Fieldwork

Homework question
ACCA AAA exam standard question

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1 Fieldwork – homework question

INTRO

It is 1 July 20X5. You are a manager in Newman & Co, a global firm of Chartered Certified
Accountants. You are responsible for evaluating proposed engagements and for recommending to
the partners whether or not an engagement should be accepted by your firm. You are also
responsible for the audits of other companies.

The following exhibits, available below, provide information relevant to the question:

Exhibit 1: Eastwood Co – request to perform assurance over Eastwood Co’s sustainability reporting

Exhibit 2: Awdry Co – request to evaluate the client’s accounting treatment and design the audit
procedures.

Exhibit 1 – Eastwood Co

Eastwood Co, a listed company, is an existing audit client and is an international mail services
operator, with a global network including 220 countries and 300,000 employees. The company
offers mail and freight services to individual and corporate custome rs, as well as storage and
logistical services.

Eastwood Co takes its corporate social responsibility seriously, and publishes sustainability key
performance indicators (KPIs) in a Sustainability Report, which is published with the financial
statements in the annual report. Partly in response to requests from shareholders and pressure
groups, Eastwood Co’s management has decided that in the forthcoming annual report, the KPIs
should be accompanied by an independent assurance report. An approach has been made to your
firm to provide this report in addition to the audit. Your firm has recently established a specialist
social, environmental and sustainability assurance department based in Oldtown, and if the
engagement to report on the Sustainability Report is accepted, it would be performed by members
of that team, who would not be involved with the audit.

You have also had a meeting with Ali Monroe, the manager responsible for the audit of Eastwood
Co, and notes of the meeting are given below:

Notes from meeting with audit manager, Ali Monroe:

Newman & Co has audited Eastwood Co for three years, and it is a major audit client of our firm,
due to its global presence and recent listing on two major stock exchanges. The audit is managed
from out office in Oldtown, which is also the location of the global headquarters of Eastwood Co.

We have not done any work on the KPIs, other than review them for consistency, as we would with
any ‘other information’ issued with the financial statements. The KPIs are produced by Eastwood
Co’s Sustainability Department, located in Fartown.

We have performed audit procedures on the charitable donations, as this is disclosed in a note to
the financial statements, and out evidence indicates that there have been donations of $9 million
this year, which is the amount disclosed in the note. However, the draft KPI is a different figure -
$10.5 million, and this is the figure highlighted in the draft Chair’s Statement as well as the draft
Sustainability Report. $9 million is material to the financial statements.

The audit work is nearly complete, and the annual report is to be published in four weeks, in time for
the company meeting, scheduled for August 20X5

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2 Fieldwork – homework question

Exhibit 2 – Awdry

Awdry Co is an entity whose principal activity is the operation of a regional railway network. The
audit for the year ended 30 April 20X5 is the first year your firm has audited Awdry Co. The financial
statements recognise total assets of $58 million and a profit before tax of $7.4 million. The detailed
audit fieldwork has started and the audit supervisor has brought the following matter to your
attention in relation to the testing of key accounting estimates.

On 1 May 20X4, Awdry Co granted 550,000 share appreciation rights to 55 executives and senior
employees of the company with each eligible member of staff receiving 10,000 of the rights. The fair
value of the rights was estimated on 30 April 20X5 by an expert using an options pricing model at
$4.50 each. Awdry Co prides itself on good employee relations and the senior management team
has estimated that all 55 staff will qualify for the rights when they vest three years after the granting
of the rights on 1 May 20X4. The company has recognised a straight line expense in this year’s draft
accounts of $825,000.

Required:

a) Using the information in Exhibit 1, evaluate the matters which should be considered
before your firm accepts the invitation to perform an assurance engagement on the
Sustainability Report of Eastwood Co.
(10 marks)

Note: You should only use Exhibit 1 for part a)

b) Using the information in Exhibit 2:

i) Evaluate the client’s accounting treatments and the difficulties which you might
encounter when auditing the accounting estimates described above; and
ii) Design the audit procedures which should now be performed to gather sufficient
and appropriate evidence.
(10 marks)

Note: You should only use Exhibit 2 for part b)

Professional marks will be awarded for the demonstration of skill in analysis and evaluation,
professional scepticism and judgement and commercial acumen in your answer

(5 marks)
Total: 25 marks

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3 Fieldwork – homework question

Ben’s answer plan

Note – this is a ‘strong’ answer, planned / written under exam timed conditions. It isn’t
perfect, but shows you what is achievable!

a) Matters to consider BEFORE accepting (10 marks)

