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For Examinations to June 2017

REVISION ESSENTIALS HANDBOOK

ACCA
Paper P7 | ADVANCED AUDIT AND ASSURANCE
(INTERNATIONAL)

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ACCA

PAPER P7

ADVANCED AUDIT AND ASSURANCE


(INTERNATIONAL)

REVISION ESSENTIALS HANDBOOK


For Examinations to June 2017


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CONTENTS

CONTENTS
Page
Syllabus (iii)
Approach to examining (iv)
Core topics (v)
Regulatory environment 0101
Money laundering 0201
Code of ethics for professional accountants 0301
Professional responsibility and liability 0401
Quality control 0501
Professional appointments 0601
Business risk 0701
Planning, material and risk 0801
Evidence 0901
Evaluation and review 1001
Audit of financial statements 1101
Group audits 1201
Assurance services 1301
Reviews and related services 1401
Prospective financial information 1501
Forensic auditing 1601

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CONTENTS

Page
Auditor reports 1701
Additional reading 1801
Examiners report September/December 2015 1901
Analysis of past examinations 2001
Examination technique 2101
Frequently asked questions 2201

CAUTION: These notes offer guidance on key issues. Reliance on these alone is insufficient to pass the examination

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SYLLABUS

Aim Understand the current issues and developments


relating to the provision of audit-related and assurance
To analyse, evaluate and conclude on the assurance
services.
engagement and other audit and assurance issues in the
context of best practice and current developments. Position within the syllabus
Main capabilities
CR (P2) AAA (P7)
On successful completion of this paper, candidates should be
able to:
Recognise the legal and regulatory environment and its AA (F8)

impact on audit and assurance practice;


Demonstrate the ability to work effectively on an
assurance or other service engagement within a .
professional and ethical framework;
Assess and recommend appropriate quality control
policies and procedures in practice management and
recognise the auditors position in relation to the
acceptance and retention of professional appointments;
Identify and formulate the work required to meet the
objectives of audit assignments and the apply
International Standards on Auditing;
Identify and formulate the work required to meet the
objectives of non-audit assignments;
Evaluate findings and the results of work performed and
draft suitable reports on assignments; and

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APPROACH TO EXAMINING

Approach to examining the syllabus Time allowed: 3 hours 15 minutes


The examination is a three hour paper constructed in two Number of marks
sections. Questions in both sections will be largely
Section A: 2 compulsory questions (35 + 25) 60
discursive. However, candidates will be expected, for
example, to be able to assess materiality and calculate Section B: Choice of 2 from 3 (20 marks each) 40
relevant ratios where applicable. _____

Section A questions will be based on case study type 100


_____
questions. That is not to say that they will be particularly
long, rather that they will provide a setting within which a
range of topics, issues and requirements can be addressed. ! From September 2016 there is no distinction between 15
minutes reading and planning time and three hours writing
Different types of questions will be encountered in Section B
time. Candidates will be allowed to write in their answer
and will tend to be more focused on specific topics, for
booklet as soon as the exam starts.
example auditors reports, quality control and topics of
ISAs which are not examinable in F8, Audit and Assurance.
(This does not preclude these topics from appearing in Additional information
Section A). Current issues will be examined across a number All relevant regulations issued by 31st August 2015 will be
of questions. examinable from the September 2016 to the June 2017
examinations.
The accounting knowledge that is assumed for Paper P7 is
the same as that examined in Paper P2. However, knowledge
of exposure drafts and discussion papers relevant to P2 will
not be expected.

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CORE TOPICS

CORE TOPICS Tick when completed Tick when completed

Regulatory environment Other assignments


Regulatory framework Audit-related and assurance services
Money laundering Review engagements
Laws and regulations Prospective financial information
Professional and ethical considerations Forensic audits
Code of ethics and conduct Internal audit
Fraud and error Outsourcing
Professional liability Public sector performance information
Reporting
Practice management
Quality control Auditors reports
Advertising, publicity, obtaining professional work
Reports to those charged with governance
Tendering Assurance engagement reports
Current issues and developments
Professional appointments
Audit of historical financial information Professional and ethical
Business risk Transnational audits
Planning, materiality, risk Social, environmental and integrated reporting
Evidence Auditing standards
Evaluation and review Accountants, auditors, employers, profession
Group audits

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REGULATORY ENVIRONMENT

1 LAWS, REGULATIONS AND STANDARDS 2 STANDARD SETTERS


The assurance profession serves the public interest and FATF the Financial Action Task Force on Money
has a social contract with society. Laundering.
The structure that audit and assurance services operate IASB the International Accounting Standards Board.
under may be summarised as:
IAASB the International Auditing and Assurance
Standards Board.
IESB the International Ethics Standards Board for
ETHICAL
Accountants.

STANDARDS IOSCO the International Organisation of Securities


Commissions.
REGULATORY OECD the Organisation for Economic Cooperation
and Development.
STATUTORY 3 PUBLIC INTEREST OVERSIGHT BOARDS
3.1 Public interest
The international regulatory framework for audit and The collective well-being of the community of people
assurance services encompasses: and institutions the professional accountant serves.
the pronouncements of the International
Federation of Accountants (IFAC); and
principles of corporate governance.

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REGULATORY ENVIRONMENT

3.2 Bodies UK Financial Reporting Council (FRC)


IFAC UKs independent regulator responsible for promoting
Oversees IFACs auditing and assurance, ethics, and high quality corporate governance and reporting to
education standard-setting activities as well as its foster investment:
Member Body Compliance Program. Promotes high standards of corporate governance
US Sarbanes-Oxley (SoX) through the UK Corporate Governance Code and
UK Stewardship Code;
The Public Company Accounting Oversight Board
(PCAOB) created to protect investors and the public Sets the professional standards for corporate
interest by promoting informative, fair and independent reporting, auditing and actuarial practice;
auditors reports. Monitors and enforces accounting, auditing and
UK Audit Regulations ethical standards;
Areas covered by the Regulations include: Oversees the regulatory activities of the actuarial
Eligibility/application to become a registered profession and the professional accountancy
auditor; bodies; and

Qualifications (entry requirements, training, post- Operates independent disciplinary arrangements


qualification experience); for public interest cases involving accountants,
auditors and actuaries.
Conduct of audit work (application of auditing
standards);
Compliance and monitoring (application of the
Regulations and reviews);
Regulatory action; and
Disciplinary procedures.

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REGULATORY ENVIRONMENT

4 AUDIT COMMITTEES 4.2 Advantages and disadvantages


4.1 UK Corporate Governance Code Advantages
Controls and systems High level, effective and informed oversight.
Enhances market, public and stakeholder confidence.
Integrity of the financial statements.
Composed of independent NEDs using own initiative.
Internal controls and risk management systems.
Link for internal/external auditors to NEDs.
Annual report is fair, balanced and understandable.
Deterrent to fraud.
Whistle-blowing procedures.
Annual report allows users to assess companys Disadvantages
performance, business model and strategy.
Seen as an unnecessary legal/regulatory burden.
Internal audit Additional cost (not cost effective).
Effectiveness of internal audit. Difficulty in finding appropriate NEDs.
Asses work plan and findings. Risks and burdens of responsibility for NEDs.
Monitor managements responsiveness to findings. May not be able to embed (in systems and culture).
Appointment/termination of head of internal audit.
Direct access to board chairman/Audit Committee and
accountable to the Audit Committee.
External audit
Appointment, re-appointment and removal.
Remuneration and terms of engagement.
Independence and effectiveness of audit process.
Engagement to supply non-audit services.
Results of audit process, representation letter,
management letter.

