It is likely that as long-term oil and gas prices fluctuate, the amounts of oil and gas which can

economically be extracted from a

given site may change. The Group should review these estimates at least annually and, if the pattern of consumption of benefits
has changed, the depreciation method should be changed prospectively as a change in estimate. Expected future reductions in
selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in the oil platform.
If the estimates of total reserves or the predictions of long-term prices are inaccurate, then the depreciation charge will
be incorrect causing overstatement, or understatement of property, plant and equipment and operating profit as a result.
Management may be reluctant to increase depreciation if required if they are under pressure to meet the profit expectations of
the market.
Oil platforms – impairment
The Group appears to be following the requirement of IAS 36 Impairment of Assets which states that assets should be
assessed for indicators of impairment each reporting period and an impairment test performed where there is an indication of
impairment. The impairment loss recognised for the six months to 31 March 20X5 of $350 million is material. The impairment
reversal of $560 million and the net effect of the impairments and reversals at $210 million are also material.
Each oil platform is treated as a separate cash generating unit (‘CGU’) by the Group. An asset is impaired where the carrying
amount of the asset is higher than the recoverable amount. The recoverable amount is the higher of the fair value less costs of
disposal and the value in use of the asset. Where the assets in a CGU are impaired, the impairment is first written off against
any obviously impaired assets (to no lower than their individual recoverable amount), then pro-rated across the remaining
assets of the CGU.
The calculation of recoverable amount for the oil platforms is a complex calculation with a high number of estimates, particularly
to assess value in use which is based on estimates for future cash flows expected to be derived from the CGU. It will also
involve estimates of the long-term oil and gas prices which are very volatile, the costs of operating the platforms for a lengthy
period in the future and the use of discount factors incorporating the risks specific to each platform. Given that the Group uses
a single discount rate for all impairment calculations, it is possible the rate used is inappropriate for some locations where the
political and economic risks profile should give rise to a different cost of capital.
There is therefore a risk that the estimates used are inappropriate resulting in an over or understatement of impairment expense
and the corresponding asset value of the CGU. This would be an area where management may be biased in making estimates
which are favourable to reported profit figures and as a result, this area should be approached with a high degree of scepticism.
IAS 36 permits the reversal of impairment losses but only where there has been a change in the estimates used to determine
the asset’s recoverable amount since the loss was recognised. In addition, the reversal cannot give rise to a carrying amount
higher than what the depreciated historical cost of the asset would be. Such reversals are generally recognised through the
statement of profit or loss for the period. There is a risk that the reversals use the CGU value in use amount and that this may
be greater than the asset’s depreciated historical cost, resulting in an overstatement of assets and profits.
Oil platforms decommissioning cost
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised if there is a
present obligation as a result of a past event, and that there is a probable outflow of future economic benefits for which a
reliable estimate can be made. In this case, there is a legal obligation to decommission the platforms.
In accordance with IAS 37, the expected cost of decommissioning the platform would require a provision for decommissioning
to be recognised as a long-term liability at the present value of the expected removal costs with the amount added to the cost of
the asset. The costs of decommissioning are likely to be high and across all the extraction platforms this is likely to be material.
The figure is highly judgemental and therefore carries a high inherent risk.
IAS 37 requires that the discount factor used is the pre-tax discount rate, reflecting the current market assessment of the time
value of money, as well as the risks specific to the liability. The unwinding of the discount would be charged as a finance cost
to the statement of profit or loss each year.
There is a risk that the Group estimates are not appropriate given the long-term nature of the obligation. This would lead to
an understatement of property, plant and equipment assets in the course of construction and an understatement of long-term
liabilities.
In addition, there is a risk that the discount factor used when calculating the present value of the decommissioning costs is not
appropriate. This may result in either an over or under-statement of the liability and the finance cost. It is unclear if the Group
rate of 1·5% used for the impairment calculations has been applied to the decommissioning provision, and this may not reflect
the specific risks attributable to each individual decommissioning location. There will be different economic and political risks
arising in different locations, potentially resulting in differing costs of capital.
Additionally, there is a risk that the provisions for decommissioning of the Group’s oil extraction platforms have not been
reviewed during the year for changes in any of the estimates, e.g. discount rates or future costs, and this could give rise to
a material misstatement of provisions. The area is also one where management could use changes in the estimate to boost
profits through the release of provisions arising from an increase in discount rate used or a reduction in estimated costs. Given
the amount of assets which would require a provision for decommissioning, any errors made in the assumptions relating to the
decommissioning of platforms could be material in aggregate.

