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Audit and Assurance

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Advanced Stage Technical Integration Level

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The Institute of Chartered Accountants in England and Wales

For exams in 2014 – July 2015

Study Manual

www.icaew.com

Audit and Assurance
The Institute of Chartered Accountants in England and Wales

Previous ISBN: 978-0-85760-472-9
First edition 2007
Seventh edition 2013

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British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library

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All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without the prior written
permission of the publisher.

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ISBN: 978-0-85760-869-7

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Polestar Wheatons
Hennock Road
Marsh Barton
Exeter
EX2 8RP

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Printed in the United Kingdom by Polestar Wheatons

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Your learning materials are printed on paper obtained from traceable,
sustainable sources.

© The Institute of Chartered Accountants in England and Wales

Welcome to ICAEW
I am delighted to welcome you as a student studying our chartered accountancy qualification, the ACA.
The ACA will open doors to a highly rewarding career as a financial expert or business leader. Once you
are an ICAEW member, you will join over 138,000 others around the world who work at the highest
levels across all industry sectors, providing valuable financial and business advice. Some of our earlier
members formed today's global Big Four firms, and you can find an ICAEW Chartered Accountant on
the boards of 80% of the UK FTSE 100 companies.
We are here to help you every step of the way. As part of a worldwide network of over 19,000 students,
you will have access to a range of resources including the online student community, where you can
interact with fellow students, and our student support team. Take a look at the key resources on page ix.

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I wish you the very best of luck with your studies and look forward to supporting you throughout your
career.

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Michael Izza
Chief Executive
ICAEW

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Contents

Introduction

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Audit and Assurance

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Key Resources

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Skills assessment guide

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Faculties and Special Interest Groups

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ICAEW publications for further reading

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Professional practice and ethics
1 Role and context of modern auditing

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2 Ethics

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3 Governance
The modern audit process

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4 Planning and risk assessment
5 Audit evidence

Other services
7 Assurance and related services

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8 Environmental and social auditing

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9 Internal auditing
Audit issues

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6 Audit completion – review and reporting

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11 Auditing in an IT environment

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12 Auditing fair values

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10 Fraud and auditor liability

Business scenarios

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14 Business structures and global enterprises

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15 Insolvency

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Index

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13 Small company audits

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1 What is Audit and Assurance and how does it fit within the ACA Advanced Stage? Structure The ACA syllabus has been designed to develop core technical. concluding and reporting. The aim of the Assurance module is to ensure students understand the assurance process and fundamental principles of ethics and are able to contribute to the assessment of internal controls and gathering of evidence on an assurance engagement. planning. managing. the aims being that students can apply analysis techniques. This includes acceptance. and ethical skills and knowledge in a structured and rigorous manner. where the focus is on the acquisition and application of technical skills and knowledge. and the ACA Advanced Stage which comprises two technical integration modules and the Case Study.1 Introduction 1. The aim is to enable students to understand the critical aspects of managing an assurance engagement. technical knowledge and professional skills to resolve real-life assurance issues faced by businesses. Progression to ACA application level SP The knowledge base put into place at Assurance is taken further in the application level module. commercial. Audit and Assurance. Progression to ACA Advanced Stage IN The advanced level papers – Business Reporting (BR) and Business Change (BC) – then take things further again. EC The knowledge level TI O N C O PY The diagram below shows the twelve modules at the ACA Professional Stage. Introduction vii .

PY Candidates will be required to use professional judgement to identify and evaluate alternatives and determine the appropriate solution(s) to compliance issues. technical knowledge and professional skills to resolve real-life compliance issues faced by businesses. Candidates may be put. C Candidates will be required to analyse and interpret both external and internal financial and nonfinancial data in order to plan for change and provide advice. EC TI This grid shows the relative weightings of subjects within each module and should guide the relative study time spent on each.1 Module aim The aim of the Business Reporting paper is: To ensure that candidates can apply analysis techniques. performance management and costing. alliances and disposals. There will also be financial reporting. The aim of the Business Change paper is: O To ensure that candidates can provide technical advice in respect of issues arising in business transformations. where business techniques include aspects of business strategy. ethical and legal implications to be considered when developing and assessing strategic and business plans. business finance. Compliance issues relating to taxation will also feature in this module. assurance. for example.2 Audit and Assurance 2.2 Specification grid O N Taxation and practical business techniques are particularly important in this module. including the impact of choice of reporting policies. while slight variations may occur in individual assessments to enable suitably rigorous questions to be set. In undertaking this analysis students will be expected to evaluate the impact of stakeholder influences on the data. acquisitions. an advisor or in an assurance role facing business issues where there are reporting implications. mergers. Over time the marks available in the assessment will equate to the weightings below. IN SP Ethics and law Taxation Audit and assurance Corporate reporting Business analysis viii Audit and Assurance BR Weighting (%) 5 – 10 20 – 30 30 – 40 30 – 40 0 BC Weighting (%) 5 – 10 25 – 35 10 – 20 15 – 25 30 – 35 . 2. or other corporate reports such as on sustainability and corporate responsibility. giving due consideration to the commercial impact of their recommendations. in the role of a preparer of financial statements.

LibCat. icaew.com/examresults exam results PY TUITION If you are receiving structured tuition. take a look at our tuition providers in your area on icaew.com/library 4. the ACA syllabus has been designed to develop your professional skills in a progressive manner.3 Key Resources STUDENT SUPPORT TEAM T +44 (0)1908 248 250 E studentsupport@icaew.com/exams exam applications. and communicate the underlying issues to your clients. past papers.com/cpl credit for prior learning/exemptions icaew. including the catalogue. regulations and more icaew. gain study and exam advice from fellow ACA and CFAB students and access our free webinars. syllabus. you will require the knowledge and skills to interpret financial and other numerical and business data. make sure you know how and when you can contact your tutors for extra help. study guides and more icaew.com/examresources examiners comments. These skills are broadly categorised as: Introduction ix .com/exams ONLINE STUDENT COMMUNITY THE LIBRARY & INFORMATION SERVICE (LIS) N C The online student community allows you to ask questions. deadlines.com/students student homepage icaew. You have access to a range of resources free of charge via the library website. O If you aren't receiving structured tuition and are interested in classroom.1 Introduction TI 4 Skills assessment guide Assimilating and using information Structuring problems and solutions Applying judgement Drawing conclusions and making recommendations IN SP     EC As a Chartered Accountant in the business world.com STUDENT WEBSITE icaew. There are also regular Ask an Expert and Ask a Tutor sessions to help you with key technical topics and exam papers.com/studentcommunity O The Library & Information service (LIS) is ICAEW's world-leading accountancy and business library. Access the community at icaew. online or distance learning tuition. In a similar way to the required knowledge.

4. x Audit and Assurance . EC TI  SP The examinations. maintaining and exercising skills and personal attributes necessary for the role and responsibilities.3 Assessment grids The following pages set out the learning outcomes for Audit and Assurance that are addressed under each of the four skills areas. there is a description of:   The specific skills that are assessed How these skills are assessed Using these grids will enable you to determine how the examination paper will be structured and to consider whether your knowledge of Audit and Assurance is sufficiently strong to enable you to apply it in the required manner. In addition. for each skills area. targeted and relevant solutions. and in particular the Advanced Stage.  Personal effectiveness – developing. completion of which is essential in order to qualify for membership. O The work experience framework is built around five key skills: Business awareness – being aware of the internal and external issues and pressure for change facing an organisation and assessing an organisation's performance.  Ethics and professionalism – recognising issues.2 Assessing your professional skills Initial Professional Development BR TAX FR FA A&A Advance Stage technical integration Professional Stage application level ETHICS Case Study O Professional Stage knowledge level BS C Technical FM PY BC Skills N The work experience requirements for students provide a framework to develop appropriate work experience. Work experience is also an essential component for examination preparation. IN This will help students see that their practical knowledge and skills gained in the workplace feed back into the exam room and vice-versa. using knowledge and experience to assess implications. making confident decisions and recommendations. further technical knowledge to real situations. The link between work experience and the examinations is demonstrated by the skills development grids produced by the examiners.4.  Professional judgement – making recommendations and adding value with appropriate.  Technical and functional expertise – applying syllabus learning outcomes and where appropriate. embrace all of these skills.

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The knowledge levels are defined as follows: Level D An awareness of the scope of the standard.4. Key to other symbols: N The knowledge level reached is assumed to be continued IN SP EC TI O → xii Audit and Assurance . Level A C A thorough knowledge with a solid understanding of the subject matter and experience in the application thereof sufficient to exercise reasonable professional judgement in the application of the subject matter in those circumstances generally encountered by Chartered Accountants. Level B O A working knowledge with a broad understanding of the subject matter and a level of experience in the application thereof sufficient to apply the subject matter in straightforward circumstances. Level C PY A general knowledge with a basic understanding of the subject matter and training in its application sufficient to identify significant issues and evaluate their potential implications or impact. For each individual standard the level of knowledge required in the relevant Professional Stage module and at the Advanced Stage is shown.4 Technical knowledge The table contained in this section shows the technical knowledge covered in the ACA Syllabus by module.

D The Authority Attaching to Standards Issued by the International Auditing and Assurance Standards Board C The Authority Attaching to Practice Statements Issued by the International Auditing and Assurance Standards Board A A C O Discussion Papers C PY The International Auditing and Assurance Standards Board Audit & Assurance Title Assurance Certificate & Professional Levels Advanced Level Audit and Assurance C B A  210 Agreeing the Terms of Audit Engagements B  220 Quality Control for an Audit of Financial Statements B  230 Audit Documentation B A 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements B A 250 A Consideration of Laws and Regulations in an Audit of Financial Statements B A International Standards on Auditing (UK and Ireland) C Working Procedures TI O N 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing C EC 250 B The Auditor's Right and Duty to Report to Regulators in the Financial Sector B A 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management B A SP 260 (Revised October 2012) Communication with Those Charged with Governance B A  315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment C A  320 Materiality in Planning and Performing an Audit C A  330 The Auditor's Responses to Assessed Risks B A 402 Audit Considerations Relating to an Entity Using a Service Organisation C B IN 300 Planning an Audit of Financial Statements 450 Evaluation of Misstatements Identified during the Audit C A 500 Audit Evidence B A  B A B A B A 501 Audit Evidence – Specific Considerations for Selected Items 505 External Confirmations 510 Initial Audit Engagements – Opening Balances B Introduction xiii .

