Advanced Audit and Assurance – International

Specimen Exam – September 2022

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Exam summary screen

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Exam questions

Section A – summary screen

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Section A – question 1

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Requirements

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Exhibit 1

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Exhibit 2

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Exhibit 3

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Exhibit 4

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Section B – summary screen

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Section B – question 1

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Requirements

Exhibit 1

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Exhibit 2

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Section B – question 2

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Requirements

Exhibit 1

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Exhibit 2

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Answers
Strategic Professional – Options, AAA – INT
Advanced Audit and Assurance – International (AAA – INT) Specimen Answers

1 Briefing notes

To: Audit engagement partner

From: Audit manager
Subject: Crux Group – audit planning
Introduction
These briefing notes are prepared to assist with planning the audit of the Crux Group (the Group) for the financial year ending
30 September 20X5. The notes contain an evaluation of the audit risks which should be considered in planning the Group audit,
which has been structured to prioritise the risks in terms of the likelihood and magnitude of misstatement in relation to each risk.
The notes also recommend the audit procedures to be performed on the Group’s segmental disclosure of revenue. Finally, there is a
discussion of the matters to be considered by Pegasus & Co in relation to a proposed additional engagement to advise management
on the Group’s social and environmental information.

(a) Evaluation of audit risk

Materiality
For the purposes of these briefing notes, the following overall materiality level will be used to assess the significance of identified
risks and as requested, this has been based on the profitability of the Group.
Benchmarks
Using profit before tax or operating profit as a suggested benchmark provides the following range:
5–10% of profit before tax = range of $4·05 million – $8·1 million.
5–10% of operating profit = range of $7·25 million – $14·5 million.
These benchmarks are only a starting point for determining materiality and professional judgement will need to be applied
in determining a final level to be used during the course of the audit. As this is a new client and therefore an initial audit
engagement, due to the increased detection risk, materiality should be set at the lower level of the range at $4 million.
New audit client
The Group is a new client, our firm having been appointed six months ago. This gives rise to detection risk, as our firm does
not have experience with the client, making it more difficult for us to detect material misstatements. However, this risk can be
mitigated through rigorous audit planning, including obtaining a thorough understanding of the business of the Group.
In addition, there is a risk that opening balances and comparative information may not be correct. As the prior year figures were
not audited by Pegasus & Co, if any misstatements existed in relation to the opening balances, this would have a significant
impact on our ability to gather sufficient and appropriate evidence over closing balances. As such, we should plan to audit the
opening balances carefully, in accordance with ISA 510 Initial Audit Engagements – Opening Balances, to ensure that opening
balances and comparative information are both free from material misstatement.
Revenue recognition
An audit risk arises in relation to the timing of revenue recognition. Given the requirement of ISA 240 The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements, that when assessing audit risks the auditor shall
presume there are risks of fraud in relation to revenue recognition, this could be a significant area of concern. It is appropriate
that customer deposits are recognised as deferred revenue when they are received. This is in line with IFRS® 15 Revenue from
Contracts with Customers which requires that revenue is recognised when a performance obligation is satisfied, and therefore
any amounts paid to the Group by customers before a cruise begins are not revenue and should be deferred. However, the
policy of recognising all of the revenue from a ticket sale when the cruise starts may not be in line with the principles of IFRS 15
because the Group is performing its obligations over time, which may be as long as a six-week period for some cruises. This
is a problem of cut-off, meaning that recognition of all revenue at the start of a cruise could result in overstated revenue and
understated liabilities.
Upgrade and maintenance costs
The Group incurs high costs in relation to upgrade and maintenance of its fleet of ships. For the Sunseeker ships, $75 million
is being spent this year. Based on initial materiality calculations, this amount is material to the financial statements and
represents 92·6% of profit before tax and is therefore extremely significant. There is an audit risk that costs are not appropriately
distinguished between capital expenditure and operating expenditure. Upgrade costs, including costs relating to new facilities
such as gyms, should be capitalised, but maintenance costs should be expensed. There is a risk that assets are overstated,
and expenses understated, if operating expenses have been inappropriately capitalised. A further risk relates to depreciation
expenses, which will be overstated if capital expenditure is overstated.
Component depreciation
IAS® 16 Property, Plant and Equipment requires that each part of an item of property, plant and equipment (PPE) with a
cost which is significant in relation to the total cost of the item must be depreciated separately. There is a risk that ships in
use are not broken down into component parts for the purpose of determining the individual cost, useful life, and residual

