AAA ONLINE (DEC) BATCH- KASHIF KAMRAN-FCCA

DAY 1
New paper format
3 questions – all compulsory
3 hours – 15 mins (in the exam hall)
Pakistan standard time
2:00 – 2:15 pm (15) RAPT( ONLY Q1)
2:15- 3:45 pm (90) WRITE Q1
3:45-4:00 pm (15) RAPT (Q2/ Q3)
4:00 -4:40 pm (40) WRITE Q2
4:40- 5:15 pm (35) WRITE Q3

Syllabus areas A,B,C,D [ Q1] and could also be part of Q2 or Q3

Syllabus areas E,F [ Q2 and Q3] will only be tested here
Successful = Understanding + Practice + read around + sensible exam techniques
1. Understand – core components ( A,B,C,D,E,F)
2. Practice- Plenty [ 2018,17,16,15,14,13]- recent papers
3. Read around – take an overview / sum up/ make a synopsis/ make a summary [ Notes +
Articles]
4. Sensible exam techniques – time management / reading/ planning / writing

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Block-1
Topic 1: Money laundering
1. Process of money laundering
a. Placement
i. First transaction undertaken by the criminal or by the money launderer to
convert the illegal money into legal money
ii. Placement is done in banks, stock market, gold , property, mutual funds etc.
b. Layering
i. Subsequent transactions of converting the legal money into further legality
ii. Layering involve doing multiple transaction one after another i.e. from bank to
stock market, from stock market to gold, from gold to property etc.
c. Integration
i. Point of satisfaction where the criminal believe it the maximum

2. Anti- money laundering guidance for an audit firm

a. An audit firm should appoint MLRO (Money laundering reporting officer)
MLRO- Receive and assess the ML reports from colleagues and passes on a valid
suspicion to regulator
Duty:
1. Receive – ML report (working papers)- from colleagues (peers= partners)
2. Assess - on the basis of evidence gathered
3. Passes on – it to a regulator / valid suspicion

b. More time should be spent on client identification process (client screening process)

Client screening – is done when a new client invites the audit firm
More time should be spend – the audit firm will gather more knowledge of business / to
identify whether it is a risky client or not?

c. Client anti-money laundering procedures should be discussed and reviewed (Internal

control systems)

ICS = Discussing them + Reviewing them (performing test of controls)

Conclude whether ICS is effective or not

d. Audit firms should keep record [ working papers] for 5 years

To defend – in case of any future litigation
e. Members should not Tip-off ( Avoid concealment)

 Member should whistle blow the client involvement in money laundering

 Should not keep it confidential
Anti ML(Firm)= MLRO+ client screening + ICS + 5 years + Tip off

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Topic 2: Professional liability of the auditor
Negligence?
 Intentional (criminal negligence) – black listed / license could be cancelled
 Un-intentional (civil negligence)- mistakes ( Fine or a penalty)
Shareholder
 Duty of care (exist)- between the SH and the auditor ( by law- companies Act / audit engagement
letter)
 Duty was breached
 Breached the SH suffered loss
Shareholders versus stakeholders

 Liability in contract ( shareholders)

o Relationship b/w the auditor (agent) and the shareholder( principal)
 Liability in tort( stakeholders/ third parties)
o Code of conduct – Professional competence and due care ( broad due care has some
limitations)
o Due care ( known third parties)- Bannerman case
Auditor liability = Liability in contract (SH)+ Liability in tort( known stakeholders)
Limiting auditor liability = Quality (International practice)+ Disclaimer(UK only)+ Incorporation(
concept not a reality) + LLP( international practice) + Capping ( Germany only)
1. Disclaimer of liability
i. UK Practice only
ii. U/S 534 of the companies act’2006
iii. Disclaimer of liability – pertaining to third parties
iv. US-534- The auditor has to agree a liability limitation agreement with client
v. In the audit report the auditor can put this exclusion as per Sec 534 “this report is
solely for the company members”
vi. For e.g. the client is a geared company