Including Fair Value Accounting Estimates and Related Disclosures C B A B A B A A  B A 600 Special Considerations – Audits of Group Financial Statements (including the Work of Component Auditors) C A 610 Using the Work of Internal Auditors C A C A A  705 (Revised October 2012) Modifications to the Opinion in the Independent Auditor's Report A  706 (Revised October 2012) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report A  710 Comparative Information – Corresponding Figures and Comparative Financial Statements B A 720 A (Revised October 2012) The Auditor's Responsibility Relating to Other Information in Documents Containing Audited Financial Statements B A 720 B The Auditor's Statutory Reporting Responsibility in Relation to Directors' Reports A  550 Related Parties 560 Subsequent Events O 570 Going Concern PY 520 Analytical Procedures C C 580 Written Representations N 620 Using the Work of an Auditor's Expert SP EC TI O 700 (Revised October 2012) The Auditor's Report on Financial Statements B International Standards on Auditing B 800 Special Considerations – Audits of Financial Statements prepared in Accordance with Special Purpose Frameworks B A 810 Engagements to Report on Summary Financial Statements B A IN 805 Special Considerations – Audits of Single Financial Statements and Specific Elements.Advanced Level Audit & Assurance Title Assurance Certificate & Professional Levels B A A 530 Audit Sampling B B A 540 Auditing Accounting Estimates. Accounts or items of a Financial Statement International Auditing Practice Note (IAPN) 1000 Special Considerations in Auditing Financial Instruments C International Standards on Review Engagements (ISREs) 2400 (Revised September 2012) Engagements to Review Historical Financial Statements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity xiv Audit and Assurance C B B .

Advanced Level Audit & Assurance Title Assurance Certificate & Professional Levels International Standards on Assurance Engagements (ISAEs) C 3400 The Examination of Prospective Financial Information 3402 Assurance Reports on Controls at a Service Organisation 3410 Assurance Engagements on Greenhouse Gas Statements C B C A C O International Standards on Related Services (ISRSs) IFAC Statements C 4400 Engagements to Perform Agreed-upon Procedures Regarding Financial Information 4410 Compilation Engagements (Revised March 2012) B PY 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information B B C B 2010/2 (Revised March 2012) Compendium of illustrative Auditor's Reports on UK Private Sector Financial Statements B B FRC Briefing Paper C B O TI Other Guidance N ISQC1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements. and Other Assurance and Related Services Engagements EC Professional Scepticism – establishing a common understanding and reaffirming its central role in delivering audit quality Ethics Codes and Standards Ethics Codes and Standards Level A ICAEW Code of Ethics A IN SP IFAC Code of Ethics for Professional Accountants (parts A. B and C and definitions) APB Ethical Standards 1–5 (revised) Provisions Available to Small Entities (revised) A Professional Stage modules Assurance Business and Finance Law Principles of Taxation Audit and Assurance Business Strategy Financial Reporting Taxation Assurance Audit and Assurance Introduction xv .

Their value is endorsed by over 40. ISBN 978-0-85760-063-9 Clarified ISAs provide many opportunities for practitioners in terms of potential efficiencies. Audit and Assurance Faculty – icaew. As well as providing accurate and timely technical analysis. Visit icaew. better reporting to clients. better documentation. ICAEW regulations. visit the Technical Resources section of the ICAEW website at icaew. standards and guidance are available at icaew. or to access any of the publications listed below.com/technicalreleases for the most up-to-date releases.com/aaf  Right First Time with the Clarified ISAs. ICAEW 2010. they lead the way in many professional and wider business issues through stimulating debate. shaping policy and encouraging good practice. and enhanced audit quality overall. information and representation for chartered accountants working within a range of industry sectors.000 members of ICAEW who currently belong to one or more of the seven faculties: Audit and Assurance Corporate Finance Finance and Management Financial Reporting Financial Services Information Technology Tax PY        C N Charity and Voluntary sector Entertainment and Media Farming and Rural Business Forensic Healthcare Interim Management Non-Executive Directors Public Sector Solicitors Tourism and Hospitality Valuation O            O The special interest groups provide practical support. This list of publications has been prepared for students who wish to undertake further reading in a particular subject area and is by no means exhaustive. EC 6 ICAEW publications for further reading ICAEW produces publications and guidance for its students and members on a variety of technical and business topics. This modular guide has been developed by ICAEW's ISA implementation sub-group to help medium-sized and smaller firms implement the clarified ISAs and take advantage of these opportunities. visit icaew.com/regulations This area includes regulations and guidance relevant to the regulated areas of audit. This modular guide is designed to give users the choice of either downloading the publication in its entirety. influence and recognition within clearly defined areas of technical expertise. or downloading specific modules on which they want to focus.com/facultiesandsigs. To find out more and to access a range of free resources. An international edition is also available. including: TI Students can register free of charge for provisional membership of one special interest group and receive a monthly complimentary e-newsletter from one faculty of your choice. xvi Audit and Assurance .5 Faculties and Special Interest Groups (SIGs) The faculties and special interest groups are specialist bodies within ICAEW which offer members networking opportunities. You are not required to study these publications for your exams.com SP ICAEW no longer prints a Members Handbook. IN The TECH and AUDIT series of technical releases are another source of guidance available to members and students. investment business and insolvency as well as materials that was previously in the handbook. For a full list of publications.

FRC.Audits of Group Financial Statements (Including the Work of Component Auditors)'. it covers a wide range of emerging regulatory. Auditing in a group context: practical considerations for auditors ICAEW. While no decisions have been taken on UK adoption of the IAASB's clarity ISAs. It is designed to be a signposting tool for practitioners and identifies the other pieces of guidance issued by ICAEW. An international edition is also available.  The Audit of Related Parties in Practice. to assign staff with the appropriate level of experience to audit this area and upfront discussions with the client to identify related parties. It covers the various types of reports issued by auditors in accordance with the Act. commercial and professional development issues. the ICAEW Audit and Assurance Faculty began a two-year consultation on a new assurance services (the ICAEW Assurance Service). Authored by leading practitioners in corporate finance. ISSN 1367-4544 The award-winning Corporate Financier magazine is published ten times a year for members. 2012. IN This guide summarises the findings of academic work on private equity transactions from around the world. ISBN 978-1-84125-565-6 PY This practical guide to the audit of related party relationships and transactions is set in the context of the significant change in approach that is required under the revised ISA and highlights the importance of planning. The revised publication contains suggestions for both group auditors and component auditors. SP Corporate Finance Faculty – icaew. The guide also includes an appendix with answers to a number of frequently asked questions on the standard. Illustrative policies and procedures are provided for selected aspects of each key area.com/corpfinfac  Private equity demystified – an explanatory guide Second Edition. March 2010. an alternative to audit based on the idea of limited assurance introduced by the International Auditing and Assurance Standards Board (IAASB). APB. An international edition is also available. John Gilligan and Mike Wright. Introduction xvii . 2008. Quality Control in the Audit Environment. ISBN 978-184152-628-7 TI  O This third edition of the guide provides a brief summary of the key sections in the Companies Act 2006 (the Act) which relate directly to the rights and duties of auditors.com/thoughtleadership  Best Practice Guidelines The Corporate Finance Faculty publishes a series of guidelines on best-practice. investors and company directors involved in corporate finance. stakeholders and key associates of ICAEW's Corporate Finance Faculty. ISBN 978-1-84152-819-9 Companies Act 2006 – Auditor related requirements and regulations third edition – March 2012 ICAEW. Aimed at professionals. including some examples for sole practitioners. icaew. regulatory trends and technical issues.com/corpfinfac  Corporate Financier magazine. EC The guide describes special considerations for auditors at each stage of the group audit's cycle. POB and others to support implementation of the Act. This report presents findings from the practical experience of providing the ICAEW Assurance Service over the subsequent two years and views of users of financial information that help in assessing the relevance of the service to their needs. they are succinct and clear overviews of emerging issues in UK corporate finance.  Alternatives to Audit ICAEW. the publication also covers matters in the IAASB's revised and redrafted 'ISA 600 Special Considerations . 2009. ICAEW 2010. ISBN 0-497-80857-605-5 The publication identifies seven key areas for firms to consider. Financing Change Initiative. ICAEW. ICAEW 2010. the need to involve the entire audit team in this. ISBN 978-0-85760-442-2 N  C O In August 2006. Hard copies of the abstract and full report are free and are also available by download from icaew.

SP A report summarising the actions being taken by the Financial Reporting Council and explaining how the UK Stewardship Code is intended to operate was also published in July 2010. written by experts. ISBN 978-1-84152-610-2 This report is a joint initiative with the Environment Agency. the Turnbull guidance was revised and updated in October 2005. and Deal Leadership. The UK Stewardship Code EC The UK Stewardship Code was published in July 2010. Corporate governance – icaew.The magazine includes features. May 2009. Listed companies are required to report on how they have applied the main principles of the Code. accountability and relations with shareholders.com/sustainablebusiness  Environmental issues in annual financial statements ICAEW. following a review by the Financial Reporting Council. A downloadable pdf is available at icaew. experienced editors and professional journalists. It is intended to assist company boards when implementing the sections of the UK Corporate Governance Code dealing with audit committees and to assist directors serving on audit committees in carrying out their role. The first version of the UK Corporate Governance Code was produced in 1992 by the Cadbury Committee. three major themes were introduced: Innovation & Corporate Finance. analysis and research.  C O The UK Corporate Governance Code contains broad principles and more specific provisions. Internal Control: Revised Guidance on Internal Control for Directors on the Combined Code (now the UK Corporate Governance Code) The FRC Guidance on Audit Committees (formerly known as The Smith Guidance) O  N Originally published in 1999. The updated guidance applies to listed companies for financial years beginning on or after 1 January 2006. It aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities by setting out good practice on engagement with investee companies to which the Financial Reporting Council believes institutional investors should aspire. Corporate responsibility – icaew.com/corporateresponsibility Sustainable Business January 2009 IN  The new thought leadership prospectus acts as a framework for the work that ICAEW do in sustainability/corporate responsibility. remuneration.com/sustainablebusiness xviii Audit and Assurance . and most recently updated in 2010. use or audit the financial statements in statutory annual reports and accounts. It offers practical advice on measuring and disclosing environmental performance. It is aimed at business accountants who prepare. and either to confirm that they have complied with the Code's provisions or – where they have not – to provide an explanation. It argues that any system that is sustainable needs accurate and reliable information to help it learn and adapt.  TI First published by the Financial Reporting Council in January 2003. Financing Entrepreneurship. or who advise or sit on the boards of the UK companies and public sector organisations.com/corporategovernance  The UK Corporate Governance Code 2010 PY The UK Corporate Governance Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectiveness. news. In May 2010 the Financial Reporting Council issued a new edition of the Code which applies to financial years beginning on or after 29 June 2010. All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report on how they have applied the UK Corporate Governance Code in their annual report and accounts. which is where the accounting profession plays an important role. Companies are encouraged to use the 2010 edition of the guidance with effect from 30 April 2011. A downloadable pdf is available at icaew. In 2011.

