Hello there and welcome to this presentation
from the ACCA in relation to ACCA paper P7
Advanced Audit and Assurance. My name's Steve Whittenbury
and I work as a subject matter expert for BPP Learning Media in the UK.
Today I want to try and talk you through a specific type of question
in relation to matters to consider and evidence that you should expect to find within
the P7 paper, a fairly frequently occurring type of question
that a lot a candidate's have sometimes struggled with in the past.
Lets have a think about what it is we're going to try and talk about
today. I'm going to use a specific
recent exam question from December of 2013 question 3
part a. This is in relation to a specific
event within a company where you are the external auditor and you have to try and
consider the impact
of this event and what it means as far as your ability to still deliver
a valid audit opinion. During his presentation
I want to try and talk about the style of question, think a little bit about what
the requirements are saying,
try to focus upon what the facts in the scenario actually are,
think a bit about what matters we would consider and what evidence we would be looking
for,
maybe try and give you the opportunity to practice this question yourself so
that you can then see how well you got on
and then try and focus upon some specific conclusions
that you can use for future questions when it's your turn to do it on your own.
Okay the requirement itself as I mentioned to you earlier
is a very typical type that we've seen in lots of different p7 exam sittings in
the past
matters that you should consider and evidence that you should expect to find.
And the basic rationale behind this type of question is that you are the Audit
Manager
and you are reviewing the work that your team has done,
you have a team of minions who have gone out and done your work and it's now your turn as
part of
good quality control procedures within the firm to explore what they've done
to inspect it to make sure that it's up to scratch so that they've done all the
work that they should have done
and that they've left no loose ends. So that's why you're always asking
in relation to information presented in the question, what are the matters that are
important
and what do they then mean as far as your ability to provide an opinion?
Have you got all the evidence you need in order to deliver that opinion? This
type of question creeps in to the p7 exam question a lot
and it's really really important that you focus on these types of questions to be
fully prepared when it's your turn.
Okay let's have a think about some of the facts
in relation to this particular scenario. Hopefully you've read the scenario
already. If you haven't don't forget this is an online presentation that you can
pause
you can rewind and you can play again. So if you've read through the scenario lets have a quick
think about what we know
from the information that's presented. We know that it's in relation to a coal
mine
and we know that this is a regulated industry
where there is a specific regulator mentioned. We also know that this
regulatory requirement to have a license could be something
which is important enough to draw attention to later on. We know that
there's been an accident at the Ledge Hill Mine
and we know that this happened sixteen days before the reporting date
so that it's fairly important that we get this right particularly when thinking
about the events and conditions in
existence at the end of the year. We know that at least a third of this mine has
been permanently closed.
We also know that there will be improvements required to the mine
and as a result those improvements might require the investment of certain sums of
money.
We also know that there's been some damage to the landscape above
which includes residential properties. We know that there's been a survey
commissioned to establish the extent
of this damage. We also know that as a result of this damage
residents are being affected and consequently there's a possibility
that there may be extra costs incurred which the company has to acknowledge
and reflect appropriately within its financial statements.
And all of these are things that we need to build into our approach as the external
auditor to make sure that they are
shown truly and fairly within the financial statements on which we will
provide our opinion.
The final aspect which might perhaps be the most important aspect
is the fact that the company is not going to report this to the regulator
because it doesn't feel it has to
it's made this unilateral decision to not disclose this
accident to the regulator because nobody's been hurt.
It does beg the question that in the real world were this to happen
there would probably be some kind of news
or media interest which might therefore mean that the idea of the company
hushing this up is unlikely, but we will have to park this for the time being and
move on to the actual requirement itself.
Now hopefully you've done this question but if you haven't now is the opportunity
for you to have a crack at doing it.
For this specific part of question 3 you will find that there are 14 marks
allocated in the original exam
structure. That would be using the 1.8 minutes per mark rationale
that we generally tend to work on;
3 hours 100 marks that's the way it tends to work out.
You would expect to spend roughly in the region of about 25 minutes
reading, planning, thinking and writing in order to deliver an answer to this.
So if you want to pause now and spend up to 25 minutes attempting an answer
I'll assume that you are familiar with what the solutions are telling you
and that we can then go through it together.
Okay let's consider the matters that we need to consider
as part of our role as being external auditors. I think there's a few
factors that you can build in and I'm going to try and give you a structure that you
can work through when trying to
concentrate on questions of this sort in the future.
The first and most important thing for your perspective as the external auditor
delivering an opinion on these financial statements is
does this matter? Is it material? Now we are usually provided with information
in questions and this one is no different.