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MONEY LAUNDERING

1 BACKGROUND Transparency of legal persons and arrangements; and


1.1 Money laundering International co-operation including mutual legal
assistance and extradition.
Money laundering is the process by which criminals
attempt to conceal the true origin and ownership of the 2 OFFENCES AND PENALTIES (UK)
proceeds of their criminal activity allowing them to
2.1 Principal offences
maintain control over the proceeds and, ultimately,
providing a legitimate cover for their illegal income. Failure to appoint a Money Laundering Reporting
Officer.
1.2 Financial Action Task Force on Money Laundering
Failure to implement appropriate risk management
FATF is an inter-governmental body which sets procedures and internal controls to comply with anti-
standards, and develops and promotes policies to money laundering legislation, including the provision of
combat money laundering and terrorist financing. training.
Policies cover Failure to undertake verification of identity of all new
clients before commencing a business relationship.
Legal systems including the scope of the criminal
offence of money laundering; Failure to apply ongoing monitoring of business
relationships, client due diligence and transactions.
Measures to be taken by financial institutions and non-
financial businesses and professions to prevent money Obtaining, concealing, retaining or investing funds or
laundering and terrorist financing, including: property or providing assistance to any person to do so,
if professional accountants know or suspect, or have
customer due diligence (CDD) and record-keeping;
reasonable grounds to know or suspect, that those funds
and
or property are the proceeds of criminal conduct or
reporting of suspicious transactions and compliance terrorist funding.
to an external financial intelligence unit (FIU).

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Failure to report any knowledge or suspicion as soon as 2.2 Fiscal offences


practicable that money laundering activities are being
Tax evasion.
carried out, or fail to make such a suspicion report.
2.3 Knowledge or suspicion
Failure to report a belief or suspicion of terrorist money
laundering in the course of their trade or profession. Knowledge is likely to include:
Doing or disclosing anything that might prejudice an actual knowledge;
investigation into such activities (e.g. tipping off). shutting ones mind to the obvious;
refraining from making inquiries;
Proceeding with a transaction without the consent of the
deterring a person from making disclosures; and
relevant authority following the submission of a
knowledge of circumstances which would indicate
suspicion report in accordance with a members firms
the facts to an honest and reasonable person and
internal procedures.
failing to make reasonable inquiries which such a
Falsifying, concealing or destroying documents relevant person would have made.
to a money laundering investigation.
2.4 Tipping-off
Failure to comply with a direction of the relevant
The offence of tipping-off occurs when an individual
authority not to proceed with a transaction or business
who has knowledge or suspicion, makes a disclosure to
relationship.
a third party (e.g. the suspected individual or entity)
Failure to maintain records in accordance with which is likely to prejudice a terrorist or money
legislative requirements. laundering investigation.
In certain cases, non-disclosure and non-action may be
effective tipping off (e.g. not carrying out a clients
instructions that constitutes money laundering, may be
sufficient to put them on guard).

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MONEY LAUNDERING

2.5 Professional duty of confidence Ensure that anyone who suspects money laundering
knows how to report this information to the MLRO.
Accounting professionals (e.g. ACCA members) will
not be in breach of any professional duty of confidence Provide the MLRO with the means by which the
if they report, in good faith, any money laundering reasonableness of the suspicion can be judged and
knowledge or suspicions to the appropriate authority. thereby assess which suspicions should be reported to
the appropriate authority.
3 PREVENTATIVE MEASURES
Client acceptance procedures should include
3.1 Risk management, internal controls and policies
identification procedures and gathering know your
Establishing a top-down, risk-based, anti-money client (KYC) information, including expected patterns
laundering culture embedded throughout the whole of business, business model, and source of funds.
organisation.
Client money procedures should include KYC,
Identifying the money laundering and terrorist financing commercial purpose of the transaction, source and
risks that are relevant to the professional accountants destination of the funds.
business: 3.2 Money laundering reporting officer (MLRO)
Being used by clients to launder assets; The MLRO should be suitably senior and experienced (e.g. a
Products and services offered that could aid money principals of an accountancy firm) and is responsible for:
laundering; considering internal reports of money laundering;
Client types and sectors, jurisdictions of client decide if there are sufficient grounds for suspicion;
origin, funding and investment; and
preparing the external report to present to the
Client activities, reputation, contacts and public appropriate authority;
profile.
advising the engagement individual/team on how to
Designing and implementing controls to manage and continue their work and interact with the client;
mitigate these risks, and record their operation.

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MONEY LAUNDERING

training the firms employees in anti-money laundering Sufficient information must be obtained, before any
and reporting suspicion procedures; potential client can be accepted, to understand:
advising how to proceed with work once an internal who the client is;
report and/or SAR has been made to guard against
where the client is an entity, who owns it and who is
tipping off or prejudicing an investigation; and
the ultimate owner;
the design and implementation of internal anti-money who controls it;
laundering systems and procedures.
the purpose and intended nature of the business
3.3 Record keeping relationship;
All client identification records together with a record the nature of the client;
of all transactions, in a full audit trail form, must be the clients sources of funds; and
maintained. the clients business and economic purpose.
Records of transactions must be kept in a readily For a normal risk individual, typical documentation
retrievable form for a period of at least five years includes official items, with a photograph, establishing
following the completion of the transaction (or series of the clients full name and permanent address.
transactions).
For a normal risk entity, obtaining from the Registrar of
3.4 Client due diligence Companies certificate of incorporation, companys
Client due diligence measures need to be carried out: registered address and a list of shareholders and
directors.
when establishing a business relationship;
Check detail against lists of known terrorist, terrorist
when carrying out an occasional transaction; organisations and other sanctions information.
where there is a suspicion of money laundering or
terrorist financing; and The greater the risk, the greater the depth, strength and
detail of KYC.
where there are doubts concerning the accuracy and
reliability of previous identification information.

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MONEY LAUNDERING

3.5 Suspicion Reporting


Recognition Professional accountants are legally required to report
knowledge or suspicions of money laundering to the
It is impossible to define suspicion. A suspicious
appropriate authority.
transaction or situation will often be one which is
inconsistent with the clients known legitimate business It is a criminal offence not to do so.
or personal activities. The key to recognition is to know
There are no de minimis concessions. The obligation
your client (KYC).
to report is irrespective of the amount involved or the
Examples of potentially suspicious transactions include: seriousness of the offence.
unusually large cash deposits; 3.6 Educating and training all staff
frequent exchange of cash into other currencies; Relevant individuals must be provided with training on:
a transaction where the counter-party to the how to report to the MLRO;
transaction is unknown;
how to identify clients;
any activity inconsistent with the normal business
how to recognise and deal with situations that may
activity; and
involve money laundering;
any activity involving off-shore business
the main money laundering offences; and
arrangements where there is no clear business
purpose underlying such arrangements. the businesss procedures to forestall and prevent
money laundering, including identification, record
keeping and reporting procedures.

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MONEY LAUNDERING

4 PROFESSIONAL CLEARANCE LETTERS 5 ANTI-MONEY LAUNDERING PROGRAMME


If suspicion has been (or may be) reported, businesses 5.1 Basic elements
and individuals need to be cautious in responding to
The basic elements to be considered when designing an
professional clearance letters.
anti-money laundering program include:
It is recommended that businesses and individuals do
Dedicated resources;
not respond to questions in professional clearance
letters concerning either: Written policies and procedures;
Comprehensive coverage;
their satisfaction as to the identity of an entity or
individual; or Timely escalation and resolution of matters;
Explicit management support;
whether any report of suspicion has been made, or
contemplated. Sufficient training and education; and
Regular review/audit of the program.

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CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

1 PROFESSIONAL CODES 2.1 Fundamental principles


1.1 Purpose Integrity.
Objectivity.
To provide professional accountants with guidelines for
Professional competence and due care.
maintaining an appropriate attitude and enhancing the
Confidentiality.
accountancy profession.
Professional behaviour.
To give accountability to the public.
2.2 Conceptual Framework
To codify behaviour beyond that which is incorporated
in legislation. Assists professional accountants (through guidance and
illustrative examples) in identifying, evaluating and
1.2 IESBA Code of Ethics for Professional Accountants responding to threats to compliance with the fundamental
principles, rather than merely following rules).
A committee of IFAC, the International Ethics
Standards Board of Accountants (IESBA) prepares and 2.3 Threats
issues the Code of Ethics for Professional Accountants.
Self-interest.
The IESBA code is intended to serve as a model for the Self-review.
member bodies of IFAC. Advocacy.
Familiarity.
The code sets standards of conduct and states
Intimidation.
fundamental principles to be the basis on which the
minimum ethical requirements should be founded. 2.4 Safeguards
Aim to eliminate or reduce to an acceptable level the
2 ACCA CODE OF ETHICS AND CONDUCT
threats faced.
Derived from the IESBA code.
Will vary depending on the circumstances.

