Professional Documents
Culture Documents
ACCA AA (F8) Course Notes
ACCA AA (F8) Course Notes
2 aCOWtancy.com
E
L
G
T
N
Syllabus A1a) Identify and describe the objective and general principles of external audit
engagements.
General Principle
3 aCOWtancy.com
fi
e
fi
…
Syllabus A1b: Explain the nature and development of audit and other assurance
engagements.
The accounting and auditing professions have been under the public
spotlight, and as a result of certain events, many changes have occurred in
relation to audit and assurance engagements
ENRON Scanda
Its auditor, Arthur Andersen, was shown to have lacked objectivity in evaluating Enron's
accounting methods
Other companies that were also involved in corporate frauds included WorldCom,
Parmalat, Cable & Wireless and Xerox
The result of these frauds was a lack of con dence in the way companies were run and
audited.
In September 2008 Lehman Brothers, a global nancial services rm, led for bankruptcy
in the US triggering a severe world-wide nancial crisis.
Lehman lent money to people on low incomes or with poor credit histories
4 aCOWtancy.com
fi
fi
fi
fi
.
fi
fi
.
Following the collapse of Lehman Brothers, other banks failed worldwide and many
needed government support to continue
In light of this global nancial crisis, regulators have been considering the effectiveness of
the audit and the auditor’s role in helping to prevent corporate and nancial institution
collapses.
One important area being focused on is the importance of professional scepticism for
audit quality.
5 aCOWtancy.com
fi
.
fi
Syllabus A1c: Discuss the concepts of accountability, stewardship and agency.
1. Accountabilit
In the context of a company, it means holding the directors who manage the
company responsible for explaining their actions to the shareholders who own the
company
2. Stewardshi
This is known as a ‘Fiduciary Relationship’ and exists between directors and shareholders
as directors are responsible for the management of the shareholders property
3. Agenc
Agency is where an agent acts on behalf of a principle to perform tasks for them
In the context of a company, the directors are the agents of the shareholders (principles)
who entrust them to manage the running of the business
6 aCOWtancy.com
y
Syllabus A1e) Explain the five elements of an assurance engagement.
Every assurance project needs 3 users, some subject matter, judged against
some criteria by gathering evidence, to then be reported o
3 user
The intended user - the person who wants the repor
The responsible party - the person who provides the subject matte
The Practitioner - the person who reviews the subject matter and provides assuranc
Subject matte
The material provided by the responsible party, which needs assurance o
Criteri
This is so the subject matter can be assesse
Evidenc
This is obtained by the practitioner so to give assuranc
Repor
This is given to the intended user and the responsible party from the practitioner
7 aCOWtancy.com
fi
a
• External Audits
An Auditor states an opinion as to whether the nancial statements Give a true and fair
view
• Review engagements
The auditor reviews the nancial statements using less evidence than required by an
audi
The report will be to the body that commissioned the review e.g. Bank, Directors
Remember they’re basically something that someone wants assurance over - so it might
be you’re buying something and you want assurance you're paying a fair pric
8 aCOWtancy.com
t
fi
fi
s
fi
t
External Audi
It reports to shareholders that the nancial statements provide a true and fair
view
Statutory Audi
• This is when entities are required by law to have an audi
• All public and large companies are required to have on
• Other organisations such as Building Societies and certain charities must als
9 aCOWtancy.com
.
fi
r
fi
fi
.
Syllabus A1g) Explain the level of assurance provided by an external audit and other
review engagements and the concept of true and fair presentation.
Levels of Assuranc
Reasonable Assurance is where there is suf cient evidence that the subject
matter agrees to certain criteria
The nancial statements must re ect accurately the underlying accounting information,
they must be clearly presented, free from material misstatement and provide an impartial
unbiased report
Levels of Assuranc
To carry out a reasonable assurance engagement, the practitioner gathers suf cient
evidence to conclude that the subject matter agrees in all material respects to the agreed
criteria
The assurance given is in the form of positive assurance. This means that in their opinion
the subject has been prepared in accordance with the criteria required
To carry out such an engagement the information must have been prepared by another
party, be identi able and in a form that enables the auditor to gather evidence to form the
opinion
10 aCOWtancy.com
fi
.
fi
.
fl
t
fi
fi
fi
Reasonable assurance engagements provide a high level of assuranc
Think about how the external audit ful ls all the criteria of a reasonable assurance
engagement as outlined above.
Only necessary to gather enough evidence to be satis ed that the subject matter is
plausible in the circumstances
Negative assurance is satisfaction that there is nothing to suggest that the subject has not
been prepared in line with the relevant criteria
The auditor will state their opinion in the form of negative assurance i.e. that they are not
aware that anything is materially misstated
This is not an audit. The report will not be to the shareholders but to the body that
commissioned the review e.g. Bank, Directors
11 aCOWtancy.com
fi
t
fi
.
fi
e
Remember
Note that neither of the above are absolute assurance as the evidence is gathered on a
test basis and there is judgement involved in the preparation of the information
12 aCOWtancy.com
.
Syllabus A2a: Describe the regulatory environment within which statutory audits take
place.
IFA
The International Federation of Accountants (IFAC) serves to strengthen the
accountancy profession worldwide, to serve the public interest and promote adherence to
high quality standards
IAAS
The International Auditing and Assurance Standards Board (IAASB) is a subsidiary of
IFAC and sets the International Standards on Auditing (ISAs) of which there are more than
30
The IAASB also sets quality control principles for all assurance engagements as well as
standards for other types of assurance engagement
ISA
These only apply to the audit of historical nancial informatio
Since 2005 all audits carried out under the laws of EU member states have to be
conducted under ISAs
13 aCOWtancy.com
.
fi
.
Note
• If, in exceptional cases, the auditor departs from an ISA to achieve the overall aim of the
audit, then this departure must be justi ed
• The entire text of an ISA is needed to understand and apply the basic principles and
essential procedures
Syllabus A2b: Discuss the reasons and mechanisms for the regulation of auditors
Therefore, countries need to have regulations in place for regulating auditors (and
implementing audit standards
National Regulatory bodies will enforce quality control of audit and inspect audit les
14 aCOWtancy.com
:
fi
g
fi
)
fi
d
fi
)
Regulation by governmen
The alternative is regulation by government
The government may establish rules and procedures to do all the work the regulatory
bodies do no
So which is best
Well, The US government has got involved over ther
They introduced the Sarbanes-Oxley Act of 2002
"The crisis has also shown that self-regulation is not adequate when looking towards the
future.
Leaving the profession to investigate and regulate itself could be seen as a con ict of
interest, but equally it could be seen as being the most practical solution as they
understand the situation better
15 aCOWtancy.com
”
fi
t
fl
Syllabus A2c: Explain the statutory regulations governing the appointment, rights, removal and
resignation of auditors
• an accountancy practice,
• sole practitioners,
16 aCOWtancy.com
fi
.
• The appointment will be made at an AGM and run until the next AGM.
• If there is no AGM, the appointment will be automatic each year unless a shareholder
objects
• Obtain clearance from the client to write to existing auditor (if denied the appointment
should be declined
• Write to the existing auditor requesting any reasons why the appointment should not be
mad
And what rights does the auditor have when being appointed
• First Appointment
This is made by directors as normally the company won't have had an GM by the
• Casual Vacancy
Such as when the current auditor resign
• Normal re-appointment
This is normally by shareholders at an AGM - but often it is simply automatic when no
AGM is required by shareholder
17 aCOWtancy.com
e
Syllabus A2c) Explain the statutory regulations governing the appointment, rights,
removal and resignation of auditors
Auditor Remova
However, if doubts as to whether the auditor is able to carry out their duties
exist, they can be removed
1. By majority at a general meeting (but a speci ed notice period must be given of the
resolution to prevent it being ‘sprung’ on the meeting
2. The auditor may resign (but must submit a statement outlining the circumstances of
their resignation
18 aCOWtancy.com
n
fi
l
fi
?
Syllabus A2d) Explain the regulations governing the rights and duties of auditors
*Note that it is the management of the company who has responsibility of preparing the
financial statements.
19 aCOWtancy.com
.
fi
fl
.
fi
t
fi
.
fi
?
They have basically 5 rights - remember these for the exam my friend.
1. The right of access to all accounting books and records at all times
2. The right to all information and explanations (from management) necessary for the
proper conduct of the audit
3. The right to receive notice of all meetings of the shareholders (such as the annual
general meeting) and to attend those meetings
4. The right to speak at shareholders’ meetings on matters affecting the audit or the
auditor.
This can be important when the auditors are in disagreement with the directors of the
client entity and are unable to communicate with the shareholders effectively by any
other method
5. If the company uses written resolutions, the auditors should have a right to receive a
copy of all such resolutions
20 aCOWtancy.com
fi
.
fi
s
fi
fi
s
Problem
• Many businesses with a recent clean audit report have subsequently gone out of
business
21 aCOWtancy.com
t
fi
.
fi
fi
fi
s
• Client website
Recent press releases from the company may provide background on changes to the
business during the year as this could lead to additional audit risk
22 aCOWtancy.com
l
fi
fi
s
fi
s
fi
t
Syllabus A2f) Explain the development and status of International Standards on Auditing
(ISAs).
1. IAASB reviews auditing developments and takes suggestions from interested parties
2. Project task force appointed to work on the detail
3. Consultation by meeting or consultation paper
4. Draft standard produced and commented on by interested parties for a period of 120
days (Exposure period)
5. Project task force considers comments and amendments made if appropriate
6. If changes signi cant there may be another exposure period
7. Standard nalised and approved by meeting of IAASB at which there must be a
minimum of 12 members
23 aCOWtancy.com
fi
fi
s
Syllabus A2g) Explain the relationship between International Standards on Auditing and
national standards.
24 aCOWtancy.com
fi
.
It is concerned with matters such as directors responsibilities, the board of directors, the
audit committee and relationship with external auditors
It ensures that companies are run in the interests of their shareholders and the wider
communit
Many corporate failures have been blamed on poor corporate governance such as
WorldCom and Enron
Poor controls allowed management to abuse their position either in the form of excessive
executive pay or manipulation of results to the ultimate detriment of shareholders
Who is Responsible
Auditors will have an interest also because poor governance makes it more likely that
material errors exist in the rms’ nancial statements
25 aCOWtancy.com
y
fi
e
fi
.
26 aCOWtancy.com
fi
fi
:
These principles are intended to ‘improve the legal, institutional and regulatory framework
for corporate governance
and…
‘to provide guidance and suggestions for stock exchanges, investors, corporations and
other parties that have a role in the process of developing good corporate governance
27 aCOWtancy.com
.
fi
r
The OECD principles state that an annual audit should be carried out by an independent,
competent, quali ed auditor to provide assurance to the board and to shareholders
The auditors are also under a duty of care to provide a competent service and are
accountable to the shareholders
• Review and guide corporate strategy e.g. risk policy, business plans, capital investment,
mergers and acquisitions and setting performance objectives
• Align executive and board remuneration in the long term interests of the compan
• Taking responsibility for the accounting and nancial reporting system ensuring an
appropriate system of control to manage risk is in plac
28 aCOWtancy.com
fi
.
fi
s
Directors Responsibilities
(Auditors will have an interest in the standards of corporate governance at a firm because
a poor system of governance will make it more likely that material errors exist in the firms’
financial statements)
The Boar
• Chairman and Chief Executive should be different people to prevent unfettered powe
• Half of the board to be Non-Executive Directors (NEDs
• There should be a rigorous and transparent nomination process
• Directors should submit for re-election regularl
29 aCOWtancy.com
d
Remuneratio
Internal Control
Auditors requirements
This statement is reviewed by the auditor and any inconsistencies with the information in
the annual report highlighted.
30 aCOWtancy.com
n
If the inconsistency highlights an error in the financial statements, the auditor will issue a
qualified report if the directors refuse to amend the error.
If the error is in the corporate governance statement, the auditor will add an emphasis of
matter paragraph to their report.
Sarbanes Oxley in the US requires auditors to state an opinion on the system of internal
control and whether the company has complied with corporate governance requirements.
Management and the external auditors have different responsibilities when it comes to
various aspects of the client business.
We will look at several aspects and draw the distinction between the responsibilities of
management and the responsibilities of the external auditor.
Corporate Governance
Management Responsibilities
• To ensure that effective measures to ensure good corporate governance are in place
Auditor Responsibilities
31 aCOWtancy.com
Financial Reporting
Management Responsibilities
• Prepare financial statements which provide a ‘true and fair’ view of the company’s
results.
Auditor Responsibilities
• Report an opinion as to whether the financial statements give a ‘true and fair’ view.
o ISA 260 Communication of audit matters with those charge with governance
places responsibilities on the external auditor.
o Communication takes the form of the letter of engagement and the management
letter sent at the beginning and end or the audit respectively.
In order to avoid an ‘expectation gap’ the auditor should ensure that management are
aware that the external auditor is not responsible for:
Management Responsibilities
Auditor Responsibilities
Management Responsibilitie
Safeguards should be in place to avoid fraud and error through the systems and controls
the company operate
Internal audit function will be responsible for monitoring and implementation of thes
Auditor Responsibilitie
If fraud or error leads to material misstatement, the auditor is responsible for detecting it.
