Audit risk evaluation and
Identification and explanation of matters where professional scepticism should be applied

Up to 2 marks for each audit risk identified and explained. Up to 1½ marks for each identification and explanation of matters where professional scepticism should be applied. Allow 1 mark for each correct calculation and comment on materiality (to a maximum of 3 marks).

– Detection risk due to this being a new audit client
 – Management bias due to pressure on results
 – Operating segments – potential for inaccurate or incomplete disclosure
 – Decline in revenue – lack of impairment review means assets and profit could be overstated
 – Software development costs – risk that research and development not distinguished and that development inappropriately capitalised
 – Publication rights – risk that amortisation is not appropriate affecting assets and profit
 – Author royalty advances – risk that expenses are inappropriately deferred
 – Borzoi Co – risk in retranslation of the income statement
 – Software revaluation – risk that the fair value is not appropriate
 – Transfer of software – risk that intercompany transaction is not eliminated on consolidation
 – Corporate governance – principles not being followed, increased risk of management bias, need to be sceptical when dealing with the CFO
 – Requirement for the auditor to evaluate the effectiveness of communication process between audit firm and audit committee
 – Management imposed limitation in scope and breach of pre-conditions for audit due to restriction on communication with audit committee

Maximum marks (a) (i) 14
 Maximum marks (a) (ii) 9

Assessment of whether Borzoi Co is a significant component

Up to 2 marks for each relevant point/comment explained:

– Explanation of significance being based on either individual financial significance to the group, or due to its specific nature or circumstances
 – Application to the scenario – determine that Borzoi Co’s total assets are above the 15% threshold
 – Explanation that Borzoi Co also has specific circumstances which mean it is a significant
component

Extent of involvement of Group auditor with Saluki Associates

Up to 2 marks for each relevant point/comment explained:
 – Evaluation of component auditor independence, competence and regulatory environment in which they operate
 – Group auditor must be involved with assessment of risk of material misstatement of Group financial statements
 – Involvement can include discussion with the component auditor or review of their risk assessment
 – Where significant risk of misstatement to the Group accounts is identified, the Group auditor may be involved with further audit procedures

Maximum marks 8

Professional marks
Generally 1 mark for heading, 1 mark for introduction, 1 mark for use of headings within the briefing notes, 1 mark for clarity of comments made

Maximum marks 4