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CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Two types Close business relationships (self-interest, intimidation).


Created by the profession, legislation or regulation. Financial interests (self-interest):
Within the work environment. Partners.
2.5 Ethical conflict resolution Employees.
Close family member.
Relevant facts.
Ethical issues involved. Loans and guarantees (self-interest).
Fundamental principles involved. Gifts and hospitality (self-interest, familiarity).
Established procedures followed.
The action followed and outcome. Provision of other services:
Alternative courses of action and consequences. Preparing accounting records and financial
Internal and external sources of consultation. statements (self-review).
3 INTEGRITY, OBJECTIVITY AND Valuation services (self-review).
INDEPENDENCE
Internal audit (self-review).
3.1 Principles and threats IT systems services (self-review).
Integrity and objectivity must be beyond question. Provision of temporary staff (self-review).
Independence in mind and independence in appearance.
Provision of litigation support services (self-
Threats to integrity and objectivity review, advocacy).
Fees and pricing (self-interest, intimidation). Provision of legal services (self-review, advocacy).
Overdue fees (self-interest). Recruitment of senior management (self-interest,
familiarity, intimidation).
Actual or threatened litigation (self-interest, intimidation).
Corporate financial services (advocacy, self-
Family and other personal relationships (self-interest, review).
familiarity, intimidation).

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CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Long association (self-interest, familiarity). 4.2 Improper use


Recent employment with an assurance client (self- Information acquired in the course of professional work
interest, self-review, familiarity). should not be used (or appear to be used) for personal
Future employment with an assurance client advantage.
(familiarity, intimidation, self-interest). Also applies to advantage of a third party.
Serving on the board of an assurance client (self- Experience gained can be used in another employment.
interest, self-review). Proprietary procedures and systems cannot.
Second opinions (professional competence, due care). 5 CONFLICTS OF INTEREST
4 CONFIDENTIALITY 5.1 Professional accountant v client
4.1 Improper disclosure Should place clients interests before own interests.
Information acquired in the course of professional work Should not accept or continue an engagement if there is
should not be disclosed to third parties. or is likely to be a significant conflict of interests.
Exceptions Any financial gain in excess of normal fees will always
result in a significant conflict.
With clients permission.
5.2 Client v client
Disclosure is obligatory required (no need for Avoid the interests of one client adversely affecting
permission) by a legal, regulatory or professional duty. those of another.
Disclosure is made (voluntarily) in the public interest Material conflicts of interests should be sufficiently
(auditors right to disclose). disclosed to enable all parties to make an informed
decision whether to engage or continue their
relationship with the firm.
If necessary, decline acceptance or discontinue.

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CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

Safeguards 6.1 Advertising


Strict policies, training and disciplinary actions. May contain any factual statement the truth of which
can be justified (but should not be unflattering to
Different assignment teams and regular independent
others).
review.
Must not:
Confidentiality agreements.
Advising clients to seek independent legal advice. bring ACCA into disrepute or bring discredit to
the professional accountant, firms or the
Disengagement as quickly as clients interests allow accountancy profession;
where the threat cannot be reduced to an acceptable
level. discredit the services offered by other professional
accountants;
6 ADVERTISING
claim superiority;
Must not bring the profession into disrepute when
marketing professional services. mislead (directly or by implication); or
Must be honest and truthful and not: fall short of local and national regulatory standards
Make exaggerated claims for services offered, regarding legality, decency, clarity, honesty and
qualifications possessed, or experience gained; or truthfulness.

Make disparaging references or unsubstantiated


comparisons to the work of another professional
accountant.

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CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

7 FEES 7.2 Fee quotations


7.1 Basis of fees A firm may obtain an assurance engagement for a fee
level that is significantly lower than that charged by the
General basis on which fees are computed should be set
predecessor firm, or quoted by another firm.
out in:
The firm must be able to demonstrate that:
promotional material;
tender documents; and the client has not been misled;
the letter of engagement. appropriate time and qualified staff are assigned to
Professional accountants can charge whatever fee they the task; and
consider appropriate based on: all applicable assurance standards, guidelines and
Seniority and professional expertise of persons quality control procedures are being complied
engaged in work; with.

Time taken; 8 DESCRIPTIONS AND NAMES.

Risk and responsibility entailed in work; Chartered Certified Accountant(s) cannot be used as
part of the registered name.
Urgency and importance of work to client; and
Should be consistent with the dignity of the profession.
Overhead expenses.
May indicate the range of services offered
Fees must not be calculated for an assurance
engagement on a percentage or contingency basis. Should not be misleading.
Should not be objectionable.

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PROFESSIONAL RESPONSIBILITY AND LIABILITY

1 FRAUD AND ERROR (ISA 240) 1.3 Management and auditor responsibilities
Objectives Those charged with governance and management
To identify and assess risks of material misstatement. To prevent and detect fraud and error:
To obtain sufficient appropriate audit evidence. Emphasis on prevention and risk management;
To respond appropriately to fraud or suspected fraud. Ensure culture of honesty and ethical behaviour.
1.1 Definitions Auditor
Fraud intentional act involving deception to obtain an To obtain reasonable assurance that financial statements
unjust or illegal advantage. are free from material misstatement (fraud or error):
Fraud risk factors events or conditions indicating an Critical application of professional scepticism;
incentive, pressure or opportunity to commit fraud. Consider susceptibility of misstatement due to fraud.

Error unintentional mistake in the financial statements Is not responsible for prevention of fraud and error.
(including omission). 1.4 Risk assessment procedures
1.2 Types of fraud Discussions with the engagement team (for example):
Fraudulent financial reporting how and where the financial statements may be
susceptible to material misstatement due to fraud;
Misstatements or omissions intended to deceive users:
how management could perpetrate and conceal
Accounting records or supporting documents; fraudulent financial reporting;
Events, transactions balances or other information;
Measurement, recognition and disclosure. how management could present disclosures to
deliberately obscure the understanding of the
Misappropriation of assets financial statements;
Theft or misuse (both tangible and intangible). how assets could be misappropriated;

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PROFESSIONAL RESPONSIBILITY AND LIABILITY

circumstances that might indicate aggressive Revenue is always a significant fraud risk. If
earnings management; considered not to be, full explanations must be
documented.
any management practices that could lead to
fraudulent financial reporting; 1.5 Effect on audit strategy and extent of work
unusual/unexplained changes in Audit strategy
behaviour/lifestyle of management or employees; Increase professional scepticism.
types of circumstances applicable to the client that, Reassess audit approach.
if encountered, might indicate the possibility of Nature, timing and extent of substantive procedures.
fraud; Procedures to match the risks identified.
how unpredictability will be incorporated into the Audit team
nature, timing and extent of the audit procedures to Specialist skills.
be performed; Stronger briefing, supervision and review.
audit procedures to be selected to respond to the Higher level of experienced staff.
entitys susceptibility to fraud; and Extent of audit procedures
the risk of management override of controls. Should not be predictable.
Use of experts.
Fraud control design, implementation and effectiveness.
Physical inspection of at risk assets.
Inquiries (to identify incentives, opportunity, etc) of: Targeted CAATs, data-mining, benchmarking.
those charged with governance; Targeted analytical procedures.
risk management personnel; Specific confirmation requests.
internal audit; Post prior-year audit transactions.
direct and indirect operating personnel;
employees who deal with susceptible transactions;
internal and external legal services.