The first two modules are free to everyone. ISBN 978-085760-079-0 The authors of this outsourcing special report share their expertise on topics including service level agreements. employees of member firms and.com/ethics  Code of Ethics  C O The Code of Ethics helps ICAEW members meet these obligations by providing them with ethical guidance. storytelling and the use of visions in medium-sized businesses.  Starting a business SR28: March 2010. the benefits of having one. Moreover.  Developing a vision for your business SR30: September 2010. whether remunerated or voluntary. organisations and professions. ISBN 978-1-84152-984-2 IN This report provides accountants with a realistic and motivational overview of what to consider when starting a business. in all of their professional and business activities. people management. leadership. ESRC seminar series – When worlds collide: contested paradigms of corporate responsibility ICAEW. For more information and to download a brochure visit icaew. ISBN 978-1-84152-455-9 TI O This publication brings ideas from a variety of disciplines. Reporting with Integrity ICAEW May 2007. ISBN 978-1-84152-855-7 This considers the challenges of designing successful organisations. through case studies and finally towards developing an individually tailored sustainability strategy for their business. because this report sees reporting with integrity as a joint endeavour of individuals. who leads the faculty's finance direction programme. member firms. The course is spread across five modules taking users from definitions of sustainability and corporate responsibility.  Finance transformation – the outsourcing perspective SR31: December 2010.  EC Finance and Management Faculty – icaew. including the accounting profession. in conjunction with the British Academy of Management. The Code applies to all members.com/corporateresponsibility  The Business Sustainability Programme (BSP) PY The Business Sustainability Programme is an e-learning package for accountants and business professionals who want to learn about the business case for sustainability. students. the concept of integrity is considered in all these contexts. the role of the FD in the process. where applicable.com/fmfac Finance's role in the organisation November 2009. This document may also be helpful to audit firms discussing this topic with clients and individuals seeking to address issues in this area with their employers. both as a concept and in practice. won an Economic and Social Research Council grant to run a seminar series which aims to bring academics and the business community together to tackle some of the big challenges in corporate responsibility. and innovation and technology. affiliates. Investment appraisal SR27: December 2009. in order to obtain a more comprehensive understanding of what is meant by integrity. ISBN 978-1-84152-854-4 SP  This special report looks at the key issues and advises managers on how they can contribute effectively to decision making and control during the process of investment appraisal. Instilling integrity in organisations ICAEW June 2009  N Practical guidance aimed at directors and management to assist them in instilling integrity in their organisations. Introduction xix . ISBN 978-0-85760-054-7 This special report looks at what makes a good vision. icaew. written by Rick Payne.com/bsp Ethics – icaew.

to set objectives and protect against pitfalls.com/fsf Audit of banks: lessons from the crisis. The IT capabilities provided as a service to businesses include: single software applications or software suites.com/frfac Financial Services Faculty – icaew. October 2007. at icaew. despite the fact that the financial services industry has the greatest concentration of measurement and modelling skills of any industry. with the consumer market now leading in terms of ease of use and portability. A downloadable pdf is available at icaew. 2012. A downloadable pdf is available at icaew. as well as its journal. (Inspiring Confidence in Financial Services initiative) ICAEW. ISBN 9780-85760-286-2 This guide will enable the business manager to develop a philosophy that allies social media's potential with the business's objectives and capabilities. Financial Reporting Faculty – icaew. ISBN 978-0-85760-285-5 This report is a source of reference for those analysing or researching the role of the finance function and provides a foundation for considering the key challenges involved.com/thoughtleadership Skilled Persons' Guidance – Reporting Under s166 Financial Services and Markets Act 2000 (Interim Technical Release FSF 01/08) EC TI This interim guidance was issued by ICAEW in April 2008 as a revision to TECH 20/30 to assist chartered accountants and other professionals who are requested to report under s166 Financial Services and Markets Act 2000. online and on demand. By All Accounts. PY The Financial Reporting Faculty makes available to students copies of its highly-regarded factsheets on UK GAAP and IFRS issues. ISBN 978-1-84152-546-4  O N This report suggests that more work is required on matching measurement practices in the financial services industry to the needs of different users of financial information.icaew.  Bringing employee personal devices into the business – a guide to IT consumerisation ICAEW. The following publications should also be of interest to students:  Make the move to cloud computing ICAEW.com/itfac SP The IT Faculty provides ongoing advice and guidance that will help students in their studies and their work.com/itcountshome) provides regular free updates as well as a link to the faculty's Twitter feed which provides helpful updates and links to relevant articles. 2011. xx Audit and Assurance . and then to take the first practical steps in a mass communications medium very different from any that British business has encountered before. (Inspiring Confidence in Financial Services initiative) ICAEW. 2012. written by Rick Payne. Measurement in financial services. March 2008.com/technicalreleases Information Technology Faculty – icaew. and virtual computing infrastructure. June 2010 ISBN 978-0-85760-051-6 O   C This research has looked into the role played by bank auditors and examined improvements that can be made in light of lessons learned from the financial crisis.com/frfac  EU Implementation of IFRS and the Fair Value Directive ICAEW.  Making the most of social media – a practical guide for your business ICAEW. who leads the faculty's finance direction programme. ISBN 978-0-85760-443-9 The gap between business and consumer technology has been growing over the last few years. ISBN 978-0-85760-617-4 IN Cloud computing in its purest form is pay-as-you-go IT. The online community (ion. The Finance Function: A Framework for Analysis September 2011. The project has included the publication of stakeholder feedback and development of a final report. online software development platforms. ranging from data storage to computer grids. ISBN 978-184152-519-8 The most comprehensive assessment to date of compliance with the requirements of IFRS and the overall quality of IFRS financial reporting.

And you can subscribe to the free newswire which gives you a weekly round up. is a practical guide for accountants in business and practice. explains exactly what iXBRL is all about and what must be done in order to e-file corporation tax returns using the new standard.com/taxfac  Tax news service You can keep up with the tax news as it develops on the Tax Faculty's news site icaew. produced jointly by KPMG. and follows on from Demystifying XBRL. the Tax Faculty and the Information Technology Faculty. All young professionals interested in tax are welcome to attend. produced jointly by Thompson Reuters. TAXline Tax Practice series of detailed briefings on current topics: C TAXline Tax Practice 27 Let property – a brief guide by Rebecca Cave (published November 2011) TAXline Tax Practice 26 The new pension rules by Anne Redston (published July 2011) N TAXline Tax Practice 25 Tax Credits by Robin Williamson (published April 2011) IN SP EC TI O TAXline Tax Practice No 23 HMRC Powers – an overview of the new powers and penalties regime by Paula Clemett (published October 2010) Introduction xxi . discussions and socialising. For more details visit icaew.com/taxfac The Tax Faculty runs a Younger Members Tax Club which provides informal presentations.com/taxnews. See the website for more details icaew.Tax Faculty – icaew. Implementing XBRL  O This booklet. the Tax Faculty and the Information Technology Faculty.com/taxfac  Demystifying XBRL  PY This booklet.

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PY O C CHAPTER 1 EC TI O N Role and context of modern auditing Introduction Topic List 1 Role of auditing 2 The audit process SP 3 Statutory audit requirement 4 Legal responsibilities 5 International standards on auditing IN 6 Quality control 7 Documentation Summary and Self-test Technical reference Answers to Self-test Answers to Interactive questions 1 .

Introduction Learning objectives Tick off Explain the role of the auditor in providing assurance to shareholders • List the main stages of the audit process • State which companies need an audit under Companies Act legislation • Explain the legal responsibilities of directors and auditors • Explain the role of International Standards on Auditing • Discuss the quality control procedures that the audit firm will carry out within the audit firm and for each individual audit • State the documentation required on an audit and explain the importance of that documentation IN SP EC TI O N C O PY • 2 Audit and Assurance .

all of which promote good corporate governance. The audit has to be seen in the context of a range of interwoven laws. ISA 200 explains that absolute assurance is not possible due to inherent limitations of the audit including those resulting from the following factors: The nature of financial reporting. and guidance. in effect they act as trustees for the shareholders. For that economic activity to continue to flourish there has to be trust.1 Role of auditing C H A P T E R Section overview The audit provides assurance to shareholders • The audit enables the auditor to form an opinion as to whether the financial statements give a true and fair view • An expectation gap may exist between what shareholders expect the audit to achieve and what it is designed to achieve Purpose of the audit 1 PY 1. no matter how small.) The expectation gap SP The primary role of the auditor is to perform an independent examination of the financial statements and to form an opinion. The audit opinion will provide reasonable assurance that the financial statements give a true and fair view. regulations. C ISA (UK and Ireland) 200 Overall Objectives of The Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing (UK and Ireland) sets out the purpose of an audit as follows: Part of the economic infrastructure O 1. in accordance with an applicable financial reporting framework.1 • O Audits serve a fundamental purpose in helping to enforce accountability and promote confidence in financial reporting.2 N 'The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.3 EC While the audit has a crucial role to play in providing assurance to shareholders it cannot be seen in isolation. The audit provides a mechanism for shareholders to help ensure that the directors are acting in the company's best interests and therefore plays a fundamental stewardship role. 1. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared. Directors are delegated responsibility for managing the affairs of the company by the owners. in all material respects. For example.' TI The audit is also a vital function of economic activity. (We will look at corporate governance in detail in Chapter 3. the directors of the company have a role to play in the preparation of financial statements that show a true and fair view. You should be very familiar with this concept from your earlier studies. it does not provide a certificate that they are completely accurate and free from every error or fraud. The public increasingly expect the following types of questions to be answered: Role and context of modern auditing 3 . many items involve judgement and assessments of uncertainties The use of testing Inherent limitations of internal control The fact that most evidence is persuasive rather than conclusive The impracticability of examining all items within a class of transactions or account balance The possibility of collusion or misrepresentation for fraudulent purposes The fact that the work undertaken by the auditor is permeated by judgement IN • • • • • • • In some instances this 'expectation gap' can lead to difficulties arising from the difference between what shareholders expect an audit to achieve and what it is designed to achieve.

Auditor liability is covered in Chapter 10. While there is no legal definition for these terms. particularly where others have the benefit of hindsight. 'true' and 'fair' are normally taken to mean the following: PY Definition True: The information in the financial statements is not false and conforms to reality. We will look at quality control in Section 6 of this chapter. The following diagram summarises the key points you should be familiar with. The major defence that the auditor has in this situation is to show that the work was performed with due skill and care and that the judgements made about truth and fairness were reasonable based on the evidence available at the time.• • • • 1. You will have come across examples of the application of substance over form in your financial reporting studies eg the treatment of a finance lease. EC 2 The audit process Section overview This section provides brief revision of the audit process SP • 2. C Definition N Fair: The financial statements reflect the commercial substance of the company's underlying transactions and the information is free from bias.1 Overview IN You will have covered the audit process in your earlier studies. 4 Audit and Assurance . Chapters 4 – 6 of this study manual cover the audit in more detail.4 Is the company a going concern? Is the company managed effectively? Is there an adequate system of controls? Is the company susceptible to fraud? The audit opinion The key judgement made by the auditor is whether the financial statements give a true and fair view. The financial statements have been correctly extracted from the underlying records and those records reflect the actual transactions which took place. TI O The problem with making judgements such as these is that they can be called into question. O In practical terms this means that the information is presented in accordance with accounting standards and law.

