ACCA F8 – Audit and Assurance Exam technique Michaela Plucarova, PwC’s Academy
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Topics
Introduction to the paper and exam structure Exam technique tips
Ø Planning your answer Ø Understanding the verbs Ø Most common errors
Preparation tips
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Introduction to the paper and exam structure Basic information Exam structure Worldwide pass rate
Slide 3 ACCA F8 - Audit and Assurance
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Basic information
q New structure of the exam since Dec 2014 !
q Examiner since June 2010 (Examiner’s Approach published in
Student Accountant, March 2000)
q 3 hours + 15 minutes (reading and planning time)
q All questions have to be answered
ACCA F8 - Audit and Assurance Slide 4
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Basic information
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q Audit theory (technical skills) – what’s the purpose of the
assurance, legal background, the stages of the audit (planning
stage including risk assessment/independence evaluation, audit
evidence – obtained from both test of controls and substantive
audit work, completion activities etc. q Application of the theory to scenarios (from doer prospective)
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Basic information Exam structure q Section A - multiple-choice questions - “choose the answer”
8 Q *2 marks = 16 marks
4 Q * 1 mark = 4 marks
ü Knowledge based questions (“theory”)
q Section B - scenario based questions - “write the answer”
4 Q * 10 marks = 40 marks
2 Q * 20 marks = 40 marks
100 marks
ü The bulk of the questions will be discursive
ü Some questions involve computation from time to time (materiality, ratios)
ü Scenario based Q: no long questions; they may content more sub-requirements (e.g. 2-3) focused on specific topics (e.g. ‘audit risk‘, ‘completion and auditor’s reports’, ‘control deficiencies’ , ‘ethical issues’, ‘evidence’)
Slide 6 ACCA F8 - Audit and Assurance
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Basic information
39% Worldwide pass rate
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Exam technique tips
Keys to success Planning your answer Understanding the verbs Most common errors How to pass?
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Keys to success
Knowledge
Time
Verbs
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Planning your answer
• requirement verbs • marks allocation • assign time to finish
to keep the time
How many ideas? How much to write?
Analyze the requirements
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Planning your answer
• requirement verbs • marks allocation • assign time to finish to keep the time How many ideas? How much to write?
• annotate the question paper
• relate text to requirements
• monitor number of points identified
Analyze the requirements
Read scenario actively
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Planning your answer
• requirement verbs • marks allocation • assign time to finish to keep the time
How many ideas? How much to write?
• annotate the question paper • relate text to requirements • monitor number of points identified
• gain the maximum from each idea
• go for easy marks • state the obvious in
your answers • use key words and
phrases Will the markers find and understand your ideas?
Analyze the requirements
Present your answer
Read scenario actively
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Understanding the verbs
Marking schemes - > read marking schemes to understand the pattern of marks awarded
Ø List – typically ½ mark per each listed idea/issue/matter
Ø Identify and explain - typically 1/2 mark per identification
and another 1 to 1,5 mark per explanation
Ø Discuss – typically 2 marks per well explained point highlighting
e.g. advantages/disadvantages or benefits/limitations
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Most common errors
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Ø Not stating the obvious Ø Too general answers (not using information from the scenario) Ø Incorrect terminology (use ACCA terminology) Ø Too much or too little in the answers (a wrong analysis of the
verbs in requirements) Ø Not answering all questions/sub-requirements (a wrong time
management) Ø Missing explanations and description of work done (why the audit
procedure is done, how it should be exactly performed,..) Ø Unclear presentation (poor handwriting, mixing different sub-
requirements, references to other answers, long paragraphs without structure and missing subheadings, a wrong format of the answer)
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How to pass?