If immaterial, these should be reported to those charged with governance, but there is no
responsibility to detect them
The inherent limitations of audit mean that the auditor cannot guarantee that the nancial
statements are free from fraud and error
33 aCOWtancy.com
s
fi
e
The auditor must consider the risk of material misstatement due to fraud and error when
planning and performing their audit
If discovered, fraud should be reported to the audit committee (if one exists), or the highest
level of management (if not involved in the fraud), or the shareholders if the fraud is by
those in senior management.
34 aCOWtancy.com
.
Syllabus A3e) Analyse the structure and roles of audit committees and discuss their
benefits and limitations.
Audit Committee
At least one member of the committee should have recent and relevant nancial
experience
There should be at least 3 non executive directors. In the case of smaller companies,
this may be 2
Advantages of a committe
• Independent Reporting
Provides internal audit with an independent reporting mechanism. Without this
management may be tempted to hide unfavourable reports
35 aCOWtancy.com
.
fi
e
fi
s
fi
g
fi
.
fi
.
fi
.
• Better Communication
Better communication between the directors, external audit and management is
facilitated
Disadvantages of Committe
36 aCOWtancy.com
.
fi
fi
.
Why does the external auditor speak rst to the Audit Committee
37 aCOWtancy.com
.
fi
fi
fi
e
fi
?
fi
y
Syllabus A3f) Explain the importance of internal control and risk management.
38 aCOWtancy.com
:
In the UK, internal controls are divided into three categories for the purpose of
corporate governance
1. Financial control
2. Compliance control
3. Operational control
Financial control
The company’s governors (directors) must satisfy themselves that the IC system is
adequate and works properl
39 aCOWtancy.com
s
Syllabus A4a) Define and apply the fundamental principles of professional ethics of
integrity, objectivity, professional competence and due care, confidentiality and
professional behaviour.
Fundamental Principle
Professional ethics could be examined as part of any question on the F8 exam. It is very
important that you know this section well.
The ACCA sets out a code of ethics for members and disciplinary action is taken against
those who fail to uphold them.
Integrit
Objectivity
Members should not allow bias, conflicts of interest or undue influence of others to
override professional or business judgements.
40 aCOWtancy.com
y
Members should act diligently and in accordance with applicable technical and
professional standards when providing professional services.
Con dentiality
Members should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to
third parties without proper or specific authority or unless there is a legal or professional
right or duty to disclose.
Professional behaviour
Members should comply with relevant laws and regulations and should avoid any action
that discredits the profession.
In the exam question you may have to apply these to a case study - groovy baby.
41 aCOWtancy.com
fi
Syllabus A4b) Define and apply the conceptual framework, including the threats to the
fundamental principles of self-interest, self-review, advocacy, familiarity, and intimidation.
Conceptual framewor
It's a coherent and consistent foundation that will underpin the development of accounting
standard
It's a statement of generally accepted accounting principles (GAAP) for evaluating existing
It's a theoretical basis for determining how transactions should be measured (historical
In summary it's..
• a framework for setting accounting standard
• a basis for resolving accounting dispute
• fundamental principles which then do not have to be repeated in accounting standard
The Framework is NOT an accounting standard, and if there's a con ict between the two
then the IFRS wins
42 aCOWtancy.com
s
fi
s
fl
s
Syllabus A4b) Define and apply the conceptual framework, including the threats to the
fundamental principles of self-interest, self-review, advocacy, familiarity, and intimidation.
Threat
Five potential threats are identified in the ACCA’s code of ethics. Safeguards are
suggested in order to counter each of the threats.
The specific threats outlined are Self Interest, Self Review, Advocacy, Familiarity and
Intimidation.
Categories of Threa
1. Self-interest
Here the auditor may have a nancial (or other) interest in a matter.
Therefore the auditor may not act with objectivity and independence
Examples outlined in the code, along with the safeguards to prevent them are as follows:
Dependence on Client
If a client makes up too high a percentage of an auditors income, they may be afraid of
losing the income.
Safeguard – If a Listed company makes up more than 10% of a firms income, they should
not audit that client. (15% for non listed companies)
Lowballing
Lowballing is setting a very low fee either to attract new clients or ensure further work.
Safeguard – Auditors should not set fees in this way, the fee must be based on a pre-
determined level of work required.
Loans, Guarantees and overdue fees
43 aCOWtancy.com
s
fi
If an auditor fears he may not get such items paid back his objectivity may be threatened.
In this case significant overdue fees constitute a loan.
Safeguard – Do not offer loans, guarantees or allow fees to go unpaid for a significant
time.
Any such items given to the auditor by a client could be seen to be a bribe.
Contingent Fees
Where a close family member or personal friend is in a senior position within the client
firm, or the auditor seeks employment with the client.
Safeguard – An assurance firm, any partner in the firm or an immediate family member of
these may not have a direct or indirect interest in the client. Any member of the team who
has such an interest must dispose of it or be removed from the team.
44 aCOWtancy.com
2. Self-review
Here the auditor reviews a judgement she has taken herself.
Or an audit rm prepared the nancial statements and then acted as auditor
If an auditor provides other services to a client such as Tax advice, then the auditor will be
reviewing their own work during the course of the audit.
This is a threat to objectivity and independence
Accounting Services
If an auditor prepares the accounts it is 100% sure that they will be reviewing their own
work. They may be tempted to hide errors to save face.
Safeguard - Auditor must not undertake accounting services for a client is they are a
LISTED company.
No management decisions should be made in other companies and a different team
should provide each service.
IT
If the auditor advises on or installs accounting software for a client this will have to be
reviewed during the audit.
Safeguard - If the IT system is important to a significant part of the accounting system, the
auditor should not design, provide or implement it.
Valuation Services
A valuation made by the auditor could have a material effect on the financial statements.
Safeguard – If valuation requires a degree of judgement and have a material effect on the
financial statements, then the auditor should not undertake to provide it.
45 aCOWtancy.com
fi
fi
.
Tax Services
As mentioned above, the tax work carried out will be reviewed during the course of the
audit and may encourage the auditor to hide mistakes.
Safeguard – If likely to have a material effect on the financial statements, should not be
taken on
External audit may use the work of internal audit as evidence of some of their conclusions.
Safeguard – If significant reliance is to be placed on the work of Internal Audit, this should
not be undertaken.
If this occurs there is a chance the person could be auditing work or systems they were
previously responsible for.
Safeguard – The employee cannot be involved in the audit until two years have elapsed.
46 aCOWtancy.com
3. Advocacy
Here the auditor is expected to defend or justify the position of the client, and act as an
‘advocate’.
Legal Services
If an auditor provides legal services, they may be perceived to take the same view as the
client and therefore lose independence.
Safeguard – Don’t negotiate on clients behalf with the bank or advise on debt
restructuring.
4. Intimidation
Here the auditor can't act independently as she is scared due to intimidatory threats
such as the threat to take away the work unless they do as the client wishes
i.e. that the auditor feels unable to give an independent opinion for fear of losing the client
or upsetting someone.
5. Familiarity
Here the auditor and client have a too close relationship, for example due to a long
association over many years in carrying out the annual audit
47 aCOWtancy.com
The auditor may be too familiar with the client and be unwilling to upset them.
Family/Personal Relationship
An auditor may be unwilling to criticise or upset a family member if they work for the client.
Safeguard – No member of the audit team may have a family member or close personal
relation in the client firm.
If a partner joins the client firm this may affect the judgement of the auditors involved.
Safeguard – All links to audit firm severed. Removed from audit team as soon as
appointment made. If made director or key management and has worked for auditor in
previous two years the audit firm must resign. (Can be reappointed after 2 yr period is up).
If a partner has acted as auditor for a client for too long a period, they may become
complacent or over familiar with them.
Safeguard - If client is listed company engagement partners should act for maximum of 5
yrs with 5 yr break in between rotations.
A Key audit partner must have a break of 2 yrs after a period of 7 yrs and senior staff on
listed audits should also not act for more than 7 yrs.
For non-listed clients it is advised that partners act for no longer than 10 years
48 aCOWtancy.com
• Was the hospitality when the auditors should have been working
• Ensure the member checked with more senior people in the rm to check if it was
allowed - otherwise it is a disciplinary offence also.
49 aCOWtancy.com
.
fi
?
Syllabus A4c) Discuss the safeguards to offset the threats to the fundamental principles.
Safeguard
• Training
To an appropriate level for the rol
• Consultation
So issues can be discussed internally and procedures are laid out to facilitate thi
• Ethical Codes
of conduc
• Internal Control
50 aCOWtancy.com
t
fi
.
fi
s
fi
The Professio
The profession regularly suggest new practices and procedures designed to improve
auditor independence
So things that the profession do to help safeguard against ethical threats are
The Individua
51 aCOWtancy.com
l
Syllabus A4d) Describe the auditor’s responsibility with regard to auditor independence,
conflicts of interest and confidentiality.
The way in which an audit rm should deal with potential threats to independence is
to have in place procedures to
The audit rm should have a checklist to ensure that they meet with the standards required
on Independence
The checklist will be completed when a new client is taken on, as well as at the planning
stage of each audit, at completion and when any other services are provided to the client
Con dentialit
• Under a legal obligation e.g. money laundering, terrorism, drug traf ckin
52 aCOWtancy.com
fi
fi
y
fi
:
fi
t
fi
g
• If one of these categories is not applicable, then the auditor is under no obligation to
disclose information and in fact may be in breach of the ACCA code of conduct for doing
so
53 aCOWtancy.com
.
Syllabus B1a) Discuss the requirements of professional ethics and ISAs in relation to the
acceptance / continuance of audit engagements
What is the nature of the industry in which they are involved – is it depressed
Has the client had a history of changing auditor regularly or had quali ed audit reports in
the past
Do client directors understand their role and are they able to carry it out
54 aCOWtancy.com
?
fi
?
Auditors should only accept a new audit engagement when it has been
con rmed that the preconditions for an audit are present.
55 aCOWtancy.com
fi
?
Syllabus B1c) Explain the process by which an auditor obtains an audit engagement
Auditors should screen clients to ensure they are not high ris
The risk to the auditor is ‘reputation risk’ i.e. that they will be associated with a poorly
regarded client
56 aCOWtancy.com
fi
?
fi
s
fi
k
1. The client should be asked for permission to contact the outgoing auditor. (If not given–
refuse the position)
2. Contact the outgoing auditor to ask if there is any professional reason not to take the
role.
3. Ensure process of appointment and resignation of previous auditor was carried out
correctly.
5. Ensure that the audit firm is properly qualified to act for the client (Legality / Ethics).
7. Ensure that the audit firm has adequate resources to conduct the audit.
8. Consider size of client, business area etc and how this will affect the audit.
9. What level of fees will be provided – is it worth it? Does it make up more fees % than
allowed?
Things to consider..
1. Fe
A fee will be quoted for a piece of audit work before it is carried out under a
tendering proces
The auditor must not lowball as we have seen above, nor may they make
unrealistic claims or promises to win the contrac
2. Get Informatio
57 aCOWtancy.com
The potential client will inform the auditor of what is expected, the timetable,
future plans of the company and any problems with current audito
3. Proposal
The auditor may then draw up a proposal containing:
• Proposed audit fe
• Nature, purpose and legal requirements of an audit
• Assessment of the requirements of the client
• How audit rm proposes to satisfy requirement
• Any assumptions made
• Proposed audit methodology
• Outline of audit rm and personne
• Ability of rm to perform the audi
Pre-condition
Is the Financial framework used acceptable? (Consider the type of business and
relevant laws and the uses of the nancial statements
Client Decisio
The client will decide on the basis of clarity, relevance, professionalism, reputation,
timeliness of delivery and originality which rm will conduct the audi
58 aCOWtancy.com
fi
fi
s
fi
e
fi
l
fi
.
Syllabus B1d) Justify the importance of engagement letters and their contents
Engagement lette
The engagement letter is sent before the audit to the client con rming their acceptance of
the audi
Content
ISA 210 Terms of Engagement gives guidance as to their content, but as a rule most will
include
• The scope of the audit including reference to legislation and professional standards
• Fee
• Complaints procedure
59 aCOWtancy.com
s
fi
s
fi
60 aCOWtancy.com
Syllabus B1e) Explain the overall objectives and importance of quality control procedures
in conducting an audit
Firms need to be sure that the audits they perform meet quality standard
ISQC 1 ( rm level
1. Ethic
2. Client Relationship
3. Leadershi
4. Human Resource
5. Engagement Performanc
6. Monitorin
61 aCOWtancy.com
s
fi
g
fi
fi
s
fi
l
fi
:
fi
fi
s
We will look at the above in more detail in the next section. See you there, hotpants…
62 aCOWtancy.com
.