SP 3 Statutory audit requirement Section overview All companies. in the early 1990s certain very small companies were granted an exemption. An ICAEW Helpsheet summarises the situation in the following diagram: Role and context of modern auditing 5 . the audit exemption criteria would be aligned with the small company criteria. except those meeting exemption criteria must have an audit IN • 3. for accounting periods ending on or after 1 October 2012.1 The audit threshold The basic principle is that all companies registered in the UK should be audited. However.Client acceptance/ continuance Considerations Ÿ Legal Ÿ Ethical Ÿ Practice C H A P T E R Establish/ reevaluate Ÿ Letter of engagement Plan the audit Ÿ Ÿ Ÿ Ÿ Obtain an understanding of the entity Evaluate internal control Assess risks Establish materiality Develop the audit approach Ÿ Ÿ Audit strategy Audit planning Audit internal control Ÿ Ÿ Tests of controls Sampling Audit business processes Ÿ Ÿ Ÿ Analytical procedures Tests of details Sampling Evaluate results Ÿ Ÿ O C N O Analytical procedures Additional procedures? TI Issue audit report Ÿ Consider other reporting requirements EC Point to note: PY 1 ISA 200 requires that the audit should be planned and performed with an attitude of professional scepticism. Professional scepticism is covered in detail in Chapter 4. In September 2012 the UK Government announced that.

a company should have an audit. or members. irrespective of size. deposited at the registered office at least one month before the end of the financial year in question. The demand for the financial statements to be audited should be in the form of a notice to the company. or • A public company.Investment Circulars Audits Practice Notes and Bulletins Ethical Standards for Auditors The Auditors' Code EC TI International Standards on Auditing (UK and Ireland) O N Ethical Standards For Reporting Accountants C O Bulletins PY Bulletins Other Assurance Engagements Guidance Ethical and Engagement Standards Standards for Investment Reporting Statements of Standards for Reporting Accountants Framework of Fundamental Principles Quality Control Standards International Standards on Quality Control (UK and Ireland) Structure of FRC Audit and Assurance Pronouncements SP IN Notice however. Audit and Assurance . holding at least 10% of the nominal value of the issued share capital or holding 10% of any class of shares. even if a small company met these criteria. if 6 • It is a regulated company such as Financial Services Authority regulated businesses and insurance providers (S478). or – in the case of a company limited by guarantee – 10% of its members in number. The notice may not be given before the financial year to which it relates. it must still have its accounts audited if this is demanded by a member. In addition.

2 so that any company which meets the small company criteria can choose to be exempt from audit (ie if the company meets two out of the three following criteria: no more than 50 employees. A director is required to Exhibit a degree of skill that can reasonably be expected Take such care as an ordinary man might be expected to take on his behalf SP – – • Conflicts of interest IN Directors should not place themselves where their personal interest conflicts with their duty to the company. These duties are as follows: 'Enlightened shareholder value' duty N • • TI The likely long term consequences The interests of employees Relationships with customers and suppliers The impact of the company's operations on the community and the environment The desirability of maintaining a reputation for high standards of business conduct The need to act fairly as between members of the company EC – – – – – – O The Companies Act 2006 requires directors to act in a way that they consider. the company may in certain circumstances void the contract. less than £6. If a director has an interest in a contract to which his company is party.1 The Companies Act sets down the responsibilities of the directors and auditors PY • Companies Act 2006 Directors' responsibilities C 4. • Fraudulent trading Directors will be responsible should the company trade with the intent to defraud creditors if they are knowingly party to such conduct.2 O The legal responsibilities regarding directors and auditors are currently contained in the Companies Act 2006. Responsibility will arise whether or not the company is in the course of winding up. Role and context of modern auditing 7 . Directors will be personally liable to the company for any loss suffered by the company (Regal (Hastings) Ltd v Gulliver). no more than gross assets of £3. etc of the company's assets. insurance. C H A P T E R 4 Legal responsibilities 1 Section overview 4.26 million. In doing so they should consider such factors as: Duty of skill and care Directors have the responsibility to take reasonable steps to ensure the safeguard.5m in turnover). in good faith would be most likely to promote the success of the company for the benefit of its members as a whole. The majority of the auditing requirements of the Act came in to force for periods on or after 6 April 2008.Points to note: 1 The criteria use UK accounting terminology rather than IFRS terminology as they are required by UK law. This is covered in Chapter 15.

These restrictions are probably the main legal safeguard available against directors abusing their position in a company. However.3 4. This is an important area for the auditor because he has a specific duty to disclose details of directors' transactions in the audit report if not disclosed elsewhere. • Theft If a company obtains property or pecuniary advantage by deception and the director has consented. 4.1 Directors' loans and other transactions Background IN The Companies Act 2006 imposes restrictions on dealings between a company and its directors in order to prevent directors taking advantage of their position. Failure to do so may render every officer of the company liable to a fine or imprisonment. One of the main ways in which this duty can be carried out is to implement an effective system of controls. subject to any material departures disclosed and explained in the financial statements – Prepare the financial statements on a going concern basis unless it is an inappropriate assumption – Ensure the financial statements are delivered to Companies House within the specified time. The disclosures ensure that shareholders and other stakeholders will be informed about all the significant transactions entered into by a company with its management that might benefit those individuals. which are sufficient to show and explain the company's transactions. 8 Audit and Assurance . The information is very sensitive. complexity and the potential lack of any formal documents.3. An action may be brought against the director if at some time before the commencement of the winding up the person knew or ought to have concluded there was no reasonable prospect of avoiding liquidation. O N – • TI A statement of directors' responsibilities should be included in the financial statements. this statutory provision does not prevent a company from buying and maintaining insurance against such a liability. this is covered in Chapter 15. Directors' and officers' insurance • EC Generally a company cannot indemnify a director against a liability arising from an act of negligence. Annual accounts O • C Directors have a number of responsibilities with regard to the annual accounts. the directors have an overriding responsibility to ensure they have adequate information to enable them to fulfil their duty of managing the company's business. and it is difficult to audit due to materiality. Safeguarding the assets SP Responsibilities to safeguard the assets of the company includes the prevention and detection of fraud. • Accounting records PY A company is required to keep adequate accounting records. then the director will be liable as well as the company. default or breach of duty. Again. The directors are required to Select suitable accounting policies and apply them consistently – Make judgements and estimates that are prudent – State whether applicable accounting standards have been followed.• Wrongful trading Where a company is in the course of winding up the provisions of wrongful trading may apply. In addition to the statutory requirement.

minor (including step) children A company with which a director is associated (ie controls > 20% voting power) Trustee of a trust whose beneficiaries include the director or connected person Partner of the director or connected person 1 Loan. or Value > 10% of company's net assets (per latest accounts). A transaction is substantial if • • Value > £100. who later reimburses the company (eg personal goods bought with company credit card). These include: • • • • Directors' spouses.3.000 made to directors or connected persons must be approved by the members of the company • Credit transactions > £15.3. A transaction where payment is deferred (eg goods bought from company on credit terms). Definitions Persons connected with a director. The company agrees to pay a third party on behalf of the director.4 Disclosure SP For all loans etc to directors • • • • Other transactions and contracts IN 4.000. Substantial property transactions between company and directors also require approval by members.5 Its amount An indication of the interest rate Principal terms Any amounts repaid Directors' interests in contracts Directors may have a personal interest in contracts planned or made by company. 4.000.3. eg because they are also directors of another company.000 must be approved by the members of the company.000 for the benefit of a director or a connected person must be approved by the members of the company EC TI • Where transactions are entered into without the required approval the transaction is voidable at the instance of the company. • Advances for legitimate business expenditure do not require approval. 4. In order for the resolution to be passed members must be provided with details of the nature of the transaction. A sum of money lent for a time to be returned in money or money's worth. N • O The following rules apply to public companies (or companies associated with public companies): Loans > £10. Directors must declare interests in contracts to board of directors at earliest opportunity. Members' approval C The following rules apply to all companies: Loans > £10.2 Definitions C H A P T E R The following definitions are relevant to your understanding of this issue. However the value of any transaction is not allowed to exceed £50.000 made to persons connected with a director must be approved by the members of the company • Quasi loans > £10.3 O Credit transaction. the amount of the loan and the purpose for which it is required and the extent of the company's liability.3.4. Role and context of modern auditing 9 . PY Quasi-loan.

auditors should check particularly that Company and each director are complying wholly with terms of contract • Terms themselves comply with Companies Act requirements and are consistent with company's articles. If not approved the transaction is voidable by the company. adequate for audit purposes.4 • Form an independent opinion on the truth and fairness of the financial statements • Confirm that the financial statements have been properly prepared in accordance with the relevant financial reporting framework and the Companies Act 2006 • State in their audit report whether in their opinion the information given in the directors' report is consistent with the financial statements. Auditors' responsibilities Under the Companies Act 2006. Whether: N Proper returns.000 (de minimis limit). Service contracts Members must approve long service contracts for directors (> two years). 10 Audit and Assurance . the correct disclosure must be included in the auditor's report (due to the particularly sensitive nature of this information and its importance to users of the accounts). have been received from branches The accounts agree with the underlying records Adequate accounting records have been kept All necessary information and explanations have been obtained O • • • • In the case of a quoted company whether the auditable part of the directors' remuneration report has been properly prepared.Exception: the transaction is not substantial if < £5. The auditor also has a duty towards other information in documents containing audited financial statements in accordance with ISA (UK and Ireland) 720A The Auditor's Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements (see Chapter 6). EC TI If the accounts (or directors' remuneration report) omit or incorrectly disclose information on directors' emoluments. it is the external auditor's responsibility to: PY 4. In examining directors' service contracts. Point to note: IN SP The scope of an audit under UK law and ISAs is now set out in formal guidance that can be crossreferred to from auditor's reports (see Chapter 6). loans and other transactions. Service contracts must be open to inspection by members. C O • The auditor will also report by exception on the following.

Previously these were issued by APB. the Councils. including practising professionals. and overseeing the work of.1 FRC Board TI Audit & Assurance Council N Actuarial Council Monitoring Committee Case Management Committee Financial Reporting Review Panel Tribunal O Accounting Council Conduct Committee Executive Committee To set high standards of corporate governance through the UK Corporate Governance Code To set standards for corporate reporting and actuarial practice To monitor and enforce accounting and auditing standards To oversee regulatory activities of the actuarial profession and professional accountancy bodies To operate independent disciplinary arrangements for public interest cases SP • • • • • EC The revised role of the FRC Board is as follows: The FRC Board is supported by three committees. the Codes and Standards Committee.1.1. Point to note: IN The FRC is now responsible for Auditing Standards. 5. Auditing and Assurance and Actuarial technical standards. The FRC Board and the Codes and Standards Committee are advised by three Role and context of modern auditing 11 . This became effective from 2 July 2012. The revised FRC structure is summarised in the diagram below: O FRC Structure C FRC Board Codes & Standards Committee 5.5 International standards on auditing C H A P T E R Section overview The structure of the FRC has been revised • The International Auditing and Assurance Standards Board issues International Standards on Auditing • The IAASB has reissued its ISAs as a result of its Clarity Project • These have been adopted by FRC (previously APB) in the UK 1 PY 5.1 • FRC In June 2012 the UK Parliament approved a proposal to revise the structure of the FRC. The Codes and Standards Committee also advises on influencing the wider regulatory framework and on the FRC's research programme. Stewardship. the Executive Committee and the Conduct Committee. Accounting.2 Codes and Standards Committee The Codes and Standards Committee is responsible for advising the FRC Board on maintaining an effective framework of UK Codes and standards for Corporate Governance. It advises the FRC Board on the Annual Plan for Codes and Standards work and for making appointments to. It comprises FRC Board members together with others with particular technical expertise.

