ACCA
Paper AAA
Advanced Audit and
Assurance
Lecture support notes by
Alan Biju Palak
Preface
This lecture support note is not an official publication by ACCA and this is not
meant for any type of commercial purposes. The objective of this lecture note is to
provide my students and friends with a concise note to crack down paper AAA,
Advanced Audit and Assurance
The book contains definitions and explanations from multiple sources including
both online and offline resources. This is a summarised presentation of the subject
content from various publishers and this note must be used only for revision
purpose and is not a substitute for complete textbook.
In order to get in-depth idea and more elaborated explanations on each of the
topics, a student is advised to attend the lecturing sessions too.
Alan Biju Palak
(ACCA Affiliate)
alanbiju31@gmail.com
Facebook / Alan Biju Palak
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ACCA AAA
ACCA AAA
Section A
Planning
Risk assessment
Gathering evidence
Ethical and professional considerations
Professional marks 4
Section B
Lecture support notes by Alan Biju Palak
-
(50 Marks)
(50 Marks)
- Completion, review and reporting (25 Marks)
- Any area of the syllabus from: (25 Marks)
• Regulatory environment
• Ethical and professional considerations
• Quality control and practice management
• Planning and conducting an audit of historical information
• Other assignments
Kindly note that, this note doesn’t contain an index page as the order of
the areas and topics will be on the basis of the relevant lecturing
sessions.
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Money laundering
Money laundering is the process by which criminals attempt to conceal the true origin and
ownership of the proceeds generated by illegal means, allowing them to maintain control
over the proceeds and, ultimately, providing a legitimate cover for their sources of
income.
Money laundering involves 3 main stages:
(1) Placement
(3) Integration
Offences
There are five basic money laundering offences:
• Acquiring, possession or use of criminal property.
• Concealing or disguising or transferring criminal property, or removing it from the
country.
• Failure to disclose knowledge or suspicion of money laundering.
• Tipping off.
• Failure by a financial services business to meet their obligations under money
laundering regulations.
'Tipping off' means to carry out any action that may make suspected money launderers
aware that they are under investigation, or prejudicing the outcome of an investigation.
Failure to disclose knowledge or suspicion of money laundering may include:
•
Failure by an individual in the regulated sector to inform the Financial
Intelligence Unit (FIU) or the firm's Money Laundering Reporting Officer
(MLRO), as soon as practicable, of knowledge or suspicion that another person is
engaged in money laundering, or
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Lecture support notes by Alan Biju Palak
(2) Layering
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Failure by MLROs in the regulated sector to make the required report to the FIU
as soon as practicable if an internal report leads them to know or suspect that a
person is engaged in money laundering.
Anti-money laundering program: basic elements
• Money laundering and terrorist financing risk assessment.
• Compliance with customer due diligence, enhanced due diligence and simplified
due diligence requirements.
• Enhanced record keeping and data protection systems, policies and procedures
Firms must appoint a Money Laundering Compliance Principal (MLCP) and Money
Laundering Reporting Officer (MLRO), to receive internal suspicious activity reports and
assess whether a suspicious activity report should be made to the appropriate regulatory
body.
Customer due diligence ensures that accountants:
•
know who their clients are, and
•
do not unknowingly accept clients which are too high risk.
Enhanced due diligence procedures include examining the background and purpose of
the transaction and increased monitoring of the business relationship.
And for the clients presenting a lower risk for money laundering, simplified due diligence
may be carried out.
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Lecture support notes by Alan Biju Palak
• Implementation of systems, policies, controls and procedures that effectively
manage the risk that the firm is exposed to in relation to money laundering activities
and ensure compliance with the legislation.
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ACCA AAA
Enhanced records must be kept of:
• All customer due diligence completed, including copies of the evidence inspected.
• Transactions with each client.
• Internal and external money laundering/suspicious activity reports.
Records must be held for five years after a relationship with a client has ended or the date
a transaction is completed.
•
A person in the organisation is nominated to receive disclosures (usually an
MLRO).
•
Anyone in the organisation, to whom information comes in the course of the
relevant business as a result of which he suspects that a person is engaged in
money laundering, must disclose it to the MLRO.
•
Where a disclosure is made to the MLRO, they must consider it in the light of any
relevant information which is available to the organisation and determine whether
it gives rise to suspicion.
•
Where the MLRO does so determine, the information must be disclosed to a
regulatory body authorised for the purposes of these regulations (the FIU), such as
the NCA in the UK.
•
The MLRO completes a standard form that identifies:
– the suspect’s name, address, date of birth and nationality
– any identification or references seen
– the nature of the activities giving rise to suspicion
– any other information that may be relevant.
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Lecture support notes by Alan Biju Palak
Reporting
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Ethical guidance on money laundering
ACCA Code of Ethics and Conduct in the area of money laundering is needed
because there is a clear conflict between:
(1) the accountant’s professional duty of confidentiality in relation to his client’s business,
and
Professional accountants are not in breach of their
professional duty of confidentiality if they report in good faith their knowledge or
suspicions of money laundering to the appropriate authority.
Disclosure in bad faith or without reasonable grounds would possibly lead to the
accountant being sued.
It may be helpful to inform clients of the auditor's responsibilities to report knowledge or
suspicion that a money laundering offence has been committed and the restrictions
created by the 'tipping off rules on the auditor's ability to discuss such matters with their
clients.
…..
The Financial Action Task Force (FATF) is an international body that promotes policies
globally to combat money laundering and terrorist financing.
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Lecture support notes by Alan Biju Palak
(2) the duty to report suspicions of money laundering to the appropriate authorities is
required by law.
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ACCA AAA
ACCA Code of Ethics and Conduct -IFAC
Fundamental principles
! Integrity
! Confidentiality
! Objectivity
! Professional behaviour
! Professional competence and due care
• Objectivity: Members should not allow bias, conflicts of interest or undue influence of
others to override professional or business judgments.
• Professional competence and due care: Members have a continuing duty to maintain
professional knowledge and skill at a level required to ensure that a client or employer
receives competent professional service based on current developments in practice,
legislation and techniques. Members should act diligently and in accordance with
applicable technical and professional standards when providing professional services.
• Confidentiality: 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 and specific authority or unless there is a
legal or professional right or duty to disclose. Confidential information acquired as a
result of professional and business relationships should not be used for the personal
advantage of members or third parties.
• Professional behaviour: Members should comply with relevant laws and regulations
and should avoid any action that discredits the profession.
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Lecture support notes by Alan Biju Palak
• Integrity: Members should be straightforward and honest in all professional and
business relationships.
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Threats to professional ethics
Lecture support notes by Alan Biju Palak
1. Self-interest threat
2. Self-review threat
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Lecture support notes by Alan Biju Palak
3. Advocacy threat
4. Familiarity threat
5. Intimidation threat
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Management threat. A firm must not assume management responsibilities as part of
an assurance engagement or for an audit client as this may create a threat to
independence.
Factors affecting the significance of the threat include:
• Value – e.g. when considering gifts and hospitality.
• Seniority of staff – e.g. when considering rotation of staff.
Lecture support notes by Alan Biju Palak
• Impact to the audit firm – e.g. when considering fee dependency.
• Materiality to the financial statements – e.g. when considering whether a non-audit
service can be provided.
Safeguards
• Discussing matter with the clients audit committee/ TCWG
• Removing the particular individual from the audit team
• Obtaining external review of the work done
• Rotate the senior personnel in case of familiarity
• Separate teams may be used to avoid self review threat
• Maintain professional skepticism throughout out the engagement
• Seeking advice from professional bodies.
• Maintaining organisational code of conduct.
• Request for services should be politely declined.
• The member must dispose of the interest immediately.( Owning shares/ financial
interest)
• Consider resigning from the engagement.
Auditing multiple entities in the competing market
• Companies which compete in the same market
• The companies which trade with each other
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ACCA AAA
In order to ensure that conflict of interest may not create threats to objectivity and
confidentiality, the firm must notify all affected clients of the conflict and obtain their
consent to act.
The following additional safeguards should be considered:
• Separate engagement teams (with different engagement partners and team
members).
• Procedures to prevent access to information
• Signed confidentiality agreements by the engagement team members.
• Regular review of the application of safeguards by an independent person of
appropriate seniority.
If adequate safeguards cannot be implemented the firm must decline or resign from one
or more conflicting engagements.
Current issues: Long Associations
For a period of more than 7 cumulative years
(a) The engagement partner
(b) Engagement quality control review
(C) Any other key audit partner role.
Cool-off period
Role
Period Served
Cooling-off period
Engagement Partner
7 Years
5 Years
Engagement Quality Control
Reviewer
7 Years
3 Years
Key Audit Partner
7 Years
2 Years
Engagement Partner + Key Audit
Partner
4 or More Years
5 Years
Engagement Quality Control
Reviewer+ Key Audit Partner
4 or More Years
3 Years
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Lecture support notes by Alan Biju Palak
• Advise the clients to seek independent advice.
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ACCA AAA
Role
Engagement Partner +
Engagement Quality Control
Reviewer
Period Served
Cooling-off period
4 or More Years
5 Years
If the individual has served the audit client as a key audit partner for period of five
cumulative years or less when the client becomes a public interest entity, the number of
years the individual may continue to serve the client in that capacity before rotating off
the engagement is seven years less the number of years already served.
And incase if the partner served a period of six or more cumulative years, maximum of
two additional years before rotating off the engagement.
If an independent regulator in the relevant jurisdiction has provided an exemption from
partner rotation in such circumstances, an individual remain a key audit partner for more
than seven years.
Exam approach on ethical threats
• Identification of threat
• Explanation of the threat
• Evaluation of the significance of the threat
• Safeguards
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Lecture support notes by Alan Biju Palak
Audit client becomes a public interest entity
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ACCA AAA
Audit Strategy
Scope:
!engagement characteristics;
!reporting objectives;
!significant engagement factors;
!preliminary activity results; and
!the resources needed.
Timing of when to deploy resources;
Management, direction and supervision
of resources.
Lecture support notes by Alan Biju Palak
Audit Planning
Audit Planning
Nature, timing and extent of risk
assessment procedures;
Nature, timing and extent of further
audit procedures, including:
•what audit procedures,
•who should do them;
•how much should be done; and
•when the work should be done.
Other necessary procedures.
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Risk of misstatement
ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment states that the auditor should adopt a risk
based approach to the audit.
ISA 330 The auditor's responses to assessed risks states that the objective of the auditor is
to 'obtain sufficient, appropriate audit evidence regarding the assessed risks of material
misstatement, through designing and implementing appropriate responses to these
risks' (ISA 330: para. 3).
