kashifkamran@gmail.

com
AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 17
(BLOCK 4 LECTURE 1)
Objective: Syllabus area F- Other assignments
Exam rigor:

 Other assignments are tested in section B of the paper (but not in every single exam sitting)
 Articles by examining team- has been written on 2 out of 4 assignments
o Forensic audit
o Audit of performance information
 Exam question on other assignments- mostly the question consist of:
o Matters you should consider in accepting an engagement(other assignment) from a new client/
existing client – Syllabus area C: Practice management (block 2)
o Audit procedures- Syllabus area D: Audit of historical FS (block 3)
o Ethical and professional issues – syllabus area B: ethical and professional issues ( Block 3)

Exam perspective- recent papers

SEP18 DEC18 MJ19 SD19 MAR20 SD20 MJ21
DDR x x x x
PFI Q3a-15 x x Q3a-15 x x
FA x x Q3-25 x x
PI x x x x

Student note: DDR/ PI- Prior to Sep 18 to search for past paper

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Due diligence review

 DDR is a moderate assurance engagement

 In a DDR the audit firm perform DD of a seller and provide buyer with adequate, reliable and relevant
information about seller, so that the buyer can take a proper decision.
 While performing DD of a seller , the audit firm, critically evaluate diversified aspect of seller business so
to provide right info to buyer
 Diversified aspect of seller business?
o Financial – is the seller financially viable? – investigate/ analyse the financial statements,
historical trend/ ratios/ profitability/ liquidity/ gearing
o Commercial – is the seller commercially viable? – investigate seller market share/ reputation/
relationship with stakeholder/ product portfolio / demand for product high/low/ competitive
position in the market
o Operation – is the seller operationally viable? – supply chain? How good the supply chain is? + the
effectiveness of internal controls systems at seller
o Legal – is the seller legally viable? Any court cases ongoing? Any hidden liabilities (contingent
liabilities)
o HR- is the seller viable from aspect of human resources? – overstaffing? Understaffed?
Competence level of staff/ critical staff (Very experienced staff)
o Technology- is the seller technologically viable?
 Technical – present IT in place – hardwares/ software’s- up to date or they are out of date/
security at present for IT at seller
 IT – future prospects- is the seller working on something for future in terms of technology
(WIP/ something in pipeline)/ innovation
Student note: The auditor will share the info about the seller with buyer that will help buyer determine the right
purchase consideration. The auditor can determine the fair value of net assets for the seller
Scope: summary

 Review engagement- moderate assurance

 Diversified aspects of seller business – share information with buyer
 Determining the fair value of net assets

Summary of the past papers

Requirements Jun11 Dec13 Dec15 Dec17
Benefits 6 6 X
Additional info 12 Up to 8 marks 7 marks (intangible
assets)
Matters – DDR Up to 8 marks x 6 marks
Type of conclusion 3 x
Purpose of DDR 2 marks
Compare the scope 4 marks
Enquiries 7 marks ( contingent
liab)
Procedures 6 marks

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Knowledge part:

 Benefits – of DDR ( 6 marks) – 2 out of 4 exam sitting – Jun11/Dec13

 Purpose- (2marks) – Dec13
o Purpose of DDR is to provide relevant, adequate and reliable information to the buyer about
diversified aspect of seller business. In a DDR the auditor critically evaluate numerous aspect of
seller business so that the buyer can take a proper decision.
 Compare the scope of the DDR with that of audit? – Dec 13- 4 marks
o The scope of due diligence is broader or wider than that of the audit of FS, because in the DDR the
auditor evaluate diversified aspects of the seller business whereas in the audit of FS the auditor
only focus on performing procedures on FS. (2)
o Furthermore, the assurance level in DDR is moderate being a review engagement whereas the
audit of FS has a reasonable assurance level. Thus the assurance level of audit is high in
comparison to a DDR. (2)
 Dec13- Type of conclusion the auditor give in DDR and compare that to that of audit. (3 marks)
o The type of conclusion the auditor given in DDR is a moderate assurance i.e. a negative assurance
normally presented with a statement, “ based upon our review nothing has come to our
attention……”. The moderate assurance is less than reasonable assurance. (1.5)
o Whereas in the audit of FS, the auditor expresses a reasonable assurance which is a high level
assurance and expressed in a form of an opinion, stating “in our opinion…….” (1.5)
Specific areas from DDR- past paper
1. Additional information – 1 mark
2. Matters (DDR question)- 1.5 mark
3. Enquiries – 1 mark
4. Procedures – 1 mark
Additional information
Additional info is a very regular feature of a question on due diligence, but sometime if you see Q1 of some old
past paper, examiner also ask for additional info in Q1 in a question on audit risk or risk of material
misstatements. (Additional info- YouTube channel- https://youtu.be/oHdDEVSFrrU )
Definition:
Additional info- mean the information the auditor requires from the management to perform the particular
engagement. Additional info is requested / or is obtained by the auditor before the start of the fieldwork.
Recommend the additional info which you should need to perform you work?
For example:
The audit team should request/ obtain the following additional info from the management:

 Lease agreement to confirm the terms and conditions associated with the lease or confirm the
classification of lease.
 Cash book to confirm receipts and payment during the last one year
 Fixed asset register to confirm the accumulated dep, types of assets, cost etc.
 Breakup of sales
 Break of intangible assets
 Bank statement
 Payroll register
Info= tangible document = requested from the management with reason = 1 mark

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Student note: at the start of engagement the auditor

1. Obtain information
2. Perform procedures on information obtained
3. Document evidence in WP file as a result of procedures performed.