Syllabus B1f) Explain the quality control procedures that should be in place over
engagement performance, monitoring quality and compliance with ethical requirements
1. Engagement partner
The partner responsible for the audit engagement, performance and report
Also she has the appropriate authority from a professional, legal or regulatory bod
4. Engagement team
All partners and staff performing the engagement, plus anyone engaged by to do audit
work
This excludes external experts
63 aCOWtancy.com
fi
fi
fi
fi
l
5. Firm
A sole practitioner, partnership or corporation of professional accountant
6. Inspection
These provide evidence of compliance with the rm’s quality control policie
7. Listed entity
An entity whose shares (or debt) are quoted on a stock exchang
8. Monitoring
An ongoing evaluation of the rm’s quality control
It includes periodic inspections of a selection of completed engagement
64 aCOWtancy.com
fi
fi
e
Elements of a QC syste
The objective of the rm is to establish and maintain a system of quality control to provide
it with reasonable assurance that
(a) The rm and its personnel comply with professional standards and applicable legal
and regulatory requirements; an
(b) Reports issued by the rm or engagement partners are appropriate in the
circumstance
1. Leadership
• An internal culture focused on quality is ke
• This means training, appraisal & mission statements
• Commercial considerations never override qualit
• Pay & Bene ts must re ect commitment to quality
• Resources must be available to support qualit
2. Human Resource
• All staff to have the capabilities & competence to ensure quality
• Appraisals and development regularl
65 aCOWtancy.com
fi
fi
s
fi
fi
fl
l
6. Monitorin
• Ensure new developments in standards and regulations are implemente
• Ensure CPD is kept up to date
• Any breaches to monitoring system dealt wit
66 aCOWtancy.com
g
fi
fi
w
fi
h
fl
.
7. Ethical Requirement
• Have procedures to comply with ethical requirements eg. independenc
• Emphasise through leadership, education/training, monitoring and dealing with non-
complianc
• Have procedures to identify independence threats eg. prompt noti cation by
employee
• Ensure that rm is noti ed of breaches of ethical requirements promptl
Types Of Revie
• Hot Reviews
A ‘hot’ review is carried out before the audit report is signed.
Performed by a suitably independent reviewer such as a senior manager (not part of the
management team).
Listed company engagements must have a hot review as well as those of public interest
or with signi cant risks.
• Is the rm independent
• Are risk assessment judgements justi ed
• Use of work outside the audit team
• Have misstatements been correctly dealt with
• Do working papers support the conclusions reached
• Is the nal engagement report justi ed in the circumstances
• Cold Review
• A ‘cold’ review is a review carried out after the audit report is signed
• It will be designed to identify problems in procedures and poor practice
• The cold review should make recommendations for improvements
67 aCOWtancy.com
fi
fi
s
fi
fi
s
fi
?
fi
.
fi
?
fi
.
Engagement Performanc
Supervision includes
• Seeing if the team has enough time and competence to do their job
Also whether they understand their instruction
• Addressing signi cant matters arising during the audit and modifying the plan
appropriatel
• Identifying matters for consultation with experienced engagement team member
Reviews include
• Ensuring that work of less experienced team members is reviewed by more experienced
one
• Ensuring that signi cant matters have been raised for further consideratio
• Appropriate consultations have happene
• The work performed supports the conclusions reached and is appropriately documente
68 aCOWtancy.com
s
fi
y
fi
:
fi
:
69 aCOWtancy.com
fi
fi
:
fi
.
fi
:
fi
m
ISA 220 Quality Control for Audits of Historical Financial Information speci es the following
quality control procedures that should be applied by the engagement team in individual
audit assignments
There should be full documentation, and conclusion on, ethical and client acceptance
issues in each audit assignment
The engagement partner should consider whether members of the audit team have
complied with ethical requirements, for example, whether all members of the team are
independent of the client
Additionally, the engagement partner should conclude whether all acceptance procedures
have been followed, for example, that the audit rm has considered the integrity of the
principal owners and key management of the client
70 aCOWtancy.com
fi
s
fl
fi
s
fi
t
fi
fi
.
fi
• Obtain evidence of the company’s registered address e.g. by obtaining headed letter
pape
• Establish the current list of principal shareholders and directors
Engagement tea
Procedures should be followed to ensure that the engagement team collectively has the
skills, competence and time to perform the audit engagement
The engagement partner should assess that the audit team, for example
Directio
There should be a discussion of the key issues identi ed at the planning stage
1. Their responsibilitie
2. The objectives of the work they are to perfor
3. The nature of the client’s busines
4. Risk related issue
5. How to deal with any problems that may arise; an
71 aCOWtancy.com
r
fi
.
Supervisio
Attention should be focused on ensuring that members of the audit team are carrying out
their work in accordance with the planned approach to the engagement
Signi cant matters should be brought to the attention of senior members of the audit team
Revie
Consultatio
Finally the engagement partner should arrange consultation on dif cult or contentious
matters
This is a procedure whereby the matter is discussed with a professional outside the
engagement team, and sometimes outside the audit rm
72 aCOWtancy.com
fi
w
fi
fi
.
fi
.
Syllabus B2a) Identify the overall objectives of the auditor and the need to conduct an
audit in accordance with ISAs.
Auditor Objective
ISA 200 says “to obtain reasonable assurance, the auditor shall obtain
suf cient appropriate evidence to reduce audit risk to an acceptably low level
ISA 315 extends this “to identify and assess the risk of material misstatement...designing
and implementing responses to the assessed risks of misstatement
Misstatemen
ISA 450 Evaluation of Misstatements Identi ed During the Audit states that this occurs
when something in the accounts is not in accordance with the applicable nancial
reporting framewor
• Factual Misstatement
Those where there is no doub
• Judgmental misstatement
Those where the managements judgements on estimates not considered
reasonable or the policies are inappropriat
• Projected misstatement
73 aCOWtancy.com
fi
t
fi
”
fi
”
Uncorrected Misstatement
Misstatements that the auditor has accumulated during the audit and that have not
been corrected.
The auditor has a responsibility to accumulate misstatements which arise over the
course of the audit unless they are very small amounts.
74 aCOWtancy.com
fi
s
Syllabus B2b) Explain the need to plan and perform audits with an attitude of
professional scepticism, and to exercise professional judgment.
When planning and performing an audit, the auditor should adopt an attitude
of professional scepticis
It is “An attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence
In other words, they must not simply believe everything management tells the
The auditor will need to exercise professional judgement on both the quantity and the
quality of evidence
So he has to judge.
75 aCOWtancy.com
”
fi
.
76 aCOWtancy.com
m
Audit risk is the risk that the auditor expresses an inappropriate audit opinion
when the nancial statements are materially misstate
Stated another way, this is the risk that there is a material misstatement in the nancial
statements, but the auditor misses it and says that they present a true and fair view
Inherent Ris
This will be considered at the planning meeting as it depends on the auditors’ knowledge
of the busines
Examples are..
This is often a problem as there must be very strong controls in place if a business
is a cash based one.
The auditor may feel that there are insuf cient controls in place to mitigate this risk
which may lead to limitation of scope
77 aCOWtancy.com
fi
k
fi
k
fi
.
In fast moving industries such as IT or fashion there may be a risk that the inventory
held by the business becomes obsolete.
The auditor may take expert advice on the valuation of inventory, or they may
review post year-end sales to ensure the goods are sold for more than they are
valued at in the nancial statements
Control Ris
This is the risk of material misstatement due to inadequate internal controls within the
business
The auditor will make a judgement as to the suitability and strength of internal controls –
we will examine how this is done at a later stage
Examples are..
• No segregation of dutie
e.g. an invoice is raised by one person and the cheque is written by another and
authorise by someone else.
If this control is weak or not in place, the auditor may have to increase the sample
size to ensure the nancial statements present a true and fair view
78 aCOWtancy.com
.
fi
fi
y
If the auditor nds this to be the case, more physical checks of the existence and
condition of assets will have to be carried out
If a business does not use passwords and other protection to protect its’ computer
systems this can lead to data loss or manipulation without authorisation.
If these controls are not in place the auditor will have to understand the system to
assess the ease of which it can be manipulated and check for anomalous trends
using analytical review
79 aCOWtancy.com
fi
.
Detection Ris
This is the risk that the work carried out by the auditor does not uncover a material
misstatement that exists
• Non-sampling risk
• The auditor did not suf ciently investigate a signi cant balanc
• The procedures used may have been inappropriate or misinterprete
• Sampling ris
‘arises from the possibility that the auditor’s conclusion, based on a sample may be
different from the conclusion reached if the entire population were subjected to the
same audit procedure’.
This is another way of saying that the sample selected by the auditor was not
representative of the data.
Detection risk may be increased by things such as inexperienced audit staff or tight
deadlines to complete the audit
80 aCOWtancy.com
k
fi
.
fi
k
Syllabus B3b) Describe the audit risks in the financial statements and explain the
auditor’s response to each risk.
This element of the syllabus can ONLY be learnt by attempting past paper question
The idea is that the examiner will give you a scenario - where there’s a risk that the FS
may be materially misstate
What you have to do is explain what that risk is (e.g. Risk stock is overvalued because it is
getting old) and then say what you would do as an auditor (to see if it is actually
overvalued - look at post year end sale prices of the stock
The key is practice these AUDIT RISK questions - they're in virtually every past pape
Describe the audit risks and explain the auditor’s response to each risk in planning
the audit of XYZ Co
Previously examined risk questions have carried a mark allocation of 10 marks. However,
a signi cant majority of candidates have not passed this part of the question.
Audit risk questions require candidates to identify risks of material misstatements, which
include inherent and control risks as well as detection risks
81 aCOWtancy.com
fi
.
fi
t
fi
In many sessions a number of candidates have wasted valuable time by describing the
audit risk model along with de nitions of audit risk, inherent risk, control and detection risk.
Unless the question requirement speci cally asks for the ‘components of audit risk’ or ‘a
description of the audit risk model’, candidates should not provide de nitions of audit risk,
inherent risk, control risk or detection risk as no marks are available
AUDIT RISK VERSUS BUSINESS RISK
The main area where candidates continue to lose marks is that they do not actually
understand what audit risk relates to.
Hence, they frequently provide answers that consider the risks the business would face or
‘business risks’, which are outside the scope of the syllabus. There are no marks available
for business risks
Risks must be related to the risk arising in the audit of the nancial statements and should
include the nancial statement assertion impacted.
Assertions about classes of transactions and events for the period under audit –
occurrence completeness, accuracy, cut off and classi cation
Assertions about account balances at the period end – existence, rights and
obligations completeness, and valuation and allocation
Assertions about presentation and disclosure – occurrence and rights and obligations,
completeness, classi cation and understandability, and accuracy and valuation
In addition, a risk can relate to a practical problem the audit team may face, such as
attendance at inventory counts where the company has multiple sites holding
simultaneous inventory counts, or if the company has had signi cant changes in their
nance department and so the risk of fraud and error has increased
The common mistake is for candidates to identify a relevant issue from the scenario and
then consider the risk to the company rather than to the auditor, linking into the related
assertion
Therefore, using Question 3b from the June 2011 exam: ‘The travel agents are given a 90-
day credit period to pay Donald Co; however, due to dif cult trading conditions, a number
of the receivables are struggling to pay.’
82 aCOWtancy.com
fi
.
fi
.
fi
fi
fi
fi
.
fi
fi
.
fi
…
fi
.
The audit risk related to this point is that if receivables are struggling to pay, then they may
be overstated and, hence, valuation of receivables is the relevant risk
The business faces the risk of slow cash ows and so there is a business risk related to
the liquidity of Donald Co. While going concern is an audit risk, the above point from the
scenario is not suf cient on its own to indicate going concern risk
In addition, Question 1a from the June 2010 exam told candidates: ‘Purchase orders for
overseas paint are made six months in advance and goods can be in transit for up to two
months.’
The explanation of the audit risk would be to ascertain that the cut-off of inventory is
appropriate at the year end. However, many candidates explained that the company may
encounter problems with stock-outs of goods, which is focused more on operational
business risk rather than on the risks to the nancial statements
Treatment of capital and revenue expenditure – the risk here could relate to existence
of property plant and equipment if revenue expenditure has been capitalised rather than
charged as an expense in the income statemen
Valuation of inventory – when, for example, there are considerable levels of aged
inventor
Completeness of liabilities – this could arise if provisions have been incorrectly treated
as contingent liabilitie
Completeness of revenue – this could be relevant where the entity being audited has
signi cant cash sales
RESPONSES TO AUDIT RISK
Having identi ed the audit risk candidates are often required to identify the relevant
response to these risks.
83 aCOWtancy.com
fi
y
fi
fi
.
fl
fi
t
From Question 3b June 2011, in relation to the risk of valuation of receivables, as Donald
Co had a number of receivables who were struggling to pay, many candidates suggested
that management needed to chase these outstanding customers.
This is not a response that the auditor would adopt, as they would be focused on testing
valuation through after date cash receipts or reviewing the aged receivables ledger
Auditor’s responses should focus on how the team will obtain evidence to reduce the
risks identi ed to an acceptable level.
Their objective is con rming whether the nancial statement assertions have been
adhered to, and whether the nancial statements are true and fair
Responses are not as detailed as audit procedures; instead they relate to the approach
the auditor will adopt to con rm whether the transactions or balances are materially
misstated.
