ACCA Pre-Sept 24

mock
Ben Wilson’s answers

Tutorial notes are provided for each

requirement, giving you extra guidance.

These answers were planned and written

under exam conditions, to time.

They are NOT perfect, but who you what is

achievable in the time allowed.

This is an ‘extract’…..the full answers are at:

https://benwilsonaaa.com/free-resources/

Or scan this QR code

1 ACCA Pre-Sept 24 mock– answers

Question 1 Thornham – Ben’s answer plan

General notes
Today - 1 July X5
Audit manager
Listed - public interest, more rules
New client - detection risk, opening balances - CDD performed
Manufacturer - globally famous - global sales
y/e/ 30 Sept X5 - 3 months before y/e - planning phase
Audit committee - use of internal audit

Briefing notes
To: Wendy Runton, audit engagement partner
From: Audit manager
Subject: Thornham Textiles Co audit planning
Date: 1 July 20X5

Introduction
These briefing notes will evaluate and prioritise the significant audit risks to be considered in
planning the audit for the financial year ending 30 September 20X5, design the principal audit
procedures to be performed in respect of the non-current assets relating to the planned closure of
the Holt factory; and the share-based payment scheme. They will also discuss the factors to be
considered when determining the nature and extent of reliance which can be placed on the work of
the internal audit department of Thornham Textiles Co.

a) Evaluate and prioritise the significant audit risks to be considered in planning the audit for the
financial year ending 30 September 20X5 (22)

ALL EXHIBITS - 6 or 7 risks required

Materiality
Range of $440k to $880k - 5% to 10% of profit before tax (PBT)

Set at lower level $440k - higher risk audit - significant changes to the business (closure of Holt
factory) - increasing risk of misstatement - new audit - reduce detection risk - unfamiliar with the
company's processes and systems

Analytical procedures
Revenue / profit / margins calculations – include these to add depth to other risks

Holt factory - asset held for sale / discontinued operation

$4.7m carrying value - highly material

Requires classification as an asset held for sale or discontinued operation

- Buyer actively being sought (actively discussing sale to another company)
- Asset available for sale in its current condition (factory is operational and being sold as an ongoing
business)
- Sale is highly probable (discussions ongoing with a buyer, judgement involved here)
- Sale will be completed within 1 year (closure planned for November X5)

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Required to reclassify the assets as 'current', to stop depreciation, and record the assets at the lower
of book value and fair value less costs to sell.

Unusual transaction - risk that management are not aware of the reporting requirements - increased
risk of error

Inadequate disclosure - assets and liabilities not presented separately

Risk prioritised - judgement involved in assessing if a sale highly probable - unusual transaction -
highly material by size

Redundancy
$1.2m cost - material - could require a provision

Present obligation - if staff have been notified about the redundancy programme - further
information required
Past event - decision has been made to close the factory
Reliably measurable - cost figure of $1.2m given by management
Probable outflow - judgemental - dependent on whether sale of factory goes ahead

Potential for management bias - overstate the likelihood of sale going through - avoid recognising
the $1.2m cost - boost profits - listed - pressure to deliver profitability to the market

New client - auditor lacks experience - hard to robustly challenge management's judgement over the
likelihood of sale - increased detection risk

Current liabilities (provisions) understated - redundancy costs (SPL) understated

Risk prioritised - management judgement involved - likelihood of sale proceeding - lack of third party
evidence available - reliant on management representations - increases risk of misstatement

Holt factory - impairment

$0.7m write down required ($4.7m - $4m) - material

Asset held for sale - required to write down to lower of book value ($4.7m) and fair value less cost to
sell ($4m) - value in use assumed to be $0 as closure is planned.

