Dec 2021 Solution

Professional Level - Audit & Assurance – December 2021
MARK PLAN AND EXAMINER’S COMMENTARY
The marking plan set out below was that used to mark this paper. Markers were encouraged to use discretion
and to award partial marks where a point was either not explained fully or made by implication. More marks
were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid
points which were made by candidates.
General comments
It was pleasing to note an increase in the pass rate compared with recent sessions. The overall average
marks on the long-form questions were very respectable. The overall average on the short-form questions
was the lowest across the four questions. This was due to poor performances on 1.1 and 1.3. It was also
pleasing to note that most candidates accessed and analysed the data within Inflo in their answers to
question 4.1. There was a significant reduction in the number of non-attempts in respect of the Inflo
question compared with recent sessions and this contributed to the increase in the pass rate.
A significant number of candidates ignored the instruction to present their answers to the short-form
questions ‘in note form only’ and wasted time providing long answers. There was an increase in the
number of candidates presenting the long-form answers using short and succinct sentences, bullet points
and a new line for each point. However, a significant minority of candidates presented their answers using
solid text, often without gaps or punctuation, in both short and long-form answers, making those scripts
difficult to mark.
Question 1.1
Total Marks: 2
Explain why analytical procedures are performed during the completion stage of an external audit.
Mandatory under ISA 520

Assist with forming an overall conclusion/corroborate audit conclusions/audit opinion
Identify previously unrecognised risks of material misstatement
Financial statements consistent with auditor’s understanding
Determine if further audit procedures are required/sufficient work performed
Answers to this question were generally disappointing as many candidates were not familiar with the
contents of paragraphs 6 and A17-A19 of ISA 520 Analytical Procedures (ISA 520). However, those
candidates who were familiar with ISA 520 generally scored full marks. The points most commonly
identified were those relating to the consistency of the financial statements with the auditor’s
understanding and assistance with forming an overall conclusion. Few candidates identified that analytical
procedures are mandatory, under ISA 520, at the completion stage of an audit. Common errors included
listing the purpose of analytical procedures at the planning stage of an audit and/or describing how
analytical procedures are performed (eg comparison with prior year/industry averages) instead of why
they are performed.
Total possible marks 5

Maximum full marks 2
Question 1.2
Total Marks: 4
Explain why the method of sample selection and invoice numbers should be included in the audit
documentation. State any further actions that the audit manager should take as a result of the
deficiencies in the audit assistant’s work.
Sample selection not explained

Demonstrate that sample is
- unbiased
- representative of the whole population
- sufficient to reduce detection risk
Copyright © ICAEW 2021. All rights reserved Page 1 of 15

- in line with firm’s policy
Invoice numbers
Supervisor can easily check the work to supporting detail
Enable an experienced auditor to understand the work at a later date
Further actions
Update working papers to include invoice numbers/method of selection
Detailed review of assistant’s other work
Discuss with the assistant/offer training/feedback
Consider the adequacy of supervision during fieldwork
Candidates’ performance in respect of the actions to be taken was stronger than their performance in
respect of the explanation as to why the method of sample selection and invoice numbers should be
included in the audit documentation. In respect of the sample selection method, the points most commonly
identified were those relating to lack of bias and representative of the population. Few candidates
mentioned detection risk and/or the firm’s policy. A small minority of candidates wasted time describing the
various methods of sample selection. In respect of the invoice numbers, the most commonly identified
point was that relating to the ability of the supervisor to check the work. Only a minority of candidates
identified that an experienced auditor (having no previous connection with the audit) should be able to
understand the work carried out. In respect of actions to be taken, the points most commonly identified
were those relating to updating the working papers for the missing information, training and, to a lesser
extent, review of the assistant’s other work. Few candidates considered the adequacy of supervision
during fieldwork.

