ACCA

Mock 2 September 2024 – June 2025 exams

Audit and Assurance (AA)

Answers

We are grateful to the Association of Chartered Certified Accountants for

permission to reproduce past examination questions and model answers.
© First Intuition Ltd, 2024
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Section A

BEECH & CO
1 D
Self-interest Familiarity
2, 3 1, 4
Option 2 represents a self-interest threat as the audit firm may be perceived as performing the
role of management by attending these meetings and this threatens objectivity.

2 C After a key audit partner has been rotated off a listed client, they should not participate
in the audit at all for at least two years
Option A is incorrect – 10 years
Option B is incorrect – 7 years
Option D is incorrect – the previous years’ service IS taken into account

3 A Not take management decisions.

The risks are self-interest and that auditors’ views become too aligned with management.
Option C safeguards against self-review. Option B is not necessary as alternative safeguards are
available. Option D would intensify the management threat.

4 D Beech & Co should divest some of the other services or resign the audit.
It is not necessary to resign the audit if the other safeguards are implemented, although it
should be monitored regularly and considered as an option if the safeguards do not continue to
mitigate the self-interest threat.

5 A
Threat Safeguard
Self-interest Do not commence audit until fees paid
It would not be necessary to resign the audit unless the situation continued and the self-interest
threat could not be avoided. It is not an intimidation threat particularly.
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 3

AQUAMARINE CO
6 D 2 and 4
Unless the auditor has suspicions arising to the contrary (or ought to have done), it is
reasonable to assume that documents presented to him to support assertions in the financial
statements are genuine.
Reliance on the results of analytical procedures is a matter of audit judgement. Often they are
supported by other audit evidence (such as the results of tests of controls, or other substantive
testing).

7 A The risk is that non-current assets are overstated as new assets may be accounted for
prior to delivery.
A company cannot recognise an asset until they it has been delivered to them and they are able
to generate economic benefits from it, hence it does not matter that the assets were ordered
together, they should be recognised as assets of the business after delivery.
Failure to depreciate the assets would result in them being overstated not understated.
Although there are several risks relating to non-current assets, not all the options given here
were correct, so D cannot be correct.

8 D 3 and 4
The fact that the audit junior is a new trainee should not increase detection risk as this should
be managed at the audit level by assigning the trainee appropriate tasks and supervising the
audit work well.
A purchased patent should be capitalised so the risks is that the intangible assets are
understated by it not being included or overstated by it not being amortised properly over its
five year life.
Errors may have occurred when the payroll was transferred to Coral. Although this is not the
ONLY audit risk associated with the outsourcing of the payroll to Coral, it is a valid audit risk to
identify.
There is a risk that the classification of the loan (the split between current and non-current
liabilities for example) and disclosures relating to the loan are incorrect.

9 D 1, 2 and 3
Option 2 tests controls over creditworthiness of new customers and hence reduces the risk that
receivables will be irrecoverable due to poor controls. As combined testing is planned, this
would be a valid test to carry out.
However, as receivables is a material balance, it is also necessary to carry out substantive
testing so option B is incorrect.
Two substantive tests are given. If receivables are overstated, there may be two causes. (1)
Receivables which do not EXIST have been included in the balance. (2) Receivables which are
unlikely to be recoverable have been included in the balance, in other words, the VALUATION of
receivables is incorrect.
4 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

Test 1 gives evidence of EXISTENCE, test 3 gives evidence of EXISTENCE and VALUATION
(recoverability).
However, given that it is a risk area, it would be insufficient to rely on test 3 as evidence of
existence, because although payment proves existence, non-payment within the audit period
does not prove lack of existence, so both tests would be performed in this situation.

10 B Obtain references about Coral Co to assess their qualifications and expertise

This would be an appropriate action if Coral Co were an expert used by management for a one
off matter, for example, a valuation in the financial statements or if Coral were an auditor’s
expert.
However, in relation to a service organisation, the auditors will not be concerned with their
reputation and qualifications per se, but in the controls at Coral Co and the capability of
producing appropriate records for Aquamarine. Hence this procedure is not appropriate. The
audit firm might seek a Type 1 or 2 report from Coral’s auditors concerning their controls.
The other tests are all valid tests in relation to the risks arising from outsourcing the payroll
during the year.
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 5

AUDIT REVIEWS
11 A 1, 2, 3
Only material misstatements would result in the audit opinion being qualified.

12 D
Material Financial statement impact
Yes Assets overstated
As the research expenditure should have been expensed, assets are overstated, expenses
understated and profit overstated.
5% of profit before tax is $1.3 so this has had a material impact on profit.

13 C
Financial statements amended Financial statements not amended
Unmodified Qualified ‘except for’

14 A 1 and 3
The written representation does not give sufficient evidence concerning the missing figures. As
the issue is a loss of evidence rather than misstated figures, write offs would be inappropriate.

