Association of Chartered Certified Accountants (ACCA) Taxation (TX - UK) and Audit and Assurance (AA) Syllabus

Explain the VAT default surcharge / penalty principle for late returns and late payment.

Late submission and late payment attract escalating penalties. Under the points-based regime a penalty point is given for each late return, with a fixed penalty once a threshold of points is reached; late paid VAT also attracts interest and percentage-based late-payment penalties.

What is the nil rate band for inheritance tax and how can the residence nil rate band (RNRB) add to it?

Each individual has a nil rate band taxed at 0%; the RNRB is an additional band available when a main residence is left to direct descendants. Unused nil rate bands (and RNRB) can be transferred to a surviving spouse/civil partner.

Distinguish a Potentially Exempt Transfer (PET) from a Chargeable Lifetime Transfer (CLT) for IHT.

A PET (a gift to another individual) becomes fully exempt if the donor survives 7 years; otherwise it becomes chargeable on death. A CLT (e.g. a gift into most trusts) is immediately chargeable to lifetime IHT, with further tax possible if death occurs within 7 years.

What is taper relief in the IHT death computation and when does it apply?

Taper relief reduces the IHT payable (not the transfer value) on gifts made between 3 and 7 years before death. The reduction increases with time: 20% (3–4 yrs), 40% (4–5), 60% (5–6), 80% (6–7). It only reduces tax, never below nil, and never creates a repayment.

Define an assurance engagement and list its five elements.

An assurance engagement is one where a practitioner expresses a conclusion to enhance the confidence of intended users about a subject matter. The five elements are: a three-party relationship, subject matter, suitable criteria, sufficient appropriate evidence, and a written assurance report.

Distinguish reasonable assurance from limited assurance and the form of conclusion each gives.

Reasonable assurance is high (but not absolute) and gives a positive conclusion (e.g. 'the statements give a true and fair view'). Limited assurance is lower, involves fewer procedures, and gives a negative conclusion (e.g. 'nothing has come to our attention to suggest the statements are misstated').

Why can an audit never provide absolute assurance? List the inherent limitations.

Inherent limitations include: use of sampling/testing rather than 100% checking, the inherent limitations of internal control, the fact that most audit evidence is persuasive rather than conclusive, the use of judgement and estimates in accounts, and the risk of management override/collusion/fraud.

What is the difference between the expectation gap in auditing?

The expectation gap is the difference between what users believe auditors do (e.g. detect all fraud, guarantee the company's future) and what auditors are actually responsible for (forming an opinion on whether the financial statements give a true and fair view).

State the objective of a statutory audit and the standard wording of the auditor's opinion on UK financial statements.

The objective is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework — i.e. that they give a 'true and fair view' (or 'present fairly, in all material respects').

List the fundamental principles of the ACCA / IESBA Code of Ethics.

Integrity, Objectivity, Professional competence and due care, Confidentiality, and Professional behaviour.

Name the five categories of threat to auditor independence under the IESBA conceptual framework, with an example of each.

Self-interest (e.g. fee dependence), Self-review (e.g. auditing own bookkeeping work), Advocacy (e.g. promoting the client's shares), Familiarity (e.g. long association/close relationships), and Intimidation (e.g. threats of dismissal or litigation).

What safeguards address the self-interest threat created by an audit client representing a large proportion of a firm's total fees?

Monitoring fee dependency against thresholds, reducing reliance on the client, an independent (engagement quality) review of the work, consulting a third party such as the regulator, and disclosing the dependency to those charged with governance.

What is the difference between corporate governance and the role of an audit committee?

Corporate governance is the system by which companies are directed and controlled. An audit committee, made up of independent non-executive directors, oversees financial reporting, internal control and risk, the internal audit function, and the relationship with (and independence of) the external auditor.

How does internal audit differ from external audit in terms of objective, reporting and appointment?

External audit gives an independent opinion on the financial statements to shareholders and is appointed by them. Internal audit is appointed by management/the audit committee, reports internally, and evaluates and improves risk management, control and governance — its scope is set by the entity.

Why does the auditor obtain an understanding of the entity and its environment, and what does this include?

To identify and assess the risks of material misstatement. It includes the industry, regulatory and external factors; the nature of the entity (operations, ownership, financing); accounting policies; objectives, strategies and business risks; and the entity's measurement of financial performance.

State the audit risk model and define each component.

$$\text{Audit Risk} = \text{Inherent Risk} \times \text{Control Risk} \times \text{Detection Risk}$$ Inherent risk: susceptibility to misstatement before controls. Control risk: risk controls fail to prevent/detect it. Detection risk: risk the auditor's procedures fail to detect it.

How does the auditor respond if assessed inherent and control risk (the risk of material misstatement) is high, in terms of detection risk?

To keep audit risk acceptably low, the auditor must reduce detection risk by performing more/better substantive work: increasing sample sizes, using more experienced staff, performing tests at the year end rather than interim, and gathering more reliable, corroborative evidence.

Define materiality and explain materiality by nature (qualitative materiality).

Information is material if its omission or misstatement could influence the economic decisions of users. Besides size, an item can be material by nature — e.g. transactions with directors, items affecting compliance with law/covenants, or those turning a profit into a loss — regardless of monetary value.

What is performance materiality and why is it set below overall materiality?

