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ACCA Paper F8 (INT) : Notes
ACCA Paper F8 (INT) : Notes
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Audit Reports Ethics Auditor Appointment Audit Letters Audit Risk Internal Control Internal Control & Audit in a Computer Environment Internal Audit Audit Evidence Inventory Subsequent Events Going Concern Corporate Governance
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7 12 15 19 23 26 29 32 34 37 40 43 46
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows view again of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database
Everybody in the World has free access to ACCAs own database of past exam questions, answers, syllabus, study guide and examiners commentaries on past sittings. This can be
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.
HowtogetthemostfromtheseExPressnotes
For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper.
Your stage in study for each paper Prior to study, e.g. deciding which optional papers to take These ExPress notes ExP recommended course notes, or ExPedite notes Dont use yet ExP recommended exam kit Dont use yet ACCA online past exams
Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Dont make any annotations on the ExPress notes at this stage.
Have a quick look at the two most recent real ACCA exam papers to get a feel for examiners style. Dont use at this stage.
Work through in detail. Review each chapter after class at least once. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.
Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand. ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it! ACCA online past exams ACCA F8 (INT) Audit and Assurance
Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them.
Download the two most recent real exam questions and answers. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticisms he or she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow.
Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.
Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still dont understand. Its too late now. Avoid looking at them in detail, especially if the notes are very big. It will scare you.
Read quickly through the full set of ExPress notes, focusing on areas youve highlighted, key workings, approaches to exam questions, etc.
Leave at home.
Leave at home.
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Our ExPress notes fit into our portfolio of materials as follows:
ACCA F8 (INT) Audit and Assurance
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Provide a base understanding of the most important areas of the syllabus only.
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Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses
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Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.
To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Chapter 1
ACCA F8 (INT) Audit and Assurance
Audit Reports
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Alternatively, the examiner may give you a draft audit report and ask you to identify and explain in what respects the report is not satisfactory.
KEY TERMINOLOGY
ISA 700 The Auditors Report on Financial Statements identifies the key elements of the auditors report (these must be learned and you should be prepared to give a brief explanation of the purpose of each element): 1. Title 2. Addressee 3. Introductory paragraph 4. Statement of responsibilities of management 5. Statement of responsibilities of the auditors 6. Scope paragraph 7. Opinion 8. Auditors signature 9. Date of report 10. Auditors address
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It is also important when assessing materiality to remember that this must be considered so far as the user and not the preparer of financial statements is concerned. A useful working definition of materiality may be taken as transactions and other events are likely to be seen as material in the context of a companys financial statements if their omission, misstatement or non-disclosure would matter to a proper understanding of such financial statements on the part of a potential user.
Past examiners reports have indicated that many candidates have been unclear as to how and when to make proper use of an emphasis of matter paragraph. It is important, therefore, that you are totally happy with this aspect of audit reports. Examples of where the use of such paragraph would be appropriate include: where there the financial statements have been prepared on a going concern basis, but this is dependent upon some significant uncertainty which is fully and adequately disclosed in the notes to the financial statements where there is a material inconsistency between the financial statements and the Directors Report and the adjustment required to remove the inconsistency would need to be made in the Directors Report but the directors are not prepared to make such adjustment.
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ACCA F8 (INT) Audit and Assurance
The type of qualified opinion to be given will depend not just on the circumstances as indicated above, but also on how serious the limitation on scope or disagreement is namely is it: 1. Material but not pervasive, that is to say that the limitation on scope or disagreement is confined to one particular aspect of the financial statements, such that the auditor is able to say that except for this matter the financial statements give a true and fair view etc. 2. Material and pervasive, that is to say that the nature of the limitation on scope or disagreement is such that it will impact on the overall view given by the financial statements. In such situation if it is caused by limitation on scope, the auditor should give a Disclaimer of Opinion, whereas if it is because of disagreement, they should give an Adverse Opinion.
The circumstances giving rise to a qualified audit opinion should be described in a separate paragraph which appears BEFORE the opinion paragraph. Wherever possible, the auditor should quantify the qualification circumstances as this should make it easier for the reader to appreciate its significance.
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ExPress Notes
Chapter 2
ACCA F8 (INT) Audit and Assurance
Ethics
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
KEY TERMINOLOGY
The fundamental principles of professional ethics as outlined in the IFAC Code of Ethics is a very important TOPIC. You might like to use TOPIC as a useful mnemonic to help you remember these principles. Technical (professional) competence and due care must be exercised by all members at all times. Members have a responsibility to act in accordance with best practice and to keep themselves technically up to date. Objectivity must be demonstrated by not allowing personal interest or influence of others to effect a members professional judgement.