15 A Except for the possible effects…

The appropriate audit opinion would be ‘except for’ on the grounds of not having sufficient and
appropriate evidence restricted to the payroll.
Option B is from an emphasis of matter paragraph which would not be appropriate with a
qualified opinion.
Option C is a disclaimer, which would only be appropriate if the issue was pervasive (which it is
not, it is restricted to two months of the payroll).
Option D is an adverse opinion which is not appropriate as it is not a pervasive disagreement.
 6 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

Section B

16 FOX
EXAMINER’S COMMENTS: PART (a)
This 30-mark question was based on a manufacturing company, Fox Industries Co (Fox), and
tested candidates’ knowledge of communicating to those charged with governance (TCWG),
internal controls, information processing controls and substantive procedures for bank and
cash.
Part (a)(i) for two marks required candidates to explain why it’s important for auditors to
communicate with TCWG and part (a)(ii) for three marks required three matters that may be
communicated by auditors to TCWG.
Most candidates performed unsatisfactorily on part (a)(i). They needed to focus on WHY it
was important to communicate rather than WHAT needed to be reported as this was the
requirement of part (a)(ii). Answers that focused on what was to be communicated would
not have gained credit as this was not the question requirement for (a)(i). In addition, some
candidates simply restated the requirement, explaining that it was important to
communicate, but without answering why. Part (a)(ii) was answered better, with most
candidates focusing on the areas of fraud, material misstatement and internal control
deficiencies. Some candidates focused on providing details of specific audit issues that would
be discussed during the audit as opposed to areas which would be formally reported to
TCWG.

EXAM SMART
Read the requirement carefully here and make sure you only answer the question set. Your
answer should describe WHY it is important to report to TCWG rather than WHAT should be
reported, as this is tested in part (ii).

(a)
(i) Importance of reporting to those charged with governance
In accordance with ISA 260 Communication with Those Charged with Governance, it is
important for the auditors to report to those charged with governance as it helps in the
following ways:
 It assists the auditor and those charged with governance in understanding matters
related to the audit, and in developing a constructive working relationship. This
relationship is developed while maintaining the auditor’s independence and
objectivity.
 It helps the auditor in obtaining, from those charged with governance, information
relevant to the audit. For example, those charged with governance may assist the
auditor in understanding the entity and its environment, in identifying appropriate
sources of audit evidence and in providing information about specific transactions
or events.
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 7

 It helps those charged with governance in fulfilling their responsibility to oversee

the financial reporting process, thereby reducing the risks of material
misstatement of the financial statements.
(ii) Matters to be communicated to those charged with governance
 The auditor’s responsibilities with regards to providing an opinion on the financial
statements and that they have carried out their work in accordance with
International Standards on Auditing.
 The auditor should explain the planned approach to the audit as well as the audit
timetable.
 Any key audit risks identified during the planning stage should be communicated.
 In addition, any significant difficulties encountered during the audit should be
communicated.
 Also significant matters arising during the audit, as well as significant accounting
adjustments.
 During the audit any significant deficiencies in the internal control system
identified should be communicated in writing or verbally.
 Those charged with governance should be notified of any written representations
required by the auditor.
 Other matters arising from the audit that are significant to the oversight of the
financial reporting process.
 If any suspected frauds are identified during the audit, these must be
communicated.
 If the auditors are intending to make any modifications to the audit opinion, these
should be communicated to those charged with governance.
 For listed entities, a confirmation that the auditors have complied with ethical
standards and appropriate safeguards have been put in place for any ethical
threats identified.

EXAMINER’S COMMENTS: PART (b)

Part (b), for 14 marks, required a report to management which identifies and explains four
deficiencies, the implications and a recommendation for each of these deficiencies; in
addition a covering letter was required.
This part of the question was answered very well and candidates were able to confidently
identify four deficiencies from the scenario. However, candidates did not always adequately
explain the implication of the deficiency to the business. For example, for the deficiency of
purchase orders not being sequentially numbered, many candidates focused on the
difficulties of agreeing invoices to orders, as opposed to the key issue of unfulfilled orders
and hence stock outs. In addition many implications were vague such as “there will be errors
if information processing controls are not applied by the purchase ledger clerk” this answer
does not give any examples of what type of errors and where they may occur. Candidates
need to think in a practical manner and apply their knowledge when answering these types
of questions.
The requirement to provide controls was, on the whole, well answered. Most candidates
were able to provide good recommendations to address the deficiencies. However some of
these recommendations were too brief, for example simply stating “apply information
processing controls” to address the deficiency of the purchase ledger clerk. The main
 8 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

recommendation where candidates failed to maximise their marks was for sequentially
numbered purchase orders. Simply recommending “that purchase orders should be
sequentially numbered” only scored ½ marks, as the control is to undertake sequence
checks, for which the orders need to be sequential. This demonstrated a lack of
understanding of this type of control.
A covering letter to the report was required and there were two marks available. Despite
this specific requirement a significant number of candidates provided their answers as a
memo rather than as a letter. Adopting a memo format resulted in a failure to maximise
marks. The two marks were allocated as ½ for a letterhead, ½ for an introductory paragraph,
½ for disclaimers and ½ for a courteous sign off of the letter, which requires more than just a
signature.
Many candidates set their answer out in two (three) columns being deficiency, implication
and recommendation.
However, those who explained all of the deficiencies, the implications and then separately
provided all of the recommendations tended to repeat themselves and possibly wasted
some time.
The requirement was for FOUR deficiencies; this session a significant proportion of
candidates provided many more than four points, it was not uncommon to see answers with
eight deficiencies. Also in many answers deficiencies were combined such as; “purchase
orders are not sequentially numbered and only orders over $5,000 require authorisation”,
the implications and recommendations would then also be combined. Providing many more
points than required and combining answers leads to unstructured answers that are difficult
to mark.
Spending too much time on this part of the exam also puts candidates under time pressure
for the rest of the paper.