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 AAA ONLINE (DEC) BATCH- KASHIF KAMRAN-FCCA
DAY 2
Professional skepticism
1. Components – due care
2. Attitude-
a. Questioning mind
b. Critical assessment of evidence gathered
3. Three elements
a. Attributes – qualities of a good auditor
i. Professional competence [ qualification]
ii. Experience [ Skilled / competent/ Callibre]
iii. Regular training and development of the auditor (CPD)
b. Mind set
i. Questioning mind
ii. Being alert in the process of audit
c. Actions
i. Critical assessment of evidence gathered ( Review of the working paper)
ii. Discussion with those charged with governance (TCWG)
Specific areas – to apply professional skepticism
When does auditor apply professional skepticism? – through out

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Topic 4: Auditor responsibility for fraud
Massaging the figures= Window dressing= creative accounting= manipulating the FS to show better
performance [Why the management do so?]
1. Self-interest- better results means better bonuses / salaries
2. Incentive / opportunity– achieving target / management can manipulate the actual results to
achieve targets (normally the last quarter / 4th quarter of the financial year is very risky]
3. Incentive- Listed Company!! – if the company is listed, the management has an outside pressure
to show better results / to boost market value of shares
4. Incentive- Negotiating a loan – if the company is negotiating a loan – there is a high chance of
financial statement been fabricated / being massaged to show better liquidity for securing a
bank loan
Auditor should be skeptical analysing the financial statements ( that is the reason that the auditor
perform risk assessment at the planning stage to identify risky areas within the financial statements)
Risky areas in the financial statement (Inherent risk / risk by default / embedded in the FS)
1. ASSETS- OVERSTATED
a. Tangible
b. Intangible
c. Current assets
2. LIABILITIES – UNDERSTATED
a. Current
b. Non-current liab
3. INCOME – OVERSTATED
a. Sales
b. Other income
c. Exchange gains
4. EXPENSES –UNDERSTATED
a. Depreciation expense
b. Bad debt expense
5. SUBJECTIVE AREAS IN THE FINANCIAL STATEMENT (Estimates of the management /
management estimates are risky / inherently risky)
a. Fair values
b. Depreciation
c. Going concern
d. Provision
6. DISCLOSURES ( Inherently risky)
a. Lack of disclosure
b. Incomplete disclosure
c. Examples
i. Contingent liability
ii. Non-adjusting event
iii. Related party transaction
iv. Operating segments

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Fraudulent financial reporting – in economic downturn
Example:
Parker company is facing difficult trading condition due to an economic recession in the country and it
was necessary to cut price on the products due to economic downturn. The consumer spending is
depressed.
Extracts from the financial statements
Sales $ million 2018 2017
Sales 8 9
Ok its fine, that sales has gone down over the last year because of economic recession by 11%. What if
the sales must have gone down by more than 11% and the management has fabricated or massaged it
to show at minus 11% ?
Sales could be overstated !!
Further, due to economic recession, the consumer spending is depressed – What about inventory in the
warehouse ?
What will happen to the inventory due to economic recession? It will become slow moving – Auditor
should be skeptical about inventory valuation?
Due to economic recession- depressed trading condition? – What about receivables in the balance
sheet?- Receivables could be overstated !! why – if bad debts are not recorded.
If I am going to the audit of Parker company – What are risky areas?
1. Sales – overstated
2. Inventory – overstated
3. Receivable – overstated

