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Home > Students > Examresources > Professionallevel > P7AdvancedAuditandAssurance > Technicalarticles

AUDIT AND ASSURANCE CASE STUDY


QUESTIONS
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ThefirstarticleinthisseriesoftwoonPaperP7casestudyquestionsdiscussedquestionstyle,whatto
lookforintherequirements,howhigherlevelskillsaretested,andthemeaningofprofessionalmarks
withinaquestionrequirement.ThissecondarticlegoesthroughpartofatypicalSectionAcasestudy
question,applyingtherecommendedapproachdescribedinthepreviousarticle.Thisapproach
comprisesfourstages.

STAGE1UNDERSTANDINGTHEREQUIREMENT
Thefirstthingtodoistoreadandfullyunderstandthequestionrequirement.Hereistherequirementwe
willbelookingatinthisarticle:
Prepareareport,tobeusedbyapartnerinyourfirm,inwhichyouidentifyandevaluatetheprofessional,
ethical,andotherissuesraisedindecidingwhethertoaccepttheappointmentasproviderofan
assuranceopinionasrequestedbyPetsupplyCo.(12marks)
Note:thisrequirementincludestwoprofessionalmarks.
Havingreadtherequirement,breakitdown.Youareaskedtodotwothings:
identify,iestatefromtheinformationprovided
evaluate,iediscussfromacriticalpointofview.

Therequirementasksyoutoconsiderprofessional,ethical,andotherissues.Thiscouldcoverawide
rangeofconsiderations,suchas:
ethics:independence,competence,conflictsofinterest,confidentiality,assessingintegrity
professionalissues:theriskprofileoftheworkrequested,thefeeandwhetheritissufficienttocompensateforhigh
risk,availabilityofstaff,managingclientexpectations,logisticalmatterssuchastiming,legalandregulatorymatters
suchasmoneylaundering,and(insomecases)obtainingprofessionalclearance
otherissues:whethertheworkfitswiththecommercialstrategyoftheauditfirm,thepotentialknockoneffectoftaking
ontheworksuchastheimpactonotherclients,oronotherworkperformedforthisclient.

Youareaskedtoproduceareport,sorememberthattheprofessionalmarksavailablewillbeawardedfor
usingthecorrectformat,theuseofprofessionalbusinesslanguage,andforpresentingyourcomments
asalogicalflowculminatinginaconclusion.
Fromreadingtherequirement,youknowthatthequestionscenariowillbebasedonapotential
assuranceassignmentandwillbebroadlybasedaroundacceptanceissues.

STAGE2READINGTHESCENARIO
Whenreadingthroughthedetailofthescenario,youshouldnowbealerttoinformationrelevanttothis
requirement.Highlightimportantpointsthatyouthinkarerelevanttothescenarioandremembertofocus
onissuesthatcouldaffectyouracceptanceofapotentialassuranceassignment.

