ACCA AA Step 04 (0519)
QUESTIONS &
ANSWERS(ELABORATIONS)
Section B
1/51
,Question 1 of 9
SeaPass is a ferry company which operates daily ferry crossings from the United Kingdom
(UK) to France. The company’s year end is 30 June 20X9. You are the audit senior and you
have started planning the audit. Your audit manager has asked you to have a planning
meeting with the client and to identify any relevant audit risks so that the audit plan can be
completed.
You obtained the following indivation at the meeting:
SeaPass has had a challenging year. The current economic crisis and worries about the
future of the Euro currency, has meant that many passengers who might previously have
booked ferry crossings to France are now choosing to spend their holiday within the UK.
SeaPass is under continual pressure from its shareholders to show consistent perdivance.
In an attempt to win new passengers and generate additional income, SeaPass spent
$800,000 on an advertising campaign which featured both in the national press and on
national television. The campaign took place in May 20X9 and the company is convinced
that this will vastly improve customer numbers during summer 20X9. Consequently the
finance director is proposing to match most of the advertising cost against summer
revenues and has shown $600,000 of the $800,000 spent as a prepayment at the year
end.
When customers book their ferry crossing they are required to pay an upfront deposit of
20% of the total cost. In previous years this has been recognised as revenue in the month
that the ferry crossing is made. However this year SeaPass have recognised the revenue
when the deposit is received. The finance director has explained that this is because the
company has spent the money as it was received in order to finance the advertising
campaign. The balance of 80% is taken by the company on the day of departure.
SeaPass want their customers to have an excellent experience when they travel with them.
With this in mind they offer a “money back guarantee”. If customers are excessively delayed
or they are not happy with the service provided by SeaPass, then they can claim
compensation under the company’s money back guarantee. Despite the company’s very
best efforts to improve customer satisfaction, compensation payments are made on a
regular basis.
SeaPass has also found that the price of fuel has risen sharply during the course of the
year and they have not been able to pass this price rise on to their customers in the div of
higher ticket prices. This has meant that its operating costs have increased considerably,
leading to falling profit margins.
The company does hold some cash reserves in the div of bank deposits. However, these
cannot be accessed for 6 months and so the company has had to take out a short term
overdraft. The finance director is pleased that the financial statements will show a net
positive cash position as the bank deposits will be greater than the overdraft at the year
end.
Required
(a) List and explain the elements of an assurance engagement. (5 marks)
Qs: 1 SeaPass.
Elements of assurance engagement:
2/51
,Practitioner – whoever is perdiving an audit – Auditor
Indented user – People who want an audit – shareholders/investrors
Responsible party – People who create/maintained subject matter (Financial Statement) – Financial
Directors
Subject matter – on what is providing assurance on (Financial Statement FS)
Criteria – Measure subject matter against - International Financial Frameworks IFRS, IAS etc
0 out of 0
This question has not yet been scored.
Marking scheme
Marks
(a) Up to 1 mark per explanation of element:
Suitable criteria 1
Assurance report 1
Appropriate evidence 1
Subject matter 1
Three party relationship (intended user, responsible party, practitioner) 1
5
(b) 1 mark per audit risk, 1 mark for explaining the auditor’s response to the risk
Pressure to maintain results 2
Accounting treatment of advertising expenditure 2
Accounting treatment of deposits 2
Provisions for customer compensation payments 2
Disclosure of bank and bank overdraft 2
10
(c) Up to 1 mark per well explained component, being ½ mark for stating the
component and ½ mark for the explanation
Control environment 1
The entity’s risk assessment process 1
The indivation system (relevant to financial reporting) 1
Control activities 1
Monitoring of controls 1
5
(d) 1 mark per well explained point:
Part of a wider understanding of the client’s business/ risks 1
Enables the auditor to design appropriate audit procedures 1
Enables the auditor to report internal control deficiencies 1
3
(e) 1 mark per well explained point:
3/51
, Assess whether the internal controls are properly designed 1
Perdiv tests of controls 1
If results are positive perdiv reduced substantive testing 1
More time efficient/ cost effective audit 1
If results are not positive, perdiv full substantive testing 1
5
1 mark for each definition:
(f)(f)
Test of control 1
Substantive procedure 1
30
Suggested solution
(a) An assurance engagement has five main elements to it:
A three party relationship. The three parties are:
The responsible party which is the organisation responsible for preparing the subject
matter to be reviewed.
The intended user who is the party who requires the assurance report.
The practitioner (for example an accountant), who is the professional who will review
the subject matter and provide assurance to the intended user.
The subject matter, namely the data to be evaluated prepared by the responsible
party.
The suitable criteria which are the “rules” against which the subject matter is to be
tested.
Appropriate evidence which must be obtained by the practitioner to confirm that the
criteria are met and
The assurance report which is provided by the practitioner to the intended user (and
the responsible party)
(b)
Audit risk Auditor’s response
SeaPass is under pressure from its end
shareholders to produce consistent perdivance
despite the current economic challenges facing
the company. It has also faced rising fuel prices
and operating costs and decreasing profit
margins.
There is a risk therefore that management may
be tempted to overstate assets and revenues
and understate liabilities and costs in the
financial statements in order to meet
shareholders’ expectations.