We're told that the value of the mine is 10 million, were told
what it is in relation to the profits and also the assets of the business.
And in this instance we would say that although it's only a third of the mine
that we believe to be affected
that still demonstrates 18% of profits
and nearly 2% of assets which suggests that in terms of the materiality
thresholds that
p7 tends to work within these are on the borderline of
being quite material to the business. So it does matter
therefore we can't just ignore it. Remember if we weren't worried about the
materiality aspects we would still record this as a non-material potential series of
issues
and think about whether they, in aggregate with other factors, might be a
problem.
The next thing after thinking about materiality is to consider the risks that
this particular specific scenario presents
and in this instance, forgive the pun, you're going have to dig a little deeper
into the scenario in order to pick out all the relevant bits.
We're told for example that the mine has been affected it may therefore as an
asset
be impaired. We may perhaps have seen certain
assets lost within the accident, we know that no human assets have been lost but that
doesn't mean to say
that things such as mine carts and other equipment might not have been damaged at
the same time.
We know that the revenues of the business might have been affected
for the period of time that the mine was unable to trade, maybe
to some extent fairly significant, so we would expect to
see a change in the revenue patterns which our analytical procedures might perhaps
have to consider.
We might also have considered and need to fully consider the impact of
provisions
for this particular business because on this basis there's a series of areas
where
our client may have to provide for things that might include
the amount of money to be spent on improvements, both capital and revenue,
the amount of money that we might have to spend in terms of relocation
perhaps even compensation cost for the domestic
residents affected above and possibly even the danger that a regulatory fine
might be coming
the way of our client who may need to provide for that as well.
Now you'll see nestled within the issues that the question has to consider
the fact that there's a possibility of going concern being affected
and I think it's important that you get this in context. This is one of only 10 mines
that the firm has
but remember this is only one and it's a small one by contrast
to all the others if you think about the size of profits and think about the size
of assets
that this one out of ten actually represents. So it may be that the
impact of this particular mine having a problem isn't necessarily going to
jeopardize
your clients going concern status but what it does mean is that perhaps if
reputation
is something which is affected by this in relation to just one mine
it could be that the rest of the firm has some potential adverse comments
attached to it which might have an impact upon its going concern.
So this wouldn't be the first thing I would say that's a matter to consider but it
would certainly be something that I would want to include within my answer.
The next thing to think about then is if we've got these particular risks
how do we know that these have been treated satisfactorily by our client?
The way of ensuring that things are reflected truthfully and fairly within the
statements
are to ensure their adherence to the accounting standards
and this is where your IFRS knowledge of GAP is going to be really really
important.
A lot of candidates do get quite concerned that they don't necessarily remember
what they learnt at p2 for example and they may feel exposed.
I think it's safest to say that in p7 you need to have a good
grounding of each of the various accounting standards that are introduced at p2 and
earlier, you don't need to know them in great detail, you won't be asked to present or
produce an entire
statement of financial position for example, but what you might be asked to think
about is what does a specific standard require you to consider
to ensure that it hasn't been misstated. And they're are probably three good ones that
you could build into your answer here.
IS 36 in relation to impairments,
IS 1 in relation to the presentation of material that is unusual
in respect of presenting these specific events that have occurred during the year
and perhaps one that is most commonly seen within p7
is IS 37 on provisions. Have all three conditions
in order to satisfy a provision being met in relation to these facts.
Now in terms of talking about the specifics of bits of
evidence that we should be working towards, the evidence that we're looking
for is the next thing.
Have our team done the bit that they should have done in order to satisfy
ourselves
that these standards have been dealt with appropriately and the way they are reflected
in the financial statements is true and fair.
This is where you now as the reviewer
are checking through the work that your minions have done to make sure
that it matches up with what you believe is enough for you then to say to the
person
above who's the partner who's going to sign off and say that the accounts show a
true and fair view.
This is where audit evidence becomes important. So for example you might want
to have a look about
what impact regulatory problems might face
obtaining a copy of the regulatory license that the mine possesses
to establish what sort of minimum service requirements there are,
what sort of penalties or fines there might be in relation to things going wrong
would be the first thing that you would look for. Next you would try and establish
the degree of non-disclosure and whether or not that might attract any
kind of fines.
We might have to consider where we get the details in relation to
the damage, the impact, the cost. This is where some sort of surveyor's report
some sort of information supporting what we know about this particular accident
to clarify the fact that we're dealing with facts and not supposition.