Dec 13- Q2
(B) Identify and explain the matters which you would focus on in your due diligence review and recommend the
additional information which you will need to perform your work. (16 marks)

 matters which you would focus on in your due diligence review

o You= auditor
o Matters= pertaining to seller
o Focus on the matters? From the perspective of buyer
o 1.5 marks per matter you should focus on as an auditor from the perspective of the buyer
 recommend the additional information which you will need to perform your work
o document (info)- which you will request from the management
o 1 mark with reasons
Brainstorming
Mizzen Co was established four years ago by two university graduates, Vic Sandhu and Lou Lien, who secured
funds from a venture capitalist company, BizGrow, to set up the company. Vic and Lou created a new type of
website interface which has proven extremely popular, and which led to the company growing rapidly and
building a good reputation. They continue to innovate and have won awards for website design. Vic and Lou
have a minority shareholding in Mizzen Co.

Mizzen Co employs 50 people and operates from premises owned by BizGrow, for which a nominal rent of $1,000
is paid annually. The company uses few assets other than computer equipment and fixtures and fittings. The
biggest expense is wages and salaries and due to increased demand for website development, freelance
specialists have been used in the last six months. According to the most recent audited financial statements,
Mizzen Co has a bank balance of $500,000.

Matters
Vic and Lou
Vic and Lou are important or rather critical success factor for making Mizzen successful. Thus Baltimore would
not like to lose them post acquisition as they are brain behind the company’s success and they are the skilled
members. Thus Baltimore has to offer some incentive or shareholder to these two individuals to attract them
toward Baltimore. (1.5)

Bizgrow
In order for the acquisition to be successful, Bizgrow intent of selling share is important. Baltimore has to do
negotiations on purchase consideration with Bizgrow in order for the acquisition to be successful. Bizgrow has a
majority shareholder and play a crucial part in the success of this acquisition (1.5)

Rapid growth
Mizzen is financially viable as the company has grown rapidly over the last 4 years, which make Mizzen an
attractive acquisition for Baltimore. Rapid growth means that Mizzen has a strong customer base and a good
market share which makes the company equally commercially viable. (1.5)

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Innovation

With innovation by Vic and Lou it seems that mizzen is technologically viable as the company continues to spend
on innovation to keep the company popular for its websites. This makes Mizzen more attractive for Baltimore as
the purpose of acquisition is to find a company which can offer website and online sales to Baltimore.

Additional information
The following info should be obtained from Mizzen management:
1. Shareholding register to confirm the minority shareholding of Vic and Lou.
2. Agreement with Bizgrow to confirm the terms and condition on which the VC has offered funds to
Mizzen
3. Personnel records pertaining to Vic and Lou to confirm their qualification and experience
4. Certificate of incorporation to confirm the company is legal and was established 4 years ago.

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 18
(BLOCK 4 LECTURE 2)
Objective: Due diligence past papers (Continuation of Lecture 17)
Dec 13 Q2-
(B) Identify and explain the matters which you would focus on in your due diligence review and recommend
the additional information which you will need to perform your work. (16 marks)

 matters which you would focus on in your due diligence review

o You= auditor
o Matters= pertaining to seller
o Focus on the matters? From the perspective of buyer
o 1.5 marks per matter you should focus on as an auditor from the perspective of the buyer
 recommend the additional information which you will need to perform your work
o document (info)- which you will request from the management
o 1 mark with reasons
Para 2
Mizzen Co employs 50 people and operates from premises owned by BizGrow, for which a nominal rent of
$1,000 is paid annually. The company uses few assets other than computer equipment and fixtures and fittings.
The biggest expense is wages and salaries and due to increased demand for website development, freelance
specialists have been used in the last six months. According to the most recent audited financial statements,
Mizzen Co has a bank balance of $500,000.

50 people (increased demand for website development)-Will that increase salaries in future?

Baltimore needs to consider whether the 50 employees are a sufficient number of staff considering there is an
increased demand for website development. Moreover, there buyer need to be carefully evaluate the additional
cost which needs to be incurred in future in terms of hiring staff and the impact of the hiring on salary expense
and profitability in future. (1.5)

Moreover, Baltimore need to retain the 50 employees because this is not an overstaffing at present and further
all these employees are skilled workers because they are associated with website development. (1.5)

Nominal rent of $1,000 is paid annually

Baltimore need to be careful about the increase in rent expenses in future as BizGrow will no more charge a
nominal rent after they sell their shareholding. The shift of nominal rent to market rent will immediately increase
the rent expenses which will impact the future profitability. (1.5)

computer equipment
Baltimore need to consider whether the computer equipment’s are fully depreciated or out of date or whether
they can still be used for years to come. The condition of computer equipment’s and other fixed asset will help
auditor judge the right fair value of net assets which will be important to the buyer in determining the purchase
consideration. (1.5)

Further the buyer need to consider any need of future capital expenditure on buying new computer
equipment’s to ensure that the website development is not effected which is the critical success factor of this
acquisition. (1.5)
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bank balance of $500,000

The auditor should consider the latest bank balance, to conclude on whether there is sufficient cash on hand for
the business or enough liquidity to run the business in context of increase in future expense like rent and salaries.
For the buyer the feasibility around liquid business will be important factors to buy or not buy the company. (1.5)

Assignment: Read the rest of case- pick up the matters which you believe is of interest to the buyer and justify
why to fetch 1.5 marks per matter.

