CONTENT OF IRC AAA NOTES

NO. TOPIC TOTAL PAGES

1 Recap & structure of AAA 1–5

2 Exam Technique (Risk assessment) 1 – 24

3 Professional marks 1–9

4 Group Audit Risks 1–7

5 Matter to be considered & Audit Evidence 1–5

6 Audit Procedures & Audit Evidence 1–4

7 Reporting on audit report/audit opinion 1 – 19

8 Example of unmodified audit report 1–4

9 Quality Management 1–7

10 Ethic 1 – 16
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TOPIC: WHAT’S NEW IN AAA?

ITEMS OUTDATED SYLLABUS SEPT 22 ONWARDS
Marks 96 technical marks 96 technical marks

4 professional marks 4 professional marks

Materiality Legal claim of $10 million Section A

presentation represents 20% of profit 1. Follow instruction in question
before tax, 2% of revenue (PBT / Total Asset / Revenue)
and 5% of total asset,
hence it is material to FS. 2. Calculate a materiality range
(Lower end & higher end)

3. Set and justify a materiality level

communication
analysis and evalution 4. Apply the materiality level throughout
comercial acumen
the question
scepticism.
Refer Note: Exam technique (Risk
Assessment)

Section B
1. Calculate materiality for each issue
2. Use the most relevant benchmark

‘or’

Sometimes, examiner has determined the

materiality level, so there is no need to
recalculate the level. Please use the given
materiality level then.

Quality Quality control Quality management

management
Engagement Engagement
Quality Control Review Quality Review

6 elements of 8 elements of
system of quality control system of quality management

2 new technical articles!

Social &
Environmental
reporting

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TOPIC : RECAP ON AAA SYLLABUS

Other engagements:  Money laundering

 Non-compliance with laws
 Due diligence
Audit and regulation (NOCLAR)
 Prospective Financial
 Ethic
Information
 Fraud
 Forensic Audit
 Professional Liability
 Key Performance Indicator
 Quality Management

TOPIC : UPDATED QUESTION STRUCTURE

Total marks
Section A B
Question 1 2 3
Technical marks 40 20 20 80

Professional marks 10 5 5 20

Total marks 50 25 25 100

Based on all 4 professional skills:

- Communication
- Analysis and evaluation Based on ONLY 3 professional skills:
- Scepticism
- Analysis and evaluation
- Commercial acumen
- Scepticism
- Commercial acumen

 Exam duration: 3 hours and 15 minutes via CBE platform

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either

SECTION QUESTION MARKS Syllabus

A 1 50 A+B+C+D +F
planning
BR + AR + Audit procedure (group/ single entity)
stage.

ethics
fraud + Pros
libiality.

QM + CAP.

B 2 25 E - completion stage impact to opinion and report

criticize
soalan related to report reporting to tcwg.

3 25

one of the non-

audit.

A+B+C+D+F
issue mtc + audit evidence
explanation (standatd)
impact to fs * sufficiency and appropriateness + recommend further procedures
* CAP - acceptance / tender.
+ evidence

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TOPIC : EXAM TECHNIQUE - RISK ASSESSMENT

1. Type of question:

 Business Risk (BR)

 Risk of Material Misstatement (RMM) *over/ under- standards.
 Audit risk (AR) * DR
 Combination of Analytical Procedure (AP) + RMM or AP + AR

2. Nature of question:

 Will be tested in Question 1

 Briefing Note format
 Many exhibits 1. if new client if question is Audit Risk - 1st priority new client
- DR
 Set at planning stage
 Carry big marks 2. prioritise issue that is material + relate to high judgement/
estimates. eg: goodwill

3. *only significant risk - relates to estimates.

split between cl and ncl --- X * interest charge

If Q1 ask AUDIT RISK // RISK OF

MATERIAL MISSTATEMENT, you need
to PRIORITISE THE RISKS

If Q1 ask BUSINESS RISK, NO NEED to

Well explained prioritise the risks since you need to
answers will naturally give SIGNIFICANT BUSINESS RISK ONLY
score professional
marks

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3. Exam Technique

3.1 BUSINESS RISK

3.1.1 Exam Technique (think as U = Businessman)

Marks
Step 1: Issue 0.5m

Step 2: Business risk 0.5m – 1m

Step 3: Impact of business risk on business objective 0.5m – 1m

1.5m – 2m

Examples:
S1 Half of its revenue stream is coming S1 Co A spend most of their cash on
from overseas sales research and development.

S2 Risk is that Co A may expose themselves S3 S3: This may put pressure on their cash
to foreign exchange losses when the + flow, hence S2: there is a risk that Co A
fluctuation of exchange rate is in S2 may not have sufficient fund to finance
adverse of Co A. its working capital or business
operation.

This may be the case since currently, Co

A is in a negative cash flow position.

S3 Hence, this will adversely affect its S3 Therefore, this may cause disruption in
profit. its business operation.

 Not necessarily need to follow the steps in sequence. You can write however you want
but please ensure all steps are there.
 Where applicable, try to link/corroborate your answer with information from other
exhibits.
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3.1.2 Common mistakes
 Please don’t give business solution
Example:
S1 Half of its revenue stream is coming from overseas sales

S2 Risk is that Co A may expose themselves to foreign exchange losses when fluctuation of
exchange rate is in adverse of Co A.

S3 Hence, this will adversely affect its profit. Therefore, Co A should enter into hedging
arrangement to minimize the chance of suffering from the foreign exchange losses.

 Please don’t end your answer with these  Overstatement/Understatement/Material

Misstatement

3.1.3 Examples of easy issue for BR

Co A involves in banking industry

S1 Co A involves in banking industry which is likely to be regarded as a highly
regulated industry.

S2 There is a risk that Co A might breach the rules and regulations within the industry,
leading to Co A to be penalized.

S3 The penalty payment may give adverse impact of its cash flow. Besides, if the issue
leaks out to public, thus, the reputation of Co A will be tarnished which will
subsequently affect its sales in future.

Co A diversify into new market (animal health market)

S1 Co A diversify into new market which is the animal health market.

S2 There is a risk that Co A might be too focus on the diversification of the new
market which is the animal health market, thus neglecting its existing market of
human health market.

S3 Due to that, the operation of the existing market may suffer as a result.

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Co A diversify into new market in foreign country

S1 Co A diversify into new market in foreign country which may subject to different
law and regulation.

S2 There is a risk that Co A might not be too familiar with the foreign law and
regulation, hence might breach the rules and regulation.

S3 If the issue leaks out to public, thus, the reputation of Co A will be tarnished which
will subsequently affecting its sales in future. // You can also discuss about
potential penalty.

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3.2 RISK OF MATERIAL MISSTATEMENT/AUDIT RISK/FS RISK
3.2.1 Exam Technique

Marks
Step 1: Materiality calculation, if any *

Step 2: Issue 0m

Step 3: Accounting Standard / How the issue should be 0.5m

accounted

Step 4: Risk on Accounting Standard/ What management 0.5m

has done wrong

Step 5: Impact to FS (both legs) 0.5m – 1m

Total marks for explanation 1.5m – 2m

Example:
S1 N/A

S2 Half of its revenue stream is coming from overseas sales

S3 IAS 21 requires foreign currency transaction to be initially translated using spot rate

S4 Risk is that Co A does not initially translate the foreign currency transaction using spot
rate // Risk is that, Co A uses wrong rate to translate the foreign currency transaction //
Failure to do so, … S5 ...

S5 Thus, it will cause revenue to be misstated // mm in FS

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*Materiality TIPS!

PBT
1. Follow instruction given in the question
TA

REV

2. Calculate materiality range

3. Set and justify a materiality level

Since ABC Co is our new client, this will lead to high
detection risk because we are not familiar with its
If new client Lower end business.

Hence, materiality will be set at the lower level of the

range which is at $XX.

Despite ABC Co is our existing client, there are changes to

the operation of the company during the year such as
If existing Lower end investment in joint venture and introduction of a new
client premium delivery pass which increase the level of risk in
FS.

Therefore, materiality level will be based on lower end,

which is at $XX.

Middle There are changes to the operation of ABC Co during the

year such as investment in joint venture and introduction
of a new premium delivery pass which increase the level
of risk in FS.

However, since ABC Co is our existing client which we

have cumulative knowledge and experience auditing the
company, thus, materiality will be based on middle range
which is at $XX.

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 For 1 general issue, you may create max 2 risks based on the accounting standard. Any 2
from the accounting standard
IAS 21 __Initial: Foreign currency transaction needs to be initially translated using spot
rate
IAS 21 __Sub 1: As at YE, monetary item and non-monetary item need to be translated
using closing rate and historical rate respectively

IAS 21 __Sub 2: Any gain or loss arising from the translation need to be recognized in
profit or loss
IAS 21__Disclosure:

 However, if examiner already specified the issue related to the overseas sales, so please
address part of accounting standard that is related to the issue first.

Example:
Half of its revenue stream is coming from overseas sales. For the gain or loss arising from
the translation of the foreign currency transaction, Co A has recognized it within OCI.
S1 N/A

S2 Half of its revenue stream is coming from overseas sales. For the gain or loss arising from
the translation of the foreign currency transaction, Co A has recognized it within OCI.

S3 IAS 21 requires any gain or loss arising from the foreign currency translation need to be
recognized in profit or loss.
S4 From the case, Co A has wrongly recognized it within other comprehensive income
instead of profit or loss.

S5 Thus, it will cause misstatement in both other comprehensive income and profit or loss.

3.2.2 Common mistake

 For S3, please specify what is required by accounting standard.