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PASS
Exam technique
Application of skills
Technical skills
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Step by step approach to two types of questions Audit Risks Audit issue and Type of Audit Report
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Audit Risks
You will be given • Minutes from the meetings with Company’s representatives – a basis
for your analysis • Financial extracts might be given – basic ratio analysis expected • Combination of both (analytics/ratios and minutes)
Typical requirements • Explain the audit risk and auditor’s response
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Audit Risks Business vs Audit Risk
Necessity to differentiate:
- Business risk > anything which may prevent the Company to reach its objectives
“Put yourself into the shoes of management” - Audit risk > risk that auditor issues inappropriate opinion
“Put yourself into the shoes auditor”
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Audit Risks Audit risk & Risk of material misstatement
Ø Risk that FS are materially misstated
Ø Identify -> state the impact on the financial statements
Ø Use the formulation “There is a risk that balance XY is over/
understated”
Ø On a top of it there is additional risk of not detecting this
misstatement (detection component of audit risk)
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ACCA F8 - Audit and Assurance
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Audit Risks Examples
Business risk Ø Company operating in fast technologically developing industry -> in case the Company falls behind
with development there is a threat of loss of market share, customers and revenue decrease.
Ø Company sells good to the customers (for credit) and the customers pay with the delays- > Company may have a problem to collect cash on time - > liquidity issue
Audit risk Ø Company operating in fast technologically developing industry -> in case the Company falls behind
with development there is a threat that the Company will be left with unsalable inventory. There is a risk that Company will not follow requirements of IAS 2 Inventory and will not value the inventory in lower of cost or NRV. Inventory may be overstated.
Ø The Company sells good to the customers (for credit) and the customers are not credible - > Company may have a problem to collect cash on time. There is an audit risk the receivables value is overstated and the provision for bad debts understated.
Ø There is a pressure from management to complete the audit in short time period -> this may increase detection risk because auditor will have less time to perform audit procedures and may overlook material misstatement. Or Auditor accepted a new engagement > this may increase detection risk because the auditor doesn’t have experience with this client (may not be aware of all risks/issues/a higher risk the auditor overlook material misstatement)
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Audit Risks Question 1 Dec 14 (Section B – Q 2 Seagull)
Extract from the scenario
…….
The finance director has informed your audit manager that he expects increased inventory levels at the
year end. He also notified your manager that one of Eagle’s key customers has been experiencing
financial difficulties. Therefore, Eagle has agreed that the customer can take a six-month payment
break, after which payments will continue as normal. The finance director does not believe that any
allowance is required against this receivable.
…..
Required:
Explain FIVE audit risks, and the auditor’s response to each risk, in planning the audit of Eagle Heating Co. (Total: 10 marks)
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Audit Risks Question 1 Dec 14 (Section B – Q 2 Seagull)
• Calculate time available and time to finish - > 10 marks * 1.8 min/mark - > approx. 18 minutes -> make a note, when you have to finish
• Requirements - How much to write / how many risks? ü Explain FIVE audit risks
-> 1 audit risk = 1 mark ü Explain auditor’s response to EACH identified risk
-> 1 response = 1 mark
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Audit Risks Question 1 Dec 14 (Section B – Q 2 Seagull)
• Start reading and annotate the text immediately (highlight the audit risks)
• Check a number of the audit risk identified in the scenario and compare with the requirements
• Start writing Audit risk # 1 and assign immediately appropriate Auditor’s response
• Recommended format of presentation:
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Audit Risk Auditor’s response
1. 1.
2. 2.
…. ….
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Audit Risks Question 1 Dec 14 (Section B – Q 2 Seagull)
The finance director has informed your audit manager that he expects
increased inventory levels at the year end. He also notified your
manager that one of Eagle’s key customers has been experiencing
financial difficulties. Therefore, Eagle has agreed that the customer can
take a six-month payment break, after which payments will continue as
normal. The finance director does not believe that any allowance is
required against this receivable.
ACCA F8 - Audit and Assurance Slide 24
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Audit Risks Question 1 Dec 14 (Section B – Q 2 Seagull)
Audit Risk Auditor’s Response
1. A key customer of Eagle has been experiencing financial difficulties and Eagle has agreed a six-month payment break. Finance director does not believe an allowance is required. If the customer is experiencing difficulties, there is an increased risk that the receivable is not recoverable and hence is overvalued. 2. ………………..
1. Discuss with the finance director why he feels an allowance is not required. Review whether any general allowance for uncollectable accounts is sufficient to cover the amount of this receivable. If the six-months payment break has now ended, review after date cash receipts for this customer to assess whether any payments have been made 2. ………………..
