Acca aaa s21 Notes

September 2021 to June 2022 exams
Watch free ACCA AAA lectures 
67

---

Only on 
OpenTuition
you can find: Free ACCA notes 
•
Free ACCA lectures 
•
Free ACCA tests 
•
Free ACCA tutor support 
•
The largest ACCA community
(5)
The first audit of a new client is in progress. The parent imports small decorative items from 
abroad. Its subsidiary trades through 12 take-away pizza shops which are very profitable. 
Dividends are regularly paid by the subsidiary to the parent. 
During the audit, an inventory count showed that the parent had imported some modern items 
which appear to be made of ivory, which is a banned import. Invoices for these items traced 
through goods received notes described them as made from a synthetic material.
‣
Note: the first audit of a new client always causes more audit risk, simply because the client, 
business and systems are all unfamiliar. Generally, a more skilled audit team than normal 
should be assigned for the first audit to reduce detection risk.
‣
Pizza shops are largely cash based. They are reported as being very profitable. Consider the 
risk of money laundering.
‣
Money is going abroad through the import business.
‣
The client might have dealt with illegal items (ivory). We need to establish the material used.
‣
If the imports are illegal, the client should be encouraged to tell the authorities and any 
penalties should be estimated and suitable provisions set up.
‣
If the material is ivory, or the client will not allow it to be tested, the auditor should withdraw 
because the integrity of management is in doubt.
(6)
A large printing machine originally cost $5 million and its accumulated depreciation amounts to 
$3 million. The sale value of the machine to an overseas buyer in the country of Burunda, net of 
selling costs, is believed to be 10 million Burundan pounds. The exchange rate at year end was 4 
Burundan pounds to $1. The value in use, using cash flow projections and a discount rate of 5%, 
is $1.5 million.
‣
The fair value of the asset needs to be considered. Current carrying amount is $2m. NRV = 
10/4 = $2.5m. Value in use is $1.5m. If the exchange rate is steady, the carrying amount 
should be held at $2m. However, the exchange rate only needs to fall to 5 Burundian pounds 
to the S1 before the NRV falls to the current carrying amount. Any further fall implies that an 
impairment adjustment is needed.
‣
Also, is the asset held for sale under IFRS 5? If so, the asset should not be depreciated and 
appropriate disclosures need to be made.
(7)
You are the auditor of a group of companies and one of the subsidiaries has had very poor cash 
flow and it seems that the bank is unlikely to renew its borrowing facility.
The finance director of the parent has told you that it will make the required loan to the 
subsidiary to keep it solvent.
‣
The auditors need to see a ‘letter of comfort’
‣
Board minutes should be examined to see if financial support has been approved.
‣
The auditors need to assess if the parent can provide any support needed.
‣
If support seems unlikely or impossible, the subsidiary's financial statements will have to be 
drawn up on a break-up basis.
‣
Costs of liquidation need to be estimated.
‣
Loan agreements must be looked at to see if the subsidiary's failure will precipitate the 
breaching a borrowing covenant.