Inventory need to be measured as per IAS 2

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3.2.3 Tips
 To max points, discuss on (initial, subsequent, disclosure).
 Sometimes, it need bridge to ensure a well-connected answer.
 For S3: if the accounting standard have many criteria (>3), write at least half of those

3.2.4 Examples of easy issue for AR/RMM

Co A is a listed company
S1 - S1 -
S2 Co A is a listed company S2 Co A is a listed company

S3 - S3 IAS 33 requires earning per share of

Co A to be disclosed in FS

S4 Risk is that, management may be S4 Risk is that no disclosure or

bias when preparing the FS such as insufficient disclosure is made in the
by overstating assets and incomes FS # // Failure to do so … S5 …
and understating liabilities and
expenses in order to produce
favourable FS *

This may be the case since Co A

makes a revision over the useful life
of its asset during the year which
lead to a reduction in depreciation
cost.

S5 Hence, it will cause material S5 Hence, it will cause material

misstatement in FS misstatement in FS

* To strengthen this risk -> need to link to # Use risk related to IAS 33 only when
any part of the scenario that may client is newly listed during the year (1st
evidence potential manipulation in FS time listed = prone to make error)

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Currently Co A is negotiating with bank to increase their financing limit
S1 -
S2 Currently Co A is negotiating with bank to increase their financing limit
S3 -
S4 Risk is that management may be bias when preparing the FS such as by
overstating assets and incomes and understating liabilities and expenses in order
to produce favourable FS. This is to increase the chance of successful negotiation.

S5 Hence, it will cause material misstatement in FS

Bonus for directors is determined based on profitability of Co A

S1 -
S2 Bonus for directors is determined based on profitability of Co A
S3 -
S4 Risk is that, management may be bias when preparing the FS such as by
overstating incomes and understating expenses in order to produce favourable
FS. This is for the sake of getting the bonus

S5 Hence, it will cause overstatement in income and understatement in expense

Co A sells food and beverages. During the year, one customer suffer illness from
eating food sold by Co A.
S1 -
S2 Co A sells food and beverages. During the year, one customer suffer illness from
eating food sold by Co A. So, there is a risk that the customer may sue Co A.

S3 IAS 37 requires provision need to be recognized when there is present obligation,

probable outflow and cost can be measured reliably.

S4 Risk is that, Co A may not recognise provision for compensation claim when the
outflow is probable

S5 Hence, it will cause understatement in expense and provision

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Co A sells food and beverages. During the year, one customer suffer illness from
eating food sold by Co A. The Customer sue Co A and lawyer states that there is 80%
probability of Co A loses the case. The compensation claim approximately $1 million
PBT: $15 million
S1 Compensation claim of $15 million represents 6.7% of profit before tax. Hence, it
is material to FS

S2 One Customer sue Co A and lawyer states that there is 80% probability of Co A
loses the case.
S3 IAS 37 requires provision need to be recognized when there is present obligation,
probable outflow and cost can be measured reliably.

S4 Since lawyer identify that there is 80% of chance of Co A losing the case so it is
likely that the outflow of compensation claim is probable. So there is a risk that
Co A fails to provide provision for compensation claim when the outflow is
probable.

S5 Hence, it will cause understatement in expense and provision

Co A incur research and development cost of $1million for its new product.
Total asset = $40 million
S1 Research and development cost of $1 million represents 2.5% of total asset.
Hence, it is material to FS

S2 Co A incur research and development cost of $1million for its new product.

S3 IAS 38 requires research cost to be expensed off whereas development cost to be

capitalised as asset when it meets capitalization criteria such as probable inflow
of economic benefit, cost can be measured reliably and has adequate resources
to complete the development (must give at least half of the criteria)

S4 There is a risk that Co A may wrongly capitalise research cost as asset or may
wrongly capitalise development cost that failed to meet capitalization criteria as
asset.
S5 Hence, this may cause asset to be overstated and expense to be understated.

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Co A incur research and development cost of $1million for its new product. All costs
incurred have been capitalised
Total asset = $40 million
S1 Research and development cost of $1 million represents 2.5% of total asset.
Hence, it is material to FS

S2 Co A incur research and development cost of $1million for its new product.

S3 IAS 38 requires research cost to be expensed off whereas development cost to be

capitalised as asset when it meets capitalization criteria such as probable inflow
of economic benefit, cost can be measured reliably and has adequate resources
to complete the development (must give at least half of the criteria)

S4 Since Co A has capitalised all cost incurred as asset, this it seems to indicate that
the research cost has been wrongly capitalised instead of expense it off.

For development cost that has been capitalised, there is a risk that the cost does
not meet the capitalization criteria.

S5 Hence, these may cause asset to be overstated and expense to be understated.

Austin & Co is newly appointed as the auditor for Co A during the year.
S1 -

S2 Austin & Co is newly appointed as the auditor for Co A during the year.
S3 -
S4 Since Co A is our new client, thus, there is a risk that opening balances and
+ comparative information may not be correct leading to FS to be misstated.
S5
Thus, we should plan to audit the opening balances carefully to ensure that
opening balances and comparative information are both free from material
misstatement.

S4 Besides, as our firm does not have experience auditing Co A, thus it is difficult for
+ us to detect material misstatements.
S5
Hence, this will increase the detection risk.

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3.3 CBE EXAM TECHNIQUE – QUESTION 1 (BR/RMM/AR without analytical procedure)

Steps Details of Technique

1. Read requirement

2. Read introductory window & spot:

- Name of auditor
- YE
- Name of client

3. (i) Read Exhibit with QS requirement = Exhibit 1

(ii) Prepare BRIEFING NOTES format:

- Copy & change To/From
- Add introduction
- Header (copy whole question requirements & marks)
- conclusion

(iii) Copy points, if any

4. Read Introductory window & copy:

- Name of auditor
- YE
- Name of client
- any other relevant info
- Points, if any

5. Read Exhibit 2 & identify points & copy points into Briefing Notes window

6. Repeat step 5 for next exhibits

7. Calculate how many points needed & write full answer

8. Prioritise the risks (applicable for AUDIT RISK & RMM only) & update prioritization of
risk in “conclusion” section

9. Remove unnecessary question requirements (verbs & marks) from main heading

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3.4 ANALYTICAL PROCEDURE

3.4.1 Keyword in question

MJ16 Identify and explain audit risk. You should utilize analytical procedure to
identify audit risk

MJ17 Evaluate risk of material misstatement. Your evaluation should utilize

analytical procedure as a method of identifying risk

S18 Evaluate the audit risk to be considered in planning the Group Audit. You
should use analytical procedure to assist in identifying audit risks

Specimen Evaluate the audit risk to be considered in planning the Group Audit. Yor
S18 evaluation should utilize analytical procedures in identifying audit risks

3.4.2 What is analytical procedure?

Compare, compare, and compare:

Ratio Ex: Compare current year trade receivables day with last year

Trend Ex: Compare current year revenue with last year

Others SOPL vs SOFP

Ex: Liability bearing interest vs Finance cost

SOPL vs SOPL
Ex: Changes in revenue vs Changes in cost of sale

SOPL/SOFP vs Other info

Ex: Staff cost vs No. of staff

 We will use analytical procedure to assist auditor to identify risk to FS

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3.4.3 Marks
Calculation (max 5m – 6m) : utilize calculation to gain marks
1m For each ratio and its comparative calculated
0.5m For each trend calculated in %

Explanation
1m – 1.5m Risk from analytical procedure
1.5m – 2m Risk from accounting standard (Refer 3.2.1)

3.4.4 Exam Technique

List of ratios:

No. Ratio Formula

1. Gross profit margin Gross profit x 100%
Revenue

2. Operating profit margin Operating profit x 100%

Revenue

3. Return on capital employed Operating profit x 100%

Equity + NCL

4. Current ratio Current asset

Current liability

5. Quick ratio Current asset- Inventory

Current liability

6. Trade payable day Trade payable x 365

Cost of sale

7. Interest cover Operating profit

Finance cost

8. Gearing ratio D or D
E D+E

9. Inventory day Inventory x 365

Cost of sale

10. Trade receivable day Trade receivable x 365

Revenue

11. Effective tax rate Tax expense x 100%

PBT
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Gross profit margin Gross profit x 100%
Revenue

(i) Check relationship between revenue and cost of sale

Revenue Cost of sale Risk

10% 10%

10% 4%

4% 10%

(ii) If additional information is given:

Revenue 4%

Cost of sale 10% Note 1: Included in cost of sale is provision for compensation claim

(iii) General

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Operating profit margin Operating profit x 100%

Revenue

(i) Check for any significant movement in revenue and operating expense

Operating profit may be due to: Operating profit may be due to:
Revenue Operating Risk Revenue Operating Risk
expense expense
30% 15% 15% 30%

30% 4% 4% 30%

4% 30%

4% 30%

(ii) If additional information is given:

SOPL
Impairment loss during the year = $30 million
2021 2020
Operating expense $27m $10m

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Return on capital employed Operating profit x 100%

Equity + NCL

Current ratio Current asset

Current liability

Quick ratio Current asset- Inventory

Current liability

(i) Increase/decrease for ratio > 1.0 / < 1.0

(ii) Decrease until ratio < 1.0

S1: x

S2:
Current ratio has decreased from __ in year __to __ in year__.
It may indicate that Client’s Name may face difficulty to meet its short-term liabilities when it falls due.
Prolonged deterioration in current ratio may led to the increase in going concern risk.

S3: IAS 1 require material uncertainty over going concern need to be disclosed in the financial
statement.

S4: Failure to do so S5: may lead to the material misstatement in the financial statement.

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Trade payable day Trade payable x 365
Cost of sale

Interest cover Operating profit

Finance cost

(i) Increase/decrease but ratio > 1.0 / < 1.0

Liability bearing interest Finance cost Risk

(ii) Increase/decrease but ratio < 1.0

S1: x

S2:
Interest cover has increase/decrease from __ in year__ to __ in year__.
It may indicate that Client’s Name may face difficulty to pay interest payment when it falls due. This
will increase going concern risk.

