hkicpa exam technique seminar - pr...
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HKICPA
Exam Technique Seminar Module C (Section A)
June 2012
Lecturer: Wilson Leung
Seminar handouts
HKICPA QP Module C
Module C (June 2011 Session) 1 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 2 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 3 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 4 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 5 Prepared by Wilson Leung
Case study – HKICPA June 2011
Question 1
Assume that you are Julie, you are going to discuss with Ben the ABC audit
arrangement for 2010. Refer to the facts of above, what independence issue(s)
would you consider for advising Ben for his consideration on whether B & Co
should continue the external auditor relationship with ABC for 2010? And
what safeguard(s) would you recommend to Ben? [10 marks]
WWhhaatt aarree tthhee iinnddeeppeennddeennccee iissssuueess iinn tthhiiss qquueessttiioonn??
Ben Bee and Julie Chan have been the in-charge in the last 3 years – lloonngg aassssoocciiaattiioonn ((ffaammiilliiaarriittyy tthhrreeaatt))
Thomas, the new general manager, is Julie’s uncle – cclloossee rreellaattiioonnsshhiipp ((ffaammiilliiaarriittyy tthhrreeaatt))
Thomas has been reaching out to Julie for assistance on system designs and user implementation testing – pprroovviissiioonn ooff nnoonn--aassssuurraannccee sseerrvviiccee ((sseellff--rreevviieeww tthhrreeaatt))
ssiiggnniiffiiccaanntt??
HHooww wwoouulldd yyoouu eevvaalluuaattee tthheessee tthhrreeaattss iinn yyoouurr aannsswweerr??
ssaaffeegguuaarrddss
((11)) CClloossee rreellaattiioonnsshhiipp [[LLPP 44..22..33..55]]
((22)) PPrroovviissiioonn ooff IITT sseerrvviiccee [[LLPP 44..22..44..22]]
HKICPA QP Module C
Module C (June 2011 Session) 6 Prepared by Wilson Leung
Question 2
Assume that B & Co has been re-appointed as ABC’s external auditor for 2010 and
was not engaged by ABC to assist on system design and implementation.
With respect to the audit of ABC’s financial statements for the year ended 31
December 2010, explain the impact of the SAP implementation on the audit in
terms of (i) audit planning and (ii) IT general controls and application
controls and (iii) data integrity, and outline the appropriate audit procedures.
[12 marks]
WWhhaatt aarree tthhee kkeeyy wwoorrddss iinn tthhiiss qquueessttiioonn??
NNeeeedd ttoo uussee IITT eexxppeerrttss
UUssee CCAAAATT
AAuuddiitt ppllaannnniinngg
((IImmpplleemmeenntt SSAAPP))
IITT ggeenneerraall ccoonnttrroollss
AApppplliiccaattiioonn ccoonnttrroollss
TTeesstt ttoo eennssuurree eeffffeeccttiivveenneessss
DDaattaa iinntteeggrriittyy
DDaattaa iiss aaccccuurraattee ffrroomm oolldd
ssyysstteemm ttoo nneeww ssyysstteemm
AApppprroopprriiaattee aauuddiitt pprroocceedduurreess
HKICPA QP Module C
Module C (June 2011 Session) 7 Prepared by Wilson Leung
Question 3
ABC has a business relationship with over 5,000 local and overseas suppliers.
With respect to the audit of ABC’s financial statements for the year ended 31
December 2009, B & Co arranged accounts payable confirmations. Some of the
confirmation replies from the suppliers indicated that the confirmed balance did
not agree with the suppliers’ record but could be reconciled and explained by ABC.
In April 2010, as instructed by Thomas, the accounts payable team implemented a
new process. They now perform reconciliations to monthly statements from
overseas suppliers, and any variance is properly is properly followed up by the
accounts payable team and approved by Thomas.
(a) Evaluate and explain the risk of material misstatement relating to the
completeness assertion of ABC’s accounts payable as at 31 December
2010. [3 marks]
(b) Suggest the audit procedures you would perform in response to the
assessed risk of material misstatement relating to the completeness
assertion of ABC’s accounts payable as at 31 December 2010.
[7 marks]
5,000 local and overseas suppliers – mmaannyy,, eeaassiillyy wwrroonngg
Differences in the sent confirmation can be reconciled – bbaallaanncceess aappppeeaarr ttoo bbee ccoorrrreecctt
Reconciliations to monthly statements and variance is properly followed up – GGoooodd iinntteerrnnaall ccoonnttrrooll
rriisskk
EEvvaalluuaattee
WWhhaatt pprroocceedduurreess ttoo ppeerrffoorrmm uunnddeerr ssuucchh rriisskk aasssseessssmmeenntt??
HKICPA QP Module C
Module C (June 2011 Session) 8 Prepared by Wilson Leung
Question 4
There are over 100,000 inventory items amounting to over HK$33 million as at 31
December 2010. Management perform a year-end inventory count on 15 and 16
December 2010.
Thomas directly supervises the year-end inventory count with the assistance of
accounting department. Management reconcile the physical count records to
inventory sub-ledger, investigate the difference and correct the sub-ledger balance
as appropriate.