Additional information
 Latest Bank statement to confirm the most updated bank balance position.
 Payroll register to confirm that the number of employees and their present salary structure
 Break up operating expense to confirm that salary is the biggest expense and what are other operating
expenses for Mizzen.
 Rent agreement to understand the terms and conditions and to confirm the nominal rent of $1000
 Fixed asset register to confirm the class of assets, the cost, their accumulated depreciation and the net
book value

Assignment- Complete the rest of Dec 13 Q2

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Dec 15 –Q3

Required:
(a) Describe the purpose of a due diligence assignment and compare the scope of a due diligence assignment with that
of an audit of historical financial statements. (6 marks)

- Purpose 2 marks
- Compare the scope – 2 mark per comparison ( only 2 comparison needed to reach 4 mark)

(b)
(i) Recommend, with reasons, the principal additional information which should be made available to assist with your
valuation of Titian Tyres Co’s intangible assets. (7)

- Additional info 1 mark per info * max 7 info ( restriction – intangible asset)

(ii) Explain the specific enquiries you should make of Titian Tyres Co’s management relevant to the contingent
liability disclosed in the financial statements. (7)

- Specific inquiries – only about contingent liability

- Each inquiry – is worth 1 mark ( max 7 inquiries)
Note: The total marks will be split equally between each part. (14 marks)

Assignment- additional info – intangible assets

 Internally generated customer database

 Database software
 License

The auditor should obtain the following additional info about intangible assets from Titian management:

-License agreement

Specific enquiries- contingent liability

During a brief review of Titian Tyres Co’s financial statements for the year ended 30 June 2015, you notice a
contingent liability disclosure in the notes relating to compensation claims made after the fitting of faulty
engine parts during 2014. The management of Titian Tyres Co has stated that the fault lies with the
manufacturer of the part and that they have made a claim against the manufacturer for the total amount sought
by the affected customers.

Specific inquiry – something becomes specific when it is connected to case

The auditor should make the following specific enquiries from Titian management on contingent liabilities as
follow:
1. The basis of concluding that the claims have a possible outflow not probable?
2. Any legal opinion taken on the conclusion that claims have a possible outflow?
3. The number of compensation claims received from the customers during the year?
4. The total amount of claims received to confirm the accuracy of the contingent liability disclosed.
5. Any such claims in prior years and how the management dealt with them ?
6. Has the manufacturer accepted the fault?
7. The amount of claim made against the manufacturer?
8. Have the management got any reply from the manufacturer against the claim?

Rule: You inquire when something is subjective, or something is ambiguous, some info is missing from the case, or
you inquire when something is not stated in case

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Dec 17 Q3a

Required:
In respect of the two matters identified above:
(i) Explain why each matter requires further investigation as part of the due diligence review, and (6
marks)- 1.5 marks per why each matter is important ( 6/1.5 = 4 why)
(ii) Recommend the investigation procedures to be performed. (6 marks)
Matter 1

 Why each matter requires further investigation – 3 marks

 Procedures – 3 marks

Matter 2

 Why each matter requires further investigation – 3 marks

 Procedures – 3 marks

Brainstorming
you have been asked to provide:
 a valuation of Zebra Co’s assets and liabilities and
 an analysis of the company’s operating profit forecasts.

Matter 1

While reviewing correspondence with customers in relation to outstanding receivables, one of the team found a
letter from a large retailer, for which Zebra Co produces a number of unique products, providing advanced notice
that they are not renewing their purchasing agreement when the current one expires. The customer
advised that they are switching to a new entrant to the market who is substantially cheaper than Zebra Co. A
brief analysis identified that the customer provides, on average, almost 5% of Zebra Co’s annual revenues

Why this matter requires further investigation – 3 marks

 Unique product for this larger retailer – ( IAS-2 inventory valuation – can these product be sold to other
customers? No ? value inventory at lower of cost or NRV) – will this impact the valuation of net asset (1.5)
 Unique products – using some plant and machinery ?specific for the large retailer ? Impairment of the
plant and machinery? – will this impact the valuation of net asset (1.5)
 Losing the larger retail(almost 5% of Zebra Co’s annual revenues) – will this impact on future revenue
and profitability (1.5)
 switching to a new entrant to the market who is substantially cheaper than Zebra Co ( threat to future
profitability of Zebra? And future sales?)- 1.5 mark

Procedures – 3 marks
1. review the advance notice from the large retailer to confirm the reasons why the customer want to switch
and the grievance the customer has with Zebra and to confirm when the agreement expire.
2. Review the inventory register to confirm the unsold inventory at the year to the large customer which
should be valued at lower of cost or NRV.
3. Discuss with Zebra management the need for impairment of plant and machinery or is there any specific
plant and machinery allocated to making unique product for large retailer.
4. Review the profit forecast to confirm the likely prospective impact on future sales and revenue due the
the loss of large retailer
5. Discuss with management their plans to compete with the new entrant and its potential impact on the
future profit.