S3: IAS 1 require material uncertainty over going concern need to be disclosed in the financial
statement.

S4: Failure to do so S5: may lead to the material misstatement in the financial statement.

Gearing ratio D or D
E D+E

You can use risk related to borrowing facility i.e. loan, provided that client took out loan during the
year.

S1: calculate materiality for loan

S2:
Gearing ratio has _____________ from __ in year__ to __ in year__.
During the year, a loan is taken out during the year.

S3:
IFRS 9 requires the loan to be amortised using effective rate.

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S4: Failure to do so S5: may cause liability and finance cost to be materially misstated.

S3:
IFRS 7 also requires numerical and narrative disclosure related to the financial liability need to be
disclosed in the notes to FS.

S4: Failure to do so S5: may cause FS to be materially misstated.

Inventory day Inventory x 365

Cost of sale

(i) Increase in ratio

S1: x

S2:
Inventory day has increased from __ days in year__ to __ days in year__.
It may indicate that their inventory takes longer period to be sold to customer.

S3: x

S4: Risk is that management may not provide sufficient provision for slow moving stock.

S5: This may lead to the overstatement in inventory.

Or

S1: x

S2:
Inventory day has increased from __ days in year__ to __ days in year__.
It may indicate that their inventory takes longer period to be sold to customer and the unsold inventory
may be prone to obsolescence.

S3: IAS 2 require unsold inventory to be measured lower of its cost or net realisable value.

S4: Risk is that management may not measure the unsold inventory using lower of its cost or net
realisable value.

S5: This may lead to the overstatement in inventory.

(ii) Decrease in ratio

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Trade receivable day Trade receivable x 365
Revenue

(i) Increase in ratio

S1: x

S2:
Trade receivables day has increase from __ days in year__ to __ days in year__.
It may indicate that management takes longer period to collect payment from its receivables.

S3: x

S4: Risk is that management may not provide sufficient provision for doubtful debt.

S5: As such, it may lead to the overstatement in receivables.

(ii) Decrease in ratio

Effective tax rate (ETR) Tax expense x 100%

PBT

(i) Increase/ decrease in ETR

Tax expense DTL / DTA / PBT Risk

(ii) General answer

1. If ETR SIGNIFICANTLY 

2. If ETR SIGNIFICANTLY 

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3.5 CBE EXAM TECHNIQUE – QUESTION 1 (RMM/AR with ANALYTICAL PROCEDURE)

Steps Details of Technique

1. Read requirement

2. Read introductory window & spot:

- Name of auditor
- YE
- Name of client

3. (i) Read Exhibit with QS requirement = Exhibit 1

(ii) Prepare BRIEFING NOTES format:

- Copy & change To/From
- Add introduction
- Header (copy whole question requirements & marks)
- conclusion

(iii) Copy points, if any

4. Read Introductory window & copy:

- Name of auditor
- YE
- Name of client
- Any other relevant info
- Points, if any

5. Read Exhibit 2 & identify points & copy points into Briefing Notes window

6. Repeat step 5 for next exhibits

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Steps Details of Technique
7. Once reached Exhibit SOFP / SOPL:
- Close Briefing Notes Window
- Open Spreadsheet window
- Put header appendix, example:

Appendix 1: SOFP

Appendix 2: SOPL

- Copy SOFP & SOPL into spreadsheet

- To add:

- Calculate maximum 5 – 6 ratios in spreadsheet & put header:

Appendix 3: Ratio

- Close Spreadsheet window

- Based on Exhibit SOFP & SOPL, identify any points & copy into Briefing
Notes Window (focus on Notes to FS)

8. Continue reading next exhibit, if any & identify points & copy into Briefing Notes
Window

9. Once read all exhibits, open Spreadsheet window:

- Go thru item in SOFP & SOPL line by line to identify risk and copy into
Briefing Notes Window.

You can look out for inconsistent relationship between the figure/any
significant variance. (You can ignore any line item that we already
identified the risk)

- Go thru ratios too to identify risk and copy into Briefing Notes Window

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10. Calculate how many points needed based on the marks & write full answer

11. Prioritise the risks (applicable for AUDIT RISK & RMM only) & update prioritization of
risk in “conclusion” section

12. Remove unnecessary question requirements (verbs & marks) from main heading

3.6 TIPS FOR EFFICIENT USE OF CBE PLATFORM

Spreadsheet
- Best view is 75%

- If Crtl C & Crtl V do not work on spreadsheet, you need to use ICON:

To copy

To paste

- When you copy SOFP/SOPL into spreadsheet with negative figure, please make sure
to remove the negative sign in ( ) form, so that variance ($ and %) can be calculated.

Word processor
- always ensure your word processor is at your right-hand side & any exhibit that you
open is always at your left-hand side

- Please utilize Ctrl C, Ctrl V, Ctrl B, Ctrl Z function

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3.7 IMPORTANT NOTE – DIFFERENCE BETWEEN CBE PRACTICE PLATFORM VS LIVE EXAM

Selecting text in a PDF exhibit

Copying and pasting into Spreadsheet Responses

 In the CBE Practice Platform, you can paste text copied from exhibits,
requirements/tasks or the scratchpad into a spreadsheet response either by
selecting the cell, double-clicking the cell or selecting the formula bar and then
selecting Ctrl-V

 In the Live Exam, you can only do this by double-clicking the cell or selecting the
formula bar and then pressing Ctrl-V

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TOPIC: PROFESSIONAL MARKS

Professional marks are allocated as follows:

Question Question Question Total marks

1 2 3
Technical marks 40 20 20 80

Professional marks 10 5 5 20

Total marks 50 25 25 100

Marks will be assessed based on 4 key professional skills:

1 3

2 4

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1 Professional skills: COMMUNICATION

1. This skill will be tested only in QUESTION 1

2. Allocated professional marks for this skill is 4 MARKS
3. How to score 4 MARKS:

Marks Details Illustration to score

marks
1m Format & structure
Notes (i)
1m Style & language

1m Adhering to requirements Notes (ii)

1m Effectiveness (relevant & linked/tailored to the scenario) Notes (iii)

Notes (i) – prepare BRIEFING NOTES format

Exhibit 1: Partner’s email

To: Audit manager

From: Norma Star, Audit engagement partner
Subject: Audit planning for the Crux Group
Date: 1 July 20X5

Hello

I have provided you with some information which you should use to help you with planning the audit
of our new client, the Crux Group (the Group), for the financial year ending 30 September 20X5. Based
on the analysis I have done on this industry, it is appropriate for overall materiality to be based on the
profitability of the Group as this is a key focus for investors and providers of finance.

I require you to prepare briefing notes for my own use, in which you:

(a) Using the information in all exhibits, evaluate and prioritise the significant audit risks to be
considered in planning the Group audit.

Note: You are NOT required to consider audit risks relating to foreign exchange transactions
and balances as this will be planned separately. (25 marks)

(b) Design the principal audit procedures to be performed on the segmental information relating to
the Group’s revenue. (5 marks)

Using the information in Exhibit 4:

(c) Evaluate the matters to be considered in deciding whether Pegasus & Co should accept the
engagement to provide advice on the Group’s social and environmental information. (10 marks)

Thank you

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Briefing Notes
To: Norma Star, Audit engagement partner
From: Audit manager
Subject: Audit planning for the Crux Group
Date: 1 July 20X5

Introduction
This briefing notes include evaluation of audit risks to be considered in
planning the Group audit risk which has been prioritised accordingly based on
its significance, principal audit procedures to be performed on the segmental
information relating to the Group’s revenue and matters to be considered in
deciding whether Pegasus & Co should accept the engagement to provide
advice on the Group’s social and environmental information. (Copy key
requirements from question requirement + include keyword “prioritise”
(applicable for RMM/AR ONLY)

(a) Audit risks To insert sub-heading,

where relevant

(b) Audit procedures to be performed on the segmental information

(c) Matters to be considered in deciding whether Pegasus & Co should

accept the engagement to provide advice on the Group’s social and
environmental information.

Conclusion
This briefing notes includes a number of significant audit risk such as risks
relating to xx, xx, xx.

Due to the risks identified, audit team with appropriate expertise need to be
assigned. This briefing notes also cover principal audit procedures to be
performed on the segmental information relating to the Group’s revenue and
matters to be considered in deciding whether Pegasus & Co should accept the
engagement to provide advice on the Group’s social and environmental
information.

 Enough with Bold, no need to waste time to underline and etc your answer

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Notes (ii) – Adhering to requirements

Please adhere to this requirement.

Please adhere to all requirements.

If you accidentally write business risk answer when questions

ask about audit risk or write any answers that against the
question requirements, then you’re going to lose this 1 mark.

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Notes (iii) – Effectiveness (relevant & linked/tailored to the scenario)

Sample answer 1:

Revenue recognition

Revenue should be recognized when performance obligation is satisfied.

There could be a risk that revenue is recognized too early which is before
performance obligation is satisfied.

This will cause revenue to be overstated and deferred income to be

understated.

VS

Sample answer 2:

Revenue recognition

The company offers a membership scheme whereby, for an annual

subscription, members can use the facilities at any of the centres.

IFRS 15 requires revenue to be recognized when performance obligation has

been satisfied over time which in this case revenue likely to be recognized
over the membership period.

Risk is that the company may recognize the annual subscription in full upon
payment by the members as its revenue instead of spreading it over 1 year.

This could lead to the overstatement in revenue and understatement in

deferred income.

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2 Professional skills: ANALYSIS AND EVALUATION

- Candidates need to demonstrate their assessment of a given scenario and the

application of their knowledge.