EXAM SMART
The Examiner highlights where candidates lost marks on this question:
 Candidates were often able to identify control deficiencies from the scenario but did
not always give a clear and specific explanation of the implications of the deficiencies.
Think about what could go wrong because of the deficiency you have identified. Why
should management be concerned?
 Control recommendations must also be sufficiently detailed. Use the model answer
below as a guide for the level of detail required.
 If a covering letter is required then make sure you lay your answer out in this format
and you will earn two easy marks. You can use the model answer below to revise the
format and content of the letter.
 A columnar layout will help you to produce a clear, focussed answer in a minimum
amount of time.
 Only give the required number of points as there are no additional marks available and
time could be spent elsewhere on the paper.
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 9

(b) Report to management

Board of directors
Fox Industries Co
15 Dog Street Cat Town X Country
6 June 20X3
Dear Sirs,
Audit of Fox Industries Co (Fox) for the year ended 30 April 20X3
Please find enclosed the report to management on deficiencies in internal controls identified
during the audit for the year ended 30 April 20X3. The appendix to this report considers
deficiencies in the purchasing and payments system, the implications of those deficiencies and
recommendations to address those deficiencies.
Please note that this report only addresses the deficiencies identified during the audit and if
further testing had been performed, then more deficiencies may have been reported.
This report is solely for the use of management and if you have any further questions, then
please do not hesitate to contact us.
Yours faithfully
An audit firm

APPENDIX
Deficiency Implication Recommendation
When raising purchase orders, the This could result in Fox ordering An approved supplier list should
clerks choose whichever supplier goods at a much higher price or a be compiled; this should take into
can despatch the goods the lower quality than they would account the price of goods, their
fastest. like, as the only factor considered quality and also the speed of
was speed of delivery. delivery.
It is important that goods are Once the list has been produced,
despatched promptly, but this is all orders should only be placed
just one of many criteria that with suppliers on the approved
should be used in deciding which list.
supplier to use.
Purchase orders are not Failing to sequentially number the All purchase orders should be
sequentially numbered. orders means that Fox’s ordering sequentially numbered and on a
team are unable to monitor if all regular basis a sequence check of
orders are being fulfilled in a unfulfilled orders should be
timely manner; this could result in performed.
stock outs.
If the orders are numbered, then
a sequence check can be
performed for any unfulfilled
orders.
Purchase orders below $5,000 are This can result in goods being All purchase orders should be
not authorised and are processed purchased which are not required authorised by a responsible
solely by an order clerk. by Fox. In addition, there is an official. Authorised signatories
increased fraud risk as an order should be established with
clerk could place orders for varying levels of purchase order
personal goods up to the value of authorisation.
$5,000, which is significant.
10 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

Deficiency Implication Recommendation

Purchase invoices are input daily Without information processing The purchase ledger clerk should
by the purchase ledger clerk and controls there is a risk that input the invoices in batches and
due to his experience, he does not invoices could be input into the apply information processing
utilise any information processing system with inaccuracies or they controls, such as control totals, to
controls. may be missed out entirely. ensure completeness and
This could result in suppliers being accuracy over the input of
paid incorrectly or not all, leading purchase invoices.
to a loss of supplier goodwill.
The purchase day book Manually posting the amounts to The process should be updated
automatically updates with the the general ledger increases the so that on a regular basis the
purchase ledger but this ledger is risk of errors occurring. This could purchase ledger automatically
manually posted to the general result in the payables balance in updates the general ledger.
ledger. the financial statements being A responsible official should then
under or overstated. confirm through purchase ledger
control account reconciliations
that the update has occurred
correctly.
Fox’s saving (deposit) bank If these accounts are only All bank accounts should be
accounts are only reconciled every reconciled periodically, there is reconciled on a regular basis, and
two months. the risk that errors will not be at least monthly, to identify any
spotted promptly. unusual or missing items.
Also, this increases the risk of The reconciliations should be
employees committing fraud. If reviewed by a responsible official
they are aware that these and they should evidence their
accounts are not regularly review.
reviewed, then they could use
these cash sums fraudulently.
Fox has a policy of delaying Whilst this maximises Fox’s bank Fox should undertake cash flow
payments to their suppliers for as balance, there is the risk that Fox forecasting/budgeting to
long as possible. is missing out on early settlement maximise bank balances. The
discounts. Also, this can lead to a policy of delaying payment
loss of supplier goodwill as well as should be reviewed, and
the risk that suppliers may refuse suppliers should be paid in a
to supply goods to Fox. systematic way, such that
supplier goodwill is not lost.
The Finance Director authorises Without looking at the detail of The Finance Director should
the bank transfer payment list for the payments list, as well as review the whole payments list
suppliers; however, he only views supporting documentation, there prior to authorising. As part of
the total amount of payments to is a risk that suppliers could be this, he should agree the
be made being paid an incorrect amount, amounts to be paid to supporting
or that sums are being paid to documentation, as well as
fictitious suppliers. reviewing the supplier names to
identify any duplicates or any
unfamiliar names. He should
evidence his review by signing
the bank transfer list.
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 11