5. business plan.3 Executive Committee The basic purpose of the Executive Committee is to provide day to day oversight of the work of the FRC.6 below). Board agenda and management of the organisation • Advises the FRC Board and its Committees on requirements to establish new advisory groups to deal with specific issues • Debates and resolves issues affecting the Codes and Standards and Conducts divisions • Ensures consistency and connectivity between the various divisions and decides which part of the FRC should lead in cross-cutting issues PY Recommends the strategic direction to the FRC Board O 5. Audit and Assurance and Actuarial work (see Sections 5. the Audit Quality Review Team monitors the quality of the audits of listed and other major public interest entities and the policies and procedures supporting audit quality at the major audit firms.1.4 • Conduct Committee N Monitoring of Recognised Supervisory and Recognised Qualifying Bodies Audit Quality Reviews Corporate reporting reviews Professional discipline Oversight of the regulation of accountants and actuaries O • • • • • C The Conduct Committee is responsible for overseeing the FRC's Conduct Division. Its responsibilities include overseeing: FRC's Conduct Division TI The Conduct Committee is supported by two sub-committees: the Monitoring Committee and the Case Management Committee (see Sections 5.1. In particular it: • Oversees the implementation of the FRC business plan • Advises the FRC Board on the budget.1.5 EC The Conduct division encompasses the FRC's monitoring.8). 5.5 and 5.1.1. 12 Audit and Assurance . 5. For example. Audit and Assurance Council The Audit and Assurance Council is responsible for: Providing strategic input and thought leadership on audit and assurance matters • Considering and advising the FRC Board on draft Codes and Standards (or amendments thereto) • Considering and commenting on proposed developments in relation to international Codes and Standards and regulations • Considering and advising on research proposals and other initiatives IN SP • No more than half of the members can be practising members of the auditing profession.1. oversight and disciplinary functions through a number of teams.1.7 and 5.Councils covering Accounting.6 Accounting Council and Actuarial Council The role of the Accounting Council and the Actuarial Council is essentially the same as that of the Audit and Assurance Council but in relation to accounting and financial reporting and actuarial matters respectively.1.

or determined by a sanctions tribunal • Appointing a Financial Reporting Review Group • Referring matters to the Conduct Committee with a view to an investigation leading to a possible disciplinary action 1 PY Agreeing the assessment of the standard of audit work for individual audits reviewed Case Management Committee O 5. which nominates a majority of its members – others are nominated by the forum of firms – to issue professional standards.7 Monitoring Committee C H A P T E R The Monitoring Committee helps ensure the consistency and quality of the FRC's monitoring work.3 International Auditing and Assurance Standards Board Pronouncements SP 5.3. Interaction between FRC and IAASB Standards N The system in the UK currently works as follows: FRC (previously APB) Modifies TI ISA O IAASB Issues ISA as used by UK Auditors 5.1 EC FRC (previously APB) Adopts IAASB was set up by the International Federation of Accountants (IFAC).8 • 5. Its functions include: • Approving letters summarising the key findings from reviews of individual audit engagements • Agreeing the contents of public reports on individual firms in relation to audit quality • Determining conditions or sanctions for acceptance by auditors or audit firms (and referring matters to an independent tribunal if not accepted) • Requiring RSBs to implement conditions or sanctions accepted by an auditor or audit firm . It issues the following standards: International Standards on Auditing (ISAs) IN • • International Standards on Assurance Engagements (ISAEs) (applicable to assurance engagements which are not audits) • International Standards on Related Services (ISRSs) (applicable to other.5.2 C The Case Management Committee advises on the handling of disciplinary cases.1. non-assurance engagements) • International Standards on Quality Control (ISQCs) (applicable to all engagements carried out under any of the IAASB's standards) • International Standards on Review Engagements (ISREs) (are to be applied in the review of historical financial information) Role and context of modern auditing 13 .1.

with the aim of making the requirements within them clearer. This is covered in Chapter 12. IAPN 1000. This is a new category of pronouncement for use in issuing non-authoritative material. Special Considerations in Auditing Financial Instruments. ISAEs and ISRSs respectively.3 O N In exceptional circumstances.4 The final ISA is issued after approval by IFAC's Public Interest Oversight Board. by use of the word 'shall' where a requirement of the ISA is set out Less ambiguity Improved readability These standards are effective for audits of financial statements for periods beginning on or after 15 December 2009. • Exposure drafts are posted on the IAASB's website for public comment. and in making judgements about the identification and assessment of risks of material misstatement.2 C All International Auditing Practice Statements (IAPS) have now been withdrawn.3. Point to note: 5. • There is transparent debate as the proposed standard is presented at an IAASB meeting which is open to the public.3. 14 Audit and Assurance . Public Interest Activity Committee (PIAC) identifies potential new projects based on a review of national and international developments. – Making judgements about how to respond to assessed risks.It also issues the following practice statements: • International Auditing Practice Notes (IAPN). including judgements about procedures that may be appropriate in the circumstances. which reviews whether due process has been followed and clears the ISA for publication. including forming an opinion on the financial statements and communicating with those charged with governance. International Assurance Engagement Practice Statements (IAEPSs). and International Related Services Practice Statements (IRSPSs) are issued to serve the same purpose for implementation of ISREs. International Review Engagement Practice Statements (IREPSs). • Comments and suggestions are discussed at a further IAASB meeting. • A project task force is established to develop a new standard based on research and consultation. an auditor may judge it necessary to depart from an ISA in order to more effectively achieve the objective of an audit. during which they reissued existing ISAs. In March 2009 the IAASB completed its Clarity Project. Authority of ISAs ISAs are to be applied in the audit of historical financial information. When such a situation arises. Working procedures TI The working procedures of the IAASB can be summarised as follows. They provide practical assistance to the auditor and may help the auditor in: – Obtaining an understanding of the circumstances of the entity. Under this project. which is open to the public and if substantive changes are made a revised exposure draft is issued. SP EC • • Clarity Project IN 5. 5. or – Addressing reporting considerations. the auditor should be prepared to justify the departure. O • PY To date one IAPN has been issued. each ISA has: • • • • A stated overall objective Clarified obligations.

Ethical Standards for Auditors Bulletins Investment Circulars Audits Other Assurance Engagements PY Bulletins Statements of Standards for Reporting Accountants O C Standards for Investment Reporting N O Ethical Standards For Reporting Accountants TI Practice Notes and Bulletins International Standards on Auditing (UK and Ireland) The Auditors' Code International Standards on Quality Control (UK and Ireland) Guidance Ethical and Engagement Standards Framework of Fundamental Principles Quality Control Standards 5. Role and context of modern auditing C H A P T E R 1 15 .5.5 FRC FRC pronouncements The following summary diagram is provided in the FRC Scope and Authority of FRC Audit and Assurance Pronouncements.1 EC Structure of FRC Audit and Assurance Pronouncements SP IN 5.

considerations or procedures. resulting in EU statutory auditors being required to carry out audits in accordance with International Standards on Auditing. these standards were based on the IAASB ISAs in issue at that time. The APB Work Programme highlighted the need for the APB to be at the forefront of international developments by contributing to IAASB work projects and. the APB (now FRC) hoped to be able to withdraw such supplementary material as relevant ISAs were revised by IAASB. the number of supplementary requirements needed for the ISAs (UK and Ireland) has been significantly reduced. the development of European-wide auditing standards following recent amendments to the 8th EC Directive.5.5. nor do auditing standards provide a simple definition. and over time. SP 6 Quality control Section overview • Quality control procedures should be adopted: IN – – • 6. an APB consultation produced support for the APB view that the clarified standards were more rigorous and clearer than the existing ISAs and that they should be implemented in the UK and Ireland as soon as possible.3 PY The adoption of the ISAs at that time did not mean that the substance of UK auditing standards was abandoned. In areas where SASs were more advanced than ISAs. This additional material was clearly differentiated from the international standards.1 At the firm level On an individual audit Professional bodies also have a responsibility to develop quality control standards and monitor compliance Principles and purpose Audit quality is not defined in law or through regulations. additions to the ISA text were made to add enhanced requirements. This was indicated in their title – 'International Standards on Auditing (UK and Ireland)'. During 2008. 16 Audit and Assurance . rather than waiting for the EU decision. EC The Clarified ISAs (UK and Ireland) were issued as exposure drafts in April 2009 and the final versions were issued in October 2009. or where there were additional UK legal requirements. TI The APB contributed to the Clarity Project and many of its recommendations were accepted and. These standards apply to audits of accounting periods ending on or after 15 December 2010. Since that time the EU has been working towards the adoption of ISAs for the audit of all EU financial statements. in particular. 5. In the UK the APB (now FRC) decided to replace all its own standards – Statements of Auditing Standards (SASs) – with the equivalent ISAs for audits of financial statements covering accounting periods beginning on or after 15 December 2004.2 Relationship between ISAs and UK standards International Accounting Standards (IAS) have been adopted by all EU listed companies for accounting periods commencing on or after 1 January 2005. as a result. Point to note: Unless indicated otherwise this manual refers to the clarified ISAs (UK and Ireland). O N It is expected that the EU will adopt the clarified standards as a requirement for all audits throughout the EU.5. Harmonisation – Clarity standards for UK and Ireland C O When the APB (now FRC) first issued the ISAs (UK and Ireland) in December 2004.

proper working practices and effective quality control and monitoring review processes. The firm's managing partners are required to assume ultimate responsibility for the firm's system of quality control. and that reports issued by the firm or engagement partners are appropriate in the circumstances. 6.1 PY The fact that auditors follow ISAs provides a general quality control framework within which audits should be conducted. at its heart it is about delivering an appropriate professional opinion supported by the necessary evidence and objective judgements. Such individuals must have: Sufficient and appropriate experience and ability to carry out the job The necessary authority to carry out the job EC • • (2) Ethical requirements SP Policies and procedures should be designed to provide the firm with reasonable assurance that the firm and its personnel comply with relevant ethical requirements and in particular independence requirements. the entire business strategy of the audit firm should be driven by the need for quality in its operations. Such a culture must be inspired by the leaders of the firm. They may appoint an individual or group of individuals to oversee quality in the firm. The policies and procedures should be in line with the fundamental principles. who must sell this culture in their actions and messages. A summary of the key points is provided below. In other words. (3) Acceptance and continuance of client relationships and specific engagements A firm should only accept. C H A P T E R Many principles contribute to audit quality including good leadership. The standards on audit quality provide guidance to firms on how to achieve these principles. Elements of a system of Quality Control N ISQC 1 identifies the following six elements of the firm's system of quality control: (1) Leadership responsibilities for quality within the firm TI O The standard requires that the firm implements policies such that the internal culture of the firm is one where quality is considered essential. There are also specific quality control standards. ethical values and appropriate client relationships.2. Objective of ISQC 1 6.2 1 Quality control at a firm level 6. You have studied ISQC 1 in Audit and Assurance at the Professional level. technical competence.2 C O The objective set by ISQC 1 is for the firm to establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements. the firm should obtain written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent by ethical requirements.Although each stakeholder in the audit will give a different meaning to audit quality. experienced judgement. ISQC (UK and Ireland) 1: Quality Control for Firms that Perform Audits and Reviews of Financial Statements and other Assurance and Related Services Engagements deals with quality control at a firm level. which should be reinforced by: IN • • • • The leadership of the firm Education and training Monitoring A process to deal with non-compliance At least annually.2. or continue with. a client where: • It has considered the integrity of the client and does not have information that the client lacks integrity Role and context of modern auditing 17 .