Overall responses include emphasising to the audit team the need for professional
scepticism, assigning additional/alternative staff to the audit, using experts, providing
more supervision on the audit and incorporating more unpredictability into the audit (ISA
330: para. A1).
The evaluation of the control environment that will have taken place as part of the
assessment of the client's internal control systems will help the auditor determine whether
they are going to take a substantive approach (focusing mainly on substantive
procedures) or a combined approach (tests of control and substantive procedures) (ISA
330: para. A3).
Risk assessment
ISA 315 (Revised) Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment requires auditors to perform the following
(minimum) risk assessment procedures:
•
Enquiries with management
•
Analytical procedures to identify trends/relationships that are inconsistent with
other relevant information or the auditor's understanding of the business.
•
Observation
•
Inspection
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Lecture support notes by Alan Biju Palak
"The objective of the auditor is to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and
assertion levels, through understanding the entity and its environment, including the
entity's internal control, thereby providing a basis for designing and implementing
responses to the assessed risks of material misstatement."
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Types of risk
Audit risk
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated.
Audit risk is a function of the risk of material misstatement and detection risk.
Audit risk = Inherent risk × Control risk × Detection risk
ISAs require the auditor to obtain reasonable assurance about
whether the financial statements as a whole are free from material misstatement by
obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low
level.
Components of audit risk
Inherent risk is the susceptibility of an assertion about a class of transaction, account
balance or disclosure to a misstatement that could be material, either individually or when
aggregated with other misstatements, before consideration of any related controls.
Control risk is the risk that a misstatement that could occur in an assertion about a class
of transaction, account balance or disclosure and that could be material, either
individually or when aggregated with other misstatements, will not be prevented, or
detected and corrected, on a timely basis by the entity's internal control.
Detection risk is the risk that the procedures performed by the auditor to reduce audit risk
to an acceptably low level will not detect a misstatement that exists and that could be
material, either individually or when aggregated with other misstatements.
(ISA 200: para. 13)
The only way in which an auditor can reduce the overall audit risk is by adjusting the
detection risk.
Business Risk
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Lecture support notes by Alan Biju Palak
Risk of material misstatement = Inherent risk × Control risk
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ACCA AAA
Business risk is the risk resulting from significant conditions, events, circumstances,
actions or inactions that could adversely affect the entity's ability to achieve its objectives
and execute its strategies, or from the setting of inappropriate objectives and strategies.
(ISA 315: para. 4)
Business risk may be split into three components:
• Financial risks
• Operational risks
• Compliance risk
Risk of material misstatement is the risk the financial statements are materially misstated
(either due to fraud or error), prior to the audit.
•
When evaluating the risk of material misstatement it is crucial to discuss the
specific impact of the risk on the financial statements, i.e.
•
the specific account balance, transaction or disclosure affected
•
whether the item might be overstated, understated, omitted, inappropriately
recognised, etc.
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Lecture support notes by Alan Biju Palak
Risk of material misstatement
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ACCA AAA
Tendering
Tendering is the process of quoting a fee for work before the work carried out.
Contents of the proposal
• the fee and how it has been calculated
• an outline of the firm and its personnel
• the nature, purpose and legal requirements of an audit
• an outline of how the audit firm proposes to satisfy those requirements
• the assumptions made, e.g. on geographical coverage, deadlines, work done by
client, availability of information, etc.
• the proposed approach to the audit or audit methodology
• quality control procedures of the firm including those relevant to the engagement
• the ability of the firm to offer other services.
Reasons for changing auditors
Reduce audit fee
Company policy of rotation
Disputes over FR matters
Size of firm
Independence issues
Appointment of a group auditor
Firm has stopped offering audit
services
Dissatisfied with Auditors work
Audit firm ceases trading
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Lecture support notes by Alan Biju Palak
• an assessment of the requirements of the client
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ACCA AAA
Advertising and publicity
The ACCA Rulebook (Sec 250) states that it is acceptable in principle for ACCA
members to advertise their services, but there is a general provision that the advertising
must not reflect adversely on:
• the member
• the ACCA, or
• the accountancy profession as a whole.
Restrictions on practice names and descriptions
•
Members of the ACCA are entitled to call themselves Chartered Certified
Accountants or just Certified Accountants, and may use the letters ACCA (as
members) or FCCA (if they are fellows).
•
These descriptions may not be used in the registered names of companies. For
example you may not set up a company called John Smith Certified Accountant
Ltd.
Practicing description
•
•
An accountancy firm may describe itself as a ‘firm of Chartered Certified
Accountants’, or a ‘firm of Certified Accountants’, or an ‘ACCA practice’ provided
that:
•
– at least half of the partners (or directors) are ACCA members, and
•
– these partners (or directors) control at least 51% of the voting rights under
the firm’s partnership agreement (or constitution).
A firm in which all partners are ACCA members may use the description ‘Members
of the Association of Chartered Certified Accountants’ on its professional
stationery .
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Lecture support notes by Alan Biju Palak
The aim of adverts should be ‘to inform, rather than impress’.
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In the case of a mixed firm, the firm should not use the description ‘Certified
Accountants and Chartered Accountants’ or similar, since this could be misleading.
Instead they may print the following statement on their stationery: ‘The partners of
this firm are members of either the ACCA or (e.g.) the ICAEW
•
A firm that has at least one ACCA member as a partner (or director) may use the
ACCA logo (also called the ACCA ‘mark’) on its professional stationery and on its
website.
•
The ACCA logo should be separate from the logo of the firm.
•
The positioning, size and colour of the ACCA logo should be chosen so that it is
clearly recognisable.
•
The logo can be downloaded by members from the ACCA website in electronic
format.
Name of Practicing firms
•
a practice name should be consistent with the dignity of the profession.
•
a practice name should not be misleading
•
a practice name should not run the risk of being confused with the name of another
firm.
•
a sole practitioner should not add ‘and partners’ to the name under which he
practices.
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Lecture support notes by Alan Biju Palak
Use of the ACCA logo
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Fees
• Members are entitled to charge a fair and reasonable fee for their services.
• The fee charged should include the recovery of any expenses properly incurred by
the audit staff in the course of the engagement.
Therefore they cost of providing service should always be considered.
Members are entitled to charge a fair and reasonable fee for their services. This
amount will be:
– the fee considered appropriate for the work undertaken
– the fee in accordance with the basis agreed with the client
– the fee by reference to custom in certain specialised areas.
Members will usually consider the following matters in setting a fee:
–
–
–
–
–
–
the seniority of the persons necessarily engaged on the work
the time spent by each person
the degree of risk and responsibility that the work entails
the urgency of the work to the client
the importance of the work to the client
the overhead expenses of the firm.
The ACCA’s position is that fees should not be charged on a percentage, contingency or
similar basis, low balling and referral fees are also not encouraged.
Alternatively, the accountancy firm can set an hourly rate for each grade of staff and
invoice the client for the number of hours involved in the assignment.
A firm may quote whatever fee is deemed appropriate however, the firm must always
ensure that the work is performed in accordance with professional standards and that the
audit team have the appropriate expertise and experience taking into consideration the
nature, size and complexity of the audit engagement. There for the the quality of the
engagement should not be reduced.
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Lecture support notes by Alan Biju Palak
Factors to consider
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Engagement letter
•
The objective and scope of the audit of the financial statements
•
The responsibilities of the auditor
•
The responsibilities of management
•
Identification of the applicable financial reporting framework for the preparation of
the financial statements
•
Reference to the expected form and content of any reports to be issued by the
Where the auditor of a parent company is also the auditor of a subsidiary, branch or
division of the group, the audit firm must decide whether to issue a single engagement
letter covering all the components, or a separate letter to each component.
If the audit firm sends one letter relating to the group as a whole, it is
recommended that the firm should identify in the letter the components of the group for
which the firm is being appointed as auditor.
Transfer of information
- Once a new accountant has been appointed, or on otherwise ceasing to hold, Office, the
outgoing firm should return all books and papers belonging to the former client which
are in the former accountant's possession, whether the new accountant or the client has
requested them or not, except where the former accountant claims to exercise a lien or
other security over them in respect of unpaid fees.
- In order to ensure continuity of treatment of a client's affairs, the outgoing firm should
provide the new accountant with all reasonable transfer information (last set of
approved accounts and detailed trial balance) that the new accountant requests, free of
charge.
- Any information in addition to the reasonable transfer information is provided purely at
the discretion of the former accountant, who may render a charge to the person
requesting the information.
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Lecture support notes by Alan Biju Palak
auditor.
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ISQC 1 Quality Control for Firms that Perform
Audits and Reviews of Financial Statements, and
Other Assurance and Related Services
Engagements
• Leadership: Firms must establish policies and procedures to promote an internal
culture that recognises the importance of quality in performing engagements
• Ethics: Firms comply with ethical requirements such as the Code of Ethics.
• Acceptance and continuance: Only suitable clients and engagements are accepted
and retained.
• Human resources: A firm must have policies and procedures in place to ensure an
appropriate engagement partner is assigned to an engagement.
The engagement partner should then ensure the right people are
allocated to the engagement team.
• Engagement performance: Firms must design policies and procedures to ensure
engagements are performed to a satisfactory standard. Policies and procedures
should cover:
- Matters relevant to promoting consistency in the quality of engagements.
- Supervision responsibilities.
- Review responsibilities.
• Monitoring: Evaluating the quality control procedures to ensure they are effective.
Therefore proper monitoring should be performed to ensure -
- Quality control procedures and practices are adequate
- Quality control procedures and practices are relevant
- Quality control procedures and practices operating effectively
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Lecture support notes by Alan Biju Palak
ISQC 1 identifies six key principles:
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Engagement quality control review
Listed entities and other high risk clients should be subject to an engagement quality
control review (EQCR). This is also referred to as a pre- issuance review or 'Hot'
review.
•
Discussion of significant matters with the engagement partner.
•
Review of the financial statements and the proposed report.
•
Review of selected engagement documentation relating to significant judgments
the engagement team made and the conclusions reached. This includes:
•
– Significant risks and responses to those risks
•
– Judgments with respect to materiality and significant risks
•
– Significance of uncorrected misstatements
•
– Matters to be communicated to management and those charged with
governance, and where applicable, other parties such as regulatory bodies.
•
Evaluation of conclusions reached in formulating the report and consideration of
whether the proposed report is appropriate.
•
The engagement team's evaluation of the firm's independence.
