ANSWER TIPS

AUDIT RISK:
1. Look at the fs and review them to know the cause of the sudden increase or decrease in the
values. (Profit, revenue, total assets)
2. If the questions specify damage to nca then we must consider if impairment review was
done. If not ppe will be overstated and impairment cost will be understated.
3. If the co is trying to raise finance, then there will be chance of risk of management bias.
4. If there is a court case, then we must also consider the legal fees.
5. Patents should be capitalised not expensed.
6. If a % of revenue is given, then we should consider whether it meets the requirement of a
segment.
7. If discounts are given, then we have to say that valuation of inventory should be checked to
its nrv if not inventory value will be overstated.
8. If any bonus is given, then we must check the chance of management bias.
9. If a property is damaged and insurance is available, we still must record the impairment loss
as separate it is the standard law. And the insurance amount as receivables and deferred
income.
10. If the increase of profit or anything is not specifically given, then we can write in the answer
that the reason for increase has not been explained by discussions with the client to date.
11. If a product in transit is damaged and insurance on it is most likely to be provided, then it
should be considered as a contingent asset and should be disclosed.
12. Value in use should not be based on company’s annual growth rate as a whole.
13. If there is a risk of new audit client, then we have to say that opening balances should be
reviewed in accordance with isa 510.
14. If owner is selling his shares, we can say that there are chances of management bias.
15. If there is multiple performance obligation, then revenue should be allocated to performance
obligation in reference to their standalone prices.
16. For long term performance obligation according to IFRS 15 there is input method and output
method.
17. Output method should be based on work certified.
18. If there is high risky item, then we should say that auditor should maintain high level of
professional scepticism.
19. If the co is trying to get stock listing, then we have to write risk of management bias.
20. Share based payment scheme is a very complex and judgemental area so they are potentially
high-risk area.
21. If there is impairment, then we have to check if there is impairment as it is seen as a sign of
impairment.
22. If there is an associate then we can write risk of classification, disclosure of income,
impairment and lack of knowledge (should be accounted in equity method)
23. If inventory is in multiple locations, we must discuss if they have robust controls on inventory
count.
24. If inventory has increased significantly then we must check if the inventory has become
obsolete.
25. Analytical procedures – operating margin, gross margin, interest cover, current ratio,
receivables collection period, roce, effective tax rate (tax/pbt)
26. Profit on disposal of a subsidiary share that doesn’t lose control should be adjusted directly
in the equity. It should not be add as gain in oci or sopl.
 27. If a property is damaged and insurance is available for the damage then it both should be
considered as separate events and impairment expense should be recorded and the
insurance receivables should be recorded when it is available.
28. If revaluation model is used then it should be revalued more oftenly and an expert is needed.
29. If a transaction seems to be misstated willingly then we can say that further controls should
be checked to identify if any other transactions are not in accordance to the satnadard. Also
we can say that the opening balance of the asset might be incorrect as might have been
overstated willingly.
30. If a subsidiary makes fs in local legislation rules rather than ifrs then according to ifrs 3
business combinations subsidiary should have the same accounting policy as parent to make
group consolidated fs.
31. If the ammortisation is not charged we should ammortise according to the months left.
32. In IFRS 5 after reclassification the asssets should not be depreciated.
33. If there is a license then the chance of risk of misstatement of it as ppe should be considered
as it should be classified as intangible asset. Further risk arises regarding instead of
amortisation depreciation might be done.
34. If joint venture then it should be recognised as invenstment and should account using equity
method in accordance with ias 28 investment in associates and joint ventures. If not under
or overstated value of investment and inccorrevt presentation of income and expenses
relating to joint venture.
35. We should assess if the overstatement of profit decreased will become 0 if so it is a very
significant matter to be discussed.
36. The audit working papers should be retained for atrleast 5 years from the period of
preparation.
37. When performing audit on going concern auditor should focus on cashflows rather than
profits.
38. The auditor does not have reposnsiblity to perform procedures regarding events after the
reporting period.
39. If there is non-compliance with laws then the auditor should report to tcwg, if they are
invlived then hig authority like audit committeeshould be reported. The auditor must
maintain fundamental principle of confidentiality. But some laws enable to override it and
report the matter.
40. Internally generated intangible assets are not recognised.
41. In IFRS 5 asset there is a risk that the asset might not be reclassified to current assets which
create a risk of inappropriate classification.
42. In lease if there is purchase option then depreciation should be based on useful life not
lower of lease period and useful life.