(a) What are the factors and procedures which should be considered in
planning the physical count on existence assertion of ABC’s inventories
as at 31 December 2010?
[7 marks]
WWhhaatt aarree tthhee kkeeyy wwoorrddss iinn tthhiiss qquueessttiioonn??
ppllaannnniinngg
NNoott pprroocceedduurreess wwhheenn aatttteennddiinngg iinnvveennttoorryy ccoouunntt
LLPP 1133..33..33..33
HKICPA QP Module C
Module C (June 2011 Session) 9 Prepared by Wilson Leung
Source: HKICPA Business Assurance Learning Pack
HKICPA QP Module C
Module C (June 2011 Session) 10 Prepared by Wilson Leung
(b) In view of the implementation of “SUCCESS” and change of the
inventory costing method, evaluate and explain the risk of material
misstatement relating to the accuracy and completeness assertion of
ABC’s inventories as at 31 December 2010. [4 marks]
(c) Suggest the audit procedures you would perform in response to the
assessed risk of material misstatement relating to ABC’s inventories as
at 31 December 2010 as described in Question 4(b)?
[7 marks]
Over 100,000 inventory items and inventory count performed on 15 and 16 December – mmoorree lliikkeellyy ttoo oommiitt
Management reconcile the physical count records to sub-ledger – GGoooodd iinntteerrnnaall ccoonnttrrooll
Implementation of a new system – ddaattaa iinnppuutt mmaayy bbee
eenntteerreedd iinnccoorrrreeccttllyy
Change of inventory costing method – NNeeww ccoosstt mmaayy bbee
ccaallccuullaatteedd iinnccoorrrreeccttllyy ((aaccccuurraaccyy))
WWhhaatt aarree tthhee rreellaatteedd aasssseerrttiioonnss iinn QQuueessttiioonn 44((bb))??
AAccccuurraaccyy aanndd ccoommpplleetteenneessss
rriisskkss
HHooww ttoo eennssuurree tthhee ccoossttiinngg iiss ccaallccuullaatteedd ccoorrrreeccttllyy??
HHooww ttoo eennssuurree tthhaatt aallll iinnvveennttoorriieess wwhhiicchh sshhoouulldd
hhaavvee bbeeeenn rreeccoorrddeedd aarree rreeccoorrddeedd??
HKICPA QP Module C
Module C (June 2011 Session) 11 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 12 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 13 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 14 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 15 Prepared by Wilson Leung
HKICPA QP Module C
Module C (June 2011 Session) 16 Prepared by Wilson Leung
Module C (December 2011 Session) 17 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 18 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 19 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 20 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 21 Prepared by Wilson Leung
Case study – HKICPA December 2011
Question 1
Define the entity’s risk assessment process (which is one of the elements of
internal controls) and describe two specific risk assessment processes that Mr.
Kwok should expect DREIT has in place to minimize the risks of premises
collapse, particularly for those caused by the illegal extension built on the
premises. [6 marks]
WWhhaatt aarree tthhee rreeqquuiirreemmeennttss iinn tthhiiss qquueessttiioonn??
Define – “WWhhaatt”” [[LLPP 1111..11..22]]
Describe two specific risk assessments – CCaassee,, aappppllyy!!
WWrroonnggllyy ppuurrcchhaassee aa pprreemmiissee wwiitthh iilllleeggaall eexxtteennssiioonn
RRiisskk aasssseessssmmeenntt
HHooww ttoo kknnooww bbeeffoorreehhaanndd aanndd ssttoopp tthhiiss ffrroomm hhaappppeenniinngg??
RRiisskk??
HHooww??
DDuuee ddiilliiggeennccee bbeeffoorree ppuurrcchhaassiinngg
IInnssppeecctt tthhee fflloooorr ppllaann aanndd ccoommppaarree wwiitthh tthhee
pphhyyssiiccaall ccoonnssttrruuccttiioonn
EEssttiimmaattee ppoossssiibbllee lloosssseess aanndd eennssuurree ssuuffffiicciieenntt
iinnssuurraannccee ccoovveerraaggee
HKICPA QP Module C
Module C (December 2011 Session) 22 Prepared by Wilson Leung
Question 2
Define fraud risk factors and identify four fraud risk factors for the purpose
of DREIT’s audit. [9 marks]
Fraud risks factors: [[LLPP 1100..11..66]]
Incentive or pressure
Opportunity
Rationalization
HHooww ttoo lliinnkk ffrraauudd rriisskkss ffaaccttoorrss ttoo ccaassee??
WWhhaatt eellssee mmaayy iinnddiiccaattee aa hhiigghheerr rriisskk ooff ffrraauudd??
NNuummbbeerrss
AAnnaallyyttiiccaall pprroocceedduurreess!!
Incentive – Remuneration of senior executives is closely linked to the growth rate of distribution per unit
Pressure – Listed company in Hong Kong
Opportunity (breakdown in internal controls) – Inconsistent control system in 50 real estates and leads to high chance of theft
HKICPA QP Module C
Module C (December 2011 Session) 23 Prepared by Wilson Leung
Question 3
DREIT has established an audit committee to comply with the Listing Rules of the
Hong Kong Stock Exchange.