TIPS Where relevant, to link information from various parts of

the scenario // different exhibits

Example:

incorporate any relevant financial information (calculation

for materiality // trend // ratio) from Exhibit: SOFP / SOPL
to support your risk answer or etc.

- Examples of issues to be assessed:

 Financial reporting = Accounting standard
 Ethical
 Legal and regulatory issue = NOCLAR related
 Impact of those issues on audit process

- Ensure any recommendation for further actions are relevant to the point of the
engagement (Planning / completion / reporting stage)

- Able to analyse the impact of a course of action, for example, if client does not amend
a material misstatement in the FS, candidates need to be able to explain the
implications on the auditor’s report.

- Identifying where data or information appears to be omitted or where further analysis

is needed to make a recommendation is also important, as that means a full evaluation
cannot be performed, for example, understanding the basis of a provision and
understanding how the audit team can gain sufficient and appropriate audit evidence
in the circumstances.

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3 Professional skills: SCEPTICISM

- Candidates are expected to demonstrate professional scepticism and judgement when

assessing the information given in the scenarios. This is key when asked to evaluate the
significant risks in a scenario, or challenging information which has been provided.

- Candidates need to prioritize risks (audit risks / risks of material misstatement only)
in their answers and in a brief conclusion, justifying their decision.

Sample answer 1:

Revenue recognition

The company offers a membership scheme whereby, for an annual subscription, members
can use the facilities at any of the centres.

IFRS 15 requires revenue to be recognized when performance obligation has been satisfied
over time which in this case revenue likely to be recognized over the membership period.

Risk is that the company may recognize the annual subscription in full upon payment by
the members as its revenue instead of spreading it over 1 year.

This could lead to the overstatement in revenue and understatement in deferred income.

Risk related to revenue recognition is to be considered as a significant risk since the area
likely to be associated with fraud risk.

In Question 1, also to reflect this Please refer Illustration Notes (i)

TIPS skill in “Conclusion” section. under “COMMUNICATION” skill.

- It is not essential to place all of the risks in order of importance. Instead, to highlight
the most important risks (at least 2 risks) in the scenario.

- Tip to challenge information  to identify and comment on wrong or inappropriate

treatment done by management

to identify issue that doesn’t seem to make sense:

Increase in revenue by 50% but lose major customers during the year

- Candidates need to be sceptical over client-generated-information (i.e., basis of

provision/ useful life of an asset ) and any possible indicator of bias (KPI linked to fin.
Info, in the midst of negotiating for funding or selling shares of the company to others)

- Candidates need to review the audit work and evidence obtained during the
engagement and assess whether it is sufficient to support a decision or information in
an auditor’s report.

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4 Professional skills: COMMERCIAL ACUMEN

- Candidates may be asked to demonstrate their commercial acumen by assessing the

business risks affecting the client at the audit planning stage.

Example:
Specific regulatory requirements or the impact of competition on future business.

- Candidates need to look at external constraints and opportunities where relevant and
also consider the validity/reasonableness of any assumption that the organisation may
be working under, given the external environment.

- Candidates may show commercial acumen by assessing the impact of the engagement
on the audit firm. This may be relevant in a scenario which requires an evaluation of
whether to accept an engagement.

Example:
Whether the audit firm is happy to be associated with the client or industry
Whether audit fee able to cover risk of client and amount of work

EXTRA ADVICE related to professional skills

- Demonstrating professionalism is not about linguistic eloquence or having an

extensive vocabulary or having perfect grammar, it is about the ability to express
points clearly, factually, and concisely and show credibility in what you are saying.

- Avoid repeating points already made. Professionally competent candidates do not

repeat information. They may reinforce a previous point, but this is usually made as a
development of a point rather than repetition.

- Make sure to include the most important & crucial points relating to the
requirement. Use your judgement to consider which points are the most important
and only include additional less important points if you are not sure you have made
enough valid points to achieve all the technical marks available for the requirement.

- Try not to include unnecessary information or make unsupported points. Bland

statement with no application does not demonstrate professionalism.

- Address the requirement. Answering the question asked is an indication of ability of

a candidate to read and understand instructions which represents demonstration of
professionalism expected in the workplace.

- Present your answers in a professional manner –> leave a line between each point.

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DON’T WORRY!

Double marking
Revenue increase by 50% but client More time to answer
lose major clients during the year.
1.8 min per mark  2.25 min per mark
Thus, there is risk of overstatement
Buffer 15 mins
in revenue

Follow question
requirements

Use info in
scenario fully
Well explained
answers will
naturally score
professional
marks

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GROUP RISK

ACQUISITION OF NEW SUBSIDIARY

ISSUE ACCOUNTING RMM/AUDIT RISK IMPACT TO FS
STANDARD
1. Consolidation method
Acquisition during Only post acquisition Wrongly consolidate full Material
the year result of the 12 months financial result misstatement in
subsidiary need to be of the subsidiary into Group FS
(This point will consolidated into Group FS
become a strong Group FS
point when the
acquisition is not
occured at beginning
of the YE)

2. Goodwill (Initial)
- If Question provide “calculation of how goodwill is calculated” so you can write risk
for each line item in the goodwill calculation

- If Question does not provide the calculation, so you can write maximum 2 risks from
the list below [I would suggest you to pick one point for FV of Net asset and another
1, any point that you like. BUT, if question mention that goodwill consists of deferred
and contingent consideration (specific issue), so address those issues first.]

“calculation of how goodwill is calculated”

Purchase consideration
Cash $ xx
Deferred $ xx
Contingent $ xx

(+) Non-Controlling Interest (NCI) $ xx

$ xx
(-) FV of Net asset
FV adjustment ($ xx)
Reorganization cost ($ xx)

GOODWILL $ xx

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ISSUE ACCOUNTING RMM/AUDIT RISK IMPACT TO FS
STANDARD
Cash consideration Incidental cost such Wrongly include incidental Material
as due diligence cost, cost in the calculation of misstatement in
cannot form part of goodwill goodwill
the goodwill
calculation

Deferred Need to be Does not discount the Overstate goodwill

consideration discounted to its consideration to its
present value present value

Or

Inappropriate discount Material

rate being used misstatement in
goodwill

Contingent Need to assign Inappropriate probability Material

consideration probability of of payment being assigned misstatement in
(without deferred payment to the to the contingent goodwill
element) contingent consideration
consideration

Contingent Need to assign “contingent element”

consideration (with probability of
deferred element) payment to the Inappropriate probability Material
contingent of payment being assigned misstatement in
consideration to the contingent goodwill
consideration

Need to be “deferred
discounted to its element”
present value
Does not discount or Material
inappropriate discount misstatement in
rate being used goodwill

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ISSUE ACCOUNTING RMM/AUDIT RISK IMPACT TO FS
STANDARD
Non-Controlling Listed:
Interest (NCI)
FV of NCI need to be Wrong market value of Material
calculated based on share price used misstatement in
the market value of goodwill
its market share price
at the acquisition
date

Not Listed:

FV of NCI need to be Inappropriate assumption Material

estimated based on used in the estimation misstatement in
FV hierarchy of input goodwill
as per IFRS 13

FV of net asset All asset and Not all assets and liabilities Material
liabilities need to be identified at acquisition misstatement in
identified at date to calculate fair value goodwill
acquisition date to of net asset
calculate fair value of
net asset

“nature of FV” Since determination of fair Material

value involves estimates misstatement in
and judgement, so there is goodwill
a risk of inappropriate
assumption used to derive
the fair value amount

FV adjustment “nature of FV” Since determination of fair Material

value involves estimates misstatement in
and judgement, so there is goodwill
a risk of inappropriate
assumption used to derive
the fair value amount

Reorganization Reorganization cost Wrongly include Understate

cost cannot be included in reorganization cost in the goodwill
the goodwill goodwill calculation
calculation

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3. Goodwill (subsequent)
ISSUE ACCOUNTING RMM/AUDIT RISK IMPACT TO FS
STANDARD
Goodwill Need to perform Does not perform Overstatement in
measurement impairment testing impairment testing goodwill and
on goodwill on understatement in
annual basis expense should
impairment loss is
needed.

(please make sure

to include this blue
sentence)

“ if Question Risk assumption used by Overstatement in

mentioned that management may be too goodwill and
management has optimistic and understatement in
perform impairment inappropriate. expense should
testing and anticipate impairment loss is
no impairment loss is needed.
needed”
(please make sure
to include this blue
sentence)

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DISPOSAL OF SUBSIDIARY
ISSUE ACCOUNTING RMM/AUDIT RISK IMPACT TO FS
STANDARD
1. Derecognition (BS)
Subsidiary being Does not derecognize Material
disposed need to be from the Group’s asset misstatement in
derecognized from group FS
the Group’s asset

2. Consolidation (PL)
Need to consolidate Does not consolidate Material
financial result of financial result of disposed misstatement in
disposed subsidiary subsidiary into Group SOPL group FS
into Group SOPL up up until the disposal date
until the disposal
date

FOREIGN SUBSIDIARY
ISSUE ACCOUNTING RMM/AUDIT RISK IMPACT TO FS
STANDARD
1. Translation for consolidation purpose
For consolidation Wrong rate used for Material
purpose, asset and translation of the financial misstatement in
liability need to be result of foreign subsidiary group FS
translated using
closing rate whereas
income and expense
need to be translated
using historical rate

2. Exchange gain or loss

Foreign exchange Wrongly recognise in profit Material
gain or loss arising or loss instead of in other misstatement in
from the translation comprehensive income group FS
of the foreign
subsidiary need to be
recognized in other
comprehensive
income

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ACQUISITION OF NEW ASSOCIATE

ISSUE ACCOUNTING RMM/AUDIT RISK IMPACT TO FS
STANDARD
Wher e an entity holds 20% or mor e of the v oti ng pow er (directly or through subsi diaries) on an inv es tee, i t will be presum ed the inv estor has signific ant i nfl uenc e unl ess i t c an be cl early demons trate d that this is not the cas e

Number of When an entity holds “Ex: if the Group own Material

shareholding 20% or more of 25%” misstatement in
voting power on an group FS
investee, it will be Risk wrongly accounted as
presumed the associate when the Group
investor has does not have significant
significant influence influence over the
unless it can be company → supposedly
clearly demonstrated account as simple
that this is not the investment
case
If the hol ding is l ess than 20%, the entity will be pres umed not to hav e signific ant i nfl uenc e unl ess suc h i nfl uenc e c an be cl early dem ons trated.