SeaPass has incurred $800,000 of advertising
expenses during the year. $600,000 of this
has been included as a prepayment at the year
4/51
QUESTIONS &
ANSWERS(ELABORATIONS)
Section B
1/51
,Question 1 of 9
SeaPass is a ferry company which operates daily ferry crossings from the United Kingdom
(UK) to France. The company’s year end is 30 June 20X9. You are the audit senior and you
have started planning the audit. Your audit manager has asked you to have a planning
meeting with the client and to identify any relevant audit risks so that the audit plan can be
completed.
You obtained the following indivation at the meeting:
SeaPass has had a challenging year. The current economic crisis and worries about the
future of the Euro currency, has meant that many passengers who might previously have
booked ferry crossings to France are now choosing to spend their holiday within the UK.
SeaPass is under continual pressure from its shareholders to show consistent perdivance.
In an attempt to win new passengers and generate additional income, SeaPass spent
$800,000 on an advertising campaign which featured both in the national press and on
national television. The campaign took place in May 20X9 and the company is convinced
that this will vastly improve customer numbers during summer 20X9. Consequently the
finance director is proposing to match most of the advertising cost against summer
revenues and has shown $600,000 of the $800,000 spent as a prepayment at the year
end.
When customers book their ferry crossing they are required to pay an upfront deposit of
20% of the total cost. In previous years this has been recognised as revenue in the month
that the ferry crossing is made. However this year SeaPass have recognised the revenue
when the deposit is received. The finance director has explained that this is because the
company has spent the money as it was received in order to finance the advertising
campaign. The balance of 80% is taken by the company on the day of departure.
SeaPass want their customers to have an excellent experience when they travel with them.
With this in mind they offer a “money back guarantee”. If customers are excessively delayed
or they are not happy with the service provided by SeaPass, then they can claim
compensation under the company’s money back guarantee. Despite the company’s very
best efforts to improve customer satisfaction, compensation payments are made on a
regular basis.
SeaPass has also found that the price of fuel has risen sharply during the course of the
year and they have not been able to pass this price rise on to their customers in the div of
higher ticket prices. This has meant that its operating costs have increased considerably,
leading to falling profit margins.
The company does hold some cash reserves in the div of bank deposits. However, these
cannot be accessed for 6 months and so the company has had to take out a short term
overdraft. The finance director is pleased that the financial statements will show a net
positive cash position as the bank deposits will be greater than the overdraft at the year
end.
Required
(a) List and explain the elements of an assurance engagement. (5 marks)
Qs: 1 SeaPass.
Elements of assurance engagement:
2/51
,Practitioner – whoever is perdiving an audit – Auditor
Indented user – People who want an audit – shareholders/investrors
Responsible party – People who create/maintained subject matter (Financial Statement) – Financial
Directors
Subject matter – on what is providing assurance on (Financial Statement FS)
Criteria – Measure subject matter against - International Financial Frameworks IFRS, IAS etc
0 out of 0
This question has not yet been scored.
Marking scheme
Marks
(a) Up to 1 mark per explanation of element:
Suitable criteria 1
Assurance report 1
Appropriate evidence 1
Subject matter 1
Three party relationship (intended user, responsible party, practitioner) 1
5
(b) 1 mark per audit risk, 1 mark for explaining the auditor’s response to the risk
Pressure to maintain results 2
Accounting treatment of advertising expenditure 2
Accounting treatment of deposits 2
Provisions for customer compensation payments 2
Disclosure of bank and bank overdraft 2
10
(c) Up to 1 mark per well explained component, being ½ mark for stating the
component and ½ mark for the explanation
Control environment 1
The entity’s risk assessment process 1
The indivation system (relevant to financial reporting) 1
Control activities 1
Monitoring of controls 1
5
(d) 1 mark per well explained point:
Part of a wider understanding of the client’s business/ risks 1
Enables the auditor to design appropriate audit procedures 1
Enables the auditor to report internal control deficiencies 1
3
(e) 1 mark per well explained point:
3/51
, Assess whether the internal controls are properly designed 1
Perdiv tests of controls 1
If results are positive perdiv reduced substantive testing 1
More time efficient/ cost effective audit 1
If results are not positive, perdiv full substantive testing 1
5
1 mark for each definition:
(f)(f)
Test of control 1
Substantive procedure 1
30
Suggested solution
(a) An assurance engagement has five main elements to it:
A three party relationship. The three parties are:
The responsible party which is the organisation responsible for preparing the subject
matter to be reviewed.
The intended user who is the party who requires the assurance report.
The practitioner (for example an accountant), who is the professional who will review
the subject matter and provide assurance to the intended user.
The subject matter, namely the data to be evaluated prepared by the responsible
party.
The suitable criteria which are the “rules” against which the subject matter is to be
tested.
Appropriate evidence which must be obtained by the practitioner to confirm that the
criteria are met and
The assurance report which is provided by the practitioner to the intended user (and
the responsible party)
(b)
Audit risk Auditor’s response
SeaPass is under pressure from its end
shareholders to produce consistent perdivance
despite the current economic challenges facing
the company. It has also faced rising fuel prices
and operating costs and decreasing profit
margins.
There is a risk therefore that management may
be tempted to overstate assets and revenues
and understate liabilities and costs in the
financial statements in order to meet
shareholders’ expectations.
SeaPass has incurred $800,000 of advertising
expenses during the year. $600,000 of this
has been included as a prepayment at the year
4/51