Global company (220 countries) – resources
Self interest – fees
Self review – KPIs in audit, inconsistent
Advocacy – promote client
Risk / public interest – 2 listings, pressure groups
Experience / professional competence – technical (emissions)
Time pressure (4 weeks) – resources / quality
Fees

b) Evaluation / audit procedures (10 marks)

Total assets $58m, PBT $7.4m – use for materiality calcs
First time audit
Listed client

i)
Evaluate accounting treatment
Material expense (11.1% PBT)
Correct to revalue at year end to FV

Difficulties when auditing

All 55 qualify in 3 years – some may leave, some may not qualify (e.g. disciplinary)
Options pricing model – complex, subjective (detection risk)
ii)
Audit procedures
T&Cs – agree to contracts
55 – discuss with management. Assess reasonableness (staff turnover rates)

HR records – trends and patters of historic staff turnover

External expert – qualifications / experience / independence
Review the external expert’s work
Review forecasts on staff turnover and staffing levels

Ben’s full written answer

Note – this is a ‘strong’ answer, planned / written under exam timed conditions. It isn’t
perfect, but shows you what is achievable!

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4 Fieldwork – homework question

a. Matters to consider BEFORE accepting (10 marks)

Global company in 220 countries. May require site visits to overseas locations, as well as the
Fartown office location (could be a long way from Oldtown). Do we have the resources in
the required locations to perform the work?

Self interest threat due to high fees. The work could be highly lucrative. Even though this
will be commercially beneficial for our firm, we may be willing to overlook issues to ensure
that fees are received. A reasonable 3 rd party may consider the auditor’s objectivity to be
compromised.

Self review threat. The KPIs related to the donations are reflected in the audited financial
statements (and are seen to be inconsistent $9m in FS and $10.5m draft KPI). The audit
team may accept the KPIs as correct without fully investigating / may be willing to overlook
issues to avoid drawing attention to poor work by the firm

Advocacy. By signing off on the KPIs to present to third parties, our objectivity could be
compromised. We could be perceived as promoting the client, compromising the objectivity
of the audit.

Risk / public interest. The client is listed on 2 exchanges, and pressure groups are known to
be relying on the KPIs. We may owe a duty of care and could be sued if there are issues with
the KPIs.

Experience / professional competence. There are KPIs covering technical areas (e.g.
emissions). We may lack the expertise to robustly challenge management on these
measures / may not fully understand the evidence. There could be issues that aren’t
detected by the team.

Time pressure (4 weeks). The quality of work may be compromised as the team rushes to
meet the deadline. Less time to visit required locations and to review evidence in detail.
Could lead to undetected issues in the KPIs.

Fees need to be sufficiently high to justify the risk of the work and the amount of work
required. Commercial viability should be assessed.

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5 Fieldwork – homework question

Ben’s full written answer

b) Evaluation & difficulties / audit procedures (10 marks)
i)
Evaluate accounting treatment
Material expense at 11.1% PBT. Account treatment is correct, the scheme has been
revalued to fair value at the reporting date.

Difficulties when auditing

Assumption that all 55 will qualify for the shares in 3 years time is subjective. It is not
possible to know what will happen in the future here. Some staff may leave the business
(likely they will forfeit their rights as a result). Others may not qualify for other reasons (e.g.
disciplinary, performance management).

Options pricing model is complex, with subjective assumptions. Auditor may lack the
knowledge to robustly challenge the assumptions made. May also fail to identify errors in
the calculation (detection risk).

Audit procedures
Terms & conditions of the scheme should be agreed to contracts. Assess if the terms include
matters that would reduce the number of staff qualifying (e.g. do they lose their rights if
they leave the business / are in a disciplinary process).

Assumption that all 55 staff will qualify. Discuss with management and assess the
reasonableness of their response. Seek supporting evidence – e.g. what have past staff
turnover rates been like? Are they consistent with management’s assumption that all staff
will be with the business in 3 years?

Review HR Records. This will help to obtain an understanding of past trends and patterns in
relation to the staff retention of senior members. This historic data will help to verify
whether management’s assumptions on future staff retention are reasonable.

External expert. Ensure they are appropriately qualified by obtaining qualification

certificates. Assess their level of experience / competence by obtaining 3 rd party references
Verify that they are not a related party of the firm (not biased). Do directors of the valuation
firm hold shares in Awdry? Check the register of shareholders.

Work of the external expert. Review the work of the external expert to verify that the
assumptions used by the expert are reasonable. The firm may also want to engage an
independent expert to do so.

Review forecasts on staff turnover and staffing levels. This will help in verifying that the
assumptions made by management with regards to the staff continuing to be in
employment until the vesting period is consistent with management’s future plans and
expectations.

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6 Fieldwork – homework question

Examiner’s mark plan

Maximum 10 marks
b.