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Why this matter requires further investigation – 3 marks
 Unique product for this larger retailer – ( IAS-2 inventory valuation – can these product be sold to other
customers? No ? value inventory at lower of cost or NRV) – will this impact the valuation of net asset (1.5)
 Unique products – using some plant and machinery ?specific for the large retailer ? Impairment of the
plant and machinery? – will this impact the valuation of net asset (1.5)
 Losing the larger retail(almost 5% of Zebra Co’s annual revenues) – will this impact on future revenue
and profitability (1.5)
 switching to a new entrant to the market who is substantially cheaper than Zebra Co ( threat to future
profitability of Zebra? And future sales?)- 1.5 mark

Matter
Unique product
The unique product made for the large retailer are very specific ones which cannot be sold to any other customer,
therefore in context of the advance notice from large customer Leopard should consider the appropriate
inventory valuation of any un-sold stock at year end to the large customer as this will impact the valuation of net
assets (1.5)
New entrant

The new entrant is a major threat for Zebra, not only this has resulted in an advance notice from one major
customer of switching to the new competitor but also this can result in further loss of other customers and this
could negatively impact on Zebra future market share and its profitability. (1.5)

Assignment – complete this question particularly the matter 2 for both requirement.

Summary – DDR

 No article to read
 Focus on class lecture
 Practice three past papers- Dec 13 Q2, Dec 15 and Dec 17 Q3
 You know the scope, assurance level, purpose, benefit of DDR
 You should know the following:
o Additional information (Dec 15/Dec13)
o Procedures (Dec17)
o Matters specific in case study for buyer (Dec 17 / Dec 13)
o Specific enquiries (Dec 15)
 You are familiar with marking scheme.

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 19
(BLOCK 4 LECTURE 3)
Objective: Forensic audit & Audit of performance info

Forensic Audit
Examiner mind-set and the scan of past paper
Dec 11 Q4 A/B Dec 12 Q4C Jun 13 Q2b Jun 15 SD2019
Ethical and 6 marks
professional issues
Matters Accepting a X Theft/ insurance X Before accepting
potential claim an engagement –
engagement 3 marks 8 marks
6 marks
Procedures X 4 marks 6 marks 4 marks 6 marks
Step in planning 3 marks
Deficiencies/ 6 marks
recommendation
Fraud discovery- 5 marks
management and
auditor difficulties

Student wants to excel in forensic should be strong at:

1. Procedures
2. Matters

Understanding – forensic audit

 Forensic audit – investigation (fraudulent activity/ bribery / criminal activities)

 Forensic investigation is an agreed upon procedure (Engagement) thus offer no assurance
 Forensic investigation is a fact finding exercise about: (Scope)
o Who did it?
o How it happened?
o Amount of loss?
 Auditor has to present a detailed report – about who did it? Amount of loss? And how it happened?
 The auditor report can also contain recommendation to avoid reoccurrence of fraudulent activity in
future

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Article:
A forensic investigation is a very specialist type of engagement, which requires highly skilled team members who
have experience not only of accounting and auditing techniques, but also of the relevant legal framework.
There are numerous different types of fraud that a forensic accountant could be asked to investigate. The
investigation is likely to ultimately lead to legal proceedings against one or several suspects, and members
of the investigative team must be comfortable with appearing in court to explain how the investigation was
conducted, and how the evidence has been gathered. Forensic accountants must therefore receive specialist
training in such matters to ensure that their credibility and professionalism cannot be undermined during the
legal process.
Note: When the audit firm is conducting a forensic investigation the steps are very similar to that of audit
with the exception of court proceeding
1. Acceptance decision
2. Planning
3. Gather evidence
4. Reporting
5. Court proceeding

Accepting the investigation

Additional considerations include whether or not the investigation is being requested by an audit client. If
it is, this poses extra ethical questions, as the investigating firm would be potentially exposed to self-review,
advocacy and management threats to objectivity. Unless robust safeguards are put in place, the firm should
not provide audit and forensic investigation services to the same client. Commercial considerations are
also important, and a high fee level should be negotiated to compensate for the specialist nature of
the work, and the likely involvement of senior and experienced members of the firm in the investigation.
If the engagement involve court proceeding – will the court proceeding give rise to an advocacy threat?