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PROFESSIONAL RESPONSIBILITY AND LIABILITY

Override of controls Management


Journal entries and other adjustments. Factual findings.
Accounting estimates. Timely (if verbal, follow up in writing).
Business transaction rationale. Report to management level above those implicated.
Transactions outside of normal procedures.
Those charged with governance
1.6 Evaluation of audit evidence
Communicate all actual, suspicions of, or weaknesses in
Errors indicative of fraud. controls relating to, fraud.
Nature and cumulative effect of errors. Communicate concerns (if any) about managements
Discrepancies in the accounting records.
attitude to managing fraud risk.
Conflicting or missing evidence.
Declining auditor-client relationship. Discuss (e.g. with the audit committee) any implications
for further audit procedures.
1.7 Written representations
Regulatory and enforcement authorities
Managements responsibility for design,
implementation and maintenance of internal control to Duty of confidentiality normally precludes.
prevent and detect fraud. If duty can be overridden, seek legal advice.
May be statutory duty without informing the client.
Disclosure to the auditor of:
the results of managements risk assessment; and
knowledge of fraud or suspected fraud.
1.8 Communication with management and those
charged with governance
If there is doubt on whom to report, auditors must seek
legal advice, or ACCA advice, before taking any action.

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PROFESSIONAL RESPONSIBILITY AND LIABILITY

1.9 Withdrawal from the engagement 2 LAWS AND REGULATIONS


In exceptional circumstances: 2.1 Non-compliance
Management does not take the necessary remedial Acts of omission or commission (intentional or
action regarding fraud; unintentional) by an entity or on behalf of the entity, that
are contrary to prevailing laws or regulations.
Results of audit tests indicate a significant risk of
material and pervasive fraud; and/or 2.2 Types of laws and regulations
There are significant doubts about the competence Direct affect form and content of the financial
or integrity of management (or those charged with statements (e.g. IFRS, true & fair view).
governance).
Indirect affect operational aspects or conduct of the
Factors to consider include: business that may impact the financial statements (e.g.
operating licence, breaches of health & safety laws,
Whether management or those charged with
financial consequences).
governance are implicated;
2.3 Management and auditor responsibilities
The effects on the auditor of continuing an
association with the client; Management to ensure that operations are conducted
within the laws and regulations applicable to the entity.
Any professional and legal responsibilities in such
circumstances; Control environment and systems.
The alternatives, if any, to withdrawal; and Auditors to plan, perform and evaluate the audit
recognising material effects of non-compliance.
Legal advice.
Procedures are similar to the audit approach to
fraud.

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PROFESSIONAL RESPONSIBILITY AND LIABILITY

2.4 Indications that non-compliance may have occurred 3 EXPECTATIONS GAP


Enquiries or investigations by regulators, authorities, etc. The difference between what the public believes the
Fines and penalties. auditor ought to do and report and what the audit
Indications of fraud. profession requires its members to do and report.
Media comment.
Public view fraud prevention should be part of the
2.5 Non-compliance discovered auditors work (where were the auditors?)
Considerations Auditors view to plan and perform the audit taking
into consideration (reasonable assurance) the risk of
Understand nature, circumstances, effect on financial
material misstatement arising from fraud and error.
statements.
3.1 Components
Potential consequences include:
Reporting gap the professions and publics view of
fines;
what should be reported differ.
penalties;
damages; Performance gap where auditors perform below
threat of expropriation of assets; existing standards.
enforced discontinuation of operations; or
litigation. Liability gap the professions and publics view of to
whom the auditor is liable are different.
Implications for the auditors report.
3.2 Bridging the gap
Procedures
Detection of fraud
Document, discuss, consult, consider.
Auditors should detect fraud requires fundamental
2.6 Reporting non-compliance and withdrawal from change in the nature and objective of the audit.
engagement
Regular forensic audit for all public interest entities
Essentially the same as for fraud and error. should be introduced.

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PROFESSIONAL RESPONSIBILITY AND LIABILITY

Independent oversight A duty of care would be owed where:


IFAC, FRC and SoX have established public oversight Foreseeability of damage to the third party;
bodies and independent standard setting, monitoring A relationship of proximity with the third party;
and disciplinary bodies. and
A situation where it would be fair, just and
Auditors report
reasonable to impose a duty of a given scope on
Must be more informative to enable users to make the professional accountants.
relevant/reliable investment and fiduciary decisions.
4.2 Limiting liability
Updated ISAs issued in January 2015. Effective for
In general, auditors are prohibited by many jurisdictions
audits of financial statements for periods ending on or
from entering into arrangements to limit their liability.
after 15 December 2016.
Limited liability partnerships (LLP) and liability
4 LIABILITY
limitation agreements are two vehicles for limiting
4.1 In contract liability that may be used in some jurisdictions.
The auditor has a contractual relationship with his client Arguments for, include:
and may therefore be sued for breach of contract.
joint and several liability is considered to be unfair
The auditor must carry out his work with reasonable where other parties (e.g. directors) may also share
skill and care. Failure to do so is a negligent breach of negligence;
contract.
the audit market may shrink as a leading firm may
Negligence is determined through: be sued out of existence;
A duty of care was owed; higher risk entities (e.g. international
A breach of that duty has arisen; and organisations) may become un-auditable; and
Financial loss has been suffered.
fees may substantially increase to cover higher
risks.

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PROFESSIONAL RESPONSIBILITY AND LIABILITY

Limited liability partnerships The contractual limits could be set on:


As a separate legal entity the LLP will be liable to the the auditors proportional share of the
full extent of its assets. responsibility for any loss;
The liability of LLP members will be limited to the a monetary cap;
investment made in the LLP.
an agreed formula (e.g. x times the audit fee); or
The personal assets of each member will be protected.
the fair and reasonable test.
Negligent engagement partners can be individually
5 LITIGATION
sued.
5.1 Managing
LLPs are required to file audited annual financial
statements. Sound client acceptance procedures.
Limited liability agreements Engagement letters.
Permit companies to limit the liability of their auditors Quality control.
provided that shareholder approval is obtained.
Full documentation and notes.
Not the same as a disclaimer of responsibility in the
Using expert advice.
auditors report.
Clauses disclaiming liability to third parties (e.g.
To be valid the agreement must:
Bannerman clause).
be fair and reasonable in the circumstances;
Limiting use of reports.
be for the current year only; and
Hold harmless clauses.
approved by a resolution of the entitys
Professional indemnity insurance (PII).
shareholders.

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QUALITY CONTROL

1 QUALITY CONTROLS 2 AUDIT FIRM ISQC 1


1.1 Documents 2.1 Elements
Statements of Membership Obligations SMO 1 Leadership responsibilities for quality within the firm
Quality Assurance Implemented by Member Bodies. the buck stops here.
International Standard on Quality Control ISQC 1. Ethical requirements Code of Ethics, staff
declarations, identify and deal with threats to
International Standard on Auditing ISA 220.
independence, senior staff rotation.
Audit Quality Framework.
Acceptance and continuance of client relationships and
1.2 Importance of quality control specific engagements.
Achieve audit objectives. Human resources recruitment, training, career
Operate effectively, efficiently and economically. development, performance reviews, technical standards,
Avoid disputes with clients professional competence, commitment to ethical, legal
Minimise risk of litigation. and regulatory standards.
Provide a professional service to clients.
Assignment of engagement teams.
Ensure regulatory body visits proceed smoothly.
Ensure staff are monitored and controlled. Engagement performance briefing, supervision,
Help identify training needs at all levels. review.
Ensure staff appraisal systems operate effectively at all
Consultation internal and external with those of
levels.
appropriate expertise (e.g. to resolve difficult or
contentious issues).
Engagement quality control review pre-issuance
reviews (hot reviews) of all listed and high risk
assignments.

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QUALITY CONTROL

Monitoring reasonable assurance that quality control 3.2 Assignment of engagement teams
works (e.g. post issuance review (cold reviews) and
Understanding and practical experience (as a whole) of:
audit regulation reviews)
audit procedures;
3 INDIVIDUAL AUDIT
professional standards;
3.1 ISA 220 regulatory and legal requirements;
technical knowledge;
ISA 220 basically takes the requirements of ISQC 1 and
professional judgement and scepticism; and
applies them at the level of the individual audit.
quality control procedures.
Engagement partner takes leadership
responsibilities. 3.3 Direction

Firm and audit staff are independent of client and Informing engagement team of :
have complied with all ethical requirements. their responsibilities;
Acceptance review carried out (e.g. integrity of nature of the business;
client, ability to act, engagement letter). risk-related issues; and
detailed audit approach.
Engagement team has appropriate abilities and
competence. May be communicated through:
Appropriate direction, supervision and review team briefing (face to face)
planned and applied. audit programme;
time budgets; and
Sufficient appropriate audit evidence obtained to
overall audit strategy and plan (planning
support the audit opinion.
memoranda).
Consultation undertaken, correctly applied and
recorded.
Engagement review planned and actioned.