•
Whether appropriate consultation has taken place on matters involving
differences of opinion and the conclusions of those consultations.
•
Whether documentation selected for review reflects work performed in relation to
significant judgments and supports the conclusions reached.
The engagement quality control reviewer should have the technical qualifications to
perform the role, including the necessary experience and authority, and should be
objective.
To be objective the reviewer should not be selected by the engagement
partner and should not participate in the engagement.
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The EQCR should include:
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Lecture support notes by Alan Biju Palak
Types of engagement quality control review
Approach to exam
In order to assess the quality of the audit you should consider factors
• Have ISAs been followed?
• Has the work been allocated to the appropriate level of staff?
• Has the audit been time pressured?
• Has the appropriate type of evidence been obtained?
• Has the audit been performed in accordance with the audit plan?
• Has the audit been properly supervised and reviewed?
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Professional liability
Liability to client
Liability to the client arises from contract law. The company has a contract with the
auditor, the engagement letter, and hence can sue the auditor for breach of contract if the
auditor delivers a negligently prepared auditor's report.
•
– When carrying out their duties the auditor must exercise due care and skill.
– Generally, if auditors can show that they have complied with generally accepted
auditing standards, they will not have been negligent.
Liability to third parties
A third party (i.e. a person who has no contractual relationship with the auditor) may sue
the auditor for damages, i.e. a financial award.
In the tort of negligence, the plaintiff (i.e. the third party) must prove that:
•
•
•
the defendant (i.e.the auditor)owes a duty of care, and
the defendant has breached the appropriate standard of care as discussed above, and
the plaintiff has suffered loss as a direct result of the defendant’s breach.
The auditor will have exercised due professional care if they are
adequately trained, complied with the terms and conditions of the engagement and
complied with the most upto date professional standards and ethical requirements.
Restricting auditors liability
•
Restrict the use of the auditor's report and assurance reports to their specific,
intended purpose.
•
Engagement letter clause to limit liability to third parties.
•
Screening potential audit clients to accept only clients where the risk
can be managed.
•
Take specialist legal advice where appropriate.
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Lecture support notes by Alan Biju Palak
•
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ACCA AAA
•
Respective responsibilities and duties of directors and auditors communicated in
the engagement letter and auditor's report to minimise misunderstandings.
•
Insurance
•
Carry out high quality audit work.
•
Take on LLP status.
•
Set a liability cap with clients.
Professional indemnity insurance (PII) is insurance taken out by an accountant
against claims made by clients and third parties arising from work that the
accountant has carried out.
Fidelity guarantee insurance (FGI) is insurance taken out by an accountant
against any liability arising through acts of fraud or dishonesty by any partner or
employee in respect of money or goods held in trust by the accountancy firm.
The expectation Gap
The expectation gap is the gap between what the public believe that auditors do (or ought
to do) and what they actually do.
This expectation gap can be categorised into:
•
Standards and performance gap – where users believe auditing standards
to be more comprehensive than they actually are and therefore the auditor
does not perform the level of work the user expects.
•
Liability gap – where users do not understand to whom the auditor is
legally responsible
Bridging the expectation gap
• Educating users to reduce the standards gap
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Lecture support notes by Alan Biju Palak
- Insurance
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Lecture support notes by Alan Biju Palak
• Increasing communication between the auditor and those charged with governance
regarding respective responsibilities of the company and the audit firm.
• Increasing the scope of the work of the auditor.
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Group and Transnational audits
The auditor with the responsibility for reporting on the consolidated group financial
statements (as well as the parent company financial statements) is referred to as the group
auditor.
The related subsidiaries, associates, joint ventures and branches etc of the group are referred
to as components.
- Objectives of an auditor
ISA 600 Special Considerations – Audits of Group Financial Statements (Including the
Work of Component Auditors) as follows:
•
•
To determine whether it is appropriate to act as the auditor of the group financial
statements, and
If acting as the auditor of the group financial statements:
– To communicate clearly with the component auditors about the scope and
timing of their work on financial information related to components and their
findings.
– To obtain sufficient appropriate evidence regarding the financial
information of the components and the consolidation process to express an opinion
on whether the group financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework.
The group auditor is responsible for establishing an overall group audit strategy and plan
(in accordance with ISA 300 Planning an Audit of Financial Statements). The group
engagement partner is ultimately responsible for reviewing and approving this.
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Lecture support notes by Alan Biju Palak
The audit firms responsible for the audits of the components are referred to as the
component auditors.
Draft
ACCA AAA
- Factors to consider before acceptance as a group auditor
• Whether sufficient appropriate audit evidence can reasonably be expected to be
obtained in relation to the consolidation process and the financial information of the
components of the group.
• Where component auditors are involved, the engagement partner shall evaluate
whether the group engagement team will be able to be involved in the work of the
component auditors.
- Factors to consider before acceptance as a component
auditor
•
•
•
•
•
Ethical requirements applicable to the group audit.
Specific competence requirements
Applicable auditing standards
Financial reporting framework applicable to the group.
Whether they can comply with the group audit team instructions including the
deadlines.
• Whether they are willing to have the group auditor involved in their work and
evaluate it before relying on it for group audit purposes.
- Materiality for the group audit
The group auditor is responsible for establishing:
• Materiality and performance materiality for the financial statements as a whole.
• Materiality for the components should be set at a an amount below the materiality for
the group as a whole.
Significant components
A significant component is a component identified by the group engagement team that is
either: of individual significance to the group, or likely to include significant risks of
material misstatement to the group financial statements. [ISA 600, 9m]
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Lecture support notes by Alan Biju Palak
(ISA 600,12)
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A significant component is identified by using an appropriate benchmark such s assets,
liabilities, cash flows, profit, revenue.
The benchmark is a matter of auditor judgment. [ISA 600, A5] ISA 600 gives an example
that an auditor may consider a component to significant if it exceeds 15% of the chosen
benchmark, however a different auditor may use a higher or lower amount.
For components individually significant to the group a full audit must be performed. [ISA
600, 26]
If the audit of a significant component is to be performed by another auditor then the
group auditor should be involved in the component's risk assessment [ISA 600, 30] This
includes :
• Discussing with the component auditor the susceptibility of the component to material
misstatement. [ISA 600, 30b]
• Reviewing the component auditor's documentation of identified risks of material
misstatement. [ISA 600, 30c]
• Performing risk assessment procedures themselves. [ISA 600, 31]
Components which include significant risks of material
misstatement
Where the component is significant because there is a significant risk of perform: material
misstatement to the group financial statements, the auditor can
• An audit of the component's financial statements.
• An audit of one or more account balances which are considered to be a significant risk.
• Specified audit procedures relating to the significant risks. [ISA 600, 27]
Components which are not significant
Analytical procedures (rather than a full audit) may be performed on components which
are not significant. [ISA 600, 28]
- Dealing with non-coterminous year-ends
The difference between the parent and subsidiary's year-end must be no more than three
months. This increases audit risk as there may be transactions and adjustments in the
consolidated financial statements that have not been audited.
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Lecture support notes by Alan Biju Palak
Components which are individually significant to the
group
Draft
ACCA AAA
The group auditor must plan to obtain sufficient appropriate evidence about transactions or
events that have not been subject to audit.
- Completion
The group auditor must review the work of the component auditor to ensure it is sufficient
and appropriate to rely on for the purpose of the group auditor's report.
Reporting
Where one or more of the subsidiaries has a modified auditors report the group auditor must
consider the impact of the issue on the group financial statements, according to the groups
materiality levels.
Deficiencies in the controls identified by either the group audit team or component auditors should
be reported to the management of the group.
Letter of support
If a subsidiary has going concern issues the parent company may offer
financial support to enable it to continue trading for the foreseeable future. If
this is the case the directors must give the component auditor a letter of
support which confirms their intention to support the subsidiary. This is also
known as a comfort letter.
The component auditor should not take this at face value.
They should consider the position of the parent and the group to help
identify whether it has the resources to fulfil its promise of support before
accepting the letter as sufficient appropriate evidence of the going concern
basis for the subsidiary.
The group auditor must consider the impact of the going concern
issues for the group as a whole. The parent company must disclose this
guarantee of assistance in their financial statements.
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Lecture support notes by Alan Biju Palak
Subsequent events, going concern and final analytical procedures will need to
be considered for the group in the same way as they are considered for single entity audits.
ACCA AAA
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Joint Audits
This is when two audit firms are appointed to provide an opinion on a set of financial
statements. They will work together planning the audit, gathering evidence, reviewing the
work and providing the opinion.
Before accepting a joint audit, the firm must consider the level of risk associated with
issuing a report alongside the other firm.
The firm should consider the experience and quality of the other firm to ensure they are
competent.
If accepted, an engagement letter should be signed and the planning can commence which
will involve agreeing an acceptable and fair division of the workload.
Transnational Audits
Transnational audit means an audit of financial statements which may be relied upon
outside the audited entity's home jurisdiction.
Reliance on these audits might be for purposes of significant lending, investment or
regulatory decisions.
The differences between a 'normal' audit, conducted within the boundaries of one set of
legal and regulatory requirements, and a transnational audit are largely due to variations
in:
•
•
•
•
Auditing standards
Regulation and oversight of auditors
Financial reporting standards
Corporate governance requirements.
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Lecture support notes by Alan Biju Palak
The auditor's report will be signed by both firms and they will be jointly responsible if the
report is wrong.
Draft
ACCA AAA
Related Services
Assurance engagements
Review of interim financial statements
Examination of prospective financial information
Social and environmental information review
Due diligence review
Agreed upon procedures
• Forensic audit
• Due diligence
Assurance engagements
An assurance engagement is one in which:
practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion
designed to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the measurement or evaluation of an underlying
subject matter against criteria.
- Elements of an assurance engagement
An assurance engagement performed by a practitioner will consist of the following
elements:
•
(a) A three party relationship. The three parties are the intended user, the
responsible party and the practitioner.
•
(b) A subject matter. This is the data to be evaluated that has been prepared by
the responsible party. It can take many forms, including financial performance.
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Lecture support notes by Alan Biju Palak
•
•
•
•
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•
(c) Suitable criteria. The subject matter is evaluated or measured against criteria
in order to reach an opinion.
•
(d) Evidence. Sufficient appropriate evidence needs to be gathered to support the
required level of assurance.
•
(e) An assurance report. A written report containing the practitioner's opinion is
issued to the intended user, in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.