Therefore, in relation to the risk of going concern, the response is to focus on performing
additional going concern procedures, such as reviews of cash ow forecasts
Also, auditor responses should not be too vague such as ‘increase substantive testing’
without making it clear how, or in what area, this would be addressed
In addition, candidates’ must ensure that they do not provide impractical responses. A
common example of this is to request directly from the company’s bank as to whether the
bank will provide a loan or renew a bank overdraft.
The bank is not going to provide this type of information to the auditor, especially if they
have not yet informed the company, and therefore this response will not generate any
marks
If the question asks for a speci c number of audit risks, such as ve, then it is not suf cient
to identify just one or two risks.
In addition, a common mistake is to identify a risk such as going concern and then give
this answer over and over again.
84 aCOWtancy.com
.
fi
fi
fi
fi
fi
fi
fl
fi
fi
In Question 3b of the June 2011 exam, there was only a maximum of one mark available
for the description of going concern risk
Each scenario will have a variety of audit risks and candidates should, as part of their
planning, aim to identify as many as possible.
They should then decide which of the identi ed risks they will explain/describe in their
answer. If the question asks for ve risks, candidates should aim to identify six or seven
points during their initial reading of the question.
Candidates should then review their list and pick the ve risks and responses that they feel
they can expand on the most when writing up their answer
T he auditor cannot affect inherent risk or control risk as these are internal
(called Entity Risk
The auditor therefore concentrates on detection risk once they have assessed
the control and inherent risk
Consider the elements of Audit risk and how they relate in our formula
If Inherent & Control risk are judged to be high, then to minimise overall audit
risk, the auditor must attempt to minimise detection risk
The auditor will have to increase the amount of tests or the number of samples
to ensure that there is less chance of a material misstatement being overlooked
or missed
85 aCOWtancy.com
.
fi
.
fi
fi
.
Syllabus B3c) Define and explain the concepts of materiality and performance materiality.
and
Syllabus B3d) Explain and calculate materiality levels from financial information.
Materialit
Materiality is important to the auditor because if a material item is incorrect, the nancial
statements will not show a ‘true and fair view.
Materiality Level
1. The auditor will decide materiality levels and design their audit procedures to
ensure that the risk of material misstatements is reduced to an acceptable
level.
0.5 – 1% of turnove
5 – 10% of pro ts reporte
1 – 2 % of gross assets
Judgement will be used by the auditor in charge and will depend on the type
of business and the risks it faces
86 aCOWtancy.com
fl
fi
’
fi
.
fi
fi
.
fi
fi
2. Consideration
Quantity
The relative size of the ite
Quality
This might be something that's low in value but could still affect users' decisions
e.g.. Directors wage
Tolerable Erro
For example nding one error out of 100 tested, might be ignore
Performance Materialit
The idea is that this will try to prevent all those small, undetected errors do not aggregate
to become materia
87 aCOWtancy.com
r
fi
s
fi
r
• Exampl
• The new standard recognises that there could well be instances where certain classes
of transactions, account balances or disclosures might be affected by misstatements
which are less than the materiality level for the nancial statements as a whole, but
which may well in uence the decisions of the user of those nancial statements
regardless of the fact they are below materiality – this is where performance materiality is
to be applied.
• Speci cally, the clari ed ISA 320 suggests performance materiality be applied to areas
such as related party transactions and directors’ remuneration.
88 aCOWtancy.com
)
fi
e
fl
fi
0
fi
fi
fi
fi
Syllabus B4: Understanding the entity and its
environment
Syllabus B4a) Explain how auditors obtain an initial understanding of the entity and its
environment.
Firstly the auditor needs to understand the entity’s environment, this will
require the auditor to assess
• Industry condition
• Principle business strategie
• Competitor
• Laws and regulation
• Technolog
• Stakeholder
• Financin
• Acquisitions and disposal
• Related partie
• Competence of managemen
• Accounting policie
ISA 315 requires a planning meeting where ‘the members of the engagement team should
discuss the susceptibility of the entity’s nancial statements to material misstatements.’
The minutes of this meeting should be documented as evidence of its occurrence
89 aCOWtancy.com
fi
g
fi
s
fi
fi
.
This involves recognising the nature of the company and management, interviewing
employees, performing analytical procedures, observing employees at work, and
inspecting company records
After you run through all applicable risk-assessment procedures, you use the results to
gure out how high the chance is that your client has material nancial-statement
mistakes
90 aCOWtancy.com
fi
s
fi
.
fi
• The quality of company management
Look for things like..
Talk with individuals holding different levels of authority, from low-level clerks all the way
up to the board of directors.
91 aCOWtancy.com
n
Syllabus B4b) Describe and explain the nature, and purpose of, analytical procedures in
planning.
Analytical procedures are compulsory at two stages of the audit under ISA 520 namely the
planning stage and the review stage.
They can be used to highlight unusual gures in order to focus the audit on them or to
establish that a trend has continued
At the planning stage they help you understand the business and its environmen
Any items which go against the expected relationships help you assess the risk of material
misstatemen
92 aCOWtancy.com
’
fi
t
fi
.
fi
fi
g
fi
fi
s
fi
fi
t
Trend analysis
The analysis of changes in an account over tim
Ratio analysis
The comparison of relationships using nancial and non- nancial dat
Reasonableness testing
Comparing expectations based on nancial data, non- nancial data, or both to
actual result
93 aCOWtancy.com
fi
)
fi
s
fi
fi
s
fi
fi
s
fi
e
fi
fi
fi
a
Syllabus B4c) Compute and interpret key ratios used in analytical procedures.
The nancial ratios used by the auditor will fall into 3 general categories
Pro tability/Retur
Gross Margi
Net Margi
ROC
Liquidity/Ef cienc
Receivables/Payables/Inventory Day
Current Rati
Quick Rati
Gearin
Financial Gearin
Operational Gearin
94 aCOWtancy.com
fi
fi
E
fi
n
fi
g
ROCE:
ROE
Gross Margi
Gross pro
Revenu
Operating Margi
Current Rati
___Current Assets__
Current Liabilitie
Quick Rati
Inventory Day
Receivable Day
95 aCOWtancy.com
fi
fi
fi
:
fi
o
Trade Receivables x 36
Credit Sales
Payable Day
__Trade Payables__ x 36
Credit Purchases1
Gearin
_____Debt2_____
Debt + Equity3
___Debt__
Equit
Interest Cover
fi
_
Syllabus B5a) Discuss the effect of fraud and misstatements on the audit strategy and
extent of audit work.
In order to detect fraud, the auditor must maintain an attitude of professional scepticism -
meaning to always be aware of the possibility of fraud, regardless of past experience of
the clien
Once an error (unintentional) or fraud (intentional) has been found by the auditor then the
auditor needs to re-assess his original risk assessment of the audi
It will make the audit higher risk and hence increase the testing that needs to be don
Also it may well make the auditor question further the integrity of the management and the
effectiveness of control
97 aCOWtancy.com
t
Fraud and error must be reported to management or the audit committee ASA
98 aCOWtancy.com
r
Syllabus B5b) Discuss the responsibilities of internal and external auditors for the
prevention and detection of fraud and error.
Management Responsibilitie
• Safeguards should be in place to avoid fraud and error through the systems and
controls the company operate
• Internal audit function will be responsible for monitoring and implementation of thes
Auditor Responsibilitie
• If immaterial, these should be reported to those charged with governance, but there is
no responsibility to detect them
• The inherent limitations of audit mean that the auditor cannot guarantee that the
nancial statements are free from fraud and error
• The auditor must consider the risk of material misstatement due to fraud and error
when planning and performing their audit
• If discovered, fraud should be reported to the audit committee (if one exists), or the
highest level of management (if not involved in the fraud), or the shareholders if the
fraud is by those in senior management.
99 aCOWtancy.com
fi
Syllabus B5c) Explain the auditor’s responsibility to consider laws and regulations.
Management is responsible for ensuring that the company complies with laws
and regulation
100 aCOWtancy.com
g
Syllabus B6a) Identify and explain the need for and importance of planning an audit.
Time spent planning the audit to ensure it is carried out ef ciently will reduce the time
taken and thus the cost
The planning process will also assess and thus reduce risk
The auditor will want to ensure that the correct team is in place to conduct the audit, they
are working ef ciently and that work is focused on material areas of risk and potential
problem areas
Planning Activitie
• Risk Assessmen
We will look in detail later at risk assessment, but at this point we should be aware
that the identi cation of risk will determine the entire audit process
• Audit Strateg
101 aCOWtancy.com
r
fi
y
fi
.
fi
.
The audit strategy sets out the scope, timing and direction of the audit
The Scope
The scope of the audit will be determined by the reporting framework applied as well as
any industry speci c requirements
If there are any geographical or other factors which may affect the audit, they will be
considered here
Timing
The timing of the audit will set out any deadlines applicable and the dates of the interim
and nal audit visits
The interim audit is conducted before the nal audit to evaluate controls and document the
systems in place.
The attendance at the stock count will be carried out at this time and perhaps the
receivables circularisation
The nal audit will involve the bulk of the audit work and it may be possible to concentrate
on the statement of nancial position gures if suf cient work has been carried out during
the interim audit
Direction
The direction of the audit will be determined by the identification of high risk areas and
materiality.
The strategy decided upon will be tailored to the client and the nature of their business and
their structure. The auditor must ensure that the strategy selected is appropriate.
102 aCOWtancy.com
fi
fi
:
fi
.
fi
.
fi
fi
fi
.
Syllabus B6b) Identify and describe the contents of the overall audit strategy and audit
plan.
As follow
Permanent l
103 aCOWtancy.com
fi
e
The permanent le kept by the audit rm will bring forward a lot of the knowledge of
the business, but this must be kept up to date
Current Fil
The current le contains the evidence and documents relevant to the current year
The planning section of the le will cover all of the areas above, and there will be a
completion section which will review the audit
In between there will be a sub-section for each balance sheet item (e.g. Non
Current Assets) and for each income statement item (e.g. purchases) with the work
done outlined and evidence documente
104 aCOWtancy.com
e
fi
fi
fi
fi
d
Syllabus B6c) Explain and describe the relationship between the overall audit strategy
and the audit plan.
Whilst the strategy sets out the overall approach, the plan lls in the
operational detail
The Audit Strategy document should identify the main characteristics of the
engagement which de ne its scop
• The audit timetable for reporting and whether there will be an interim as well as nal
audi
• The timings of the audit team meetings and review of work performe
The document should show the factors directing the audit team's effort such as
105 aCOWtancy.com
t
fi
s
fi
d
fi
:
• Materiality level
• Using professional skepticism in gathering and evaluating audit
evidenc
It should consider the knowledge from prelim planning & other areas such as
106 aCOWtancy.com
e
fi
:
Syllabus B6d) Explain the difference between interim and final audit.
Syllabus B6e) Describe the purpose of an interim audit, and the procedures likely to be
adopted at this stage in the audit.
Syllabus B6f) Describe the impact of the work performed during the interim audit on the
final audit.
The interim audit is used to lessen the amount of work at the final audit.
Which testing gets done where needs planning - although some tests such as year end
stock take can only be performed at the year end as the interim is performed during the
year
This is a matter of timing and the auditor has the following choice
1. Interim and Final audit
2. Final audit onl
3. Continually using CAAT
Interim Audit
Basically before the Year-end, allowing procedures to be more spread out and improve
planning of the nal audi
The interim audit should improve risk assessment and therefore make the nal procedures
more ef cien
It will help with the levels of materiality and allow the nal audit to concentrate on year end
valuations and matters of signi cant subjectivit
107 aCOWtancy.com
fi
t
fi
s
fi
fi
fi
:
Final Audi
Post year-end, focus on year end valuations and areas of signi cant subjectivit
108 aCOWtancy.com
d
fi
s
fi
k
fi
y
Syllabus B6g) Explain the need for, and the importance of, audit documentation.
Audit documentation relates to the working papers generated by the auditor during the
audit
• a suf cient appropriate record of the basis for the auditor’s report, an
• evidence that the audit was performed in accordance with ISAs and applicable legal
and regulatory requirements
1. the nature, timing, and extent of the audit procedures performed to comply with ISAs
and applicable legal and regulatory requirement
2. the results of the audit procedures and the audit evidence obtained, an
3. signi cant matters arising during the audit and the conclusions reached
In documenting the nature, timing, and extent of audit procedures performed, the auditor
should record the identifying characteristics of the speci c items or matters being tested
The auditor should document discussions of signi cant matters with management and
others on a timely basis
If the auditor has identi ed information that contradicts or is inconsistent with the auditor’s
nal conclusion regarding a signi cant matter, the auditor should document how the
auditor addressed the contradictions or inconsistency in forming the nal conclusion
109 aCOWtancy.com
fi
fi
.
fi
:
fi
.
fi
s
fi
fi
fi
d
who performed the audit work and the date such work was completed, an
who reviewed the audit work and the date and extent of such review
The auditor should complete the assembly of the nal audit le on a timely basis after the
date of the auditor’s report
After the assembly of the nal audit le has been completed, the auditor should not delete
or discard audit documentation before the end of its retentio
If the working papers do not exist then the auditor will be unable to prove how and why the
opinion expressed was arrived at. There will also be nothing to prove that the audit was
carried out in accordance with the ISA’s
The working papers should provide evidence such that a suitably quali ed practitioner
could follow the procedures outlined and come to the same conclusion as the person who
carried out the audit
If the working papers do not exist, then this will be impossible and likewise if they are
unclear as to the work carried out
110 aCOWtancy.com
fi
s
fi
fi
.
fi
S
fi
d
fi
n
fi
d
Syllabus B6h) Describe the form and contents of working papers and supporting
documentation.