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QUALITY CONTROL

3.4 Supervision 3.5 Review


The monitoring of the assignment progress to consider Work performed by each assistant needs to be reviewed
whether: by more experienced personnel to consider:
assistants have the necessary skills and work performed is in accordance with audit
competence; program;
assistants understand the audit directions; and work performed and results obtained are
adequately documented;
work is being carried out in accordance with the
overall audit plan and the audit program. all significant audit matters have been resolved or
are reflected in audit conclusions;
Informed of and addresses significant accounting and
auditing questions. objectives of audit procedures have been achieved;
Resolves any differences of professional judgment audit evidence is sufficient and appropriate to
between personnel. support audit opinion; and
Identify matters requiring higher level consultation. conclusions expressed are consistent with the
results of the work performed and support the
audit opinion.
3.6 Quality control review formats
Audit review panel.
Second partner review.
Pre-issuance (hot) review.
Post-issuance (cold) review.

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QUALITY CONTROL

4 AUDIT QUALITY FRAMEWORK Process


Rigorous audit process and quality control.
Outputs
External (e.g. auditors report) and internal (e.g.
deficiencies letter).
Interactions
Key players in the financial supply chain.
Auditors, management, those charged with
governance, shareholders, regulators, users.
Contextual
Factors that have the potential to affect the nature and
quality of financial reporting and audit quality.
Reporting framework.
Laws and regulations.
Business practices.
Inputs Corporate governance.
Culture.
Auditors: Litigation environment.
values, ethics, attitudes; and Audit regulation.
knowledge, skills, experience Human resources.

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PROFESSIONAL APPOINTMENTS

1 NEW APPOINTMENTS 2 CLIENT SCREENING AND ACCEPTANCE


1.1 Professional scepticism A basic quality control (due diligence) procedure to
ensure appropriate ethical and business considerations are
Throughout the entire client screening, professional
undertaken before a new client is accepted (or current
enquiry and engagement acceptance procedure, it is
appointment continued) and that the risks of
critical that the auditor applies professional scepticism.
accepting/continuing with the client are assessed.
Situations where professional scepticism would be
Ability to audit (potential) client practical and
applied include:
ethical considerations.
the reason for changing auditor;
Understanding the business governance,
reasons for disagreements with previous auditor; environment, risks, processes, controls.
understanding the integrity of those charged with Association with the (potential) client
governance and management; reputational risk.
establishing pre-conditions of an audit; Financial viability of the (potential) client fee
recovery.
understanding the entity and its business
environment; Legal requirements money laundering due
diligence.
understanding the control environment;
Logistics timing, staff allocation, specialist
application of accounting policies, use of requirements.
estimation and fair values;
Question Do we wish to accept/continue with this
use of managements experts;
firm as a client?
areas that require a high degree of subjectivity;
and
assessing responses to professional enquiries.

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PROFESSIONAL APPOINTMENTS

3 PROFESSIONAL ENQUIRY 3.2 Existing accountant


3.1 Nominee The existing accountant should obtain clients
permission to discuss his affairs with the nominee.
The nominee should:
They should answer without delay
request prospective clients permission to
communicate with existing accountant; and that there are no matters of which the nominee
should be aware; or
with permission, write to existing accountant
requesting information relevant to deciding those factors of which the prospective accountant
whether or not to accept the appointment. should be aware.
If permission is refused, the appointment must be Existence of unpaid fees is not of itself a reason for
declined. declining nomination.
If a conflicting view between client and current 3.3 Working papers
auditor/adviser is raised, discuss with client to be
Access to working papers assists successor auditors
satisfied that:
work, for example, on opening balances and
clients view can be accepted as reasonable; and/or comparatives (e.g. attendance at inventory count).
client will accept that nominee might express a Client and nominee auditor usually have no rights of
contrary opinion. access to existing auditors working papers.
If current auditor/adviser does not respond within a Professional courtesy may permit reasonable access to
reasonable time: key working papers.
phone or fax; and In some jurisdictions (e.g. UK) it is a legal
requirement to allow access to working papers.
if all else fails, send a final letter by recorded
delivery stating that no matters will be assumed Proprietary documents and audit methodology
unless advised otherwise. cannot be accessed.

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PROFESSIONAL APPOINTMENTS

4 TERMS OF AUDIT ENGAGEMENT 4.2 Purpose of the engagement letter


4.1 Preconditions Helps to avoid misunderstanding between the client and
auditor.
To establish if the preconditions for an audit are present, the
auditor should: Documents and confirms:
Assess the appropriateness and acceptability of the managements and auditors acceptance of
financial reporting framework. respective responsibilities;
Obtain managements agreement that it acknowledges auditors acceptance of the appointment;
and understands its responsibilities for:
the applicable reporting framework;
the preparation and fair presentation of the
objective and scope of the work (audit); and
financial statements (according to the framework);
form and content of reports (including
internal controls (so financial statements are free
modifications, limitations and restrictions on use).
from material misstatement); and
May have a separate section dealing with other relevant
providing the auditor with unrestricted access to all
details (e.g. fees, timetable, other services, etc).
relevant information and necessary persons (to
obtain audit evidence). Should be reviewed at time of re-acceptance of
assignment and new letter issued for changes in
legislation/GAAP, new directors etc.

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PROFESSIONAL APPOINTMENTS

Main contents for an audit 5 TENDERING


Objective and scope of the audit. The process of inviting more than one firm to compete
for the assurance assignment of the entity.
Managements responsibilities.
5.1 Potential benefits
Financial reporting framework applied.
For the entity
The form of the auditors report.
Obtaining the service at a lower cost or a better service
The fact that there is an unavoidable risk that some
for the same cost or improved service content at a
material misstatement may remain undiscovered.
competitive cost.
Expectation of receiving from management written
Being able to compare firms methodologies, services
confirmation concerning representations made in
and cultures.
connection with the audit.
Being able to establish the best fit with a firm.
Unrestricted access to whatever records, documentation
and other information are requested. For the audit firm appointed
Agreement that management will inform the auditors of A new (good) client and fee obtained, on the basis of
any material subsequent events between the date of the successful client screening procedures.
auditors report and the issue of the financial statements.
Knowledge obtained during the tendering process will
The auditor's responsibilities for other information assist in an effective first audit.
received after the date of the auditor's report.
Knowledge and experience gained may have
Basis on which fees are computed and any billing application to current clients, future clients and future
arrangements. tenders.

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PROFESSIONAL APPOINTMENTS

5.2 Potential risks 5.4 Invitation to tender


For the entity Need to give a broad indication of the information
required to be included in the audit firms written
Being blinded by the presentation and failing to
responses.
identify the true (negative) features of the firm or failing
to identify the intangible benefits of the firm. Background on firm;
Experience of firm in the relevant sector;
Being low balled and failing to appreciate the true
Audit team (e.g. biographies);
costs of additional services or the potential increases in
Range of services;
service fees in future years.
Approach to the audit; and
For the audit firm appointed Fees.
Inability to recover the tender costs plus a substantial Some general background to the organisations activities
reduction in audit fees the level of audit work cannot (e.g. an annual report) may be enclosed with the
be compromised. invitation.
Poor client screening may result in accepting a rogue 5.5 To bid, or not to bid
client risk of damage to the firms reputation.
Matters to be considered
5.3 Tendering process (entity perspective)
Technical proficiency of the firm to carry out the audit.
Shortlist reputation, recommendation, experience. Worth investing in a new sector and keeping up to date.
Prepare and send invitation to tender. Geographical and international aspects.
Other commitments to existing client base.
Provide necessary information to firms as requested.
Staffing arrangements.
Evaluate documentary submissions and select for Ethical issues - conflicts of interest, fee levels.
presentation stage. Compatible with the image of the audit firm or strategic
Oral presentations and Q&A sessions. plan.
Notification of decision.

