ACCA F8 - Audit and Assurance Revision Kit 2016

31 C The audit risk relates to the concern that South may have capitalised costs which are revenue in
nature. As such the appropriate response is to review the invoices which have been capitalized not
just for their amount but also to determine the nature of the expense to which the invoice relates.
32 D The audit risk relates to the concern that the system may not be reliable, that not all invoices have
been recorded and that staff may not be familiar with the system. All of the responses are therefore
valid with the exception of response (2). This involves vouching the revenue per the system back to
till receipts. Given that one concern is that revenue is understated, testing should be from the till
receipts to the system to ensure that all sales have been recorded.
33 B The concern over deficiencies in South's internal controls is a valid concern, but the review of legal
correspondence is unlikely to be an appropriate response to this as the auditor would need to review
internal controls. The impact on the reputation of South is also a valid concern as it could have
implications for the viability of the company but again it is unlikely that information specifically
relating to this would be available in the legal correspondence reviewed.
Mason
34 C There is a risk that the revenue for the annual fees is not properly recognised in the period to which it
relates, leading to revenue (and deferred income) being materially misstated in the financial
statements. Revenue should be recognised according to the accounting period in which the related
performance obligations of the contract are met.
35 C The auditor should obtain a breakdown of the capitalised costs and vouch them back to invoices to
determine whether they relate to a capital or revenue expense. They can then determine whether they
have been recognised appropriately in accordance with IAS 16 Property, plant and equipment.
36 B The key risk here is going concern. It is possible that the company will lose one of only four
customers. In addition a bank loan is being renegotiated and it is expected that costs will increase.
This may threaten Mason's ability to continue as a going concern.
37 C All of the responses are valid with the exception of contacting the customer directly
38 D Specialist equipment has been removed from the aircraft and is now included in inventory. Inventory
should be valued at the lower of cost and net realisable value, not at amortised cost. The fact that the
equipment has been replaced suggests that its net realisable value is lower than its cost. This may
mean that inventory is overstated in the financial statements.
39 Sleeptight
Text references. Chapters 6 and 13.
Top tips. This 30 mark case study style question contains a mixture of knowledge-based questions and questions
requiring application to a long scenario.
Part (a) requires you to recall your knowledge of professional scepticism and judgement. In part (ii), notice that
your examples of areas to apply professional judgement should be limited to the planning stage.
Part (b)(i) worth 16 marks contains a common requirement where you are asked to explain audit risks and then
suggest appropriate responses. Audit risks will be related to potential material misstatements of the financial
statements and this should be in the forefront of your mind throughout when you are answering this part of the
question. When you are explaining your risk you should therefore state how the financial statements are affected.
Responses are the auditor's responses, not management responses. These will therefore be procedures or actions
the auditor will carry out to mitigate the risks.
In part (b)(ii) you should have realised that the auditor must attend the inventory count and is required to perform
certain procedures specified by ISA 501.
In part (d), although you would assess the reliability of the expert, don't forget there are also other important
procedures such as reviewing the disclosures and the revaluation adjustments.
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