2015-1 ACCT7103 Assignment – FAQ, p.1

2015-1 ACCT7103 Assignment – FAQ, p.1
2015-1 ACCT7103 Assignment – FAQ
General comments
? Do not talk about the general theory or definitions of the fraud triangle (or the general
theory/definitions of anything!). Simply incorporate them into the discussion of the risks,
e.g., fact #1 creates an incentive for managers to [do something] which affects sales revenue
[in what way? Over-state or under-state?] because… [briefly explain the reason in 1 or 2
sentences].
? Always get straight to the point. This is not a “report” so you don’t need an introduction or
a summary anywhere in the assignment. If you have sentences that are general statements
that do not use the facts of the assignment or are not directly answering the questions, you
don’t need these sentences. For example, general descriptions of different types of audit
procedures and their functions are not needed. You simply need to explain an audit
procedure that can check the audit objectives of the accounts/transaction classes in the
questions.
? “If the assignment doesn’t say so, do not assume it.” This is true regarding internal controls
and any other risk factors that are not mentioned in the assignment. Don’t talk about
internal auditors, audit committee, related parties, etc. if the assignment does not mention
these things. This is because, if you want to discuss things that are not mentioned in the
assignment, there is an unlimited number of things you can say – and at the same time you
show no knowledge that you are able to assess the facts given in the case.
? When assessing inherent or control risks, just follow the example of the sentence provided
in the assignment guide. Follow the structure of that sentence. State the factor, state why it
causes a higher or lower risk of misstatement (over or under statement) due to fraud or error.
In explaining why, the incentives/opportunities/attitude of the fraud triangle are relevant, but
do not give general theory/definitions, just use the facts of the assignment to explain.
? Discuss the good and the bad – you’re not just looking for factors that cause a higher risk but
also factors that can decrease risk. Each factor should be explained with only a couple of
sentences unless there’s an important factor that’s slightly more complicated to explain.
? In the control risk assessment section, you can explain how some internal control
weaknesses specified in the assignment can lead to misstatements of sales
revenue/allowance for doubtful debts.
? You can just suggest simple methods of fraud, without using complicated methods. In fact,
a simple fraud method will make it easier for you to design the relevant audit tests.
? Some people asked for examples of tests of control (TOC) and substantive tests. There are
many examples of substantive tests in the tutorial questions since lecture 1. There are
examples of TOC in the internal control tutorial. Of course, the textbook also provides
detailed explanations and examples that are helpful.
2015-1 ACCT7103 Assignment – FAQ, p.2
? There is no need to discuss the timing of procedures for either TOC or substantive test.
? There is no need to talk about sample size or sampling techniques such as stratification.
? The assignment has nothing to do with auditor’s independence threats, so please don’t talk
about self-interest threats etc. You can of course talk about the CEO’s self-interest but it’s
not a “self-interest threat”.
? It’s usually easy for us to tell when an audit procedure looks like it’s a general description
copied from the textbook or somewhere because the procedure is too general (and
beautifully worded). It is not related to the facts/questions/audit objectives/accounts
specified in the assignment. Avoid copying a procedure from somewhere because this
makes us think there’s no attempt to design an appropriate procedure that fits this case. You
can start with a procedure in a book and then see if it will work for this case – explain the
procedure in more detail to link it to this assignment.
? Read through your own assignment. What’s clear to you (as you’re the author) may not be
clear to the reader. You can use simple language to clearly explain what you mean – this is
not a writing competition to use big words unless you are sure your sentences correctly
convey your meaning to the reader. Of course, you should use appropriate audit
terminology as much as possible. Clearly spell out the links between a factor and the risk of
misstatement. Some people do not explain the links and then later say to us “but isn’t the
link obvious? Why do I need to say it?” Yes the links are obvious, but many people still
give us wrong explanations when we ask them to explain. So please clearly explain the
basic steps of your arguments to the teaching staff (following the examples in the
assignment guide and in the Q&A session) so we know you’re not just repeating the facts
given in the case followed by a repetition of the requirement (misstatement of an account)
without any kind of analysis.
? Instead of saying some factor motivates employees to manipulate an account, it’s better to
make the type of manipulation clear by saying the factor motivates employees to overstate
(or understate) the account, unless both are likely.
? There is no need to reference concepts etc. from the lecture/tutorial notes, textbook or
Accounting/Auditing Standards unless you feel a strong need to do so.
? You just need to assess inherent risks and control risks. You don’t need to suggest solutions
for your client company (well, not for this assignment).