5
(c) Audit procedures in relation to the respect of impairment of oil and gas platforms
– Review the controls in place over preparation of the impairment reviews including the sources of information used and
test the controls to ensure they are operating effectively.
– Review the impairment indicator analysis prepared by management and assess whether the analysis is consistent with
the auditor’s understanding of the Group and industry.
– From the non-current asset register, confirm the carrying amount of each CGU prior to any impairment being recognised
and confirm the carrying amount of each component of the CGU.
– Discuss with management the difficulties in measuring fair value less costs of disposal to confirm that basing recoverable
amount on value in use is acceptable and in accordance with IAS 36.
– Obtain the client’s schedule calculating value in use and discuss the basis of the calculation with management, assessing
the reasonableness of the key assumptions used, for example, the effects of climate change on demand and prices.
– For long-term gas and oil prices, compare the assumptions against market data and industry forecasts to support the
assumptions used in management’s calculations.
– Review the discount factors used in the impairment reviews and ensure that specific risks in relation to each CGU are
factored into the discount factor.
– Compare operating costs for a sample of CGUs to historical operating costs to confirm they are complete and realistic.
– Compare future capital expenditure within the cash flow forecasts for CGUs to capital expenditure forecasts.
– Compare management’s historical forecasting accuracy to actual results to assess management’s capability in producing
forecasts and ensure that the estimates have been prepared on a consistent basis with historical forecasts.
– Confirm the basis on which impairment reversals have been recognised to ensure that there has been an increase in the
service potential of the relevant oil and gas platforms.
– Review impairment reversal journals to ensure asset carrying amounts do not exceed depreciated historical cost.
– Agree all necessary disclosures have been made in the financial statements in respect of the impairment in accordance
with IAS 36, for example, details of the nature of the assets, the events and circumstances which led to recognition of any
impairment loss and the impairment loss recognised.

(d) Auditor’s responsibilities in relation to the matters arising from the email from the audit committee and the impact on
planning the audit
The unusual payment referred to in the email from the Group audit committee may be a bribe to a government official in order
to facilitate the granting of an extraction licence in that country. In many countries, payments of this nature are illegal and it is
possible that the Group has performed an illegal act.
The auditor is required by ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement to gain an
understanding of the legal and regulatory framework in which the audited entity operates. This will help the auditor to identify
non-compliance and to assess the implications of non-compliance.
The auditor also needs to consider the requirements of ISA 250 Consideration of Laws and Regulations in an Audit of Financial
Statements. ISA 250 states that while it is management’s responsibility to ensure that the entity’s operations are conducted in
accordance with the provisions of laws and regulation, the auditor does have some responsibility in relation to compliance with
laws and regulations, especially where non-compliance has an impact on the financial statements.
ISA 250 requires that when non-compliance is identified or suspected, the auditor shall obtain an understanding of the nature
of the act and the circumstances in which it has occurred, and further information to evaluate the possible effect on the
financial statements. Therefore, procedures should be planned to obtain evidence regarding the payment.
ISA 250 requires the matter to be discussed with management and where appropriate with those charged with governance.
The auditor should attempt to find out whether the payment was approved at a high level or whether the director was acting
in isolation. The auditor should also consider whether this is a one-off event or whether there is evidence of further instances.
As the Chair of the audit committee brought the matter to our attention, it is unlikely that the audit committee had knowledge
of such practices and we may be able to utilise some of the internal audit investigation results to aid our understanding.
There is also an issue in that this situation potentially indicates a lack of integrity of the operations director and may indicate
a wider issue in terms of the region covered by that director or even more widely within the Group. Where we have doubts
regarding management integrity within a client, we will be less able to place reliance on representations from management and
will need to plan extended audit procedures accordingly.
The override of controls which has taken place with this transaction may also indicate that we need to reassess control risk,
although it is encouraging that the internal audit and audit committee have detected this instance.
The failure of our interim audit procedures to identify the transaction referred to by the Chair of the audit committee is likely
to be due to a combination of factors. If the incident is isolated, then the payment is immaterial. It is not possible for auditors
to test every transaction and in this case, the override of the Group’s controls by a director would mean that normal controls
testing would not have highlighted a weakness in the controls over the operation licence payments.