EXAMINER’S COMMENTS: PART (C)

Part (c), for four marks, required four information processing controls to ensure the
completeness and accuracy of the input of purchase invoices. Performance on this question
was quite unsatisfactory. Many candidates failed to pick up marks for this question; also this
question was left unanswered by some candidates.
The requirement was for information processing controls, these could be computerised or
manual, but they needed to address the specific area of INPUT of invoices. Many candidates
gave general computer controls such as passwords or provided auditor’s substantive tests. In
addition candidates listed recommendations from part (b) such as “sequentially numbered
orders or regular bank reconciliations”; these have nothing to do with input of invoices.
Some answers focused on auditing the purchase cycle, agreeing orders to goods received
notes and to invoices. Candidates clearly either have a knowledge gap in this area or failed
to read the question requirement carefully.

EXAM SMART
If you struggled to generate ideas for information processing controls, use the list below to
help you revise the topic. Remember that although these are often part of the IT system,
they can be manual as well as computerised.

(c) Information processing controls

 Document counts – the number of invoices to be input are counted, the invoices are
then entered one by one, at the end the number of invoices input is checked against the
document count. This helps to ensure completeness of input.
 Control totals – here the total of all the invoices, such as the gross value, is manually
calculated. The invoices are input, the system aggregates the total of the input invoices’
gross value and this is compared to the control total. This helps to ensure completeness
and accuracy of input.
 One for one checking – the invoices entered into the system are manually agreed back
one by one to the original purchase invoices. This helps to ensure completeness and
accuracy of input.
 Review of output to expected value – an independent assessment is made of the value
of purchase invoices to be input, this is the expected value. The invoices are input and
the total value of invoices is compared to the expected value. This helps to ensure
completeness of input.
 Check digits – this control helps to reduce the risk of transposition errors. Mathematical
calculations are performed by the system on a particular data field, such as supplier
number, a mathematical formula is run by the system, this checks that the data entered
into the system is accurate. This helps to ensure accuracy of input.
 Range checks – a pre-determined maximum is input into the system for gross invoice
value, for example, $10,000; when invoices are input if the amount keyed in is
incorrectly entered as being above $10,000, the system will reject the invoice. This helps
to ensure accuracy of input.
 Existence checks – the system is set up so that certain key data must be entered, such as
supplier name, otherwise the invoice is rejected. This helps to ensure accuracy of input.
12 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

EXAM SMART
Marks will be awarded for any other relevant information processing controls.

EXAMINER’S COMMENTS: PART (d)

Part (d), for seven marks, required substantive procedures for bank and cash at the year end.
Performance on this question was unsatisfactory. Substantive procedures are a key area of
the paper and may feature in each session.
Some scripts were with hardly any valid bank and cash procedures. Tests which start with
“to ensure that” are unlikely to gain any marks as these are objectives rather than audit
tests. Also some candidates failed to read the question requirement which stated that the
audit was of year end cash and bank; these answers focused more on tests of controls over
the whole of the year for cash and bank, these did not gain any credit.
Some candidates focused on the bank reconciliation and auditing its detail, such as
unpresented cheques and outstanding lodgements. Most candidates were able to suggest
obtaining a bank confirmation letter and counting petty cash, however this seemed to be the
extent of many answers. It was unsatisfactory to see that many candidates did not
understand the purpose of the bank reconciliation as a common answer was “to agree the
bank confirmation letter to the financial statements” as opposed to the bank reconciliation.
Many provided vague answers such as “cast the ledger” and a minority misunderstood the
question and focused on auditing payables and receivables.

EXAM SMART
 For this paper it is essential that you understand the difference between a substantive
test and a test of control.
 When describing substantive procedures try to start your sentences with a verb as they
are something the auditor does. Think about the documentation the auditor will have
available e.g. cash book, bank statements, bank confirmation letter, bank reconciliation.
 Make sure you practice plenty of questions like this one as candidates often struggle to
describe substantive tests and you can expect them to appear in every exam sitting.

(d) Substantive procedures over bank and cash balance of Fox Industries Co (Fox)
 Obtain Fox’s current bank account reconciliation and check the additions to ensure
arithmetical accuracy.
 Obtain a bank confirmation letter from Fox’s bankers for all of its accounts.
 For the current account, agree the balance per the bank statement to an original year-
end bank statement and also to the bank confirmation letter.
 Agree the reconciliation’s balance per the cash book to the year-end cash book.
 Trace all of the outstanding lodgements to the pre year-end cash book, post year-end
bank statement and also to paying-in-book pre year end.
 Trace all unpresented cheques through to a pre year-end cash book and post year-end
statement. For any unusual amounts or significant delays obtain explanations from
management.
 Examine any old unpresented cheques to assess if they need to be written back into the
purchase ledger as they are no longer valid to be presented.
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 13

 Agree all balances listed on the bank confirmation letter to Fox’s bank reconciliations or
the trial balance to ensure completeness of bank balances.
 Review the cash book and bank statements for any unusual items or large transfers
around the year end, as this could be evidence of window dressing.
 Examine the bank confirmation letter for details of any security provided by Fox or any
legal right of set-off as this may require disclosure.
 For the saving (deposit) bank accounts, review any reconciling items on the year-end
bank reconciliations and agree to supporting documentation.
 In respect of material cash balances, count cash balances at the year end and agree to
petty cash records, such as the petty cash book.
 Review the financial statements to ensure that the disclosure of cash and bank balances
are complete and accurate.