PBT increased by $2.3m (35.4%) - suggests write down has not been recorded - would decrease PBT

$4m does not include sale costs - legal fees, advisor costs - actual write down could be greater than
$0.7m

Factory value overstated (current asset, as an asset held for sale) - impairment expense (SPL)
understated

Share options
Equity settled share options - spread cost evenly over the vesting period - value at grant date
1,000 staff x 1,000 shares x $1.70 / 3 years = $567k per year - maximum cost - assuming redundant
staff retain options - material

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Potential for error - new scheme - management may lack experience of performing the calculation -
unrealistic assumption that all staff will remain - unclear if redundant staff will retain their options

Equity could be under or overstated - employee expense (SPL) under or over stated. More likely
overstated, given the unrealistic assumption over all staff remaining increasing the cost of the
scheme.

Litigation
$2m claim - material

Contingent asset - recognise if virtually certain to be received - breach of patent seems clear from
the scenario - use of the name is protected - status of the legal claim unknown - prudent not to
recognise an asset

Disclosure required - if probable - further information required about the status of the case -
management incentive not to disclose - draws attention to the matter - globally famous brand -
could impact sales if customers question legitimacy of the products

Disclosures inadequate - full details of the case required ($2m claim, status of the case, court dates,
likelihood of winning) - user of accounts fully informed

Flood damage
Damaged inventory - value of $625k - material

Valued at the lower of cost and net realisable value - $625k assumed to be the cost of the inventory
(further information required to confirm this) - net realisable value likely to be $0 - flood damage
would damage the cloth making it impossible to sell - write down of $625 required

Management bias - may be reluctant to recognise the cost - profit margins have fallen (11.1% in X5
[$8,800/$79,500]) vs 11.3% in X4 [$6,500/$57,400]) - would further reduce margins - negative signal
to market - listed

Current assets (inventory) overstated - inventory write down expense (SPL) understated

Tutorial notes
This was the LAST question I did in the exam – leaving the balance of my time for this huge and
important question. I reached here with c1 hour remaining. This was ridiculously time pressured.
Had you done this question first, you would undoubtedly have overrun and been under pressure.

22 marks….less 3 marks for materiality…..19 marks for audit risks. With 3 marks per well explained
risk, I was happy with 6, as there will be a few marks for the calculations I included in the answer

Prioritisation – I prioritised the first 2 risks that I came up with – to make sure I earned the PSM
even if I ran out of time (and didn’t put a conclusion)

Forex – I didn’t think this was a ‘significant’ risk as the company is listed, it’s a simple calculation.
So I avoided it as I didn’t want to lose a PSM for not adhering to the requirements.

New client / analytical procedures – I use these to add depth to other risks…..rather than making
them risks in their own right

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b) Principal audit procedures

Non current assets (planned closure of Holt factory) (5)

Board minutes - approval of closure of factory - additional detail (e.g. planned date of closure -
November X5) - evidence that TT are committed to the closure within 12 months - classification as
an asset held for sale / discontinued operation

Obtain valuation report - assuming available by the date of the audit - confirm market value of the
factory as an individual asset - market value of other properties in the area - valuation reasonable

Obtain qualification certificates - trade references - external valuer - assess their professional
competence - reliability of their valuation

Evidence of negotiations with the potential buyer - emails / meeting minutes - assess likelihood of
the sale going ahead - likelihood of $4m being received - assess if fair value is genuinely $4m

Written management representations - confirm intent to sell within 12 months - evidence to support
$4m valuation - management judgement - confirm in writing

Share based payment scheme (5)

Contract letters / HR records - terms and conditions of the share scheme - accuracy of the stated
terms - number of shares (1,000), price ($2.50), requirement to remain until 30 September X7 -
drives the cost of the scheme

Board minutes - confirm approval of the scheme - 1 October X4 - board approval required to issue
shares - without this, the scheme doesn't actually exist

Fair value calculation - $1.70 per share - judgement assumptions made - e.g. discount rate - assess if
reasonable - in line with discount rates used by other companies made in the sector

HR records - historic staff turnover rates - employees that have already left (October X4 to today) -
assess reasonableness of assumption that no staff will leave - unrealistic given the 3 year timeframe

Legal advice - staff made redundant - entitlement to shares - impacts the cost of the scheme

Tutorial notes
Principal procedures – main ones only. I avoided anything minor (like ‘add up/cast’), to reduce the
risk of losing a PSM for not adhering to the requirements. The examiner’s answer includes lots of
‘basic’ tests…..going against their own advice. Do as the examiner SAYS not as they DO!

