Question 1

SECTION A - STRATEGIC CASE STUDY

You are an audit manager in the firm of K&P. You are planning the audit of AuraGrid PLC, a listed multinational renewable energy and public utility company, for the year ending 31 December 202X.

Exhibit 1: Email from Audit Partner
To: Audit Manager
From: Sarah Jenkins, Audit Partner
Subject: Audit Planning for AuraGrid PLC

Hello,
I need you to prepare briefing notes for our upcoming planning meeting. AuraGrid has expanded significantly this year. They have entered a new jurisdiction, the developing nation of 'Novaria', to build offshore wind farms. They also acquired a smart-grid technology startup, SmartGridX.

Please prepare briefing notes which:
(a) Evaluate the principal business risks facing AuraGrid PLC. (10 marks)
(b) Evaluate the significant audit risks to be considered in planning the group audit. (18 marks)
(c) Discuss the group audit implications of the Novaria expansion, specifically regarding our reliance on the component auditor, a small local firm named 'NovAudit'. (12 marks)
(d) Evaluate the ethical and practice management implications of a recent offer made by AuraGrid's CFO, who has invited me (the Group Audit Partner) to sit on the advisory board of the new Novaria subsidiary to provide 'strategic regulatory advice'. (10 marks)

Note: 10 professional marks are available within the total 50 marks for the structure, clarity, and professional tone of your briefing notes, as well as the exercise of professional skepticism and commercial acumen.

Exhibit 2: Background Information on AuraGrid
AuraGrid's expansion into Novaria involves a $500m investment. The Novarian government has provided a $50m conditional grant, requiring AuraGrid to employ 70% local staff and maintain the wind farms for 10 years. If conditions are breached, the grant is repayable. AuraGrid has recognized the full $50m as income this year to boost profitability.

To hedge against the risk of low wind seasons, AuraGrid has entered into complex weather derivative contracts. These are highly bespoke financial instruments traded over-the-counter.

On 1 July 202X, AuraGrid acquired 100% of SmartGridX for $120m. The net assets at acquisition were valued at $40m, resulting in $80m of goodwill. SmartGridX's primary asset is internally generated software for grid optimization, which AuraGrid capitalized at $30m just prior to the acquisition.

Exhibit 3: Financial Extracts (Projected to 31 Dec 202X)
Revenue: $2,400m (202W: $1,900m)
Profit Before Tax: $180m (202W: $140m)
Total Assets: $3,500m (202W: $2,800m)

Accepted Answer

Step 1: Adopt the persona of an Audit Manager writing to a Partner. Use the Briefing Note format. Step 2: For business risks, focus on the commercial reality of the scenario (Novaria, grants, weather). Step 3: For audit risks, calculate materiality first. Then link specific scenario facts to accounting standards (IAS 20, IFRS 9, IAS 36, IAS 38) and explain the impact on the financial statements. Step 4: For group audit, apply ISA 600 principles regarding component auditors. Step 5: For ethics, identify the specific threats (self-interest, management threat) using IESBA terminology and state the required action (decline).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Candidates often confuse business risks with audit risks. A business risk is 'the company might lose money because the wind doesn't blow'. An audit risk is 'the derivative used to hedge the wind risk is incorrectly valued in the financial statements'. Another common mistake is failing to calculate and use materiality to justify why an audit risk is significant.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA AAA — Advanced Audit and Assurance Practice Exam 5

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