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 value of each part. For example, if significant, the gym equipment should be depreciated over three years and therefore
requires separate consideration from other assets such as ship exterior, engine, etc. There is an audit risk that depreciation is
not correctly determined on this component basis, meaning that the assets and their associated depreciation expense could
be over or understated in value. This risk is also heightened due to the unusual movement in relation to the accumulated
depreciation figure, which has only increased by $49 million in the year. Information is not given on the Group’s depreciation
policy, however, compared to the total cost of PPE at the financial year end of $2,304 million, this equates to only 2·1%, which
appears quite low, suggesting understatement.
Cyber-security attack
The recent cyber-security attack could highlight that internal controls are deficient within the Group. Even though this particular
problem has now been rectified, if the Group internal audit team had not properly identified or responded to these cyber‑security
risks, there could be other areas, including controls over financial reporting, which are deficient, leading to control risk. The
situation could also indicate wider weaknesses in the Group’s corporate governance arrangements, for example, if the audit
committee is not appropriately discharging its responsibilities with regards to internal audit.
Tutorial note: Based on best practice, the audit committee should review and approve the annual internal audit plan and
monitor and review the effectiveness of internal audit work. The audit committee should ensure that the internal audit
plan is aligned to the key risks of the business. Credit will be awarded for discussion of these issues in the context of the
cyber‑security attack.
In addition, the cyber-security attack could have resulted in corrupted data or loss of data relating to the sales system, if the
customer details were integrated with the accounting system. There is an audit risk that reported revenue figures are inaccurate,
incomplete, or invalid. Though the issue could be confined to the sales system, it is possible that other figures could also be
affected.
Finally, the cyber-security incident is likely to result in some fines or penalties being levied against the Group as it seems the risk
was not properly dealt with, leaving customer information vulnerable to attack. It may be necessary for the Group to recognise
a provision or disclose a contingent liability depending on the likelihood of a cash payment being made, and the materiality
of any such payment, in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The related audit
risk is understated liabilities and understated expenses or incomplete disclosures if any necessary liability is not recognised or
disclosure not made in the notes to the financial statements.
Related party transaction
It appears that Vela Shipbuilders Co, which is building new Explorer Cruise ships for the Group, is a related party of the Group.
This is because Max Draco is the chairman of both the Group and Vela Shipbuilders Co. According to IAS 24 Related Party
Disclosures, a related party relationship exists where a person has control or joint control, significant influence, or is a member
of the key management personnel of two reporting entities. The fact that Max Draco’s son is the chief executive officer of Vela
Shipbuilders Co also indicates a related party relationship between the Group and the company.
IAS 24 requires that where there have been transactions between related parties, there should be disclosure of the nature
of the related party relationship as well as information about the transactions and outstanding balances necessary for an
understanding of the potential effect of the relationship on the financial statements. There is an audit risk that the necessary
disclosures regarding the Group’s purchases of ships from Vela Shipbuilders Co are not made in the Group financial statements.
The related party transactions are material by their nature, but they are also likely to be material by monetary value. The
information provided does not specify how much has been paid in cash from the Group to Vela Shipbuilders Co during the
year, but the amount could be significant given that the Group has presumably paid any final instalments on the ships which
have come into use during the year, as well as initial instalments on the new ships starting construction this year.
Operating licences
The Group’s operating licences of $56 million are material to the financial statements. It is appropriate that the licences are
recognised as intangible assets and that they are amortised according to their specific useful life. However, an audit risk
arises due to the possible impairment of some or all of these licences, which arises from the governments having withdrawn
the licences in some countries where the Group operates their Pioneer Cruises. While the licence withdrawal is apparently
temporary in nature, the withdrawal is an indicator of impairment and it is possible that the operating licences are worth
nothing, so should be written off in full. Management should conduct an impairment review in accordance with IAS 36
Impairment of Assets to determine the recoverable amount of the licences and if this is less than the carrying amount,
recognise an impairment loss accordingly. If this does not take place, the intangible assets are likely to be overstated, and profit
overstated.
Tutorial note: Credit will also be awarded for discussion regarding de-recognition of the operating licences as well as their
reduction in value, and for considering whether the Pioneer Cruise ships also need to be reviewed for impairment.
Borrowing costs
The ships being constructed fall under the definition of a qualifying asset under IAS 23 Borrowing Costs, which defines a
qualifying asset as an asset which takes a substantial period of time to get ready for its intended use or sale. This includes
property, plant and equipment during the relevant construction period, which for the ships is three years. IAS 23 requires that
borrowing costs which are directly attributable to the acquisition, construction or production of a qualifying asset should be
capitalised. The audit risk is that interest costs have not been appropriately capitalised and instead have been treated as finance
costs, which would understate assets and understate profit for the year.

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 The amounts involved appear to be material. The information does not state precisely when the loans were taken out and when
construction of the ships commenced or when they come into use by the Group on completion, so it is not possible to determine
exactly when capitalisation of finance costs should commence and cease. However, looking at the loan of $180 million taken
out for the ships currently under construction, the interest for the year would be $11·7 million, which is a material amount.
Revenue and profit trends
Group revenue is projected to increase by 14% in the year. The segmental information shows that this overall increase can be
analysed as:
– Revenue from Sunseeker Cruises increasing by 11·1%.
– Revenue from Explorer Cruises decreasing by 5·3%.
– Revenue from Pioneer Cruises increasing by 37·5%.
The different trends for each segment could be explained by business reasons, however, there is a potential risk that revenue
has been misclassified between the segments, e.g. revenue from Explorer Cruises could be understated while revenue from
Pioneer Cruises is overstated.
In particular, the projected revenue for Pioneer Cruises could be impacted by the recent withdrawal of operating licences which
affects the operation of these cruise itineraries. Management may not have factored this into their projections, and there is a
risk that this segment’s revenue is overstated.
Operating profit is projected to increase by 43·6% in the year, and profit before tax is projected to increase by 24·6% in the
year. While the increased margins could be due to economies of scale, the increase in profit appears out of line with the
increase in revenue and could indicate that expenses are understated or misclassified.
On-board sales
On-board sales of food, drink, and entertainment account for approximately 15% of revenue. There is a risk that this is a
reportable operating segment, but the projected operating segment information does not disclose this revenue separately.
According to IFRS 8 Operating Segments, an operating segment is a component of an entity which engages in business
activities from which it may earn revenues and incur expenses, whose operating results are reviewed regularly by the entity’s
chief operating decision maker and for which discrete financial information is available, which seems to be the case in this
instance.
A reportable segment exists where the segment’s revenue is 10% or more of the combined revenue of all operating segments.
There is a risk of incomplete disclosure of revenue by reportable segments if on-board sales meet the definition of an operating
segment and it is not disclosed in the notes to the financial statements as such.