6
In terms of reporting non-compliance to the relevant regulatory authorities, ISA 250 requires the auditor to determine whether
they have a responsibility to report the identified or suspected non-compliance to parties outside the entity. In the event that
management or those charged with governance of the Group fail to make the necessary disclosures to the regulatory authorities,
the auditor should consider whether they should make the disclosure. This will depend on matters including whether there is
a legal duty to disclose or whether it is considered to be in the public interest to do so.
Confidentiality is also an issue, and if disclosure were to be made by the auditor, it would be advisable to seek legal advice on
the matter. Further advice on disclosure in the public interest is given by the IESBA’s Code of Ethics for Professional Accountants
(the Code) in the section giving specific guidance on Responding to Non-compliance with Laws and Regulations (NOCLAR).
The guidance gives examples of situations where disclosure might be appropriate. These examples include references to an
entity being involved in bribery and breaches of regulation which might impact adversely on public health and safety. The
Code also clarifies that in exceptional circumstances where the auditor believes there may be an imminent breach of a law or
regulation, they may need to disclose the matter immediately.
The decision to disclose will always be a matter for the auditor’s judgement and where the disclosure is made in good faith, it
will not constitute a breach of the duty of confidentiality. The auditor may also consider taking legal advice to understand the
implications of any particular course of action.
The audit plan must also ensure that the whole process of complying with laws and regulations guidance including the course
of action considered, the judgements made and the decisions taken are adequately documented.

2 (a) Brook Coal Co

Long association
The same audit team has been performing the audit of Brook Coal Co for seven years. The IESBA International Code of Ethics
for Professional Accountants (the Code) states that when an individual is involved in an audit engagement over a long period
of time, this may create familiarity and self-interest threats.
The familiarity threat arises as the audit personnel become more trusting of the management of the client and fail to be as
rigorous in evaluating their judgements, impairing professional scepticism. There may be a presumption that circumstances
have not changed or that new information will be disclosed by the client.
The self-interest threat arises where an individual might have concern about losing a longstanding client or maintaining close
personal relationships which might influence the individual’s judgement inappropriately.
Here, the entire team has been involved with the audit for a long time, seven years, resulting in familiarity threats across the
team. The significance of the threat should be evaluated for the individual team members. This will be higher for the more
senior members of the team such as the audit engagement partner and the audit manager who are involved in reviewing the
work of more junior staff and have more influence on the outcome of the audit.
The safeguard proposed of performing an engagement quality review is a valid one, albeit one which should be in place already
for a listed entity. This does not, however, address the issue sufficiently.
Long association of the audit engagement partner
There is a requirement that for listed entities, the key audit engagement partner can only serve in this position for a total of
seven years prior to a cooling off period where they are not permitted to undertake a key partner role for the client. As it stands,
it would be expected that the audit engagement partner be replaced for the next audit. This does not appear possible given the
only other partner in the firm with the relevant industry and client knowledge and experience is the engagement quality review
(EQR) partner and who is leaving in September.
It may be possible, with the approval of those charged with governance (TCWG), for the key audit engagement partner to
continue for an additional year as it could be argued that the resignation of the EQR partner with experience in mining company
audit counts as an unforeseen circumstance. For this to be acceptable, Pickle & Co must ensure sufficient additional safeguards
are in place to mitigate the familiarity threat. This might be a suitable action given the overall level of the threat is reduced
by the retirement of the Brook Coal Co finance director, removing one of the sources of close relationship between senior
management and the firm.
Long association of the audit team
One way to reduce the familiarity threat would be to rotate the rest of the audit team and bring in a fresh team including a new
audit engagement manager. Promoting the existing audit senior to the role in place of the current manager will not address this
threat, but it is possible that the team could be replaced with a team from another client. As the client does not want too much
change and disruption, perhaps a new manager and supervisor can be put in place, but the junior staff remain to provide some
continuity.
After the 20X6 audit, the key audit engagement partner must be replaced, and the firm should put procedures in place to train
or recruit a new partner for Brook Coal Co in sufficient time. If this is not possible, Pickle & Co should not allow themselves to
be put forward for reappointment to the 20X7 audit.
Engagement quality review partner
The audit of Brook Coal Co is subject to an EQR because it is a listed client and as a safeguard against the threats to
independence arising from long association. ISQM 2 Engagement Quality Reviews provides eligibility criteria which must be

7
met for the partner appointed to the role of engagement quality reviewer (reviewer). An EQR should be appointed who is not a
member of the engagement team and has the competence and capability to perform the review and who is sufficiently objective
to perform that review.
With respect to competence and capability, it would be expected that the reviewer would have knowledge of the client’s
industry and understanding of, and experience relevant to engagements of a similar nature and complexity. Although Abeeku
Ngomi has experience with the oil industry, it must be assessed whether this is sufficiently close to the coal mining industry
for them to be classed as having the appropriate competence and capability.
For Bora Kim, having been previously a senior member of the audit engagement team, there will arise a self-review threat to
independence as they will have previously been involved with significant judgements made by the engagement team and may
not assess those judgements with the required level of professional scepticism.
It is unlikely either of the proposed reviewers will be appropriate and Pickle & Co should appoint an external reviewer with
the correct competence and capabilities. This may be from another firm in their network, or external to the firm’s network if
necessary.