 Yes, why?
o Because presenting a client in a court proceeding is promoting the client business interest
o In forensic investigation, advocacy is permissible because its embedded part of engagement
Summary: Acceptance
1. Ethical issues- (Existing audit client)- self review/ advocacy/ management threat
2. High fees – versus special nature of work
3. Senior members in the team

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Definition

 Forensic audit – gather SAAE

 Forensic accounting- investigate FS for non-adherence to IFRS
 Forensic investigation – question / or identify the suspect or culprit

Past papers
2011- Dec Q4 a and b
(A)- Ethical and professional issues (Assignment)

(B)- Matters to be discussed with Jack

Explain the matters that should be discussed in the meeting with Jack Privet in respect of planning the
investigation into the alleged fraudulent activity.6 marks

Para 3:
I am very worried about the scale of this fraud, as travel and client entertainment is one of our biggest expenses. All of
the alleged fraudsters have been suspended pending an investigation, which I would like your firm to conduct. We will
prosecute these employees to attempt to recoup our losses if evidence shows that a fraud has indeed occurred, so your
firm would need to provide an expert witness in the event of a court case. Can we meet tomorrow to discuss this
potential assignment?’

Matters – to be discussed with Jack (Convert them to paras – assignment)

 Deadline for completing work / court proceeding

 Fees
 Any initial calculation performed on scale of fraud / estimation?
 Access to suspended employees? Because they are a source of evidence?
 Clarity on the scope of investigation?
 Assurance level- to avoid misunderstanding
 Do Jack need any recommendation on control?

Dec 12- Q4c- Procedures 4 marks (Assignment)

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June 13 Q2b

Required:
In respect of the theft and the associated insurance claim:
(i) Identify and explain the matters to be considered (3m), and the steps to be taken in planning (3m) the forensic
accounting service; and 6 marks
(ii) Recommend the procedures to be performed in determining the amount of the claim. 6m= 6procedures

Note: The total marks will be split equally between each part. (12 marks)

Answer
Matters – 3 m

Steps – 3 m

Procedures – 6 m

The audit committee of the Group has contacted Kennel & Co to discuss an incident that took place on 1 June 2013. On that
date, there was a burglary at the Group’s warehouse where inventory is stored prior to despatch to customers. CCTV filmed
the thieves loading a lorry belonging to the Group with boxes containing finished goods. The last inventory count took place
on 30 April 2013.
The Group has insurance cover in place and Kennel & Co’s forensic accounting department has been asked to provide a
forensic accounting service to determine the amount to be claimed in respect of the burglary. The insurance covers the cost
of assets lost as a result of thefts.
It is thought that the amount of the claim will be immaterial to the Group’s financial statements, and there is no ethical
threat in Kennel & Co’s forensic accounting department providing the forensic accounting service.

In respect of the theft and the associated insurance claim Identify and explain the matters to be considered (3m)

 Who did it? – Who is the suspect? Anyone identified?

 Any such theft from warehouse in the past
 What weaknesses exist in the ICS at the warehouse?
 Has the theft informed to the police dept?/ any recovery made
 Has the insurance company been informed of theft ?/ any replies from insurance company

Matter
-The audit firm should consider the weaknesses in the internal control system at the warehouse which resulted in the theft
on 1st June. The weaknesses will help audit firm to exactly identify the loopholes which will help them with their
investigation (1)

-The audit firm should discuss with audit committee whether any suspects have been identified or whether any initial
investigation has been carried out to identify the likely suspect. (1)

Q: the steps to be taken in planning (3m) the forensic accounting service – 3 mark

Kennel & Co should carefully plan the forensic investigation of the theft from the warehouse by carefully considering
planning matters:

-should carefully understand the scope of engagement in terms of relevant laws and regulation and the size of warehouse
and nature of inventory to perform an efficient investigation

-should develop a proper timetable to perform the engagement in line with the deadline given by the audit committee

-should consider developing a proper audit team with experienced team members to perform investigation as
investigation requires more senior team members

Student note: step in planning = block 3 planning= scope, timing, direction and resources

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Procedures- amount of claim

Brainstorming

Insurance claim - The insurance covers the cost of assets lost as a result of thefts.

Lorry –cost xxx

Finished good(inventory)- cost xxx

xxx

Less: recovery if any made by police (xxx)

Net insurance claim xxx

Procedures-

1. Agree the cost of lorry stolen to the purchase invoice or to the fixed asset register to confirm the cost. (1)

2. Discuss with audit committee whether any recovery has been made by police pertaining to lorry or the inventory (1)

3. Discuss with audit committee the basis underlying their claim that the amount will be immaterial or whether any initial
amount of claim has been worked out. (1)

4. Review cost card for laptop and mobile phone to confirm the cost per unit of a laptop and mobile phone.

5. review the dispatch list as of 1st June, to confirm how much quantity was to be dispatch on June 1st in relation to laptops
and mobile phone

6. Discuss with the warehouse manager any leftover inventory on June 1st at the dispatch location which was not stolen.

7. Watch the CCTV footage to confirm number of boxes which were loaded on to the lorry

8. Reconcile the inventory position as from April 30th to June 1ST to identify any discrepancies in the quantity as per physical
record of warehouse which can be the quantity stolen

Inventory stolen:

 How much quantity has been stolen?