• An attestation engagement
This is where the underlying subject matter has not been measured or
evaluated by the practitioner, and the practitioner concludes whether or not the subject
matter information is free from material misstatement (ISAE 3000: para.12).
• A direct engagement
This is where the underlying subject matter has been measured and evaluated
by the practitioner, and the practitioner then presents conclusions on the reported outcome
in the assurance report (ISAE 3000: para.12).
Levels of Assurance
Reasonable assurance
The objective of a ‘reasonable assurance engagement’ is to
obtain sufficient appropriate evidence to conclude that the subject matter conforms in all
material respects with identified suitable criteria. The accountant expresses their
conclusion in a positive form, giving an opinion on whether the subject matter is free
from material misstatement.
Negative/limited Assurance
The objective of a ‘limited assurance engagement’ is
to obtain sufficient appropriate evidence to be satisfied that the subject matter 'appears
plausible' in the circumstances. The accountant expresses their conclusion in a negative
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Lecture support notes by Alan Biju Palak
- Types of review engagements
ACCA AAA
Draft
form, stating that their procedures have not identified any material misstatement of the
subject matter.
Review of interim financial statements
Procedures
•
•
•
•
Enquires of relevant parties
Analytical procedures]
Obtaining Written representations
Other review procedures to obtain sufficient appropriate evidence.
Prospective financial information
Prospective financial information (PFI) means financial information based on assumptions
about events that may occur in the future and possible actions by an entity. It may ‘be in
the form of a forecast or a projection, or a combination of both. (ISAE 3400,3)
A forecast is a PFI prepared on the basis of assumptions as to future events that
management expects to take place and the actions management expects to take (bestestimate assumptions).(ISAE 3400,4)
A projection is a PFI prepared on the basis of hypothetical assumptions about future
events and management actions that are not necessarily expected to take place, or a
mixture of best estimate and hypothetical assumptions. (ISAE 3400,5)
The forecast may be either a cash flow forecast or a profit forecast.
Procedures
•
•
•
•
Analytical procedures
Enquiry
Inspection
Written Representation
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Lecture support notes by Alan Biju Palak
'The objective of an engagement to review interim financial information is to enable the
auditor to express a conclusion whether, on the basis of the review, anything has come to
the auditor’s attention that causes the auditor to believe that the interim financial
information is not prepared, in all material respects, in accordance with an applicable
financial reporting framework.' (ISRE 2410-para7)
ACCA AAA
Draft
The review of prospective financial information is usually provided with a
negative assurance.
Social and environmental reporting
and assurance
Monitoring of KPIs enables performance to be evaluated in comparison to
benchmark performance criteria or progress to be compared to the results of competitors.
To generate KPIs for the company, management need to:
• Identify the goals of the organisation in relation to social and environmental matters
• Measure the performance
• Assess whether the goal has been achieved
Impact in audit
A company's social and environmental obligations may lead to liabilities that must be
recognised in the financial statements.
When an auditor realises that his client may have environmental
issues that could impact the financial statements, additional procedure be designed and
carried out to detect any potential misstatements.
Possible areas that might lead to the risk of material misstatements include the following:
• Provisions
• Contingent liabilities, Impairment of asset values
• Accounting for capital or revenue expenditure on cleaning up the production process or
to meet legal or other standards.
• Product redesign costs.
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Lecture support notes by Alan Biju Palak
KPIs or business performance measures are financial and non-financial statistical
measures that are chosen and monitored to determine the strategic performance of an
organisation, including those factors of performance that are critical for the continued
success of the organisation.
ACCA AAA
Draft
• Product viability/going concern considerations.
Planning an engagement
• Understanding and agreeing the scope of the engagement,
• Obtaining an understanding of the entity.
• Evaluating the KPIs to ensure that each measure is quantifiable and to ensure that
evidence will be readily available to support the stated KPI.
• Reviewing and agreeing the KPIs over which assurance is to be provided, flagging
any KPIs that are not specific enough to measure accurately, and over which
assurance can therefore not be provided.
• Identifying the evidence that should be available in relation to each KPI in order to
provide an assurance conclusion.
• Considering the potential for manipulation of each KPI, to achieve the desired result,
i.e. identifying those KPIs which present the highest engagement risk.
Procedures
The same principles for gathering evidence apply for any type of assignment. The
assurance provider should obtain sufficient appropriate evidence to be able to form a
conclusion on the subject matter. Procedures will include:
•
•
•
•
Enquiry of management and experts.
Recalculation of figures to verify arithmetical accuracy.
Inspection of supporting documentation.
External confirmation from third party certification providers.
Problems auditing social and environmental reports
• Accountants lack the specific skills and experience needed to assess many
environmental/social matters.
• There is a significant amount of subjectivity with regard to social and environmental
reports
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Lecture support notes by Alan Biju Palak
• Considering the appropriateness of the KPIs chosen in the light of this
understanding, ensuring the KPIs chosen represent the priorities of the company.
ACCA AAA
Draft
• Evidence may not be sufficient or appropriate for the purposes of providing assurance
• Potential for manipulation
Audit of performance information
in the public sector
Performance audits may include
(1) Performance information
(2) Value for money (economy, efficiency and effectiveness of operations )
(3) Operational audits
Performance information
Performance information is information published by public sector bodies regarding their
objectives and the achievement of those objectives.
The external auditor may have a responsibility to report on
this information to the users of such information.
Planning an audit of performance information
• Obtain an understanding of the information to be reported on including how it is
collected, aggregated, reporting processes, systems and controls.
• Make enquiries with management and staff to obtain an understanding of the data
and how it is processed and reported.
• Establish materiality.
• Examine the processes, systems and controls in place to collect, aggregate and
report the performance information.
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Lecture support notes by Alan Biju Palak
Performance audits aim to provide management with assurance and advice regarding the
effective functioning of its operational activities.
ACCA AAA
Draft
Procedures
Procedures to gather evidence will be the same as for a normal audit:
Reports on performance information may be in the form of reasonable assurance
or limited assurance.
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Lecture support notes by Alan Biju Palak
• Inspection of the supporting documentation for the information.
• Enquiry of management and other personnel within the organisation.
• Perform analytical procedures on the information such as comparison with prior year
or other organisations of a similar size.
• Obtain written representation from management regarding the accuracy and
completeness of the information.
• Recalculation of amounts included in the performance information.
Draft
ACCA AAA
Agreed upon procedures
Agreed upon procedures require the accountant to report on factual findings and hence no
assurance (conclusion) is expressed.
Due diligence
Levels of assurance
• Assurance engagement -Limited assurance
• Agreed upon procedure- No assurance is provided
Procedures
•
Enquiries of relevant parties
•
•
Analytical procedures
Inspection of documents and records.
Forensic audits
Forensic audit refers to the specific procedures within a forensic investigation in order
to obtain evidence, by performing analytical procedures and substantive procedures.
Applications of forensic audit
• Fraud investigations
• Insurance Claims
• Professional negligence
Since the forensic audit is an agreed upon procedure, no assurance is provided for the
engagement and the practitioner will perform the procedures agreed with the client.
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Page 39
Lecture support notes by Alan Biju Palak
Due diligence is a fact finding exercise and is usually conducted to reduce the risk of poor
investment decisions.
ACCA AAA
Draft
Lecture support notes by Alan Biju Palak
Factors to consider before acceptance
an engagement
Preconditions for an audit
The preconditions for an audit are that management acknowledges and
understands its responsibility for:
- Preparation of the financial statements in accordance with the applicable financial
reporting framework.
- Internal control necessary for the financial statements to give a true and fair view.
- Providing the auditor with access to all relevant information and explanations.
• Due diligence
-
Why the company is not using their existing firm of accountants .
whether the target company's employees know about the acquisition.
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Page 40
ACCA AAA
-
Draft
Whether the acquisition is a hostile takeover.
Scope of the due diligence
The reason for the acquisition.
Any ethical threats which may be created.
• Prospective Financial Information
-
The intended use of the information, such as internal management or external users.
Whether the information will be for general or limited distribution.
The nature of the assumptions.
The elements to be included in the information.
The period covered by the information.
• Forensic Audit
- Acceptance level of risk by the practitioner
- The practitioner must ensure that they can comply with the ethical requirements.
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Lecture support notes by Alan Biju Palak
(ISAE 3400,10)
ACCA AAA
Draft
Reporting
• Title – clearly indicating the report is an independent assurance report.
• Addressee – identifies the intended user.
• Identification and description of the subject matter including period of the
information, name of the entity to which the subject matter relates.
• Identification of the criteria.
• Description of any significant, inherent limitations.
• Restriction on the use of the report to specific users.
• Statement of responsibilities of the responsible party and practitioner.
• Statement that the engagement was performed in accordance with professional
standards.
• Summary of the work performed.
• Practitioner's conclusion.
• Date.
• Name of the firm or practitioner and location.
(ISAE 3000,69)
Audit engagement(Specific)
•
•
•
•
•
•
•
•
•
•
•
•
•
Title
Addressee
Auditor's opinion
Basis for opinion
Key audit matters
Explanatory paragraph
Other information
Responsibilities of management
Auditors responsibilities
Other reporting responsibilities
Name of the engagement partner
Signature
Auditor's address
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Lecture support notes by Alan Biju Palak
Assurance engagements
Draft
ACCA AAA
• Date
•
Title and addressee.
•
Identification of the subject matter i.e. the forecast information.
•
Reference to any applicable laws or standards (e.g. ISAE 3400).
•
A statement that it is management's responsibility to prepare the PFI.
•
Reporting accountant's responsibilities and basis of opinion.
•
A reference to the purpose and restricted distribution of the PFI.
•
A statement of negative assurance as to whether the assumptions provide a
reasonable basis for the PFI.
•
An opinion on whether the PFI is properly prepared on the basis of the assumptions
and is presented in accordance with the relevant financial reporting framework.
•
Appropriate caveats about the achievability of the results given the nature of
assumptions and inherent limitations in the forecasting process.
•
Reporting accountant’s signature and address.
•
Date of the report.
(ISAE 3400, 27)
Audit of social, environmental and integrated
reporting
•
•
the methodology is stated
the matters reviewed are spelled out precisely
•
•
reference is made to other documents where applicable
a conclusion is given.
Forensic Audit
•
a summary of the procedures performed
•
a summary of the results of procedures
•
any limitations in the scope of the engagement
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Lecture support notes by Alan Biju Palak
Prospective financial information
Draft
ACCA AAA
•
a conclusion.