(b) Principal audit procedures to be performed on the segmental information

– Review the financial reports sent to the highest level of management to confirm the basis of segmental information which
is reported internally and confirm that this basis is used in the notes to the published financial statements.
– Review the Group’s organisational structure to confirm the identity of the chief operating decision maker.
– Discuss with management the means by which segmental information is reviewed by the chief operating decision maker,
e.g. through monthly financial reports and discussion at board meetings.
– Review board minutes to confirm that the segments as disclosed are used as the basis for monitoring financial performance.
– Discuss with management whether the on-board sales should be reported separately given that it appears to constitute a
reportable segment contributing more than 10% of total Group sales and is actively monitored.
– Obtain a breakdown of the revenue, e.g. by cruise line or individual ship, to confirm that revenue has been appropriately
allocated between the reportable segments.
– Perform analytical procedures to determine trends for each segment and discuss unusual patterns with management.
– Recalculate the revenue totals from the breakdown provided to confirm that they are reportable segments, i.e. that they
each contribute more than 10% of revenue.

(c) Additional service to advise management on measurement of social and environmental information
The Group’s request for Pegasus & Co to advise management on its social and environmental reporting creates an ethical
threat to objectivity. Providing additional, non-audit services to an audit client can create several threats to the objectivity and
independence of the auditor.
The IESBA International Code of Ethics for Professional Accountants (the Code) does not specifically discuss this type of
additional engagement, so the audit firm should apply the general framework to consider whether it is appropriate to provide
the service. This means that the firm should evaluate the significance of the threats to independence and consider whether
safeguards can reduce the threats to an acceptable level.
Perhaps the most significant ethical issue is that providing advice to management, which would involve determining how social
and environmental information is measured and published, could be perceived as taking on management responsibilities,
which is prohibited by the Code. To avoid taking on management responsibilities, the audit firm must be satisfied that client
management makes all judgements and decisions which are the proper responsibility of management. Measures to achieve
this could include:

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 – Ensuring that a member of the Group’s management with appropriate skill, knowledge and experience is designated to
be responsible for the client’s decisions and to oversee the service,
– Management oversees the work performed and evaluates the results, and
– Management accepts responsibility for any actions arising as a result of the service provided.
A self-review threat could also arise if Pegasus & Co provides the service to the Group. Some of the social and environmental
information could be related to transactions or balances within the financial statements which will be subject to audit, for
example, the value of charitable donations. The self-review threat means that less scrutiny may be used in performing
procedures due to over-reliance on work previously performed by the audit firm. This potentially impacts on the level of
professional scepticism applied during the audit and the quality of work carried out.
There could be a further self-review threat depending on whether the social and environmental information will form part of
the Group’s annual report. If this is the case, the audit team is required by ISA 720 The Auditor’s Responsibilities Relating
to Other Information to read the other information included in the annual report and to consider whether there is a material
inconsistency between the other information and the financial statements and to also consider whether there is a material
inconsistency between the other information and the auditor’s knowledge obtained in the audit. This requirement creates
a self‑review threat if members of the audit team have been involved with the additional service to provide advice on the
measurement of the social and environmental information.
A self-interest threat can also be created by the provision of non-audit services where the fee is significant enough to create
actual or perceived economic dependence on the audit client. The Group is willing to pay an ‘enhanced fee’ for this service due
to its urgent nature, and while this does not necessarily create fee-dependency, there could be a perception that the audit firm
has secured a lucrative fee income in addition to the income from providing the audit.
The Group needs the work to be carried out to a tight deadline, which could impact on the scope and extent of the procedures
which the firm can carry out, also impacting on the quality of work and the risk of the engagement. This pressure to perform
work quickly within the next month could be viewed as intimidation by the client.
All of these threats are heightened by the fact that the Group is a listed entity, therefore a public interest entity in the terminology
of the Code.
Other safeguards could possibly be used to reduce the threats identified to an acceptable level. These may include having a
team separate from the audit team, including a separate partner, perform the work on the social and environmental information;
and conducting a review of both the audit and additional service by the engagement quality control reviewer.
The audit firm should discuss the request with the Group audit committee, who ultimately will need to approve that the firm can
perform the service. The corporate governance code under which the Group operates may restrict or prohibit the provision of
non-audit services by the audit firm in the case of listed entities, so the audit committee should consider if any such restrictions
exist.
Discussions should also be held regarding the new regulatory requirements. The audit firm should be clear on the reliance
which will be placed on the report by the regulatory authorities and matters such as whether an assurance report is required,
and if so, who will be performing this work. In addition, there may be specific requirements which impact on the scope of the
work, for example, whether any specific key performance indicators are required to be published.
Finally, even if the ethical issues can be overcome, the firm should consider whether it has the skills and competencies to
provide the advice to management. This can be quite specialised work and it is not necessarily the case that the firm will have
staff with the appropriate skills available to carry out the work, especially if the work is to be carried out to a tight deadline.
In conclusion, in terms of providing advice to management on social and environmental information, this will be difficult to do
without breaching ethical principles and should be further discussed with the Group audit committee.
Conclusion
These briefing notes highlight a number of significant audit risks, including those relating to property, plant and equipment,
revenue recognition and disclosure requirements. A number of audit procedures have been recommended in relation to the
audit of segmental information provided in relation to revenue. As mentioned, the provision of the additional service should be
further discussed with the Group audit committee.

