ACCA
Tuition (Course) Exam September 2020 exams
Paper AAA
Advanced Audit and Assurance
Answers
We are grateful to the Association of Chartered Certified Accountants for permission to reproduce
past examination questions and model answers.
© First Intuition Ltd, 2020
, 2 Tuition (course) examination answers ACCA AAA
1 BLUEBELL CO
EXAMINER’S COMMENTS: PART (a)
The requirement to part a should not have been a surprise. Most candidates approached the
requirement in a logical manner, working through the information provided in the scenario,
and for each point from the case study attempting to provide an explanation of the financial
statement risk. Many candidates demonstrated a sound knowledge and understanding of
the relevant financial reporting issues, and many could apply that knowledge in an audit
context to come up with specific financial reporting risks. It was also encouraging to see less
confusion in scripts between business risk, audit risk, and financial statement risk than in
previous sittings.
However, some common failings in answers to requirement (a) are noted below:
Describing a financial reporting issue but then failing to develop the point to provide a
financial statement risk. For example, most candidates appreciated that the property
sale discussed in note 3 of the scenario was some kind of financing arrangement and
was not a genuine sale. However, too few candidates then went on to discuss the risk
of non-current assets being potentially understated due to the properties being
incorrectly removed from the statement of comprehensive income (balance sheet), or
the risk of depreciation expenses and finance charges being understated, clearly hoping
that one would be correct.
Vague answers – many candidates simply explained a risk as ‘risk of incorrect
accounting treatment’ or ‘risk that accounting standard not followed’. These answers
unfortunately highlight to markers a lack of knowledge rather than an application of
knowledge.
A propensity for asking questions was apparent in many scripts. For example, a risk
explained by asking ‘is the accounting treatment for the provision correct?’ or ‘has the
property been valued correctly?’ These are not financial statement risks and are
definitely not explanations of such risks.
Failure to think about the figures provided. Very few candidates looked at the trends
shown by the draft financial statements. For example, only a small minority recognised
that after removing the share -based payment and property repair expenses from
operating expenses, the company’s underlying operating expenses had decreased by
13.5%, whereas revenue had increased by 24.8%. This should have prompted a
discussion that either revenue was overstated, expenses understated, or both.
Briefing paper
To: Mia Smith
From: Audit manager
Date: xx/xx/xx
Subject: Audit planning issues for Bluebell Co
Introduction
This briefing paper summarises:
Key financial statement risks for the audit
Principal audit procedures on share-based payments and deferred tax recoverability
Ethical issues arising and responses
, ACCA AAA Tuition (course) examination answers 3
Relevant KPIs for Bluebell Co and related evidence
(a) Financial Statement Risks
Revenue Recognition
Bluebell Co has an accounting policy of recognising revenue when a room is occupied. The
deposits (and possibly sometimes even full payment) are received when the room is booked.
There is a risk revenue will be overstated if it is recognised too early. On receipt of a deposit
prior to the occupation of the room, the revenue should be deferred and disclosed as a liability,
per IFRS 15 Revenue from Contracts with Customers. Liabilities may therefore be understated
and profit overstated.
Bluebell Co’s increase in revenue is 24.8%. Compared to the industry average of only 20% this
may be indicative that Bluebell’s revenue is overstated.
Share-based payment
There is a risk that the expense could be overstated if the assumption regarding all of the shares
vesting is incorrect. The expense should be calculated by considering whether performance
conditions attached to the share options will be met. It is unlikely that every single employee
granted an option will meet the required performance criteria and therefore a more realistic,
lower estimate should be made of the expense. The expense should be adjusted each year end
to account for staff turnover. If the expense is overstated due to an incorrect assumption, then
the corresponding credit to equity is also overstated.
In addition, the calculation of the total cost of the share-based payment is complex, and this
adds to the risk that components of the calculation may be incorrect. For example, the fair value
used to calculate the expense should be the fair value of the granted share options calculated at
the grant date; the use of fair value at any other date is incorrect. The model used to calculate
fair value must comply with IFRS 2 Share-based Payment.
It is also important for the measurement of the expense that it has been calculated based on
the share options being granted midway through the accounting period.
Provisions
There is a risk that provisions have been recognised inappropriately. The provisions for repairing
flood damage should only be recognised if Bluebell Co has an obligation to perform the repairs
at the year end. There is unlikely to be any legal or constructive obligation attached to this
situation so a provision should not have been recognised in this accounting period. Operating
expenses (and property, plant and equipment if any portion of the provision relating to
refurbishment has been capitalised) and liabilities are therefore overstated.
There is a risk that disclosures relating to any capital commitment entered into before the year
end are insufficient.
In addition, it is important to consider that the buildings are covered by an insurance policy,
which will pay out for repair and refurbishment costs to the assets. The fact that Bluebell Co has
recognised a repair expense of $100 million indicates that either the buildings were not covered
by adequate insurance (a business risk), or that the accounting implication of the
reimbursement has been ignored.
EXAM SMART
Credit will be awarded for alternative interpretations as to whether an obligation exists at
the year end for the property repairs to be carried out.
