AAA PRACTICE TO PASS MARCH 2019 ACCA PAKISTAN – BY KASHIF KAMRAN – FCCA [ JAN 29- FEB 1 2019]

ACCA PAKISTAN- PTP – MARCH 2019 (AAA BY KASHIF KAMRAN)

DAY 1 – AUDIT RISK
SESSION QUESTIONS SUGGESTED ANSWERS
JUNE 2015-Q1
Briefing note
To:
From:
Re:
Introduction:

Matters - Audit strategy (initial engagement)

In the planning the initial audit engagement for Ted Co , the audit firm should correspond with the Crilly & Co,
the previous auditor to obtain understanding of key aspect of the business and any potential areas of risk in
financial statements. Further, the firm should carefully evaluate the results of analytical procedures to
understand the trends in the financial information and to identify unusual trends as risky areas in the financial
statements
The firm should also carefully consider the accounting policies of Ted Co and ensure that these policies do not
possess any risk of material misstatements. Specific consideration should be giving in initial engagement to
opening balances and it must be confirmed that the opening balances are properly carried forward.
Audit risk
New audit client
Ted Company (Ted) is a new audit client for Craggy Co therefore the audit firm will have less knowledge of
business thereby increasing the detection risk in the first year audit.
Further, there could be a risk of material misstatements in opening balances if such balances are wrongly brought
forward by Ted management.
Listed company
Being a listed company, there is a risk of management bias in manipulating results for showing better
performance. Thus Ted management could overstate assets/ profit and understate liabilities/ expenses. Revenue
has increased by near 2% and profit by near 6% indicates such risk might exist.
Intangible assets
There is a substantial increase of 66 % in development cost recognized this year. There is a risk that the
development cost has not met the criteria for capitalization as stated in IAS-38. This could have resulted in
overstatement of profit which has already increased by 48 % over the last year and understatement of operating
expenses.

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AAA PRACTICE TO PASS MARCH 2019 ACCA PAKISTAN – BY KASHIF KAMRAN – FCCA [ JAN 29- FEB 1 2019]
Online sales
25% of the sales are made online through website. There are several risks associated with sales made online.
There is a high detection risk with on line sales due to non-availability of records due to paperless environment
and it would be difficult to find the audit trail. Moreover, there could be issues with sales cut-off related to online
sales and thus revenue could be overstated.
License
The license income represents 13.4% of the total assets and is therefore material. As Ted has given an exclusive
license means that risk and rewards are fully transferred and Ted has no managerial involvement then revenue
from the sale of a license should not be deferred at all. Thus mean that currently there is a significant
understatement of revenue and profit.
Internal audit
The company does not have an internal audit function; this will make monitoring of overall internal control
system weak in the company there by increasing the risk of material misstatements in the financial statements.
NEDs
One non-executive director is insufficient number. Less number of NEDs will make overall monitoring of system
weaker in the company thereby increasing the risk of material misstatements in the financial statements.
Short term investment
Speculative investments in equity shares should be measured at fair value through profit or loss. Currently the
short term investment is held at cost of $ 8 million. Thus STI and profit is overstated by $ 2 million. The short
term investment is _____% of the total assets, thus material to the statement of financial position.
EPS
EPS to be calculated based on the profit or loss for the year (post-tax) attributable to ordinary shareholders as
presented in the statement of profit or loss. The EPS is wrongly calculated based upon adjusted profit before tax
number. Thus EPS currently is distorted and misstated.
Analytical review – result
Significant growth in revenue i.e.46% and profitability (both gross profit i.e. 62.5% and net profit i.e. 48%)
increases the risk that the number could contain potential risk of material misstatements. This could be in line
with the risk of management bias due to listed company. Revenue could be overstated to show better profitability
to shareholders.
Moreover, there could be understated of cost of sales and operating expenses to show better gross profit and net
profit.
Note: You can identify more risk from results of analytical review given in the question to identify
possible under or overstatements

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AAA PRACTICE TO PASS MARCH 2019 ACCA PAKISTAN – BY KASHIF KAMRAN – FCCA [ JAN 29- FEB 1 2019]
Procedures
Portfolio of short term investment (4 procedures needed)
1. Review board minutes for the approval of $ 8 million investment in equity shares of listed company
2. Review the bank statement to confirm the payment of $ 8 million
3. Discuss with management that the short term investment is to be carried at fair value at year end
4. Review the draft financial statements to confirm the adjustment has been made.
5. Review the stock exchange quotations at the year end to confirm the fair value of short term investment
at the year end
6. Recalculate the fair value (No.of share held * market value of share at year end)
7. Review the management working for the fair value of shares held in listed companies.
Earnings per share (4 procedures needed)
1. Discuss with management that the EPS is based upon profit attributable to shareholders rather adjusted
profit
2. Confirm the number of shares as at 31st May from the share prospectus, board minutes etc.
3. Recalculate the EPS based upon the profit after tax
4. Review the draft financial statement to confirm that the EPS has been adjusted.
Conclusion
There are several risk of material misstatement as identified through this briefing note within the financial
statements of Ted Company, therefore the audit should be carefully planned in each of these risky areas in order
to reduce the detection risk to an acceptable level .

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AAA PRACTICE TO PASS MARCH 2019 ACCA PAKISTAN – BY KASHIF KAMRAN – FCCA [ JAN 29- FEB 1 2019]
JUNE 2017- Q1
Student guidance: The live practice to pass session will demonstrate many part of this question with
marking scheme for more clear guidance on how to use this sketch answer for your preparation
Risk of material misstatement associated with analytical review
Calculation current ratio, interest cover, operating profit margin, effective tax rate would ideally help
you in commenting on these ratios and gain marks. 1 mark per ratio with comparative (utilized).

– Understatement of expenses and overstatement of sales ( impairment loss / and Chico

product discontinuation)
– Understatement of finance costs
– Tax expense not in line with movement in deferred tax liability
– Overstatement of current assets/understatement of current liabilities

Other risks of material misstatement – up to 3 marks for each RoMM which includes the MTR/ and 2
marks for general RoMM from case study.

– Change to PPE useful lives may not be appropriate – overstated assets and profit
– Management bias risk due to new loan being taken out
– Impairment to Chico brand may be understated if full carrying value of brand not written off
– Chico inventories will need to be written off – risk of overstated assets
– Risk that goodwill has not been tested for impairment
– A provision may be needed for customer claims – risk of understated liabilities
– Deferred tax liability appears incorrect and likely to be overstated

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