•
Title
•
Addressee
•
Introductory paragraph identifying the subject matter – the performance
information being reported on
•
Scope including the applicable standards and guidance followed
•
Respective responsibilities of management and the assurance provider
•
Inherent limitations of the report
•
Summary of the work performed
•
Conclusion based on the work performed
•
Signature of the assurance provider
•
Date
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Lecture support notes by Alan Biju Palak
Audit of performance information in the public
sector
Page 44
ACCA AAA
Draft
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Lecture support notes by Alan Biju Palak
International
Standards
on
Auditing.
Page 45
Draft
ACCA AAA
ISA 200 Overall objectives of the independent auditor and
the conduct of an audit in accordance with International
Standards on Auditing.
ISA 200: para. 11
In conducting an audit of financial statements, the overall objectives of the auditor are:
• To obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby enabling
the auditor to express an opinion on whether the financial statements are prepared,
in all material respects, in accordance with an applicable financial reporting
framework; and
•
To report on the financial statements, and communicate as required by the ISAs, in
accordance with the auditor's findings.
In other words,
• To Express an opinion on the FS
• To ensure that FS are prepared in accordance with Financial reporting framework
• To give a reasonable assurance that the financial statements are free from material misstatements
due to fraud and error .
Professional Judgement
Professional judgement is the application of relevant training,Knowledge
and experience in making informed decision about the appropriate
course of action in the circumstance of the audit engagement.
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Lecture support notes by Alan Biju Palak
Objectives of an audit.
Draft
ACCA AAA
Professional Scepticism
Professional Scepticism is an attitude that includes having a questioning
mind,
being alert to the conditions that may indicate possible misstatements
due to fraud or error and
subjecting the audit evidence to a critical assessment rather than taking
The auditor shall obtain sufficient appropriate evidence to reduce audit
risk to an acceptably low level' (ISA 200: para. 17)
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Lecture support notes by Alan Biju Palak
it at its face value.
Draft
ACCA AAA
ISA 210 Agreeing the terms of audit
engagements
ISA 210: para. 3
The objective of the auditor is to accept or continue an audit engagement only when the
basis on which it is to be performed has been agreed, through:
• Establishing whether the preconditions for an audit are present, and
Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms of
the audit engagement.
Preconditions for an audit
ISA 210: para. 6
In order to establish whether the preconditions for an audit are present, the auditor shall
determine whether the financial reporting framework to be applied in the preparation of
the financial statements is acceptable.
- For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation;
- For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error;
- To provide the auditor with:
•
Access to all information of which management is aware that is relevant to the
preparation of the financial statements;
•
Additional information that the auditor may request from management for the
purpose of the audit; and
•
Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
If any of these conditions does not exist, the auditor shall not accept the audit unless
legally required to so do (ISA 210: para. 3).
In addition, the auditor should not accept the engagement if those charged with
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Lecture support notes by Alan Biju Palak
•
ACCA AAA
Draft
governance impose a limitation on the scope of the auditor's work likely to result in a
disclaimer of opinion, again, unless the auditor is legally required to accept the audit
(ISA 210: para. 7).
A item is material if its omission or misstatement would reasonably
influence the economic decisions by a user of financial statements.
It is affected by the size and nature of the misstatement.
Planning Materiality/Overall materiality
Planning Materiality is the Materiality that have been decided for the
financial statements as a whole.
Performance materiality
The amount or amounts set by the auditor at less than the materiality level or
levels for particular classes of transactions, account balances or disclosures’.
The following benchmarks and percentages may be appropriate in the calculation
of materiality for the financial statements as a whole.
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Lecture support notes by Alan Biju Palak
ISA 320 Materiality in planning
and performing an audit
Draft
ACCA AAA
The calculation or estimation of materiality should be based
on Professional judgement.
Materiality for the financial statements as a whole must be
reviewed throughout the audit and revised if necessary.
ISA 500 Audit evidence
The sufficiency means the quantity of the evidence and the appropriateness means the
quality of the evidence
Sufficiency of the evidence will depend on the :
• The materiality of the item.
• The risk assessment of the item.
• The results of other audit procedures.
Reliability of evidence depends on several factors:
– Independent, externally generated evidence is better than evidence
generated internally by the client.
– Effective controls imposed by the entity, generally improve the reliability
of evidence.
– Evidence obtained directly by the auditor is more reliable than evidence
obtained indirectly or by inference.
– It is better to get written, documentary evidence rather than verbal
confirmations.
– Original documents provide more reliable evidence than photocopies or
facsimiles.
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Lecture support notes by Alan Biju Palak
The auditor need to obtain sufficient appropriate evidence to be able to draw reasonable
conclusions. (ISA 500,4)
ACCA AAA
Draft
Audit procedures for obtaining evidence
• Analytical procedures
• Enquiry
• Inspection
• Observation
• Recalculation and reperformance
The auditor obtains evidence to draw conclusions on which to base the audit opinion.
This is achieved by performing procedures to:
• Obtain an understanding of the entity and its environment
• Test the operating effectiveness of controls in preventing, detecting and
correcting material misstatements.
• Detect material misstatements by performing substantive procedures.
Audit Procedures
Tests of controls are designed to check that the audit client's internal control systems
operate effectively.
Substantive procedures are designed to detect material misstatement at the assertion
level in the financial statements
•
Substantive analytical procedures test the balances as a whole to identify any
unusual relationship
•
Substantive tests of detail looks at the supporting evidence for individual
transactions and traces them through to the financial statements to ensure they are
dealt with appropriately.
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Lecture support notes by Alan Biju Palak
• External confirmations
ACCA AAA
Draft
ISA 501 Audit Evidence- Specific
Considerations for Selected Items
In accordance with ISA 501 auditors are required to obtain Sufficient and appropriate
evidence with regard to three specific matters, as follows.
1) The existence and condition of inventory
• Evaluate management's instructions
• Observe the count procedures
• Inspect the inventory
• Perform test counts
- Perform procedures with regard to final inventory records to ensure they reflect actual
inventory count results.
2) The completeness of litigation and claims involving the entity
-
Enquiry of management and in-house legal counsel.
Reviewing minutes of board meetings and meetings with legal counsel
Inspecting legal expense accounts.
If there is a significant risk of material misstatement due to unidentified litigation or
claims the audit should seek direct communication with the entity's external legal
counsel.
3) The presentation and disclosure of segmental information
- Understand, evaluate and test methods used by management to determine segmental
information.
- Perform analytical procedures.
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Lecture support notes by Alan Biju Palak
- Attendance at the inventory count
ACCA AAA
Draft
Lecture support notes by Alan Biju Palak
Relying the works of others
ISA 610 Using the work of internal
auditors
Factors to consider before using the work of an internal auditor
• Technical Competence/Qualification
• Objectivity/Scope
• Status /level of reporting
• Communication b/w internal and external auditor
• Independence of internal auditor
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Page 53
ACCA AAA
Draft
Before using the specific work
1. How audit evidence obtained?
2. What judgements/assumptions were taken?
3. How work was performed?
4. What are the conclusions reached?
Using the internal auditor to provide direct
assistance
External auditors can consider whether the internal auditor can provide direct
assistance with gathering audit evidence under the supervision and review of the
external auditor.
The following considerations will be made:
•
Direct assistance cannot be provided where laws and regulations prohibit such
assistance.
•
The competence and objectivity of the internal auditor. Where threats to
objectivity are present, the significance of them and whether they can be
managed to an acceptable level must be considered.
•
The external auditor must not assign work to the internal auditor which
involves significant judgment, a high risk of material misstatement or with
which the internal auditor has been involved.
•
The planned work must be communicated with those charged with
governance so agreement can be made that the use of the internal auditor is
not excessive.
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Lecture support notes by Alan Biju Palak
The work of an internal auditor should not be mentioned in the auditors report.
ACCA AAA
Draft
ISA 620 Using the work of an auditor's
expert
An auditors expert is any person who is having in-depth knowledge in subjects other than
accounting and auditing.
•
The significant assumptions made.
•
The use and accuracy of source data.
•
The reasonableness of the findings and their consistency with other evidence.
Using the work of a management expert will be dealt under ISA 500
ISA 402 Audit considerations relating to
an entity using a service organisation
Service organisation. A third-party organisation (or segment of a third-party
organisation) that provides services to user entities that are part of those entities'
information systems relevant to financial reporting.
User entity. An entity that uses a service organisation and whose financial statements are
being audited.
User auditor. An auditor who audits and reports on the financial statements of a user
entity.
Service auditor. An auditor who, at the request of the service organisation, provides an
assurance report on the controls of a service organisation.
ISA 402: para. 7
The objectives of the user auditor, when the user entity uses the services of a service
organisation, are:
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(a) To obtain an understanding of the nature and significance of the services provided by
the service organisation and their effect on the user entity's internal control relevant to the
audit, sufficient to identify and assess the risks of material misstatement; and
(b) To design and perform audit procedures responsive to those risks.
Understanding the service provided
• Nature of services provided and the significance of these to the user entity,
including effect on entity's internal control
• Degree of interaction
• Nature of relationship including contractual terms.
Alternative options
• Obtaining a type 1 report or type 2 report from a service auditor, if available
• Contacting the service organisation through the user entity
• Visiting the service organisation and performing necessary procedures
• Using another auditor to perform necessary procedures
Type 1 report : A report on the description and design of controls at a service
organisation.
Type 2 report : A report on the description, design and operating effectiveness of controls
at a service organisation.
Reflection in auditors report
Same as ISA 620
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• Nature and materiality of transactions processed or financial reporting processes
affected
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ISA 240 The auditor's responsibilities
relating to fraud in an audit of financial
statements
Fraud is an intentional act, to deceive others and to obtain illegal or unjust advantage.
The objectives of the auditor are:
•
(a) To identify and assess the risks of material misstatement of the financial
statements due to fraud;
•
(b) To obtain sufficient appropriate audit evidence regarding the assessed risks of
material misstatement due to fraud, through designing and implementing
appropriate responses; and
•
(c) To respond appropriately to fraud or suspected fraud identified during the audit.
Types of fraud:
• Fraudulent Financial reporting
• Misappropriation of Assets
Fraud risk factors:
Those events or conditions that influences or pressurises or given an opportunity to
commit fraud.
• Dishonesty
• Need/Motivation
• Opportunity
Fraud should not be disclosed to any governing body unless it overrides the principle of
confidentiality by any legal or professional duty.
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Error is an unintentional mistake.
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ISA 230 Audit documentation
Audit documentation is the record of audit procedures performed, audit evidences
obtained and audit conclusions reached. These are also known as audit working papers.