(b) Suki Group

When assessing whether it is appropriate to tender for the audit of Suki Group (the Group), Pickle & Co must assess threats
arising to independence and the availability of safeguards to ensure these are mitigated sufficiently to allow the audit to be
performed in an unbiased manner.
Fees
Self-interest – audit fees
The fees proposed for the audit are high, representing 22·8% of the firm’s total forecast fee income for the year ending
31 December 20X5 including the fee for the audit. Such a level of fees may be considered to give rise to the threat of fee
dependency. The IESBA International Code of Ethics for Professional Accountants (the Code) identifies high fees as giving rise
to self-interest threats and intimidation threats as the firm will be less willing to challenge the client for fear of losing the client.
Whilst the Code does not set a cap on the size of the audit fee for a single client relative to the firm’s total income, the threat
becomes more significant the higher the fee level is.
This threat is both firm wide and can exist at the level of the local office or partner where an individual partner’s remuneration
or career is impacted by the loss of a significant client. ISQM 1 Quality Management for Firms that Perform Audits or Reviews
of Financial Statements, or Other Assurance or Related Services Engagements requires firms to have in place a culture and a
system of quality management which prioritises audit quality over revenues and profits to reduce this threat.
The internal system of quality management (SoQM) for Pickle & Co is likely to have fee thresholds at which a fee dependency
threat exists, therefore there will have been determined suitable safeguards to mitigate this risk. Generally, this would include
involving a reviewer to perform an EQR and to assess the reasonableness of the fees charged.
The firm should also inform TCWG of the threat and the safeguards in place to mitigate this to an acceptable level. It is likely
this would be appropriate in the case of the audit of the Group and these details will be included in the tender document
submitted to enable TCWG to evaluate whether they are satisfied that the mitigations are sufficient.
Self-interest – other fees
The fee dependency risk is exacerbated in this instance by the fees for the provision of other services. Adding the audit to the
fees already billed in this financial period gives a total fee of $596,000 with respect to the Group, representing 38% of forecast
annual fee income for the current year if the audit fee proposed for the Group is included. Of this, $157,000 is non-recurring
in relation to the forensic work, giving a recurring fee of $439,000 or 28% of the firm’s income.
For a non-listed client, where the total fee income from that client exceeds 30% of firm fees for more than five years, the Code
requires the audit firm to obtain an external review of the audit of the fifth year’s audit work prior to a sixth year’s auditor’s
report being issued. Whilst this may be several years in the future, it is likely that most firms will require compliance with their
internal policy on fee levels as part of their SoQM. As such, this level of fee dependency should be reviewed against the firm’s
internal policy on fees.
If the firm is also appointed as auditor to the Group, Pickle & Co may determine it is appropriate to have engagement quality
reviews completed on each of the other engagements which the firm has completed for the Group. It would also safeguard
against the threat of fee dependency on this one client to decline future, non-audit engagements such as forensic and consulting
work in future.
Basis of calculating fees
The proposed audit fee for the audit of the Group includes a discount in recognising them as a valuable client. However, the
Code prohibits audit fees to be influenced by the provision of other services, unless this arises as a result of cost savings arising
from experience with the client. From the way the discount is described, it appears, however, to be influenced by value of the
client to Pickle & Co implying that the discount is a recognition of the other services provided. Therefore, this is inappropriate
as it contravenes the Code.

8
Potential future listing
The Group’s management has stated their intention to list the company in the next couple of years. Should this occur, the fee
dependency threat will be elevated due to the public interest nature of listed companies. If the Group obtains a listing, Pickle &
Co would be required to assess whether fees would exceed 15% of the firm’s total fee income. Pickle & Co would be expected
to notify TCWG that the fee levels have exceeded this threshold, and also provide information regarding safeguards which will
be implemented to mitigate the resulting threat to independence.
If this occurs in a second year, the firm would also be required to have the equivalent of an audit EQR completed by an external
reviewer.
If the situation continues to exist, then after five years, the audit firm should cease to act as auditor.