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PROFESSIONAL APPOINTMENTS

5.6 Selection criteria 6 LOWBALLING


Normally based on the information requested in the tender: Lowballing or predatory pricing is where a firm seeks to
Understanding of the business and management; increase its market share by dropping its quote for an audit
fee to undercut its competitors
Knowledge, understanding and experience of the
business sectors operated in; Commercial reality.
Range and quality of services provided; ACCA Code of Ethics does not specifically prohibit.
Audit methodology used; Public perception that audit quality is reduced.
Evidence of quality in work and services provided; Risk must be managed to ensure integrity and
objectivity (independence) is not seen to be threatened.
Calibre and fit of proposed senior team members;
Personal rapport chemistry; Audit quality must not be impaired by reduction in fees.

Standing of the audit firm;


Ability to add value to the business; and
Competitive fees fair, value for money.

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BUSINESS RISK

1 BUSINESS RISK 1.3 Risk analysis


Business risk results from significant conditions, events, Likelihood, impact.
circumstances, actions or inactions that could adversely High, medium, low
affect the entitys ability to achieve its objectives and
1.4 Risk management
execute its strategies, or through the setting of
inappropriate objectives and strategies. Transfer, Avoid, Reduce, Accept (TARA)
Any event which may affect the entitys ability to 2 BUSINESS RISK AUDIT APPROACH
survive and compete in its market as well as to maintain
its financial strength, positive public image and the 2.1 Nature
overall quality of its people and services. Addresses how business risk could evolve into a risk of
material misstatement in the financial statements
1.1 Risk management
(financial statement risk).
THREATS TO ACHIEVING
CORPORATE OBJECTIVES Traditional audit concentrates on risks inherent in
IDENTIFY specific transactions bottom-up approach.

MONITOR ? ANALYSE Business risk approach is a top-down approach driven


by ISA 315 and ISA 330.
PLAN
APPROACH &
ACTION

1.2 Types of risk


Strategic (enterprise). Information.
Financial. Human capital.
Process (operational). Integrity.
Compliance. Technological.
Environment. Reputation.

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BUSINESS RISK

UNDESTAND THE BUSINESS 2.3 Top-down approach


ENVIRONMENT CONTROLS Takes into account the risks that are inherent within the
entity and its environment, how such risks are managed
and their potential impact on the financial statements.
UNDERSTAND WHAT CAN GO WRONG TO
CREATE MATERIAL ERRORS The auditor gains a greater understanding of
FINANCIAL ASSERTION managements current and future business strategy, core
STATEMENT LEVEL LEVEL business processes, key performance indicators and
associated risks and controls in place.
AUDIT STRATEGY AND PLAN Involves the auditor comparing the expectations
TESTS RESULTS CONCLUSIONS developed that are based on this assessment with the
performance and position reflected in the financial
report.
2.2 Rationale
The approach identifies and focuses attention on key or
Effective recognises impact of going concern, fraud,
critical business processes.
complexity of transactions, impact of technology and
globalisation.
Efficient changes in technology (being used by both
auditors and their clients) and in the character of the
information being audited gives greater scope for audit
effort to be devoted to higher level assessments.
Improved client service added value recognised by
client.
Corporate governance input.
Engagement risk can be lowered.

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PLANNING, MATERIALITY AND RISK

1 PLANNING 1.2 Professional scepticism


1.1 Scope and objectives Must be applied throughout the planning process.
Planning entails developing: Ensures that:
the overall audit strategy setting the scope, timing right level of professional judgement is used; and
and direction of the audit; and resources are allocated to high risk areas.
a detailed approach for the nature, timing and Application of professional scepticism means:
extent of audit procedures in order to reduce audit
developing and applying a high degree of
risk to an acceptable low level the audit plan.
knowledge of the entitys business and operating
environment;
critically appraising and challenging management
and their assertions;
designing the nature, timing and extent of audit
procedures that are responsive to assessed risks;
designing audit procedures to find any evidence
that would contradict management assertions; and
revising the assessment of risks and modifying the
audit approach as new or contradictory audit
evidence becomes available.

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PLANNING, MATERIALITY AND RISK

1.3 Activities 2.1 Methods


Preliminary engagement activities (e.g. client Inquire.
relationship, compliance with ethical requirements,
Observe.
terms of engagement).
Review, inspect, analyse.
Developing and documenting the overall audit strategy
and detailed audit plan. Analytical procedures, benchmarking.
Audit team discussions about client and financial
Establishing the resources required.
statements:
Direction, supervision and review of the audit team.
Susceptibility to material misstatements;
Changing the strategy and plan as audit issues emerge. Susceptibility to fraud;
Application of the financial reporting framework;
Communication to those charged with governance and Maintaining professional scepticism;
management. Staying alert for indications of fraud and error; and
2 UNDERSTANDING THE ENTITY Rigorous follow up and monitoring.
2.2 Using the understanding
The auditor should identify and assess risks of material
misstatement, whether due to fraud or error, at the financial In addition to those uses already discussed:
statement and assertion levels, through understanding the Determine materiality levels;
entity and its environment, including internal control, in Determine special audit considerations;
order to design and implement responses to those risks. Analytical expectations;
Evaluate audit evidence;
Recognise conflicting information;
Making informed enquiries and discussions; and
Appraise accounting policies and disclosures.

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PLANNING, MATERIALITY AND RISK

3 ANALYTICAL PROCEDURES 3.2 Expectations and performance measures


3.1 At the planning stage Understanding the entity and planning analytical
procedures establishes expectations about plausible
Meaning
relationships that are reasonably expected to exist.
The analysis of significant ratios and trends including
When such expectations are not met, consider potential
the resulting investigation of fluctuations and
increase in the risk of material misstatement.
relationships:
Professional scepticism must apply when, for example,
that are inconsistent with other relevant
the auditor is aware of the potential for pressure to be
information; or
placed upon management to meet expected performance
which deviate from predictable amounts. measures.
Purpose
4 INTERNAL CONTROL
To assist in understanding the business.
4.1 Elements
To identify areas of potential risk (e.g. financial
condition).
To plan nature, timing and extent of other audit
procedures.
Based on
Interim financial information.
Budgets/forecasts and management accounts.
Draft financial statements.
Discussions with client.
Understanding the entity and its environment.
Ratio and trend analysis over several years

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PLANNING, MATERIALITY AND RISK

4.2 Understanding 5 INTERNAL AUDIT


Design. 5.1 Activities
Implementation.
Poor design/implementation indicates increased risk of
material misstatement.
4.3 Methods
Previous experience of entity.
Inquiry.
Observation.
Inspection.
Walk-through.
CAATs.
Re-performance.
Actions taken.
Professional judgement.
5.2 Coordination of work
Share information obtained for planning purposes.
Discuss business developments.
Discuss materiality, risk and audit objectives.
Review work plans, programs and findings.
Liaise on timing of internal audit work (so external
auditor can use findings).

