Updates for T8/F8/P7 ACCA coming exams in June 2010
The latest standards for reporting
1. ISA 705 introduces the term - inability to obtain appropriate and sufficient evidence as opposed to the term limitation of scope (ISA 701)
2. ISA 705 introduces the term - material misstatement as opposed to disagreement (ISA 701)
Reason - increases the clarity of the issues that causes problems to the financial statement. Previous terms were deemed to be confusing since layman do not understand what those terms mean.
3. ISA 706 - emphasis of matter is no longer called modified (previously was parked under ISA 701), it just emphasis of matter paragraph. It only applies for limited situation (those that affects current year financial statements only)
It has provided the following as the conditions where it applies:
An uncertainty relating to the future outcome of exceptional litigation or regulatory action. (ISA 570 GC issues)
Early application (where permitted) of a new accounting standard (for example, a new International Financial Reporting Standard) that has a pervasive effect on the financial statements in advance of its effective date.
A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.
It means that EOMP has limited application compared to the previous standard. ISAAB is trying to reduce the widespread usage of EOMP since it diminishes the value of communication and using it implies that matter is not properly disclosed in the FS (which constitutes a MM)
4. ISA 706 - other matter paragraph (OMP) is a new addition to the world of reporting. This is used for matters that are not within the scope of financial statement.
Matters that would be included in the OMP are
- comparatives have not been audited (ISA 710)
- comparatives have been audited by another auditor (ISA 710)
- material inconsistency with other information (ISA 720)
- modification in auditor report for comparative financial statement (ISA 710)
5. ISA 450 - Evaluation of misstatements found during the audit (critical for P7 students since impacts your audit report question and materiality issues significantly)
- Auditor is responsible to evaluate the identified misstatement found during the audit and aggregate uncorrected misstatement
- Auditor must perform additional procedures to determine if correction performed by management has reduced the misstatements in the stated accounts
- Auditor is responsible to obtain a written representation from the management whether they believe the effects of uncorrected misstatements are immaterial, individually and in aggregate, to the financial statements as a whole.
- Auditor must include in the audit documentation (ISA 230):
(a) The amount below which misstatements would be regarded as clearly
trivial (ISA 320 - Planning materiality x 5 - 10%)
(b) All misstatements accumulated during the audit and whether they have
been corrected
(c) The auditor’s conclusion as to whether uncorrected misstatements are
material, individually or in aggregate, and the basis for that conclusion
- Misclassification misstatement should be evaluated in terms of quantitative and qualitative basis - if a misclassification error is material but does not change the nature of the FS significantly, it could be classified as not being material (this is an example of auditor using qualitative factors to override quantitative materiality)
- Circumstances when misstatement is considered material when it lower than quantitative
a) Affects compliance with regulatory requirements;
b) Affects compliance with debt covenants or other contractual requirements;
c) Relates to the incorrect selection or application of an accounting policy that
has an immaterial effect on the current period’s financial statements but is likely to have a material effect on future periods’ financial statements;
d)Masks a change in earnings or other trends, especially in the context of general economic and industry conditions;
e) Affects ratios used to evaluate the entity’s financial position, results of
operations or cash flows;
f) Affects segment information presented in the financial statements (for
example, the significance of the matter to a segment or other portion of
the entity’s business that has been identified as playing a significant role
in the entity’s operations or profitability);
g) Has the effect of increasing management compensation, for example, by ensuring that the requirements for the award of bonuses or other incentives are satisfied;
h) Is significant having regard to the auditor’s understanding of known
previous communications to users, for example, in relation to forecast
earnings;
i) Relates to items involving particular parties (for example, whether external parties to the transaction are related to members of the entity’s management);
j) Is an omission of information not specifically required by the applicable financial reporting framework but which, in the judgment of the auditor,
is important to the users’ understanding of the financial position, financial performance or cash flows of the entity; or
h) Affects other information that will be communicated in documents containing the audited financial statements (for example, information to be included in a “Management Discussion and Analysis” or an “Operating and Financial Review”) that may reasonably be expected to
ISA 320 Materiality
- Standard materiality - planning and final materiality is based on turnover, PBT, TA or NA %
- Performance materiality - used in conjunction with ISA 450 to determine if uncorrected misstatement are material *note there are qualitative factors that can override the performance materiality
- Threshold materiality - level used to determine if error is trivial
Spots for the P7 paper - since I have completed all the revisions for this paper.
Based on my review, nothing has come to my attention that causes me to believe that the accompanying spots are not reliable
1. Forensic audit (proactive nature)
2. Internal controls
3. Risk question - either BR/AR/FSR -suppose higher aspects of issues impacting
going concern since article is out + issues that had impacted Lehman Brothers, implies that BR question should include financial instruments as a source of business risk impacting going concern - do not talk about IAS 32/39 if it is BR question!
4. Group audit (ISA 600 + ISA 550)
5. Audit report (ISA 450 + ISA 705 + ISA 720 + ISA 710)
6. Current issues - new IFAC 2011 or note for going concern
Other tips were given directly in the class.
Note for JUNE 2010 EXAM - the exam question for part A will no longer be directly asked as in previous examination since there was a requirement to make the paper more practical (as per P6 paper)
DO NOT PANIC -when the exam question is:
Required:
(d) Respond to the email from your partner
(16 marks)
Requirement (d) contains professional marks which will be awarded for the format of the answer and for the clarity of the assessment provided (2 marks)
This means you have to read the emails from the manager, partner or client and determine the requirements.
Your professional marks will be:
Dear X
Responding to your email dated xx/xx/xx, I have put together an analysis of the business risk that is relevant for the planning of audit of ZZZ Plc. I have included the analysis in the attachment labelled XX.doc
Attachment
Issues - Explain the risk
Completed
Thats all for now - if there are questions shoot away, I will discuss the issues later. I still have one more revision to do - P1 in PAAC this friday.
Prepared by Mr.Jay MSc FCCA (lecturer for audit)