work experience and coaching by more experienced staff. 18 Audit and Assurance . Ensuring good engagement performance involves a number of issues: IN • • • • • Direction Supervision Review Consultation Resolution of disputes Many of these issues will be discussed in the context of an individual audit assignment (see below). in accordance with standards and guidance. that is. to do so • It can comply with ethical requirements including appropriate independence from the client (4) Human resources The firm's overriding desire for quality will necessitate policies and procedures on ensuring excellence in its staff. The assignment of engagement teams is an important matter in ensuring the quality of an individual assignment. The firm should have policies and procedures to determine when a quality control reviewer will be necessary for an engagement. such a review must be completed before the report is signed. The firm should have policies and procedures in place to ensure that: Key members of client staff and those charged with governance are aware of the identity of the audit engagement partner • The engagement partner has appropriate capabilities. including time and resources.• It is competent to perform the engagement and has the capabilities. The firm must also have standards as to what constitutes a suitable quality control review. to provide the firm with 'reasonable assurance that it has sufficient personnel with the competence. These may be electronic. competence and time to individual assignments so that he will be able to issue an appropriate report. PY These will cover the following issues: Recruitment • Performance evaluation • Capabilities • Competence • Career development • Promotion • Compensation • The estimation of personnel needs O • C The firm is responsible for the ongoing excellence of its staff. Firms often produce a manual of standard engagement procedures to give to all staff so that they know the standards they are working towards. capabilities and commitment to ethical principles necessary to perform engagements in accordance with professional standards and applicable and regulatory requirements. and to enable the firm or engagement partners to issue reports that are appropriate in the circumstances'. education. This will include all audits of financial statements for listed companies. N This responsibility is given to the audit engagement partner. competence. authority to perform the role • The responsibilities of the engagement partner are clearly defined and communicated to that partner TI O • EC The engagement partner should ensure that he assigns staff of sufficient capabilities. When required. (5) Engagement performance SP The firm should take steps to ensure that engagements are performed correctly. through continuing professional development.

the audit firm may want to take legal advice. at least one engagement per engagement partner would be reviewed. These deficiencies might be one-offs. if necessary Point to note: All quality control policies and procedures should be documented and communicated to the firm's personnel. particularly with respect to materiality and significant risks • Whether appropriate consultation has taken place on matters involving differences of opinion or other difficult or contentious matters. EC There are two types of monitoring activity. and • Evaluation of the conclusions reached in formulating the report and considering whether the proposed report is appropriate. 'has it kept up to date with regulatory requirements?' An inspection cycle would usually fall over a period such as three years. Corrective action IN • • • • Remedial action with an individual Communication of findings with the training department Changes in the quality control policies and procedures Disciplinary action. an ongoing evaluation of the system of quality control and cyclical inspection of a selection of completed engagements. Monitors will be more concerned with systematic or repetitive deficiencies that require corrective action. they must monitor their system of quality control. in which time. other parties such as regulatory bodies • Whether documentation selected for review reflects the work performed in relation to the significant judgements and supports the conclusions reached C O PY • N (6) Monitoring • • • Relevant Adequate Operating effectively O The standard states that firms must have policies in place to ensure that their quality control procedures are: TI In other words. When evidence is gathered that an inappropriate report might have been issued. Monitoring activity should be reported on to the management of the firm on an annual basis. and the conclusions arising from those consultations • The significance and disposition of corrected and uncorrected misstatements identified during the engagement • The matters to be communicated to management and those charged with governance and.In particular the following issues must be addressed: • Discussion of significant matters with the engagement partner • Review of the financial statements or other subject matter information of the proposed report • Review of selected engagement documentation relating to significant judgments the engagement team made and the conclusions it reached. where applicable. C H A P T E R 1 For listed companies in particular the review should include: The engagement team's evaluation of the firm's independence in relation to the specific engagement • Significant risks identified during the engagement and the responses to those risks • Judgements made. An ongoing evaluation might include such questions as. Role and context of modern auditing 19 . SP The people monitoring the system are required to evaluate the effect of any deficiencies found.

the engagement partner ensures that the members of the engagement team are informed of: • Supervision Supervision includes: Tracking the progress of the audit engagement – Considering the capabilities of individual members of the engagement team and that they understand their instructions – Addressing issues that arise and modifying the audit approach if appropriate – Identifying matters for consultation or consideration by more experienced members of the audit engagement. • Direction TI The policies and procedures for quality control on individual audits parallel those for the firm outlined above. Their responsibilities The objectives of the work to be performed The nature of the entity's business Risk issues Problems that may arise Detailed approach to the audit engagement SP – – – – – – EC At the planning stage.1 O ISA 220 states that the objective of the auditor is to implement quality control procedures at the individual engagement level. The engagement partner is ultimately responsible for quality control on an individual engagement.3 • You will have studied ISA (UK and Ireland) 220 Quality Control for an Audit of Financial Statements in the previous Audit and Assurance paper. however. but also during the audit. For example ethical requirements must be considered. supervision and review.6. A summary of the key points is provided below. develop and support capable and competent staff giving due attention to the firm's human resources policies and procedures • Deliver quality audits consulting when needed and meeting requirements for engagement quality control review • Monitor and seek continuous improvement of the firm's system of quality control and carry out a periodic objective inspection of a selection of completed audit engagements O PY Document the operation of the quality control system Quality control on an individual audit C 6.3 Practical application The ICAEW Audit and Assurance Faculty publication Quality Control in the Audit Environment: A practical guide for firms on implementing ISQC (UK and Ireland) 1 recommends that firms take the following key steps to give them confidence that they are compliant with ISQC 1: • Lead from the top giving a consistent message on the importance of quality control • Always act ethically in accordance with relevant Standards and pronouncements • Accept only those engagements where the firm is confident it can provide a service in compliance with requirements with particular emphasis on integrity and competencies • Recruit.3. Policies and procedures N 6. of particular significance for individual audits are the procedures of direction. In addition. IN – 20 Audit and Assurance .2.

• Review C H A P T E R Reviewing concerns the inspection of work by engagement members by more senior members of the same engagement. • The quality assurance team leader must issue a written report upon completion of the review assignment including a conclusion on whether the firm's system of quality control has been designed to meet the relevant standards and whether the firm has complied with its system of Role and context of modern auditing 21 . such as Continuing Professional Development (CPD) guidelines. A cycle-based. This assistance can take various forms. SMO 1 was revised in November 2012 and has an effective date of 1 January 2014.4 The work has been carried out in accordance with professional and regulatory requirements Significant matters have been raised for further consideration Appropriate consultations have taken place and have been documented Where appropriate the planned audit work is revised The work performed supports the conclusions The evidence obtained is sufficient and appropriate to support the audit opinion The objectives of the engagement have been achieved C O IFAC Statement of Membership Obligations 1 (SMO 1) (revised) Quality Assurance sets out the requirements of an IFAC member body with respect to quality assurance review systems for its members who perform audits. Firms are responsible for implementing policies and procedures that comply with ISQC 1. other assurance and related services engagements of financial statements. The revised SMO includes an applicability framework that provides guidance on how to address obligations where organisations have varying degrees of responsibility for meeting the requirements of the SMO: Where IFAC members have direct responsibility that must implement all the requirements of the SMO • Where IFAC members have no responsibility for this area they must use their best endeavours to encourage those responsible to follow the requirements of the SMO and assist in their implementation if appropriate • Where responsibility is shared they must implement those that they are responsible for and use their best endeavours to encourage those responsible for the remainder to follow the requirements of the SMO O N • TI In particular SMO 1 (revised) makes the following points: IFAC believes that the following objectives have worldwide applicability and that member bodies should strive to achieve them: Member bodies must identify and undertake actions to have ISQC 1 and other relevant standards adopted and implemented and requirements established for firms to implement a system of quality control in their jurisdiction. and implement and maintain appropriate systems of quality control. risk-based or mixed approach for selecting firms for quality assurance review must be used. This includes ensuring that: – – – – – – – Assuring the Quality of Professional Services 1 PY 6. • Member bodies must assist their members to understand the objectives of quality control. All firms or partners performing audits must be considered in the selection process. SP EC • Member bodies must develop quality review programmes designed to evaluate whether firms (or an individual partner) have established and complied with appropriate quality control policies and procedures and are complying with those. or implementing programmes that enable firms to obtain an independent confidential assessment of their quality control policies and procedures. It covers many of the issues dealt with by ISQC 1 and ISA 220 but addresses them largely from the perspective of the role of the professional bodies eg ICAEW. IN • • Member bodies must require quality assurance review teams to follow procedures that are based on published guidelines. The procedures should include reviews of audit working papers and discussions with appropriate personnel. review.

timing. The ISA sets out certain requirements about what should be recorded. a manufacturer of waste paper bins. Audit and Assurance . Interactive question 1: Addystone Fish [Difficulty level: Intermediate] PY You are an audit senior working for the firm Addystone Fish. The former engagement partner to Wicker retired two months ago.1 O Audit documentation is an important part of quality control It provides evidence of work done to support the audit opinion Significant matters must be documented Audit working papers should be reviewed TI • • • • Audit documentation EC Audit documentation is a key part of the overall quality control framework during the course of an audit. the other partners have decided to leave the audit of Wicker largely in his hands. These include: 22 • Discussions undertaken with directors and • How the auditor addressed information that appeared to be inconsistent with his conclusions in relation to significant matters. and significant professional judgements made in reaching those conclusions. SP In your previous studies. The key general rule concerning what to include on a working paper to remember.' The key reason for having audit papers therefore is that they provide evidence of work done.quality control during the review period. You are unhappy with Wicker's inventory valuation policy and have raised the issue several times with the audit manager. you have learnt the practical issues surrounding how audit papers should be completed. • Member bodies must require firms to make improvements in their quality control policies and procedures where improvement is required. They may be required in the event of litigation arising over the audit work and opinion given. Reasons for negative conclusions should be given. Educational or disciplinary measures may be necessary. Corrective action should be taken where the firm fails to comply with relevant professional standards. and significant matters arising during the audit and the conclusions reached thereon. with recommendations for areas of improvement. He has refused to meet you on site to discuss these issues. such as the identifying characteristics of the specific items being tested. It also sets out points an auditor should record in relation to significant matters. ISA (UK and Ireland) 230 Audit Documentation provides guidance on this issue. You are currently carrying out the audit of Wicker Ltd. N 7 Documentation Section overview 7. Requirement O Comment on the situation outlined above. and extent of the audit procedures performed to comply with the ISAs and applicable legal and regulatory requirements and the results of the audit procedures and the audit evidence obtained. is: IN 'What would be sufficient to enable an experienced auditor. All audit work must be documented: the working papers are the tangible evidence of all work done in support of the audit opinion. having no previous connection with the audit to understand the nature. He has dealt with the client for a number of years and does not see what you are making a fuss about. As the audit manager had dealt with Wicker for so many years. C See Answer at the end of this chapter.

