Read the text about an interesting house and choose the most suitable heading (A-G) for each paragraph. There is one extra heading you do not need. 1.-------------------------- Donnachach McCarthy takes environment issues very seriously. As an eco- auditor, he gives advice to people and companies on how to make their homes and offices more eco-friendly. As an author, he writes books that persuade leaders to have a greener lifestyle, and he is often a speaker on environmental issues at different conferences. 2.-------------------------- Yet, he doesn't believe words are enough: he would like to lead by example, this is why he returned his home in central London into a place where he can prove he lives by the green principles which he promotes. His Victorian house from the 1840s was equipped with different environmentally friendly devices to become first a zero- carbon house ( same amount of CO2 in and out) and later on carbon - negative (less CO2 out than in). 3.-------------------------- How is this possible? First of all, he is very careful to use alternative energy source like wind and sun wherever possible. Heating in the house is provided by a wood burner that is powered by waste wood near his house. Hot water comes from a solar water heating system from the roof and his toilet only uses rainwater. Water is not wasted in his home. While the average British household consumes 160 litres of tap water a day, he only uses 26 litres. 4.-------------------------- The same level of attention is given to household waste in his house. With thorough recycling he only needed one bin for the whole of last year and even this one bin was not full. 5.-------------------------- He does not misuse electricity either. Donnachach McCarthy does not buy any from outside sources because he generates his own 'green' electricity with the solar electric panels on his roof. In fact, he produces so much that the national system pays him for extra amount. 6.-------------------------- If we add up how much greenhouse gas we produce a year, we get out carbon footprint, which is measured in units of carbon dioxide (CO2). The carbon footprint of an average British household is 6,000 kg of CO2. In the case of Donnachach McCarthy's place this figure is minus 114 kg! Donnachach McCarthy said in an interview: 'if I can do it in an old terraced house in central London, there is nothing to stop people everywhere doing it in their own homes.' (2 Điểm) How to build a green house Throw it out - are you sure? Watch your step Providing a good model to follow A man of many talents You can give it a try! No bills to pay

Professional Level – Options Module, Paper P7 (UK)
Advanced Audit and Assurance (United Kingdom) June 2009 Answers
1 (a) Briefing notes
To: Audit Juniors
From: Audit manager
Subject: Understanding a client’s business and environment
(i) Introduction
Gaining an understanding of the business of a client, and the environment in which it operates is a crucial part of the
audit planning process. ISA 315 (UK and Ireland) Obtaining an understanding of the entity and its environment and
assessing the risks of material misstatement provides guidance on this matter. The issue is that the auditor must have
a thorough understanding of many aspects of the client’s business and environment in order to be able to assess risk,
decide on an appropriate audit strategy, and be able to design and perform effective audit procedures.
Aspects to be considered
ISA 315 states that there are five main aspects of the client’s business and environment which the auditor should
understand.
1. Industry, regulatory and other external factors, including the applicable financial reporting framework
This means having an understanding of the industry in which the company operates, including the level of
competition, the nature of the relationships with suppliers and customers, and the level of technology used in the
industry. The industry may have specific laws and regulations which impact on the business. The auditor should
also consider wider economic factors such as the level and volatility of interest rates and exchange rates and their
potential impact on the client.
The importance of these issues is their potential impact on the financial statements and on the planning of the
audit. For example, if a client operates in a highly regulated industry, it may be worth considering the inclusion in
the audit team of a person with specific experience or knowledge of those regulations. Regulations include the
financial reporting framework, for example, whether the company uses local or international financial reporting
standards.
2. Nature of the entity and its accounting policies
This includes having an understanding of the legal structure of the company (and group where relevant), the
ownership and governance structure, and the main sources of finance used by the company. Complex ownership
structures with multiple subsidiaries and/or locations may increase the risk of material misstatement.
Understanding the nature of the company also includes an understanding of the accounting policies selected and
applied to the financial statements. The auditor must consider whether the accounting policies applied are
consistent with the applicable financial reporting framework.
3. Objectives and strategies and related business risks
The management of the company should define the objectives of the business, which are the overall plans for the
company. Strategies are the operational approaches by which management intend to meet the defined objectives.
For example, an objective could be to maximise market share, and the strategy to achieve this could be to launch
a new brand or product every year. Business risks are factors which could stop the company achieving its stated
objectives, for example, launching a product for which there is limited demand. Most business risks will eventually
have financial consequences, and thus an effect on the financial statements. This is why auditors perform a
business risk assessment as part of their planning procedures.
4. Measurement and review of the entity’s financial performance
Here the auditor is looking to gain an understanding of the performance measures which management and others
consider to be of importance. Performance measures can create pressure on management to take action to improve
the financial statements through deliberate misstatement. For example, a bonus payable to the management based
on revenue growth could create pressure for revenue to be overstated. Thus the auditor must gain an understanding
of the company’s financial and non-financial key performance indicators, targets, budgets and segmental
information.