 Quantity stolen * price per unit= cost of inventory stolen
o Incident on June 1
o CCTV filmed
o Last count took place on 30 th April

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Jun 15 Q4c – Procedures on alleged bribery payment - 4 marks (Assignment)

Sep Dec 19 Q3

Evaluate the matters which should be considered before your firm accepts the invitation to perform a forensic
investigation for Beyer Co. (8 marks)/ 2 mark per matter= 4 matters
Student note – This is a new client

Recommend the procedures which should be performed in order to quantify the inventory loss; and (6 marks)/ 1
mark per procedure= 6 procedure = CASP

Evaluate the deficiencies in Beyer Co’s internal control system, and explain how they contributed to the fraud,
together with recommendations to prevent such a fraud reoccurring. (6 marks)

STUDENT NOTE
 Identify a deficiency + explain the deficiency + how it contributed to the fraud = 2 marks per deficiency
 Recommendation - 1 mark per

Note: If you found 2 weaknesses it will be good to score 6 marks

Explain the difficulties arising for management and for the auditor with respect to discovering fraud. 5 marks

Management

 Fraud involve collusion

 Is done with perfection
 Due to lack of whistle blowing ( weak internal audit dept./ no internal audit dept)
 Systems might not be robust for discovering fraud
 Management override of control- management themselves are involve in fraud

Auditor

 Audit is done on a sample basis

 Audit is done on material basis
 Auditor has less time span when audit is performed
 Audit is done after the year end – when fraud take place during the year.
 Inexperience audit team

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Summary – forensic audit

1. Read the article forensic audit

2. There are a total of 5 past papers – Dec 11 to Dec 19 to be attempted
3. Be case specific to find answer to most of the forensic requirement – like matters, procedures etc.
4. Assignment:
a. Dec 12 Q4c + Jun 15 Q4c= procedures
b. SD19 Q3 in full

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OTHER ASSIGNMENT: AUDIT OF PERFORMANCE INFORMATION (PI)
Article: performance info in public sector (Must to read)
Understanding – Audit of PI

Past papers- to read the mind of examiner for this assignment

Dec 14 Q4b- 10 marks Dec 15 Q2B- 10 marks Jun 17 Q3b- 10 marks

Discuss Measuring & reporting – Measuring & relevance – 5 Difference between
4 marks mark performance audit and
audit of PI- 3 marks
Procedures 6 marks 5 marks 7 marks

Scope of audit of PI from exam perspective:

 Knowledge about (Examiner article)

o Measuring
o Reporting
o Relevance
o Difference between performance audit and audit of PI
 Procedure – Case specific.

Understanding of audit of PI

 Audit of PI not FS
 Difference is – the subject matter of this audit
 What is performance information? – is an information other than financial statements
o Dec 14- Social and environmental performance (private sector)
o Dec 15- University academic performance (public sector)
o Jun17- Hospital information (public sector)
 You need to perform procedures to confirm the validity of the performance information

Article:
Difference between performance audit and audit of performance information?
It is worth reiterating the difference between the audit of performance information and performance auditing as
both are likely to occur in the public sector. Candidates are reminded that the audit of performance
information is concerned with the audit of reported performance information against predetermined
objectives. The auditor’s role here is usually to report on the credibility, usefulness and accuracy of the
reported performance. Performance auditing is related to the evaluation of how the public sector body
is utilising resources and often focuses on determining how the public sector body is achieving economy,
efficiency and effectiveness, sometimes referred to as value for money auditing. It is the former that is
the focus of this area of the P7 syllabus.

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Audit of PI (Examinable)

Audit of performance information is concerned with the audit of reported performance information against
predetermined objectives. The auditor’s role here is usually to report on the credibility, usefulness and
accuracy of the reported performance
E.G.

The management has an objective of giving donation to local charities. During the year 2021 the management give
donations worth $500,000 to local charities.

Performance auditing (not examinable)

Performance auditing is related to the evaluation of how the public sector body is utilising resources and often
focuses on determining how the public sector body is achieving economy, efficiency and effectiveness, sometimes
referred to as value for money auditing.

Audit of PI

 Audit of reported performance against pre-determined objective

 Auditor need to ensure the usefulness, credibility and the accuracy of PI
 Assurance level:

Reporting on PI (Auditor)

There is no specific format or wording that is prescribed by international regulations for reporting on
public sector performance information, though in some jurisdictions the national regulators may
issue country-specific requirements.

Generally, the auditor will provide a conclusion on whether the public sector entity has
achieved its objectives as shown by the reported performance information and concludes
on the information itself. This conclusion may be in the form of a reasonable assurance
conclusion – ie an opinion is expressed, or may be in the form of a negative assurance conclusion
– ie no opinion is expressed. Essentially, in the absence of any jurisdiction specific requirements,
the auditor will agree the type of conclusion with the public sector organisation and usually its
regulating body.

 Is there any definite assurance level for audit report on PI?- No

 So the auditor performing audit of PI has to agree the assurance level with the client

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Procedures

Audit procedures may include:

1. Tests of controls on the systems used to generate performance information

2. Performing analytical review to evaluate trends and gauge the consistency of the information
3. Discussion with management and other relevant individuals, for example those responsible for the
reporting process
4. Review of minutes of meetings where performance information has been discussed
5. Confirmation of performance information to source documentation; this may be performed on a sample
basis
6. Recalculation of quantitative performance information measures

Student note:

 CASP- You need to adapt the list above versus the case
 Procedures= TADMSR = case specific

Agenda: Lecture 20 Block 4 lecture 4 (final)

 Reading of measurability and relevance

 Solving past paper Dec 14 / Dec 15
 Review of PFI

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AAA SMART COURSE 2021-22
KASHIF KAMRAN –FCCA
Lecture 20
(BLOCK 4 LECTURE 4)
Objective: Audit of performance info & Review of PFI
Continuation from Lecture 19- Audit of PI
Discuss:

 Measurability
 Relevance
 Reporting (Lecture 19)
Measurability- of performance information

 Measurability – is the management claim (performance information)

 How PI is captured and reported?
o Capture- system in place? are they good or not
 Automated
 Manual
o Reported by the management – demonstrate integrity / competence / experience / hierarchy
of reporting
 Sometime measuring something is very subjective – that increase risk that measurability might be
wrong.
Relevance of – performance information

 For whom the PI is published or reported by the management?