3 (a) Determination of components at which to perform audit work

ISA 600 (Revised) Audits of Group Financial Statements states that the determination of components at which to perform audit
work is a matter of professional judgement.
The determination is based on the Group auditor’s understanding of the Group’s risk profile. According to ISA 315 (Revised)
Identifying and Assessing the Risks of Material Misstatement, the auditor may be required to revise the risk assessments based
on them becoming aware of information during the audit which would have caused them to determine a different amount
initially.
Newly formed or acquired entities within business units may increase the risk of material misstatement and necessitate Group
audit work to ensure that risks are mitigated to an appropriate level. This is especially important in the case of a mid-year
acquisition where there is a lower probability that the auditor has a thorough understanding of the business and opening
balances which increases the detection risk and therefore the inherent risk of the audit.
When abnormal fluctuations are identified by analytical procedures performed at Group level, in accordance with ISA 315, the
Group auditor should direct Group audit work to obtain explanations and audit evidence to ensure no material misstatements
occur at the Group level.
Components which have significant transactions with related parties must also be considered by the Group auditor for Group
audit work as there is a risk that this is not analysed in the component audit and the Group financial statements could be
materially misstated if not addressed.
Significant judgement will be required to determine what coverage of the Group components is needed, and how this will be
obtained; this may be particularly challenging where there are only a few significant components within the Group. Coverage
is determined, in part, by the nature of the Group, the quality of its controls, and the quality and sources of information and
evidence available.
Any components where control deficiencies have previously been identified should also be selected for Group audit work. This
will aim to reduce the risk of further control deficiencies which may result in errors and misstatements at the assertion level of
the Group.
Tutorial note: Credit will also be given for additional areas as discussed in ISA 600 (Revised), such as significant transactions
outside the normal course of business, entities or business units in which significant changes have taken place and based on
how the Group has centralised activities relevant to financial reporting.

(b) Landry Co
Landry Co is currently for sale and is therefore undergoing significant change in relation to the Group and its ownership. This
would constitute a business unit where a significant change is taking place. As the sale of Landry Co is a significant transaction
outside the normal course of business, this will require specific attention from the Group auditors. According to ISA 600
(Revised), the Group auditor would therefore be required to plan and perform audit work at this subsidiary.
(i) Classification of Landry Co as held for sale
According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, a disposal group of assets should be
classified as held for sale where management plans to sell the assets, and the sale is highly probable. Conditions which
indicate that a sale is highly probable are:
– management is committed to a plan to sell;
– the asset is available for immediate sale;
– an active programme to locate a buyer is initiated;
– the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions);
– the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value;
– actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn.
The decision by the Group to sell Landry Co has reached the stage where they are negotiating with two potential buyers.
This would appear to imply that an active programme is in place to find a buyer. It is, therefore, likely that Group
management is committed to the sale, especially if the negotiations are at an advanced stage and a price is agreed.
On this basis, it is likely to provide evidence that the assets would be classified as held for sale. One of the prospective

