ACCA F8 - Audit and Assurance Revision Kit 2016

79 The correct answer is:
Accounting treatment
No provision but disclose as
a contingent liability
Reason
A present obligation exists, but the outflow of
economic resources is not probable.
Management believe that there is a 35% chance of the claim succeeding. For an event to be ‘probable,’ it
should be more likely than not to occur (ie a 50% probability). In this case, the outflow of economic
resources is therefore not probable, so a provision should not be recognised. A present obligation (not a
possible obligation) exists, since the former managing director has sued Newthorpe for unfair dismissal. It is
because the likelihood of him succeeding in his claim is not probable that the claim should be treated as a
contingent liability instead of a provision.
80 The correct answer is:
Send an enquiry letter to Newthorpe’s lawyers to obtain their view as to the probability of the claim being
successful
Independent third party audit evidence is generally considered to be more reliable than client-generated or
auditor-generated audit evidence. Although all the procedures are valid, only the written confirmation from
Newthorpe’s lawyers provides an expert, third party confirmation on the likelihood of the claim being
successful. It is also sent directly to the auditor rather than to the client.
81 To perform specific procedures to identify possible non-compliance
ISA 250 distinguishes between laws and regulations which have a direct effect and those which have an
indirect effect on the financial statements. For those which do not have a direct effect on the financial
statements the auditor must undertake specified audit procedures to help identify non-compliance with laws
and regulations that may have a material effect on the financial statements.
Tirrol
82 The correct answers are:
We should budget for the extra time required to document an understanding of the entity, its environment
and its systems, and to verify material opening balances.
We must agree a clear timetable with the client for the testing of the computerized inventory systems,
setting out availability of access to the system, files and personnel required to complete testing.
As this is Cal & Co’s first year of auditing Tirrol Co, additional time should be budgeted for documenting an
understanding of the entity and for verifying the opening balances. Because Cal & Co’s audit software has to
be rewritten and the testing is taking place on a live basis, it is particularly important to plan our CAATs
procedures carefully.
The IESBA’s Code of Ethics does not prohibit lowballing, so withdrawing from the audit engagement on this
basis is disproportionate. However, the firm should be able to demonstrate that appropriate time and
qualified staff are assigned to the audit, and that all applicable standards are being adhered to. It may not be
appropriate to adopt a combined approach if control risk is deemed to be high. The appropriate audit
approach should be determined by the risk assessment, not by time or fee constraints.
83 The correct answers are:
The ability to test all 25 of Tirrol Co’s locations using the same audit software, resulting in time and cost
savings
The ability to search all items for exceptions, thus giving greater assurance over the inventory figure
The ability to select and extract a sample of inventory data for testing, thus reducing sampling risk
The ability to test the actual computer files from the originating programme, rather than printouts from a
spook or preview files, thus eliminating exporting errors
All of the options are valid benefits associated with the use of audit software.
Answers 137