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Nowreadthefollowingextractfromthescenarioandhighlightthesalientpointsremembertolookout
foranyfactorsrelevanttotheethical,professional,andotherissuesdescribedabove.
Extract:YouareaseniormanagerinDyke&Co,asmallfirmofCharteredCertifiedAccountants,which
specialisesinprovidingauditsandfinancialstatementreviewsforsmalltomediumsizedcompanies.You
areresponsibleforevaluatingpotentialassuranceengagements,andforproducingabriefreportoneach
prospectivepieceofworktobeusedbythepartnersinyourfirmwhendecidingwhethertoacceptor
declinetheengagement.Dyke&Coiskeentoexpandtheassuranceservicesoffered,asareplacement
forrevenuelostfromthemanysmallcompanyclientschoosingnottohaveastatutoryauditinrecent
years.ItiscurrentlyMay2007.
PetsupplyCohasbeenanauditclientofDyke&Coforthepastthreeyears.Thecompanyownsand
operatesachainofretailoutletssellingpetsupplies.ThefinancedirectorofPetsupplyCorecently
communicatedwithyourfirmtoenquireabouttheprovisionofanassurancereportondataprovidedin
theEnvironmentalReportpublishedonthecompanyswebsite.Thefollowingisanextractfromtheemail
senttoyourfirmfromthefinancedirectorofPetsupplyCo:
Atthelastboardmeeting,myfellowdirectorsdiscussedthecontentoftheEnvironmentalReport.They
arekeentoensurethatthedatacontainedinthereportiscredible,andtheyhaveaskedwhetheryour
firmwouldbewillingtoprovidesomekindofopinionverifyingthedisclosuresmade.PetsupplyCois
stronglycommittedtodisclosingenvironmentaldata,andinformationgatheredfromourwebsiteindicates
thatourcustomersareveryinterestedinenvironmentalmatters.Itisthereforeimportanttousthat
PetsupplyCoreportspositiveinformationwhichshouldhelptoretainexistingcustomers,andtoattract
newcustomers.Iamkeentohearyourviewsonthismatteratyourearliestconvenience.Wewouldlike
verificationofthedataassoonaspossible.
YouhavelookedatPetsupplyCosEnvironmentalReportonthecompanywebsite,andfoundagreat
dealofnumericaldataprovided,someofwhichisshownbelowinTable1.

TABLE1:PETSUPPLYCO'SENVIRONMENTALREPORTNUMERICALDATA
PetsupplyCo:environmental
keyperformanceindicator
(KPI)/target

ActualKPIyear
to30April2007

ActualKPIyear
to30April2006

Reasonforvariance/trend

Tospend$1mperannumon
$1.1mspenton
developingenvironmentallyfriendly relevant
packagingandbags
development

$0.75mspenton
relevant
development

PetsupplyCohasmoreliquid
fundsavailableintheyearto
2007tospendondevelopment
projects

Toincreasetheamountofwaste
recycledby10%perannum

50tonnesofwaste
recycled

25tonnesofwaste
recycled

PetsupplyCohasdoubledthe
amountofwasterecycleddueto
installationofrecyclingbinsat
all
stores

Toensurethatatleast90%ofour
customersareveryhappywith
PetsupplyCosenvironmental
policies

95%veryhappy

70%veryhappy

Customerscompletesurveysin
storetorateourpoliciesdata
showsthatcustomersare
extremelyhappywithour
progressonenvironmental
matters

STAGE3TAKETIMETOTHINKABOUTTHEREQUIREMENTANDTHESCENARIO
Asdiscussedinthepreviousarticle,youmusttaketimeandnotrushtoanswer.Whenevaluatingthis
particularscenariotrytothinkwidelyabouttheinformationprovided.Youranswershouldcoverabroad
rangeofissuesratherthanconcentratingononeortwo.Yourcommentsmustbetailoredtothescenario.
Itispointless,forexample,towriteaboutageneralacceptanceissuewhichisnotspecificallyrelatedto
PetsupplyCo.
Itisimportanttoappreciatethatfewmarkswillbeavailableforstatingtheissue.Thehigherlevelskill
marksinthisquestionwillbeawardedforadiscussionofwhytheissueisrelevanttothedecisionabout
whetherornottoprovidetheassuranceservicetoPetsupplyCo.Therequirementistoevaluatethe
scenarioandthereforeitiscrucialtodemonstrateanappreciationthattheremaybetwoconflictingsides
tothediscussion.
Table2showsanexampleofathoughtprocesswhichidentifiestheissuesandexplainswhyeachissueis
relevanttotherequirementtheissuesareshownintheorderinwhichtheyappearinthequestion.