Assumed 5 marks per sub requirement – although we don’t know this for sure, it is the only
assumption we can make. Important to have a balanced answer here for PSMs

I focused my answer on ‘judgemental’ matters, and used the word ‘judgemental’ in my answer –
to make it super clear to marker, so I would get the PSM for judgement.

I started here – picking up the ‘easier’ marks for procedures while I was still fresh.

Notice that each of my procedures follows the same structure. 1) The ‘evidence’. 2) Explain ‘how’
the test works. 3) Explain ‘why’ I am doing the test. Do these 3 things to earn a full mark.

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c) Discuss factors to consider (reliance on internal audit) (8)

Objectivity - employed by the company - inherent self interest threat - may not highlight issues that
impact going concern - impact their employment - consider who directs their work - if free to decide
where to focus - or if controlled by an executive director

Report to audit committee - enhances objectivity - non executive directors - more able to report
issues without fear of recrimination from an executive director - more able to place reliance on their
work

New client - lack of prior year file - documentation of systems - internal audit report useful starting
point - external auditor must assess how well the work was planned / performed / reviewed - cannot
rely on it fully - must perform testing to confirm the quality of the report

Qualifications and experience of internal auditors - not required to be qualified accountants - if

unqualified / inexperienced, less reliance can be placed

Resourcing / staffing - sufficient people and technology resources - perform work effectively - if
under-resourced - less likely to be professionally competent - place less reliance on their work

Level of substantive testing - driven by risk of material misstatement - judgement for the external
auditor - where high, must perform appropriate level of testing - despite audit committee suggestion
- listed client - public interest - risk of being sued if negligent

Internal audit performing testing - only where routine / mechanical - no judgement involved - work
reviewed by external auditor - any high risk areas must be tested by the external auditor directly

Conclusion

Objectivity and quality of work - key factors - if satisfactory can place some reliance on internal audit
- only in low risk / non judgemental areas

Tutorial notes
As this was 8 marks – I used sub headings (I do this if the number of marks is 8 or more).
Sub headings make your answer easier to mark, and help to earn a communication PSM in Q1.

Lots of ‘knowledge’ was required here about internal audit – there wasn’t much to use in the
scenario. This is unusual in AAA.

If you struggled to generate points here – its totally fine to just make a few short points and move
on. Save the time to use elsewhere in the exam! Clearly you can’t do this on every requirement and
pass the exam….but in one or two places, its fine.

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6 ACCA Pre-Sept 24 mock– answers

Question 1 Thornham - Ben’s full written answer

Note – this is a ‘strong’ answer, planned / written under exam timed conditions. It isn’t
perfect, but shows you what is achievable!

Briefing notes
To: Wendy Runton, audit engagement partner
From: Audit manager
Subject: Thornham Textiles Co audit planning
Date: 1 July 20X5

Introduction
These briefing notes will evaluate and prioritise the significant audit risks to be considered in
planning the audit for the financial year ending 30 September 20X5, design the principal audit
procedures to be performed in respect of the non-current assets relating to the planned closure of
the Holt factory; and the share-based payment scheme. They will also discuss the factors to be
considered when determining the nature and extent of reliance which can be placed on the work of
the internal audit department of Thornham Textiles Co.

a) Evaluate and prioritise the significant audit risks to be considered in planning the audit for the
financial year ending 30 September 20X5 (22)

Materiality
Range of $440k to $880k, 5% to 10% of profit before tax (PBT).

