ACCA APPROVED CONTENT PROVIDER A ACCA approved content provider C C A BPP Learning Media is dedicated to supporting aspiring business professionals P with top-quality learning material as they study for demanding professional 7 exams, often whilst working full time. BPP Learning Media’s commitment to student success is shown by our record of quality, innovation and market leadership in paper-based and e-learning materials. BPP Learning Media’s study A d v materials are written by professionally qualified specialists who know from a n c personal experience the importance of top-quality materials for exam success. e d A u d it a Paper P7 n d Advanced Audit and Assurance (International) A s s This ACCA Study Text for Paper P7 Advanced In addition to ACCA examining team reviewed u r a Audit and Assurance (International) has been material you get: n c comprehensively reviewed by the ACCA examining e • A user-friendly format for easy navigation ( team. This review guarantees appropriate depth In • Exam focus points describing what the examining t and breadth of content and comprehensive syllabus e team will want you to do rn coverage. a • Regular Fast Forward summaries emphasising the t io key points in each chapter n a • Questions and quick quizzes to test your l) • Aun pdrearcsttiacned qinugestion bank containing exam- S standard questions with answers t u d • A full index y • All you need in one book T e x t ACCA Approved 2F 0o 16, Mr exa Study Text Free access m ars to our Exam ch in 2 S Paper P7 Success site 0e 1p Contact us 7 antem Advanced Audit and Assurance Look inside BPP House db 1L4o2n-d1o4n4 W Ux12b r8idAgAe Road Juneer 20 (International) United Kingdom 216 TT 0+4844 5( 00)7250 1 810704 0( U2K2)11 (Overseas) 017, De For exams in September 2016, December c E [email protected] e m 2016, March 2017 and June 2017 bpp.com/learningmedia b e r February 2016 £32.00 ACP7(INT)ST16 (RICOH).indd 1-3 04/02/2016 16:09 ACCA APPROVED CONTENT PROVIDER As the first accredited publisher of ACCA materials, BPP Learning Media has set the benchmark for producing exceptional study materials for students and tutors alike. Our Study Texts, Practice & Revision Kits and i-Passes (for exams on demand) are reviewed by the ACCA examining team and are written by our in-house authors with industry and teaching experience who understand what is required for exam success. EXAM SUCCESS SITE To help maximise your chances of succeeding in your exams, we’ve put together a suite of exclusive ACCA resources. Our Exam Success site provides you with access to a free digital version of this publication, as well as extra resources designed to focus your efforts on exams and study methods. To access the Exam Success site, please email [email protected] with the subject line “Access to Exam Success site - eBook”, including your order reference number and the name of the book you’ve bought (ie ACCA F5 Study Text) for your access code. Once you have received your code, please follow the instructions below: To access the BPP ACCA Exam Success site for this material please go to: www.bpp.com/ExamSuccessSite n Create a user account if you don’t already have one. Make sure you reply to the confirmation email. n Log in using your registered username and password. Select the paper you wish to access. n Enter the code you received when prompted. You will only have to do this once for each paper you are studying. S T U D Y PAPER P7 T E ADVANCED AUDIT AND X ASSURANCE T (INTERNATIONAL) BPP Learning Media is an ACCA Approved Content Provider. This means we work closely with ACCA to ensure this Study Text contains the information you need to pass your exam. In this Study Text, which has been reviewed by the ACCA examination team, we:  Highlight the most important elements in the syllabus and the key skills you need  Signpost how each chapter links to the syllabus and the Study Guide  Provide lots of exam focus points demonstrating what is expected of you in the exam  Emphasise key points in regular fast forward summaries  Test your knowledge in quick quizzes  Examine your understanding in our practice question bank  Reference all the important topics in our full index BPP's Practice & Revision Kit also supports this paper. FOR EXAMS IN SEPTEMBER 2016, DECEMBER 2016, MARCH 2017 AND JUNE 2017 First editio n 2007 A note about copyright Ninth edition February 2016 Dear Customer What does the little © mean and why does it matter? ISBN 9781 4727 4434 0 (Previous ISBN 9781 4727 2685 8) Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them on e-ISBN 9781 4727 4676 4 their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating British Library Cataloguing-in-Publication Data rights over the use of the content. A catalogue record for this book Breach of copyright is a form of theft – as well as being a criminal is available from the British Library offence in some jurisdictions, it is potentially a serious breach of professional ethics. Published by With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: BPP Learning Media Ltd BPP House, Aldine Place  Photocopying our materials is a breach of copyright London W12 8AA  Scanning, ripcasting or conversion of our digital materials into www.bpp.com/learningmedia different file formats, uploading them to facebook or e-mailing them to your friends is a breach of copyright Printed in the United Kingdom by You can, of course, sell your books, in the form in which you have bought them – once you have finished with them. (Is this fair to your RICOH UK Limited fellow students? We update for a reason.) Please note the e-products Unit 2 are sold on a single user licence basis: we do not supply 'unlock' codes Wells Place to people who have bought them secondhand. Merstham And what about outside the UK? BPP Learning Media strives to make RH1 3LG our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal Your learning materials, published by BPP Learning Media Ltd, activity by illegally photocopying our material or supporting are printed on paper obtained from traceable sustainable organisations that do. If they act illegally and unethically in one area, sources. can you really trust them? All rights reserved. No part of this publication may be reproduced, Copyright © IFRS Foundation stored in a retrieval system or transmitted, in any form or by any All rights reserved. Reproduction and use rights are strictly limited. No means, electronic, mechanical, photocopying, recording or part of this publication may be translated, reprinted or reproduced or otherwise, without the prior written permission of BPP Learning utilised in any form either in whole or in part or by any electronic, Media Ltd. mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval We are grateful to the Association of Chartered Certified system, without prior permission in writing from the IFRS Foundation. Accountants for permission to reproduce past examination Contact the IFRS Foundation for further details. questions. The suggested solutions in the practice answer bank have been prepared by BPP Learning Media Ltd, unless otherwise The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the stated. “Hexagon Device”, “IFRS Foundation”, “eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IASs”, “IFRS”, “IFRSs”, “International Accounting