Professional behaviour must be demonstrated by members at all times, in both their private and business life, so as not to be seen to take any action which might bring the profession into disrepute. Integrity requires that members are always honest and do not knowingly allow themselves to be associated with anything dishonest so far as others are concerned. Confidentiality requires that under normal circumstances members should at all times respect confidentiality with regard to a clients affairs so far as third parties are concerned and that members should not make use of client information for personal gain.
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1. 2. 3. 4. Self-interest - e.g. owning shares in a client company Self-review e.g. providing accounting services to an audit client Familiarity e.g. acting as auditor to a company where a close relative is the CEO Intimidation e.g. continuing to act as auditor to a company which has started legal proceedings against the audit firm 5. Advocacy e.g. acting on a clients behalf in negotiations to raise new finance for the company
ACCA F8 (INT) Audit and Assurance
Safeguards against threats As part of its quality control procedures, a professional firm must establish its own formalised procedures for the identification and management of such threats. Additionally, general safeguards may be seen as being: Those created by the ACCA e.g. requirement for potential members to complete an ethics module Those created by members themselves e.g. ensuring that CPD requirements are met
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ExPress Notes
Chapter 3
ACCA F8 (INT) Audit and Assurance
Auditor Appointment
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
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ExPress Notes
Chapter 4
ACCA F8 (INT) Audit and Assurance
Audit Letters
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1. 2. 3. 4. 5. 6. Banks Customers Suppliers Selling agents Consignees Legal representatives
ACCA F8 (INT) Audit and Assurance
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ACCA F8 (INT) Audit and Assurance
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Frequency Management representations will have been obtained at various stages during the conduct of the audit, but the formal documentation of these should be obtained on an annual basis, as close as possible to the signing off of the audit report. Content Typical content will include the following: Confirmation of directors responsibilities for financial statements Confirmation that all necessary information and explanations have been provided to the auditors Confirmation of facts, where knowledge of such facts is confined to management Confirmation of directors estimates and judgement used in the preparation of the financial statements
ACCA F8 (INT) Audit and Assurance
Steps to be taken if directors refuse to provide representation letter 1. Discuss with management reasons for refusal and try to resolve any contentious area. 2. If management still not prepared to provide, ask if they would be prepared to minute acceptance of auditors version. 3. If not prepared to do this, consider whether any further audit work required. 4. If auditor feels that there is insufficient audit evidence without management representations should consider possibility of qualifying audit opinion on grounds of limitation on scope.
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Chapter 5
ACCA F8 (INT) Audit and Assurance
Audit Risk
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ACCA F8 (INT) Audit and Assurance
KEY TERMINOLOGY
AUDIT RISK is very simply the overall risk that the auditor gives an inappropriate audit opinion in his report. Eg. if an auditor gave an unqualified opinion, when in fact the company was not a going concern, then shareholders and others placing reliance on this report in making economic decisions relating to their dealings with the company might suffer financial loss. Audit risk is seen as being made up of 3 elements: AUDIT RISK = INHERENT RISK x CONTROL RISK x DETECTION RISK The auditor must assess inherent risk and control risk but cannot influence them, they are what they are. The only element which the auditor can influence directly is detection risk, which he must do in order to have overall an acceptable level of audit risk. Inherent risk is the risk that there may be material errors or misstatements in the clients financial statements, before giving consideration to any internal controls that may have been established. Eg. in a high tech company there is high risk of obsolescent inventory which if not recognised could result in a material overstatement of both profits and asset values. Control risk is the risk that the clients internal control systems will fail to prevent or detect material errors or misstatements. Eg. if there is not effective segregation of duties then there is a much higher risk of employee fraud, without the need for collusion, going undetected. Detection risk is the risk that the auditors tests and enquiries will fail to detect material errors or misstatements in the transactions and balances reflected in the clients financial statements. Eg the detection risk is always greater with a new client because the auditors have had less time to build up their knowledge and understanding of the clients business and the risks to which it is exposed. Detection risk is seen to include the elements of: 1. Sampling risk eg. if the auditor selects too small a sample size, it may not be representative of the population from which it is drawn, resulting in the auditor reaching an invalid conclusion about that population.