? You do need to form an overall IR and CR assessment for requirements 1 and 2. There is no
need to summarise your analysis again, just say “based on the analysis above, inherent risk
is assessed to be [high/medium/low] for this audit.”
? The marking scheme is different for the assignment compared to the mid-exam. For the
assignment, the number of marks is more of an indication of its overall weight in this course
(e.g., 8% or 4%). A section worth N marks does not mean you only need to identify N
factors. If I can see about 10 or 11 inherent risk factors in this assignment, then you are
expected to be able to correctly identify about 8 to 9 inherent risk factors in order to get full
marks for that section.
? For requirements that are worth only 2 marks, you still need to provide a good explanation
of the audit procedures with sufficient details to obtain that 1 mark. Usually this can be
done with a short paragraph of about 3 to 4 sentences for each assertion.
2015-1 ACCT7103 Assignment – FAQ, p.3
Inherent risks
? There is no need to classify inherent risks based on the headings in the lecture slides, e.g.,
industry factors, etc. Some terminology may be useful to you though.
? Remember the list of inherent risks in the lecture notes is far from comprehensive, so don’t
try to fit the assignment’s facts into those categories. A better approach is to carefully go
through each fact given in the assignment to classify them into inherent risks/control risks.
These risks may not fit any of the inherent risk categories.
? Some factors may be both an inherent risk and a control risk, but the reason how they affect
the risk of misstatement of an account may be different, so a factor like that should be
discussed in both sections.
Control risks
? Only talk about the internal controls that are specified in the assignment. Some elements of
the 5 elements of the internal control system are not mentioned in the assignment, so there’s
no need to discuss these.
? The assignment does not mention a lot of things — how do you know that the company does
or does not have other controls? Do not make assumptions about “other controls”. There is
no need to discuss them.
? Some people are not sure how to approach this question. I suggest the following approach:
To assess control risk, you can identify the controls that are already in place, briefly explain
(in 1 or 2 sentences) why/how they are good or bad for the relevant accounts/audit
objectives. Some risks/controls are general risks/controls that apply to many
accounts/transactions/assertions but that’s fine, because they also apply to the account/audit
objectives relevant to this assignment. Of course, if you see obvious problems/limitations
for the controls given in the assignment, discuss these too.
? Do clearly specify the types of control activities that exist in the company, e.g., this
company has [control activity, e.g., separations of duties between X & Y] which helps
improve the accuracy of accounting records (including sales) because…
Analytical procedures
? You can just use the ratio(s) provided in the assignment without discussing other ratios. Do
your analysis using other information in the assignment too (not just the numbers in the
table). For example, if the ratio is changing in an unexpected way (give your reasons why
the change is expected or unexpected), it indicates a higher risk of misstatement (over or
under statement?) for which account?
Test of control (TOC)
? A test of control checks whether an internal control works or not. A substantive test should
directly check for misstatements in a recorded transaction/final account balance.
? Choose a test that’s clearly a test of control, instead of something that may also be a test of
details of transactions unless you can clearly show the specific internal control that’s tested.
2015-1 ACCT7103 Assignment – FAQ, p.4
? What is the control activity being tested? As I said repeatedly, if you can’t clearly identify
the control activity tested, then your procedure is most likely not a test of control.
Remember, a test that directly checks COGS completeness is more likely a test of
transactions than a test of control unless you can clearly identify the control activity tested
by the audit procedure.
? Be as specific as possible. If you’re testing a computer processing control, specify the name
of the control if possible (e.g., a data reasonableness test).
? The assignment guide said you should not use the same audit procedure for test of control
and substantive test. It does NOT mean that you can’t use the same TYPE of audit procedure.
That is, you can use documentary evidence for both your TOC and substantive test. Just
don’t use exactly the same procedure as both the test of control and substantive test.
Substantive testing
? The substantive test does not need to be related to any internal control weakness.
? You do not need to identify whether your test is a test of details of transaction or balance.
Just describe the procedure in sufficient detail, e.g., instead saying “examine source
documents”, specify the types of documents examined.
? Make sure your substantive test actually addresses the relevant audit objective of the
relevant account/transaction class.
? Please choose a reasonably effective substantive test that checks the relevant audit objective
of the relevant account/transaction class. Use a procedure that has a reasonably good chance
of detecting misstatements due to the type of fraud you have chosen. Don’t use a procedure
that only checks mathematical accuracy such as re-calculation because such a procedure
does not pick up possible fraud or even most mistakes other than just calculation errors.
Avoid using “inquiry of the client” as the only audit procedure as this does not provide
reliable evidence.