Tuition (Course) Exam September 2020 exams
Paper AAA
Advanced Audit and Assurance
Answers
We are grateful to the Association of Chartered Certified Accountants for permission to reproduce
past examination questions and model answers.
© First Intuition Ltd, 2020
, 2 Tuition (course) examination answers ACCA AAA
1 BLUEBELL CO
EXAMINER’S COMMENTS: PART (a)
The requirement to part a should not have been a surprise. Most candidates approached the
requirement in a logical manner, working through the information provided in the scenario,
and for each point from the case study attempting to provide an explanation of the financial
statement risk. Many candidates demonstrated a sound knowledge and understanding of
the relevant financial reporting issues, and many could apply that knowledge in an audit
context to come up with specific financial reporting risks. It was also encouraging to see less
confusion in scripts between business risk, audit risk, and financial statement risk than in
previous sittings.
However, some common failings in answers to requirement (a) are noted below:
Describing a financial reporting issue but then failing to develop the point to provide a
financial statement risk. For example, most candidates appreciated that the property
sale discussed in note 3 of the scenario was some kind of financing arrangement and
was not a genuine sale. However, too few candidates then went on to discuss the risk
of non-current assets being potentially understated due to the properties being
incorrectly removed from the statement of comprehensive income (balance sheet), or
the risk of depreciation expenses and finance charges being understated, clearly hoping
that one would be correct.
Vague answers – many candidates simply explained a risk as ‘risk of incorrect
accounting treatment’ or ‘risk that accounting standard not followed’. These answers
unfortunately highlight to markers a lack of knowledge rather than an application of
knowledge.
A propensity for asking questions was apparent in many scripts. For example, a risk
explained by asking ‘is the accounting treatment for the provision correct?’ or ‘has the
property been valued correctly?’ These are not financial statement risks and are
definitely not explanations of such risks.
Failure to think about the figures provided. Very few candidates looked at the trends
shown by the draft financial statements. For example, only a small minority recognised
that after removing the share -based payment and property repair expenses from
operating expenses, the company’s underlying operating expenses had decreased by
13.5%, whereas revenue had increased by 24.8%. This should have prompted a
discussion that either revenue was overstated, expenses understated, or both.
Briefing paper
To: Mia Smith
From: Audit manager
Date: xx/xx/xx
Subject: Audit planning issues for Bluebell Co
Introduction
This briefing paper summarises:
Key financial statement risks for the audit
Principal audit procedures on share-based payments and deferred tax recoverability
Ethical issues arising and responses
, ACCA AAA Tuition (course) examination answers 3
Relevant KPIs for Bluebell Co and related evidence
(a) Financial Statement Risks
Revenue Recognition
Bluebell Co has an accounting policy of recognising revenue when a room is occupied. The
deposits (and possibly sometimes even full payment) are received when the room is booked.
There is a risk revenue will be overstated if it is recognised too early. On receipt of a deposit
prior to the occupation of the room, the revenue should be deferred and disclosed as a liability,
per IFRS 15 Revenue from Contracts with Customers. Liabilities may therefore be understated
and profit overstated.
Bluebell Co’s increase in revenue is 24.8%. Compared to the industry average of only 20% this
may be indicative that Bluebell’s revenue is overstated.
Share-based payment
There is a risk that the expense could be overstated if the assumption regarding all of the shares
vesting is incorrect. The expense should be calculated by considering whether performance
conditions attached to the share options will be met. It is unlikely that every single employee
granted an option will meet the required performance criteria and therefore a more realistic,
lower estimate should be made of the expense. The expense should be adjusted each year end
to account for staff turnover. If the expense is overstated due to an incorrect assumption, then
the corresponding credit to equity is also overstated.
In addition, the calculation of the total cost of the share-based payment is complex, and this
adds to the risk that components of the calculation may be incorrect. For example, the fair value
used to calculate the expense should be the fair value of the granted share options calculated at
the grant date; the use of fair value at any other date is incorrect. The model used to calculate
fair value must comply with IFRS 2 Share-based Payment.
It is also important for the measurement of the expense that it has been calculated based on
the share options being granted midway through the accounting period.
Provisions
There is a risk that provisions have been recognised inappropriately. The provisions for repairing
flood damage should only be recognised if Bluebell Co has an obligation to perform the repairs
at the year end. There is unlikely to be any legal or constructive obligation attached to this
situation so a provision should not have been recognised in this accounting period. Operating
expenses (and property, plant and equipment if any portion of the provision relating to
refurbishment has been capitalised) and liabilities are therefore overstated.
There is a risk that disclosures relating to any capital commitment entered into before the year
end are insufficient.
In addition, it is important to consider that the buildings are covered by an insurance policy,
which will pay out for repair and refurbishment costs to the assets. The fact that Bluebell Co has
recognised a repair expense of $100 million indicates that either the buildings were not covered
by adequate insurance (a business risk), or that the accounting implication of the
reimbursement has been ignored.
EXAM SMART
Credit will be awarded for alternative interpretations as to whether an obligation exists at
the year end for the property repairs to be carried out.