9
purchasers is noted as having instructed a firm to carry out due diligence on Landry Co which indicates that a sale is
forthcoming and supports the classification as held for sale.
If the subsidiary does meet these criteria, then specific disclosures will be required in the financial statements. These will
disclose the assets which are held for sale and discontinued operations, including that those assets are recognised as
current assets and the results of the discontinued operation are presented separately in the statement of profit or loss and
the statement of cash flows.
As a result, important disclosures are currently missing from the financial statements which could mislead users with
respect to the future revenue, profits and cash flows of the Group.
It is a material misstatement in the Group financial statements as Landry Co has not been classified as held for sale and
its profit presented as a discontinued operation.
After classification as held for sale, non-current assets or disposal groups are measured at the lower of carrying amount
and fair value less costs of disposal. Depreciation ceases to be charged when an asset is classified as held for sale.
As Landry Co is the only subsidiary located overseas, it appears that it represents a major geographical area of the
business for the Group. The profits from Landry Co exceed the materiality threshold of $5 million.
(ii) Landry Co classified as a discontinued operation
The information suggests that the planned disposal of Landry Co is in the advanced stages as they are in talks with two
potential buyers, management appears to be committed to sell and it would appear to fit the criteria as held for sale.
However, it should also be considered whether Landry Co fits the requirement to be treated also as a discontinued
operation.
IFRS 5 defines a discontinued operation as a component of an entity which either has been disposed of or is classified as
held for sale, and:
– represents either a separate major line of business or a geographical area of operations; or
– is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operation.
– Is a subsidiary acquired exclusively with a view to resale.
IFRS 5 provides further guidance regarding the valuation of the assets held for sale. Prior to Landry Co being classified
as held for sale, the disposal group should be reviewed for impairment in accordance with IAS 36 Impairment of Assets.
This impairment review would require the asset to be held at the lower of carrying amount and recoverable amount, where
the recoverable amount is the higher of value in use or fair value less costs of disposal.
Currently, the carrying amount of the company in the Group financial statements is $78 million and the Group is hoping
to sell the subsidiary for $90 million which would indicate that the assets are not impaired, however, this will need to be
confirmed with reference to the price which is considered achievable.
Landry Co currently has a carrying amount of $78 million which is substantially above the materiality threshold
of $5 million. Therefore, this would be considered a material subsidiary. In this instance, it would appear that the
$78 million of assets should be classified as held for sale.
It therefore appears that the ‘held for sale’ criteria are met. In the consolidated financial statements, the assets and
liabilities of Landry Co should be disclosed separately as a disposal group held for sale, as the assets and liabilities are to
be disposed of in a single transaction.
In the parent company’s individual financial statements, the investment in Landry Co should be shown separately below
current assets as an asset held for sale.
It is important that assets held for sale are appropriately disclosed in the Group financial statements in order that
transparency of decision making is provided to shareholders and other users of the accounts. Other users of the financial
statements may include the employees of Landry Co who are currently unaware of the sales plans and would look to find
alternative employment if they knew in advance of the proposed sale.
Evidence
– Notes of a discussion with Group management regarding the stage of the negotiations with the two potential buyers
including details on likely price and timing of the sale.
– Evidence of the reasonableness of the $90 million sales price, e.g.
o Review correspondence with the potential buyers to establish if they have been trying to secure a reduction in
the price.
o Any expert valuation which led to the price being set at $90 million in the first place.
o An auditor’s expert valuation of the appropriate value of Landry Co.
– A review of Group board minutes for evidence the sale has been approved and to understand the progress of
negotiations.
– A review of correspondence with prospective buyers to assess the stage of negotiations and evidence of the price
which might be achieved.

10
– A review of any draft contracts in place and correspondence with legal advisers to provide evidence as to whether
the negotiations with either of the two potential buyers could be considered to be at an advanced stage.
– Copy of management’s impairment review of the value in use and the fair value less costs of disposal for Landry Co,
with assumptions reviewed for consistency with the auditor’s understanding.
– Review of work of component auditor on the impairment and valuation of assets and liabilities in the subsidiary to
identify any impairment indicators at the Group level.
– Details of the marketing programme in place to locate a buyer, for example, marketing literature.
– Written representation from management on the opinion that the assets will be sold before 31 March 20X6.
– Subsequent events procedures, including a review of post year-end board minutes and a review of significant cash
transactions, to confirm if the subsidiary was expected to be or has been sold in the period after the year end.

(c) Justification of an appropriate audit opinion and impact on the auditor’s report
The progress with respect to the sale of Landry Co confirms that this company should be classified as a discontinued operation
in the consolidated statement of profit or loss and the assets and liabilities of Landry Co should be separately presented as held
for sale in the consolidated statement of financial position.
The lack of classification of Landry Co as a discontinued operation represents a material misstatement in the Group financial
statements.
This error appears to be pervasive; every line of the financial statements is affected as Landry Co should only appear twice on
the statement of financial position (as current assets held for sale, with any selling costs shown as current liabilities directly
associated with the assets held for sale) and once on the statement of profit or loss, below the profit for the year from continuing
operations.
Instead, it has been consolidated on a line-by-line basis. It represents a material aspect of the financial statements, with profit
exceeding the material threshold, therefore, the financial statements as a whole are potentially misleading to the user if this
subsidiary is classified as a continuing operation. The error can be deemed to be pervasive.
An adverse opinion should be given stating that the financial statements do not give a true and fair view.
The Basis of Opinion paragraph should be renamed Basis of Adverse Opinion and should explain the reason for the opinion,
i.e. the inappropriate consolidation of a subsidiary held for sale.