5. Internal control
The auditor must gain knowledge of internal control in order to consider how different aspects of internal control
could impact on the audit. Internal control includes the control environment, the entity’s risk assessment
procedures, information systems, control activities, and the monitoring of controls. Put simply, the evaluation of the
strength or weakness of internal control is a crucial consideration in the assessment of audit risk, and so will have
a significant impact on the audit strategy. The design and implementation of controls should be considered as part
of gaining an understanding. The auditor should also understand whether controls are manual or automated. ISA
315 contains a great deal of detailed guidance on the understanding of controls, which these briefing notes do not
cover.
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(ii) Procedures used to gain understanding
1. Inquiries of management and others within the company
A discussion with management is often the starting point in gaining understanding. A meeting is usually held with
management to talk about all of the aspects of the company and its environment referred to in the first part of the
briefing notes. However, inquiries can also be made of others, who may be able to provide a different perspective
or provide specific insights into certain matters. For example, internal auditors would be able to comment
specifically on internal controls.
2. Analytical procedures
Auditors perform analytical procedures at the planning stage in order to identify unusual transactions or events,
and to understand the main trends reflected in the financial statements for the year. This will enable the auditor,
for example, to see if the company has experienced a growth or decline in turnover or profits in the year, which
when reviewed in the context of industry or economic trends, may indicate a risk of material misstatement.
Analytical procedures should be performed in accordance with ISA 520 (UK and Ireland) Analytical procedures.
3. Observation
Observation may help to support inquiries of management and others, and could involve, for example, physical
observation of the internal control operations, and visits to premises such as factories, warehouses and head office.
4. Inspection
Inspection may support inquiries made of management and others. It could include, for example, an inspection of
business plans, internal control manuals, reports made by management such as interim financial statements, the
minutes of board meetings, and reviewing the company’s website and brochures.
Conclusion
Auditors must make sure that they have gained and documented an understanding of five main aspects of the client’s
business and the environment in which it operates, and a variety of procedures can be used. Without a thorough
knowledge of the business and its environment, an auditor would be unable to effectively assess the risk of material
misstatement in the financial statements, and therefore could not plan the audit to minimise audit risk.
(b) Business risks include the following:
Health and safety regulations
Champers Ltd operates in a highly regulated industry, and the risk of non-compliance with various laws and regulations is
high. The industry has strict health and safety regulations which must be complied with, and there will be regular health and
safety inspections to ensure that regulations are being adhered to. One of the Happy Monkeys restaurants failed a health and
safety inspection during the year. This could lead to bad publicity and damage to the brand name. As the Happy Monkeys
business segment contributes the highest proportion of revenue to the company, damage to this brand name could be
significant for the company. In addition, damage to one brand name could be easily transferred to the other brand names
used by Champers Ltd.
Child play areas
There was an incident during the year where a child was injured at a Happy Monkeys restaurant. This could have significant
repercussions for the company. It is essential that the play areas are perceived as a safe environment in which children can
be placed by their parents. If this is not the case, then visits to these restaurants will fall in number, leading to loss of revenue
and cash inflows. The Happy Monkeys business segment contributes 53% to total revenue (2008 – 49%), so any loss of
revenue from this brand could have a major impact on the performance of the company as a whole. Any bad publicity
surrounding this incident could cause major damage to the Happy Monkeys brand.
In addition, this incident could provoke action by regulatory bodies, such as an investigation into health and safety procedures
at all Happy Monkeys child care facilities. Any breaches in regulation could result in the facility and possibly the associated
restaurant being shut down. As discussed above, damage to any one of the brand names could easily transfer across to the
other brand names used by Champers Ltd.
As a result of the accident, the company may have to spend a significant amount on the play areas to bring them in line with
the required health and safety standards. Funds may have to be diverted from other projects e.g. the advertising campaign
for the Quick-bite brand, or the development of new Green George cafés.
Quick-bite chain – revenue reduction
Turnover from the Quick-bite business segment has fallen by 6%. This is significant given that the business segment
contributes 25% to total turnover in 2009 (2008 – 30%). The reduction in demand is likely to be linked to the increased
awareness of the importance of healthy eating. Champers Ltd has responded to this issue by publishing nutritional
information, but new business strategies will need to be put in place to avert further any decline in turnover. Perhaps the
company should consider carrying healthier product lines to attract any customers they have lost. These new product lines
could be part of the advertising campaign for the brand.
Expenditure on advertising to support the Quick-bite brand name is material at 10% of the total turnover of the company, and
the expenditure amounts to 40% of the turnover generated by the Quick-bite business segment. Given the company’s
relatively poor cash position at the year end, this level of expenditure is unlikely to be sustainable. This is a competitive market
with a huge number of suppliers, so brand awareness is important, but supporting the brand name using expensive
advertising techniques could prove to be prohibitively expensive.