Question 1.3
Total Marks: 4
Explain why it is necessary for prospective auditors to contact the outgoing auditor and state the
actions that the auditor should take.
Need to contact outgoing auditor
Required by ICAEW Code of Ethics
Alert incoming auditor to matters significant to their appointment/reasons for not accepting e.g.
- unpaid fees
- unlawful acts/fraud
- disagreements with management
- questionable financial reporting practices
- indicators of poor management integrity/dishonesty
- limitations on scope of audit/lack of access to evidence
Allow new auditor to make a decision re accepting the client
Obtain access to audit files (opening balances)
Actions to take
Ensure contact details are correct
Telephone call
Send letter by recorded/registered delivery
Stating intention to accept in absence of reply within a specified period
Discuss with client (e.g. why not reappointed)
Ask client to assist (e.g. prompt auditor to respond)
Consider other information (e.g. internet search/prior year audit report)
Review statement of circumstances
Answers to this question were generally disappointing. Candidates’ performance in respect of explaining
why the prospective auditor needs to contact the outgoing auditor was generally stronger than their
performance in respect of actions to be taken. In respect of the need to contact the outgoing auditor, the
points most commonly identified were those relating to alerting the incoming auditor to reasons for not
accepting appointment such as unpaid fees, poor management integrity and unlawful acts. The points

most commonly overlooked were those relating to questionable financial reporting practices and limitations
on the scope of the audit. Few candidates identified that professional clearance is required by the ICAEW
Code of Ethics. In respect of actions to be taken, the points most commonly identified were those relating
to discussing the matter with the prospective client and considering other information. Many candidates
overlooked the information in the question which stated that despite repeated emails and letters sent by
post, there had been no reply and wasted time citing that follow-up emails and letters should be sent.
These candidates failed to appreciate that a different tack was required such as a telephone call or
recorded/registered delivery. A common error was to state that, in the absence of a response from the
outgoing auditor, the engagement should not be accepted. This is not the case, as the ICAEW Code of
Ethics states that the prospective auditor is entitled to assume that the existing auditor’s silence implies
there is no adverse comment and may accept appointment as long as other steps have been taken to
obtain information about any possible threats.

Question 1.4
Total Marks: 4
Explain how management override of controls affects the auditor’s assessment of control risk and
outline the audit procedures to be included in the audit plan to address this risk.
Assessment of control risk
Control risk increased/higher
Weak control environment/tone at the top/lack of integrity
Controls may not operate effectively/can’t be relied on
Errors/fraud not prevented/detected
Audit procedures
Review journal entries
Scrutinise accounting estimates for management bias
Identify significant/unusual transactions/outside normal course of business
Investigate related party transactions
Investigate reconciling items
Use of data analytics software to identify outliers
This question was generally well answered as most candidates provided a plausible explanation of the
impact that the risk of management override has on the auditor’s assessment of control risk. However, a
significant number of candidates struggled with identifying audit procedures to address the risk of
management override. Although most candidates stated that control risk would be assessed as high, a
significant number failed to mention this fact. The points most commonly identified were those relating to
the reduced reliability on internal controls and prevention and detection of errors and fraud. Answers were
generally disappointing in respect of audit procedures as only a minority of candidates were familiar with
the contents of paragraph 32 of ISA (UK) 240 The Auditor’s Responsibilities Relating to Fraud in an Audit
of Financial Statements. The audit procedure most commonly identified was that relating to journal entries.
Only a minority of candidates identified the other procedures. A common misunderstanding was to list
strategy points such as lower materiality thresholds and extended substantive procedures instead of audit
procedures to address the risk of management override.

Question 1.5
Total Marks: 3
State, with reasons, the actions that the audit assistant should take in relation to a potential money
laundering scenario
Actions to take
Report to MLRO
No tipping off
Retain all evidence

Reasons
May not be a clear economic purpose for the transactions/No rational explanation
Potentially money laundering
Layering/disguising
Illegal activity/POCA
Personally responsible
Duty to report/criminal offence NOT to report
Criminal offence to tip off
Not to prejudice subsequent investigation
This question was generally well answered as most candidates recognised that the transactions described
in the question represented suspected money laundering and, as such, needed to be reported to the firm’s
MLRO without tipping off the client. A significant number of candidates wasted time citing the MLRO’s
responsibilities – there were no marks for these points as this was outside the scope of the question which
only required the actions to be taken by the audit assistant. A minority of candidates wasted time
considering whether the amounts of the transactions were material. Materiality of amounts was irrelevant
as there is no de minimis when money laundering is suspected. The points most commonly overlooked
were those relating to the economic purpose of the transactions and layering/disguising.
Total possible marks 5½