EXAM SMART
Marks will be awarded for any other relevant bank and cash tests

Marking guide Marks

(a) (i) Up to 1 mark per well explained point
– Assists the auditor and those charged with governance in understanding
matters related to the audit
– Obtains information relevant to the audit
– Helps those charged with governance in fulfilling their responsibility to
oversee the financial reporting process
(ii) Up to 1 mark for each example matter to be communicated to those charged with
governance
Max 5
(b) Up to 1 mark per well explained deficiency, implication and recommendation. If not
well explained then just give ½ mark for each. Overall maximum of 4 marks each for
deficiencies, implications and recommendations.
2 marks for presentation: 1 for address and intro and 1 for conclusion.
– No approved suppliers list
– Purchase orders not sequentially numbered
– Orders below $5,000 are not authorised by a responsible official
– No information processing controls over input of purchase invoices
– Purchase ledger manually posted to general ledger
– Saving (deposit) bank accounts only reconciled every two months
– Payments to suppliers delayed
– Finance director only reviews the total of the payment list prior to payment
authorising
Max 14
(c) Up to 1 mark per well explained information processing control
– Document counts
– Control totals
– One for one checking
– Review of output to expected value
– Check digits
– Range checks
– Existence checks
Max 4
14 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

Marking guide Marks

(d) Up to 1 mark per substantive procedure
– Check additions of bank reconciliation
– Obtain bank confirmation letter
– Bank balance to statement/bank confirmation
– Cash book balance to cash book
– Outstanding lodgements
– Unpresented cheques review
– Old cheques write back
– Agree all balances on bank confirmation
– Unusual items/window dressing
– Security/legal right set-off
– Review reconciliations for saving (deposit) accounts
– Cash counts for significant cash balances
– Review disclosure of bank and cash in financial statements
Max 7
Maximum marks available 30

17 HAWTHORN ENTERPRISES
EXAMINER’S COMMENTS
This 20-mark question was based on Hawthorn Enterprises Co and tested candidates’
knowledge of financial statement assertions and substantive procedures.
Part (a) was for eight marks in total and comprised of (a)(i) which required four financial
statement assertions relevant to classes of transactions and events and part (a)(ii) which
required an example substantive procedure for each assertion identified which would be
relevant to the audit of revenue. This question was unrelated to the scenario and was
knowledge based, and candidates’ performance was unsatisfactory.
Financial statement assertions are a key element of the AA syllabus and so it was very
disappointing to see that a significant minority of candidates do not know the assertions
relevant to classes of transactions and events. A significant proportion of candidates
provided existence and valuation which were irrelevant as these are assertions relevant to
account balances. Where candidates did correctly identify the assertions they often failed to
explain them adequately or did so with reference to assets and liabilities rather than
transactions. Also many explanations were too brief or simply repeated the assertion, such
as, “accuracy ensures the amounts in the financial statements are accurate”.
A number of candidates provided example procedures which were not relevant when testing
revenue, but instead focused on receivables or purchases. This can only be due to a failure
to read the question requirement properly. In addition many procedures were vague or
incomplete, such as agreeing goods despatch notes to sales invoices but not then agreeing
the invoices to the sales day book. Also many of the procedures were tests of control rather
than substantive procedures. The direction of the occurrence and completeness tests were
often confused resulting in incorrect procedures. The direction of occurrence tests should
generally start at accounting records, whereas completeness procedures should begin at
source documents.
The remainder of the question provided candidates with three short scenarios detailing
matters that had been brought to attention prior to the audit fieldwork and candidates were
expected to produce appropriate substantive procedures relevant to each matter. Part (b)(i)
for three marks required substantive procedures in relation to auditing supplier statement
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 15

reconciliations. Part (b)(ii) for four marks required substantive procedures over the bank
reconciliation and finally part (b)(iii) for five marks required substantive procedures in
relation to the existence and valuation of receivables. Performance on this question was
unsatisfactory. A significant minority did not attempt all parts of this question.
Most candidates were unable to tailor their knowledge of general substantive procedures to
the specific issues in the scenario and question requirements. Many candidates spotted the
terms payables, bank and receivables and proceeded to list all possible tests for these areas.
This is not what was required and this approach scored few or no marks. The scenario was
provided so that candidates could apply their knowledge. However it seems that many
candidates did not take any notice of the scenario at all. As addressed in previous examiner’s
reports candidates must strive to understand substantive procedures, learning a generic list
of tests will not translate to exam success as they must be responsive to the scenario.

EXAM SMART
 It is very important to learn which assertions relate to classes of transactions (as well as
account balances at the year-end and disclosures) so that you can tackle questions like
this.
 When describing substantive procedures you should start your sentences with a verb as
they are something the auditor does.
 Think about the documentation the auditor will have available e.g. GDN’s, customer
orders.
 You may also find the AEIOU mnemonic useful here. Analytical procedures are a good
way of testing revenue.