Set at lower level $440k as this is a higher risk audit. Significant changes to the business have
occurred (closure of Holt factory), increasing the risk of misstatement. As a new audit client,
lowering materiality helps to reduce detection risk as the auditor is unfamiliar with the company's
processes and systems.

Holt factory - asset held for sale / discontinued operation

$4.7m carrying value is highly material.

Requires classification as an asset held for sale or discontinued operation as the IFRS criteria have
been met:
- Buyer actively being sought (actively discussing sale to another company)
- Asset available for sale in its current condition (factory is operational and being sold as an ongoing
business)
- Sale is highly probable (discussions are ongoing with a buyer, judgement is involved here. It is not
clear that this criteria has been met)
- Sale will be completed within 1 year (closure planned for November X5)

If the criteria are met, Thornham Textiles (TT) are required to reclassify the assets as 'current', to
stop depreciation, and record the assets at the lower of book value and fair value less costs to sell.

Unusual transaction, not in the normal course of business. Increased risk that management are not
aware of the reporting requirements, increasing the risk of error.

Inadequate disclosure in the financial statements. Assets and liabilities may not presented
separately and disclosed as held for sale / discontinued.

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7 ACCA Pre-Sept 24 mock– answers

Risk prioritised. Judgement is involved in assessing if a sale highly probable, with scope for
management bias. This is an unusual transaction that is highly material by size, disclosure errors
could be significant.

Redundancy
$1.2m cost is material, it could require a provision if the criteria below are met:

- Present obligation would exist if staff have been notified about the redundancy programme.
Further information required here to assess if staff have been notified.
- Past event exists, as the decision has been made to close the factory.
- Reliably measurable as the cost figure of $1.2m has been given by management.
- Probable outflow required is judgemental, dependent on whether sale of factory goes ahead. If the
factory is sold, less redundancies will be needed.

Potential for management bias to overstate the likelihood of sale going through. This would avoid
recognising the full $1.2m cost and boost profits. As TT is listed, there may be pressure to deliver
profitability to the market.

New client, where the auditor lacks experience. May be hard to robustly challenge management's
judgement over the likelihood of sale, increasing detection risk.

Current liabilities (provisions) may be understated, redundancy costs (SPL) understated.

Risk prioritised as management judgement is involved over the likelihood of sale proceeding. A lack
of third party evidence may be available, the auditor will be reliant on management representations.
This increases the risk of misstatement.

Holt factory - impairment

$0.7m write down required ($4.7m - $4m) is material

Asset held for sale (if the criteria above are met), TT are required to write down the factory to the
lower of book value ($4.7m) and fair value less cost to sell ($4m). Value in use is assumed to be $0 as
closure is planned.

PBT increased by $2.3m (35.4%), suggesting that the write down has not been recorded, as this
would decrease PBT.

$4m does not include sale costs (such as legal fees and advisor costs). Actual write down could be
greater than $0.7m, as these costs would need to be recognised in the fair value less costs to sell
calculation.

Factory value may be overstated (current asset, as an asset held for sale), impairment expense (SPL)
understated

Share options
Equity settled share options, as employees have the right to buy shares (no cash received). TT must
spread the cost evenly over the vesting period, based on the fair value of the options at the grant
date.

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8 ACCA Pre-Sept 24 mock– answers

1,000 staff x 1,000 shares x $1.70 / 3 years = $567k per year. This is the maximum cost, assuming
redundant staff retain options, making the cost material.

Potential for error. As a new scheme, management may lack experience of performing the
calculation. An unrealistic assumption that all staff will remain has been made, and it is unclear if
redundant staff will retain their options, both of which would impact the cost of the scheme.

Equity could be under or overstated, employee expense (SPL) under or over stated. More likely
overstated, as the unrealistic assumption over all staff remaining would increase the cost of the
scheme.

Litigation
$2m claim is material.