ACCA F8 - Audit and Assurance Slide 25
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Audit issue and Type of Audit Report
You will be given: • Short description of the audit issues identified during the audit,
figures for materiality calculation • 1-3 short descriptions of audit issues Typical requirements: • Discuss the issue (what is the problem) • Explain the procedures / steps to form conclusion • Describe the impact on the audit report
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Audit issue and Type of Audit Report
Mark allocation (usually given to each scenario) § One mark for well explained issue § One mark for well described correct accounting treatment § One mark for materiality calculation § One mark for evaluation of the impact on the audit report § One mark per well explained type of modification § One mark per well described audit procedure (if it is required)
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Audit issue and Type of Audit Report
Approach (following marks allocation)
1. Issue - discuss/explain the problem 2. Accounting treatment - treatment suggested by the accounting
standard; presentation & disclosure has to materially correct as well 3. Materiality – calculation; state whether the matter is material 4. Impact - material or pervasive 5. Apply to scenario – adjustment needed? Impact on opinion? 6. Modification - opinion / report 7. Reason - modification
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Audit issue and Type of Audit Report June 2011 (a part of Q # 5)
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You are the audit manager of Daffy & Co. The following additional issues have arisen during the course of the audit of Minnie Co. Profit before tax is $10m.
(i) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is $2·5m and the element charged to land only is $0·7m.
(4 marks)
(ii) Minnie Co’s computerised wages program is backed up daily, however for a period of two months the wages records and the back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these two months are $1.1m. (4 marks)
(iii) Minnie Co’s main competitor has filed a lawsuit for $5m against them alleging a breach of copyright; this case is ongoing and will not be resolved prior to the audit report being signed. The matter is correctly disclosed as a contingent liability. (4 marks)
Required:
Discuss each of these issues and describe the impact on the audit report if the above issues remain unresolved.
Note: The mark allocation is shown against each of the issues above. Audit report
extracts are NOT required.
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Audit issue and Type of Audit Report June 2011 Q # 5 (answer plan for issue (i))
4 marks = 4 points need to be explained Depreciation
1. Issue – Non-compliance with IAS 16 (PPE) – depreciation should be only be charged on buildings
not on land
2. Accounting treatment – depreciation from the land should be cancelled
3. Materiality calculation - the error represents 7% of PBT ($ 0.7 m / $ 10 m)
4. Impact is considered as material but not pervasive - if management doesn’t change FS, the qualified
audit opinion considered necessary
5. The opinion paragraph would be qualified “except for” because of material disagreement
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Audit issue and Type of Audit Report Full answer for issue (i)
ü Depreciation has been provided on the land element of property, plant and equipment and this is
contrary to IAS 16 Property, Plant and Equipment, as depreciation should only be charged on
buildings > 1 mark
ü The error is material as it represents 7% of profit before tax (0·7m/10m) and hence management
should remove this from the financial statements. > 1 mark
ü If management refuse to amend this error then the audit report will need to be modified. As
management has not complied with IAS 16 and the error is material but not pervasive then a qualified
opinion would be necessary. > 1 mark
ü A basis for qualified opinion paragraph would need to be included explaining the material
misstatement in relation to the provision of depreciation on land and the effect on the financial
statements. The opinion paragraph would be qualified ‘except for’ – due to material misstatement > 1
mark
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Preparation tips
Resources Approach to home study and revision
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Practice past exams questions and examiner’s reports
Start from the latest and work backwards http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/past-exam-papers.html
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Read technical articles
Start by reading the most recent articles http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles.html
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Further ACCA resources
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Self study guides http://www.accaglobal.com/gb/en/student/your-study-options/choosing-to-self-study.html
ACCA Learning community https://www.accalearningcommunity.com/ ACCA - F8 Audit and Assurance aims and updates http://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f8.html
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Approach to home study / revision
Study syllabus topics • from study text • from technical articles
Question practice • analyze the requirements • plan the answers on your own • assess quantity / quality
• check suggested solution and marking scheme • read examiner’s comments
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Good luck with your exams...
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Michaela Plucarova PwC’s Academy [email protected]