Share of profit Need to recognise Does not recognise share Understate

share of profit of of profit Group income
associate as Group
income “if question already Material
recognise share of profit” misstatement in
Group income

Risk of wrong calculation

of share of profit

Share of profit should Does not present share of Material

be presented as a profit of associate as a misstatement in
separate line item in separate line item in the group FS
the Group SOPL Group SOPL

OTHER GROUP ISSUES

ISSUE ACCOUNTING RMM/AUDIT RISK IMPACT TO FS
STANDARD
Intragroup Intragroup Does not eliminate Material
transaction transaction need to intragroup transaction misstatement in
be eliminated in group FS
Group FS

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Unrealised profit Unrealised profit Does not eliminate Material

need to be unrealized profit misstatement in
eliminated in Group group FS
FS

Inventory in transit Inventory in transit may be Understatement

omitted from inventory in inventory
count

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TOPIC : MATTER TO BE CONSIDERED & AUDIT EVIDENCE (MTC & AE)
– related to accounting standard
1. Exam technique

Marks
Step 1: Materiality calculation, if any 1m

Step 2: Issue 0m

Step 3: Accounting Standard / How the issue should be 0.5m

accounted

Step 4: Risk on Accounting Standard / What management 0.5m

has done wrong / If management done correctly,
mention it

Step 5: Impact to FS (both legs) 0.5m – 1m

Step 6: Impact on audit opinion (recent past year question

does not require this step)

Total marks for explanation 1.5m – 2m

2. Question requirement & marks allocation technique:

Identify and explain matter to be considered and audit evidence

To be gathered in respect of the issues (8 marks)

(7 marks)

3. There are TWO types of MTC & AE questions:

Can apply
Accounting Standard

Not able to apply Straight away think

Accounting Standard of what to consider

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4. Example for : Can apply Accounting Standard

Recap: IFRS 5

Initial - need to meet reclassification criteria:

P Price of asset must be reasonable
U Unlikely to have change in the plan
M Management committed to the plan
A Actively locating for buyer
S Sales within 1 years

Subsequent – Asset held for sale no need to depreciate

During the year, Co A reclassify its assets as asset held for sale of $20 million.
Total Asset = 350 million

Initial
S1 The asset held for sale of $20 million represents 5.71% of total asset, hence it is
material to FS.

S2 During the year, Co A reclassify its assets as asset held for sale of $20 million.

S3 IFRS 5 requires non-current asset to be classified as asset held for sale when it
meets the reclassification criteria such as management actively locating for buyer,
the price of assets are reasonable and sales expected to take place within one
year.

S4 Risk is that, Co A may reclassify the non-current asset as asset held for sale but
the assets do not meet the reclassification criteria.

S5 This will cause the non-current asset to be understated but current asset to be
overstated.

Subsequent
S3 If the asset meet the reclassification criteria, thus, IFRS 5 further require Co A to
stop depreciating its assets once the assets has been reclassified to asset held for
sale.

S4 Risk is that, Co A may continue to depreciate the assets even after it has been
reclassified as current asset.

S5 This will understate the current asset and overstate the expense.

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 Since the above scenario is about reclassification of the NCA to AHFS occurred during the year, so
please discuss answer related to initial recognition first followed by subsequent measurement if
you still short of marks.

 But, if the above scenario has an add-on scenario, for example: focus more on price of asset or
any other criteria, you should ensure your answer addressing the given criteria/issue first.

The board of Co A has approved a plan to sell company’s assets of $20 million during the
year and several potential buyers have expressed an interest to buy the asset. Co A expects
that the disposal will take place just after year end.
Total Asset = 350 million

Initial
S1 The asset of $20 million represents 5.71% of total asset, hence it is material to FS.

S2 Co A plans to sell its asset of $20 million.

S3 IFRS 5 requires non-current asset to be classified as asset held for sale when it
meets the reclassification criteria such as management actively locating for buyer,
management committed to the plan to sell, and sales expected to take place
within a year after reclassification.

From the case, the board has approved the disposal plan and there are several
potential buyers who have expressed an interest to buy the asset. Hence, this
likely to indicate that management is committed to the plan to sell, and they
are actively locating for buyer.

Besides, the company expect that the disposal will take place just after year end,
hence, this indicates that the sales likely to take place within a year after
reclassification.

Therefore, the assets to be disposed likely can be classified as asset held for sale.

S4 Risk is that, Co A may not reclassify the assets as asset held for sale.

S5 This will cause the non-current asset to be overstated and current asset to be
understated.

if you need more points – drill down IFRS 5 and ensure your answer are within
allocated time

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5. Example for : Not able to apply Accounting Standard

Inventory cost of $20 million = purchase cost + overhead, where this overhead is
estimated by production manager
Total Asset = 350 million

 Since the issue is related to inventory, can we apply IAS 2 about lower of cost
or NRV?
 If yes, what would be the risk then?
 If no, what would be the risk then?

S1 The inventory of $20 million represents 5.71% of total asset, hence it is material
to FS.

S2 Inventory cost of $20 million is calculated based on purchase cost + overhead,

where this overhead is estimated by production manager.

S3 x
S4 Thus, there is a risk of inappropriate estimation or bias when estimating the
overhead since it is based on estimation.

S5 This will cause material misstatement in inventory.

‘or’
S4 Thus, auditor need to consider whether the assumption used to estimate the
overhead is appropriate as there could be a risk of inappropriate estimation or
bias associated with the estimation.

S5 This will cause material misstatement in inventory.

 Read the whole case & think:

I. What examiner trying to ask you
II. Don’t create risk/MTC based on single wording

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TOPIC : AUDIT PROCEDURE & AUDIT EVIDENCE

1. Marks : 1 mark for each procedure/evidence given

2. Exam technique to score full 1 mark:

Audit procedure Audit Evidence

VERB SUBJECT PURPOSE SUBJECT PURPOSE

Enquire the management to find out on Enquiry A note from enquiry with management
how they determine the insurance claim. to find out on how they determine the
insurance claim.

Discuss with management to find out on Discussion A note from discussion with
how they determine the insurance claim. management to find out on how they
determine the insurance claim.

Obtain/inspect the external confirmation External A copy of external confirmation from

from insurance company to confirm on confirmation insurance company from insurance
their opinion on the likelihood of company to confirm on their opinion on
insurance claim the likelihood of insurance claim

Inspect board of director resolution to Inspection: A copy of board of director resolution to

confirm approval on management Document confirm approval on management
decision to sell asset. decision to sell asset.

Inspect post year end bank statement to A copy of post year end bank statement
confirm customer has settled its amount to confirm customer has settled its
owed. amount owed.

Inspect engineer reports to confirm the A copy of engineer reports to confirm the
stage of completion for work in progress. stage of completion for work in progress.

Physically inspect the building to confirm Inspection: A physical inspection on the building to
its existence. Fixed Asset confirm its existence.

Recalculate depreciation charge to Recalculation A recalculation on depreciation charge to

confirm its mathematical accuracy. confirm its mathematical accuracy.

Observe the stock take performed by Observation An observation on the stock take
client to ensure it being carried out as per performed by client to ensure it being
stock take instruction. carried out as per stock take instruction.

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Audit procedure Audit Evidence

VERB SUBJECT PURPOSE SUBJECT PURPOSE

Reperform the matching process of Reperformance A reperformance on the matching

purchase order, delivery order, and process of purchase order, delivery
purchase invoice to confirm that the order, and purchase invoice to confirm
process was carried out as per standard that the process was carried out as per
operating procedure. standard operating procedure.

Perform analytical procedure by Analytical A comparison between ______ with

comparing _____ with ______ and procedure ______ to investigate significant
investigate significant fluctuation. fluctuation.

Example: Example:

Perform analytical procedure by A comparison between current year

comparing current year sales with prior sales with prior year sales to investigate
year sales to investigate significant significant fluctuation.
fluctuation.

3. Thinking process to generate audit procedure/evidence:

IMPORTANT TIPS:

I. To confirm the right and obligation

II. To confirm whether payment has been made

III. To confirm receipt of good/it is existed

IV. To confirm record correctly (cross check to Accounting Standard/drill down the source of
calculation)

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4. Examples:

During the year, Co A reclassify its NCA to AHFS under current asset

Auditors will have concern whether the reclassification meet the initial recognition
criteria as per IFRS 5  so they need to perform procedure/gather evidence

INTIAL RECOGNITION CRITERIA:

P : Price must be reasonable

U : Unlikely to have a change in plan to sell

M : Management committed to sell

A : Actively locating for buyer

S : Sales expected to take place within 1 year

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Inventory costs include all purchase costs and the costs of conversion of raw
materials into finished goods. Conversion costs include direct labour costs and an
allocation of production overheads. Direct labour costs are calculated based on the
average production time per unit of inventory, which is estimated by the production
manager, multiplied by the estimated labour cost per hour, which is calculated using
the forecast annual wages of production staff divided by the annual scheduled
hours of production.