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2. Non-sampling risk is any other risk that might result in the auditor arriving at the wrong audit conclusion eg. if client management were to deliberately provide the auditor with misleading information and explanations. From an exam point of view it is important not to confuse audit risk with Business Risk. Business risk is the risk that a company will fail to meet its strategic objectives or that the policies adopted will be inappropriate. Business risk is to a large extent tied up with the fundamental accounting assumption of going concern. Business risk may also be seen as being made up of 3 main elements: 1. Operational risk eg. shortage of essential raw materials for manufacturing process 2. Financial risk eg. foreign exchange losses when trading internationally 3. Compliance risk eg. payment of fines for breach of anti-pollution legislation
ACCA F8 (INT) Audit and Assurance
It is important to note carefully the question requirement as to what type of risk you have been asked to consider when analysing a given scenario. So if the question scenario makes it clear that the company is trading in different currency zones then: 1. Business risk = foreign exchange losses reduce companys profitability 2. Audit risk = overstatement of profit if foreign exchange losses are not properly recognised
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Chapter 6
ACCA F8 (INT) Audit and Assurance
Internal Control
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ExPress Notes
It should also be noted carefully that in the light of recent developments in corporate governance frameworks, the many corporate scandals and the current world-wide economic recession that nowadays an integral part of any effective internal control system is that it should include an effective system for risk identification and risk management. This in turn has led to auditors more frequently adopting a risk based approach to auditing.
KEY TERMINOLOGY
ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment states that there are 5 components of internal control: 1. 2. 3. 4. 5. The control environment The entitys risk assessment process The information system Control activities Monitoring of controls
The IIA have provided the following useful definition: An internal control is any action taken by management to enhance the likelihood that established objectives and goals will be achieved. Management plans, organises and directs the performance of sufficient actions to provide reasonable assurance that objectives and goals will be achieved. Thus, control is the result of proper planning, organising and directing by management. The UK Turnbull report gives us a useful summary of the main purposes of an internal control system, by stating that internal control consists of the policies, processes, tasks, behaviour and other aspects of a company that taken together: Facilitate its effective and efficient operation by enabling it to respond to significant business, operational, financial, compliance and other risks to achieving the companys objectives. This includes safeguarding the assets from inappropriate use or from loss and fraud and ensuring that liabilities are identified and managed. Help to ensure the quality of internal and external reporting. Help ensure compliance with applicable laws and regulation, and also with internal policies with respect to conduct of business.
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Essential features of any good system of internal control As a useful aide memoire when asked to evaluate a described system of internal control within a question scenario, you could make use of the mnemonic PCRAM. Plan of organisation Custody procedures Recording procedures Authorisation procedures Management supervision NB. When evaluating any system of internal control, it is important to recognise that part of the whole system which we call internal control should include what we call internal check (segregation of duties) and also internal audit. Steps in auditors consideration and approach to a clients internal control systems 1. 2. 3. 4. Ascertain details of clients systems (interview, ICQs, etc). Record details of client systems (narrative notes, flowcharts, etc). Confirm details of client systems (walk through test). Evaluate the client systems. If system is assessed as being sound then proceed to step 5. If system is assessed as being inherently weak, then there is no purpose to carrying out tests of control in that area. Such weaknesses should be discussed with client management and formally documented in a management letter. In this area of the clients activities it will then be necessary to design and carry out an extended programme of substantive testing. 5. Test the client systems (tests of control). 6. Assess the results of tests of control. If tests of control confirm that the system is working satisfactorily then proceed to step 6. If tests of control reveal that a system evaluated as being sound in theory is not working satisfactorily in practice then proceed as in step 4 where system was evaluated as being inherently weak. 7. Design and carry out limited programme of substantive testing.
ACCA F8 (INT) Audit and Assurance
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Chapter 7
ACCA F8 (INT) Audit and Assurance
KEY TERMINOLOGY
The basic requirements for an effective system of internal control do not of course change simply because a computer is brought into the business environment. However, computers
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bring with them their own additional control considerations. Specifically, internal control in a computer environment is normally considered under 2 main headings: 1. General Controls These relate to the environment within which computer systems are developed, operated and maintained. They will therefore be relevant to all applications. They are often sub-divided into administration controls and systems development controls. They may be either manual or programmed. 2. Application Controls These relate to those activities which have been computerised and are concerned with the completeness and accuracy of the processing of authorised data and the maintenance of computer files. As with general controls, they may be either manual or programmed. Essential features of any good system of internal control in a computer environment To help you in learning some of the important practical aspects of internal control systems in a computer environment we can again perhaps make use of a series of mnemonics.