Purpose of audit documentation
๏
To show that the audit work has been done properly.
๏ To enable senior staff to review the work of junior staff. obtained.
Lecture support notes by Alan Biju Palak
๏ To help the audit team in future years.
๏ To encourage a methodical, high-quality approach.
Contents of Working papers
•
Title
•
Date prepared
•
Preparer name and signature
•
References to other schedules
•
Purpose of the audit tests being performed
•
Precise details of work performed
•
Conclusion from the work performed
•
Reviewers signatures and date of review
•
Incase of any further modification, name of person who made the changes and the
reviewers name with reasons for modification.
Incase of Recurring audits- Audit files can be split as,
• Permanent audit file
• Current audit file.
An audit firm should retain the working papers for at least 5 years from the period of
preparation.
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ISA 505 External confirmations
External confirmations are audit evidence obtained as a direct written response to the auditor
from a third party (the confirming party), in paper form, or by electronic or other medium.
Types of confirmation request
• Positive confirmation request
• Negative confirmation request
A negative confirmation request is 'a request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the information provided in the request'
Steps in obtaining external confirmation
• Select the samples of items that requires confirmation
• Select an assertion
• Design the confirmation request
• Obtain permission from the client
• Send the confirmation request
• Followup request.
Factors to consider before selecting confirmation request:
• Materiality of the item.
• Efficiency of the Internal Control System.
• Existence of fraud risk factors.
• Risk of material misstatement.
• Chances of having non response.
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A positive confirmation request is 'a request that the confirming party respond directly to the
auditor indicating whether the confirming party agrees or disagrees with the information in the
request, or providing the requested information'
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ISA 530 Audit sampling
Types of sample selection
Random Sampling
Systematic sampling
Haphazard sampling
Cluster sampling
Lecture support notes by Alan Biju Palak
Monetary unit sampling
Data Analytics
Data analytics is the science and art of discovering and analysing
patterns, deviations and inconsistencies, and extracting other useful
information in the data of underlying or related subject matter of an audit
through analysis, modelling, visualisation for the purpose of planning and
performing the audit.
ISA 570 Going concern
ISA 570 Going Concern states that the auditor must:
- Obtain sufficient appropriate evidence regarding the appropriateness of management's use of
the going concern basis of accounting in the preparation of the financial statements.
- Conclude on whether a material uncertainty exists about the entity's ability to continue as a
going concern.
- Report in accordance with ISA 570.
Incase of non existence of going concern financial statements can be prepared in
break-up basis.
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When performing the audit procedures an auditor should focus on cashflows rather than
profits, as the company can pay its debts when they fall due.
ISA 580 Written representations
Written representations are written statements by management provided to the auditor to
confirm certain matters or to support other audit evidence.
The objectives of the auditor are:
! To obtain written representations that management believes that it has fulfilled
the fundamental responsibilities that constitute the premise on which an audit is
conducted
! To support other audit evidence relevant to the financial statements
! To respond appropriately to written representations or if management does
not provide written representations requested by the auditor
Factors to consider
• Must be in clients letter head
• The date of the written representation must be as near as practicable to, but not after,
the date of the auditor's report on the financial statements and must be for all the
financial statements and period(s) referred to in the auditor's report
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Reliability of written representations
An auditor has to check the consistency of the written representation with that of other
audit evidences.
If the matter cannot be resolved, the auditor shall reconsider the assessment of the
competence, integrity and ethical values of management, and the effect this may have on
the reliability of representations and audit evidence in general.
Written representations not provided
• Discuss the matter with management
• Re-evaluate the integrity of management and evaluate the effect this may have on the
reliability of representations and audit evidence in general
• Take appropriate actions, including determining the impact on the auditor's report
ISA 260 Communication with those
charged with governance
'Those charged with governance' is defined by ISA 260 as:
The person(s) or organisation(s) with responsibility for overseeing the strategic direction
of the entity and obligations related to the accountability of the entity.
Management' is defined by ISA 260 as:
The person(s) with executive responsibility for the conduct of the entity's operations.
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Reflect in Auditors report if required.
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Matters to be communicated by auditors to those charged
with governance
(a) The auditor's responsibilities in relation to the financial statement audit
(b) Planned scope and timing of the audit
(c) Significant findings from the audit
(e) Audit Conclusion
The auditor shall communicate the following for listed entities:
.
(i) A statement that the engagement team and others in the firm, the firm, and
network firms have complied with relevant ethical requirements regarding
independence
.
(ii) All relationships between the firm and entity that may reasonably be
thought to bear on independence
.
(iii) Related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level
ISA 265 Communicating deficiencies in internal
control to those charged with governance and
management
A deficiency in internal control 'exists when:
.
(a) A control is designed, implemented or operated in such a way that it is unable
to prevent, or detect and correct, misstatements in the financial statements on a
timely basis; or
.
(b) A control necessary to prevent, or detect and correct, misstatements in the
financial statements on a timely basis is missing' (ISA 265: para. 6(a)).
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(d) Auditor independence
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A significant deficiency in internal control is a deficiency or combination of deficiencies
in internal control that, in the auditor's professional judgment, is of sufficient importance
to merit the attention of those charged with governance (ISA 265: para. 6(b)).
Management letter or report(Covering letter)
The auditor shall include the following in the written communication:
• Deficiency in the ICS
• Implication in the FS
ISA 701 Communicating key audit matters in the
independent auditor’s report,
Key audit matters. 'Those matters that, in the auditor's professional judgment, were of
most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with
governance' (ISA 701: para. 8).
ISA 706 Emphasis of matter paragraphs and other matter
paragraphs in the independent auditor's report
An emphasis of matter paragraph is a paragraph included in the auditor's report that
refers to a matter appropriately presented or disclosed in the financial statements that, in
the auditor's judgement, is of such importance that it is fundamental to users'
understanding of the financial statements (ISA 700: para. 7(a))
An other matter paragraph is a paragraph included in the auditor's report that refers to a
matter other than those presented or disclosed in the financial statements that, in the
auditor's judgement, is relevant to users' understanding of the audit, the auditor's
responsibilities or the auditor's report (ISA 706: para. 7(b)).
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• Recommendations
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ISA 560 Subsequent events
Subsequent events are 'events occurring between the date of the financial statements and
the date of the auditor's report, and facts that become known to the auditor after the date
of the auditor's report’.
IAS 10 Events after the reporting period
• Those that are indicative of conditions that arose after the year-end date (non-adjusting
events)
The auditor shall perform procedures designed to obtain sufficient appropriate audit
evidence for all the events up to the date of the auditor's report that may require
adjustment of, or disclosure in, the financial statements have been identified .
The auditor does not have any obligation to perform procedures, or make enquiries
regarding the financial statements, after the date of the report
However, if the auditor becomes aware of a fact that, had it been known to the auditor at
the date of the auditor's report, may have caused the auditor to amend the auditor's report,
the auditor shall:
! Discuss the matter with management and those charged with governance.
! Determine whether the financial statements need amendment.
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• Those that provide evidence of conditions that existed at the year- end date (adjusting
events)
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! If amendment is required, enquire how management intends to address the
matter in the financial statements.
.
If amendment is required to the financial statements and management makes the
necessary changes, the auditor must carry out a number of procedures:
! Undertake any necessary audit procedures on the changes made.
! Extend audit procedures for identifying subsequent events that may
require adjustment of or disclosure in the financial statements to the date of
the new auditor's report.
If management does not amend the financial statements:
! If the auditor's report has not yet been provided to the entity, the auditor shall
modify the opinion and then provide the auditor's report.
! If the auditor's report has already been provided to the entity, the auditor shall
notify management and those charged with governance not to issue the financial
statements before the amendments are made; but if the financial statements are
issued anyway, the auditor shall take action to seek to prevent reliance on the
auditor's report.
Facts discovered after the financial statements have been issued
Auditors have no obligations to perform procedures or make enquiries
regarding the financial statements after they have been issued.
However, if the auditor becomes aware of a fact that, had it been known to the
auditor at the date of the auditor's report, may have caused the auditor to amend the
auditor's report, the auditor shall follow same steps as above.
If management amends the financial statements, the auditor shall
carry out any necessary procedures on the amendment and review the steps taken
by management to ensure that anyone in receipt of the previously issued financial
statements is informed.
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! Provide a new auditor's report on the amended financial statements.
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The auditor shall also issue a new or amended auditor's report, which will include an
explanatory paragraph .
If management still does not act, the auditor shall take appropriate action to seek to
prevent reliance on the auditor's report.
An accounting estimate is an approximation of a monetary amount in the absence
of a precise means of measurement' (ISA 540: para. 7(a)).
The auditor's objective is to obtain sufficient appropriate audit
evidence about whether accounting estimates are reasonable and related
disclosures are adequate.
Estimation uncertainty is 'the susceptibility of an accounting estimate and related
disclosures to an inherent lack of precision in its measurement' (ISA 540:
para. 7(c)).
Management's point estimate is 'the amount selected by management for
recognition or disclosure in financial statements as an accounting
estimate' (ISA 540: para. 7(e)).
Auditor's point estimate or auditor's range is the amount, or range of amounts,
respectively, derived from audit evidence for use in evaluating management's
point estimate' (ISA 540: para. (b)).
The auditor shall also evaluate the degree of estimation uncertainty associated with an
accounting estimate. Where estimation uncertainty is assessed as high, the auditor shall
determine whether this gives rise to significant risks (ISA 540: para. 10–11).
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ISA 540 Auditing accounting estimates, including
fair value accounting estimates, and related
disclosures.
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ISA 520 Analytical procedures
Technique to carryout analytical procedures
• Ratio analysis
• Examining related accounts in conjunction with each other.
• Trend analysis.
ISA 520 (para. 5) states that when using analytical procedures as substantive tests,
the auditor must:
(a) Determine the suitability of particular analytical procedures for given assertions.
(b) Evaluate the reliability of data from which the auditor's expectation of recorded amounts or
ratios is developed.
(c) Develop an expectation of recorded amounts or ratios and evaluate whether this is sufficiently
precise to identify a misstatement that may cause the financial statements to be material
misstated.
(d) Determine the amount of any difference that is acceptable without further investigation.
Analytical procedures at the final stage:
- Ensure FS are consistent with FR framework
- Ensure FS are consistent with auditor’s understanding
- Enable the auditor to form an overall conclusion
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• Reasonableness test. This involves calculating the expected value of an item and comparing it
with its actual value.
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ISA 700 Forming an opinion and reporting on
financial statements
An unmodified opinion is the opinion expressed by the auditor when the auditor
concludes that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework (ISA 700: para. 16).