Question 1.6
Total Marks: 3
State, with reasons, the impact of management’s refusal to adjust the financial statements on the
auditor’s opinion.
Modified opinion
Qualified/except for
Overstatement/misstatement
8.8% of PBT/£260k
Material
Not pervasive
Limited to specific elements in SFP/isolated
Offset discouraged by ISAs
This question was generally well answered with a significant number of candidates scoring full marks.
Most candidates correctly identified that the misstatements were individually material, but not pervasive, at
8.8% of profit before tax and, as such, warranted a qualified opinion. However, few candidates mentioned
that ISA 450 Evaluation of Misstatements Identified During the Audit, discouraged the offset of individually
material misstatements. A significant minority of candidates stated, incorrectly, that the situation was
pervasive. These candidates failed to appreciate that the misstatements were confined to specific
elements of the financial statements and did not represent a substantial proportion of the financial
statements.


Question 2
Total Marks: 36 marks
General comments
This question attained the second highest overall average on the long-form questions. Parts 2.1 and 2.2
were well answered but many candidates struggled to cite sufficient points to perform well on part 2.3.
2.1 Justify why trade receivables and provisions have been identified as key areas
of audit risk. For each key area, describe the procedures that should be
included in the audit plan to address those risks.
General
Justifications
Management has an incentive to window dress the

financial statements due to the sale of shares.
The short period for reviewing subsequent events

leaves less time for evidence to emerge.
Trade receivables Procedures

Justification
Risk of overstatement as trade receivables days Enquire of management why receivables days have
have increased to 41.8 days from 35.8 days. increased (e.g. changes in credit terms/current
economic climate).
This exceeds the 30-day credit terms.
Direct confirmation of receivables and reconcile any
differences.
Match invoices entered in receivables ledger with

sales reports.
Agree balances per ledger to customers’ monthly

reports.
Inspect post year-end credit notes and

ensure adjustments made for those relating to pre-
year end transactions.
Some of the outstanding balances may be

irrecoverable. Review aged trade receivables to identify old
balances
Le Farfadet (LF) debt is material at 5.5% of
PBT/2.1% of revenue. Assess the reasonableness of the allowance for
receivables.
£620K may not be recovered as no payment has
been received in 3 months and LF is experiencing Read board minutes for matters relating to
financial difficulties. recoverability of outstanding balances.
Inspect bank statements for post year-end cash

receipts (particularly, whether any amounts received
from LF).
Review correspondence with customers (particularly

LF) regarding financial difficulties or disputes, to
assess the likelihood of receiving payment.
Obtain a written representation confirming the

adequacy of the allowance.

LF is invoiced in euro which could lead to translation Reperform forex calculation using a trusted external
errors. exchange rate.
Manual invoicing to clients, combined with the range Recalculate commission based on contract terms.
of commission rates (4-8%) could lead to calculation
errors.
Evaluate and test controls to assess the reliability of

Upgrade of accounting system may have resulted in the upgraded system.
changeover errors.
Assess the system changeover procedures.
The new, automated link may have functionality
issues. Review results of any testing of the new system
including any parallel run of old and new systems.
Enquire of employees whether there are any

functionality issues with the new system.
HMRC provision Procedures

Justification
The amount of the penalty is material at 9.9% of Inspect HMRC correspondence regarding the basis
PBT/3.8% of revenue. of the penalty and its amount.
GVO is likely to lose the appeal according to legal Inspect the legal correspondence regarding the likely
advice. outcome of any appeal.
A provision should be recognised as there will be a Obtain a second opinion from an auditor’s expert (tax
probable outflow, due to a past event, that can be or legal).
reliably measured.
Enquire of management regarding the reasoning for
the appeal/not making a provision.
Inspect board minutes for discussion of the likely