Performance materiality is an amount set below overall materiality, applied to particular balances/classes, to reduce to an acceptably low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. It provides a margin for individually immaterial errors.

What are the auditor's responsibilities regarding fraud under ISA 240?

The auditor must maintain professional scepticism, identify and assess risks of material misstatement due to fraud, design responses (including testing journal entries and addressing management override), and obtain reasonable assurance the statements are free from material misstatement whether caused by fraud or error. Preventing/detecting fraud is management's responsibility.

Distinguish the auditor's responsibility for laws and regulations that directly affect the financial statements from those that do not (ISA 250).

For laws/regulations with a direct effect on material amounts/disclosures (e.g. tax), the auditor obtains sufficient appropriate evidence of compliance. For others (central to operating ability, e.g. licences), the auditor only performs limited procedures to identify non-compliance that may have a material effect.

List the five components of a system of internal control under the COSO framework.

Control environment, the entity's Risk assessment process, Information system and communication, Control activities, and Monitoring of controls.

Distinguish a test of control from a substantive procedure.

A test of control evaluates the operating effectiveness of a control in preventing/detecting material misstatements (e.g. checking authorisation signatures). A substantive procedure detects material misstatements in the figures themselves, comprising tests of detail and substantive analytical procedures.

What is a deficiency in internal control and a significant deficiency, and what must the auditor do about significant ones?

A deficiency exists where a control is unable to prevent/detect misstatements, or is missing. A significant deficiency is one important enough to merit the attention of those charged with governance; the auditor must communicate significant deficiencies to them in writing on a timely basis.

State the assertions the auditor tests for transactions/events and for account balances at period end.

Transactions: Occurrence, Completeness, Accuracy, Cut-off, Classification (and Presentation). Balances: Existence, Rights and obligations, Completeness, Accuracy/Valuation and allocation (and Presentation).

What are the financial statement assertions used to evaluate the quality (reliability) and sufficiency of audit evidence?

Sufficiency relates to the quantity of evidence; appropriateness relates to its quality (relevance and reliability). Evidence is more reliable when obtained from independent external sources, generated under effective controls, obtained directly by the auditor, in documentary form, and from original documents.

List the main audit procedures for obtaining evidence (the methods under ISA 500).

Inspection (of records/documents/assets), Observation, External confirmation, Recalculation, Reperformance, Analytical procedures, and Enquiry. (Mnemonic: AEIOU — Analytical, Enquiry/External confirmation, Inspection/Observation, etc.)

What key procedures are used to audit inventory existence and valuation at the year end?

Attend the inventory count to observe procedures and perform test counts (count-to-sheet and sheet-to-count) for existence/completeness; for valuation, test costing records and compare cost with net realisable value (post-year-end selling prices), reviewing for slow-moving/obsolete items.

What is the primary audit procedure for the existence and rights of trade receivables, and how are non-replies handled?

A direct (external) confirmation circularisation to customers tests existence and rights/obligations. For non-replies, the auditor performs alternative procedures — e.g. inspecting after-date cash receipts, matching to despatch notes and sales invoices — to gain evidence the balance is valid and collectible.

What are Computer-Assisted Audit Techniques (CAATs), and distinguish audit software from test data?

CAATs use the computer as an audit tool. Audit software (e.g. file interrogation) is used to perform substantive procedures on client data — selecting samples, recalculating, identifying exceptions. Test data is used to test controls by entering dummy data (valid and invalid) to check the system processes it correctly.

Distinguish adjusting and non-adjusting subsequent events (IAS 10) and the auditor's responsibility before versus after the report is signed (ISA 560).

Adjusting events give evidence of conditions existing at the year end (adjust the figures); non-adjusting events arose after (disclose if material). Up to the audit report date the auditor performs active procedures; between signing and issue the auditor has no obligation to search but must act on facts that come to light.

Define going concern and identify indicators that may cast doubt on it.

Going concern assumes the entity will continue operating for the foreseeable future (at least 12 months). Indicators include net liabilities, recurring losses, inability to pay creditors/loans on the due date, loss of key customers/suppliers/staff, withdrawal of finance, and adverse key financial ratios.

How is the auditor's report affected if a material uncertainty related to going concern is adequately disclosed versus inadequately disclosed?

If adequately disclosed, the opinion is unmodified but a separate 'Material Uncertainty Related to Going Concern' section is added. If disclosure is inadequate, the opinion is modified — qualified ('except for') or adverse — because of the material misstatement.

What are written representations and why does the auditor obtain them (ISA 580)?

Written representations are written statements from management confirming certain matters or supporting other evidence — e.g. that they have fulfilled their responsibility for the financial statements and provided all relevant information. They are necessary evidence but are not sufficient on their own for matters that can be corroborated otherwise.

Compare a qualified, adverse and disclaimer of opinion, and the circumstances giving rise to each.

Qualified ('except for'): misstatement or lack of evidence that is material but not pervasive. Adverse: a misstatement that is both material and pervasive (statements do not give a true and fair view). Disclaimer: inability to obtain evidence that is both material and pervasive (auditor cannot form an opinion).

What is an emphasis of matter paragraph and how does it differ from a key audit matters (KAM) section?

An emphasis of matter draws users' attention to a matter already correctly disclosed in the statements that is fundamental to understanding them, without modifying the opinion. KAMs (required for listed entities) are matters of most significance in the current audit, selected from those communicated to those charged with governance.