Qualified opinion
.
(1) The auditor concludes that misstatements are material, but not pervasive, to
the financial statements (ISA 705: para. 7(a)).
.
(2) The auditor cannot obtain sufficient appropriate audit evidence on which to
base the opinion but concludes that the possible effects of undetected
misstatements, if any, could be material but not pervasive (ISA 705: para. 7(b)).
Adverse opinions
An adverse opinion is expressed when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements are both material
and pervasive to the financial statements (ISA 705: para. 8.
Disclaimers of opinion
An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate
audit evidence on which to base the opinion and concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be both material and
pervasive (ISA 705: para.10).
ISA 705 (para. 30) states that when the auditor expects to express a modified opinion,
the auditor must communicate with those charged with governance the circumstances
leading to the expected modification and the proposed wording of the modification in the
auditor's report.
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ISA 705 Modifications to the opinion in the
independent auditor's report
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Pervasiveness
.
(a) Those that are not confined to specific elements, accounts or items in the
financial statements
.
(b) Those that are confined to specific elements, accounts or items in the financial
statements and represent or could represent a substantial portion of the financial
statements
.
(c) Those that relate to disclosures which are fundamental to users' understanding
of the financial statements (ISA 705: para. 5(a))
ISA 250 Consideration of laws and
regulations in an audit of financial
statements
ISA 250 (para. 6) distinguishes the auditor's responsibilities in relation to compliance with
two different categories of laws and regulations:
.
(a) Those that have a direct effect on the determination of material amounts and
disclosures in the financial statements
.
(b) Those that do not have a direct effect on the determination of material amounts
and disclosures in the financial statements but where compliance may be
fundamental to the operating aspects, ability to continue in business, or to avoid
material penalties
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Pervasiveness is a term used to describe the effects or possible effects on the financial
statements of misstatements or undetected misstatements (due to an inability to obtain
sufficient appropriate audit evidence). There are three types of pervasive effect:
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For the first category, the auditor's responsibility is to obtain sufficient appropriate audit
evidence about compliance with those laws and regulations (ISA 250: para. 13).
For the second category, the auditor's responsibility is to undertake specified audit
procedures to help identify non-compliance with laws and regulations that may have a
material effect on the financial statements.
The auditor shall communicate management and with those charged with governance,
but, if the auditor suspects that those charged with governance are involved, the auditor
shall communicate with the next highest level of authority, such as the audit committee
or supervisory board. If this does not exist, the auditor shall consider the need to obtain
legal advice (ISA 250: paras. 22–24).
The auditor shall consider the impact on the auditor's report.
The auditor shall determine whether identified or suspected non-compliance has to be
reported to the regulatory and enforcement authorities. Although the auditor must
maintain the fundamental principle of confidentiality, in some jurisdictions the duty of
confidentiality may be overridden by law or statute (ISA 250: para. 28).
ISA 720 (Revised) The auditor's responsibilities
relating to other information
Other information is financial or non-financial information (other than the financial
statements and the auditor's report thereon) included in an entity's annual report (ISA 720:
para. 12(c)).
An annual report is a document, or combination of documents, prepared typically on an
annual basis by management or those charged with governance in accordance with law,
regulation or custom.
A misstatement of the other information exists when the other information is
incorrectly stated or otherwise misleading (including because it omits or obscures
information necessary for a proper understanding of a matter disclosed in the other
information) (ISA 720: para. 12(b)).
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Reporting identified or suspected non-compliance
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Material misstatements of the other information
ISA 720 (para. 14) states that the auditor shall read the other information to identity
material inconsistencies with the audited financial statements. If a material inconsistency
is identified, the auditor shall determine whether the audited financial statements or other
information is misstated.
If the financial statements are materially misstated but management refuses to correct the
misstatement, the auditor shall modify the audit opinion (ISA 720: para. 20).
If the other information is materially misstated and needs to be revised but management
refuses, the auditor shall communicate this matter to those charged with governance and:
! Withdraw from the engagement (where this is legally permitted).
Other Information paragraph
.
The auditor's report will always include a separate Other Information section when
the auditor has obtained some or all of the other information as of the date of the
auditor's report
If the auditor concludes that there is a material misstatement of the other information, the
'Other Information' section is placed immediately after the basis of opinion section.
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! Consider the implications for the auditor's report, or
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ISA 450 Evaluation of misstatements identified
during the audit.
A misstatement is 'a difference between the reported amount, classification, presentation,
or disclosure of a financial statement item and the amount, classification, presentation, or
disclosure that is required for the item to be in accordance with the applicable financial
reporting framework. Misstatements can arise from error or fraud' (ISA 450: 4(a)).
The ISA distinguishes misstatements as,
Factual misstatements (misstatements about which there is no doubt),
Judgemental misstatements (misstatements arising from management's judgement
concerning recognition, measurement, presentation and disclosure or accounting policies)
Projected misstatements (the auditor's best estimate of misstatements arising from
sampling populations) (ISA 450: para. A3).
ISA 450 Evaluation of misstatements identified during the audit (para. 5) requires the auditor to
accumulate misstatements identified during the audit, other than those that are clearly trivial.
As part of their completion procedures, auditors shall consider whether the aggregate of
uncorrected misstatements in the financial statements is material and requires the auditor
to communicate uncorrected misstatements and their effect to those charged with
governance, with material uncorrected misstatements being identified individually.
The auditor shall also communicate the effect of uncorrected
misstatements relating to prior periods.
The auditor shall request a written representation from management and those charged
with governance whether they believe the effects of uncorrected misstatements are
immaterial (individually and in aggregate) to the financial statements as a whole.
Documentation
ISA 450 (para. 15) requires the auditor to document the following information:
• The amount below which misstatements would be regarded as clearly trivial
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An uncorrected misstatement is a misstatement that the auditor has accumulated during
the audit and that has not been corrected (ISA 450: 4(b)).
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• All misstatements accumulated during the audit and whether they have been corrected
• The auditor's conclusion as to whether uncorrected misstatements are material and the
basis for that conclusion
ISA 550 Related party disclosures
Disclosure should be made of the following:
•
the nature of the related party relationship.
•
information about the transactions including the amount and any balances
outstanding at the year-end.
•
any allowance for doubtful receivable or expense recognised in respect of
irrecoverable debts.
If transactions have not been disclosed in accordance with those requirements
the potentially significant deficiency in the internal control system should be
reported to those charged with governance.
The related party transactions are generally deemed material by nature.
ISA 510 Initial Engagements -Opening
Balances
ISA 510 Initial Engagements Opening Balances requires that when auditors take on a new
client, they must ensure that:
• Opening balances do not contain material misstatements
• Appropriate accounting policies have been consistently applied, or changes adequately
disclosed.
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The auditor should obtain sufficient appropriate evidence that the financial statements
achieve fair presentation of the related party relationships and transactions and have been
accounted for in accordance with the financial reporting framework. [ISA 550, 9]
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ISA 710 Comparative InformationCorresponding Figures and Comparative
Financial Statements
The auditor need to obtain sufficient and appropriate evidence about whether comparative
information included in the financial statements has been presented in accordance with
the financial reporting framework.
current period financial statements (i.e. figures shown to the right of the current year figures). [ISA
710, 6b]
Comparative financial statements: where preceding period amounts are included for
comparison with the current period (i.e. the prior year's full financial statements are included within
the current year annual report).
Effect in auditors report
- The auditor's opinion does not refer to the corresponding figures because the opinion is
on the current period financial statements as a whole including the corresponding figures.
- If the prior period's auditor's report was modified and the a matter which gave rise to the
modification is unresolved, the current auditor's opinion will also have to be modified
either because of the effects on the current period or because of the effects of the
unresolved matter on the comparability of the current and corresponding figures.
- If a material misstatement is identified in the prior period financial statements on which
an unmodified opinion was issued, a modified opinion should be given in respect of the
corresponding figures.
- If a prior year adjustment has been put through to correct material misstatements arising
in the prior year, an unmodified opinion can be issued. An emphasis of matter paragraph
will be needed to draw attention to the disclosure note explaining the reason for the
restatement of the opening balances.
- If the prior period financial statements were audited by a different auditor, or were not
audited, the auditor may refer to this in an Other Matter paragraph.
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Corresponding figures: where preceding period figures are included as integral part of the
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ACCA AAA
1. The company undertakes continuous
production in its factory.
As production will not cease, the exact
cut-off of the work in progress will need to be assessed.
If the cut-off is not correctly calculated, the inventory
valuation may be under or over stated.
2. Ordered plant and machinery, but half of the
order have not yet been delivered.
Only assets which physically exist at the year-end should
be included in property, plant and equipment. If items
not yet delivered have been capitalised, PPE will be
overstated.
Consideration will also need to be
given to depreciation and when this should commence.
If depreciation is not appropriately charged when the
asset is available for use, this may result in assets and
profit being over or understated.
3. Purchase of patent.
In accordance with IAS 38 Intangible Assets, this should
be included as an intangible asset and amortised over its
life. If management has not correctly accounted for the
patent, intangible assets and profits could be
overstated.
4. Company has taken a new loan.
The loan needs to be correctly split between current and
non-current liabilities in order to ensure correct
disclosure.
Also, as the level of debt has increased,
there should be additional finance costs. There is a risk
that this has been omitted from the statement of profit
or loss leading to understated finance costs and
overstated profit.
5. Company outsources the payroll work.
A detection risk arises as to whether sufficient and
appropriate evidence is available at Company to confirm
the completeness and accuracy of controls over payroll.
If not, another auditor may be required to undertake
testing at the service organisation.
The payroll processing had transferred to
service entity. If any errors occurred during the transfer
process, these could result in the payroll charge and
related employment tax liabilities being
under/overstated.
1. The auditor should discuss with management the
process they will undertake to assess the cut-off point
for work in progress at the year end. This process should
be reviewed by the auditor while attending the year-end
inventory count.
In addition, consideration should be
given as to whether an independent expert is required
to value the work in progress. If so, this will need to be
arranged with consent from management and in time
for the year-end count.
2. Discuss with management as to whether the
remaining plant and machinery ordered have arrived; if
so, physically verify a sample of these assets to ensure
existence and ensure only appropriate assets are
recorded in the non-current asset register at the year
end.
Determine if the asset received is in
use at the year-end by physical observation and if so, if
depreciation has commenced at an appropriate point.
3. The audit team will need to agree the purchase price
to supporting documentation and to confirm the useful
life.