GENERAL CONTROLS ADMINISTRATION CONTROLS (DOFF) Division of duties and responsibilities eg. between IT and user department staff Operator controls eg. use of passwords File controls eg. regular file back-ups Fire precautions and standby arrangements eg. contingency planning
GENERAL CONTROLS SYSTEMS DEVELOPMENT CONTROLS (CAST) Conversion procedures eg. parallel running Authorisation, acceptance and amendment procedures eg. sign off procedures Standardisation eg. use of SSADM Testing eg program logic checks
APPLICATION CONTROLS (IPOF) Input controls eg. data verification by means of double-keying
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Processing controls eg. data validation by means of check digit Output controls eg. actioning of error reports File maintenance controls eg. checking amendments to standing data
ACCA F8 (INT) Audit and Assurance
Alternative audit approaches There are generally seen as being 3 main alternative approaches to the audit of a computerised accounting system:
1. Auditing around the computer Here the concentration of audit effort is on the inputs to and outputs from the clients computer system. 2. Auditing through the computer Making use of CAATs, principally: Test data Audit software eg. selection of data for further testing 3. Auditing within the computer Making use of embedded audit facilities such as: ITF Integrated Test Facility SCARF Systems Control and Review File
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Chapter 8
ACCA F8 (INT) Audit and Assurance
Internal Audit
KEY TERMINOLOGY
The IIA defines internal auditing as follows> Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisations operations.
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ExPress Notes
It helps an organisation accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. FUNDAMENTAL DIFFERENCES BETWEEN INTERNAL AND EXTERNAL AUDITORS Both internal auditors and external auditors will have a major interest in the effectiveness of a companys internal control systems. Both are assurance providers and as such will make use of similar techniques and procedures. The external auditor should approach internal audit as any other aspect of internal control before placing any reliance upon the work of internal audit to perhaps reduce the level of some of their own testing. Key factors to consider in assessing the potential reliability of the work of internal audit will include such matters as: Qualifications Experience Quality of audit documentation Independence Management response to internal auditor recommendations
Effective co-operation between the two sets of auditors can help to avoid unnecessary duplication of effort, with a consequent benefit of time and cost savings. However, it is important for the external auditor to always be aware of certain fundamental differences as indicated below: SCOPE APPROACH RESPONSIBILITY INTERNAL AUDITOR MANAGEMENT MANAGEMENT MANAGEMENT EXTERNAL AUDITOR ISAs + REGULATIONS ISAs + REGULATIONS SHAREHOLDERS
NB under Corporate Governance provisions, the head of internal audit should be appointed by and report to the Audit Committee. The Audit Committee should also be responsible for determining the nature and scope of the work of internal audit. TYPICAL AREAS OF INTERNAL AUDIT INVOLVEMENT These would include, but not be restricted to the following (any of which you need to be prepared to write briefly about): VFM audits (the 3 Es) IT audit Financial audit Operational audit
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Chapter 9
ACCA F8 (INT) Audit and Assurance
Audit Evidence
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
ASSERTIONS RELATING TO TRANSACTIONS AND EVENTS OCCURRENCE COMPLETENESS ACCURACY CUT-OFF CLASSIFICATION
ACCA F8 (INT) Audit and Assurance
ASSERTIONS RELATING TO ACCOUNT BALANCES EXISTENCE RIGHTS AND OBLIGATIONS COMPLETENESS VALUATION AND ALLOCATION
ASSERTIONS RELATING TO PRESENTATION AND DISCLOSURE OCCURRENCE AND RIGHTS AND OBLIGATIONS COMPLETENESS CLASSIFICATION AND UNDERSTANDABILITY ACCURACY AND VALUATION
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
RELIABLE In most instances, the auditors will base their opinion upon a variety of evidence rather than a single source. In considering the comparative reliability of the different forms of evidence which may be available the following general rules may be applied: 1. Documentary evidence will be more reliable than oral evidence. 2. Putting the different forms of documentary audit evidence in ascending order of comparative reliability, they may be seen as: (i) Client originated and client maintained eg. inventory records (ii) Third party originated but client maintained eg. supplier invoice (iii) Evidence obtained directly from third party eg. bank confirmation letter (iv) Auditor generated eg. any audit working paper detailing audit work performed and conclusion reached
ACCA F8 (INT) Audit and Assurance
AUDIT PROCEDURES RELATING TO AUDIT EVIDENCE ISA 500 indicates 8 procedures some combination of which may be adopted by auditors in order to obtain audit evidence: 1. 2. 3. 4. 5. 6. 7. 8. Inspection of records or documents Inspection of tangible assets Observation Enquiry Confirmation Recalculation Reperformance Analytical procedures
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Chapter 10
ACCA F8 (INT) Audit and Assurance
Inventory
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
To a large extent, therefore we can usefully consider what work we might do BEFORE, DURING and AFTER the clients stocktaking. As a useful exercise when you have a spare 5 minutes take a blank piece of paper and under these 3 headings see if (in point form) you can come up with the following sort of ideas. BEFORE Review previous year working papers Obtain and review client stocktaking instructions Consider sales method Consider stock locations Consider need for independent experts Confirm date and timing of stock count Liaise with internal auditors Allocate and brief own staff
DURING Observe procedures Test counts Re-counts Note third party inventories Notes re cut-off Notes re condition
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ExPress Notes
AFTER Follow up on attendance notes Routine tests on inventory records Analytical procedures Test valuation Review disclosure Obtain management representations
ACCA F8 (INT) Audit and Assurance
The above is not necessarily a fully comprehensive list but should give a good flavour for the level of detail that might be required.