2 Rivers Co

A review of the information relating to the audit of Rivers Co indicates many problems with how the audit has been planned and
performed which implies that the audit has not been conducted in accordance with ISA 220 Quality Control for an Audit of Financial
Statements, ISQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and other Assurance and
Related Services Engagements, and the IESBA International Code of Ethics for Professional Accountants (the Code).
Audit partner rotation
Bob Newbold has been acting as audit engagement partner for eight years. As Rivers Co is a listed company, this goes against the
requirements of the Code which requires that an individual shall not act as the engagement partner for more than seven years.
The problem is that long association of the engagement partner with the client leads to a self-interest threat to auditor objectivity,
whereby the audit firm’s judgement is affected by concern over losing the long-standing client. There may also be a familiarity threat

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due to close relationships between the audit engagement partner and management of Rivers Co, meaning that the partner ceases
to exercise sufficient professional scepticism, impacting on audit quality. This is especially the case, given that Bob Newbold is
performing additional non-audit services for the client, which will be discussed further below. Bob Newbold should be replaced as
soon as possible by another audit engagement partner.
The fact that Bob has been allowed to continue as audit engagement partner for longer than the period allowed by the Code indicates
that Welford & Co does not have appropriate policies and procedures designed to provide it with reasonable assurance that the firm
and its personnel comply with relevant ethical requirements, as required by ISQC 1. The firm should review whether its monitoring
of the length of time that audit engagement partners act for clients is operating effectively and make any necessary improvements
to internal controls to ensure compliance with ISQC 1.
Tutorial note: The Code does allow a key audit partner to serve an additional year in situations where continuity is especially
important to audit quality, as long as the threat to independence can be eliminated or reduced to an acceptable level. Credit will
be awarded for appropriate discussion on this issue.
Supervision and review
Bob Newbold has booked only two hours for audit work performed on Rivers Co. This is not sufficient time for the audit partner
to perform their duties adequately. The audit partner is required to take overall responsibility for the supervision and performance
of the audit. He should have spent an appropriate amount of time performing a review of the audit working papers in order to be
satisfied that sufficient appropriate audit evidence had been obtained; this is a requirement of ISA 220. Instead, it appears that most
of the final review was performed by a newly promoted audit manager who would not have the necessary experience to perform
this review. It is possible that there is insufficient evidence to support the audit opinion which has been issued, or that inappropriate
evidence has been obtained.
There is also a related issue regarding the delegation of work. Possibly some of the detailed review of the working papers could
have been delegated to someone other than the audit partner, in which case the senior audit manager, Pat Canley, would be the
appropriate person to perform this work. However, Pat only recorded six hours of work on the audit. Thus, confirming that too much
of the review has been delegated to the junior audit manager, especially given that going concern was identified as a significant audit
risk, meaning that the partner has even more reason for involvement in the final review of audit work.
There is also an issue around the overall amount of time which has been recorded for the audit work performed on this client. A total
of 173 hours does not seem sufficient for the audit of a listed company, suggesting that audit quality could have been impacted by
inadequate time spent in planning and performing the audit work.
Special investigation
Bob Newbold’s focus appears to have been on the special investigation performed for Rivers Co, to which he booked 40 hours of
time.
There is insufficient documentation as to the nature of this non-audit work, and it could relate to the provision of a non-audit
service which is not allowed for a public interest entity. Rivers Co is a listed company, and the Code prohibits the audit firm from
providing certain non-audit services, for example, certain internal audit services, valuation services and tax services. The lack of
documentation means that Welford & Co could have provided a prohibited service and therefore be in breach of the Code.
The fact that $890,000 was charged for this special investigation indicates that it was a substantial engagement and just the matter
of inadequate documentation is a cause for concern. There is also a possibility that in actual fact no work has been performed, and
the firm has accepted this money from the client but provided no service. This would be a very serious issue, could be perceived as
a bribe, and it should be investigated with urgency.
However, there are also possible threats to auditor objectivity including a self-interest threat due to the monetary value of the service
provided, meaning that Bob Newbold’s attention seems to have been focused on the special investigation rather than the audit,
leading to the problems of inappropriate delegation of this work as discussed above. His additional involvement with Rivers Co by
providing this work compounds the familiarity threat also discussed previously. Depending on the nature of the work performed for
the client, there may also be other threats to objectivity including self-review and advocacy.
A self-interest threat is created as the value of the services provided is substantial compared to the audit fee. The fact the non-audit
fees are so high would create a proportionately bigger intimidation threat because they would form a larger part of the firm’s income
and the audit firm may not be objective for fear of losing the client.
Welford & Co should ensure that its policies and documentation on engagement acceptance, especially in relation to additional
services for existing audit clients, are reviewed and made more robust if necessary.
Engagement quality control review
As this is a listed audit client, an engagement quality control review should have been performed. It is not clear whether this took
place or not, but no time has been recorded for this review. If a pre-issuance review was carried out, then it should have picked up
these problems prior to the audit opinion being issued.
Audit of going concern
The audit work on going concern has been inappropriately delegated to an audit assistant who would not have the necessary
skill or experience. This is especially concerning given that going concern was identified as a significant audit risk, and that the
work involves using judgement to evaluate information relating to contract performance. The work should have been performed
by a more senior member of the team, probably one of the audit managers, who is more able to exercise professional scepticism