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PLANNING, MATERIALITY AND RISK

5.3 Basic principles Determine effect on audit plan:


Understand: Nature/scope of internal audit work to be
performed;
The role of internal audit;
Its insight into operations and business risks; Assessed risks of material misstatement;
Work and results; and
Degree of subjectivity and judgement involved in
Reports to those charged with governance.
the evaluation of the audit evidence gathered by
Determine: internal audit; and
Relevance of internal audit; and The need to reperform work of internal audit.
Possible use of internal audits work and its
6 MATERIALITY
adequacy for the purpose of external audit.
6.1 Levels of materiality
5.4 Relying on the work of internal audit
Obtain a sufficient understanding of internal audit
activities:
to identify and assess the risk of material
misstatement of the financial statements; and.
to design and perform relevant audit procedures.
Make a preliminary assessment of the internal audit
function if relevant to the auditors risk assessment:
Objectivity;
Competence; and a
Systematic and disciplined approach

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PLANNING, MATERIALITY AND RISK

6.2 Planning materiality 6.4 Evaluating misstatements


Quantitative factors: Need to determine if the strategy, nature, timing and
extent of audit tests need to be modified.
5 10% profit;
1% net assets; Consider cumulative effects.
1 2% total assets; and
Use professional judgement and scepticism.
1 % revenue.
Misstatement may affect other information that
Where qualitative measures are involved, overall
accompanies the financial statements.
materiality may be relatively low or even zero (e.g.
narrative disclosures should be as relevant, accurate and 7 AUDIT RISK
reliable as possible and not mislead or be economic
with the truth). 7.1 Overview
The risk that the auditor gives an inappropriate audit
6.3 Performance materiality
opinion when the financial statements are materially
The amounts set by the auditor to reduce to an misstated.
appropriately low level the probability (risk) that the
aggregate of uncorrected and undetected misstatements 7.2 Audit risk model
could exceed materiality for the financial statements as Inherent risk + Control risk + Detection risk
a whole. Detection risk has two components:
Not simply a mechanical calculation, but draws upon: Sampling risk; and
the nature of the entity; Non-sampling risk.
the auditors past experience;
the use of professional judgement; and
the expectation of misstatements in the current
period.

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PLANNING, MATERIALITY AND RISK

7.3 Risk of material misstatement


Risk that the financial statements will contain a material
error prior to being audited.
Derived from inherent risk and control risk.
7.4 Significant risks
Those risks that relate to material non-routine
transactions and judgemental matters where there is, for
example;
greater ability for management intervention re
accounting treatment;
greater ability to use manual override of internal
controls;
complex calculations or accounting policies open
to different interpretations;
subjective judgement based on a significant
measurement uncertainty; and
the nature of the transactions makes it difficult to
implement effective controls over the risks.
Revenue is always considered to be a significant risk,
unless clearly not.
Any risk that relates to potential fraud is also considered
to be a significant risk.

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EVIDENCE

1 AUDIT EVIDENCE Relevance


Sufficient appropriate audit evidence should be Supports financial statement assertions relating to:
obtained, from which reasonable conclusions can be
recognition;
drawn, as a basis for the audit opinion.
measurement; and
Audit evidence supports the auditors opinion. presentation/disclosure
Evidence is obtained from understanding the entity, Two groups of assertions:
tests of control and substantive procedures.
Transactions, events and related disclosures
1.1 Sufficiency (completeness, occurrence, classification, cut-off,
classification); and
Sufficiency measures quantity of evidence required.
Account balances and related disclosures
Factors include:
(existence, rights and obligations, completeness,
Nature and level of inherent risk; accuracy, valuation and allocation).
Nature of internal control;
Reliability
Reliance on effective controls;
Auditors (cumulative) knowledge and experience; External (independent) usually more reliable than entity
Materiality of items; (internal) sources.
Audit findings (e.g. fraud or error); and Documentary/written more reliable than verbal/oral.
Source and reliability of information (i.e.
persuasiveness). Auditor obtained more reliable than indirectly obtained.
Information more reliable when related internal controls
1.2 Appropriate
are effective.
Appropriateness measures quality (relates to relevance Original documents more reliable than copies (hard or
and reliability). electronic).
Consistency increases persuasiveness.

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EVIDENCE

1.3 Procedures 2.2 Suitability


Inspection (documents, records, physical assets, etc). Good where an item can be verified directly by
Observation (of procedures and processes). reference to another (valid, audited) item.
Inquiry (of other parties both internal and external). Can provide corroborative evidence.
Confirmation (from other parties of inquiries made). May be particularly effective in testing understatement.
Recalculation (to confirm mathematical accuracy).
2.3 Reliability of data
Reperformance (to confirmed procedures performed).
Influenced by its source and nature.
Analytical procedures (to establish relationships
Depends on the circumstances under which it is
between data sets and develop expectations).
obtained.
2 SUBSTANTIVE ANALYTICAL REVIEW
Factors to consider
2.1 Approach
Audit objectives and extent of reliance.
Suitability (and sufficiency) of substantive analytical Degree of disaggregation of available information.
procedures. Availability of financial and non-financial data.
Reliability of information available.
Evaluate reliability of data.
Sources of information.
Develop expectations. Comparability of information.
Knowledge previously gained.
Determine the amount of any difference that is Nature of entity and its operations.
acceptable without further investigation. Controls in operation.
2.4 Types of test
Trend analysis.
Ratio analysis.
Reasonable test.

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EVIDENCE

2.5 Extent of reliance 3.2 Terminology


Factors to consider Audit sampling
Materiality of items involved. Applying procedures to less than 100% of items.
Risk assessments. All sampling units have equal chance of selection.
Accuracy with which expected results can be predicted. Forms a conclusion on population as a whole.
Degree to which information can be disaggregated.
Error
Availability of information.
Control deviation (in tests of control).
Greatest use
Misstatement (in a substantive procedure).
Existing, well established, client.
Anomalous error
Well-known, stable industry.
Predictive information available. Arises from an isolated event.
Effective accounting and internal control systems. Not representative of errors in the population.
3 AUDIT SAMPLING Population
3.1 Basic principles The entire set of data.
Choose items appropriately to meet test objective: Sampling risk
all items (100%); Possibility that auditors conclusion, based on a sample,
specific items (judgemental sampling); or is inappropriate.
audit sampling (draw conclusion on population as
Confidence level
a whole).
The mathematical complement of risk (e.g. 5% risk
95% confidence).

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EVIDENCE

Non-sampling risk 3.4 Design


The risk of an inappropriate conclusion for any reason Test objective.
not related to sample size. Nature of evidence required.
Complete population.
Sampling unit
Characteristics of population.
Individual items in a population. Deviation or misstatement characteristics.
Combination of procedures required.
Statistical sampling
Sample size
Random selection of a sample.
Use of probability theory to evaluate. Reduce sampling risk to an acceptable level.
Low sampling risk requires high sample size.
Stratification Use of statistical means or professional judgement.
Dividing a population into sub-populations.
3.5 Sample selection
Tolerable misstatement Random selection
Equates to performance materiality. Random number tables or generator.
Tolerable rate of deviation Every item has an equal chance of being selected.
The maximum acceptable failure rate of an internal Systematic/interval sampling
control (usually zero). Constant selection interval.
3.3 Audit sampling Unstructured population must be randomly distributed.
Value-weighted selection.
Sample design.
Sample selection.
Audit procedures.
Error evaluation.

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EVIDENCE

Monetary unit sampling (MUS) 3.6 Results


Every $ unit has an equal chance of being selected. All errors and deviations must be analysed.
Higher value items have a greater chance of being Nature and cause;
selected (value-weighted). Potential effect on test objectives; and
Confirm or revise preliminary assessment of the
Every item value greater than the sampling interval will population characteristics.
be selected.
3.7 Error projection
Haphazard selection (not audit sampling)
Monetary misstatements indicative of the population,
Random sampling but without use of tables or extrapolate to the population.
generator.
Isolated misstatements not indicative of the population
Significant risk of intentional or unintentional bias. should not be extrapolated.
Block sampling (not audit sampling) 3.8 Evaluation of results
All items selected within a given range. Tests of control
Mainly used to test populations for completeness before
sample selection. If control risk is higher than originally assessed:
Testing each item extend sample size (statistical sampling approach);
test alternative controls; or
If an item is inappropriate, select another using same extend substantive procedures (judgemental
selection criteria. approach).
If test cannot be completed, alternative procedures Substantive procedures
should be implemented.
If substantive errors are considered to be material:
If no alternative is available, treat test item as an error.
management should be requested to adjust; and
re-evaluate uncorrected misstatements.

