Exam Pattern:

Section A – 3 x 5 x 2 Marks = 30 Marks

Section B – 70 Marks

 Audit Risk
 Internal Control
 Substantive Procedures
 Reporting
 Corporate governance (maybe maybe)

NOTE : List is ½ mark per point

RECALCULATION IS ONLY ½ Mark in substantive procedure (if you calculate then 1 mark)

Knowledge Based Questions:

1. Principles of UK corporate governance code (Leadership, effectiveness, accountability,
remuneration and Relations with shareholders)
2. Audit Committee (Benefits + Limitations)
3. Fundamental Principles of Ethics for Section A (PICOP)
4. Elements of assurance engagement (CREST)
5. Difference between reasonable and limited engagement (Audit vs. Review engagement)
6. Benefits of Audit Planning
7. Materiality and Performance Materiality
8. Audit Risk and its components
9. Analytical Procedures (definition and how it is used in the 3 stages of Audit)
10. Matters to be considered before accepting the engagement (Risk, Independence, Fees,
Preconditions, reputation, professional competence and more – ISA 210)
11. Letter of Engagement – (Binding contract between the auditor and the client) and need 6 items
12. Audit risk and response (7 normally)
13. Professional Skepticism
14. Components of Internal Control (CRIME)
15. Documentation of Internal Control Systems (Narrative Notes, Flowcharts, Questionnaires –
Adv. & Dis.)
16. Difference between Direct Controls and Indirect controls.
17. Computer Controls (General + Applications)
18. Difference between control objective, control procedure and test of control
19. Define significant deficiency – communicated to those charged with governance
20. Limitations of Internal Control System
21. Using the Work of Others - ISA 610 and 620

Answer Plans
1)
 Audit Risk – 1 Mark
½ - Identification
½ - Explanation
 Accounting Standard- “as per acc. std”
 Risk – opposite of standard
 FS impact – Overstatement or
Understatement (both for inventory
counts possible)
Audit Response – 1 Mark
 More professionally skeptical, more team
members, more samples, focus on
judgmental areas
 Test of controls
 Recalculate and agree with mgt cal.
 Discuss with mgt on the assumptions and
asses the reasonableness
 Obtain confirmation with lawyers
 Detailed Cost & NRV testing
 Detailed Going Concern testing to assess
the reasonableness of the Going Concern
Basis

2)

Corporate Governance Weakness Recommendation

Identification – ½ Corporate Governance Principle

+
Explanation – ½ Action

3)

Deficiency Recommendation Test of Control Strength

½ - Identification ½ - Identification

½ - Explanation ½ - Explanation

Consequence + Business Explanation + Risk

Impact prevented

Loss of Supplier /
Customer / Employee
goodwill

4) Covering Letter

To,
The management of XYZ
 Please find the enclosed report to management on the deficiencies in the Internal Control
identified during the audit. The appendix of the report considers the deficiencies and recommendation.

Please note that this report only contains significant deficiencies and this is solely for the use of
the management.

Yours Faithfully,
ABC Audit Firm

Appendix
DEFICIENCY & CONTROL

5) Reporting Answers
Materiality
Brief Explanation of the Issue
Accounting Standard + Risk + FS impact
Name of Report + Name of Opinion with reason (material misstatement or evidence)
Pervasive or not with a reason
This is non-pervasive as it does not impact the full FS and impacts only the disclosure notes.
Basis para placement and reason
A basis for qualified opinion paragraph will be included after opinion graph and includes the reasons and
quantification.

6) Whether FS require amendment

Materiality
Brief Explanation of the Issue + Identification and explanation of adjusting / non-adjusting
Accounting Standard + Risk + FS impact

Common Answers
 1) Introductory Paragraph Risk

Risk Response

New Client for the audit firm
XYZ Co. is a new client for the audit firm and this
increases the detection risk.
The audit team should ensure they understand the
client and use more experienced team members
and increase sample testing especially on
judgmental areas and be professionally skeptical
throughout the audit

The Audit team is not familiar with the client’s

business and their products and services, also the
accounting policies should be applied
consistently. Opening Balances might not be
brough forward correctly leading to material
misstatements.

The Client is a listed Client / Going to get listed

soon / Bonus or incentives for the management:
The client is a listed client and this increases the
risk of manipulation of the FS.
The audit team should be professionally skeptical
throughout the audit and increase sample tested
especially judgmental areas

This increases the risk of management bias as the

management will want to show a good financial
performance and they will manipulate the FS by
using judgments and estimations leading to
overstated assets and income and understated
liabilities and expenses

Fraud:

The payables ledger supervisor was dismissed for

a fraud and this was recognized as an expense.

There is a risk that there could be more frauds that

are not uncovered yet as fraud is well concealed
resulting in understated expenses

Anything which is definitely wrong as there is no Discuss the accounting treatment with the
MAYBE WRONG then management and request them to amend it as per
the standards.
Audit risk as normal

Going Concern Risk

As per the accounting standards, when there are Detailed Going Concern testing to assess the
going concern uncertainties, a disclosure should reasonableness of the Going Concern Basis
be made about doubts, effects, basis and time.

There is a risk that the management did not make

the disclosure related to going concern leading to
inadequate disclosures and material
misstatements.

Disposal of PPE Recalculate

Risk : Incorrect Calculation of Profit or loss

Legal Claims :

As per the accounting standard a provision should Obtain a written confirmation from the lawyer
be recognized if there is a present obligation due about the likelihood of the success of the claim
to past events, probable outflow of economic
resources and reliable estimates.

If there are deficiency report submitted to

management

Risk : management no rectify the deficiency

If PPE is purchased in the year and not received

as at the year end, the risk will be the early
recognition of PPE

Service Organization: 2) The auditors should obtain a type 1 report to

confirm the description report or type 2 report to
1) When was the service organization confirm the description, design and operating
appointed – Loss of date, partial transfer, effectiveness of the controls
data corruption, etc.

2) Detection Risk – sufficient appropriate

audit evidence may not be obtained

2) Substantive Procedures for Receivable VALUATION

  Discuss with the finance director the reasons for ____________ the allowance and assess
the reasonableness of the assumptions
 Review the aged receivables report to identify any long outstanding old balances and
discuss with the management the need for an allowance or write-off for correct valuations
 Review the board meeting minutes to identify any significant concerns in relation to
payment by customers
 Analytically review the receivable days and compare it with previous year to identify any
significant variances and investigate them
 Review the post year end cash book and bank statements to confirm if any money was
received for correct valuations
 Obtain any customer correspondences to confirm if any concerns regarding the payment
of the receivable that needs an allowance or write-off

Other Notes

1) If a recommendation or control answer is _____ should be sequentially prenumbered always

complete the answer as ____ should be sequentially number and on a regular basis, a sequence
check must be done to identify gaps.
2) If Segregation is suggested as a control, explain how it should be segregated
3) If there is an automatic calculation for internal control check if a manual verification is done, if
not then it is a deficiency.
4) Always end going concern indicator answer in IMPACTING CASH FLOWS
5) If other information is wrong in a question, it is always an unmodified opinion where the auditor
will explain this issue in the other information paragraph