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 and to challenge management where necessary on the assumptions underpinning the forecasts. Mary certainly should not have
documented the conclusion on going concern, the conclusion should be reached by a more experienced auditor having reviewed all
of the evidence obtained.
It is concerning that the audit work appears to have been based on a review of contracts which were selected by management. First,
only five contracts were reviewed but the company is typically working on 20 contracts at one time. So, it is likely that the coverage
of the audit work was insufficient, and more contracts should have been subject to review. Given the risk attached to going concern,
perhaps all of the contracts currently being carried out should have been reviewed, or the sample selected based on the auditor’s
evaluation of the risk associated with each contract and their materiality.
Second, management may have selected the better performing contracts for Mary to review. This would create a false impression of
the performance of the company as a whole, leading to an inappropriate conclusion on going concern being reached. Mary, or one
of the more senior members of the audit team, should have challenged management on the selection of these contracts.
Finally, the work performed by Mary on this small selection of contracts appears insufficient and inappropriate. The audit assistant also
appears to have placed too much reliance on the firm’s data analytics tool and demonstrates a lack of understanding of how the data
analytics tools should be used to obtain audit evidence. By simply using the data analytics tool to agree the mathematical accuracy of
the forecasts and the assumptions, insufficient testing has been carried out in relation to these key documents. Assumptions should
not just be agreed as consistent with the previous year, especially in a situation of increasing economic uncertainty as applies in this
case. Assumptions should be challenged, and other work performed as required by ISA 570 Going Concern. The data analytics tool
could have been used more appropriately, e.g. to perform sensitivity analysis which would have allowed for identification of areas of
concern or requiring further investigation.
The lack of further audit procedures means that the audit evidence is not likely to be sufficiently robust in this significant area. This
is further demonstrated by the fact that Mary only spent eight hours on this critical area of the audit work and has commented that
this was due to the evidence generated by the data analytics tool. This again demonstrates the over-reliance placed on this tool,
raising a concern that staff require further training in the use of and interpretation of evidence generated in this way.
Audit committee
It is concerning that the audit committee of Rivers Co does not appear to have raised concerns about the issues discussed, especially
the provision of the non-audit service and the length of time which Bob Newbold has served as audit engagement partner. One of
the roles of the audit committee is to oversee ethical issues relating to the external auditor and to be involved with the engagement
of external providers. Welford & Co should ensure that these matters are discussed with the audit committee so that further ethical
issues do not arise in the future.
Conclusion
From the discussion above, it can be seen that there are many problems with the audit of Rivers Co. Bob Newbold appears to have
ignored his responsibilities as audit engagement partner, and the audit firm needs to discuss this with him, consider further training
or possibly taking disciplinary action against him. Welford & Co needs to implement procedures to ensure all work is carried out at
the appropriate level of personnel with the appropriate experience and that training is given to staff to ensure they understand the
client does not pick or specify the audit work to be carried out in any area, it is to be selected by the audit team in accordance with
the audit firm’s methodology and sampling tools. Training may also need to be provided in the appropriate use of audit data analytics
tools as a basis for obtaining audit evidence.

3 (a) Matters, further actions and auditor’s report implications

Matters
The company is at an advanced stage of negotiations with a competitor to sell its scientific publishing division. Currently, the
finance director has not included any reference to the sale in the financial statements for the year ended 31 March 20X5 and
there is no appropriate justification for this. The finance director’s assessment that the sale only affects next year’s financial
statements is incorrect.
Materiality
The revenue of the scientific publishing division of $13 million and the profit of the division of $1·4 million are both material.
The assets of the division are also significant, as they represent 27·3% of the company’s total assets, based on their value in
use which is recognised in the financial statements.
Discontinued operation and classification of assets held for sale
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations defines a discontinued operation as a component of an
entity which either has been disposed of or is classified as held for sale, and:
– represents either a separate major line of business or a geographical area of operations;
– is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operation.
IFRS 5 requires specific disclosures in relation to assets held for sale and discontinued operations, including that the assets are
recognised as current assets and the results of the discontinued operation are presented separately in the statement of profit or
loss and the statement of cash flows.