outcome and the intention to appeal.
Lease provision
Justification Procedures
The provision is material at 5.3% of PBT/2.1% of

revenue.
There is a risk of understatement as:
- there may be other contractual costs not Inspect the lease contract regarding the lease
included terms/obligations
- the assessment was performed by Raoul’s son Inspect the surveyor’s report and assess the
(a related party) reasonableness of assumptions made (e.g. amount
of work required/repair costs)
- he may not be competent or free from influence Consider the surveyor’s reputation/ experience
Obtain a second opinion from an auditor’s expert
Obtain a written representation on the completeness

- the cost of repairs is an estimate and of the provision.
judgemental in nature.

General
Candidates who presented their answers in a tabular format and/or used short bullet points tended to score
higher marks. This approach often produced more focused answers and meant that candidates did not
waste time writing lengthy answers.
The majority of candidates identified the risk of management bias due to the pending sale of shares but few
candidates identified the short period for reviewing subsequent events.
Performance was generally stronger on the justification of the risks than on the audit procedures to address
the risks.
Trade Receivables
Most candidates earned some of the calculation marks by correctly identifying that there had been a
significant increase in trade receivables and/or receivables days and that management should be
questioned as to the reason for the increase. A significant minority suggested, as a procedure, calculating
receivables days for both years, rather than performing the calculation. Consequently, these candidates
failed to appreciate that receivables exceeded the credit period.
Most candidates identified that there was a risk that the LF debt was irrecoverable and included some
relevant procedures such as inspecting correspondence and bank statements for post year-end receipts.
Many also identified the risk of translation errors and reperforming the calculation. However, a significant
minority omitted checking the exchange rate to a reliable source. A significant number considered the forex
transactions from the point of view of exchange gains/losses instead of the possibility of errors arising from
the use of an inappropriate rate.
Most candidates referred to the upgrade of the accounting software and the risks associated with
changeover. However, few candidates considered functionality issues.
The points most commonly overlooked were the procedures which were specific to the scenario such as
matching invoices entered in the receivables ledger with sales reports and agreeing balances per the ledger
to customers’ monthly reports.
Provisions
Most candidates appreciated that the HMRC penalty should have been recognised and that there were
objectivity issues with the lease provision being estimated by Raoul’s son. Marks could have been improved
by calculating the materiality of each, which many did not do.
The points most commonly identified were those relating to correspondence, board minutes and use of
auditor’s experts. The points most commonly overlooked were those relating to the surveyor’s report and
the underlying assumptions regarding the repair costs.
Although many candidates suggested management representations and board minutes as procedures, they
were often not specific enough to earn marks eg “Obtain management representations about the provisions”
or “Read board minutes about the LF debt”. These points were too vague to earn marks.
Many candidates referred to the going concern implications of large pay-outs to HMRC and losing LF as a
customer, despite going concern not being identified as a risk area. No marks were awarded for these
points as they were outside the scope of the requirement.


2.2 State the purposes of holding a briefing meeting with the audit assistants and list the matters
that you would cover in the meeting.
Purposes
Allocate work to assistants and ensure that they understand their responsibilities.
Allow audit assistants to ask questions to clarify their understanding.
Reduce detection risk and improve audit quality.
Matters to cover
Compliance with relevant ethical standards.
Points brought forward from the previous year’s audit that are relevant to the current audit.
The company’s background including significant changes at the entity.
Key personnel within GVO.
Matters relevant to the fieldwork, in particular:

- areas of audit risk and business risk
- fraud risk
- related parties
- materiality thresholds
- timescales or deadlines
- the importance of maintaining professional scepticism
- how to raise any issues or problems encountered during the audit.
This question was well answered by the majority of candidates, with many scoring full marks. Most
candidates correctly identified work allocation, timescales, business background, risk areas, materiality and
professional scepticism. Few candidates identified audit quality, points brought forward from the previous
year and related parties.