Contents of Documentatio
• Planning
• Audit work carried out on each section of the financial statements (e.g. Non Current
Assets, Inventory)
Discussion of all signi cant matters with management must also be documente
Include
1. Planning Documentation (Strategy, plan, risk analysis
2. Audit programme
3. Summary of signi cant matter
4. Letters of con rmation / representatio
5. Correspondenc
fi
fi
s
fi
fi
d
fi
e
Systems Informatio
Title deed
Contract
112 aCOWtancy.com
s
Syllabus B6i) Explain the procedures to ensure safe custody and retention of working
papers.
The auditor retains ownership of the working papers and the client does not have the right
to view or copy any of the work the auditor carries out.
The auditor must be careful if they include copies of client generated items
113 aCOWtancy.com
fi
.
Laptops are very susceptible to theft, not just for the contents, but for the machine
itsel
So, ensure laptops should always be locked away securely or taken home by the audit
tea
Audit les should be updated and nished no later than 60 days after the repor
They should then normally be kept for at least 5 year
1. Secure storag
2. Archiving of the old le
3. IT back up
114 aCOWtancy.com
m
fi
s
fi
s
fi
?
Understanding it means you can trust that the system gives reliable informatio
In this way internal controls will have a direct effect on Audit Ris
Syllabus C1b) Describe and explain the five components of internal control
115 aCOWtancy.com
fi
fl
k
These ar
1. Control Activitie
2. Risk Assessmen
3. Information System
4. Monitoring of Control
5. Strong Control Environmen
Control Activitie
This includes all procedures designed to ensure management directives are carried ou
116 aCOWtancy.com
e
• Controls over IT
Passwords, usernames, back-ups and any other appropriate controls should be in
place
• Reconciliation
Key account balances such as bank and debtors should be reconciled on a regular
basis
• Arithmetical Accurac
Items such as invoices etc should be checked to ensure they are arithmetically
correct
• Control Account
Control accounts for accounts such as wages, PAYE, VAT should be maintained
Only authorised staff should have access to certain areas of the business such as
valuable or sensitive assets
Items such as cash and inventory should be counted periodically and compared to
the amount in the accounting records
• Segregation of Dutie
117 aCOWtancy.com
.
Risk Assessment
1. The auditor should understand how management assess risk and how they take action
to mitigate risks discovere
2. Management should be undertaking regular risk assessments to ensure that all risks
are identi ed and mitigated
Information Syste
The auditor must ‘obtain an understanding of the information system, including the related
business processes, relevant to nancial reporting.
The auditor must decide what areas of the information system are relevant to the nancial
reporting of the entity and only concentrate on those systems
The classes of transactions in the entities operations which are signi cant to the
nancial statements
The procedures, within both IT and manual systems, by which those transactions are
initiated, recorded, processed and reported in the nancial statements
How the information system captures events and conditions other than classes of
transactions, that are signi cant to the nancial statements
The nancial reporting procedure used to prepare the entities nancial statements,
including signi cant accounting estimates and disclosures
118 aCOWtancy.com
fi
fi
fi
fi
fi
fi
m
fi
.
fi
fi
:
fi
fi
’
fi
fi
.
fi
• This is a key area to the exam as a question will often require you to
understand business systems in a scenario. Read and ensure yo
understand the above areas.
Monitoring of Control
2. The auditor may be able to rely on some of the work of internal audit as we will see
later, but must rst gain an understanding of how controls are monitored and how
effective the monitoring is
119 aCOWtancy.com
.
fi
.
Commitment to competence
Organisational structure
120 aCOWtancy.com
.
Syllabus C2a) Explain how auditors record internal control systems including the use of
narrative notes, flowcharts and questionnaires.
The rst step the auditor will take is to document the syste
• Organisational Chart
A written description of the system showing what happens and the controls operating at
each stag
121 aCOWtancy.com
fi
e
A written description of the system showing what happens and the controls operating at
each stag
1. Narrative notes can become too much, especially if the system is comple
2. They don't identify control exceptions - they just record what is ther
1. Too easy for staff to overstate controls present (as the questions relate to potential
controls
2. A standard list of questions may miss out unusual control
122 aCOWtancy.com
)
fi
s
Flowcharts - Advantage
Flowcharts - Disadvantage
1. Changes can be dif cult as often the whole owchart needs re-drawin
2. Narrative notes will still be needed to explain the owchart and hence it can be time
consumin
123 aCOWtancy.com
g
fi
s
fl
fl
m
124 aCOWtancy.com
e
fi
)
125 aCOWtancy.com
fi
f
fi
t
fi
fi
.
Syllabus C3a) Describe computer systems controls including general IT controls and
application controls
Examples are.
Sequence check
Arithmetic check
Existence check
Authorisation checks
Examples include
Backup control
126 aCOWtancy.com
s
The auditor must be aware of the implications of the IT systems of the entity.
Many transactions may now be automated and the automation must be checked and
understood.
ACCA MAP
This is a little memory technique for remembering the typical controls in a busines
Authorisatio
Computer control
Compariso
Arithmeti
Account reconciliation
Physical control
Segregation of dutie
127 aCOWtancy.com
S
Syllabus C3b) Describe control objectives, control procedures, control activities, key
controls and tests of controls in relation to:
i) The sales system;
• Review new customers’ les for references, credit checks, authorisation by senior staf
• Ensure credit limits for customers are not exceeded by trying to post a sale which is
beyond the credit limi
• Match GDN with sales invoices checking prices, quantities, arithmetical accuracy, VAT
and posting
• Verify credit notes with correspondence, original invoices, amounts and authorisatio
• Check numerical sequence of invoices, credit notes, GDN’s and sales orders – enquire
into missing numbe
• Agree sample of accounts in sales ledger re-performing additions and balances carried
dow
128 aCOWtancy.com
n
fi
s
129 aCOWtancy.com
Syllabus C3b) Describe control objectives, control procedures, activities and tests of
control in relation to:
130 aCOWtancy.com
Purchase
As follows
131 aCOWtancy.com
:
132 aCOWtancy.com
133 aCOWtancy.com
Syllabus C3b) Describe control objectives, control procedures, control activities, key
controls and tests of controls in relation to:
iii) The payroll system
Payrol
as follows
134 aCOWtancy.com
l
135 aCOWtancy.com
136 aCOWtancy.com
Syllabus C3b)Describe control objectives, control procedures, control activities, key
controls and tests of controls in relation to:
iv) The inventory system
Inventor
as follows
137 aCOWtancy.com
fi
:
138 aCOWtancy.com
139 aCOWtancy.com
Inventory System continue
Perpetual Inventor
Perpetual inventory is the recording as they occur of receipts, issues and the resulting
balances of individual items of inventory in both quantity and value. These inventory
records are updated using stores ledger cards and bin cards
Stocktakin
The process of stocktaking involves checking the physical quantity of inventory held on a
certain data with the balance on the stores ledger cards or bin cards
Periodic stocktakin
Periodic stocktaking involves checking the balance of every item in inventory at a set point
in time, usually at the end of an accounting year
Continuous stocktakin
This involves counting and valuing selected items of inventory on a rotating basis. Each
item is checked at least once a year
Inventories cost a considerable amount of money and therefore, control procedures must
be in place
140 aCOWtancy.com
.
1. physical security procedures, regular stocktaking and recording of all issues to eliminate
unnecessary losses from inventory
2. separation of ordering and purchasing activities to eliminate ctitious purchases
3. quotation for special order to reduce the probability of ordering goods at in ated prices
Inventory losses arising from theft, pilferage or damage must be written off against pro ts
as soon as they occur
141 aCOWtancy.com
.
fi
fl
;
fi
.
Capital expenditur
The auditor will test the controls in place over capital expenditure.
The tests used will vary according to the entity being audited and are similar to the tests of
control over purchases, but will usually include:
• The asset register should contain all information surrounding the asset such as invoice
for the purchase, location, value etc.
• The documents confirming the ownership of the assets should be kept safe in a fire
proof environment.
142 aCOWtancy.com
Syllabus C3b) Describe control objectives, control procedures, control activities, key
controls and tests of controls in relation to: v) The cash system
143 aCOWtancy.com
Syllabus C4: Communication on internal control
Syllabus C4b: Explain, in a format suitable for inclusion in a management letter, signi cant de ciencies
within an internal control system and provide recommendations for overcoming these de ciencies to
management
Control weaknesses will form part of the letter to management which the
auditor provides to the managemen
The management letter will express the fact that the weaknesses found are not
necessarily all weaknesses but just those found by the auditor
The report will also express that it is for the sole use of management and no disclosure will
be made to third partie
1. Weaknes
2. Consequenc
3. Recommendation
Signi cant de ciencies should always be reported to those charged with governanc
In the Exa
Often you have to report de ciencies in the form of a management letter in the exam..
So use this structure.
• De cienc
144 aCOWtancy.com
fi
fi
s
fi
fi
:
fi
fi
fi
e
• Consequenc
• Recommendatio
Also make sure that the bene t of the recommended action outweighs the cost
Don't just think of what to do, also think of who and whe
145 aCOWtancy.com
fi
fi
t
e
fi
g
fi
.
m
t
Syllabus C4c) Discuss the need for auditors to communicate with those charged with
governance.
Those charged with governance are basically those responsible for running the company -
those responsible for good corporate governance too therefore
1. To communicate clearly with TCWG the responsibilities of the auditor in relation to the
financial statement audit, and an overview of the planned scope and timing of the
audit;
3. To provideTCWG with timely observations arising from the audit that are significant
and relevant to their responsibility to oversee the financial reporting process
4. To promote effective two-way communication between the auditor and those charged
with governance.
fi
r
The external auditor is also required by ISA 260 Communication of audit matters to those
charged with governance to provide management periodically with observations arising
from the audit that are signi cant and relevant to management’s responsibility to oversee
the nancial reporting process
Communication takes the form of the letter of engagement and the management letter
sent at the beginning and end or the audit respectively
147 aCOWtancy.com
fi
t
fi
.
Expectations Ga
In order to avoid an ‘expectation gap’ the auditor should ensure that management are
aware that the external auditor is not responsible for
148 aCOWtancy.com
fi
fi
fi
fi
fi
p
fi
h
Syllabus C5a) Discuss the factors to be taken into account when assessing the need for
internal audit.
• Liaising with external auditor to reduce time and expense of external audit.
The Internal Audit department does this by undertaking assignments and reporting their
findings to the Audit Committee (or Board if no Audit Committee).
149 aCOWtancy.com
However..
If one is deemed necessary, but doesn’t currently exist, then the audit committee should
make a recommendation to the boar
The reason for the absence of an internal audit function should also be explained in the
annual repor
• Accounting syste
While not complex, accounting systems must provide accurate information. Internal
audit can audit these systems in detail ensuring that fee calculations, for example, are
correct
150 aCOWtancy.com
.
• Computer system
Maintenance of computer systems is critica
Internal audit could review the effectiveness of backup and disaster recovery
arrangement
• Effect on audit fe
Provision of internal audit may decrease the audit fee where external auditors can
place reliance on the work of internal audit.
This is unlikely to happen during the rst year of internal audit due to lack of
experience
• Corporate governanc
Internal audit could still recommend policies for good corporate governanc
1. No statutory requiremen
• As there is no statutory requirement, the directors may see internal audit as a waste
of time and money and therefore not consider establishing the departmen
151 aCOWtancy.com
.
fi
e
fi
l
fi
t
2. Accounting system
• Many accounting systems are not necessarily complex so the directors may not see
the need for another department to review their operations, check integrity, etc
3. Family busines
• There is therefore not the need to provide assurance to other shareholders on the
effectiveness of controls, accuracy of nancial accounting systems, etc
4. Potential cos
• There would be a cost of establishing and maintaining the internal audit departmen
5. Review threa
• Some directors may feel challenged by an internal audit department reviewing their
work (especially the nancial accountant).
They are likely therefore not to want to establish an internal audit department
152 aCOWtancy.com
t
fi
s
fi
.
Syllabus C5b) Discuss the elements of best practice in the structure and operations of
internal audit.
Internal Audit reports their ndings to the Audit Committee (or Board if no Audit
Committee)
Is it Independent
• The Internal Audit function will need to be professionally competent, suf ciently
resourced and well organised in order to carry out its’ function effectively
• One of the key concepts surrounding internal audit is the independence of internal audit
from management
153 aCOWtancy.com
.
fi
.
fi
.