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 According to IFRS 5, a disposal group of assets should be classified as held for sale where management plans to sell the assets,
and the sale is highly probable. Conditions which indicate that a sale is highly probable are:
– Management is committed to a plan to sell;
– The asset is available for immediate sale;
– An active programme to locate a buyer is initiated;
– The sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions);
– The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value;
– Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn.
In respect of the scientific publishing division, management has decided to sell the division and a buyer has been found. The
advanced stage of negotiations would suggest the sale is highly probable.
As a result, important disclosures are currently missing from the financial statements which could mislead users with respect to
the future revenue, profits, assets and cash flows of the company. Failing to provide information about the sale of the division
could be seen as a significant omission from the financial statements, especially given the materiality of the assets of the
division to the company’s assets as a whole.
There is therefore a material misstatement as the scientific publishing division has not been classified as held for sale and its
profit presented as a discontinued operation and the necessary disclosures have not been made in the financial statements.
Held for sale – valuation
IFRS 5 provides further guidance regarding the valuation of the assets held for sale. Prior to classification as held for sale, the
disposal group should be reviewed for impairment in accordance with IAS 36 Impairment of Assets. This impairment review
would require the asset to be held at the lower of carrying amount and recoverable amount where the recoverable amount is
the higher of value in use or fair value less costs of disposal.
In this case, the recoverable amount would be $42 million representing the fair value less costs of disposal. Management has
valued the disposal group based on its value in use at $41 million which means that assets and profit are currently understated
by $1 million. This represents 10·7% of profit before tax and is material to the profit for the year.
After classification as held for sale, non-current assets or disposal groups are measured at the lower of carrying amount and
fair value less costs of disposal which would continue to be $42 million. Depreciation ceases to be charged when an asset is
classified as held for sale.
Further actions
– The auditor should request that management adjusts the financial statements to recognise the discontinued operation and
to separately disclose the assets held for sale in accordance with IFRS 5.
– In addition, the client should be requested to amend the carrying amount of the assets to the recoverable amount of
$42 million in line with IFRS 5 requirements.
– If management refuses to adjust the financial statements, the auditor should communicate the misstatements to those
charged with governance. They should repeat the request and inform them of the modifications which would be made to
the auditor’s report if the adjustments are not made.
– If management still refuses to amend the financial statements, the auditor should request a written representation from
management confirming their intent to proceed without amending the financial statements and that they are aware of the
potential repercussions.
Auditor’s report implications
If the adjustments are not made, then there is a material misstatement in the financial statements. The matter has resulted in
an understatement of assets and profits by $1 million which in isolation is unlikely to be pervasive as limited components of
the financial statements are affected. This would result in a qualified audit opinion in which the auditor’s report would state
that ‘except for’ the material misstatement in relation to the valuation of the assets held for sale, the financial statements are
fairly stated.
However, there are also several important disclosures omitted which would be required for users to understand both the
current financial position of the company and its ability to generate future revenue and profits. As such, it would be a matter
of judgement as to whether the lack of disclosures in conjunction with the material misstatement mentioned above have
a pervasive impact on the financial statements. Depending on the auditor’s judgement on this issue, this may give rise to
an adverse opinion if the auditor considered the impact of these issues to result in the financial statements being wholly
misleading.
Depending on the opinion provided, a basis for qualified or adverse opinion paragraph would be added underneath the opinion
paragraph to describe and quantify the effects of the misstatements.

(b) (i) Auditor’s responsibility for other information presented with the financial statements
ISA 720 The Auditor’s Responsibilities Relating to Other Information requires the auditor to read other information,
defined as financial or non-financial information (other than financial statements and the auditor’s report thereon),
included in an entity’s annual report.

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 The purpose of reading the other information is to consider whether there is a material inconsistency between the other
information and the financial statements or between the other information and the auditor’s knowledge obtained during
the course of the audit. If the auditor identifies that a material inconsistency appears to exist, or becomes aware that the
other information appears to be materially misstated, the auditor should discuss the matter with management and, if
necessary, perform other procedures to conclude whether:
(i) A material misstatement of the other information exists;
(ii) A material misstatement of the financial statements exists; or
(iii) The auditor’s understanding of the entity and its environment needs to be updated.
The auditor does not audit the other information and does not express an opinion covering the other information.
Matters identified from the chairman’s statement
In this case, the chairman’s statement refers to strong growth in the year, in particular the scientific publishing division
and suggests that the growth will continue. In the current year, the scientific publishing division represented 12% of
revenue and 15% of profit before tax and is a material component of the company. As the scientific publishing division
will be disposed of early in the next financial period, it will not continue to form part of the basis for revenue or growth,
and the chairman’s statement could be considered misleading. Further, as a result of the disposal, on a like for like basis
it is more likely that the financial statements for the year ended 31 March 20X6 will include a reduction in revenue rather
than growth.
In addition, the remainder of the business has experienced a lower level of growth in revenue and profits in the period
than the scientific publishing division. Revenue growth of continuing business is 2% compared to 44% in the scientific
publishing division. Profit growth of the ongoing business is 5% compared to 100% for the scientific publishing division.
ISA 720 states that a misstatement of the other information exists when the other information is incorrectly stated or
otherwise misleading, including because it omits or obscures information necessary for a proper understanding of a
matter disclosed in the other information. In the case of the chairman’s statement regarding growth of the company, it
could be argued that the way the information is presented obscures the understanding of the growth and profitability of
the ongoing business. As mentioned above, this would be considered very misleading.
The chairman has also made an inappropriate reference to the view of the auditor, implying that the auditor’s report
validates this assertion. The statement also appears to inappropriately pre-empt that the auditor’s report will provide an
unmodified opinion which, based on the assessment above, may not be the case given the material misstatement and
lack of disclosures. This is inappropriate and all reference to the auditor’s report should be removed.
In addition, there is also an issue arising with respect to the use of recycled paper. The chairman’s statement in this case
is inconsistent with the knowledge obtained during the audit. Whether the auditor considers this to be material would
be a matter of judgement, depending on how many publications there are in total and the proportion using non-recycled
paper and whether the issue may be material by nature rather than by size. This could be the case if it is perceived that
there is a deliberate misrepresentation of facts which may be misleading to the users of the financial statements.
(ii) Implications for completion of the audit
The auditor should discuss with management and the chairman the information in the statement which appears to
inaccurate or inconsistent. In particular, this should focus on a discussion of the misleading growth analysis given that
the scientific publishing division will not be contributing to company performance once it is sold.
In the case of the incorrect disclosure relating to the use of recycled paper, the auditor should seek further information to
support the file note regarding publications not using recycled paper. The names of those publications should be obtained,
and a discussion held with the production manager to confirm the auditor’s understanding.
Following these investigations and discussions, the auditor should then request that any information which is inaccurate,
inappropriate, or inconsistent is removed or amended in the chairman’s report.
If management refuses to make the changes, then the auditor’s request should be escalated to those charged with
governance. The auditor should also consider the effect of this situation on their assessment of management integrity and
whether it affects the reliance which can be placed on written representations from management. If the issue remains
unresolved, then the auditor should take appropriate action, including:
– Considering the implications for the auditor’s report and communicating with those charged with governance about
how the auditor plans to address the issues in the auditor’s report; or
– Withdrawing from the engagement, where withdrawal is possible under applicable law or regulation.
Implications for the auditor’s report
If the other information remains uncorrected, the auditor would use the other information section of the auditor’s report
to draw the users’ attention to the misstatements in the chairman’s statement. This paragraph would include:
– A statement that management is responsible for the other information;
– A statement that the auditor’s opinion does not cover the other information and, accordingly, that the auditor does
not express (or will not express) an audit opinion or any form of assurance conclusion thereon;