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How the auditor should respond to earning management?
 Use of professional scepticism
 Discussion among engagement team
 Planning meeting(ISA-300)- at the stage of the planning there should be a discussion
between the engagement partner and the team, where by the engagement partner
informs the team of the risky areas within the financial statement
 Evaluation of accounting policies
 The audit team should critically evaluate the accounting policies to ensure that the
accounting policies are in line with IAS / IFRS
 Completeness of disclosures
 The audit team should critically evaluate the disclosure required in the FS and should
ensure their completeness / there should not be an omission of a disclosure required
 Communication with TCWG
 If the auditor identify any material misstatement( wrong accounting policy / lack of
disclosure) the auditor should to inform TCWG for rectifying it
 Audit report
 If not rectified by TCWG, the auditor would consider the implication for the audit report
 Other reporting requirements
 Should the auditor inform the regulator? In some countries the auditor has an obligatory
responsibility to inform the regulator of a breach of IAS/ IFRS for e.g. in USA, there is a
regulator known as PCAOB, to whom the matter should be whistle blown.

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Topic 5: Auditor responsibility for laws and regulations
Auditor responsibility- Should be ALERT of any instance of non-compliance with laws and regulations
(NOCLAR) and if any found should take appropriate actions.
Laws and regulations – there are many laws and regulations which are applicable to a company
HOWEVER the auditor should only take knowledge about those laws and regulations which have a direct
or indirect effect on the financial statement.
Type A – Laws [Direct effect on FS]
 IAS/ IFRS
Type B – Laws [Indirect effect on FS]
 Health and safety laws- it can cause a provision or contingent liab in the FS
 Environmental laws - it can cause a provision or contingent liab in the FS
Auditor = KOB(Knowledge of business)= relevant laws = direct/ indirect effect on FS
Auditor responsibilities for NOCLAR
1. Obtaining an understanding of the nature of the act and the circumstances in which it has
occurred and further information to evaluate the possible effect on the financial statements
 Nature of act- whether it was an omission or a commission
 Circumstance – Intentional or un-intentional
 Possible effect on the FS – Understatement / overstatement / provision / contingent
liabilities
2. Discussing the matter with management and those charged with governance and obtaining legal
advice in certain circumstances;
 First with the management – Middle management
 Then with TCWG – BOD / Audit committee
 Legal advice – certain circumstances ( what are certain circumstances) – when NOCLAR
has a public interest / for e.g. the hospital is using expired medicines / there is an
environmental breach etc.
 Legal advice is been taken to whistle blow the matter to public/ and you are taking the
legal advice from the professional accountancy body
3. Evaluating the implications of NOCLAR in relation to other aspects of the audit;
 If the auditor identify the NOCLAR / will it affect other aspect of audit? Yes/ how:
1. Client integrity- auditor should re-asses it
2. Impact on the sample size- will the auditor increase the sample size for the
remaining audit
3. Re-assess the need to be more skeptical /re-assess the materiality level

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4. Evaluating the impact of NOCLAR on the audit opinion; and
 If the management fails to rectify the NOCLAR then the auditor should consider its impact
on the audit report
5. Determining whether to report NOCLAR to an appropriate authority outside the entity
 Informed to a regulator ( regulator responsible for laws and regulations)
 Reporting will take precedence over confidentiality
6. Documentation
 The auditor should maintain proper working papers for all NOCLAR identified during the
process of audit and the actions taken

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TOPIC 6: USING THE WORK OF OTHERS
OTHERS – Who others are for an external auditor?
1. ISA-600 –The auditor of the subsidiary ( when you are a parent auditor)

Example:
ABC Co chartered certified accountant is the auditor of the parent company of Plant group. The
plant group comprised of a parent company and six subsidiaries. ABC company is responsible
for the audit of the parent company and three of its subsidiaries whereas the remaining three
subsidiaries are audited by another audit firm.

Plant group ABC Co Another audit firm

Parent company Auditor
S1 Auditor
S2 Auditor
S3 Auditor
S4 Another audit firm
S5 Another audit firm
S6 Another audit firm

What should ABC Co look for in context of another audit firm?