• Although the internal audit department is paid for and part of the company, care must be
taken to keep it objective and independent
Ensure that the internal audit function is well regarded by other departments
Have a ‘whistle blowing’ function for internal audit to report serious misconduct
when found
A question regarding Internal Audit on the exam may well focus on the
independence of internal audit, so remember
• Scope of Internal Audit work should be determined by Audit Committee or chief internal
auditor
• The head of internal audit should be suf ciently experienced and professionally quali ed
154 aCOWtancy.com
.
fi
.
fi
.
Syllabus C5c) Compare and contrast the role of external and internal audit.
Let's look at the difference in roles between internal and external audi
• Internal Audi
• External Audi
Ensure accounts free from material misstatement and prepared in line with
reporting framework
Evidenc
• Internal Audi
Eg It may just be a check that assets exist, with no concern over their valu
155 aCOWtancy.com
e
• External Audi
The risk would have been analysed during planning and in the light of subsequent
evidenc
Reportin
• Internal Audi
• External Audi
Communicate to stakeholder
156 aCOWtancy.com
e
Syllabus C6a) Discuss the scope of internal audit and the limitations of the internal audit
function.
Items such as
1. Effectiveness of system
2. Effectiveness of Internal Control
3. Whether manuals are followe
4. Whether internally produced info is reliabl
5. Compliance with OEC
• Reporting System
Reporting to the Finance Director - who is responsible for some of the info being
reported on!
Action
Report to Audit Committee instea
• Scope of Work
Could be decided by executive directors and thus in uenced away from their particular
areas (the cheeky monkeys)
157 aCOWtancy.com
D
fl
t
Action
• Audit Work
Auditing their own work (Self review threat)
Action
• Lengths of Service
Too long in IA and there may well be a familiarity threat
Action
Action
158 aCOWtancy.com
)
Syllabus C6b) Explain outsourcing and the associated advantages and disadvantages of
outsourcing the internal audit function.
Outsourcin
Outsourcin
is when an external specialist organisation (also known as a service organisation) is used
to carry out functions which would normally be performed within the entity
1. The service organisation fully maintains the outsourced function (keeps accounting
records and internal records
2. The service organisation executes transactions only at the request of the entity, or acts
as a custodian of assets.
Here the reporting entity will maintain internal records relating to the outsourced
function
159 aCOWtancy.com
fi
.
fi
.
A rm may decide to outsource its internal audit function as this may seem
like better value for mone
Advantages of Outsourcin
Disadvantage
• If Internal and External audit are provided by the same rm (prohibited under ethics rules
in UK) then there may be a con ict of interest
160 aCOWtancy.com
fi
s
fl
.
fi
g
fl
.
fi
fi
.
Syllabus C6c) Discuss the nature and purpose of internal audit assignments including
value for money, IT, financial, regulatory compliance, fraud investigations and customer
experience.
As follow
1. Economy
Are goals achieved at a minimum cost (still paying attention to quality)
2. Ef ciency
Are resources being used to maximise output
3. Effectiveness
Are objectives being achieved
• It may be dif cult to measure outputs and ef ciency. For example, how do we measure
the output of a re service
161 aCOWtancy.com
fi
s
fi
fi
fi
y
fi
?
fi
t
• It may be dif cult to de ne the objectives particularly of a Not for Pro t organisations with
many different factors in uencing policy
• Economy and ef ciency may work against quality which will be required to ensure
effectiveness
1. Challeng
Why and how is a service provided
2. Compar
Assess performance against other provider
3. Consult
Talk to users for feedbac
4. Compete
Provide ef cient, effective services through fair competitio
Internal auditors within an organisation implementing best value will play an integral role in
ensuring its’ effective implementation
162 aCOWtancy.com
e
fi
:
fi
.
fi
fi
fl
k
fi
IT & Financial assignment
Information Technolog
The internal audit function of an organisation may well have an IT specialist in the team
The main function of internal audit in the area of IT will be to assess the controls in place
Other functions will be to ensure that the systems in place represent value for money and
also to ensure effective controls over the awarding of IT contracts
Financial Assignment
The role of IA here is to make sure the information required for management and external
accounts are reliable and produced timely
Financial internal audit work echoes the work of the external auditor. Checks will be made
of record keeping and implementation of nancial procedure
It can also look to design controls which help identify in ation, interest rate and currency
risk
163 aCOWtancy.com
s
fi
.
fl
s
Syllabus C6d) Discuss the nature and purpose of operational internal audit assignments
Operational assignment
An assignment based on operations should identify the possible risks involved in that
operation, the procedures in place to mitigate the risks and whether those procedures are
being followed
Procuremen
Marketing
164 aCOWtancy.com
fi
?
Treasury
This is a high risk area and there should be extensive controls in place to ensure risk is
mitigated.
Internal audit should ensure procedures in place to manage exposure to foreign currency
risk, interest rate fluctuations and inflation are all working correctly.
Human Resources
The company will have policies in place and it is the responsibility of internal audit to
ensure that these policies are adhered to by managers.
Syllabus C6e) Describe the format and content of audit review reports and make
appropriate recommendations to management and those charged with governance
165 aCOWtancy.com
fi
y
Internal Audit should discuss with management as they conduct their assignment any
issues that arise and not just include unexpected ndings in the report
1. Cove
The cover will set out the subject, who the report is to, the date and any
rating/evaluation require
2. Executive Summar
This section summarises the report to get across the essence of the nding
Internal audit may undertake a ratings system for grading those systems
under review
166 aCOWtancy.com
r
fi
.
fi
y
fi
s
fi
.
Syllabus D1a) a) Explain the assertions contained in the financial statements about:[2]
(i) Classes of transactions and events and related disclosures;
(ii) Account balances and related disclosures at the period end;
• Transactions and Events: In general this refers to income statement gures, but will
include events such as the purchase of a non current assets
• Account Balances at the Year End: These will be the items on the statement of
nancial position
• Presentation and Disclosure: This is how the nancial statements are presented and
how items have been disclosed
Different assertions apply to each of these three areas of the nancial statements
167 aCOWtancy.com
fi
fi
fi
.
fi
.
fi
:
fi
fi
.
• Occurrence: transactions and events that have been recorded have occurred and
pertain to the entity
• Completeness: all transactions and events that should have been recorded have been
recorded
• Accuracy: amounts and other data relating to recorded transactions and events have
been recorded appropriately
• Cut-off: transactions and events have been recorded in the correct accounting period
• Classi cation: transactions and events have been recorded in the proper accounts
• Rights and Obligations: the entity holds or controls the rights to assets, and liabilities
are the obligations of the entity.
• Completeness: all assets, liabilities and equity interests that should have been
recorded have been recorded.
• Valuation and Allocation: assets, liabilities and equity interests are included in the
nancial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
168 aCOWtancy.com
fi
fi
.
• Occurrence and rights and obligations: disclosed events, transactions and other
matters have occurred and pertain to the entity.
• Completeness: all disclosures that should have been disclosed in the nancial
statements have been included.
• Accuracy and Valuation: nancial and other information are disclosed fairly and at
appropriate amounts.
fi
evidence , including inspection , observation, external confirmation, recalculation, re-
performance, analytical procedures and enquiry
Using Assertion
This is done b
1. Inspectio
2. Observatio
Payment of wages
Inventory counts
Opening mai
170 aCOWtancy.com
m
fi
s
3. Inquir
This means getting information from people inside or outside the entity
It can be a formal written or an oral inquiry
4. Con rmatio
This means corroborating evidence from third parties with the internal
evidenc
5. Re-Performanc
6. Analytical Procedure
For example, comparing the rent charge from one period to the next and see
if other evidence such as number of rental properties corroborates the
increase or decreas
171 aCOWtancy.com
fi
y
fi
e
fl
fi
s
s
.
Suf cien
Appropriat
1. You need enough to have reasonable assurance that the speci c audit area is free
from material misstatemen
2. A high quantity of poor quality evidence does not mean its suf cient (or appropriate
3. The auditor must consider both the relevance and the reliability of the evidenc
4. Be careful though of over auditing.
Lots of high quality evidence on immaterial areas is a waste of resource
• Generally yes.. but be careful... think of the fact you may be over auditing and therefore
wasting resources, particularly if the area is low risk and immateria
172 aCOWtancy.com
fi
t
fi
fi
fi
t
fi
fi
e
• Invisible Evidenc
Ticks on audit programmes that say a procedure has been done, but where there is
no evidence of i
The use of management representations alone is not suf cient and appropriate
audit evidenc
It could constitute a limitation on the scope of an audit that might result in the wrong
opinion being expresse
• Lead schedule
173 aCOWtancy.com
fl
e
fi
fi
e
fi
fi
a
fi
y
Eg The Investment Property lead schedule that reconciles the opening fair value to
the closing fair valu
Lead schedules should be cross-referenced to the audit evidence that supports the
relevant gures/disclosure
• Redundant accounts
Accounts and trial balances which have been superseded
Particularly where the audit rm is involved in the accounts preparation, these are
not suf cient or appropriate audit evidenc
174 aCOWtancy.com
fi
fi
e
fi
e
Relevant evidence will be evidence that relates directly to the assertion being tested – if it
doesn’t then why is it being used
Reliable evidence is evidence which the auditor can have faith is trustworthy
ISA 500 sets out types of evidence which are more reliable than others
More Reliabl
• Better when generated internally but the related controls are effectiv
Less Reliabl
• Ora
175 aCOWtancy.com
l
So here's a reminder
1. Analytical Procedure
2. Enquir
3. Inspectio
4. Observatio
5. Re-calcUlation / Re-performanc
176 aCOWtancy.com
y
fi
s
Syllabus D2b) Discuss and provide examples of how analytical procedures are used as
substantive procedures
Analytical procedure
There are two categories of substantive procedures - analytical procedures* and tests of
detail
*Analytical procedures generally provide less reliable evidence than the tests of detai
AP's are used at different times in the audit whereas tests of detail are only applied in the
substantive testing stag
Analytical procedures are compulsory at two stages of the audit under ISA 520
They can be used to highlight unusual gures in order to focus the audit on them or to
establish that a trend has continued
177 aCOWtancy.com
.
fi
e
&
fi
fi
fi
:
The nancial ratios used by the auditor will fall into 3 general categories
• Pro tability/Retur
1. Gross Margi
2. Net Margi
3. ROC
• Liquidity/Ef cienc
1. Receivables/Payables/Inventory Day
2. Current Rati
3. Quick Rati
• Gearin
1. Financial Gearin
2. Operational Gearin
• Suitabilit
• Reliabilit
The auditor may only rely on data generated from a system with strong control
• Degree of Precisio
178 aCOWtancy.com
fi
fi
E
fi
n
Some gures will not have a recognisable trend over time or be comparabl
• Acceptable Variatio
Variations having an immaterial impact on the nancial statements will not hold as
much interest to the auditor as those that d
179 aCOWtancy.com
fi
n
fi
e
Syllabus D2c) Discuss the problems associated with the audit and review of accounting
estimates.
The auditor must be sure that the judgements and estimates made by
management are soun
Management will have to use an element of judgment in preparing the nancial statements
in areas such as depreciation rates, deferred tax and provisions
The problem with auditing estimates is a lack of physical evidence and subjectivity
The auditor will carry out several procedures on an area of accounting estimat
1. Look at the process employed to calculate the estimate and decide whether it is
appropriat
2. Use the work of an expert to ascertain whether an estimate is accurat
3. Check that any items accrued for do occur after the balance sheet dat
4. Discuss any points of concern with management to see why they included the item at
the amount they di
180 aCOWtancy.com
fi
.
Syllabus D2d) Describe why smaller entities may have different control environments and
describe the types of evidence likely to be available in smaller entities.
181 aCOWtancy.com
e
Syllabus D2e) Discuss the difference between tests of control and substantive
procedures
Therefore the auditor will assess each of the areas mentioned before (control environment,
control procedures etc.) in order to identify risky areas
The auditor will then undertake tests of control to establish whether the auditor can place
reliance on the
Test of Contro
These test the systems in place by determining whether the controls over it are
suf cient or no
If the control in place is strong, then the auditor is able to place reliance on the
information generated by that particular syste
Substantive procedure
These, on the other hand, are procedures to gain direct assurance over a gure in
the nancial statements
182 aCOWtancy.com
fi
fi
fi
.
fi
Syllabus D3: Audit sampling and other means of testing
Syllabus D3a) Define audit sampling and explain the need for sampling.
As the auditor can't test everything, only samples are used for substantive
testin
The tests of controls which we have looked at will establish for the auditor how much
reliance he can place that the information generated by the system is free from error
The results of tests of control will therefore determine how much substantive testing is
required (tests performed on individual gures in the nancial statements)
The amount of substantive testing undertaken can therefore be varied by using different
sample sizes
This is one of the reasons the auditor cannot give absolute assurance over gures in the
nancial statements – the audit has been carried out on a sample basis
This is telling the auditor that they can use a sample to draw conclusions about some
aspect of the transactions (e.g. were they authorised?) rather than looking at every
transaction
183 aCOWtancy.com
fi
fi
g
fi
n
fi
d
fi
.
Material items in the population must be tested. This means that 100% of transactions may
be tested if they are all material
184 aCOWtancy.com
.
Syllabus D3b) Identify and discuss the differences between statistical and non-statistical
sampling.