 Stakeholders
 (Is the info relevant? relevant versus what?)
 So if the PI meet the need for stakeholder it is relevant.
Past papers

 Dec 14- Q3B- 10 M

 Dec 15- Q2B- 10 M
 Jun 17- Q3B- 10 M

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Dec 14 Q3B- Drilling
Requirement:
Discuss the difficulties in measuring and reporting on social and environmental performance; and (4 marks)
- 2 mark per discussion
- 2 max difficulties
(ii) Recommend the procedures to be used to gain assurance on the validity of the performance information in Faster
Jets Co’s CSR report. (6 marks)
- 1 mark per procedure- specific to case study (CASP)

Difficulties

 Measuring- some of the information within social and environment might be complex or difficult to
measure or subjective to measure like Co2 emission
 Measuring- might face challenges in capturing information particularly the one related to environment
unless robust system are put in place
 Reporting – due to absence of a reporting structure or format, it will be a challenge for the management
as to what to report or what not to report? / On openness of information (how much to report)? /
how to report
Procedures
1. Review a sample of donation slips to confirm the amount of donation paid during the year
2. Review the cash book to confirm donation paid during the year
3. Review the correspondence between the global charities and Faster Jet to confirm that 800 free flight
were acknowledge by global charities
4. Review the ticketing system or record to confirm the number of flight offered for free during the year to
confirm the claim of management
5. Recalculate the cost per flight i.e. 560,000/800= $700 to confirm that the cost per flight agree with the
routes cost on which the flight was offered
6. Review the cost records of the faster jet to confirm the validity of $700 versus the routes on which the
flight were offered.
7. Review the breakup of operating expenses to confirm that $560,000 has been recognized as the expense
8. Review the bank statement for the payment against local learning initiative to confirm the amount of
$750,000
9. Review the board minutes to confirm the approval of $750000 to be spent on local learning initiative
10. Review the sample of invoices against local learning initiative to confirm the adequacy of $750,000
11. Review the attendance records of the schools to confirm 2250 children attended the education days.
12. Review the mileage log book to confirm that the number of miles has indeed reduced by 5% over the last
year/ review the mileage log book to confirm that the number of business trips taken this year are less
than last year
13. Analyse the current year and last year fuel cost to confirm validity of management claim of 7% reduction
is fuel cost

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Dec 15 Q2B
Required:
(i) Discuss the relevance and measurability of the reported performance information; and (5)/ 2 = 3 discussion

(ii) Recommend the examination procedures to be used in auditing the performance information. (5)/ 1 = 5 procedures
Note: The total marks will be split equally between each part. (10 marks)

(i) Discuss the relevance and measurability of the reported performance information; and (5)/ 2 = 3 discussion

 Public sector university

 Small university
 2000 students
 Publishing the PI for the first time
Relevance – stakeholders (when the university in publishing PI for the first time- they need to identify all relevant
stakeholders to ensure that the PI publish satisfy all stakeholders e.g. current students, prospective students,
government etc.)
Measurability-

 Public sector university - small? Will they have proper records/ systems in place for capturing
information
 Small university- the management competence/ experience ?
 First time ? inexperience increase challenges in measurability

Procedures: (Complete them as your assignment)

Recommend the examination procedures to be used in auditing the performance information

1. Test the systems used by the Rothko university to generate PI to confirm that system in place are
effective to rely on the performance information

June 17 Q3b- Assignment

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Syllabus area F: Other assignment: Review of prospective financial information (PFI)
Examiner expectation versus the past papers
Jun12 Jun14 Dec16 Sep18 Mar20
Procedures 13 8 7 9 9
Matters – in 6
agreeing the
terms of
engagement
Matters- before 6 6 6
accepting
engagement
(block 2)
Evaluate the 7
appropriateness
of the cash flow
forecast

Students- when preparing for PFI

 Matters before accepting engagement ( 3 out of 5 exam sittings)

 Procedures (5 out of 5 exam sittings)
 Evaluate the appropriateness of forecast (Once)
 Matters in agreeing terms of engagement (Once)

Understanding – REVIEW OF PFI

 Moderate assurance engagement (Review)

