F8: TARGET HIGH RISKS QUESTIONS for DEC 08

- Relevant to F8 candidates. Call this F8 exam tips if you like, but they are important reminders i.e. avoiding pitfalls common to candidates of F8 Audit and Assurance paper in exam. I have incorporated Alan Lewin, 2008, article in Student Accountant journal of October issue.
- Relevant to all who want success but feel its eluding them. Well! Don't give up!

Earl Nightingale said 'You become what you think about'...

Napoleon Hill said ' What ever the mind of man can conceive and believe it can achieve'

C W Longenecker “… get our thinking processes working for us rather than against us.”


Pic 01: Every step you take, you are closer to your to victory.


Pic 02: You are your own worst enemy, if you let it.


Pic 03: Focus on the goal, you will achieve it.


Pic 04: Can you see yourself succeed? YES, YOU CAN!!

ARE YOU LIKE THIS? LIKE WHAT, YOU MAY ASK? READ ON:

If you think you are beaten, you are.
If you think you dare not, you don't.
If you like to win but think you cant,
It's almost a cinch you wont.

If you think you'll lose, you're lost.
For out in the world we find
Success begins with a fellow's will.
It's all in the state of mind.

If you think you're outclassed, you are.
You've got to think high to rise.
You've got to be sure of yourself before
You ever can win the prize.

Life's battles don't always go
To the stronger or faster man,
But sooner or later, the man who wins
Is the man who thinks he can!

So much for encouraging and motivating you, lets focus on technicals of F8. The following are carefully prepared in anticipation of upcoming exams. Helps you to focus, prioritise and same time I have inserted common pitfalls HIGHLIGHTED BY ALAN LEWIN in October 2008 newsletter. Apply and heed the warnings as this will distinguish you between getting a pass or otherwise.

Question 1
a) Substantive test – provisions for bad debts (company's management policy) and specific bad debts (clients actually unable or refused to pay - gone bankrupt or court disputes).
b) “AT THE COMPLETION OF AUDIT” – advise what further Audit procedures on Non current assets in view of not complying with ISA and lack evidence on valuation and provision for depreciations.
- REQUIRED to obtain management representation letter, considering issuing a modified report if items are of materiality matter. Concerned with what is management’s stand on the accounting policies
- NOT REQUIRED to perform further audit test such as to obtain Sales & Puchase agreement to verify the valuation of Non-Current assets and compare the depreciation policy to similar rivals in the industry. You ALREADY have done that during audit work. The question is at the end or completion of audit work.
c) Control procedures – sales systems
d) Distinguishing tests data & CAAT
– tests data using dummy input on "client" computer system and
– obtaining data using "auditors" CAAT software to extract from client’s computer system

Question 2
a) What is Letter of weakness that auditors issue?
b) What is ISA 500 – valuation, allocation and completeness works as assertions.
c) Subsequent events, adjusting and non-adjusting events
Please see exam techniques below.

Question 3
a) Auditors’ independence and inserting safeguards. Case study : Engagement partner is twice divorced and has re-married for the 3rd time. His new wife receive a dowry prize of US$5million worth of shares in Pfizer Pharmaceutical Limited.
i. What is the ethical issue? Wife ownership is deemed as partner’s interests in client-Pfizer
ii. Why is this an ethical issue? Partner’s independence and professional due care is undermined as he has indirect personal interests in the client via his new wife.
iii. How to insert audit safeguards? Well, divorcing a third time is certainly out of question! Recommend to switch to other engagement partner for the job.
iv. IMPORTANT NOTE : candidates, you need to specifically mention to the case study! There are other ethics principles acronym as POCIP IOI. Review questions done in my tutorials.
b) Corporate governance and the benefits of iNEDs committee

Question 4
a) Explain importance of Audit Strategy. Further Audit Plan and Work required to manage audit risk deriving from Inherent Risk, Detection Risk and Control Risk. Don’t forget to insert Business Risk
b) Payroll tests of controls – authorization of payment to employees wages
c) Payroll substantive tests
i. SAY trace and calculate amount banked in to employee Mr. Smith account are reflected as deduction from bank statements.
ii. SAY sight Mr Smith’s contract to determine his total wages and then calculate net pay after employees’ deductions. Trace the figure if its input to the employees payroll account. Perform total pay made in a week/month and trace the figure to the management’s monthly income statement. This substantiate that the employees figure are actually recorded in the monthly income statement which is totaled up together with other 11 months in the year to make the final employees wages item in CIS.
iii. DON’T SAY check Mr. Smith pay if its in the final accounts. [vague and generalized statement -Alan will kill you, and so would I!]
d) External auditors rely on internal auditors
i. Benefits on reliance – efficiency, economical and effective
ii. Possible reliance – internal auditors have wide powers + could report to Audit Committees + well qualified + experienced + objectives are similar to external auditors
iii. Impossible for reliance – material items must be independently verified + narrow internal audit scope of work + poor corporate governance like having internal auditors to report only to Chief Accountant

Question 5
a) Adjusting and non-adjusting events
b) Auditors responsibilities and audit work needed following the post audit events
c) Different types of Auditors’ Report and its effectiveness toward shareholders-members modified report

Other critical topics
-Going concern – audit procedures that involves the future prospects of company
-Audit sampling
-Analytical procedures embedded in Substantive tests
-Fraud and negligence – External Auditors’ responsibilities
-Not for profit organizations – completeness, accuracy, cut-off tests on income/donations -and expenditures. Adequacy of internal controls
-Small businesses – poor internal controls highlighted

Other critical exams techniques
TYPE I Question: Lists, Briefly outline auditors responsibilities.
- only have 1/2 mark per point. So your answers are:
ß ISA 240 requires auditrs to recognize fraud and errors that could materially affect financial statements
ß Apply professional skeptism
ß Seek legal advise if directors refuse to cooperate
ß Report primarily to shareholders-members
ß If suspects fraud, highlight in report to Board of Directors
ß Reasonable assurance that financial statement is true and fair.

TYPE II Question: identify weaknesses giving reasons for your concern over the internal controls over the inventory management. Justify pertaining to the case study by recommending solutions to overcome the weaknesses.
- 1 mark for identifying weaknesses
- 1 mark fro recommending improvements

IMPORTANT EXAM TECHNIQUE : Type II is FOUR TIMES more marks than Type I. Don’t waste your time being "safe" and give lengthy explanation to Type I Questions – which are normally found in F8 Paper Question Number 2.

In other words…
You are better off spending 36 minutes writing for a 20 mark Type II question than spending the same amount of time for a 5 mark Type I question.

Disclaimer of liabilities: While its advantageous to focus on high risk questions i.e. its likelihood that its examined in the coming exam, but a total reliance on them is detrimental to users' mental and emotional health. Discretion is required.

REFERENCE:
Alan Lewin, 2008, Ready to sit Paper F8?, Student Accountant, http://www.accaglobal.com/students/publications/student_accountant/archive/2008/90/3150174, October 2008