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 – A description of the auditor’s responsibilities relating to reading, considering and reporting on other information as
required by this ISA; and
– A statement which describes the uncorrected material misstatement of the other information.
As the inconsistency is in the chairman’s statement rather than the audited financial statement, the audit opinion is not
modified as a result.

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Strategic Professional – Options, AAA – INT
Advanced Audit and Assurance – International (AAA – INT) Specimen Marking Scheme

Marks
1 (a) Audit risk evaluation
Up to 3 marks for each audit risk (unless indicated otherwise). Marks may be awarded for other, relevant
audit risks not included in the marking guide.
In addition, ½ mark for relevant trends or calculations which form part of the evaluation of audit risk
(max 3 marks).
Appropriate materiality calculations and justified materiality level should be awarded to a maximum of
2 marks.
– New audit client (2 marks)
– Revenue recognition
– Upgrade and maintenance costs
– Component depreciation
– Cyber-security breach (control risk, corporate governance weakness, data corruption, financial
statement implications – max 5 marks)
– Related party transaction disclosure
– Operating licences
– Borrowing costs
– Revenue and profit trends
– On-board sales
Maximum marks 25

(b) Audit procedures on segmental reporting

Up to 1 mark for each relevant audit procedure. Examples are provided below, and marks will be awarded
for other relevant points.
– Review the financial reports sent to the highest level of management to confirm the basis of segmental
information which is reported internally
– Review the Group’s organisational structure to confirm identify of the chief operating decision maker
– Discuss with management the means by which segmental information is reviewed by the chief
operating decision maker
– Review board minutes to see that segmental information is subject to regular review
– Discuss with management whether the on-board sales should be reported separately
– Obtain a breakdown of the revenue to confirm that revenue has been appropriately allocated between
the reportable segments
– Perform analytical procedures to determine trends for each segment and discuss unusual patterns with
management
– Recalculate the revenue totals from the breakdown provided to confirm that they are reportable
segments
Maximum marks 5

(c) Additional service to provide advice on social and environmental information

Up to 1 mark for each relevant answer point explained:
– Assuming management responsibility identified and fully explained
– Assuming management responsibility is prohibited
– Self-review threat identified and fully explained
– Self-review threat increased if the social/environmental information included in annual report
– Self-interest threat identified and fully explained
– Pressure to perform work quickly
– Appropriate safeguards recommended (1 mark each to max 3 marks)
– Group audit committee to approve non-audit work
– It may be prohibited in the jurisdiction of the Group
– Scope of the work, and specific requirements from the regulators
– Level of assurance which may be required and who is going to provide this
– Skill and competence to perform work
Maximum marks 10

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 Marks
Professional marks
Communication
– Briefing notes format and structure – use of headings/sub-headings and an introduction
– Style, language and clarity – appropriate layout and tone of briefing notes, presentation of materiality and
relevant calculations, appropriate use of the CBE tools, easy to follow and understand
– Effectiveness and clarity of communication – answer is relevant and tailored to the scenario
– Adherence to the specific requests made by the audit engagement partner
Analysis and evaluation
– Appropriate use of the information to determine suitable calculations
– Appropriate use of the information to support discussions and draw appropriate conclusions
– Assimilation of all relevant information to ensure that the risk evaluation performed considers the impact of
contradictory or unusual movements
– Effective prioritisation of the results of the risk evaluation to demonstrate the likelihood and magnitude of
risks and to facilitate the allocation of appropriate responses
– Balanced discussion of the information to objectively make a recommendation or decision
Professional scepticism and judgement
– Effective challenge of information supplied, and techniques carried out to support key facts and/or decisions
– Determination and justification of a suitable materiality level, appropriately and consistently applied
– Appropriate application of professional judgement to draw conclusions and make informed decisions about
the courses of action which are appropriate in the context of the audit engagement
Commercial acumen
– Audit procedures are practical and plausible in the context of the Crux Group
– Use of effective examples and/or calculations from the scenario to illustrate points or recommendations
– Recognition of the appropriate commercial considerations of the audit firm
Maximum marks 10
–––
Maximum 50
–––

