ACCA F8 - Audit and Assurance Revision Kit 2016

Question 17
Text reference. Materiality and performance materiality are covered in Chapter 6. Audit risk and analytical
procedures are also covered in Chapter 6.
Top tips. This is a typical scenario-based exam question on audit risk, with a knowledge element. It is important to
go through the scenario carefully, line by line, so that you can identify the risk factors as you will need to explain
how they may impact on the financial statements in part (b)(ii). This part also requires you to describe the auditor's
responses to the identified audit risks – vague answers here will not score well. For example, it is not sufficient to
say 'Discuss with management'. Your answer needs to be more detailed and explain how you, as auditor, are going
to undertake audit work to address the risk. This part of the question is best answered in a columnar format so that
you can link the audit risks with the appropriate responses and give your answer more structure. Make sure you
make reference to the ratios you calculated in part (b)(i) of the question.
Easy marks. Part (a) is a knowledge-based part for five marks on materiality and performance materiality. Provided
you are comfortable with the definitions of these terms, this part should pose no problems. Part (b)(i) asks you to
calculate five ratios for both years and again, this is a relatively straightforward part of the question – you should be
able to score maximum marks here. Note the requirement for the number of ratios you need to calculate and the
fact that you need to calculate each ratio for both financial years.
(a)
Marking scheme
Up to 1 mark per well explained point:
– Materiality for financial statements as a whole and also
performance materiality levels
– Definition of materiality
– Amount or nature of misstatements, or both
– 5% profit before tax or 1% revenue or total expenses
– Judgement, needs of users and level of risk
– Small errors aggregated
– Performance materiality 5
(b) (i) ½ mark per ratio calculation per year.
(ii)
– Gross margin
– Operating margin
– Inventory days
– Inventory turnover
– Receivable days
– Payable days
– Current ratio
– Quick ratio 5
Up to 1 mark per well described audit risk and up to 1 mark per
well explained audit response
– Receivables valuation
– Inventory valuation
– Depreciation of plant and machinery
– Management manipulation of profit to reach bonus targets
– Completeness of warranty provision
– Disclosure of bank loan of £1 million
– Going concern risk 10
20
Marks
Mock exam 1: answers 205