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TOPIC : REPORTING ON AUDIT REPORT/AUDIT OPINION
1. Mainly, there are 2 type of reporting questions:
- Implication on auditor’s report/opinion
- Critically appraise or comment the audit report

2. Type 1: IMPLICATION ON AUDITOR’S REPORT/OPINION

a) Examples of question requirements and How to interpret?

Examples of Question Requirements:
1. Identify and explain the implication on audit report/opinion if no adjustment being made
and further action to be performed.
(8 marks)

2. Identify and explain the implication on completion of audit as well as adjustment to be

made together with further procedure to be performed. If management refuse to adjust,
explain the impact of the issue to audit report/opinion.
(10 marks)

3. Identify and explain matter that should be discussed for uncorrected misstatement and
its impact to audit report/opinion if management refuse to adjust.
(8 marks)

4. Identify and explain matter to be considered and action to be taken and also impact to
audit opinion.
(8 marks)

How to interpret:
Implication on audit report/opinion Assess case + F1-F3

Implication on completion of audit Assess case + Action

Adjustment Adjustment

Matter to be considered Assess case

Further procedure Further procedure

Further action Further action

Matter that should be discussed (MTD) Assess case + MTD = what matter to be discussed
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b) What to write for assess case? = same as exam technique for MTC

If the issue can apply accounting standard: If the issue cannot

Step 1: Materiality calculation, if any apply accounting
standard
Step 2: Issue

Step 3: Accounting Standard / How the issue should

be accounted Straight away assess
the case i.e. whether
Step 4: What management has done what management has
done is correct or
Step 5: Impact to FS (both legs) wrong

c) Let’s practice interpreting question requirements

d) Tips:

 No need to bother on how to allocate marks for each question requirement. What
you need to do is to ensure all component of questions requirements have been
addressed.
 Familiarize yourself with all 3 flowcharts (F1, F2, F3)
 Give at least 2 actions/procedures if being asked
 Give at least 1 MTD if being asked
 For adjustment, it depends on the number of mistakes done by client. The
adjustment must correspond to the mistake that client made.

e) Short form:

FSMM Financial statement materially misstated

ANATOSAE Auditor not able to obtain sufficient appropriate evidence
M not P Material but not pervasive
M and P Material and pervasive
Q Qualified ‘except for’ opinion
A Adverse opinion
DOO Disclaimer of opinion
BFQO Basis for qualified opinion
BFAO Basis for adverse opinion
BFDOO Basis for disclaimer of opinion
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f) 3 flowcharts as follow:

FLOWCHART 1 - for issue other than related to going concern

S1 Issue material? No Unmodified opinion

Yes

FSMM S2 ANATOSAE

M not P M and P S3 M not P M and P

Q A S4 Q DOO

BFQO BFAO S5 BFQO BFDOO

Tips to write each step:

S1 Ex:

The claim amount of $200,000 represents 6% of profit before tax, hence it is material
to FS.

The expense of $5000 represents 0.1% of profit before tax, 0.01% of total asset and
0.2% of revenue. Hence, it is not material to FS. (If you wish to conclude the issue is
not material, you need to ensure calculation for all materiality threshold given in
question are not material)

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S2 Ex:

If management refuse to adjust the claim amount, hence audit opinion will be
modified on ground of financial statement materially misstated.

If management refuse to provide the document, hence audit opinion will be modified
on ground of auditor not able to obtain sufficient appropriate evidence.

S3 It must be accompanied with reason

Scenario related to: Example of reasons

1 MM M not P because it is just a single
misstatement

1 AUTOSAE M not P because it is just a single issue

1-4 MM/ 1-4 AUTOSAE M not P because it does not affect

substantial portion of FS

>4 MM/ >4 AUTOSAE M and P because it does affect

substantial portion of FS

1-4 MM but the MM can turn profit  M and P because it can turn profit into
loss loss
MM related to disclosure M not P because it is just a disclosure
(except for disclosure related to GC)

But how to determine whether the issue is pervasive or not?

M not P M and P
- MM/ANATOSAE that affect 1-4 areas - MM/ANATOSAE that affect >4 areas
in FS in FS

- Disclosure issue i.e. RPT disclosure - Single MM/1-4 MM that can turn
(except for GC disclosure  use F2) profit into loss

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S4 Ex:

Hence, qualified ‘except for’ opinion will be issued.

Hence, adverse opinion will be issued.

Hence, disclaimer of opinion will be issued.

S5 Ex:

Basis for Qualified Opinion paragraph will be inserted after Qualified Opinion
paragraph to explain the reason for modification of audit opinion

Basis for Adverse Opinion paragraph will be inserted after Adverse Opinion
paragraph to explain the reason for modification of audit opinion

Basis for Disclaimer of Opinion paragraph will be inserted after Disclaimer of Opinion
paragraph to explain the reason for modification of audit opinion

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FLOWCHART 2 - for issue related to going concern

Going concern assumption

Appropriate Not Appropriate

Any material FS prepared under

uncertainty existed? break up basis?

Yes No No Yes

Disclosure of No disclosure issue FSMM Unmodified Opinion

material uncertainty on material +
In notes to FS is uncertainty EOM
needed M and P

Unmodified
Opinion A
Disclosure?
BFAO

Not Made Made (inadequate) Made (adequate)

FSMM Unmodified Opinion

+
If If
MURGC
M not P M and P

Q A

BFQO BFAO
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Few scenario can be tested

1. Has MU, Client agrees to disclose the MU in notes to FS

2. Has MU, Client does not agree to disclose the MU in notes to FS

3. Has MU, Audit working paper concludes that MU has been adequately disclosed in notes
to FS

4. Has MU, Client agrees to disclose brief note about MU in the notes to FS

5. Has MU

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FLOWCHART 3 – Usage of paragraph

Emphasis of Matter (EOM) Other Matter (OM) Other information (OI)

- A paragraph which aims to draw attention - A paragraph which aims to - OI paragraph is a paragraph
to a matter: draw attention to matters: that is used to describe
(I) Which has been correctly accounted (I) Which is outside FS auditor’s responsibility for
in FS (II) Relevant to user’s OI & the outcome of
(II) Fundamental to user’s understanding fulfilling those
understanding responsibility.
- Examples:
- Examples: (I) Prior year FS have not - OI refers to financial & non-
(I) An uncertainty relating to future been audited financial information which
outcome of exceptional litigation (II) Prior year FS have been has been included in annual
action audited by another report/ integrated report,
(II) A significant subsequent event that auditor i.e chairman statement/ KPI
occur (III) Auditor to provide more report
(III) Early application of new accounting clarifications with the
standard that has a material effect jurisdiction of the - Material inconsistency (MI)
on FS country refer to where the
(IV) A major catastrophe that has had, or information in FS and Other
continues to have, a significant - Position: After BFO, KAM EOM Information is materially
effect on FS not consistent.
(V) If going concern is not appropriate - Audit opinion will not be
and management has correctly use modified - If there is MI, auditor will
break up basis to prepare FS decide whether the audited
FS or OI is misstated
- Position: After BFO, MURGC before/after
KAM depending on severity of the issue Material Uncertainty Related to - If OI is materially misstated
Going Concern (MURGC) & management refuse to
- Audit opinion will not be modified adjust the OI, auditor shall
- A paragraph which is used describe MI issue in OI
- The paragraph must state that auditor’s when the going concern paragraph after BFO,
opinion is not modified in respect of the assumption is appropriate and before KAM, after EOM.
matter emphasized. material uncertainty exists
which have been disclosed - If FS is materially misstated
Key audit matter (KAM) adequately in the FS >> refer flowchart 1 or 2
(depend on what issue)
- A paragraph used to describe matter
- Position: Immediately after
of most significance in audit of FS in - If no MI, auditor will still
BFO
current year. include OI paragraph by
describing, ‘we have
- Audit opinion will not be
- What to include in KAM para: nothing to report in this
modified
regard’. But OI paragraph
(i) Introduction paragraph which
will be placed after KAM
explained concept of KAM and - The paragraph must state that paragraph.
state KAM paragraph does not auditor’s opinion is not
provide separate opinion modified in respect of the - Audit opinion will not be
(ii) Explanation on why the issue matter emphasized. modified
Examples ofconsidered
wording: as KAM
(iii) Explanation on how auditor Page | 8
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Opinion paragraph

Basis for opinion paragraph

Material Uncertainty Related to Going Cocern paragraph

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Key Audit Matter paragraph

concept of KAM

To state that does not

express separate opinion

Explanation on why this Explanation on how

item considered as KAM auditor audit the item

Other information (if no Material Inconsistency)

Sources: MIA, AMMB Annual Report

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Emphasis of Matter paragraph

Qualified opinion paragraph

Basis for Qualified Opinion paragraph

Sources: MIA, AMMB Annual Report

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Adverse Opinion paragraph

Disclaimer of Opinion paragraph

Sources: MIA, AMMB Annual Report

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3. When & How to aggregate?

WHEN? Lookout for keywords such as:

Each
individual
impact

to decide whether to aggregate or not...

SD17 Q5(b)

D14 Q5(b)

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HOW?

Let say you need to aggregate... but how?

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4. Type 2: CRITICALLY APPRAISE OR COMMENT ON AUDIT REPORT

a) What question wants?

Criticise/Comment format of the report Criticise/Comment audit opinion

expressed in scenario given
Remaining marks after deduct mark for 1 mark = materiality calculation, if any
materiality and audit opinion 2 marks = audit opinion

1 point for format = 1 mark

Example: 10 marks questions

1m = materiality
2m = criticize/comment on audit opinion
7m = criticize/comment on format

General Exam Technique:

Step 1: Identify mistake in audit report

Step 2: How it should have been

How to present your answer?

Format

Bla bla bla (your answer for format)

Audit opinion

Bla bla bla (your answer for audit opinion)

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b) Let’s criticize format first! But what to criticize?

