterial when looked at individually, should be considered as
material when taken collectively with other components.
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ExPress Notes

Scope and Reliability of the work of component auditors
Basically, the group auditor needs to consider whether the component auditor has carried
out the work that the he would have done and to the standards that he would have applied
had he had direct responsibility.
The group auditor cannot just accept without question the work of component auditors, and
before placing reliance upon it should considers factors such as the component auditor’s:
 professional qualification
 experience
 independence
 reputation
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ExPress Notes

Chapter 11
Forensic Audits
START
The Big Picture
This is the examiner’s baby!!
When the current syllabus was introduced this was the only totally new thing in comparison
with the old syllabus.
Like any good mother, the examiner is defensive of her children!! At the ACCA Teachers’
Conference when the new syllabus and examiners were introduced. Lisa Weaver was quite
passionate in her justification for its inclusion. This was in the face of a number of questions
from the floor, as to whether it was appropriate to include what in practice is such a highly
specialised area in a general auditing paper.
Needless to say, there was a question on this topic in the Pilot Paper and it has since
appeared in real exams and is likely to continue to do so.
It is perhaps one of the few areas in P7 where you can anticipate getting marks for being
able to provide suitable definitions.
Make sure you read the examiner’s article ‘Forensic Auditing’ in the September 2008
Student Accountant.
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ExPress Notes
KEY TERMINOLOGY

Forensic Accounting
Covers a wide range of investigative work which accountants in practice might be asked to
carry out.
Work is often, but not exclusively, related to investigating alleged fraudulent activity and
involves the use of accounting, auditing and investigative skills.
Refers to whole process of investigating a financial matter, including potentially acting as an

expert witness.
Forensic Investigation
Is in fact part of forensic accounting and refers to the practical measures adopted to gather
evidence in respect of an alleged fraud and present findings to the client and perhaps
ultimately to a court of law.
Forensic Auditing
Refers to the specific procedures adopted in order to obtain evidence and involves the use
of audit techniques to this end.
KEY KNOWLEDGE
Characteristics of Good Forensic Accountant / Auditor
The characteristics and skills required may be seen to include:
 Ability to identify frauds with minimal information

 Good knowledge of accounting standards
 Good knowledge of internal control
 Good knowledge of evidence
 Interpretative skills
 Investigative skills
 Interview skills
 Reporting skills
 Integrity
 Objectivity
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ExPress Notes

KEY KNOWLEDGE
Types of Investigation
There are many types of investigation which a professional accountant might be asked to
undertake in addition to fraud, amongst the most common being:
 Matrimonial disputes
 Partnership disputes
 Insurance claims
 Professional negligence claims
KEY KNOWLEDGE
Types of Fraud
Just as there are many different types of investigation, there are any number of different
types of fraud. Based on the examiner’s articles you should perhaps consider the most
important as being:
 Corruption
 Asset misappropriation
 Financial statement fraud
KEY KNOWLEDGE
Conducting an Investigation
The main stages should be seen as covering the following:
 Acceptance of engagement procedures

 Planning of the investigation
 Gathering evidence
 Reporting
 Court proceedings
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ExPress Notes

Chapter 12
Prospective Financial Information
START
The Big Picture
Another of those areas which you will not have come across at F8, as it is only examinable
in P7.
Possibility sometimes of gaining a few marks for definitions and also for applying standard
client acceptance procedures to this non-audit situation.
Prospective financial information (PFI) may be seen as information that is based upon
assumptions about possible future events and the actions that may be taken by the
company that the information relates to.
Major difference as compared to traditional audit work is that procedures consist primarily of
making use of analytical review and enquiry.
Not examined every time by any means, but comes up on a sufficiently regular basis that it
should be seen as an important part of your studies.
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ExPress Notes
KEY TERMINOLOGY

Forecast
Generally, but not exclusively, prepared for a 12 month period, a forecast is PFI based on
management expectations at the time of preparation of both future events and management
actions.
Projection
Generally, prepared for a longer period, often up to 5 years, a projection is PFI based on
hypothetical assumptions about future events and management actions, more of a ‘what if’
approach.
KEY KNOWLEDGE
Acceptance Procedures
As with an audit client, normal due diligence procedures, including risk assessment, should
be carried out before agreeing to act as the reporting accountant in relation to a PFI
engagement.
In particular consideration should also be given to the following:
 Intended uses for and users of PFI