BPP Learning Media is grateful to the IASB for permission to Standards” and “International Financial Reporting Standards”, “IFRIC” reproduce extracts from the International Financial Reporting “SIC” and “IFRS Taxonomy” are Trade Marks of the IFRS Foundation. Standards including all International Accounting Standards, SIC and IFRIC Interpretations (the Standards). The Standards together with Further details of the Trade Marks including details of countries where their accompanying documents are issued by: the Trade Marks are registered or applied for are available from the Licensor on request. The International Accounting Standards Board (IASB) 30 Cannon Street, London, EC4M 6XH, United Kingdom. Email: [email protected] Web: www.ifrs.org Disclaimer: The IASB, the International Financial Reporting Standards (IFRS) Foundation, the authors and the publishers do not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise to the maximum extent permitted by law. © BPP Learning Media Ltd 2016 ii Contents Page Introduction Helping you to pass..........................................................................................................................................................v Studying P7....................................................................................................................................................................vii The exam paper ..............................................................................................................................................................xv Syllabus and study guide...............................................................................................................................................xvi Part A Regulatory environment 1 International regulatory environments for audit and assurance services..................................................................3 Part B Professional and ethical considerations 2 Code of ethics and conduct...................................................................................................................................39 3 Professional liability..............................................................................................................................................75 Part C Practice management 4 Quality control.....................................................................................................................................................105 5 Obtaining and accepting professional appointments...........................................................................................119 Part D Audit of historical financial information 6 Planning and risk assessment.............................................................................................................................143 7 Evidence..............................................................................................................................................................193 8 Evaluation and review (I).....................................................................................................................................229 9 Evaluation and review (II) – matters relating to specific accounting issues..........................................................267 10 Evaluation and review (III) – matters relating to specific accounting issues.........................................................293 11 Group audits and transnational audits.................................................................................................................333 Part E Other assignments 12 Audit-related services and other assurance services............................................................................................365 13 Prospective financial information (PFI)................................................................................................................397 14 Forensic audits....................................................................................................................................................411 15 Social, environmental and public sector auditing................................................................................................423 16 Internal audit and outsourcing.............................................................................................................................453 Part F Reporting 17 Reporting.............................................................................................................................................................471 Part G Current issues and developments 18 Current issues.....................................................................................................................................................507 List of articles by the examining team ....................................................................................................519 Practice question bank ....................................................................................................................................525 Practice answer bank .......................................................................................................................................547 Index ..........................................................................................................................................................................607 Review form Contents i ii iv Helping you to pass BPP Learning Media – ACCA Approved Content Provider As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examination team. By incorporating the examination team’s comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies. The PER alert Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the 'PER alert' feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement. Your achievement of the PER should now be recorded in your online My Experience record. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the Study Text, the purposes of which are explained fully on the Chapter features page, will help you while studying and improve your chances of exam success. Developing exam awareness Our Study Texts are completely focused on helping you pass your exam. Our advice on Studying P7 outlines the content of the paper, the necessary skills you are expected to be able to demonstrate and any brought forward knowledge you are expected to have. Exam focus points are included within the chapters to highlight when and how specific topics have been examined, or how they might be examined in the future. Using the Syllabus and Study Guide You can find the syllabus and study guide on page xvi to xxvii of this Study Text. Testing what you can do Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt. We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. Introduction v Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list Tells you what you will be studying in this chapter Topic list Syllabus reference and the relevant section numbers, together with ACCA syllabus references. Introduction Puts the chapter content in the context of the syllabus as a whole. Study guide Links the chapter content with ACCA guidance. Highlights how examinable the chapter content is Exam guide likely to be and the ways