ACCA P7 - Advanced Audit and Assurance

650 Pages·2016·7.77 MB·English

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