AUDIT PROCEDURES:
1. IF A PROPERTY IS BOUGHT CONFIRM EXISTENCE BY VISITING
2. CONFIRM URCHASE BY AGRREING BANK LEDGER TO BANK STATEMENTS
3. If there is expert obtain information to confirm experience and qualification of the expert.
4. If there is expert obtain confirmation of experts independence
5. Reperform any calculations contained in the experts working papers.
6. If fv is used for investment property then enquire co if they have other inv property to
confirm if they are treated using fv model to confirm consistency.
7. If an asset is bought then confirm exitence by visiting the site
8. Obtain proof of ownership.

BUSINESS RISKS:
  We can always write on impact in profit margin cashflow.

TENDERING:
MATTERS TO BE INCLUDE:
1. Outline of the firm (locations, service offered, organisational structure, history of the firm)
2. Specialisms of the firm: (speciality of the firm that is relevant to the client)
3. Identify the requirements of the client: (write the requirement of the client from the
question)
4. Outline of the proposed audit approach: (likely to be the most detailed part, should include
the audit methodology used for the audit, procedures used, evidence gathered and how the
audit will be conducted. Also clarify they are in adherence to isa and other relevant
regulations.
5. Quality management: (emphasise importance of quality management and procedures used
to maintain quality audits, and their adherence to international standards on quality
management)
6. Communication with management: (outline the reports and other communications to be
made as part of the audit and the purpose content and timing of the reports_
7. Timing: (assess whether the provided time for the audit is reasonable, if there is
consolidated and individual fs then first individual fs audit should be done)
8. Fees: (fees and the calculation of fees that if rate per hour and the payment terms such as
instalments)
9. Key staff and resources: (number of members and relevant experience needed. If any
external specialists is required for the audit)
10. Other services: (non-audit services that might be beneficial for the client)

ADVERTISEMENT:
 If business advice is provided it will lead to self-review threat.

Other assignments:
 If there is uncorrected misstatements in the fs then As per ISA 450 evaluation of
misstatements identified during the audit the auditor is required to obtain an understanding
of the managements reasons for not making adjustments to the financial statements. Als o
the auditor is required to communicate with tcwg about the uncorrected misstatements and
the effect they will have individually or aggregate in the auditors opinion.
 If there are immaterial misstatements then we should state they are immaterial to the fs and
should be ignored
 Materiality should be set in pllaning set it should be revised as audit progresses when new
information becomes available.
 Without physical inspection existence can’t be confirmed and also the auditor will be not
able to identify damages and obsolence which would lead to impairment.
 Evidence obtained directly by auditor is more reliable than external evidences. If the external
party is an accomplice of the client co then it should be considered when depending on the
evidence.
 The issues raised in counting of inventory can be considered as a deficiencu of the internal
controls of the co and these should be discussed with tcwg in accordance to
 ISA 265 Communicating Deficiencies in Internal Control
to Those Charged with Governance and Management.
 Internally generated brand name will not be recognised in individual fs but will be recognised
in consolidated fs.
 Work of internal auditors should not be used in high risk areas.
 Some countries don’t allow to use the internal audit work of internal auditors
 To use internal auditors work we must check their competence, independence and quality of
work done.
 We should also have permission from the client co to use internal auditor’s work.
 Decision should be made by external auditor not internal, and risk is external auditors.
 When an accountant is asked to perform work for a non-audit client then to contact the
clients’ current auditors the firm should be given permission from the client. If the
permission is denied, then the engagement should be denied.
 If a new shop is started and it generates same revenue as old shops then it should be
questioned as new shops will take time to generate hig revenue.
 If bespoke customer cancels his contract we have to consider the chances of impairment of
assets as some machineries would be specifically for the production of the bespoke client.
 To prove negligence injured party must prove:
1. The auditor owes a duty of care. (literllay means auditor should perform the audit in a
good stabdard and relevant legal and professional way).
2. That duty of care has been breached.
3. Financial loss has occurred.
 According to ISA 240 auditors responsibilities relating to fraud in an audit of fs, the
management is primarily responsible for preventing and detecting fraud. The auditor is only
liable to obtain reasonable assurance that the fs are free from material misstatements
caused by fraud.
 If the client is a long standing client of the firm the there might be chance that the auditor
might not be exercising professional scepticism during the audit.
 Previous year audit evidence can be ued only if the auditor confirms that no changes have
taken place.
 As there will be high transactions relating to revenue of the cco the chance of detecting frud
in the revenue will be low as the sampling method will be less chance to find the fraud thus
resulting in high risk of fraud. Also high % of revenue will be on cash sales so it is ano another
indicator of fraud cahnces.
 Giving independent assurance will enhance the credibility of the report.
 To do forensic reporting the auditor should have professional competence and sufficient
experience in relation to gathering and safeguarding evidences.
 Inn forensic reporting there will be risk of confidentiality. Permsiion should be acquired form
the entity to disclose the information to third party.