2.3 Identify and explain the legal, professional, and ethical issues arising from Raoul’s
email, and state the actions that you should take.
Ethical and professional issues – job offer
There is a self-interest threat to objectivity/independence. The audit senior may be less willing to identify
issues and may be less robust when challenging management due to the incentive of the job offer.
Integrity of the audit senior may be threatened if they are tempted not to disclose the job offer to the audit
firm.
Raoul is not acting with integrity as he has requested that the audit senior keeps quiet about the job offer.
There is a conflict of interest for the audit senior as they may not be able to act in the best interest of both
the audit firm and GVO.
Ethical and professional issues – time pressure

Professional competence and due care may be impacted if the audit is rushed to meet the deadline to
secure the role. The audit senior is more likely to make mistakes or not identify misstatements if they are
working more quickly. This could lead to an inappropriate audit opinion being issued.
The short time frame leads to increased audit risk as there is less time for subsequent events to occur or
evidence to emerge (for example, post year-end receipts). There is also less time for review procedures to
be performed.

There is higher engagement risk as a duty of care may be owed to the potential buyer. WM is aware of the
potential use of the audited financial statements and may be sued for damages if an inappropriate auditor’s
report is issued. This could damage the reputation of the audit firm.
Actions to take
Respond to Raoul and explain the need to brief the audit manager or engagement partner about the job
offer.
Inform the audit manager or engagement partner about the job offer.
Consult the firm’s ethics partner.
Consider using the ICAEW helpline for advice.
Answers to this part of the question were disappointing with only a minority of candidates scoring more than
5 marks. Most candidates earned marks for the self-interest threats to objectivity and integrity and the
implications of the job offer. However, many failed to question Raoul’s integrity. Many also identified the
threat to professional competence and due care arising from the time pressure and that rushing the audit
work may have an adverse impact on audit quality. The points most commonly overlooked were the
implications of the short review period and the higher engagement risk. A significant minority of candidates
wasted time by suggesting actions to be taken by the audit firm, rather than the audit senior. Such points
were outside the scope of the requirement so did not earn marks.

Question 3
Total Marks: 24
General comments
Answers to this question attained the highest overall average of the four questions on the paper. Part 3.1
was particularly well answered followed closely by Part 3.2. Candidates’ performance on 3.3 was
satisfactory but not as good as their performance on the first two parts of the question.
3.1 Draft points for inclusion in the report to BB’s management on the internal control
deficiencies identified. For each deficiency you should outline the possible consequence(s)
of the deficiency and provide recommendations to address it.
General consequences
BB is exposed to data theft or a data leak that could breach GDPR rules. This could lead to an
investigation by the ICO/regulator, fines, and claims for damages/compensation.
Negative publicity could lead to reputational damage and a loss of customers, impacting the profitability
and cash flow of the organisation.
General recommendations
Develop policies and communicate them to staff and provide training where appropriate.
Monitor procedures to ensure that they are being followed and take disciplinary action for any non-
compliance.
Out of date virus protection software - consequences

BB is exposed to hacking and virus infection that could corrupt the company’ systems.
Viruses could then be transmitted to customers when downloading software.
Operations may be disrupted if systems are taken offline, and recovery costs may be significant.
Out of date virus protection software – recommendations

Update virus protection software immediately and automate software updates in future.

Undertake an investigation to identify if any hacks have taken place.
Task a specific person with responsibility for updating the software.

System access - consequences
Staff may inappropriately access/download customer data and use it fraudulently.
Former employees may breach their contractual obligations and approach customers immediately on
leaving the company.
Inability to trace systems access leading to a lack of accountability
System access - recommendations

Only give access to customer data where it is required for an employee’s role.
Implement access controls which include passwords to restrict access.
Encrypt customer data to protect sensitive data and allow read only access.
Quality assurance – consequences

Issues with software may go undetected, leading to poor functionality of the system.
Significant costs may be incurred to rectify any issues that were not detected.
Customers may request refunds or cancel their subscriptions.
Quality assurance – recommendations