 Prospective- means future
 Future – means assumptions
 Forecast information – for bank loans/ IPO / assessing going concern
Matters before accepting engagement on PFI:
From Block 2 knowledge:
1. Competence (versus PFI)
2. Deadline
3. Fees
4. Ethical issues (exisiting client)
Specific to PFI:
5. Intended use of PFI- does the management want to use PFI for internal purpose (like going concern) or
external purpose (like bank loan or IPO)- versus auditor liability/ risk
6. Nature of assumption used by management in preparing forecast –
a. Best estimate – there are underlying basis for that
b. Hypothetical assumption – wild guess about future
7. Subject matter of PFI- what is the management forecasting? Cash flow forecast/ profit or loss forecast
/ sales forecast
8. Time period of PFI- how long is the forecast? Is it for next 1 year/ or 2 year or 5 years (risk)

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Example:
The management is forecasting sales for the year 2022. Currently its 2021. The sales in last 5 years have grown
by 10% each year. The sales for 2021 is $10 million

 Hypo assumption- forecast 2022 sales= $10 million *1.10= $11 million (2022)- Hypo assumption only
use past trend and these trends are then projected (Projection= hypo assumption)
 Best estimate- forecast 2020 sales = $10 million* 1.10 = $11 million (on the basis of past trend).
However the management conduct an analysis of opportunities and threat by carefully studying the
external environment and concluded that there is a increase growth in economy and the public
confidence in increasing on the basis of the central bank report and economy is project to increase
rapidly in next 2 year.
 The management conclude sales for 2022 will be $ 15 million
 Forecast = past trend + future opportunities and threat (best estimate)
 Projection = past trend only (HYPO)

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Past papers

 Matters in agreeing terms of engagement ( once in June 12)- live class

o Each matter is worth 2 marks
 Matters before accepting engagement ( thrice in 5 exams papers) – Assignments
o Existing client- 1 mark per matter
o New client -2 marks per matter
 Procedures – 5 out of 5 exam papers- (Live class- procedures from one past paper) / rest will be your
assignment
o 1 mark per procedure
 Evaluate the appropriateness of the cash flow prepared (once in Dec 16) – live class
o 1.5 marks per appropriateness
Matters in agreeing the terms of engagement
Terms of engagement = AA knowledge = engagement letter
1. Scope
2. Deadline
3. Management responsibility
4. Auditor responsibility
5. Fees
Dec 16- Q3
Evaluate the appropriateness of the cash flow forecast prepared by Rope Co and recommend the further audit
procedures which should be performed. (14 marks)

 Evaluate the appropriateness of the cash flow forecast prepared by Rope

o Assumption given in exam paper – evaluate whether the assumption are realistic or not- justify
your reasons
o Each evaluation will give you 1.5 marks
o 7 marks / 1.5 marks = 5 evaluation
 Procedures – 1 mark per procedure (CASP)

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Assumption
 Receipts from customers and payments to suppliers have been estimated based on detailed sales forecasts
prepared by the sales director.
 Salaries and overheads have been estimated as the prior year cost plus general inflation of 2%.
 The bank loan expires on 5 January 2018. The finance director expects to take out a matching facility with the
current lender to pay off the existing debt.
 On 1 October 2015, the chief executive, Mr J Stewart, gave the company a three-year, interest free loan secured by
a fixed charge over the operational assets of Rope Co. The audit team was unaware of this loan prior to obtaining
the cash flow forecast.
 The directors plan to sell some investments in listed shares to fund the repayment of the chief executive’s loan.
 At 30 September 2016, the investments were carried in the statement of financial position at their fair value of
$350,000.

Evaluate the appropriateness

Sales forecast
The sales forecast used for estimated receipt from customers is prepared by sales director who is an experience
and competent part of management to predict future sales. Thus the sales forecast can be trustworthy for
assumption and the assumption can be realistic (1.5)
However, the sales forecast is the right document for predicting future cash receipt from customers but is not a
valid document to predict the future payments to suppliers as the future payment to supplier depends on future
purchasing trends and forecast (1.5)
Salaries and overhead
The assumption that salaries and overhead will increase by the rate of inflation is wrong, because salaries and
overhead increase or decrease in not just dependable on inflation rather many more factor like increase in
business volume/sales, increase or decrease in number of employees etc. (1.5)
Matching facility
The expectation of the director for a matching facility of $1.5 million from current lender need to be evaluated
sceptically, because the expectation might be right or wrong. The expectation seems dim considering the
company cash flow position is not much attractive and has been negative for a very long time, so its quite risky
whether the bank will disburse a new matching facility to the company or not. (1.5)
Procedures
1. Review the sales forecast prepared by sales director to understand the realisticness of assumption used
by sales director in predicting future sales. (1)
2. Analyse the previous trends in salaries and wages of prior years to confirm whether salary only increases
by 2% or whether the increase in salary in prior year in more than 2%
3. Review the HR budget/ plan for next 2 years in terms of any number of employees forecasted to work in
the organization.
4. Review the forecast production plan to confirm the increase in future product to justify or conclude on
the forecast growth of overheads.
5. Review the current loan agreement to confirm its future expiry in January 2018
6. Review correspondence with bank whether the bank is willing to extend the matching facility when the
current one expires
Share with you- on Whatsapp group- 2 of my webinars on Review of PFI where I have done this Dec 16
question and the June 14 question

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Assignment from PFI

 Jun 14 (webinar)
 Dec 16 (partially done+ webinar)
 Sept 18
 Mar 20

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