(a) Assertions for classes of transactions and events

Occurrence
The transactions and events that have been recorded have actually occurred and pertain to the
entity.
Substantive procedures
 Select a sample of sales transactions recorded in the sales day book; agree the details
back to a goods despatched note (GDN) and customer order.
 Review the monthly breakdown of sales per key product, compare to the prior year and
budget and investigate any significant differences.
Completeness
All transactions and events that should have been recorded have been recorded.
Substantive procedures
 Select a sample of GDNs raised during the year; agree to the sales invoice and that they
are recorded in the sales day book.
 Review the total amount of sales, compare to the prior year and budget and investigate
any Substantive procedures for supplier statement reconciliation
Accuracy
The amounts and other data relating to recorded transactions and events have been recorded
appropriately.
16 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

Substantive procedures
 Select a sample of sales invoices and recalculate that the totals and calculation of sales
tax are correct.
 Review the total amount of sales, compare to the prior year and budget and investigate
any significant differences.
 For a sample of sales invoices, confirm the sales price stated agrees to the authorised
price list.
Cut-off
Transactions and events have been recorded in the correct accounting period.
Substantive procedures
Select a sample of pre and post year-end GDNs and agree that the sale is recorded in the correct
period’s sales day books.
 Review the post year-end sales returns and agree if they relate to pre year-end sales that
the revenue has been correctly removed from the sales day book.
Classification
Transactions and events have been recorded in the proper accounts.
Substantive procedures
 Agree for a sample of sales invoices that they have been correctly recorded within
revenue nominal account codes and included within revenue in the financial statements.

EXAMINER’S COMMENTS: PART (b)

In part (b)(i) candidates needed to focus on testing supplier statement reconciliations rather
than trade payables in general. The most common correct answer awarded credit was
“agree the supplier statements to the payables ledger.” Very few candidates scored more
than 1 mark. Incorrect answers focused on calculating trade payables days or undertaking a
payables circularisation.
In part (b)(ii) many candidates focused on auditing the cash balance rather than the bank
reconciliation. Hence answers such as casting the cash book, requesting a bank confirmation
letter or counting the petty cash balance were not awarded any credit. Preparation of bank
reconciliations is part of the F3 Financial Accounting syllabus and therefore candidates
should have considered the items which are included as part of the bank reconciliation and
focused on deriving tests to audit each component.
In addition to verify if unpresented cheques and outstanding lodgements were valid
reconciling items, audit procedures should have focused on inclusion in the pre year-end
cashbook and post year-end bank statements. Very few candidates demonstrated an
understanding of this point.
In part (b)(iii) stronger candidates were able to generate tests focusing on analytical review
against prior year balances, review of aged receivables listing or discussions with
management about an allowance for receivables. However, a significant proportion of
candidates incorrectly suggested undertaking receivables circularisation, including the
detailed steps required, this was despite the scenario clearly stating that the finance director
had requested that a circularisation not be carried out.
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 17

The requirement verb was to “describe” therefore sufficient detail was required to score the
1 mark available per test. Candidates must provide enough tests as they should assume 1
mark per valid procedure. Candidates are reminded yet again that substantive procedures
are a core topic area and they must be able to produce relevant detailed procedures.

EXAM SMART
 In part (b) you are asked to describe some more substantive procedures. Use the mark
allocation as a guide to the number of procedures you need to provide.
 Make sure that you answer is specific to the scenario in the question, rather than just
giving general substantive procedures.

(b)
(i) Substantive procedures for supplier statement reconciliations
 Select a representative sample of year-end supplier statements and agree the
balance to the purchase ledger of Hawthorn. If the balance agrees, then no further
work is required.
 Where differences occur due to invoices in transit, confirm from goods received
notes (GRN) whether the receipt of goods was pre year end, if so confirm that this
receipt is included in year-end accruals.
 Where differences occur due to cash in transit from Hawthorn to the supplier,
confirm from the cashbook and bank statements that the cash was sent pre year
end.
 Discuss any further adjusting items with the purchase ledger supervisor to
understand the nature of the reconciling item, and whether it has been correctly
accounted for.
(ii) Substantive procedures for bank reconciliation
 Obtain Hawthorn’s bank account reconciliation and cast to check the additions to
ensure arithmetical accuracy.
 Agree the balance per the bank reconciliation to an original year-end bank
statement and to the bank confirmation letter.
 Trace all the outstanding lodgements to the pre year-end cash book, post year-end
bank statement and also to paying-in-book pre year end.
 Trace all unpresented cheques through to a pre year-end cash book and post year-
end statement. For any unusual amounts or significant delays, obtain explanations
from management.
 Examine any old unpresented cheques to assess if they need to be written back
into the purchase ledger as they are no longer valid to be presented.
(iii) Substantive procedures for receivables
 Review the aged receivable ledger to identify any slow moving or old receivable
balances, discuss the status of these balances with the credit controller to assess
whether they are likely to pay.
 Select a significant sample of receivables and review whether there are any after
date cash receipts, ensure that a sample of slow moving/old receivable balances is
also selected.
18 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