Test all software thoroughly and fix any issues prior to releasing future updates
Document testing procedures and provide a checklist for testers to follow.
Task a specific person with responsibility for quality assurance testing.
The reviewer should sign off that quality assurance procedures have been followed prior to software
updates being released.
Consider using a third party/independent quality assurance provider.
Back-up procedures – consequences

Up to one month’s software development would be lost if the backup is corrupted.
Backups may not work as they are untested.
There may be delays in restoring the system.
This could disrupt business operations and lead to additional recovery costs.
Back-up procedures – recommendations

Backups should be made more regularly (daily/weekly).
Backups should be stored in a cloud location or at multiple physical sites.
Restoration of the system from the backup should be tested on a periodic basis.
Task a specific person with responsibility for overseeing the restoration of the system from the backup.
It was very noticeable that candidates who presented their answers in a tabular format or in paragraphs
with headings for each deficiency scored higher marks. A minority of candidates listed the consequences
for all of the deficiencies under one heading and then proceeded to list the recommendations with no
attempt to match the recommendations to the deficiency. Most candidates identified the general
consequences and the general recommendations at some point throughout their answers.

The consequences and recommendations in respect of the out-of-date virus software and the unrestricted
access were well answered by many. The points most commonly overlooked in respect of the virus
software were those relating to disruption of operations, recovery costs and the identification of whether
any hacks had taken place. The points most commonly overlooked in respect of access were those
relating to accountability and restricting the access to a read only function.
Quality assurance and back up issues were not as well answered. In respect of quality assurance, the
points most commonly overlooked were those relating to the documentation of testing procedures, signing
off the test procedures and the possibility of using a third party. In respect of backup procedures, the main
shortcoming was to deal only with one of the two issues. Strong candidates appreciated that there were
two separate issues ie. the frequency of the backup and the lack of testing. The points most commonly
overlooked were those relating to business interruption and recovery costs. A significant minority failed to
appreciate that monthly backups were insufficient.
Total possible marks (½ mark per consequence, 1 mark per recommendation) 30

3.2 Explain the benefits to a company of non-audit services being provided by its external auditor
rather than a third party.
The convenience of using a single provider (one stop shop) should reduce the time taken to appoint a
provider and provide reassurance that the service is delivered by a trusted source.
The auditor’s existing understanding of the business, combined with there being an established working
relationship, should reduce disruption for the client and lead to improved quality of all the services
provided.
Knowledge sharing within the audit firm should lead to time savings and efficiencies for the audit firm. This
could be passed on to the client in the form of reduced fees.
This part of the question was well answered by the majority of candidates with many scoring maximum
marks. Most candidates identified benefits such as the working relationship, less disruption and time/cost
savings. A minority of candidates mis-understood the requirement and answered the question from the
auditor’s perspective, citing how the auditor will benefit from offering the services to the client and the
impact on the annual audit. No marks were awarded for these points as they were outside the scope of the
requirement.
Total possible marks (1 mark per point) 8

3.3 Identify and explain the threats to WBT’s independence and objectivity arising from the
request made by BB’s chief executive. State, with reasons, how WBT should respond to the
request.
Threats to independence and objectivity

Identifying a candidate is a significant role, leading to a management threat. The auditor may make
decisions on behalf of management, and their views may become too closely aligned.
A familiarity threat could exist where the auditor is less likely to be critical of the recruited individual or is
too trusting of the individual, as they are well known to the audit firm.
Actions
Refuse the request as the threats to objectivity and independence are insurmountable.
The provision of recruitment services is prohibited by the FRC Ethical Standard.
Most candidates identified the management threat and linked it to decision making and the alignment of
views with management. They then often stated that the request should be refused as the threats were
insurmountable. The points most commonly overlooked were those relating to the familiarity threat. A

common error was to stray beyond the requirement and waste time on ethical issues other than objectivity
and independence. There were no marks for these points.
Total possible marks (½ mark per point) 4