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TABLE2:EXAMPLEOFATHOUGHTPROCESSWHICHIDENTIFIESISSUESANDSHOWS
RELEVANCETOTHEREQUIREMENT
Issuefromthescenario

Whyrelevanttotherequirement

Yourfirmiskeentoprovidemoreassurance
servicesduetolossofincomefromaudit
services

Theengagementwillprovideanextrasourceofrevenue,and
acceptingtheassignmentfitsthecommercialstrategyof
Dyke&Co.But,thefirmshouldnotputthefactthatitwants
morerevenuefromprovidingassuranceservicesabovethe
moreimportantconsiderationofethicalandprofessional
issues,andtheoverallassessmentoftheriskattachedtothe
assignment.Itwillalsobeimportanttoconsiderwhetherthe
assignmentisaoneoffengagementorislikelytobean
ongoingservice.

PetsupplyCohasbeenaclientforthreeyears

Yourfirmwillalreadypossessgoodbusinessunderstanding,
whichwillreducetheriskassociatedwiththeengagement,
andshouldalsocutdownonplanningtime.However,Dyke&
Comustconsidervariousethicalmatters,asPetsupplyCois
alreadyanauditclient,includingtheappropriatenessof
providinganonauditservice,andtheimpactonthelevelof
feesreceivedfromanexistingclient.Itisirrelevanttodiscuss
whethertherearegeneralthreats,suchasfinancialinterests
inPetsupplyCo,asDyke&Coalreadyprovidestheaudit
service,andshouldthereforealreadyhaveconductedgeneral
ethicalclearance.

Theassuranceservicerequestedistoprovidean Thisappearstobeaveryspecialistassignmentanditis
opiniononenvironmentalkeyperformance
questionablewhetherasmallfirmofaccountantswould
indicators
possessrelevantskillsandexperience.However,thefirm
couldeitherspendtimeandmoneytrainingstafftoperform
theassignment,orbringinspecialiststoperformthework.
ThiswouldenableDyke&Cotobuildupexperienceinthis
area,enablingittoprovidefurtherservicesofthistype,which
fitsinwiththefirmscommercialstrategy.However,whether
theskillsaredevelopedinhouse,orboughtin,therewillbe
considerableexpenseinvolvedDyke&Cowouldneedto
carefullyconsiderthefeechargedasthefirmwillwantto
recoverasmuchcostaspossible.
PetsupplyCoiskeentodisclosepositivedatain
ordertomaintaincustomersatisfaction

Thereisahighinherentriskattachedtotheenvironmental
data.PetsupplyCohasaclearreasontomanipulatethedata
inordertodisclosethattargetsarebeingmet.Indeciding
whethertoaccepttheassignment,Dyke&Comustconsider
whetherthisriskcanbereducedtoanacceptablelevel.It
maybedifficultforDyke&Cotochallengethedirectorswith
confidenceaboutthedata,givenitslackofexperienceinthis
area.

PetsupplyCorequiresaverificationofthe
environmentaldata

Theclientappearstohaveanunrealisticexpectationofwhat
anassuranceservicecanprovide.Beforeanydecisionis
madeaboutacceptance,Dyke&Comustexplaintotheclient
thatitsreportwillnotverifyorcertifythedata,andislikelyto
provideatbestlimitedassuranceoverthedatathe
expectationoftheclientclearlyneedstobemanaged.

PetsupplyCowantstheworkperformedas
quicklyaspossible

Asdiscussedabove,Dyke&Cowillneedtoeitherdevelopor
buyinexpertiseinthisarea,andduetothehighinherentrisk
identifiedabove,thefirmwillwanttospendplentyoftime
gatheringevidence.Theclientagainmayhaveunrealistic
expectationsaboutthetimeframeinwhichtheopinioncould
beprovided.