FEES:
 We must check if the fees are related to success of the co then it means contingent fee which
is not acceptable.
 Contingent fee will lead to self-interest threat.
 Fee should be based on work done and expertise used.

MONEY LAUNDERING:
 Definition of money laundering and the steps should be explained by relating to the
question.
 If the criminal was to be questioned, then there are chances of tipping off.
  If the tipping off was on good faith it won’t be a problem but if not, then it will lead to a
problem.
 The method of reporting to mlro should be described and all the procedures.
 if implications is asked then we have to explain what money laundering is
 if senior asks the client about the transaction, then we have to write points of tipping off
 if it is clear that the client is doing money laundering then we have to write the risk for the
auditor for doing this engagement.

ETHICS:
 Non-audit services cannot be provided to public interest entity.
 If auditor is has long association with client then we can say that the professional skeptism of
the auditor might diminish and becomes too accepting of the clients methods and
explanations.
 In ethics answer we have to explain the significance of the threat.
 As per the code acceptability of hospitality is prohibited unless it is a trivial amount or does
not interfrere in the outcome.
 If the client is not an audit client, then there will be no self-review threat.
 If the client is not an audit client then we can write that the indepemndence of the firm have
not been previously considered which might lead to threat to objectivity.
 If the client pressurises the audit firm to complete the engagement or was informed that
they will not give work to the firm again then it can be seen as intimidacy threat.
 If the audit team perform both internal and external review then a significant ethical threta
of self review threat arises.
 When the audit firm perform the internal audit for the gtroup there is risk of auditor doing
management responsibilities.
 If tax services is done by the auditor then advocacy threat arises as the auditor is promoting
the client co to a third party that is tax authority.
 For a non listed co auditor can do tax services but safeguards should be placed regarding the
indepencd to objectivity and controls in place. This should reviewed by a senior tax
personenel.
 Tax service can be done to directors but the risk of doing the audit should be considered.
 Contingent fee leds to self-interset threat.
 Referral fees will lead to self-interest threa to objectivity and to professional competence and
due care.
 Referral fees are not prohibited as per the code but the the significance of the threat should
be evaluated.
 Safeguards of referral fees are disclosing the arrangement of referral fees and obtaining
advance agreement of the arrangaemnet.
 For listed entities it is prohibited to give internal audit services.
 No safeguards can reduce the threat relating to management responsibility.
 If there is any breach of laws and regulations then the auditor should document the findings
and discuss with the management. In addition the auditor might have statutory duty to
report the incident to relevant regulators.

Quality controls:
 First, we must introduce the co issues as a brief and whether they are applied as per ISA 220
QULAITY MANAGEMENT OF FINANCIAL STATEMENTS.
 Director’s emoluments are material by nature.
 Going concern audit will have subjective areas so the audit should be done by senior
personnel.
  Reviewing each other’s work is not acceptable according to ISA 220.
 As per isa 220 a more senior or experienced person should review the work conducted.
 Giving assistance is ok but doing the calculation is not acceptable and creates self-review
threat.
 Non audit service cannot be provided to public listed entity.
 If a valuer’s information is vague then we have to say it in the answer in regardandce to ISA
500 audit evidence auditor should obtain sufficient and appropriate evidence.
 If audit is time pressured then there will be detection risk due to not obtaining sufficient
evidences.
 If the auditor is asked to assist in something like final presentation then we can say that it is
management responsibilities and should not be involved. The auditor can review for the
bank but cannot attend the final presentation.
 If auditor intends to rely on internal audits over a period of time then it should be tested
regularly as it should provide evidence that the internal control systems are operating
effectively. This is due to chance of change of internal controls system over the period of
time.
 If there is a component in a group that we are not auditing then we must check if we have
understanding about the component auditor and be involved wityh the component auditors
risk assessment to identify the risk of material misstatements.
 The group audit materiality should not be used for subsidiary.
 The subsidiary materiality should be discussed by group auditor to component auditor.
 If there is any breach in laws and regulations by the client or brach of laws by employee then
as per ISA 250 consideration of Laws and Regulations in an Audit of Financial Statements the
auditor should obtain understanding of the laws and regulations and the nature of the
activity and if legally require the auditor should report the breach to appropriate authority. If
needed even to outside audthority but should be faithfully and shoulc consider the legal
implications.