Question 4
Total Marks: 20
General comments
Answers to this question attained the lowest overall average mark on the long-form questions. However,
the overall average mark was close to that on the other two long-form questions and higher than the
overall average mark on the short-form questions. It was pleasing to note that the average mark on 4.1
which involved the use of data within Inflo was just over 60%.
4.1 Using information in the scenario and the ‘Explore’ module in the data analytics software,
explain why accounts 0057, 4003 and 5003 may be misstated. Outline the audit procedures
that should be included in the audit plan to obtain assurance that each of these items is fairly
stated in the financial statements.
General
The loan application increases the risk of management bias or window dressing.
Balances on accounts 0057, 4003 and 5003 are flagged as being of elevated risk on the heat map.
Intangible assets - why misstated

Webdot consultancy fees of £95K (ID 74653) may not meet the capitalisation criteria.
Judgement is involved in assessing whether costs are research or development expenditure.
Subscription fees of £6,360 (ID 74654) cannot be capitalised as they are an ongoing expense of providing
the service. They must be expensed.
They also relate to year ending 31 December 2022.
Director’s time costs of £7,000 (ID 74655) is a round sum amount, increasing the risk that a systematic
approach to allocating their time to development has not been followed.
Round sum journals are suspicious.
Intangible assets - procedures

Obtain a breakdown of capitalised costs and assess each element against the capitalisation criteria.
Vouch Webdot’s fees to the invoice to confirm the accuracy of the capitalised figure.
Ask management to remove the hosting expenses.
Agree director’s time to timesheets and payroll records.
Review the reasonableness of assumptions re the split of director’s time between research and
development activities.
Obtain a written representation regarding any assumptions made in respect of capitalised costs meeting
the relevant criteria.
At home revenue – why misstated

Revenue of £187,234 has been recognised. This comprises three monthly postings of £38,453 (ID 74656)
relating to April, £65,460 (ID 74657) relating to May, and £83,321 (ID 74658) relating to June.
The risk of misstatement is high due to:
- potential functionality issues with the new system
- manual posting of monthly totals from the spreadsheet to the accounting system.

At home revenue – procedures

Evaluate and test the reliability of the new system.
Vouch entries in Account 4003 to the spreadsheet.
Agree amounts received to bank statements.
Commission payable – why misstated

£28,085 (ID 74659) has been recognised.
Manual calculation of the commission payable could lead to human error.
Expected commission of 20% would be £37,447.
Commission payable of £28,085 appears to be understated by £9,362 which is 5% below the 20% rate.
Commission payable – procedures

Inspect commission payable agreement to confirm the 20% rate.
Agree the £28,085 commission payment to post year-end bank statement.
Enquire of management the reason for the commission rate being below 20%.
Where candidates made use of the data within Inflo, they tended to score high marks on this part of the
question. However, a minority did not use Inflo at all, significantly reducing the marks available to them.
Strong candidates identified that the transactions within the accounts specified in the question were
identified as elevated risk on the heat map.
Intangible assets
The points most commonly identified were those relating to whether or not the transactions recorded in
this account should be capitalised and, to a lesser extent, the round sum nature of the director’s time
costs. Strong candidates also identified that the hosting expenses did not qualify as development costs.
Many candidates identified the need to review the items included to ensure that they met the capitalisation
criteria, and the time costs should be checked to time sheets and payroll records. The points most
commonly overlooked were those relating to the removal of the hosting expenses and the written
representation.
At home revenue
This part of the question was generally well answered as many candidates identified that errors could
arise due to functionality issues with the new system, the manual input of monthly totals to the system and
that the system should be tested for reliability. The points most commonly overlooked were those relating
to the reperformance of the monthly postings to the accounting system and checking the amounts
received to the bank statements.
Commission payable
Answers to this part of the question were often disappointing as only a minority of candidates earned
marks for the points other than the amount of the commission, error risk associated with manual
calculation and checking the commission rate to the agreement. Strong candidates correctly identified that
the amount of the commission did not represent 20% and then earned the mark available for discussing
the issue with management.
Some candidates cited points which had clearly been memorised from previous exam papers e.g.
amounts posted outside working hours. This highlights the danger of rote learning previous answers, as
these points were not relevant to this scenario and did not earn any marks. A minority of candidates
wasted time by interrogating accounts other than those specified in the question and identified points
which were not relevant to the answer.