- Full audit report vs extract of an audit report

- Heading

Type of Opinion Opinion Paragraph Basis for Opinion Wording

Paragraph
Unmodified Opinion Basis for Opinion FS shows true and
Opinion fair view // FS is
present fairly

Qualified Opinion Qualified Opinion Basis for Qualified FS shows true and
Opinion fair view except for
// FS is present
fairly except for

Adverse Opinion Adverse Opinion Basis for Adverse FS does not show
Opinion true and fair view //
FS does not present
fairly

Disclaimer of Disclaimer of Basis for We do not express

Opinion Opinion Disclaimer of any opinion
Opinion

- Quantification

(Ex: trade receivables are misstated > trade receivables of $2m are misstated)

- Potential impact to FS

(Ex: This would have increased assets by $... and profit before tax by $...)

- Reference
(Relevant accounting standard being mentioned ex: IAS 28)

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- Language/ wording issue
 We feel
 We are worried
 Management lack of integrity
 Finance Director, named Mr. Abu, does not…..
 Use IFRS instead of International Financial Reporting Standard
(but no issue if question use IFRS ®)
 Put materiality in the report
 Procedures have proven conclusively

- Clarity

Intangible asset being capitalized >> does not specifically referred to the R&D

- Sequence of Paragraph

- Usage of paragraph (usually marks given 2m – 3m)

 Emphasis of matter (EOM)
 Other matter (OM)
 Key Audit Matter (KAM)
 Material uncertainty over going concern (MURGC)
 Other information (OI)
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Tips to criticize/comment on usage of paragraph:

Auditor in question include EOM paragraph in audit report to emphasize on the legal
claim issue. The outflow is probable, but client does not make any provision & only
disclose as contingent liability. The legal claim amount of $2m. (material to FS)

Step 1: Identify mistake in audit report

- The usage of ___________ paragraph is

- ______________ paragraph is used to

- From the case,

Step 2: How it should have been

- Supposedly, the matter needs to be explained in

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c) Now, we are done criticizing the format, let’s criticize/comment the audit opinion!

Audit opinion
Your audit opinion expressed in = Conclude
VS
question

Example:

Since management refuse to recognize the provision, hence audit opinion will be modified on
ground of financial statement materially misstated.
The issue is material but not pervasive since it is just single misstatement.
Hence, Qualified ‘except for’ opinion will be issued.

From the case, auditor has expressed adverse opinion instead of qualified ‘except for’ opinion.

Thus, the opinion expressed by auditor in the case is incorrect.

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EXAMPLE OF UNMODIFIED AUDIT REPORT WITH UNMODIFED AUDIT OPINION

<ISA700 – Illustration 1>

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ABC Company [or Other Appropriate Addressee]

Report on the Audit of the Financial Statements

Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the
statement of financial position as at December 31, 20X1, and the statement of comprehensive
income, statement of changes in equity and statement of cash flows for the year then ended,
and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects, (or
give a true and fair view of) the financial position of the Company as at December 31, 20X1, and
(of) its financial performance and its cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRSs).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for
the Audit of the Financial Statements section of our report. We are independent of the Company
in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code) together with the ethical requirements that are relevant
to our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical
responsibilities in accordance with these requirements and the IESBA Code. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance
in our audit of the financial statements of the current period. These matters were addressed in
the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with ISA 701.]

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Other Information
The directors of the Company are responsible for the other information. The other information
comprises the directors’ report but does not include the financial statements of the Company
and our auditors’ report thereon.

Our opinion on the financial statements of the Company does not cover the other information
and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements of the Company, our responsibility is to
read the other information identified above and, in doing so, consider whether the other
information is materially inconsistent with the financial statements of the Company, or our
knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the
date of this auditors’ report, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard on the
Directors’ Report.

Responsibilities of Management and Those Charged with Governance for the Financial
Statements
Management is responsible for the preparation and fair presentation of the financial statements
in accordance with IFRSs and for such internal control as management determines is necessary
to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern
andusing the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting
process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered

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material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:

▪ Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.

▪ Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control.

▪ Evaluate the appropriateness of accounting policies used and the reasonableness of

accounting estimates and related disclosures made by management.

▪ Conclude on the appropriateness of management’s use of the going concern basis of

accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Company’s
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Company to cease to
continue as a going concern.

▪ Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and to communicate with them all
relationships and other matters that may reasonably be thought to bear on our independence,
and where applicable, related safeguards.

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From the matters communicated with those charged with governance, we determine those
matters that were of most significance in the audit of the financial statements of the current
period and are therefore the key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our report because
the adverse consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor’s report would vary depending on the nature
of the auditor’s other reporting responsibilities prescribed by local law, regulation, or national
auditing standards. The matters addressed by other law, regulation or national auditing
standards (referred to as “other reporting responsibilities”) shall be addressed within this section
unless the other reporting responsibilities address the same topics as those presented under the
reporting responsibilities required by the ISAs as part of the Report on the Audit of the Financial
Statements section. The reporting of other reporting responsibilities that address the same topics
as those required by the ISAs may be combined (i.e., included in the Report on the Audit of the
Financial Statements section under the appropriate subheadings) provided that the wording in
the auditor’s report clearly differentiates the other reporting responsibilities from the reporting
that is required by the ISAs where such a difference exists.

The engagement partner on the audit resulting in this independent auditor’s report is [name].

[Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate
for the particular jurisdiction]

[Auditor Address]

[Date]

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TOPIC: QUALITY MANAGEMENT (QM)

To safeguard the quality of service delivered to client i.e.

1. Why QM is important 
express audit opinion, in order to reduce risk of firm being sued
for negligence

2. How to implement a good quality management system as required by ISQM 1?

The system of quality management needs to address 8 components related to:

Firm’s risk
Governance and Ethical Acceptance and
assessment
leadership requirement continuance of
process
engagement

Engagement Information and Monitoring and

Resources
performance communication remediation
process

1 Firm’s risk assessment process

(i) Firm needs to establish quality objectives related to each component in the system of
quality management

(ii) Once established, quality risks that may jeopardize the achievement of the quality
objectives will be identified and assessed

(iii) Once identified and assessed, actions to address the risk will be designed and implemented

For example,

Component : Resources
Quality objective : Resources i.e., staff hired by firm, need to have appropriate competency to
perform the assigned engagement
Quality risk : Staff are not having appropriate competency
Action : Send the staff to appropriate training on timely basis

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2 Governance and leadership

Firm needs to establish quality objectives that ensure its governance and leadership support the system
of quality management through establishment of culture that prioritize quality and ethics.

Scenario:

Engagement partner refuse to challenge judgement made by management for fear of

losing the client

Quality management issue/mistake:

Engagement partner focuses on making profit rather than maintaining quality of audit.
+ ethical answer: self-interest threat

3 Ethical requirement

Firm needs to establish quality objectives that firm and its staff comply with relevant ethical
requirements.

Scenario:

One of the audit team members is having family relationship with the finance director

Quality management issue/mistake:

Firm assigns someone in the audit team who has family relationship with Finance
Director. Hence, this may threaten the independence of the audit team member.

4 Acceptance and continuance of engagement

Firm needs to establish quality objectives that ensure an engagement is only undertaken when the firm
is competent, independent and has considered the integrity of client.

Scenario:

Firm accept Co A as audit client without performing any Customer Due Diligence (CDD)

Quality management issue/mistake:

Firm simply accept new audit client without performing any CDD

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5 Resources

(i) Firm needs to establish quality objectives that ensure it has sufficient personnel with
competence and capability.

(ii) Firm needs to establish quality objectives that ensure it has appropriate technology such
as Data Analytic software to perform an engagement.

Scenario:

Austin Ames is just promoted as manager 1 month ago. Due to that, firm assigns Austin
Ames as manager-in-charge to audit Beverly Hills Plc.

Quality management issue/mistake:

It seems that the firm assign incompetent staff to lead the audit of a listed audit client
considering that Austin Ames is newly promoted to manager 1 month ago. Austin Ames
may not have sufficient competency to be the manager-in-charge.

6 Engagement performance

(i) Firm needs to establish quality objectives that ensure the performance of quality
engagements are in place.

(ii) It covers matters related to:

- Direction
- Supervision
- Review
- Consultation

(iii) For example,

Direction:
Planning meeting should be held before audit work can be performed to ensure
each team member understand their roles, nature of client, risk area etc

Supervision:
Should be continuous and Include tracking progress so that sufficient skills and time
are available to complete the work and problem arise can be rectified soonest
possible

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Review:
- Done hierarchically
- Must be evidenced
- Review carried out before audit report being signed = Hot review = Pre-
issuance review

- ISQM 2:
 It requires Engagement Quality Review (EQR) to be conducted by
Engagement Quality Reviewer before audit report can be signed.

 Engagement Quality Reviewer will review the significant judgement and

conclusion reached by the engagement team.

 Compulsory for listed audit client or client operating in certain industries

such as banking and insurance.

Consultation:
- Must take place on difficult matter
- Must be documented

Scenario:

Audit manager and audit partner perform review on the audit work on the same day.
This is the first time the audit manager perform review on the audit work

Quality management issue/mistake:

The review process seems to be not appropriate.

Review done by the audit manager seems to be quite late since it takes place on the
same day as the audit partner’s review. Besides, the review is not conducted in a
hierarchy.

7 Information and communication

Firm needs to establish quality objectives that ensure information and communication related to
system of quality management are in place to enable appropriate implementation of quality
management.

