ACCA F8 - Audit and Assurance Revision Kit 2016

Reduction of sample sizes
It is clearly unacceptable to reduce sample sizes as a way of saving time. The sample sizes detailed in the
audit plan should have been designed to gather sufficient appropriate audit evidence. Reducing the sample
size beneath this point increases detection risk, and the risk of the auditor giving the wrong opinion.
Basis of sample selection
Selecting a sample on the basis of the ease of finding evidence for an item, is not an appropriate basis.
Indeed, this might actively increase detection risk as it means by definition that those items for which
evidence is not readily available, or might not even exist, are not tested.
Conclusion
The litany of failures above suggests that this engagement has not been adequately supervised, and that the
audit work performed is inadequate in some areas. A detailed review should be performed so that any other
shortcomings can be addressed.
Doubt is also cast over the sufficiency of the firm's quality control procedures. This matter should be
referred to the relevant partner for consideration.
41 Abrahams
Text references. Chapters 6 and 13.
Top tips. The first requirement in part (a) was straightforward and you should have been able to explain each
component (inherent risk, control risk and detection risk) in turn. Note that the definition of audit risk itself was not
required. The example of a factor which would increase audit risk in relation to each component required more
thought as often auditors think of how to reduce these risks. However if you know what decreases the risk, it is not
difficult to work out what increases it. For example, increasing sample sizes can decrease detection risk, so not
selecting an appropriate sample size will increase it. There are a number of factors to choose from in each case, but
only one example was required for each - so only give one and then move on.
Part (b) tested the important area of identifying and responding to audit risks. It should be clear from your answer
how each risk impacts on a financial statement assertion or area, since this is the nature of an audit risk. If there is
no clear link the chances are you have identified a business risk that may not be a relevant audit risk. Your response
should be clear and include a specific action rather a general response of, for example, 'do more work on this area'.
Part (c) asks for substantive procedures in relation to gaining evidence over two specific aspects of inventory
(inventory held by a third party and standard costs used in the inventory valuation). In (ii) there is always a danger
that standard costs are not updated enough to take account of movements in actual costs so your tests should
focus on this, for example comparing standard costs with actual costs per invoices or wages records.
Easy marks. Easy marks were available in (a) for explaining the components of audit risk.
Examination Team's comments. Part (a) was knowledge based and candidates performed well.
Part (b) for 10 marks required a description of five audit risks and responses for Abrahams. Many candidates
performed inadequately on this part of the question. As stated in previous examiner's reports, audit risk is a key
element of the Audit & Assurance syllabus and candidates must understand audit risk. The main area where
candidates continue to go wrong is that they did not actually understand what audit risk relates to. Hence they
provided answers which considered the risks the business would face or 'business risks', which are outside the
scope of the syllabus.
Part (c) was answered unsatisfactorily by most candidates, especially (cii) on standard costs. Candidates seemed to
see 'inventory valuation' in the requirement and so produced generic tests for verifying that inventory should be at
the lower of cost and NRV. This was not what the question required. Candidates did not seem to understand that
standard costing was an acceptable option for calculating the cost of inventory and hence they needed to test how
close an approximation to actual cost standard cost was.
Answers 85