 Review customer correspondence to identify any balances which are in dispute or

unlikely to be paid.
 Review board minutes to identify whether there are any significant concerns in
relation to payments by customers.
 Calculate average receivable days and compare this to prior year, investigate any
significant differences.
 Inspect post year-end sales returns/credit notes and consider whether an
additional allowance against receivables is required.
 Select a sample of goods despatched notes (GDN) before and just after the year
end and follow through to the sales ledger to ensure they are recorded in the
correct accounting period.
 Select a sample of year-end receivable balances and agree back to valid supporting
documentation of GDN and sales order to ensure existence.
Marking guide Marks
(a) Up to 1 mark per assertion, ½ mark for stating assertion and ½ mark for explanation,
max of 4 marks; up to 1 mark per relevant revenue substantive procedure, max of
4 marks.
– Occurrence – explanation and relevant substantive procedure
– Completeness – explanation and relevant substantive procedure
– Accuracy – explanation and relevant substantive procedure
– Cut-off – explanation and relevant substantive procedure
– Classification – explanation and relevant substantive procedure
Max 8
(b) (i) Up to 1 mark per well described procedure, overall maximum of 3 marks for
supplier statement reconciliations, maximum of 4 marks for bank and maximum of
5 marks for receivables.
Supplier statement reconciliation
– Select a sample of supplier statements and agree the balance to the purchase
ledger
– Invoices in transit, confirm via GRN if receipt of goods was pre year end, if so
confirm included in year-end accruals
– Cash in transit, confirm from cashbook and bank statements the cash was
sent pre year end
– Discuss any further adjusting items with the purchase ledger supervisor to
understand the nature of the reconciling item, and whether it has been
correctly accounted for
Max 3
(b) (ii) Bank reconciliation
– Check additions of bank reconciliation
– Bank balance to statement/bank confirmation
– Cash book balance to cash book
– Outstanding lodgements
– Unpresented cheques review
– Old cheques write back
Max 4
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 19

Marking guide Marks

(b) (iii) Receivables
– Aged receivables report to identify any slow moving balances
– Review the after date cash receipts
– Review customer correspondence to assess whether there are any invoices in
dispute
– Review board minutes
– Calculate average receivable days
– Post year-end sales returns/credit notes
– Cut-off testing of GDN
– Agree to GDN and sales order to ensure existence
Max 5
Maximum marks available 20

18 EAGLE HEATING
EXAMINER’S COMMENTS
Part (a) of this question required identification and description of five audit risks from the
scenario and the relevant auditor’s response for each. Performance on this question was
mixed, although better than June 2014 when audit risk was last tested.
The scenario contained significantly more than five risks and so candidates were able to
easily identify enough risks for the marks available. Candidates who scored well in this
question went on to describe how the point identified from the scenario was an audit risk by
referring to the assertion and the account balance impacted.
As in previous diets however, a significant number of candidates tended to only identify facts
from the scenario such as “Eagle Heating has reduced its selling price due to increased
competition” but failed to describe how this results in an audit risk, thus limiting the marks
that can be scored to ½ marks. To gain the full 1 mark candidates needed to explain that this
drop in selling price could impact inventory valuation as there was a risk that inventory may
be overvalued due to NRV now being lower than cost or that this presents a going concern
risk as this drop in selling price may not be sustainable. Only by connecting the fact from the
scenario to the relevant assertion and area of the financial statement will the candidate have
adequately explained the audit risk.
Unfortunately many candidates yet again focused on business risks rather than audit risks
with answers such as increased risk of theft and difficulties in counting inventory arising due
to the increase in inventory levels. These candidates then provided responses related to how
management should address these business risks. This meant that out of a potential 2 marks
per point, candidates would only score ½ marks for the identification of the issue from the
scenario.
Additionally, many candidates performed poorly with regards to the auditor’s responses.
Many candidates gave business advice, such as replacing the financial controller who was
dismissed or provided inappropriate responses such as attending inventory counts to
address the inventory valuation risk. Audit responses need to be practical and should relate
to the approach (ie what testing) the auditor will adopt to assess whether the balance is
materially misstated or not.
Many candidates presented their answers well as they adopted a two column approach with
audit risk in one column and the related response next to it. This helps candidates to ensure
20 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

that for every risk identified there is a related response and candidates are encouraged to
continue to use this approach where appropriate.
Future candidates must take note of the importance of audit risk which is a key element of the
syllabus and must be understood, and they would benefit from practising audit risk questions.

EXAM SMART
Candidates often struggle with risk identification questions such as this one, so it important
to practise them to master the required exam technique.
 The Examiner is asking for FIVE risks but you may find more in the scenario. If this is the
case then select your five best points.
 For each risk, the Examiner is asking you to do two things; explain the audit risk and
describe the auditor’s response. Therefore for each risk there will be one mark available
for explanation and another for providing a response. A tabular layout will help you
produce a concise and focused answer.
 As you read the scenario consider why the Examiner is giving you each piece of
information and highlight any factors you believe might lead to an audit risk, e.g.
‘customer experiencing financial difficulties’.
 Then, make yourself write down next to those words, a financial statement impact: e.g.,
in the above case, ‘receivables overstated?’
 This should make you focus on the audit risk, not the business risk (irrecoverable debts
in this case). Business risk is not examinable in paper AA.
 In terms of the audit response, remember that you want to ensure that the financial
statements are not materially misstated, so in terms of that customer, think ‘have any
payments been received since the year end?’ How do you prove that? Review post
year-end cash receipts…