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Examples of information to be communicated to staff of the firm:

(i) Ethical and professional requirements

- Firm’s policies on ethics
- Training material
- Registers of training undertaken
- Completed independent declarations

(ii) Client acceptance and continuation

- Risk assessments documented
- Client identity documents obtained and stored
- Engagement letters issued

(iii) Engagement performance

- Audit program devised/produced
- Role assignment delegated and recorded
- Client information obtained and input into automated audit tools
- Conclusions documented in audit file
- Report to management and TCWG

8 Monitoring and remediation process

Firm needs to establish quality objectives that ensure monitoring and remediation process are in place
so that appropriate actions able to be taken in response towards any part of deficiency found within
the system of quality management.

For example,

Firm conduct Cold Review (also known as post-issuance review) to identify any deficiencies
in its system of quality management once audit report has been signed.

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3. If firm does not implement good system of quality management, then, it becomes the
quality management issue = mistake done by firm = answer for quality management
question.

4. Exam technique

Marks
Step 1: Quality management Issue (what firm/auditor has done wrong) 0.5m

Step 2: Why the issue is a problem 0.5m

Step 3: How it should have been 0.5m

1.5m

5. Examples:

On the audit planning checklist, the audit senior has crossed through the analytical
procedure section and written ‘not applicable – new client’. The audit planning checklist
has not been signed off as having been reviewed.

Step 1: On the audit planning checklist, the audit senior has crossed through the
analytical procedures and written ‘not applicable-new client’.

Step 2: This is inappropriate as it is mandatory for auditor to perform analytical

procedure at planning stage regardless of whether it is new or existing client.
The audit senior is not competent as he is not aware about this. By not doing
analytical procedures at the planning stage, the audit team may not have good
understanding of client business and may not able to identify risk of material
misstatement.

Step 3: Thus, analytical procedure should have been performed.

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Step 1: Besides, the audit planning checklist has not been signed off as having been
reviewed.

Step 2: This is inappropriate as it will indicate that the audit has been inadequately
planned and the audit work has commenced before the audit plan has been
reviewed. Hence, it may cause the audit not being carried out effectively and
efficiently.

Step 3: Supposedly, the audit planning checklist need to be reviewed before

commencement of any audit work by signing it off.

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TOPIC: ETHICS

Comply with P²ICO Thru

F A S S I M threats
(Fundamental principles)

Safeguards

Threaten
(to reduce the threats to
an acceptable level)
US = Professional Accountant

4 UNIVERSAL safeguards:
Situation Situation Situation
A B C 1. Assign separate team (self-review threat)
2. Communicate the issue (to specify) to TCWG
3. Get 2nd independent partner/independent
reviewer to review the work
4. Notify the issue (to specify) to the ethic partner
so that the partner can evaluate the significance
of the threat

Another safeguard i.e. remove audit senior from

audit team → to check stage of audit:

- Planning stage
You need to know
- Evidence gathering stage
Code of Ethics
- Completion stage
Where? - Reporting stage

P²ICO: FASSIM:
P: Professional competence and due care F: Familiarity threat
P: Professional behaviour A: Advocacy threat
I: Integrity S: Self interest threat
C: Confidentiality S: Self review threat
O: Objectivity I: Intimidation threat
M: Management threat

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Fundamental Principles (P²ICO)

Professional competence Professional accountant to:
and due care

- Attain and maintain professional knowledge and skill at the

level required to ensure that a client or employing
organization receives competent professional service,
based on current technical and professional standards and
relevant legislation; and

- Act diligently and in accordance with applicable technical

and professional standards.

Professional behavior A professional accountant to comply with relevant laws and

regulations and avoid any conduct that might discredit the
profession.

Integrity Professional accountant to be straightforward and honest in

all professional and business relationships.

Confidentiality Professional accountant to respect the confidentiality of

information acquired as a result of professional and business
relationships such as by not disclosing confidential information
acquired outside the firm without proper authority.

Objectivity Professional accountant not to compromise professional or

business judgment because of bias, conflict of interest or
undue influence of others.

Source: IESBA Code of Ethic

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1. Exam technique

Marks
Step 1: Issue 0.5m

Step 2: Name of threat + reason/how the issue threaten auditor’s 0.5m – 1m

objectivity

Step 3: Code of Ethic 0.5m – 1m

Step 4: Significance of the threat 0.5m – 1m

Step 5: Safeguards (each) 1m

2. Tips to write

Step 1 + 2 (name of threat)

- Write name of threat without identification of issue = 0 mark
- Examples:
There is self-interest threat. 0m

Client provides a bank loan to auditor. This may give rise to 0.5m
self – interest threat.

Step 2 (reason/how the issue threaten auditor’s objectivity)

Examples:

Familiarity Auditor may be too familiar with client so auditor may tend to rely on their
threat work and being less skeptical

Advocacy Auditor may be perceived to promote client to ….bank…. (follow case)

threat

Self interest Auditor may have financial interest in client, thus, auditor may reluctant to
threat raise any audit issue in order to avoid the performance of client being affected.

Self review Auditor may end up reviewing its own work and reluctant to admit its own
threat mistake, if any.

Intimidation Auditor may feel pressured to …reduce audit fee… (follow case) or
threat
Auditor being threaten by client to …. provide unmodified opinion.. (follow
case)

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Management Auditor may assume management responsibility by making final decision on

threat behalf of client

Step 3 Code of Ethic (COE)

- Read & understand the Code
- Only quote relevant part of the Code only

Step 4 Significance of the threat

Examples:

Fee The higher the recruitment service fee, the significant the threat is.

Auditor hold The threat is too significant which no safeguard could reduce it to an
direct share in acceptable level.
client

Threat relates to Since the company is a listed company, thus the threat will be more significant.
listed co

Position of Since the auditor is an audit manager and the client are a financial controller,
auditor & client thus the threat appears to be significant.

(usually for
familiarity threat)

Step 5 Safeguards
- Some issues, COE already specify the safeguards

- If there are 2 issues that share the same safeguard, you can explain issue 1 from Step
1 – Step 4, then issue 2 from Step 1 – Step 4, then only write the safeguard. But, if you
want to write twice also no issue (issue 1: Step 1 – Step 5 & issue 2: Step 1 – Step 5)

- If there are 2 issues or more but not sharing same safeguard, so settle full steps for
each issue (settle issue one by one)

3. Examples of Question

- Whole question relates to ethical issue

- Ethic + Quality control
- Ethic + Quality control + Professional Issue/Practice Management

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4. Further explanation on each ethical issue

F A S S I M

FAMILIARITY THREAT
where auditor is too familiar with client
+
Auditor may be less skeptical on client’s work
Or
Auditor may tend to rely on client’s work
Or
Auditor may lose its professional skepticism

Example:

Audit manager = Husband

Finance director = Wife

COE: R521.5

Significance of the threat:

Usually you can assess thru the length of relationship & position of
Auditor & Client

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F A S S I M

ADVOCACY THREAT
where auditor may be perceived to promote client to …bank…
(follow case)

Examples:

- Auditor attend a meeting with the bank on behalf of client

- Auditor offers legal services to client and defend them in court
- Auditor becomes expert witness

Significance of the threat + safeguard:

If the threat appears to be too significant which no safeguard

could reduce it to an acceptable level.

Hence, auditor need to reject the offer to …..attend meeting with

the bank…(follow case)

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F A S S I M

SELF INTEREST THREAT

where auditor has interest in client

Explanation of reason/how depends on scenario

Example:

Auditor hold direct shares in client

COE: prohibit Auditor to hold direct shares in client

Significance:
Threat is too significant which no
safeguard could reduce it to an Sell off the direct shares
acceptable level

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F A S S I M

SELF REVIEW THREAT

where auditor provide non audit service on top of audit

Reason/How:

Auditor may end up reviewing its own work related to …..tax

computation…(follow case)
+
and reluctant to raise any audit issue on the tax figure during audit
engagement
or
and may place extra/over reliance on the work during the audit
engagement

Example:

Client request auditor to also prepare FS

COE: prohibit auditor to prepare FS for a listed audit client

Significance:
Threat is too significant which no
safeguard could reduce it to an Reject offer to prepare FS
acceptable level

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F A S S I M

INTIMIDATION THREAT
where auditor being threaten or pressured by client

Examples:

- A threat of dismissal from client’s office

- A threat of not giving the firm any contract on non-audit services
- Client seeks second opinion from different firm

Significance of the threat + safeguard:

If the threat is too significant which no safeguard could reduce it

to an acceptable level.

Hence, auditor may consider to ….resign/withdraw…(follow case)

from the engagement.

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F A S S I M

MANAGEMENT THREAT
where auditor assume management responsibility on
……preparation of FS….(follow case) by making final decision on
behalf of the client

Tips to identify whether there is any management threat:

- If the service requested relates to firm giving advice to client

- If the service requested is under client’s responsibility i.e.
preparation of FS, design internal control system

Significance of the threat:

When auditor assume management responsibility, the threat will

be too significant which no safeguard could reduce it.

Thus, auditor:
- Must not assume management responsibility or make final
decision for client

- Need to ensure there is a designated person-in-charge from

client that will make the final decision related to the service.

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Conflict of Interest
Situations

• Provide service to both clients who are competitors

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Safeguards:

If client refuses to give the consent, thus, the firm should end or decline to perform services that would
result in the conflict of interest.

Source: IESBA Handbook

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Exam technique – Conflict of interest

S1: ISSUE

This may create potential conflict of interest.

S2: NAME OF THREAT + REASON

Conflict of interest will threaten the objectivity of ______________ because ____________ may not able

to act in the best interest of both parties when _______________________________________________

____________________________________

It will also threaten the confidentiality principle of ________________ because ______________ may leak

out confidential information of ________________________________________ or vice versa.

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S3: X

S4: X

S5: SAFEGUARD

Thus, _________________ need to consider disclosing the nature of conflict of interest to both

parties and obtain their consent to act for both.

If consent is given, _____________ need to consider implementing further safeguards such as:

However, if consent is not given,

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Referral fee

Source: IESBA Handbook

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