Statistical or non-statistical
Statistical samplin
Extrapolate the error rates e.g. (if half of the sample's wrong then half of the
population is too
Non-statistical samplin
Any method which does not t into the above is non-statistical samplin
185 aCOWtancy.com
fi
g
fi
g
Syllabus D3c) Discuss and provide relevant examples of, the application of the basic
principles of statistical sampling and other selective testing procedures.
Methods of Samplin
These ar
Random selection
Ensures each item in a population has an equal chance of selectio
Systematic selection
A number of sampling units in the population is divided by the sample size to give a
sampling interval
Haphazard selection
The auditor selects the sample without following a structured technique – the
auditor would avoid any conscious bias or predictabilit
Judgemental selection
Selecting items based on the skill and judgement of the audito
If the auditor would have reached a different conclusion if he had tested the entire
population, rather than a sample, this is sampling risk
Non Sampling Risk is the risk that the auditor comes to an incorrect conclusion for
reasons other than the size of the sample used.
186 aCOWtancy.com
e
Misstatement or deviatio
The smaller the tolerable misstatement or rate of deviation, the greater the required
sample siz
The higher the expected misstatement or rate of deviation, the greater the required sample
size
187 aCOWtancy.com
.
Syllabus D4a) Explain the audit objectives and the audit procedures in relation to:
Receivables:
i) direct confirmation of accounts receivable
• Cut-off problem
This means asking customers for written con rmation of their account balanc
188 aCOWtancy.com
fi
fi
)
fi
fi
)
1. The auditor decides which customer gets asked (not the client
2. Auditor states that the reply comes to her directl
3. Auditor sends out the request personally
189 aCOWtancy.com
fi
.
1. Plannin
2. Deciding Positive or Negative Con rmatio
3. Selecting a Sampl
4. What to do when you get the Replie
5. Summarising & Concludin
Plannin
When to do it (Timing
1. A positive con rmation request asks the customer to reply to the auditor whether or
not he agrees with the balanc
190 aCOWtancy.com
g
fi
e
fi
fi
g
fi
fi
fi
fi
s
fi
m
This asks the customer to reply only where he disagrees with the balance
• If no reply is received - this means he agrees, however it might also mean he never
received or checke
• The evidence from negative con rmation circulars is therefore less reliabl
• So why would an auditor use negative conformation circulars then???
Well only when all of the following apply..
Sample Selectio
191 aCOWtancy.com
n
fi
d
fi
n
1. Overdue balance
2. Negative balance
3. Accounts on which round sum payments are received (instead of paying the actual
invoice amounts
4. Nil balance
5. All "material" balance
1) Control errors o
2) Just timing difference
192 aCOWtancy.com
fi
s
fi
n
fi
s
4. No reply received?
These cannot be ignored!!
Then conclude on the likely level of misstatement in the total population based on the
sample results, and whether this is material
193 aCOWtancy.com
s
fi
d
Syllabus D4a) Explain the audit objectives and the audit procedures in relation to:
Receivables:
ii) other evidence in relation to receivables
and prepayments
Bad debt
Cut-Of
This ensures that revenue (and therefore receivables) are properly recorded in the correct
accounting period
194 aCOWtancy.com
f
fi
e
Ensure sales invoices and credit notes around the year end are shown in the
correct yea
Ask for explanations about unusual control account entries around the year en
Receivables - Prepayment
195 aCOWtancy.com
r
fi
fi
d
fi
:
Syllabus D4a) Explain the audit objectives and the audit procedures in relation to:
Receivables:
iii) completeness and occurrence of sale.
196 aCOWtancy.com
Syllabus D4b) Explain the audit objectives and the audit procedures in relation to:
Inventory:
i) inventory counting procedures in relation
to year-end and continuous inventory
systems
ii) cut-off testing
iii) auditor’s attendance at inventory counting iv) direct confirmation of inventory held by
third parties, v) valuation
vi) other evidence in relation to inventory.
Completeness Assertio
• Not all stock owned is included in account
Existence Assertio
• Not all stock included in accounts actually exist
Valuation Assertio
• Stock is incorrectly value
Due to incorrect cost allocatio
Not valuing at NRV (if lower than cost
197 aCOWtancy.com
fi
d
Well she needs evidence about the existence and condition of inventor
But also..
198 aCOWtancy.com
.
fi
s
• Observ
How entries in and out of stock are dealt with during the coun
• Recor
Any differences between their own test count and that of the client..
This record will be used after the count to con rm that all inventory items are
included in the client’s inventory lis
Goods received (& despatch) notes issued before and after the count (for cut-off
199 aCOWtancy.com
d
fi
fi
)
It helps avoid the potential disruption of an annual count at the year end of the reporting
perio
1. Client has a system for maintaining accurate and up-to-date inventory record
2. Every item is counted at least once a yea
3. Counting is well organised and controlle
4. Counts are documented and reviewed by managemen
5. All differences are investigate
200 aCOWtancy.com
fi
d
Inventory - Cut-of
Cut-off affects inventory, cost of sales, sales, payables & receivables.. phew
Sales Cut-of
It's not just sales that would be wrong otherwise but also receivables and closing inventory
(oh yes it would be a jolly wolly mess if we get it wrong
Purchases Cut-of
All purchases must be shown in the right period too - amazing right?! :
• Correct Entries
Dr Purchases Cr Payables
201 aCOWtancy.com
f
Audit wor
2. Despatch notes
Record the numbers of these around the year end
202 aCOWtancy.com
k
Syllabus D4b) Explain the audit objectives and the audit procedures in relation to:
Inventory:
i) inventory counting procedures in relation
to year-end and continuous inventory
systems
ii) cut-off testing
iii) auditor’s attendance at inventory counting iv) direct confirmation of inventory held by
third parties,
v) valuation
vi) other evidence in relation to inventory.
Inventory - Valuatio
This is basically selling price less cost to sell it. This is normally higher than cos
• Cost to be Included
• Actual cost of the items (plus delivery
• Audit Test
• Con rm which Inventory method used (FIFO, AVCO etc
• Check gures to purchase inventorie
203 aCOWtancy.com
fi
fi
direct material
direct labour and
production overhead
2. Audit Test
• Get breakdown
of costs of nished and WIP good
• Calculations
Check and recalculat
• Materials
check fo etc and to purchase invoic
• Labour
Check pay rates against payroll records
Check hours worked with time record
• Production overheads
Ensure only production overheads (not selling or admin)
Ensure overhead absorption rates are based on normal levels of outpu
• Work in Progress
Check the stage of completion, for both materials, labour and overhead
204 aCOWtancy.com
fi
s
fi
s
1. Audit Test
• Review Procedures
for comparing cost to NR
• Follow up
Evidence from:
1) Inventory count
2) Lots of returns
3) Price reductions given to customer
• Check
for slow-moving item
• Review prices
after year en
• Ensure
estimated costs to complete are accurat
205 aCOWtancy.com
s
Syllabus D4c) Explain the audit objectives and the audit procedures in relation to:
Payables and accruals:
i) supplier statement reconciliations and
direct confirmation of accounts payable, ii) obtain evidence in relation to payables
and accruals, and
iii) purchases and other expenses.
Payables - Trad
Testing for completeness is harder because you're looking for something that has not
been recorde
(whereas when testing for existence you can audit something that is there
Cut-off incorrec
206 aCOWtancy.com
d
Substantive Procedure
Purchases Cut-of
Goods received before year end - should be shown in inventory and as a liabilit
207 aCOWtancy.com
fi
fi
f
Payables - Accrual
Accruals balances are dif cult to audit as the gures reported are often based
on estimate
Although these are often not material - we are checking mainly for completenes
We will use analytical procedures and the auditors knowledge of the busines
Substantive Procedure
Wages accrua
208 aCOWtancy.com
s
fi
s
fi
s
Hence, they normally have strong internal controls, such as a bank reconciliation from
bank statements to the cash boo
Valuation assertion
Reconciliation differences incorrectly dealt wit
Completeness assertion
Material cash balances are omitte
209 aCOWtancy.com
• Method 1
The auditor gives the balances from the client’s accounting records and asks
the bank to con rm
• Method 2
The auditor asks for the balance (not giving the bank the balance rst)
The letter is sent from the auditor (and the reply back to auditor
210 aCOWtancy.com
fi
r
fi
fi
fi
s
fi
k
fi
The following work is performed:
Use letter for other audit areas eg. Bank charges accrua
Check all bank rec items against supporting evidence (eg Unpresented cheques in
later bank statements
• The auditor should count cash at all locations at the same time (to prevent moving cash
around
• A signed receipt from the of cial, stating the cash returned after the count by the audito
211 aCOWtancy.com
)
fi
t
fi
l
Syllabus D4e) Explain the audit objectives and the audit procedures in relation to:
Tangible and intangible non-current assets
i) evidence in relation to non-current assets
and
ii) depreciation
iii) profit/loss on disposal
There are many things here.. cost, depreciation, additions, disposals and
disclosures..hold tight
Completeness assertion
Assets owned but not included in the F
Existence assertion
Assets in the FS don't actually exist (already sold or scrapped
Valuation assertion
Incorrect recording, valuations, or depreciation calculation
212 aCOWtancy.com
• Completeness
(Not so important, but test for understatement)
Get the NCA register (showing cost, additions, disposals, revaluations, impairments,
depreciation
• Existence
Important check here for overstatement
Check the sample assets are in use (and their current condition
• Valuatio
213 aCOWtancy.com
fi
d
Analytical procedures:
Ratio of depreciation to total asset value
Compare totals to P/
Vehicles
Examine vehicle registration document
• Presentation and disclosur
214 aCOWtancy.com
fi
Y
• Disposal
fi
fi
:
fi
e
fi
n
Goodwil
Development cost
Goodwill Proform
FV of consideration 1,000
FV of NCI 400
FV of Net Assets acquired (1200)
Impairment (100)
Goodwill 100
Payables - Provision
Ensure the client has distinguished between provisions & contingent liabilitie
Contingent Asset
217 aCOWtancy.com
fi
Y
fi
s
218 aCOWtancy.com
fi
s
Substantive Procedure
• This list should show the movement in the year (an amortised cost table basically
• Check for arithmetical accurac
• Review cashbook for large, unusual receipts that may actually be new loan
219 aCOWtancy.com
t
fi
s
Syllabus D4g) Explain the audit objectives and the audit procedures in relation to:
Share capital, reserves and directors’ emoluments:
i) evidence in relation to share capital, reserves and directors’ emoluments
Check the nominal value of shares issued during the year to supporting
documentatio
Check cash received for shares is properly recorded in the main ledger (not to
sales
Check no legal requirements have been broken (eg. Improper use of share
premium account
Check dividends have only been taken from a legally distributable reserve (eg NOT
share premium
Check authorisation for dividen
220 aCOWtancy.com
)
2) Agree a sample of the individual monthly salary payments and the bonus payment to
the payroll record
3) Con rm the amount of each bonus paid by agreeing to the cash book and bank
statement
6) Review the disclosures made regarding the directors’ remuneration and assess whether
these are in compliance with local legislatio
221 aCOWtancy.com
fi
s
fi
Syllabus D5: Computer-assisted audit techniques
Syllabus D5a) Explain the use of computer- assisted audit techniques and data analytics
in the context of an audit.
Syllabus D5b) Discuss and provide relevant examples of the use of test data and audit
software and other data analytics tools.
Using CAAT
CAATs use a computer to assist the auditor in testing during the audit
procedure
1. Audit Softwar
2. Test Dat
Audit Softwar
The auditor may use audit software to run the client data to check for error
They can scrutinise large volumes of data, whose results can be investigated furthe
The software does not, however, replace the need for the auditor's own procedure
222 aCOWtancy.com
a
check calculation
automate the con rmation letter proces
produce report
follow transaction
Test Dat
Another method which may be used by the auditor is the use of test data
This is really putting a dummy transaction through the system to ensure that controls are
working and that calculations are performed correctl
Examples of error
223 aCOWtancy.com
a
fi
s
Meaning the auditor does not audit how the computer works, but rather checks that the
inputs generate the expected outputs from the syste
This increases audit risk as the auditor cannot tell with certainty whether the
internal processes of the system are working correctl
• Disadvantage
224 aCOWtancy.com
fi
s
fi
s
fi
r
fi
y
fi
s
ISA 620 deals with the use of the work of an expert by the audito
The auditor may not have the expertise to make judgements on all aspects of a clients’
business and may seek help in the form of an expert.
Examples of this are specialist inventory, property valuation and complex work in progress
Enquiries:
Competence
Is a member of a recognised professional body?
How long has the expert been a member of the recognised body?
How much experience does the expert have?
Objectivity
Does the expert have any nancial interest in the company?
225 aCOWtancy.com
?
fi
fi
?
Does the expert have any personal relationship with any director in the company?
Is the fee paid for the service reasonable and a fair, market based price
Before any work is performed by the expert the auditor should agree in writing
226 aCOWtancy.com
fi
fi
fi
t
fi
a
Syllabus D6d) Explain the extent to which reference to the work of others can be made
in audit reports.