Contingent asset should be recognised if virtually certain to be received. The breach of patent seems
clear from the scenario (use of the 'Norfolk Cloth' name is protected). However, the status of the
legal claim is unknown, it is prudent not to recognise an asset.

Disclosure required if winning the case is probable. Further information required about the status of
the case to assess this fully. Management could be biased here, not disclosing the matter to avoid
drawing attention to it. Norfolk cloth is a globally famous brand, it could impact sales if customers
question the legitimacy of the products.

Disclosures may be inadequate. Full details of the case must be disclosed ($2m claim, status of the
case, court dates, likelihood of winning) so that a user of the accounts is fully informed.

Flood damage
Damaged inventory with a value of $625k, which is material.

Inventory must be valued at the lower of cost and net realisable value. $625k assumed to be the cost
of the inventory (further information required to confirm this). Net realisable value likely to be $0 as
severe flood damage would damage the cloth, making it impossible to sell. A write down of $625 is
required.

Management bias could be present here. They may be reluctant to recognise the cost as profit
margins have fallen (11.1% in X5 [$8,800/$79,500]) vs 11.3% in X4 [$6,500/$57,400]). This extra cost
would further reduce margins, a negative signal to the market.

Current assets (inventory) may be overstated, inventory write down expense (SPL) understated.

Tutorial notes
This was the LAST question I did in the exam – leaving the balance of my time for this huge and
important question. I reached here with c1 hour remaining. This was ridiculously time pressured.
Had you done this question first, you would undoubtedly have overrun and been under pressure.

22 marks….less 3 marks for materiality…..19 marks for audit risks. With 3 marks per well explained
risk, I was happy with 6, as there will be a few marks for the calculations I included in the answer

Prioritisation – I prioritised the first 2 risks that I came up with – to make sure I earned the PSM
even if I ran out of time (and didn’t put a conclusion)

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9 ACCA Pre-Sept 24 mock– answers

Forex – I didn’t think this was a ‘significant’ risk as the company is listed, it’s a simple calculation.
So I avoided it as I didn’t want to lose a PSM for not adhering to the requirements.

New client / analytical procedures – I use these to add depth to other risks…..rather than making
them risks in their own right

b) Principal audit procedures

Non current assets (planned closure of Holt factory) (5)

Obtain board minutes. Confirm board approval factory closure and the planned date of closure
(November X5). Evidence that TT are committed to the closure within 12 months, driving
classification as an asset held for sale / discontinued operation.

Obtain valuation report (assuming available by the date of audit fieldwork). Confirm market value of
the factory as an individual asset. Assess if valuation is in line with market value of other properties
in the area (valuation reasonable)

Obtain qualification certificates and trade references for the external valuer. Assess their
professional competence, as this drives the reliability of their valuation.

Evidence of negotiations with the potential buyer (e.g. emails / meeting minutes). Assess the
likelihood of the sale going ahead and that $4m will be received. Evidence to support the fair value
being genuinely $4m.

Written management representations should be obtained. Confirm the board's intent to sell within
12 months, and the assessment that $4m will be received. These are key management judgements
so must be confirmed formally in writing.

Share based payment scheme (5)

Contract letters and HR records should be obtained, particularly the terms and conditions of the
share scheme. Confirm the accuracy of the stated terms:
- number of shares (1,000)
- price ($2.50)
- requirement to remain until 30 September X7
These inputs drives the cost of the scheme, recognised in the financial statements, so must be
verified.

Board minutes should be reviewed. Confirm board approval of the scheme and the grant date of 1
October X4. Board approval is required to issue shares, without this, the scheme doesn't actually
exist.

Fair value calculation performed by management should be obtained ($1.70 per share). Assess the
judgemental assumptions made (e.g. discount rate) and assess if reasonable. Confirm if the discount
rate used is in line with that used by other companies made in the sector.

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10 ACCA Pre-Sept 24 mock– answers

HR records showing historic staff turnover rates and employees that have already left (October X4 to
today) should be obtained. Assess reasonableness of assumption that no staff will leave, this appears
unrealistic given the 3 year timeframe and 1,000 staff included in the scheme.