Matters relating to quality management before accepting the engagement:

 When determining whether to accept the engagement a firm should assess whether this
would be possible under iqsm1 quality management for firms that perform audit or review
of fs and other assurance engagements.
 It should be based on nature and circumstances of the engagement, integrity of the client
and firms’ ability to perform the engagement.
 The business model, operation structure and the operations of the clienbt should be
understood to do the engagement.
 Chances of money laundering should be assessed. (owner managed, trust structure,
donations).
 Customer due diligence should be performed.
 It should be considered why the client approached the firm rather than their existing audit
firm.
 Further information should be obtained from current auditors and other external personnels.
If the permission is denied, then ethe engagement should not be accepted.
 Firm skills and resources
 If there are any systems involved the need of its assistance should be considered.

specific aspects of the terms of engagement which should be agreed:

 Identification of subject matter
 Purpose of the engagement and intended user of the report (agree the specific purpose,
need permission to communicate with third parties and intended users are to be specified).
  Responsible party (like financial controller)
 Nature of the engagement (non-assurance and no opoinion will be provided on agreed upon)
 Timing and extent of procedures (what the firm will do and will not do in the specified time)
 Reference to the expected form and content of the report

Matters to be considered:
 We must use a mare approach.
 Materiality, accounting treatment, risk, evidence.
 We should check the year end dates.
 In lease financial liability = sale proceeds (cv+profit)
 Subsidiary should be on the basis of line by line of the fs while associate will be shown as a
single line in both sofp and sopl.
 If subsidiary is considered as associate, then there is chance that audit report will be adverse
and pervasive.
 When checking an item is material, we have to say both sopl and sofp. Profit material will be
sopl and asset material will be sofp.

PFI:
 Based on ISAE 3400 the examination of prospective information, certain matters are
considered before the engagement is accepted.
 Scope of the work: must consider the specific terms of the engagement, what information
should be included.
 Intended use of the information: whether it is for general or limited assurance.
 Period covered by the PFI: as period increases reliability o information decreases.
 Nature of the assumptions: should not accept if the assumptions used are clearly unrealistic.
 Resources and skills: staff available with appropriate skills and expertise to perform the PFI
engagement within the specified time limit.
 The assurance will be negative assurance and it is lower level of assurance than an aidit of
historical information.

CONTENT OF THE PFI REPORT:

As per isae 3400 report should have:
 Title, addressee and sign
 Identification of the PFI
 A reference to the isae 3400
 A statement that management is responsible for preparing pfi and the assumptions used.
 The usage if it is limited or general
 An opinion whether the pfi is properly prepared in the basis of assumptions and is in
accordance with relevant standards.
 Appropriate caveats concerning achievability of the results indicated in the pfi.

PFI AUDIT PROCEDURES:

 confirm that accounting policies applied in the fs have been consistentlly in accordance with
relevanat standards.
 Recast the forecast to ensure it is arithmetically accurate
 Perform analytical procedures of pfiwith historical data to confirm consistency of the report
 Enquire the management about the assumption used in the preparation of the pfi.
 Asses whether any expenditure is missing like depreciation.
 Investigate any unsua4lk trendsthrough discussion with management.
NEED OF CUSTOMER DUE DELIGENCE:
 It is a procedure took for anti-money laundering regulations
 The need for identifying the client and their operations
 It is a risk assessment procedure
 Firm should understand the business operations and structure of the co like owners,
shareholders etc and its source of funds.
 Where a business relationship is established understand the purpose of it.
 The record obtained for customer due diligence must be retained for a minimum of 5years
after the business relationship.
 To confirm identity we can check their passports.