The junior has been carrying out audit procedures on the assertions of completeness and existence of non-current assets. See Answer at the end of this chapter. audit procedures have been completed and the memo below has been produced outlining some of the issues found during the audit. According to the junior. SP You are the audit senior responsible for the audit of Viewco for the year ending 31 December 20X1. This is sometimes called a peer review or hot review. the auditors' report etc. personnel not involved in the audit may be asked to review some or all of the audit work. giving reasons. Role and context of modern auditing 23 . as it allows a more senior auditor to evaluate the evidence obtained during the course of the audit for sufficiency and reliability. • The objectives of the audit procedures have been achieved. You are supervising the work of a relatively inexperienced audit junior. C The following should be reviewed on a timely basis. he should document why. Together with a junior member of staff.2 Review 1 PY We shall briefly revise here the review of working papers. Requirements (a) Explain why it is necessary for an auditor to prepare working papers. particularly in large complex audits. if subsequent events results in additional procedures being carried out). Finished goods are normally of the order of £3 million. 7. • The work performed and the results obtained have been adequately documented. • The conclusions expressed are consistent with the results of the procedures performed and support the audit opinion. what information the working papers relating to this inventory count attendance should contain. its financial year-end. O • The overall audit strategy and the audit plan • The assessments of inherent and control risks • The results of control and substantive procedures and the conclusions drawn including the results of consultations • The financial statements. proposed audit adjustments and the proposed auditors' report O N • EC TI In some cases. C H A P T E R The ISA also contains details about how the audit file should be put together and actions in the event of audit work being added after the date of the audit report (for example. if required. It carries out a full physical inventory count at its central warehouse every year on 31 December. It is an important quality control procedure. Interactive question 2: Documentation (revision) [Difficulty level: Intermediate] Viewco is a manufacturer of TVs and DVD players. You should be familiar with these points from your earlier studies. Work performed by each assistant should be reviewed by personnel of appropriate experience to consider whether: The work has been performed in accordance with the audit programme.If an auditor felt it necessary to depart from customary audit procedures required by audit standards. with components and work in progress normally approximately £1 million. and how the different test achieved audit objectives. so that more evidence can be obtained to support the audit opinion. Review of working papers is important. IN (b) State. • Any significant matters have been resolved or are reflected in audit conclusions. you will be attending Viewco's physical inventory count. Interactive question 3: TrucksToGo Ltd [Difficulty level: Intermediate] You are the audit senior on the audit of TrucksToGo Ltd.

engines missing. IN SP EC TI O N C See Answer at the end of this chapter. I am therefore happy that the vehicles belonged to the company and no further action is necessary. a significant number of assets were not available for verification – the vehicles were in use by the company and therefore not on the premises. On enquiry. and detail the action necessary to complete the audit procedures. 24 Audit and Assurance . Requirement O Explain to the junior why the evidence collected is insufficient. Part of the existence work on non-current assets included obtaining a sample of assets from the asset register and then physically verifying those assets. As an alternative. This representation was received in a meeting with the Finance Director and recorded on the audit file at this time. Refer to your objectives in reviewing audit documentation as a format for your answer. PY I have reached the conclusion that all non-current assets are correctly stated and valued in the financial statements. A number of vehicles were noted on the company premises in a poor state of repair. for example. the vehicle manager confirmed that the vehicles were under repair. vehicles on the premises were agreed back to the asset register.Memo: Issues identified during audit The directors have confirmed that there are no further non-current assets to include in the financial statements. Unfortunately.

C H A P T E R Summary and Self-test Summary Audit 1 Auditing standards Legal responsibilities International standards on auditing PY Statutory audit O Clarity Project – Enhanced shareholder value – Transactions with Company Opinion Set by IAASB and FRC N Auditors Apply to audit and assurance work O Directors C Purpose of ISAs TI Quality control standards – ISQC 1 EC Provides standards at Audit level – – – – – – Leadership Ethics Clients HR Engagements Monitoring IN SP Firm level Sections of standard Role and context of modern auditing 25 .

although additional work is required on the audit of some development expenditure which had not been included in LaFa's financial statements before. the services of your firm's accounts department will therefore not be required. The audit and other services engagement this year was agreed on the same fee as the previous year. The client is considered to be low risk. N Requirement 2 Bee5 O Identify and explain the risks which will affect the quality control of the audit of LaFa. (12 marks) 26 Audit and Assurance . resigned to take up a position as Finance Director in SoTee plc. However. (12 marks) TI You are the audit manager in charge of the audit of Bee5. as the managing board of WTR has yet to identify a suitable candidate. Bee5 has requested significant assurance work relating to a revision of its internal control systems. a construction company. The firm has offices in three cities in one country and provides a range of audit.Self-test 1 LaFa plc The WTR audit firm has 15 partners and 61 audit staff. Requirement IN Discuss the impact on the audit approach for Bee5 from the above information. SoTee is audited by a different firm of auditors. Make specific reference to any quality control issues that will affect the audit. Due to the retirement of the engagement partner from ill health last year. Suggest how the risks identified can be reduced. LaFa's parent company. Mr W. control systems are generally good and your assurance firm. Part of the outstanding work left by Mr W was the implementation of a system of ethical compliance for all assurance staff whereby they would confirm in writing adherence to the ICAEW codes of ethics and confirm lack of any ethical conflict arising from the code. PY LaFa plc is one of WTR's largest clients. Clients range from sole traders requiring assistance with financial statement production to a number of small plcs – although none is a quoted company. C O Part way through the audit of WTR. LaFa's management were insistent that WTR could continue to provide a similar level of service for the same fee. has normally assisted in the production of the financial statements providing some additional assurance of the accuracy and completeness of the statements. SP EC During the initial planning meeting with the client you learn that a new Finance Director has been appointed and that Bee5 will produce the financial statements this year. WTR provides audit services as well as preparation of taxation computations and some advisory work on the maintenance of complicated costing and inventory management systems. The current accounting software has become less reliable (increased processing time per transaction and some minor data loss due to inadequate field sizes). LaFa has been appointed a new engagement partner. WTR's quality control partner. Mr W has not yet been replaced. assurance tax and advisory services. The client will replace this software with the new Leve system in the next financial year but requires advice on amending its control systems ready for this upgrade. Sheridan & Co. Information on the development expenditure will be made available a few days prior to audit completion “due to difficulties with cost identification” as stated by the Finance Director of LaFa.

11 ISQC 1.20 ISQC 1.3 ISA 200.16 ISQC 1.3 ISA 230.12 • The identity of the preparer and reviewer must be documented IN • ISA 230.21 ISQC 1.9 Role and context of modern auditing 27 .9 ISA 220.32 N ISQC 1.48 3 ISA 220 Leadership responsibilities • Ethical requirements • Acceptance and continuance • Assignment of engagement teams ISA 220.10 • Inconsistencies regarding significant matters must be documented ISA 230.29 ISQC 1.8 ISA 220.14 • Engagement performance ISA 220.18–.12 4 ISA 230 Purposes of audit documentation • Should enable an experienced auditor to understand the procedures performed.C H A P T E R Technical reference 1 ISA 200 • Purpose of an audit • General principles of an audit ISA 200.15 EC TI O • ISA 220.8 Auditors must document discussions of significant matters with management ISA 230.11 • Departures from relevant requirements in ISAs must be documented ISA 230.2–. the results and evidence obtained and significant matters identified SP • ISA 230.24 1 2 ISQC 1 • Objective • Elements of a system of quality control • Importance of documenting procedures • Leadership • Ethical requirements • Independence • Acceptance and continuance • Human resources • Engagement performance • Monitoring PY ISQC 1.19 ISQC 1.26 ISQC 1.14–.17 C O ISQC 1.

Client acceptance A firm should only accept. There is the risk that deficiencies of quality control will go undetected. Lack of a comprehensive quality control review (the quality control partner resigning as noted above) increases the risk of poor quality work. ISQC 1. partners may not be aware of the full client list of WTR and hold shares in an audit client. The client has also indicated that information regarding development expenditure may not be available during the audit and will be subject to a separate audit check just prior to the signing of the financial statements and audit report. the partner in quality control resigned during the audit of LaFa plc and has not been replaced. even though the scope of the audit has increased. TI Policies and procedures should be designed to provide the firm with reasonable assurance that the firm and its personnel comply with relevant ethical requirements. SP The guidelines should be circulated and confirmed by all staff as soon as possible. the entire business strategy of the audit firm should be driven by the need for quality in its operations. Such a culture must be inspired by the leaders of the firm. and therefore subject to the ethical requirements of their professional body. over these guidelines. • Second. there is still room for inadvertent breach. EC In WTR. requires that the firm implements policies such that the internal culture of the firm is one where quality is considered essential. In the WTR audit firm. the client is placing fee pressure on WTR. This means that there is no one person in charge of maintaining quality control standards in the audit firm. a client where it: Has considered the integrity of the client and does not have information that the client lacks integrity • Is competent to perform the engagement and has the necessary time and resources • Can comply with ethical requirements including appropriate independence from the client IN • While there is little indication that LaFa lacks integrity. is it not clear that staff will comply with the code. there appears to be a lack of leadership on quality control. 28 Audit and Assurance . who must sell this culture in their actions and messages. There is a risk therefore that LaFa management is losing some integrity and WTR need to view other management evidence with increased scepticism. Two issues give rise for concern: First. While professional staff will be members of the ICAEW or similar body. For example. There is the risk that audit procedures will not be fully carried out to ensure that the tight budget is met. There could be an attempt to “force” an unmodified audit report when WTR should take more time (and money) auditing development expenditure. or continue with. audit staff may not be aware of WTR's policy on entertainment and therefore accept meals. While it is unlikely that staff will knowingly break the ethical code. Similarly. WTR is under fee pressure from LaFa plc to complete the audit and provide other services for the same fee as last year. for example. C O • Ethical requirements O N The quality control partner should be replaced as soon as possible while the fee situation with LaFa should be monitored – any potential cost overrun must be discussed with the client and where necessary additional fees agreed. In other words.Answers to Self-test 1 LaFa plc Culture of WTR PY The quality control auditing standard. precise implementation has not been confirmed within WTR.