(a) To what extent can the establishment of an effective audit committee
improve DREIT’s corporate governance in the context of external
auditing, financial reporting and internal control? [8 marks]
aaddvvaannttaaggeess
Present your answer into: [LP 2.4.1]
External auditing
Financial reporting
Internal control
TToo wwhhaatt eexxtteenntt ccaann …… aauuddiitt ccoommmmiitttteeee …… iimmpprroovvee??
Source: HKICPA Business Assurance Learning Pack
HKICPA QP Module C
Module C (December 2011 Session) 24 Prepared by Wilson Leung
(b) Describe some ways to gauge the effectiveness of DREIT’s audit
committee. [6 marks]
HHooww ttoo mmeeaassuurree tthhee eeffffeeccttiivveenneessss ooff aann aauuddiitt ccoommmmiitttteeee??
HHooww??
DDeessccrriibbee ssoommee wwaayyss ttoo ggaauuggee ……
Improve quality of financial reporting – mmeemmbbeerrss ooff
aauuddiitt ccoommmmiitttteeee nneeeedd ffiinnaanncciiaall eexxppeerrttiissee
Improve quality and efficiency of the external auditor – ffrreeee ccoommmmuunniiccaattiioonn ttoo tthhee eexxtteerrnnaall aauuddiittoorrss
Increase public confidence – ccoommppoossiittiioonn ooff tthhee bbooaarrdd
mmuusstt bbee bbaallaanncceedd
Increase public confidence – NNoonn eexxeeccuuttiivvee ddiirreeccttoorrss
mmuusstt bbee iinnddeeppeennddeenntt
WWhhaatt ddooeess iitt mmeeaann bbyy eeffffeeccttiivvee??
HKICPA QP Module C
Module C (December 2011 Session) 25 Prepared by Wilson Leung
Question 4
Assume that Mr. Kwok’s estimate of losses to DREIT following the premises
collapse is material for audit purposes but the Manager of DREIT has refused to
adjust the financial statements. Against such circumstances of the case, assume that
any misstatements are not likely to be pervasive to DREIT’s financial statements.
(a) Identify and discuss the most appropriate form of audit opinion.
[7 marks]
(b) Assume that you are Mr. Kwok and have decided to modify the audit
opinion. Write a draft report comprising the report title, the basis of
opinion, the qualified opinion and the report issuer sections ONLY.
[8 marks]
WWhhaatt iiss tthhee iissssuuee iinn tthhiiss QQuueessttiioonn??
mmiissssttaatteemmeennttss
QQuuaalliiffiieedd oorr aaddvveerrssee??
nnoott ppeerrvvaassiivvee
QQuuaalliiffiieedd ooppiinniioonn
HHooww ttoo ssccoorree 77 mmaarrkkss??
DDrraafftt …… ssppeecciiffiicc 44 sseeccttiioonnss!!
CCaassee ssppeecciiffiicc
HKICPA QP Module C
Module C (December 2011 Session) 26 Prepared by Wilson Leung
Question 5
The tenancy of Mr. Kwok’s CPA practice office will expire in November 2011.
Mr Kwok has been offered by DREIT a two-year tenancy in one of its prime
commercial premises at a monthly rent of HK$10 per square foot with an
initial three-month rent-free period. [6 marks]
RReenntt aann ooffffiiccee ffrroomm tthhee cclliieenntt ppaayyiinngg aa cchheeaapp mmoonntthhllyy rreennttaall
WWhhaatt iiss tthhee iissssuuee iinn tthhiiss QQuueessttiioonn??
GGiiffttss aanndd hhoossppiittaalliittyy
AAPPPPLLYY ccoonncceeppttuuaall ffrraammeewwoorrkk
CCiittaattiioonn:: CCooddee ooff EEtthhiiccss
FFaacctt:: RReenntt aann ooffffiiccee ffrroomm tthhee cclliieenntt ppaayyiinngg aa
cchheeaapp mmoonntthhllyy rreennttaall
IISSSSUUEE:: GGiiffttss aanndd hhoossppiittaalliittyy
TThhrreeaattss:: SSeellff iinntteerreesstt tthhrreeaatt
SSiiggnniiffiiccaanntt?? NNaattuurree –– HHKK$$1100 iiss ffaarr bbeellooww mmaarrkkeett rraattee VVaalluuee –– CCoouulldd bbee ssiiggnniiffiiccaanntt
IInntteenntt –– DDoouubbttffuull
SSaaffeegguuaarrddss:: TToooo ssiiggnniiffiiccaanntt,, nnoo ssaaffeegguuaarrdd.. RReejjeecctt..
HKICPA QP Module C
Module C (December 2011 Session) 27 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 28 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 29 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 30 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 31 Prepared by Wilson Leung
HKICPA QP Module C
Module C (December 2011 Session) 32 Prepared by Wilson Leung
Five tips in writing Module C exam
1. Read the requirements first before you read the case
2. Budget your time properly
3. Plan your answer based on key words in the question. Your answer should relate to marks
4. Follow the “standard + apply” approach
5. Don’t forget to use numbers when given – analytical procedures !
Good luck!!!