CRITICAL APPRAISAL OF AUDITORS REPORT:

*We have to check:
1. If opinion is correct.
2. If opinion and basis of opinion headings are correct.
3. If subject matter name and period is given
4. If they have used unprofessional wordings (name of a person instead as management).
5. If they gave vague information (incomplete).
6. If they have used aberrations like ifrs (it should not be used).
7. If they have named and used relevant standard.
8. If the materiality is quantifiable and standard.
9. If the explanatory paragraph is correct (like emphasis matter paragraph)

 We cannot say proven conclusively as only reasonable assurance is provided rather than
absolute.
 If the questions states, they have acquired a subsidiary then it is vague information as name
of the subsidiary co is not stated.
 If a matter is disclosed in the fs and question gives in the note. It is wrong as number of the
note should be provided.
 If a standard is trying to be referred, then we cannot say relevant standard instead the
specific standard should be recommended.

PLANNING OF KPI:
 Understand and agree the scope of the engagement.
 Obtain an understanding of the entity.
 KPI should represent the priorities of the co.
 Evaluate KPI to ensure they are quantifiable and to ensure evidence will be available to
support the stated KPI.
 Flagging any KPI that are not specific enough to measure accurately.
 Consider the potential for manipulation for each KPI.

PROBLEMS ARISING IN AUDITING KPI:

 lack of skills and experience required to audit KPI.
 Potential for manipulation.
 Evidence may not be sufficient to provide assurance.
 Significant amount of subjectivity,

Matters to consider before accepting KPI:

1. Resources and skills
2. Threat to objectivity as it is a non-audit service.
 3. Time pressure
4. Risk of the co
5. Chances of manipulation
6. If overseas co then the cost to travel and willingness to travel
7. Commercial consideration (risk of losing an important audit client should be considered). But
this should not override any ethical considerations.

Examination procedures of PFI:

 Recalculation of forecast statement of profit or loss to confirm mathematical accuracy.
 Confirmation that accounting policies used in forecast statements is in accordance with IFRS.
 Discuss the key assumptions used to prepare forecast to assess the reasonableness and
consistency.
 Written representation from management confirming reasonableness of the assumptions.
 Recalculation of depreciation
 Obtain and review a breakdown of operating expenses to ensure all items are included.
 Perform analytical review of revenue cos increase in profit etc.
 The competence and experience of the staff who prepared the forecast should be assessed.

ISA:
 PFI – ISAE 3400 the examination of prospective financial information
 Quality management: ISA 220 revised quality management for an audit of financial
statements.
 Opening balances – ISA 510.0

Climate related:
Climate‐related risks (CRR) – impact on planning and performing the audit During the planning stage,
the auditor must obtain an understanding of the entity, the industry in which the entity operates and
its system of internal control. This will help the auditor understand the level of exposure the client ha
s to CRR which must be taken into consideration when identifying and assessing risks of material mis
statement and designing appropriate audit procedures.
Industries directly exposed to CRR include energy, agriculture, transportation, construction and manu
facturing. Other industries may be indirectly exposed due to supply chain issues.

Companies directly exposed to CRR may have risks of material misstatement related
to impairment of assets, provisions, going concern, adequacy of disclosures, amongst others.
When the auditor obtains an understanding of the entity’s system of internal control,
they must understand the components of internal control such as the entity’s risk
assessment process for identifying climate‐related business risks which are relevant to
financial reporting. Due to the inter‐
relationship between risk and materiality, the assessment of CRR will also impact the determination
of materiality, with preliminary materiality likely to be set at a lower amount for entities which are m
ore exposed to CRR. The auditor must also consider the information needs of users and assess wheth
er certain balances and disclosures affected by CRR will influence users’ decisions as these may be m
aterial by nature.
Some governments have brought in requirements for disclosures relating to CRR and therefore as par
t of their consideration of laws and regulations, auditors will need to ensure compliance with these n
ew requirements.
The results of the auditor’s risk assessment will influence the design of appropriate audit procedures
responsive to those risks. Where CRR are significant, procedures which provide more persuasive evid
ence will need to be performed to ensure sufficient and appropriate evidence is obtained, particularl
y in respect of balances affected by estimation uncertainty such as valuation of assets which may be
affected by impairment.
For some areas such as estimation of energy resources (e.g. gas, fossil fuels) an auditor’s expert may
need to be used to provide audit evidence. The requirements of ISA 620 will therefore apply.
The going concern status of some entities may be uncertain for example where extreme weather is b
ecoming more common causing devastating effects year on year.
CRR will need to be taken into account by management when assessing the ability to continue as a g
oing concern, and then by the auditor when evaluating management’s use of the going concern basis
of accounting, and when assessing the adequacy of disclosures of material uncertainties relating to g
oing concern.
If the auditor is not satisfied that the financial statements are free from material misstatements relat
ed to climate issues, the auditor must consider the impact on the auditor’s report and opinion. Even i
f climate‐related issues are appropriately accounted for, there may be a need for additional communi
cation in the auditor’s report such as inclusion in the key audit matters section for a listed company o
r the need for a material uncertainty related to going concern paragraph where the client has adequa
tely disclosed the issues. Finally, where climate-related matters are included in the other published in
formation within the annual report, and such information is made available to the auditor before the
audit is finalised, the auditor will need to read this other information and report any misstatements i
n accordance with ISA 720.