I. Whether the subsidiary to which another audit firm is responsible to perform audit is
significant subsidiary or not?
a. A subsidiary is significant to the group if it contributes 15% or more to the total
profit of the group or it is 15% or more of the total assets of the group
II. If it is a significant subsidiary of the group, then ABC company has to see whether another
audit firm is a related firm or an unrelated firm?
a. Related firm is a firm which is related to ABC company in terms of its size,
reputation, experience etc. (equal firm)
b. Unrelated firm is a firm which is not related to ABC company in terms of size,
reputation or experience ( small firm)
III. If the significant subsidiary is being audit by an un-related firm to ABC company, then
ABC company should check the following before relying on the work of the un-related
firm:
a. Independence
b. Experience in the relevant industry
c. Competence of the teams members involved in the auditor
d. Quality of the working papers developed.

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2. ISA-610- The internal auditor

Before relying on the work of an internal auditor the auditor should ensure:
I. Independence of an internal auditor ( whether he reports to Audit committee or not)
II. Competence of the internal auditor ( qualification of the members of internal audit team)
III. Experience ( since how long they are serving the internal audit dept)
IV. Documentation for the work / how good the documentation is (internal audit report)

3. ISA-620- Expert

Before relying on the work of an expert the auditor should ensure:

I. Independence of an expert
II. Competence of the expert ( certification in the relevant area)
III. Experience ( since how long has he been an expert)
IV. Documentation for his work / how good the documentation is

4. ISA- 402- Service organization

Example: You are an auditor representing ABC & Co a firm of chartered certified accountant, and
you are responsible for the audit of Crow company. Crow company has outsourced its payroll
function to Jack company a service organization.

Before I rely on the work of Jack Company in respect of payroll I will ensure that Jack company
is:
I. Independent of crow company
II. Experience of Jack company / market reputation/ how well it is known in the market / in
the relevant area where the jack company is providing services
III. Documentation of their work/ how well the work relating to payroll was documented
IV. Review the internal control at Jack company (Visit Jack company for it) before I can place
reliance on the payroll data being obtained from Jack company

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 AAA ONLINE (DEC) BATCH- KASHIF KAMRAN-FCCA
DAY 3
EXAM PRACTICE: TOPIC 3 – PROFESSIONAL SKEPTICISM
JUNE 2015- Q-3 Part a/ b (i)= 11 marks [TONY GROUP]
DISCUSS HOW PROFESSIONAL SKEPTICISM SHOULD BE APPLIED TO THE STATEMENT MADE BY
SILVIO?
Goodwill of $10 million is recognised in the Group statement of financial position, having arisen on several business
combinations over the last few years. An impairment review was conducted in March 2015 by Silvio Dante, the Group
finance director, and this year an impairment of $50,000 is to be recognised in respect of the goodwill.
Silvio has prepared a file of documentation to support the results of the impairment review, including notes on the
assumptions used, his calculations, and conclusions. When he gave you this file, Silvio made the following comment:
‘I don’t think you should need any evidence other than that contained in my file. The assumptions used are
straightforward, so you shouldn’t need to look into them in detail. The assumptions are consistent with how we
conducted impairment reviews in previous years and your firm has always agreed with the assumptions used, so you
can check that back to last year’s audit file. All of the calculations have been checked by the head of the Group’s
internal audit department.’

I don’t think you need any evidence other than that contained in my file- That means that Silvio is trying
to limit the scope of the audit work by recommending to the audit team that my file will be a sufficient
resource for impairment. Rather it is the auditor responsibility to decide what evidence should be
obtained / how the evidence should be obtained. Become alert / why Silvio is raising such a comment !
Assumption are straightforward- Assumption are risky by nature/ contains the risk of management
bias / if wrong assumption are used for recoverable amount of goodwill, the impairment loss could be
understated. Further the auditor should critically review the assumption, and the basis as to how the
recoverable amount was determined
Your firm has always agreed with the assumption used- It is not a guarantee that if the firm agreed with
assumption used last year can agree this year also / because auditor perform each year audit with a
proper mind set / proper use of professional skepticism
Check back to last year audit file- Last year audit file will only contain evidence about the assumption
used in last year / and how impairment was calculated the last year but will not provide any assurance
on the assumption used this year for determining the impairment loss.
All calculation checked by group internal audit dept- Auditor should ensure the independence and
experience of the internal audit dept before placing any reliance on the internal audit department work.
Auditor should be skeptical about the IA dept expereicne and independence. Auditor should re-check
the calculations