The amortisation charge should be
recalculated in order to ensure the accuracy of the
charge and that the intangible is correctly valued at the
year end.
4. During the audit, the team would need to confirm
that the loan finance was received. In addition, the split
between current and non-current liabilities and the
disclosures for this loan should be reviewed in detail to
ensure compliance with relevant accounting standards.
The finance costs should be recalculated
and any increase agreed to the loan documentation for
confirmation of interest rates. Interest payments should
be agreed to the cash book and bank statements to
confirm the amount was paid and is not therefore a
year-end payable.
5. Discuss with management the extent of records
maintained by the service entity and any monitoring of
controls undertaken by management over the payroll
charge.
Consideration should be given to contacting
the service organisation’s auditor to confirm the level of
controls in place.
Discuss with management the transfer process
undertaken and any controls put in place to ensure the
completeness and accuracy of the data.
Where possible, undertake tests of controls to confirm
the effectiveness of the transfer controls.
6. Land and buildings will be revalued at the year
end.
The land and buildings are to be revalued at the yearend; it is likely that the revaluation surplus/deficit will be
material.
The revaluation needs to be carried out and
recorded in accordance with IAS 16 Property, Plant and
Equipment, otherwise non-current assets may be
incorrectly valued.
7. Receivables for the year to date are considerably
higher than the prior year.
If this continues to the year end, there is a risk that
some receivables may be overvalued as they are not
recoverable.
8. Company is planning to make some employees
redundant after the year end.
Once the timing of this announcement has been
confirmed and if it is announced to the staff before the
year end, then under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets a redundancy provision
will be required at the year end. Failure to provide will
result in an understatement of provisions and expenses.
9. Goods in transit.
At the year end, there is a risk that the cut-off of
inventory, purchases and payables may not be accurate
and may be under/overstated.
10. Company has incurred expenditure in
developing a new range of products.
This expenditure is classed as research and development
under IAS 38 Intangible Assets. The standard requires
research costs to be expensed to profit or loss and
development costs to be capitalised as an intangible
asset.
If the company has incorrectly classified
research costs as development expenditure, there is a
risk the intangible asset could be overstated and
expenses understated.
11. The bonus scheme for senior management and
directors of the Company is based on the value of yearend total assets.
There is a risk that management might
be motivated to overstate the value of assets through
the judgements taken or through the use of releasing
provisions or capitalisation policy.
6. Discuss with management the process adopted for
undertaking the valuation, including whether the whole
class of assets was revalued and if the valuation was
undertaken by an expert. This process should be
reviewed for compliance with IAS 16.
7. Discuss with management the reasons for the
increase in receivables and management’s process for
identifying potential irrecoverable debt. Test controls
surrounding management’s credit control processes.
Extended post year-end cash
receipts testing and a review of the aged receivables
ledger to be performed to assess valuation. Also
consider the adequacy of any allowance for receivables.
8. Discuss with management the status of the
redundancy announcement; if before the year end,
review supporting documentation to confirm the timing.
In addition, review the basis of and recalculate the
redundancy provision.
9. The audit team should undertake detailed cut-off
testing of purchases of goods at the year end and the
sample of GRNs from before and after the year end
relating to goods from suppliers should be increased to
ensure that cut-off is complete and accurate.
10. Obtain a breakdown of the expenditure and verify
that it relates to the development of the new products.
Undertake testing to determine whether the costs relate
to the research or development stage. Discuss the
accounting treatment with the finance director and
ensure it is in accordance with IAS 38.
11. Throughout the audit, the team will need to be alert
to this risk and maintain professional scepticism.
Detailed review and testing on judgemental
decisions, including treatment of provisions, and
compare treatment against prior years. Any manual
journal adjustments affecting assets should be tested in
detail.
In addition, a written representation should be
obtained from management confirming the basis of any
significant judgements.
12. A new general ledger system was introduced
and the old and new systems were run in parallel.
There is a risk of the balances in the month of transfer
being misstated and loss of data if they have not been
transferred from the old system completely and
accurately. If this is not done, this could result in the
auditor not identifying a significant control risk.
In addition, the new general ledger system will require
documenting and the controls over this will need to be
tested.
12. The auditor should undertake detailed testing to
confirm that all of the balances at the transfer date have
been correctly recorded in the new general ledger
system.
The auditor should document and test
the new system. They should review any management
reports run comparing the old and new system during
the parallel run to identify any issues with the
processing of accounting information.
13. A number of reconciliations, including the bank
reconciliation, were not performed at the year end,
Control account reconciliations provide comfort that
Accounting records are being maintained completely
and accurate.
At the year end, it is important to
confirm that balances including bank balances are not
under or overstated. This is an example of a control
procedure being overridden by management and raises
concerns over the overall emphasis placed on internal
control.
13. Discuss this issue with the finance director and
request that control account reconciliations are
undertaken.
14. Company’s previous finance director left after it
was discovered that he had been committing fraud
with regards to expenses claimed.
There is a risk that he may have undertaken other
fraudulent transactions; these would need to be written
off in the statement of profit or loss. If these have not
been uncovered, the financial statements could include
errors.
14. Discuss with the new finance director what
procedures they have adopted to identify any further
frauds by the previous finance director.
15. There have been a significant number of sales
returns made subsequent to the year end.
As these relate to pre year-end sales, they should be
removed from revenue in the draft financial statements
and the inventory reinstated.
15. Review a sample of the post year-end sales returns
and confirm if they relate to pre year-end sales, that the
revenue has been reversed and the inventory included
in the year-end ledgers.
If the sales returns have not been correctly recorded,
then revenue will be overstated and inventory
understated.
All reconciling items should be tested in
detail and agreed to supporting documentation.
In addition, the team should maintain their
professional scepticism and be alert to the risk of further
fraud and errors.
In addition, the reason for the increased
level of returns should be discussed with management.
This will help to assess if there are underlying issues with
the net realisable value of inventory.
16. During year-end inventory count there were
movements of goods in and out.
If these goods in transit were not carefully controlled,
then goods could have been omitted or counted twice.
This would result in inventory being under or
overstated.
16. During the final audit, the goods received notes and
goods despatched notes received during the inventory
count should be reviewed and followed through into the
inventory count records as correctly included or not.
17. The audit client is a new client for the auditors.
As the audit team is working with the client for the first
time they may not be familiar with the Accounting
policies, transactions and balances, there will be an
increased detection risk on the audit.
17. Audit Company should ensure they have a suitably
experienced team. Also, adequate time should be
allocated for team members to obtain an understanding
of the company and the risks of material misstatement.
18. The company undertakes continuous (perpetual)
inventory counts.
Under such a system all inventory must be counted at
least once a year with adjustments made to the
inventory records.
18. The completeness of the continuous (perpetual)
inventory counts should be reviewed. In addition, the
level of adjustments made to inventory should be
considered to assess whether reliance on the inventory
records at the year-end will be acceptable.
Inventory could be under or overstated
if the continuous (perpetual) inventory counts are not
complete and the inventory records accurately updated
for adjustments.
19. A sales-related bonus scheme has been introduced
in the year; this may lead to sales cut-off errors with
employees aiming to maximise their current year bonus.
19. Increased sales cut-off testing will be performed
along with a review of any post year-end cancellations
of contracts as they may indicate cut-off errors.
20. Out of the customers who bought goods on credit
there are concerns about the creditworthiness of some
customers. There is a risk that some receivables may be
overvalued as they are not recoverable.
20. A review of the aged receivables ledger to be
performed to assess valuation. Also consider the
adequacy of any allowance for receivables.
21. Company has incurred expenditure on updating,
repairing and replacing a significant amount of the
production process machinery.
If this expenditure is of a capital nature, it should be
capitalised as part of property, plant and equipment
(PPE) in line with IAS 16 Property, Plant and Equipment.
However, if it relates more to repairs, then it should be
Expensed to the statement of profit or loss (income
Statement). If the expenditure is not correctly classified,
Profit and PPE could be under or overstated.
21. The auditor should review a breakdown of these
costs to ascertain the split of capital and revenue
expenditure, and further testing should be undertaken
to ensure that the classification in the financial
statements is correct.
22. Inventory held at different warehouses.
At the year-end there will be inventory counts
undertaken in all warehouses. It is unlikely that the
auditor will be able to attend at all inventory counts and
therefore they need to ensure that they obtain sufficient
evidence over the inventory counting controls, and
completeness and existence of inventory for any
warehouses not visited.
22. The auditor should assess which of the inventory
sites they will attend the counts for. This will be any with
material inventory or which have a history of significant
errors.
For those not visited, the auditor will
need to review the level of exceptions noted during the
count and discuss with management any issues which
arose during the count.
Inventory is stored within all warehouses; if some are
owned by company and some rented from third parties.
Only warehouses owned by company should be included
within PPE. There is a risk of overstatement of PPE and
understatement of rental expenses if company has
capitalised all warehouses.
The auditor should review supporting documentation
for all warehouses included within PPE to confirm
ownership by company and to ensure non-current
assets are not overstated.
23. During the year an asset has been disposed of at a
profit.
The asset needs to have been correctly removed from
property plant and equipment to ensure the noncurrent asset register is not overstated, and the profit
on disposal should be included within the income
statement.
23. Review the non-current asset register to ensure that
the asset has been removed. Also confirm the disposal
proceeds as well as recalculating the profit on disposal.
Consideration should be given as to whether
the profit on disposal is significant enough to warrant
separate disclosure within the income statement.
24. The company values inventory as selling price less
average profit margin (any other methods).
Inventory should be valued at the lower of cost and net
realisable value (NRV) and if this is not the case, then
inventory could be under or overvalued.
IAS 2 Inventories allows this as an inventory valuation
method as long as it is a close approximation to cost. If
this is not the case, then inventory could be under or
overvalued.
24. Testing should be undertaken to confirm cost and
NRV of inventory and that on a line-by-line basis the
goods are valued correctly.
In addition, valuation testing
should focus on comparing the cost of inventory to the
selling price less margin to confirm whether this method
is actually a close approximation to cost.
records and submitted returns monthly to
head office.
25. Discuss with management the process undertaken to
transfer the data and the testing performed to confirm
the transfer was complete and accurate.
The opening balances for each branch have been
transferred into the head office’s accounting. There is a
risk that if this transfer has not been performed
completely and accurately, the opening balances may
not be correct.
Computer-assisted audit techniques
could be utilised by the team to sample test the transfer
of data from each supermarket to head office to identify
any errors.
25. Branches maintained their own financial