Initial audit engagement:

 ISA 300 suggests that unless prohibited by laws arrangements should be made with the
predecessor auditor to review their working papers as it can help to assess the
appropriateness of opening balances.
 It is also important to know whether any previous year auditor’s reports were modified if so
the reason for the modification.
 Professional clearance should have been sought as a process of client acceptance by
discussing with previous auditor.
 Any ethical issues raised during client acceptance should be considered.
 Regarding opening balances procedures should be planned in accordance to ISA 510 initial
audit engagements opening balances.
 It is important to develop an understanding of the business including the legal and regulatory
framework applicable to the co.

New auditors report:

The extended auditor’s report that is given in ISA 700 Forming an Opinion and Reporting on Financial
Statements differs from the previous version of the report in the following ways: The opinion is given
at the start of the report rather than towards the end of the report where users previously had to
search for it. The
were previously referred to in an Other Matter paragraph which users potentially did not pay much
attention to. The section on auditor responsibilities is much more detailed than the previous version
of the auditor’s report. There has always been an expectation gap in that users think the auditor has
a greater responsibility than they actually have for detecting fraud and error and what the audit
involves. By including more detail about the audit process it should be more evident to users that an
audit involves a significant amount of judgment about subjective matters which means it is not a
straightforward exercise and different auditors may reach different conclusions about the same issue.
370 KAPLAN PUBLISHING ANSWERS TO PRACTICE QUESTIONS – SECTION B : SECTION 4 For listed
companies a Key Audit Matters section is included which describes matters the auditor considers to
be of importance to the user to aid their understanding of the audit. These matters are selected from
the matters communicated with those charged with governance and include areas of higher assessed
risk of material misstatement and areas which involve significant management judgment. This again
is intended to highlight to users the difficulties faced when auditing a company and how the audit
addressed the matters. If users have a greater understanding about the complexities of an audit they
should be more sympathetic towards the auditor and recognise that not every fraud and error can be
detected during the audit. Whilst the changes described above appear to provide much better
communication between the auditor and users and therefore should go some way to reduce the
expectation gap, the benefits may not be seen by everyone. The report is much longer, extending
onto several pages as compared with one or two pages previously. Users may not be inclined to read
through that amount of detail. Even with an understanding that the audit is a subjective exercise
users may still believe the auditor’s main responsibility should be to detect fraud as they are
professionally qualified and should know what to look for. For those who understand more about the
process and recognise the issues of subjectivity and complexity they may see the audit as a pointless
exercise which may affect the credibility of the audit process and the profession as a whole. In
conclusion there are many benefits from the introduction of the extended auditor’s reports and the
increased level of detail should improve the understanding of users of the financial statements and
the auditor’s report. However, the reports may provide too much detail which may not be read at all
or which may result in users focusing more on the limitations of an audit which may reduce the
credibility of the audit process.