The auditor should make no reference to the use of the work of others in the audit repor
It is the auditors’ opinion in the report and the work of others is simply one type of
evidence that may be used, if suf cient and reliable, to come to that opinio
227 aCOWtancy.com
fi
t
Syllabus D6b) Discuss the extent to which external auditors are able to rely on the work
of experts, including the work of internal audit.
The external auditor must determine whether it is likely to be adequate for the
purposes of the audit
So we look at
• Whether the internal audit staff are suf ciently independent to retain objectivit
• The quali cations and technical competence of the internal audit staf
• The professionalism of the staff and the standing of internal audit within the
organisatio
• Are internal audit constrained in any way by management
If these considerations are ful lled the auditor may assess the reliability of the work
carried out by internal audit by ensuring
• Internal audit working papers are well documented and have been reviewe
• Evidence gained by internal audit is suf cient and appropriat
• Any conclusions drawn are reasonable and vali
• Management have acted on recommendations made by internal audi
If all of the above is satis ed the auditor may choose to place reliance on some of the work
of internal audit
Remember that although they may use some of the work of internal audit as evidence, the
responsibility for the nal opinion will always lie with the external auditor
228 aCOWtancy.com
fi
n
fi
:
fi
fi
fi
fi
?
Syllabus D6c) Explain the audit considerations relating to entities using service
organisations
229 aCOWtancy.com
fi
fi
y
Audit Implication
• Value for money audits (see earlier
• Concentrate on substantive procedures (due to possible weak internal controls
• Analytical reviews and management representations where little audit trai
• Test larger % of population due to smaller volume
Reportin
If required by law = Normal audit repor
If voluntary = Re ect objective of audi
In either case - follow the accepted structure
1. Addresse
2. Scop
3. Responsibilities of auditors & manager
4. Work don
5. Opinio
6. Date, name and address of audito
230 aCOWtancy.com
fi
e
fi
g
fl
r
fi
?
fi
Auditors are responsible for their audit work from Y/E to issuing of F
• Active Duty
Between the Y/E and signing the FS
• Passive Duty
Between the signing and issue date
To act if they become aware of anything that may affect their audit opinio
231 aCOWtancy.com
m
Subsequent events are events which occur after the balance sheet dat
This involves
• Review how management assess subsequent events and ask if any have been foun
232 aCOWtancy.com
:
fi
w
fl
t
Subsequents Event
Subsequent events are events which occur after the balance sheet date that may have
an effect on the nancial statements
The auditor is required under ISA 560 to perform a subsequent events review. The types
of procedure this entails are
• Review of post year end management accounts, budgets and cash ow forecasts
• Check post year-end cash received to ensure receivables are received and net
realisable value of inventory
233 aCOWtancy.com
fi
.
fi
.
fl
.
(and yes I know it's obvious you amoooosing monkey head, but I don't make this syllabus
up!
Adjusting
Events which require the FS to be adjusted to provide a ‘true and fair view
Non-Adjusting
Events which do not require the FS to be adjusted to provide a ‘true and fair view
Adjusting Event
1. These provide additional evidence relating to conditions existing at the balance sheet
dat
2. An example is:
Inventory sold after the year end below cost
This provides evidence that the valuation of inventory at the Y/E was incorrect
234 aCOWtancy.com
)
fi
s
Non-Adjusting Event
235 aCOWtancy.com
fi
s
fi
Syllabus E2: Going concern
Syllabus E2a) Define and discuss the significance of the concept of going concern.
Going concern is de ned under IAS 1 as the assumption that the company will continue
in operational existence for the foreseeable futur
1. Foreseeable Futur
2. Use of Judgemen
GC involves the use of judgement on the basis of the information available at the
tim
3. Break up basis
This is when GC basis is not appropriate
236 aCOWtancy.com
e
fi
(
fi
t
fi
n
Syllabus E2b) Explain the importance of and the need for going concern reviews.
If the auditor gave the opinion that the nancial statements represented a true and fair
view without considering the going concern assumption and the business went bust shortly
after, the auditor may be held to account
237 aCOWtancy.com
fi
fi
.
fi
Director's Responsibilit
• They should use a suitable basis on which to base the going concer
The directors should have a suitable basis on which to base the going concern assumption
using information on sources of nance, future pro tability and repayment of debt
• Disclosur
If the directors have any material uncertainties as to the going concern of the business
they must disclose them in the nancial statements
Auditors Responsibilit
• If there are going concern issues, the auditor must ensure that suf cient disclosures are
made
At least 12 months
Auditor Responsibility Decide if management are right to use going
concern statu
238 aCOWtancy.com
e
fi
fi
fi
fi
.
fi
n
Syllabus E2d) Identify and explain potential indicators that an entity is not a going
concern.
239 aCOWtancy.com
fl
fi
s
fl
s
240 aCOWtancy.com
:
fi
fl
e
Syllabus E2f) Discuss the disclosure requirements in relation to going concern issues.
and
Syllabus E2g) Discuss the reporting implications of the findings of going concern
reviews.
If the going concern basis is appropriate for the nancial statements then the auditors do
not need to mention it in their report
If the going concern basis is appropriate for the nancial statements but a material
uncertainty exists
If the auditor decides that the going concern basis is inappropriate then they will give an
adverse audit opinion unless management agree to alter the nancial statements as they
do not give a true and fair view
241 aCOWtancy.com
fi
:
fi
.
fi
fi
fi
fi
g
Syllabus E3a) Explain the purpose of and procedure for obtaining written
representations.
Management Representation
The auditor may ask management to con rm in writing matters which have
arisen during the audi
The ISAs require the auditor to obtain management representations on certain speci c
issue
For exampl
242 aCOWtancy.com
s
fi
:
fi
:
fi
fi
What goes into the letter
The whole idea of getting a management letter is to ensure evidence is suf cien
In some ways - the idea is that if management are going to lie to us - then better they lie to
us in writing! This saves us a little in auditor negligence case
But always remember management representations ONLY are never suf cient - always
back up with other evidenc
4 Step
243 aCOWtancy.com
s
fi
fi
.
fi
fi
t
Syllabus E3b) Discuss the quality and reliability of written representations as audit
evidence.
Management representations are not independent evidence and therefore will not be
100% reliable
The auditor must make a judgement as to whether the management are competent and of
suf cient integrity so as to place reliance on their representations
The auditor may also consider whether conditions are such that management may feel
under pressure and thus more susceptible to concealing the truth.
Potential Problem
244 aCOWtancy.com
fi
Syllabus E3c) Discuss the circumstances where written representations are necessary
and the matters on which representations are commonly obtained.
This is basically when other forms of evidence just aren’t available e.g
245 aCOWtancy.com
fi
Syllabus E4a) Discuss the importance of the overall review in ensuring that sufficient,
appropriate evidence has been obtained.
Final Revie
ISA 220 sets out that the quality review should consider the planning, supervision and
review of the audit in determining whether quality standards have been met
During the audit it is likely that the auditor will come across errors in the nancial
statements.
The auditor should keep a list of these throughout the audit and report them to
managemen
The 4 Review
246 aCOWtancy.com
fi
.
3. Documentation Revie
247 aCOWtancy.com
?
fi
w
fl
m
Syllabus E4b) Describe procedures an auditor should perform in conducting their overall
review of financial statements.
2. Reviewing accounting policy disclosure - checking they agree with the accounting
treatment adopted and are suf ciently disclose
3. Reviewing consistency of FS with the auditor’s knowledge of the business and the
results of their audit wor
6. Assess whether the audit evidence gathered by the team is suf cient and appropriate
to support the audit opinio
248 aCOWtancy.com
fi
k
fi
s
fi
Syllabus E4c) Explain the significance of uncorrected misstatements.
Evaluation of Misstatement
Misstatements aren't just monetary gures, they could also be incorrect classi cation or
disclosure
Evaluating Misstatement
This is to ensure that no management bias exists in the decision taken on what constitutes
an ‘immaterial misstatement
Management must also provide written representations that all uncorrected errors are
immateria
249 aCOWtancy.com
t
fi
s
fi
e
fi
t
fi
t
Syllabus E5a) Identify and describe the basic elements contained in the independent
auditor’s report
1. Opinio
This is the rst section.
It identi es also what has been audite
If the audit opinion has been modi ed, the explanation would be here to
fi
fi
)
fi
fi
d
States audit evidence is suf cient and appropriate to provide a basis for the auditor’s
opinio
7. Other informatio
Describes the auditor’s responsibilities for “other information” (e.g., the rest of the
annual report), and the outcome
9. Auditor’s responsibilitie
Includes a description of the auditor’s responsibilities with respect to going concer
251 aCOWtancy.com
n
fi
fi
s
fi
s
fi
.
These key matters would be selected from the matters the auditor sends to those charged
with governanc
Independence
An explicit statement about the auditor’s independence and other relevant ethical
requirement
Engagement partner
Explicitly state the name of the engagement partne
Prominence of opinion
Placed at the beginning of the repor
Ordering
A preferred (not mandatory) ordering of the items in the repor
Going concern
Explicitly reported on, including the appropriateness of management's use of the going
concern basis and any material uncertainties identi e
Auditor responsibilities
Some responsibilities could be moved to an appendix, or referenced to a website of an
appropriate authorit
252 aCOWtancy.com
s
fi
t
fi
r
1. Possibly unnecessary where such matters are already in the Annual Report by those
charged with Governanc
2. Whats the difference between an Emphasis of Matter and a Key Audit Matter
It is not a requirement of auditing standards but it has become increasingly common for
audit rms to include a disclaimer paragraph within the audit report
It states the fact that the auditor’s report is intended solely for the use of the company’s
member, and that no responsibility is accepted or assumed to third parties
1. Advantages:
– Potential to limit liability exposure
– Clari es extent of auditor’s responsibility
– Reduces expectation gap
– Manages audit rm’s risk exposur
2. Disadvantages:
– Each legal case assessed individually – no evidence that a disclaimer would offer
protection in all cases
– May lead to reduction in audit qualit
253 aCOWtancy.com
fi
fi
fi
e
Audit Opinio
If the auditor disagrees with some aspect of the nancial statements or is unable to state
that they provide a true and fair view, then a modi ed audit report will be issue
Emphasis of matte
• If the auditor wishes to draw attention to a particular matter, but agrees with the nancial
statements an ‘emphasis of matter’ paragraph will be included in the audit report
• The matter referred to will be fully disclosed in the accounts and the auditor is simply
drawing the users’ attention to it
• The paragraph will make it clear that the opinion is not quali ed and will be given a
separate heading after the opinion paragraph.
• If it’s also a KAM then it simply gets shown as a KAM instea
Examples
Signi cant subsequent event; New IFRS adopted earl
254 aCOWtancy.com
fi
fi
fi
:
fi
r
fi
.
fi
fi
y
fi
d
fi
.
Quali ed Report
There are two reasons that an auditor may qualify an audit report
1. Disagreemen
2. Insuf cient Evidenc
Disagreemen
A quali ed report for the reason of disagreement will be issued if the auditor disagrees with
the application of accounting policies, the policies used, treatment of a particular item or
the adequacy of disclosure
This will mean that the auditor agrees with the rest of the nancial statements, but
disagrees with that particular element of them
In this situation the auditor will qualify the audit with an ‘except for’ paragraph i.e. In our
opinion, except for the effect on the nancial statements of the matter referred to in the
preceding paragraph, the nancial statements give a true and fair view
A disagreement which is material and pervasive is of such signi cance that the
nancial statements do not give a true and fair view
255 aCOWtancy.com
fi
fi
fi
fi
t
fi
s
fi
n
fi
fi
:
Adverse opinion
In such a situation an adverse opinion is issued i.e. the nancial statements do not give
a true and fair view
If the auditor is unable to form an opinion, then the report will be quali ed for Insuf cient
Evidenc
Insuf cient Evidence will be due to being unable to obtain suf cient evidence which should
have been available
A material insuf cient evidence will mean that the auditor agrees with the rest of the
nancial statements, but is unable to agree with that particular element of the
In this situation the auditor will qualify the audit with an ‘except for’ paragraph i.e. In our
opinion, except for the matter referred to in the preceding paragraph, the nancial
statements give a true and fair vie
256 aCOWtancy.com
fi
fi
fi
e
fi
.
fi
e
fi
fi
fi
fi
m
fi
• Material & Pervasive - Disclaimer of opinio
Insuf cient evidence which is material and pervasive is of such signi cance that auditor
is unable to state whether the nancial statements give a true and fair vie
Disclaimer of Opinion
In such a situation a disclaimer of opinion is issued i.e. the auditors do not express an
opinion on the nancial statement
257 aCOWtancy.com
fi
fi
fi
s
fi
w
Syllabus E5d) Describe the format and content of key audit matters, emphasis of matter
and other matter paragraphs.
Emphasis of Matte
Other Matter
This refers to anything else the auditor may wish to bring to the users attentio
Where does it go? Normally before KAM (but can go After the KAM paragraph
after)
Key points? Highlights the matter in the FS by The effect on the auditor's
reference to its page or note responsibilities
number
258 aCOWtancy.com
s
fi
r
fi
S
fi
d