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Chapter 11
ACCA F8 (INT) Audit and Assurance
Subsequent Events
KEY TERMINOLOGY
Subsequent Events Relate to events occurring or facts emerging after the accounting period end, but before formal approval of the financial statements by a companys management.
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Adjusting Events Are those which relate to an item or condition existing at the SOFP date, where the subsequent events assist in forming an opinion as to the amount properly attributable to such item or condition, where at the SOFP date there was some doubt about the value. Eg. making provision at the year end because of the subsequent insolvent liquidation of a customer, where the amount outstanding at the year end was still unpaid at the time of the subsequent liquidation. Non-adjusting Events Are those which do not alter the year end position, but which would have had a material impact on the financial statements if they had occurred prior to the year end. Such nonadjusting events should be communicated by way of notes to the financial statements. Eg. The destruction by fire shortly after the year end of one of a companys warehouses. As auditors we should give careful consideration to those events which at first sight may appear to be non-adjusting, but which might be seen to impact on going concern, which could mean that in fact they need to be treated as adjusting events.
ACCA F8 (INT) Audit and Assurance
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Chapter 12
ACCA F8 (INT) Audit and Assurance
Going Concern
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
KEY TERMINOLOGY
Going concern The concept of going concern is based upon the assumption that the business will continue to exist as a viable commercial entity for the foreseeable future, without the need for any significant cut-back in its present level of activity. Foreseeable future is normally taken as being a minimum of 12 months from the current accounting date. If for any reason, management consider a shorter period, then there should be a note to the financial statements indicating what that shorter period is and managements reasons for choosing it.
POSSIBLE INDICATOR Shortage essential raw materials for manufacturing process Material FOREX losses Numerous fines for breach of anti-pollution legislation
POSSIBLE MITIGATING FACTOR R & D Dept close to finding synthetic alternative New hedging policy New more environmentally friendly manufacturing process about to come on line
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ExPress Notes
Assessment of current and projected economic environment in which company operates Assessment of state of industry sector in which company operates Review of correspondence files and board minutes for evidence of significant disputes Review of subsequent period cash flow and profit forecasts Discuss management procedures and review and obtain management representations
ACCA F8 (INT) Audit and Assurance
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2011 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.
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ExPress Notes
Chapter 13
ACCA F8 (INT) Audit and Assurance
Corporate Governance
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ExPress Notes
ACCA F8 (INT) Audit and Assurance
KEY TERMINOLOGY
WHAT IS CORPORATE GOVERNANCE? Various definitions have been provided such as: 1. Corporate governance is the system by which organisations are directed and controlled. (Cadbury Report) 2. Corporate governance is a set of relationships between a companys directors, its shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of achieving those objectives and monitoring performance, are determined. (OECD)
Director training There should be an effective induction programme for all new directors and thereafter the company should ensure that there is an on-going programme for CPD for all directors.
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ExPress Notes
Internal Control The directors will be responsible for establishing and maintaining an effective system of internal control. This system should be assessed and reported on by management on an annual basis. In particular management in such review should give consideration to: Internal audit Enterprise risk management Corporate ethical culture Corporate social responsibility Whistleblowing facility
ACCA F8 (INT) Audit and Assurance
Communication with shareholders Management should encourage smaller investors to participate in company GMs, especially the AGM, and have a regular dialogue with institutional investors. Institutional investors in their turn are expected to exercise their voting power responsibly. Financial reporting The board needs to present a balanced and understandable assessment of the companys past performance, present position and future prospects.
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