Before accepting the engagement for this year Sheridan & Co must ensure that: • Income from Bee5 is not approaching 15% of the firm's total income. There is therefore no impact on the current year's audit as a result of this change. If. the audit partner of LaFa should have ensured that the audit team. O • C To decrease audit risk. it will be appropriate to maintain similar audit staff from last year (eg retain the audit senior and manager) and WTR could consider a second partner review to ensure WTR quality control standards have been followed. Role and context of modern auditing 29 . As this is a new audit area. Commencing the audit with the expectation of finding control deficiencies means that audit staff must be selected carefully. C H A P T E R Mr W accepting the position of Finance Director at SoTee appears to place the independence of WTR with LaFa in jeopardy. this year there is a request for additional assurance regarding the internal control systems. IN The control system used by Bee5 must still be evaluated to determine the extent to which the system is still reliable. had staff with the necessary experience to audit this item. however. and • There appears to be a tight audit deadline for auditing development expenditure. Regarding the audit of LaFa. the reason given by the client for the upgrade relates to reliability issues with the current control systems. This work will not only raise the amount of income generated from the client but will also require the use of specialist staff to perform the work. It may not be appropriate to send junior trainees with restricted experience to the client unless their work is closely monitored and carefully reviewed. However. there is some risk that control quality regarding audit monitoring will be compromised because: The audit partner is new. If these skills are not available then Sheridan & Co must either hire staff with those skills or decline the work on internal control systems. There will be a further impact on the quality control of the audit. EC • Ensure that staff familiar with the Bee5 internal control system are available to provide the assurance work. While SoTee is not an audit client. As Finance Director of the parent company. Lack of competence increases audit risk as the area may not be audited correctly or completely. then WTR must consider resignation from the audit of LaFa.The audit of LaFa plc this year includes development expenditure. Develop the audit approach An increase in control risk will cause detection risk to increase. The impact on the audit will be an increased level of substantive testing to obtain sufficient confidence on assertions such as completeness and accuracy. SP Plan the audit – evaluate internal control The current internal control system is due to be upgraded in the next financial year. the audit partner in WTR must ensure that no undue influence is being placed on LaFa. 1 Monitoring of audit PY The audit firm must have policies in place to ensure that quality control procedures are implemented and maintained. However. Bee5 N 2 Client acceptance TI O In previous years Bee5 has required a standard audit from your assurance firm. this is the case. and WTR has a whole. There will be consequent impact on the audit approach as noted below. Where deficiencies are identified then control risk will increase. and potentially the financial information being provided by that company. and may therefore not have extensive knowledge of the audit client. If income is approaching this level then additional independence checks may be required such as a second partner review. Mr W will be in a position to influence the management of LaFa.

30 Audit and Assurance . reliance will still be obtained from the overall control environment. However. Evaluate results IN SP EC TI O N C O PY The higher risk associated with the audit this year means that a quality control review will be appropriate for this client.Audit internal control – tests of controls As noted above detailed tests of control on the accounting system will be limited. Part of the planning process will be to book time of the quality control partner. Sheridan & Co needs to maintain the integrity of work performed as well as ensuring that the audit opinion is correct.

the failure to resolve the dispute is a breach of the firm's policy under ISQC 1. Assigning the audit to the experienced audit manager is not sufficient. At worst.C H A P T E R Answers to Interactive questions Answer to Interactive question 1 Several quality control issues are raised in the scenario: Engagement partner 1 An engagement partner is usually appointed to each audit engagement undertaken by the firm. In this case. at best. Answer to Interactive question 2 O Working papers are necessary for the following reasons: To assist the engagement team to plan and perform the audit • To assist members of the engagement team responsible for supervision to direct and supervise the audit procedures. to take responsibility for the engagement on behalf of the firm. it indicates that the firm does not have a suitable policy concerning such disputes as required by ISQC. the lack of engagement partner may have contributed to this failure to resolve the disputes. regulatory or other requirements SP (b) TI • EC (a) N C ISA 220 requires that the audit engagement partner takes responsibility for settling disputes in accordance with the firm's policy in respect of resolution of disputes required by ISQC 1. and to discharge their review responsibilities in accordance with ISA 220 • To enable the engagement team to be accountable for its work • As a record of matters of continuing significance to future audits • • To enable the conduct of quality control reviews and inspections in accordance with ISQC 1 To enable the conduct of external inspections in accordance with applicable legal. This does not appear to have been handled well. Conflicting views O In this scenario the audit manager and senior have conflicting views about the valuation of inventory. Information Reasons 1 Administration • Enables an organised file to be produced Date prepared • Enables papers to be traced if lost Initials of preparer • Any questions can be addressed to the appropriate person • Seniority of preparer is indicated • Evidence that guidance on planning. In any event. with the manager refusing to discuss the issue with the senior. PY The lack of audit engagement partner also means that several of the requirements of ISA 220 about ensuring that arrangements in relation to independence and directing. supervising and reviewing the audit are not in place. controlling and recording is being followed • Evidence of adherence to auditing standards IN Client name Year-end Title Initials of senior to indicate review of junior's work Role and context of modern auditing 31 .

For Viewco probably more counting of higher value finished goods • Ensures appropriate amount of procedures performed based on initial assessment • Clear plan for audit team 3 Objectives of attendance that is. that is. for example.Information Reasons • Enables auditor to familiarise himself with different types of inventory lines • Audit team will not miss the count (iii) Personnel involved • Auditor aware who to address questions/ problems to (iv) Copy of client's inventory count instructions and an assessment of them • Enables an initial assessment of the likely reliability of Viewco's count • Assists in determining the amount of procedures audit team need to do • C 2 Planning Enables compliance work to be carried out. checking Viewco staff follow the instructions • To ensure all areas covered at count • Clear where to find different models/components (i) Summary of different models of TVs and DVD players held and the approximate value of each Summary of different types of raw material held and method of counting small components Plan of warehouse O O (v) Time and place of count N (ii) PY Summary of different stages of WIP identified by client Location of any third party/moving inventory clear (vi) Details of any known old or slow moving lines • Special attention can be given to these at count for example. 32 Audit and Assurance . include in test counts (vii) Scope of test counts to be performed that is. number/value of items to be counted and method of selection. Details of controls testing procedures performed – observing Viewco's counters and ensuring they are following the instructions and conducting the count effectively. to ensure that the quantity and quality of inventory to be reflected in the financial statements is materially accurate • Reporting partner can confirm if appropriate/adequate procedures performed 4 Details of procedures performed • Provides evidence for future reference and documents adherence to auditing standards • Enables reporting partner to review the adequacy of the procedures and establish whether it meets the stated objective • Enable reassessment of likely reliability of Viewco's count • Enables assessment of chances of items being double-counted or omitted IN SP EC TI • A.

number of units and problem • TI (ii) O N For both of the above note inventory code.Information Reasons (i) Note of whether the area was systematically tidied (ii) Note of whether or how counted goods are marked C H A P T E R (iii) Note of how Viewco record and segregate any goods still moving on count day 1 • Enables assessment of overall standard of count and hence likely accuracy (v) • Evidence of independent checks may enhance reliability Evidence to support the accuracy and completeness of Viewco's count sheets Note whether counters are in teams of two and whether any check counts are performed PY (iv) Note of adequacy of supervision and general impression of counters B. dusty/ damaged boxes. Details of substantive procedures performed • From physical inventory to client's count sheet • • From Viewco's count sheets to physical inventory • O Details of items of raw materials or finished goods test counted: C (i) Evidence to support the existence of inventory recorded by Viewco Details of review for any old/ obsolete inventory for example. description. goods received as purchases and items in WIP are not also in raw materials and finished goods • Enables follow up at final audit to ensure that Viewco's final sheets are intact and no alterations have occurred SP • IN (iv) Copies of: (v) • Last few despatch notes • Last few goods received notes • Last few material requisitions • Last few receipts to finished goods Copies of client's inventory count sheets (where number makes this practical) Role and context of modern auditing 33 . Use a symbol to indicate agreement with Viewco's records Details can be followed up at final audit and the net realisable value investigated EC (iii) Details of review of WIP Assessment of volume of part complete items of each stage • Evidence in support of accuracy of quantity of WIP • Assessment of appropriateness of degree of completion assigned to each stage by Viewco (could describe items at various stages) • Details can be followed through at final audit to final inventory sheets • Basis for discussion of any description • Enables follow up at final audit to ensure cut-off is correct that is. Note code. goods despatched are reflected as sales. description. number of units and quality.

then alternative evidence such as the log book is obtained. in practice the asset values need to be compared to the carrying amounts in the asset register and where the asset will no longer be used.Information Reasons 5 Summary of results • Senior/manager can assess any consequences for audit risk and strategy and decide any further procedures needed • Provides full documentation of issues that could require a judgemental decision and could ultimately be the basis for a qualified opinion • Indicates whether or not the initial objective has been met and whether there are any implications for the audit opinion In particular: (i) Details of any problems encountered (ii) Details of any test count discrepancies and notes of investigation into their causes 6 Conclusion PY (iii) Details of any representations by the management of Viewco Answer to Interactive question 3 Has the work been performed in accordance with the audit programme? O • C The non-current asset procedure of agreeing non-current asset details from the asset register to the actual asset is to confirm the existence of the asset – in other words that the asset should be included in the register. the objectives of audit procedures have not been achieved. it is unclear how the representation from the director was received – although it appears that this was only verbal. While your primary task was satisfying the assertions of existence and completeness. this fact needs to be recorded. I recommend that the procedures you were carrying out are completed as detailed in the audit programme. The audit procedure has therefore not been completed in accordance with the audit programme. • Have any significant matters been resolved or are reflected in audit conclusions? SP The fact that some vehicles were found obviously not in working order is cause for concern. • Have the objectives of the audit procedures been achieved? As already noted. Regarding the completeness of non-current assets. The difficulty with verbal evidence is that it can be disputed at a later date. 34 Audit and Assurance . not existence. I recommend that you prepare a list of the assets which are in a poor state of repair so additional valuation procedures can be performed on them. complete write off or disposal considered. where assets are obviously unusable. Agreeing physical asset details back to the register tests for the assertion of completeness. • O N I recommend that the existence test is completed as specified. Have the work performed and the results obtained been adequately documented? EC TI Adequate documentation normally means that written representations by management are recorded in writing. IN While no further action may be necessary on completeness and existence. I recommend that the director's representation is obtained in writing. either in a paper document or use of email or other electronic communication system that can be traced back to the client. where physical existence of the asset cannot be determined by seeing the asset. The issue is that assets may well be over-valued in the financial statements. However. that is all assets that should be recorded in the register are recorded – not that assets in the register do exist. There is still insufficient evidence to confirm the existence and completeness of non-current assets.

Your memo states that assets were correctly stated and valued. 1 Second. the audit procedures carried out do not relate to the valuation of those assets.• Are the conclusions expressed consistent with the results of the work performed and support the audit opinion? C H A P T E R The conclusion on the assertions of completeness and existence is incorrect. IN SP EC TI O N C O PY I recommend that when audit procedures are complete that the conclusion is amended to match the assertions being audited. audit procedures have not been completed correctly (see the point on completeness testing for example) which means that the assertion of completeness cannot be confirmed. Valuation procedures include the auditing of depreciation and not simply ascertaining the condition of those assets at the end of the reporting period. Role and context of modern auditing 35 . The point is not valid for two reasons: First.