ACCA Platinum Text IFC & IBC 2011 (for DIGITAL prints)_Layout 1 13/10/2011 12:28 Page 1 Maximise Your Exam Success with BPP Learning Media’s Platinum Approved Materials LEARN Our Study Texts are the only Texts that have been reviewed by the examiner. This ensures that our coverage of the syllabus is appropriate for your exam. By choosing our Platinum Approved Study Text you are one step nearer to achieving the exam success you deserve. PRACTISE AND APPLY Our Practice & Revision Kits are the only Kits that have been reviewed by the examiner. Use our Kits and our i-Pass CD-ROMs to reinforce and apply your knowledge. Kits are packed with past ACCA exam questions together with full solutions and handy tutor’s hints. i-Pass contains approximately 300 questions, covering all important syllabus areas. REVISE AND RETAIN Revise using our pocket-sized Passcards and then listen to our audio Success CD to give your revision a boost. Our Interactive Passcards product takes the Passcards, adds additional tutorials, comments and lots of testing and links them to the Study Text. The result is a truly interactive revision experience. Revise using the on-screen Passcards and dip into the on-screen Study Text for more detail. BPP LEARNING MEDIA CUSTOMER SERVICES Tel: 0845 075 1100 (UK) Email: [email protected] Tel: +44 (0)20 8740 2211 (Overseas) Website: www.bpp.com/learningmedia To help maximise your chances of passing, we’ve put together some exclusive additional ACCA resources. To access the BPP ACCA online additional resourcesfor this material please go to: http://accaresources.bpp.com/student 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 codebelowwhen prompted. You will only have to do this once for each paper you are studying. S T U D Y T PAPER P7 E X ADVANCED AUDIT AND T ASSURANCE (UNITED KINGDOM) BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content for the ACCA qualification. In this, the only Paper P7 study text to be reviewed by the examiner:  We discuss the best strategies for studying for ACCA exams  We highlight the most important elements in the syllabus and the key skills you will need  We signpost how each chapter links to the syllabus and the study guide  We provide lots of exam focus points demonstrating what the examiner will want you to do  We emphasise key points in regular fast forward summaries  We test your knowledge of what you've studied in quick quizzes  We examine your understanding in our exam question bank  We reference all the important topics in our full index BPP's i-Pass productalso supports this paper. FOR EXAMS UP TO JUNE 2014 First edition 2007 Sixth edition October 2012 ISBN 9781 4453 9659 0 (Previous ISBN 9781 4453 7773 5) e-text ISBN 9781 4453 9219 6 British Library Cataloguing-in-Publication Data All our rights reserved. No part of this publication may be A catalogue record for this book reproduced, stored in a retrieval system or transmitted, in is available from the British Library any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior Published by written permission of BPP Learning Media Ltd. BPP Learning Media Ltd BPP House, Aldine Place We are grateful to the Association of Chartered Certified London W12 8AA Accountants for permission to reproduce past examination questions. The suggested solutions in the www.bpp.com/learningmedia exam answer bank have been prepared by BPP Learning Media Ltd, unless where otherwise stated. Printed in the United Kingdom by Polestar Wheatons Hennock Road Marsh Barton Exeter EX2 8RP © BPP Learning Media Ltd Your learning materials, published by BPP 2012 Learning Media Ltd, are printed on paper sourced from sustainable, managed forests. ii Contents Page Introduction How the BPP ACCA-approved Study Text can help you pass v Studying P7 vii The exam paper ix 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 33 3 Professional liability 77 Part C Practice management 4 Quality control 107 5 Obtaining and accepting professional appointments 121 Part D Audit of historical financial information 6 Planning and risk assessment 145 7 Evidence 191 8 Evaluation and review (i) 225 9 Evaluation and review (ii) matters relating to specific accounting issues 259 10 Evaluation and review (iii) matters relating to specific accounting issues 285 11 Group audits and transnational audits 321 Part E Other assignments 12 Audit-related services and other assurance services 357 13 Prospective financial information (PFI) and insolvency 377 14 Forensic audits 415 15 Social and environmental auditing 427 16 Internal audit and outsourcing 445 Part F Reporting 17 Reporting 463 Part G Current issues and developments 18 Current issues 493 List of examiner's articles 509 Exam question bank 513 Exam answer bank 535 Index 599 Review form Contents i ii A note about copyright Dear Customer What does the little © mean and why does it matter? Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content. Breach of copyright is a form of theft – as well being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics. With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media:  Photocopying our materials is a breach of copyright  Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright 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 fellow students? We update for a reason.) But the e-products are sold on a single user licence basis: we do not supply ‘unlock’ codes to people who have bought them second hand. And what about outside the UK? BPP Learning Media strives to make 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 activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them? iv How the BPP ACCA-approved Study Text can help you pass BPP Learning Media – the sole Platinum Approved Learning Partner - content As ACCA’s sole Platinum Approved Learning Partner – content, BPP Learning Media gives you the unique opportunity to use examiner-reviewed study materials for exams up to June 2014. By incorporating the examiner’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. NEW FEATURE – the PER alert! Before you can qualify as an ACCA member, you do 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. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success. Developing exam awareness Our Texts are completely focused on helping you pass your exam. Our advice on Studying P7 outlines the content of the paper, the necessary skills the examiner expects you 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 were 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 (x) 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 Exam 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 and the Topic list Syllabus reference relevant section numbers, together the 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. Exam Guide Highlights how examinable the chapter content is 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 earn you Key terms easy marks in exams. Tell you when and how specific topics were examined, or Exam focus points how they may be examined in the future. Formulae that are not given in the exam but which have to Formula to learn 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). Give you essential practice of techniques covered in the Question chapter. Case Study Provide real world examples of theories and techniques. A full list of the Fast Forwards included in the chapter, Chapter Roundup providing an easy source of review. A quick test of your knowledge of the main topics in the Quick Quiz chapter. Found at the back of the Study Text with more Exam 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 examiner The examiner, Lisa Weaver, 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 examiner 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 examiner often examines topics that she has written about in student accountant. 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 law and regulation. (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 examiner 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 examiner 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 examiner has stressed the need for candidates to be able to tackle these types of scenario. (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 examiner has also stressed the importance of the relationship between financial reporting and auditing. This will be Introduction vii 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 examiner 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 What skills are required?  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 3 How to improve your chances of passing  Study the entire syllabus. Although Section B of the paper contains an optional element, the two questions in Section A are compulsory and could cover a range of topics from across the syllabus. Question spotting at this level is unwise and not recommended.  Practise as many questions as you can under timed conditions – this is the best way of developing good exam technique. Make use of the Question Bank at the back of this text. BPP’s Practice and Revision Kit contains numerous exam standard questions (many of them taken from past exam papers) as well as three mock exams for you to try.  Section A questions will be the case study type of question – make sure you relate your answers to the scenario rather than being generic. Answers that are simply regurgitated from texts are unlikely to score highly.  Present your answers in a professional manner – there are between four and six professional marks available for setting answers out properly and for coherent, well structured arguments and recommendations. You should be aiming to achieve all of these marks.  Consider the question requirement carefully so that you answer the actual question set.  Answer plans will help you to focus on the requirements of the question and enable you to manage your time effectively  Answer the question that you are most comfortable with first – it will help to settle you down if you feel you have answered the first question well.  Answer all parts of the question – leaving out a five mark discursive element for example may mean the difference between a pass and a fail.  Read the financial press and relevant web sites for real life examples – the examiner is specifically looking for evidence of wider reading.  Read Student Accountant (the ACCA's student magazine) regularly – it often contains technical articles written either by or on the recommendation of the examiner which can be invaluable for future exams. The P7 examiner made the same comment in a number of her recent examiner’s reports which is so important that we will quote it here: “Similar factors as detailed in previous examiner’s reports continue to contribute to the unsatisfactory pass rate: viii Introduction