in which it could be examined. What you are assumed to know from previous Knowledge brought forward from earlier studies studies/exams. Summarises the content of main chapter headings, FAST FORWARD allowing you to preview and review each section easily. Examples Demonstrate how to apply key knowledge and techniques. Definitions of important concepts that can often Key terms earn you easy marks in exams. Tell you when and how specific topics have been Exam focus points examined, or how they may be examined in the future. Formulae that are not given in the exam but which Formula to learn have to be learnt. This is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER). Essential practice of techniques covered in the Question chapter. Case Study Real world examples of theories and techniques. A full list of the Fast Forwards included in the Chapter Roundup chapter, providing an easy source of review. A quick test of your knowledge of the main topics Quick Quiz in the chapter. Found at the back of the Study Text with more Practice Question Bank comprehensive chapter questions. Cross referenced for easy navigation. vi Introduction Studying P7 As the name suggests, this paper examines advanced audit and assurance topics. Paper P7 is one of the professional level Options papers and as such candidates must consider carefully whether they have the required competencies. The P7 examination team The examination team expects you to demonstrate a highly professional approach to all questions – not just presenting information in a professional manner, but also integrating knowledge and understanding of topics from across the syllabus. The examination team is also very keen for students to demonstrate evidence of wider reading and to demonstrate an understanding of current issues as they affect audit and assurance. At the absolute minimum you should read Student Accountant. The examination team often examines topics that it has written about in Student Accountant. Syllabus update The P7 syllabus has been updated for the September 2016 sitting onwards. The full syllabus and Study Guide can be found in this Study Text on pages xvi to xxvii. 1 What P7 is about The aim of the syllabus is to analyse, evaluate and conclude on the assurance engagement and other audit and assurance issues in the context of best practice and current developments. The paper builds on the topics covered in Paper F8 Audit and Assurance but as an advanced paper it tests much more than just your knowledge of ISAs and your ability to list standard audit procedures. You must be able to apply your knowledge to more complex audit and assurance scenarios, identifying and formulating the work required to meet the objectives of audit and non-audit assignments and to evaluate the findings and results of work performed. Accounting knowledge examined in Paper P2 Corporate Reporting is also assumed. Therefore, candidates studying for P7 should refer to the Accounting Standards listed under P2. The syllabus is divided into seven main sections: (a) Regulatory environment This section introduces the legal and regulatory environment including corporate governance issues. It also examines the topics of money laundering and the consideration of laws and regulations. (b) Professional and ethical considerations The details of the various ethical codes should be familiar to you from your earlier studies, however the importance of this topic should not be underestimated. The examination team has indicated that ethical and professional issues are likely to feature in every sitting. This section also covers fraud and professional liability, both of which are topical issues. (c) Practice management This part of the syllabus covers quality control, tendering and professional appointments. It also covers advertising, publicity, obtaining professional work and fees. (d) Audit of historical financial information This is the largest section of the syllabus looking in detail at the procedures involved in a range of audit and assurance assignments. The examination team has indicated that evidence gathering is a key part of the syllabus and is likely to feature at each sitting. Requirements are likely to focus on specific assertions, balances or transactions. (e) Other assignments This section also covers a range of audit-related and assurance services. The examination team has stressed the need for candidates to be able to tackle these types of scenario. Introduction vii (f) Reporting The detail of audit reports should be familiar to you from your earlier studies. At this level you will be expected to apply this knowledge to more complex scenarios. The examination team has also stressed the importance of the relationship between financial reporting and auditing. This will be particularly important when forming an appropriate audit opinion. This section of the syllabus also includes reports to management and other reports. (g) Current issues and developments Current issues and developments includes a wide range of topics including the IAASB clarity project, professional, ethical and corporate governance, information technology, going concern, transnational audits and social and environmental auditing. The examination team has indicated that this is likely to be examined at each sitting, and that candidates are expected to have read around the issues for themselves. You will need to be able to discuss current issues topics in the context of a client scenario. 2 Skills you have to demonstrate 2.1 Knowledge and application Even with exams you've previously taken, you'll remember that passing didn't only mean reproducing knowledge. You also had to apply what you knew. At Professional level, the balance is tilted much more towards application. You will need a sound basis of technical knowledge. The exams will detect whether you have the necessary knowledge. However, you won't pass if you just spend your time acquiring knowledge. Developing application skills is vital. 2.2 Application skills • A thorough understanding of the relevant audit, assurance and financial reporting regulations that fall within the syllabus • The ability to apply knowledge to specific client scenarios • The ability to have an independent opinion, backed by reasoned argument • An appreciation of commercial factors which influence practice management • An appreciation of fast-moving developments in audit and assurance practices The P7 examination team made very similar comments in a number of recent examiner's reports which is so important that we will quote it here. These pitfalls tend not to change from year to year: 'Similar factors as detailed in previous examiner's reports continue to contribute to the unsatisfactory pass rate: • Failing to answer the specific question requirements • Not applying knowledge to question scenarios • Not explaining or developing points in enough detail • Lack of knowledge on certain syllabus areas • Illegible handwriting' 'As seen in previous sittings, what makes the difference between a pass and a fail script is usually the level of application skills which have been demonstrated. Candidates who answer the specific question requirement, and tailor their answers to the scenarios provided are likely to do well.' (Examiner's Report, June 2011) viii Introduction