11
St rategic Professional – Options, AAA – INT
Advanced Audit and Assurance – International (AAA – INT) March/ June 2024 Sam ple Marking Schem e

Marks
1 (a) Evaluation of business risks
Generally, up to 2 marks for each risk evaluated. Marks may be awarded for other, relevant business risks
not included in the marking guide.
– Failure to find new sites or viable sites
– Operating licences
– Extraction health and safety
– Litigation and bad publicity from pollution incidents
– Decreasing demand for fossil fuels
– Decommissioning costs increase
Maximum marks 10

(b) Evaluation of risks of material misstatement

Generally, up to 3 marks for each risk evaluated unless otherwise indicated.
In addition, ½ mark for relevant trends or calculations which form part of the evaluation of business risk or
risk of material misstatement (max 3 marks).
Up to 3 additional marks for materiality, comprising the appropriate calculation of the lower and upper
thresholds based on projected revenue – 1 mark for each calculation, plus 1 mark for justification of
materiality determined within the range.
– Operating licences
– Operating segments (4 marks)
– Oil platforms
– Depreciation
– Impairment (5 marks)
– Decommissioning provision (4 marks)
Maximum marks 14

(c) Audit procedures

Generally, 1 mark for each well described procedure.
Impairment of oil and gas extraction assets
– Review the controls in place over preparation of the impairment reviews including the sources of
information used and test the controls to ensure they are operating effectively
– Review the impairment indicator analysis prepared by management and assess whether the analysis
is consistent with the auditor’s understanding of the Group and industry
– From the non-current asset register, confirm the carrying amount of each CGU prior to any impairment
being recognised and confirm the carrying amount of each component of the CGU
– Discuss with management the difficulties in measuring fair value less costs of disposal to confirm that
basing recoverable amount on value in use is acceptable and in accordance with IAS 36
– Obtain the client’s schedule calculating value in use and discuss the basis of the calculation with
management, assessing the reasonableness of the key assumptions used, for example, the effects of
climate change on demand and prices
– For long-term gas and oil prices, compare the assumptions against market data and industry forecasts
to support the assumptions used in management’s calculations
– Review the discount factors used in the impairment reviews and ensure that specific risks in relation
to each CGU are factored into the discount factor
– Compare operating costs for a sample of CGUs to historical operating costs to confirm they are complete
and realistic
– Compare future capital expenditure within the cash flow forecasts for CGUs to capital expenditure
forecasts
– Compare management’s historical forecasting accuracy to actual results to assess management’s
capability in producing forecasts and ensure that the estimates have been prepared on a consistent
basis with historical forecasts
– Confirm the basis on which impairment reversals have been recognised to ensure that there has been
an increase in the service potential of the relevant oil and gas platforms
– Review impairment reversal journals to ensure asset carrying amounts do not exceed depreciated
historical cost
– Agree all necessary disclosures have been made in the financial statements in respect of the
impairment in accordance with IAS 36, for example, details of the nature of the assets, the events and
circumstances which led to recognition of any impairment loss and the impairment loss recognised
Maximum marks 8

13
Marks
(d) Implications of the email from the audit committee
Generally, up to 1 mark for each valid point of discussion:
– Bribe/illegal act
– Auditor’s responsibility with regards to understanding the entity re laws and regulations
– Auditor’s and directors’ responsibility for compliance with laws and regulations
– Auditor responsibility re NOCLAR (understanding the nature/circumstances of the act/impact on the
financial statements)
– Availability of internal audit findings on the transaction
– Integrity of directors in doubt
– Implication for audit of judgements and extension of audit procedures (up to 3 marks)
– Reasons why auditor may not have detected, such as transaction being immaterial, and auditors do
not test every transaction
– Reporting of non-compliance to authorities
– Interaction of reporting with confidentiality
– Bribery specifically covered by IESBA’s NOCLAR pronouncement
– Auditor required to keep documentation on all actions, decisions and judgments made
Maximum marks 8
Professional skill marks
Communication
– Briefing note format and structure – use of headings/sub-headings and an introduction
– Style, language and clarity – appropriate layout and tone of briefing notes, presentation of materiality and
relevant calculations, appropriate use of the CBE tools, easy to follow and understand
– Effectiveness and clarity of communication – answer is relevant and tailored to the scenario
– Answering the specific angle and requirements of the question
Analysis and evaluation
– Appropriate use of the information to support discussions and draw appropriate conclusions
– Identification of procedures or actions which address the areas of judgement and risk in relation to the
impairment of the Group’s oil and gas extraction assets
– Effective justification of the specified areas at risk of material misstatement, evaluating the likelihood and
magnitude of these risks
– Balanced discussion of the issues and actions arising from the potential non-compliance with laws and
regulations
Professional scepticism and professional judgement
– Effective challenge of information supplied and techniques carried out to support key facts and/or decisions
– Determination and justification of a suitable materiality level, appropriately and consistently applied
– Identification of possible management bias or error
Commercial acumen
– Appropriate use of the industry information to evaluate business risks
Maximum marks 10
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Maxim um 50
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14
Marks
2 (a) Brook Coal Co
Generally, up to 1 mark for each explained point.
– Long association – familiarity
– Long association – self interest
– Safeguards proposed are insufficient
– Evaluation re: partner (up to 2 marks)
– Evaluation re: rest of audit team (up to 2 marks)
– Proposed safeguards
– EQR requirements explained (up to 2 marks)
– Assessment of competence re Abeeku
– Assessment of independence Bora
– EQR partner to be appointed from external/wider network
– If threats not mitigated, do not seek reappointment
Maximum marks 7