Quality management
The need for change The main objectives for an accountancy firm in respect of quality control are to:
− − Perform work in accordance with professional standards and applicable legal and regulatory
requirements, and Issue engagement reports which are appropriate in the circumstances. Quality
management is an area of increasing importance due to the accounting scandals that have been
widely publicised in recent years. The accountancy profession has always tried to maintain
confidence in the work of professional accountants and recent scandals such as Carillion, Patisserie
Valerie, BHS and Ted Baker are likely to cause confidence in the profession to plummet. The IAASB is
seeking to increase the robustness of quality systems applied by accountancy firms to reduce the risk
of failures of this scale and frequency occurring by introducing a range of quality management
standards to replace and revise existing standards in this area. Current guidance Currently there are
two quality control standards providing guidance: − − ISQC 1 Quality Control for Firms that Perform
Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements
ISA 220 Quality Control for an Audit of Financial Statements. Proposed guidance There will now be 3
quality standards providing guidance for firms: 1 ISQM 1 – Quality Management for Firms that
Perform Audits or Reviews of Financial Statements or Other Assurance or Related Services
Engagements (currently ISQC 1) This standard enhances the current requirements of ISQC 1 and
requires a more proactive approach for identifying risks to quality and responding to them
appropriately. 2 3 ISQM 2 – Engagement Quality Reviews (currently included within ISA 220 and ISQC
1) This standard extracts the requirements for engagement quality control reviews from the existing
standards of ISQC 1 and ISA 220. This has been done to emphasise the need for engagement quality
control reviews and to differentiate the responsibilities of the engagement quality control reviewer
from those of the firm. ISA 220 (Revised) – Quality Management for an Audit of the Financial
Statements The revised standard aims to keep ISA 220 fit for purpose in a wide range of
circumstances and in a complex environment by emphasising the importance of professional
scepticism, enhancing the documentation of the auditor’s judgment, and reinforcing the need for
robust communications during the audit. 376 KAPLAN PUBLISHING ANSWERS TO PRACTICE
QUESTIONS – SECTION B : SECTION 4 Improvements/benefits of the proposed changes The changes
are being proposed to improve quality of engagements by: − − − − Bringing the standards up to date
to take account of the evolving environment and keeping them fit for purpose. Improving the
governance of the accountancy firm by increasing leadership responsibilities including enhancing the
engagement partner's responsibilities. Greater monitoring of the firm's quality management
systems. More thorough engagement quality reviews. Scalability The new standards requires firms to
proactively identify and respond to risks affecting quality. This allows for the standards to be applied
proportionately to the size of the accountancy firm as smaller firms will not necessarily need to
implement the same policies and procedures as larger firms. Firms will need to customize the design,
implementation and operation of its quality management system based on the nature and
circumstances of the firm and the engagements it performs.

Best estimate and hypothetical assumptions

Best estimate assumptions relate to future events that management expects to take place and the
actions management expects to take. Management may have already implemented a plan which
incorporates these assumptions and as such there may be some evidence available to support them.
This makes it easier for the auditor to validate the reasonableness of the assumptions used to
prepare the forecast which may reduce engagement risk. Hypothetical assumptions relate to future
events and management actions that are not necessarily expected to take place. Hypothetical
assumptions generally relate to events and actions further into the future therefore are more
uncertain and less evidence, if any, will be available to support them. This makes it more difficult for
the auditor to validate the reasonableness of the assumptions used to prepare the forecast which
may increase engagement risk.

DATA ANALYTICS:

Data analytics Data analytics is the science and art of discovering and analysing patterns,
deviations and inconsistencies, and extracting other useful information in the
data of underlying or related subject matter of an audit through analysis,
modelling, visualisation for the purpose of planning and performing the audit.
Data analytics can allow the interrogation of 100% of the transactions in a
population where the data set is complete and can be provided to the auditor.
Essentially data analytics is a progression from using computer assisted audit
techniques to perform analytical procedures.

How data analytics can improve audit quality

As there is potential to audit 100% of the transactions, detection risk is significantly reduced.
Audit procedures can be performed more quickly resulting in more time being
available to analyse the information and exercise professional scepticism.
There is likely to be greater interaction between the audit firm and the audit
committee throughout the year which is likely to result in the firm’s knowledge
of the business being updated on a regular basis as compared with a traditional year‐
end audit where the understanding is updated during the planning stage.
Specifically, in relation to the Sunshine Hotel Group, audit quality can be
improved by improving the consistency of the audits of the subsidiaries within
the group, irrespective of which office of the firm performs the audit.
This means the auditor is more likely to issue an appropriate audit opinion.

SUSTAINABILITY REPORTS:
 There is 2 materiality financial and impact materiality
 Financial is impact on fs
 Impact materiality is impact on the society.
 While considering materiality there will be qualitative in nature and quantitative.