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June 2016- Q3
Part a- 7 marks
Why auditor presume there is a risk of fraud in revenue recognition? ( 5 mark/ 1 mark per
presumption)
 Because, revenue is an item of income, which has an inherent risk of overstatement
 Because, revenue could be wrongly recognized if the management fails to understand the
requirement of IFRS-15, relating to performance obligation
 Because, directors are paid bonuses on the basis of company’s performance, and one of the
criteria to judge performance is revenue
 Because there is a greater is risk of cut-off in revenue recognition, i.e. revenue could be recorded
in the wrong accounting period
 Because revenue is the top line of income statement and if manipulated can have a trickle-down
effect on the profitability so it is easy for the management to manipulate the revenue
Why ISA 240 requires specific responses in relation to risk mitigation? ( 2 why = 2 marks)
The ISA 240 requires specific response in relation to risk mitigation, firstly because specific responses
given in ISA 240 promotes standardization of audit practices pertaining to risk mitigation and
eliminates the doubts of using wrong judgement. Further the specific response boost shareholder
confidence in the auditor true and fair view, reflected as part of the auditor opinion.
Part b(ii)- Legal dispute – 6 marks
Implication for completion of audit
For each implication which you will justify on the completion of audit = 1 mark * 4 = 4 marks

Manager should consider the materiality of the reversal of the provision, i.e. 6.8 % of the profit. Then
the manager should re-consider the client integrity as the symptoms demonstrated by Mr. Smith
indicate that the client is involved in fraudulent financial reporting. Moreover, the manager need to
reconsider, the audit approach for the remaining audit. Lastly, the manager needs to consider the
implication for the audit report if the reversal of provision is proved to be wrong.

Further actions
For each further action recommended = 1 mark (*3) = 3 marks

Discuss the underlying basis of reversal with Mr.Smith( if he is available later)

Correspond with legal advisor of the company, to seek his views on the likelihood that the company
will be successful
Re-consider whether the reversal of the provision was an adequate decision or not .

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At the year end – York company reversed the provision
1. Year end is the time when most of the number in the FS are massaged / manipulated
2. Reversed a provision – is an abnormal event / and should be carefully dealt by the auditor/
because through the reversal of provision Phil Smith can overstate the profit and understate
the liability
Mr. Smith believe
1. Believe is an assumption of the owner- which can be right or wrong / assumption are
inherently risk
2. Mr. Smith took a wrong assumption to boost the profit of his company or to show better
performance
Mr.Smith is not available / no evidence was provided
1. Not available- owner is trying to hide from the auditor
2. No evidence – means that the basis used by Smith are illogical
FRAUDULENT FINANCIAL REPORTING = YEAR END + REVERSED+ OWNER + BELIEVED+ HIDING
+ NO EVIDENCE
RULES FOR MATERIALITY –ENTIRE AAA PAPER
MATERIALITY SCALE OF MATERIALITY
TOTAL ASSETS 1 – 2 % of the total assets
PBT 5- 10 % of the profit
REVENUE ½ - 1 % of the revenue

Reversal of provision is $ 150,000 which is 6.8% of the profit and .5% of the total assets, thus it is
material to the profit and immaterial to the total assets

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Topic 8:
Why Joint audit ( realistic )
1. Shareholder wants a better assurance / engages two auditor
2. Shareholder must have evaluated that the benefit of two audit are more than the cost incurred
3. In some countries, joint audit is governed by legislations
a. EU- audit reform ( 2015)
i. Mandatory for listed companies to have two auditor
4. Joint audit are normally performed of very large and complex companies

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