Maximum 10 marks

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7 Fieldwork – homework question

Examiner’s mark plan – Professional Skills Marks

Analysis and evaluation

- Appropriate use of the information to support discussion, draw appropriate conclusions and design
appropriate responses (MUST DO ALL 3) (E.G. PROVIDE A BRIEF EXPLANATION OF THE ACCOUNTING
TREATMENT RELATED TO THE CASH SETTLED SHARE BASED PAYMENTS AND CONCLUDE THAT THE
ACCOUNTING TREATMENT APPLIED BY THE CLIENT IS CORRECT)
- Appropriate assessment of professional issues raised, using examples where relevant to support
overall comments (E.G. 4 WEEK DEADLINE – CREATING A PROFESSIONAL COMPETENCE ISSUE DUE
TO HAVING TO RUSH TO COMPLETE THE WORK)
- Appropriate use of the information to determine and apply suitable calculations (E.G. PERFORM A
CALCULATION OF THE CASH SETTLED SHARE BASED PAYMENTS TO SUPPORT YOUR POINT THAT THE
CORRECT ACCOUNTING TREATMENT WAS APPLIED BY THE CLIENT)
Professional scepticism and judgement
- Identification of possible management bias and consideration of the impact on the sustainability
and CSR Reports (E.G. INCONSISTENCY RELATED TO THE CHARITABLE DONATIONS: MANAGEMENT
MAY BE INCENTIVISED TO SHOW HIGHER CHARITABLE DONATIONS ON THE CSR REPORT TO MAKE IT
LOOK INTO A MORE FAVOURABLE LIGHT ….OR…..INCETIVISED TO SHOW LOWER CHARITABLE
DONATIONS ON THE FINANCIAL STATEMENTS TO REPORT HIGHER PROFITS)
- Appropriate application of professional judgement demonstrate awareness of areas that are more
prone to management manipulation (E.G. MANAGEMENT INCENTIVE TO OVERSTATE PROFITS TO
BOOST SHARE PRICE, MAKING THEIR SHARE OPTIONS MORE VALUABLE)
- Effective challenge and critical assessment of certain assumptions made by management (E.G. IT
MAY BE UNREALISTIC FOR MANAGEMENT TO ASSUME THAT ALL OF THE 55 SENIOR MANAGEMENT
ENTILTED FOR THE SHARE BASED PAYMENTS WILL REMAIN IN EMPLOYMENT THROUGHT THE
VESTING PERIOD OF 3 YEARS)
Commercial Acumen
Showing insight and perception in understanding the wider implications and impact of
implementing relevant recommendations and demonstrate acumen in arriving at suitable
conclusions (E.G. 220 COUNTRIES, STAFF MAY BE REQUIRED TO TRAVEL – THIS IS AN ADDITIONAL
COST THAT MUST BE FACTORED INTO THE FEE)

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8 Fieldwork – homework question

Tutorial Notes

Part a)
Can you think of a very common mistake that students tend to make in AAA?..... You’re right…. It is
very common that students miss out on marks for making points that are too generic….

….and questions like the one in part a), tend to be a trap for such a mistake!
Students tend to miss out on marks by discussing points that can be used in every scenario which is
related to a non-audit engagement… such as ‘scope being a matter to consider’ and explaining that
‘limited assurance will be given’

How can you avoid this?... try and guess… drum roll…. APPLICATION, APPLICATION, APPLICATION!!
Use the hints included in the scenario and ensure that your points are tailored.

Lets do a little illustration and build up a point together which is worth 1 full mark:

‘The engagement should be commercially viable’ – correct, this is right and worth ½ mark. However,
it is too generic.. as can be applied to every engagement.. (which firm would consider accepting an
engagement at a loss?)

Now we have to make this point tailored to the scenario by applying the technical knowledge
mentioned above, to the scenario that we’ve been given… ‘The client operates in 220 countries and
there are also offices in Farland which must be visited, therefore the fee should take into
consideration to cover additional costs such as travel and accommodation’ This is worth the other ½
mark which is what makes or breaks in AAA.. repeat after me… APPLICATION, APPLICATION,
APPLICATION!!

Part b)
Another very common mistake in AAA? Correct.. it’s when students don’t answer the full question….
Always start by planning an answer with subheadings that link back to the requirement! Questions
like the ones in part b) tend to be a trap for such mistakes as students tend to discuss parts of the
requirement and miss out on marks for failing to discuss other parts!

Now can you think of an easy way to score marks?.... numbers, numbers, numbers… whenever
you’re given numbers… guess what? You have to use them! Here easy extra marks could be scored
by calculating the materiality of each matter!

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9 Fieldwork – homework question