4.2 Explain the ethical issues arising in respect of the finance director’s two suggestions that
your firm undertakes the audit on a contingent fee basis and that the audit team is provided
with free lunches.
Audit fee on contingent basis
A self-interest threat to objectivity, independence and integrity exists as the audit firm has an incentive to
ensure the loan application is successful.
This could lead to errors being overlooked and an inappropriate audit opinion being issued.
An advocacy threat may exist if it is perceived that the audit firm’s interests are too closely aligned with the
directors’ interests.
A threat to professional behaviour exists if the auditor is associated with false or misleading information
and, if this turns out to be the case, it will discredit the profession.
There are no safeguards that could reduce these threats to an acceptable level.
Contingent fees are prohibited under the FRC Ethical Standard.
Free lunches with directors

A self-interest threat to objectivity and independence exists as the free lunches could be perceived as an
incentive.
A familiarity threat could exist as relationships may develop between the audit team and the directors
resulting in the audit team being insufficiently sceptical or too trusting of management.
This could impact the auditor’s professional competence and due care when performing the audit work and
reduce audit quality.
The monetary value of the lunches should be considered. Individual lunches may be insignificant, but the
cumulative value of multiple lunches may be significant in the view of a reasonable and informed third
party.
This question was generally well answered. Most candidates recognised that contingent fees were
prohibited by the FRC Ethical Standard and provided convincing reasons for not being appropriate in an
audit environment. Many candidates highlighted the difference between a single lunch being trivial and the
cumulative value not being inconsequential. The third-party test was frequently mentioned. The points
most commonly overlooked were those relating to the advocacy threat and the threat to professional
behaviour. A common error was to waste time suggesting actions/responses to the ethical issues. Such
points were beyond the scope of the requirement and did not earn marks.
Total possible marks 11½


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Professional Level - Audit & Assurance – December 2021

MARK PLAN AND EXAMINER’S COMMENTARY

Mandatory under ISA 520

Total possible marks 5

Sample selection not explained

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- in line with firm’s policy

Total possible marks 10

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Total possible marks 9

Total possible marks 10

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Total possible marks 5½

Total possible marks 4

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Total Marks: 36 marks

Management has an incentive to window dress the

The short period for reviewing subsequent events

Trade receivables Procedures

Match invoices entered in receivables ledger with

Agree balances per ledger to customers’ monthly

Inspect post year-end credit notes and

Some of the outstanding balances may be

Inspect bank statements for post year-end cash

Review correspondence with customers (particularly

Obtain a written representation confirming the

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Evaluate and test controls to assess the reliability of

Enquire of employees whether there are any

HMRC provision Procedures

Inspect board minutes for discussion of the likely

The provision is material at 5.3% of PBT/2.1% of

There is a risk of understatement as:

Obtain a second opinion from an auditor’s expert

Obtain a written representation on the completeness

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Total possible marks 49

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Allow audit assistants to ask questions to clarify their understanding.

Reduce detection risk and improve audit quality.

Compliance with relevant ethical standards.

The company’s background including significant changes at the entity.

Key personnel within GVO.

Matters relevant to the fieldwork, in particular:

Total possible marks 15

Ethical and professional issues – time pressure

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Consult the firm’s ethics partner.

Consider using the ICAEW helpline for advice.

Total possible marks 15

Out of date virus protection software - consequences

Viruses could then be transmitted to customers when downloading software.

Out of date virus protection software – recommendations

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Undertake an investigation to identify if any hacks have taken place.

Task a specific person with responsibility for updating the software.

Inability to trace systems access leading to a lack of accountability

System access - recommendations

Implement access controls which include passwords to restrict access.

Quality assurance – consequences

Customers may request refunds or cancel their subscriptions.

Quality assurance – recommendations

Document testing procedures and provide a checklist for testers to follow.