Someofthedatashownintheenvironmental
reportisnotwelldefined

Itwouldberelativelyeasytogatherevidenceontheamount
spentondevelopment,asthisissimilartoasubstantiveaudit
procedurebutitmaybehardforDyke&Cotosubstantiateif
themoneyhasreallybeenspentonenvironmentallyfriendly
packaging.
Quantifyinghowmuchwastehasbeenrecycledwilldepend
onthestrengthofthesystemputinplacebyPetsupplyCoto
capturethedata.Equally,itwouldbedifficulttogather
detailedevidencetoreachanopiniononcustomersatisfaction
asitisaverysubjectivemeasure,notsuitablefor
quantification.Alloftheabovepointssuggestthatthe
engagementwillinvolvetestingsomesubjectiveissues,and
possiblyrelyingonthecontrolsputinplacebytheclient,both
ofwhichhaveanimpactontheoverallriskassessmentofthe
workrequested.

Table2isnotananswer,itisathoughtprocess.Thisiswhatyoushouldbethinkingaboutafterreading
throughthescenario.Thepreviousarticlestressedtheimportanceofthinkingthroughthescenario.It
mayhelptojottheseideasdowninananswerplanbeforemakingastartonyourwrittenanswer,asthis

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willhelpyoutoprioritisethepointsandgivethereportalogicalflow.

STAGE4WRITINGTHEREPORT
Therequirementstatesthattwoprofessionalmarksareavailable.Asdiscussedinthepreviousarticle,
thesemarksarenotforthetechnicalcontentoftheanswer,butforthewaytherelevantpointsare
communicated.Thereportwillbeevaluatedonthefollowing:
Useofareportformatabriefintroduction,clearseparatesectionseachdiscussingadifferentpoint,andafinal
conclusion.
Styleofwritingthereportisaddressedtothepartnerandsolanguageshouldbeappropriate.Youdonotneedto
explainthingsthatwouldbeobvioustoapartner,andyoumustbetactful.
Clarityofexplanationmakesurethateachpointisexplainedsimplyandprecisely,andavoidambiguity.
Evaluationskillsdemonstratethateachpointmayhaveapositiveandanegativeside.

Remember,whenansweringanyquestionrequirementitisqualitynotquantitythatcounts.Youshould
makeeachpointsuccinctlyandremainfocusedonthespecificrequirement.Questionscanbetime
pressured,butitisimportanttorememberthatyoushouldbeabletoreadtherequirement,thinkaboutit,
andwriteananswerinthetimeavailable.Thismeansthatthereisonlyalimitedamountoftimeavailable
foractuallywritingtheanswer,sokeepitshortandtothepoint.Irrelevantwaffleearnsnomarksandwill
detractfromtheprofessionalskillsevaluation.Whatfollowsisanoutlinereportformatforthis
requirement:
Introduction
Reportisinternal,addressedtoapartner,coveringproposedassuranceserviceforexistingauditclient

Section1ethicalmatters
Provisionofnonauditservice
Impactontotalfeefromclient
Competencetoperformworkspecialisedengagement

Section2riskrelatedmatters
Highinherentriskfigurespronetomanipulation
Datahighlysubjective
Needtorelyonsystemsputinplacebyclient

Section3commercialmatters
Feewillhavetobehighenoughtocompensateforhighrisk
Feemayneedtocompensateforspecialistsifused
StrategicfitassignmentinlinewithcommercialgoalsofDyke&Co
Buildupexperienceinnonauditservice
Ascertainwhetherassignmentwillberecurring

Section4othermatters
Managingclientexpectationregardingtypeofopinionsought
Managingclientexpectationregardingtimeframe

Conclusion
Summaryofkeyissuesanddecisiononacceptance

Note:notalloftheabovepointsarenecessarytosecureapassmarkthemarkingschemeisalsoflexible
enoughtocaterforcommentsthatmaynotappearinthemodelanswer.

SUMMARY
ThisarticleshowshowtoapproachonerequirementfromatypicalSectionAquestioninPaperP7.Itis
importanttopractisetechniquebyattemptingasmanyquestionsaspossible,startingwiththePilotPaper
forPaperP7.
WrittenbyamemberofthePaperP7examiningteam

Lastupdated:18Aug2015

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