(a) Audit risks and responses

Audit risk Auditor’s response
Eagle Heating Co (Eagle) has decreased the selling The auditor should undertake detailed cost and NRV
price of products significantly since September 2014 testing to assess whether inventory is overvalued
and there are increased levels of inventory expected and requires write down.
at the year end.
It is possible that the selling price may have fallen so
that the net realisable value (NRV) of inventory is
below cost. IAS 2 Inventory requires inventory to be
stated at the lower of cost and NRV. Hence it is
possible that inventory is overvalued.
A key customer of Eagle has been experiencing If the six-months payment break has now ended,
financial difficulties and Eagle has agreed a six- review after date cash receipts for this customer to
month payment break; however, the finance assess whether any payments have been made.
director does not believe an allowance is required. Discuss with the finance director why he feels an
If the customer is experiencing difficulties, there is allowance is not required. Review whether any
an increased risk that the receivable is not general allowance for uncollectable accounts is
recoverable and hence is overvalued. sufficient to cover the amount of this receivable.
ACCA AA R e v i s i o n e xa mi n at i o n a n s w e rs 21

Audit risk Auditor’s response

In light of the increased competition, reduction in The auditor should undertake detailed going
selling price and financial difficulties of a key concern testing. They should review the cash flow
customer, there is an increased risk that Eagle is forecast for the foreseeable future to assess
facing going concern difficulties. whether the going concern basis is appropriate or
whether additional going concern disclosures are
required in the financial statements.
The financial controller of Eagle was dismissed in The audit team should write to the company’s
October and is threatening to sue the company for lawyers to enquire of the existence and likelihood of
unfair dismissal. success of any claim from the former financial
If it is probable that Eagle will make payment to the controller.
financial controller, a provision for unfair dismissal is
required. If the payment is possible rather than
probable, a contingent liability disclosure would be
necessary. If Eagle has not done this, there is a risk
over the completeness of any provisions or
contingent liabilities.
The financial controller has been dismissed and his The team should remain alert throughout the audit
tasks have been allocated between the finance for additional errors within the finance department.
department team, this has increased their workload. In addition, discuss with the finance director
This increases the inherent and control risk within whether he will be able to provide the team with
Eagle as errors may have been made within the assistance for any audit issues as there is no
accounting records by the overworked finance team financial controller available.
members and there is no one working in a
supervisory capacity.
The purchase ledger supervisor left in August and no The audit team should increase their testing on
reconciliations of supplier statements and purchase trade payables at the year end, with a particular
ledger control account have been performed. There focus on completeness of payables. A detailed
is an increased risk of errors within trade payables review of the year-end purchase ledger control
and the year-end payable may be under or account reconciliation should be performed with a
overstated. focus on any unusual reconciling items.
Preliminary analytical review of the draft statement Update the analytical review with the full year
of profit or loss has identified a significant fall in results and if significant fluctuations on prior year
administration expenses. remain, discuss these with management. Obtain
Administration expenses tend to be fixed costs and supporting evidence to verify management
hence would be unlikely to fluctuate significantly explanations.
with changes in sales volumes. Hence there is a risk
that administration expenses are understated.

(b) Procedures relating to inventory valuation

EXAM SMART
Let the reference to the fall in selling prices of inventory guide you towards selling price
testing (NRV) as well as cost testing.

 For a sample of items in inventory, trace to purchase invoice to verify cost price.
 For the same sample, trace items to post year-end sales invoices to confirm net realisable
value (NRV).
 Compare price lists before and after the price reduction to identify significant price
changes which might indicate NRV has fallen below cost.
22 R e v i s i o n E xami n at i on a n s w e rs ACCA AA

 Review stock movement reports to identify items which have not sold since year end
which might require full write off.
(c) Quality control procedures

EXAM SMART
Note here that the question was specific to engagement performance. Only three
procedures were required and the top three are the most obvious as they are required on
every audit. The model answer here gives the range of answers you could have given.

 Direction: The audit should be planned and audit staff briefed on their responsibilities
within the audit team.
 Supervision: Audit staff will be responsible for supervising more junior staff, ensuring
they understand what is required of them, informing them of audit risks, materiality and
any particular factors relating to the client, being prepared to answer queries.
 Review: Senior audit staff will review the work of more junior members to ensure it is in
line with the audit plan and that sufficient appropriate evidence has been obtained and
documented.
 Consultation: In the event of contentious matters arising on the audit (for example, in
relation to judgemental issues, eg going concern), the engagement partner should have
arranged consultation.
 Differences of opinion: Again, should differences of opinion have arisen during the audit,
the engagement partner should have followed firm procedures on how to resolve these.
Marking guide Marks
(a) Up to 1 mark per well explained risk and up to 1 mark for each well explained response.
Overall max of 5 marks for risks and 5 marks for responses
─ Inventory valuation
─ Receivable valuation
─ Going concern
─ Unfair dismissal of financial controller
─ Increased inherent risk of errors in finance department due to loss of financial
controller
─ Under- or over-stated trade payables
─ Completeness of administration expenses
Max 10
(b) Up to 1 mark for each appropriate procedure Max4
(c) Up to 2 marks for well explained procedures Max 6
Maximum marks available 20