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 Marks
2 Rivers Co

Generally, up to 1 mark for each well explained point:

– Long association of audit partner breaches the IESBA Code seven-year maximum period allowed
– Self-interest threat identified and explained
– Familiarity threat identified and explained
– Recommend replace Bob with a new audit partner as soon as possible
– Firm’s monitoring of the length of time partners act for clients seems deficient
– Audit partner should have spent more time on the audit and in particular on the final review
– The total amount of time spent on the audit appears low for the audit of a listed company – implications for
audit quality
– Inappropriate delegation of tasks, the junior audit manager lacks experience
– There may not be sufficient, appropriate evidence to support the audit opinion
– Welford & Co may have provided a prohibited non-audit service to Rivers Co, a listed company
– The size of fee for the non-audit service creates a self-interest threat
– Bob’s involvement with the non-audit service creates familiarity threats to audit objectivity
– Lack of documentation could indicate that no work has been performed – possibly a bribe from the client
– Welford & Co to review policies, procedures and documentation on engagement acceptance
– Apparent lack of engagement quality control review being carried out before the audit opinion was issued
– Inappropriate delegation of work on going concern to an inexperienced audit assistant
– Sample of contracts reviewed is too small – insufficient evidence obtained
– Management selection of contracts is likely to be subject to bias – the auditor should select which contracts
should be reviewed
– Over-reliance on and misunderstanding of use of data analytics tools
– Insufficient work on going concern – assumptions should be challenged not agreed to prior year
– Data analytics could have been used to carry out specific going concern testing such as sensitivity analysis
– Lack of time spent on going concern testing due to over-reliance on data analytics
– Additional training required
– Client audit committee – should have identified the ethical and audit quality issues
– Overall conclusion relating to the quality of the engagement
Maximum marks 20
Professional marks
Analysis and evaluation
– Appropriate assessment of the ethical and professional issues raised, using examples where relevant to
support overall comments
– Effective appraisal of the information to make suitable recommendations for appropriate courses of action
Professional scepticism and judgement
– Effective challenge and critical assessment of the evidence supplied with appropriate conclusions
– Demonstration of the ability to probe into the reasons for quality issues including the identification of missing
information or additional information which would be required
– Appropriate application of professional judgement to draw conclusions and make informed comments
regarding the quality of the work carried out
Commercial acumen
– Inclusion of appropriate recommendations regarding the additional quality control procedures required by
the firm
– Appropriate recognition of the wider implications on the engagement, the audit firm and the company
Maximum marks 5
–––
Maximum 25
–––

15
 Marks
3 (a) Matters, further actions and auditor’s report implications
Up to 1 mark for each point unless otherwise stated.
Matters
– Assessment of finance director’s approach
– Assessment of materiality
– Disclosure rules re held for sale/discontinued operations
– Application to the scenario to conclude asset is held for sale (HFS)
– Material misstatement of classification and disclosure
– Accounting rule on valuation of held for sale assets
– Rule that depreciation should cease when asset meets criteria of HFS
– Application to the scenario to derive correct value
– Materiality of the error in valuation
Further actions
– Request adjustment from management to recognise the discontinued operation and to separately
disclose the assets held for sale
– Request management to amend the carrying amount of the assets to the recoverable amount of
$42 million
– If management refuses escalate to those charged with governance (TCWG)
– If still refuses, obtain written representation confirming intent to proceed
Auditor’s report implications
– Qualified on basis of material misstatement
– Justification of whether pervasive and possible adverse impact due to lack of significant disclosures
– Basis of opinion paragraph position and content
Maximum marks 10

(b) (i) Auditor’s responsibilities in relation to other information presented with the financial statements
Assessment of ISA requirements including:
– Auditor must read other information for inconsistency with financial statements or understanding
of the business
– Consider the source of the inconsistency
(i) A material misstatement of the other information exists;
(ii) A material misstatement of the financial statements exists; or
(iii) The auditor’s understanding of the entity and its environment needs to be updated
– Auditor does not give opinion on the other information
Matters arising from chairman’s statement
– Growth discussion ignores discontinued operation
– Calculations to support the ongoing growth
– Statement obscures actual growth, hence misleading/material misstatement in other information
– Inappropriate reference to the content of the auditor’s report
– Misstatement of fact regarding recycled paper usage
– Judgement as to whether it is material misstatement of other information
Maximum marks 5
(ii) Implications for the completion of the audit
– Seek further information to confirm understanding
– Request management to correct
– Escalate to TCWG
– Impact on assessment of management integrity and written representations
– Notify TCWG effect on auditor’s report
– Consider resigning
Implications for the auditor’s report arising from the draft chairman’s statement
– Addressed in other information section to draw attention to issue covering
o Statement other information not audited
o Responsibilities of auditor regarding other information
o Description of uncorrected misstatements
– Auditor’s opinion is not modified
Maximum marks 5

16
 Marks
Professional marks
Analysis and evaluation
– Appropriate use of the information to support discussion, draw appropriate conclusions and design
appropriate responses
– Identification of omissions from the analysis or further analysis which could be carried out
– Balanced assessment of the information to determine the appropriate audit opinion in the circumstances
Professional scepticism and judgement
– Effective challenge of information, evidence and assumptions supplied and techniques carried out to support
key facts and/or decisions
– Appropriate application of professional judgement to draw conclusions and make informed decisions about
the actions which are appropriate in the context and stage of the engagement
Maximum marks 5
–––
Maximum 25
–––

17