(b) Suki Group

Generally, up to 1 mark for each explained point.
In addition, ½ mark for relevant calculations which form part of the evaluation (max 1 mark).
– Threat of fee dependence as a result of high fees
– Fee dependence creates specific ethical threats (1 mark for each threat explained):
o Self interest
o Intimidation
– Threat also exists at individual office/partner level
– Mitigation of threats (up to 2 marks)
– Increased risk due to fees from other services
– Possible actions to safeguard (up to 2 marks)
– Discounting and fees explained
– Implications on Pickle & Co if Group becomes listed
o Implication on fees
o Professional and ethical implications (up to 3 marks)
Maximum marks 10
Professional skill marks
Analysis and evaluation
– Appropriate use of the specific information to support discussion and draw appropriate conclusions
– Demonstration and appropriate application of relevant technical financial knowledge to support conclusions
and recommendations
Professional scepticism and judgement
– Effective challenge of information, evidence and assumptions supplied and techniques carried out to support
key facts and/or decisions
Commercial acumen
– Appropriate recognition of the wider implications on the engagement, the audit firm and the company
Maximum marks 5
–––
Maxim um 25
–––

15
Marks
3 (a) Determination of components at which to perform audit work
Generally, up to 1 mark for each matter explained.
– Determination matter of professional judgement based on group risk profile
– Revisions to risk profile may be required based on information gained through the audit
– Consideration of whether Group should focus planning and audit work on the component (up to
4 marks)
o Newly formed or acquired entities
o Significant transactions outside the normal course of business
o Significant transactions with related parties
o Entities/business units in which significant changes have taken place
o Abnormal fluctuations as identified by analytical procedures
– Controls at the client may affect the coverage of work (up to 2 marks)
Maximum marks 5

(b) Matters and evidence

Generally, up to 1 mark for each matter explained and each piece of evidence recommended (unless
otherwise stated).
In addition, ½ mark for relevant calculations which form part of the evaluation (max 1 mark).
Landry Co – possible classification as held for sale
– IFRS 5 definition of operation held for sale
– Application to scenario to determine classification (up to 2 marks)
– Disclosure requirements applied to scenario
Landry Co – possible classification as discontinued operation
– IFRS 5 definition of discontinued operation (separate major line of business/geographical region)
– Application to scenario to determine classification (up to 2 marks)
– Explained and evaluation of possible impairment (up to 2 marks)
– Disclosure requirements applied to scenario (up to 2 marks)
– Material misstatement due to missing disclosures
– Evidence (1 mark per valid piece of evidence)
Maximum marks 11

(c) Justification of an appropriate audit opinion and impact on the auditor’s report
Generally, up to 1 mark for each explained point.
– Landry Co is a discontinued operation and issue is a material misstatement of classification
– Assessment (including justification) of pervasiveness
– Audit opinion based on pervasiveness conclusion
o Adverse on the basis of material and pervasive misstatement
– Impact on basis of opinion paragraph
Maximum marks 4
Professional skill marks
Analysis and evaluation
– Appropriate use of the specific information to support discussion and draw appropriate conclusions
– Demonstration and appropriate application of relevant technical financial knowledge to support conclusions
and recommendations
Professional scepticism and judgement
– Effective challenge of information, evidence and assumptions supplied and techniques carried out to support
key facts and/or decisions
– Appropriate application of the materiality set for the audit
Commercial acumen
– Appropriate recognition of the wider implications on the engagement, the audit firm and the company
Maximum marks 5
–––
Maxim um 25
–––

16