We then need to try and get some idea from perhaps correspondence with solicitors
or representations from directors or forecasts or bills or something of that sort
which provides us with an indication of how much money it's going to cost in future
to deal with the fact that we've got changes to the mine in terms of the
impairments
we've got to do some remedial work to the ground above
we got to pay for the cost of relocating members of the public
and we've also maybe got to think about further problems in relation to associated
fines that
might come our way. We might want to try and establish, we're told
that there were no accidents in relation to members of staff being injured,
but it might not be a bad idea for us to verify that by means of
an accident book or other health and safety records that might be present.
Finally in order to try and address the issues in concerning the
evidence that's available to us in terms of going concern
we might want to try and seek management representations
that would give an indication that the company is considered still a viable
going concern
we might want to review board minutes for this purpose possibly even obtain
copies are forecasts or
prospective financial information that supports where we believe this
particular business is going
and that it does have a future.
Okay that's the sort of issues that you should have considered
when trying to put together an answer. How well did you do?
Well the marking rubric that the examining team supplies after each sitting
is usually very comprehensive and you'd expect for a question of this sort if you've
fully developed a point
within a context of a well argued sentence with a beginning a middle and
an end
that you'd usually get a mark for each of the points that you'd raised. So in this instance
you'll probably find that a well balance answer would have needed about fourteen
things in order to score
the 14 marks, and I think judging by the things that we've just talked about you could probably
have found 14 things fairly easily.
Don't forget though that your knowledge of the standards is always going to be
important
and you have no way of guaranteeing that this sort of thing will be replicated.
Another thing which I think is quite important for you to draw out when trying to
consider how well you got on
is to think a bit about the role that the examining team plays.
Now, as you've picked up my name's Steve and this is a
digging context so we have to talk about digging,
my children are very much into Minecraft at this time that this particular question
was set, Minecraft was very much the popular thing for kids of
that age to get involved in. So as a man called Steve I've got to dig deeper
and play the Minecraft card at this stage here and I think this is a key part of
what the examining teams comments fed back. Through the examiner's reports that you
can get access to online
that suggested that candidates started well but didn't dig deep enough
they didn't go further than just considering the fact that the mine was
impaired
or they didn't go beyond the fact that there was a going concern issue and I think
to get a full
thorough set of marks you've got to explore fully and you've got todig as deep as you
can into the scenario
and think about all the various aspects that could be affected by the situation
as presented.
The examining team did point out within their comments that as well as not digging
deep into the scenario
a lot of candidates displayed some poor financial knowledge
some poor financial reporting awareness even, for example
illustration of something that the examining team mentioned in the report
was that candidates wrote that there should be a provision for lost revenue
which is plainly crazy,
similarly also audit evidence that was suggested by candidates
was of not sufficient quality, for example suggesting simply that there
should be
discussions with management or that items should be properly disclosed,
neither of those is done in enough detail in order to score or attract adequate
marks.
So unless you write fully and thoroughly you won't score the marks you need
to survive. Okay I want to try and finish off by thinking about conclusions
that you can draw from this hopefully having attempted this question yourself
and from this presentation you can take on further.
There are I think a number of issues that you can draw out when trying to think
about an approach for a
matters to consider and evidence to be looking out for
that you can build for any other subsequent type of this question that you attempt in
future.
Materiality; how much does this matter?
What are the risks presented, what parts of the financial statements could be
affected?
What do the standards tell us about how they should be represented?
And then what sort of evidence should we be looking for
in order to make sure that this has been attractively and
appropriately treated within the way we do what we do.
Finally in terms of that evidence I also want to try and get you to remember
that there are certain things that the examining team is looking out for
that if you want to write say that something is
of sufficient caliber and quality in terms of your answer
you can't just say, 'check that this has been disclosed', 'obtain managment
representations',
'read board minutes', those alone are not going to be enough.
What you want to be saying is; what you're doing, why you're doing it,
how you're doing it, where you have to go in order to do it,
who you might have to speak to in order to do it and what kind of documentation
you're looking for.
There are six things that you could build in, not every procedure will have
that
but you would expect evidence and procedures to reflect those.
Finally the most important message I can leave you with after having considered
materiality,
risks, standards and evidence is to think about reflection
and the role that plays in how you can learn from your own performance every
time you do a question.
Think about what you wrote, what was good and try and do more of it,
think about what you wrote which wasn't enough and do even more of that next time
and think about the comments that the examining team have made within their
reports
so that you can then build a little bit more on those for the next time
you do it. So there's a few suggestions for you
for when you're going to do p7. All that remains for me to do is to wish you the very best of
luck when it's your turn to do p7
and I hope you can bear in mind some of these thoughts when you actually go through it
and do it yourself. Thanks for your time today I wish you the very best of luck.
Bye now.