Legal advice obtained by management should be reviewed, regarding the staff being made
redundant. Assess their entitlement to shares, if redundancy is exempted by the scheme as a leaving
condition. The impacts the cost of the scheme.

Tutorial notes
Principal procedures – main ones only. I avoided anything minor (like ‘add up/cast’), to reduce the
risk of losing a PSM for not adhering to the requirements. The examiner’s answer includes lots of
‘basic’ tests…..going against their own advice. Do as the examiner SAYS not as they DO!

Assumed 5 marks per sub requirement – although we don’t know this for sure, it is the only
assumption we can make. Important to have a balanced answer here for PSMs

I focused my answer on ‘judgemental’ matters, and used the word ‘judgemental’ in my answer –
to make it super clear to marker, so I would get the PSM for judgement.

I started here – picking up the ‘easier’ marks for procedures while I was still fresh.

Notice that each of my procedures follows the same structure. 1) The ‘evidence’. 2) Explain ‘how’
the test works. 3) Explain ‘why’ I am doing the test. Do these 3 things to earn a full mark.

c) Discuss factors to consider (reliance on internal audit) (8)

Objectivity
Internal audit (IA) are employed by the company. An inherent self interest threat exists, IA may not
highlight issues that impact going concern (as it could impact their employment).
Consider who directs their work. If IA are free to decide where to focus, it makes them more
objective (and we can place more reliance on their work). If they are controlled by an executive
director, they would be less objective.

Reporting
IA report directly to the audit committee. This enhances objectivity as reporting is to non executive
directors. IA would be more able to report issues without fear of recrimination from an executive
director. Would allow reliance to be placed on their work.

New client
As this is the first year auditing TT, there is no prior year file. TT's controls and systems must be
documented fully as part of the audit. Internal audit report would be a useful starting point for this.
The external auditor (EA) must assess how well the work was planned / performed / reviewed . EA
cannot rely on the report fully, they must perform testing to confirm the quality of the report.

Qualifications and experience

Internal auditors are not required to be qualified accountants. If IA staff are unqualified /
inexperienced, less reliance can be placed on their work

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11 ACCA Pre-Sept 24 mock– answers

Resourcing / staffing
Consider if IA have sufficient people and technology resources to perform their work effectively
(planning, performing and reviewing). If under-resourced, IA are less likely to be professionally
competent, meaning less reliance can be placed on their work

Level of substantive testing

Must be driven by the risk of material misstatement, a judgement for the external auditor. Where
risk is high, EA must perform detailed substantive testing, despite the audit committee's suggestion.
As a listed client. public interest is high and there is a risk of being sued if negligent (e.g. be over-
relying on IA's work).

Internal audit performing testing

Must only allow IA to assist where controls are routine / mechanical, with no judgement involved in
the testing. IA's work must be reviewed in detail by the EA. Any high risk areas of the audit must be
tested by the external auditor directly

Conclusion
Objectivity of IA and the quality of IA's work are key factors to consider when placing reliance on
their work. If satisfactory, EA can place some reliance on IA's work, but only in low risk / non-
judgemental areas.

Tutorial notes
As this was 8 marks – I used sub headings (I do this if the number of marks is 8 or more).
Sub headings make your answer easier to mark, and help to earn a communication PSM in Q1.

Lots of ‘knowledge’ was required here about internal audit – there wasn’t much to use in the
scenario. This is unusual in AAA.

If you struggled to generate points here – its totally fine to just make a few short points and move
on. Save the time to use elsewhere in the exam! Clearly you can’t do this on every requirement and
pass the exam….but in one or two places, its fine.

11
12 ACCA Pre-Sept 24 mock– answers

This is an ‘extract’ of my answers

For Q2 and Q3, head to https://benwilsonaaa.com/free-resources/
Or scan this QR code

12