 Basis for assumptions used
 Complexity of components of PFI
 Period covered by PFI
 Time allowed for work
 Type of assurance required (should be limited only)
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ExPress Notes

KEY KNOWLEDGE
Reporting Accountant Procedures
Given nature of engagement, majority of procedures will be restricted to analytical review

and enquiry. Particular consideration needs to be given to the following:
 Ensuring sufficient knowledge of the business

 Consideration of reasonableness and reliability of management assumptions
 Ensuring consistency with known information
 Checking arithmetical accuracy
 Obtaining management representations
KEY KNOWLEDGE
PFI Reporting
Apart from standard reporting content (title etc) it is important to ensure:
 Statement of management responsibilities

 Confined to giving limited or negative assurance
 Caveats regarding inherent limitations of PFI
(end of ExPress Notes)
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1. Assurance and Engagements 7

10. Group Audits 39

11. Forensic Audits 43

12. Prospective Financial Information 46

Components of an effective study system

 The ExPress notes for that paper

Your stage in These ExPress ExP ExP ACCA online

Our ExPress notes fit into our portfolio of materials as follows:

Notes Notes Notes

To maximise your chances of success in the exam we recommend you visit

“An engagement in which a practitioner expresses a conclusion designed to

The IAASB framework distinguishes between assurance engagements and non-assurance

Assurance engagements are broken down into:

1. Assurance engagements on historical financial information, which are then sub-

Non-assurance engagements are indicated as including:

 Agreed upon procedures

Reasonable assurance engagements on historic financial information

1. Ethical requirements – practitioners should comply with ethical requirements such as

Many companies, frequently in response to shareholder expectations, now publish details of

1. Financial – eg accounting ratios based upon the financial statements

Assurance approach to KPIs will require careful consideration of:

 The definition of the KPI

 Lack of precise definitions

Modified Audit Reports

Modified audit report with unqualified opinion

Key points to remember in relation to the use of such paragraph are:

 it should have a separate heading

Examples of where the use of such paragraph would be appropriate include:

Consideration of risk is as an integral part of a modern day audit.

Audit risk is seen as being made up of 3 elements:

AUDIT RISK = INHERENT RISK x CONTROL RISK x DETECTION RISK

Detection risk is seen to include the elements of:

Business risk may also be seen as being made up of 3 main elements:

1. Business risk = foreign exchange losses reduce company’s profitability

ISA 220 Quality control for audits of historical financial information

It is particularly important to have procedures relating to proper consideration of client

Specific consideration should be given to money laundering implications.

Professional etiquette procedures should be properly applied in relation to communication

In particular policies and procedures should cover:

 Recruitment and performance evaluation

A legally enforceable duty of care can be established in one of three ways:

i. Under contract – engagement letter would meet this requirement

Negligence, as already indicated, would be assessed against proper application of

Objectivity must be demonstrated by not allowing personal interest or influence of others to

1. Self-interest - e.g. owning shares in a client company

ASSERTIONS RELATING TO TRANSACTIONS AND EVENTS

ASSERTIONS RELATING TO ACCOUNT BALANCES

ASSERTIONS RELATING TO PRESENTATION AND DISCLOSURE

 OCCURRENCE AND RIGHTS AND OBLIGATIONS

1. Documentary evidence will be more reliable than oral evidence.

1. Inspection of records or documents

Typical audit procedures

 Discussions with management and subsequent review of company procedures for

 Discussions with management on their proposed reaction

RISK POSSIBLE INDICATOR POSSIBLE MITIGATING

 Assessment of current and projected economic environment in which company

CIRCUMSTANCES REPORT IMPLICATIONS

Accounting policies (uniformity of)

Information (availability of)

Scope and reliability of the work of component auditors

This is the examiner’s baby!!

Refers to whole process of investigating a financial matter, including potentially acting as an