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EVIDENCE

3.9 Statistical sampling Record the audit evidence.


Involves: Must be sufficiently complete to provide an overall
understanding of the audit.
random sample selection; and
probability theory for evaluation of results. 4.2 Professional scepticism
Attribute sampling Thought and actions, reasoning and outcomes must all
be documented.
Units have, or have not, an attribute (property).
Driver is event occurrence, not monetary values. 4.3 Form and content
Used in tests of control.
Matters to consider
Variables sampling
Nature of the engagement.
Value within a continuous range.
Form of the auditors report.
Conclusions based on monetary values.
Nature and complexity of the organisation and its
3.10 Non-statistical sampling
accounting and internal control systems.
Everything else that is not statistical sampling
Specific audit methodology.
4 DOCUMENTATION
Standardisation.
4.1 Importance
Extent of schedules, analyses and other documentation
Support audit opinion. prepared by the entity.
Demonstrate that the audit was performed in accordance Needs for direction, supervision and review of tasks
with ISAs. assigned to assistants.
Assist in the planning and performance of the audit.
Facilitate the supervision and review of audit work.

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EVIDENCE

Techniques ACCA recommended minimum


Seven years for audit working papers.
Seven years for tax files (then return to client).
If stored electronically, standard security and backup
procedures plus time lock to prevent early deletion.
4.6 Ownership

Electronic files plus administration and control. Working papers are the auditors property and are
confidential.
4.4 Confidentiality and safe custody
Inspection is at the auditors discretion.
Confidentiality
5 WRITTEN REPRESENTATIONS
Confidentiality is a fundamental ethical principle.
5.1 Written representations
Safe custody A written statement by management to confirm certain
24/7 restrictions and secure access. matters or to support other audit evidence.
Standard data security principles apply for audit Necessary information that the auditor requires.
documentation in e-format.
Often relate to areas of the audit that are:
4.5 Retention
subjective; and/or
For a period: dependent on managements responsibilities,
sufficient to meet the needs of the audit practice; and judgement and actions (or lack of).
in accordance with legal and professional Do not provide sufficient appropriate audit evidence on
requirements. their own.

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EVIDENCE

Audit objectives As audit evidence


To obtain written representations that management REPRESENTATIONS
(those charged with governance) has: DURING COURSE OF
AUDIT
fulfilled its responsibility for preparing the
financial statements; and
provided the auditor with complete information. GENERALLY SEEK REQUIRED IN
CORROBORATIVE SPECIFIC
EVIDENCE INSTANCES
To support other audit evidence relevant to assertions if
necessary (or required by ISAs).
5.3 Essential management representations
To respond appropriately where written representations
are not provided. Responsibility for the preparation of the financial
statements following the applicable framework.
5.2 Procedure for obtaining
Provided all relevant information and access (e.g. to
Auditor prepares on client letterhead. books, records and personnel).
Dated close to (before) the date of the auditors report. All transactions have been recorded and are reflected in
Signed by those responsible for the financial statements: the financial statements.

CEO; and 5.4 Other representations


Minuted by the board. As required by ISAs.
To support audit evidence already gathered.
To confirm oral representations made by management:
Seek corroborative evidence;
Evaluate reasonableness/consistency; and
Consider whether individuals adequately informed.

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EVIDENCE

If necessary (material, other evidence cannot reasonably Auditor may:


be expected to exist) obtain in writing. Confirming oral
issue a qualified opinion: or
representations reduces risk of misunderstanding.
issue a disclaimer: or
Specific instances in extreme cases, withdraw from the engagement
(if allowed to by law).
May be the only audit evidence which can reasonably
be expected to be available (e.g. managements Where significant doubt about representations on
intention to settle a legal claim out of court). managements responsibilities, auditor should issue a
disclaimer of opinion on the basis of unable to obtain
In areas of understatement (e.g. liabilities, income,
sufficient appropriate audit evidence.
disclosures). Management represents that it is not
aware of any understatement or non-disclosure. 5.6 Refusal by management to provide representations
Where contradicted by other audit evidence: Discuss the reasons why with management and those
charged with governance.
Investigate as doubt must be resolved; and
Reliability of other representations may also be Establish if other audit evidence is available.
called into doubt.
If no satisfactory solution, consider implications for the
5.5 Reliability of representations auditors report (e.g. disclaimer).
If in doubt reconsider original risk assessment. 5.7 Typical other content
Where concerns about managements competence, Significant assumptions are reasonable.
integrity, ethics or diligence, consider reliability of:
All events after the reporting date have been adjusted or
representations: and disclosed (IAS 10).
audit evidence in general.
Effects of uncorrected misstatements are immaterial
(individually and in aggregate).

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EVIDENCE

Appropriate selection and application of accounting 6.2 Reliability


policies.
External, direct, written.
Appropriate classification of assets and liabilities.
6.3 Design of Request
Plans or intentions that may affect the carrying amount
Confirming party
or classification of assets and liabilities.
Knowledge of subject matter.
Recognition, measurement and disclosure of all
Ability and willingness to reply.
liabilities (actual and contingent).
Positive
Title to assets pledged as security.
Reply is expected.
Aspects of laws, regulations and contractual
Preferred when risk is assessed as high.
agreements that may affect the financial
statements, including non-compliance. Negative
6 EXTERNAL CONFIRMATION Only reply if disagreement.
The process of obtaining and evaluating a direct Consider when:
communication from a third party in response to a
Strong internal controls;
request for information affecting financial statement
Large number of small balances;
assertions.
Errors not expected; and
6.1 Need for Expectation that request will not be ignored.
Factors to consider: Open
Materiality; Balance not shown.
Risk of material misstatement; Respondent requested to provide information.
Effectiveness of controls; and Understatement approach (e.g. payables).
Availability of other evidence to reduce audit risk.

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EVIDENCE

Closed Disagreement
Balance shown. Identify reason.
Overstatement approach (e.g. receivables). Increased risk of material misstatement.
Apply further audit procedures to obtain sufficient
6.4 Confirmation process
reliable audit evidence.
The auditor must control:
No response
determination of information required;
Consider use of alternative procedures.
selection process and who should confirm;
If insufficient, consider implications for auditors
design of request;
report.
sending requests; and
receiving responses. 7 EXPERTS
If management refuses to allow confirmation: 7.1 Managements expert
Assess reasonableness of refusal; Audit evidence
Re-assess risk of material misstatement;
Used by the entity to assist in preparing the financial
Perform alternative procedures, if appropriate; and
statements.
Consider implications for auditors report, if any.
Asset/liability valuations;
6.5 Responses
Assessment of quantities/condition of assets; and
Information given Legal services.
Expected individual and expected means. Financial statement considerations:
Consistency and reliability with other evidence.
materiality;
Agreement risk of material misstatement; and
quality, quantity and cost of other evidence.
Risk of tick box approach.

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EVIDENCE

Expert considerations: Source data


competence, capabilities and objectivity; Complete, sufficient, relevant, reliable, consistent.
understandability of the work carried out; and
appropriateness of the work as audit evidence. Terms of reference

Competence Nature, scope and objectives of work.


Assumptions and methods to be used.
Nature and level of experience of the expert. Access to records and employees.
Qualifications, member of professional body, reputation. Respective roles and responsibilities.
Previous experience or working with expert. Nature, timing and extent of communications.
Capabilities Form/content of the experts report (in writing)
including limitations of use.
Experts ability to exercise his competence.
Consider effect, if any, of management restrictions. Assessing expert findings

Objectivity Appropriateness with regard to the financial statement


assertions.
Professional judgement free from bias, conflict of
interest or influence of others. Source data used.
Consider threats to experts objectivity (e.g. self-interest). Assumptions used and consistency with prior years.
Field of expertise Corroborated with and consistency with other sources
of evidence.
Relevance to audit assertions.
Ability to evaluate experts work and findings. Auditors overall knowledge and findings.
Applicable professional standards or legal requirements. Timing of work carried out.
Assumptions and methods used.
Nature of data used.
Observation.
Need to use auditors expert to corroborate.

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EVIDENCE

7.2 Auditors expert Evaluation of experts work


Need Same approach as audit team.
To assist the auditor in obtaining sufficient appropriate 7.3 Auditors report
audit evidence.
No reference to expert in unmodified report, unless
Professional judgement used to determine if there is a required by law.
need for an auditors expert.
If report is modified, reference to the expert may be
Typically: needed to clarify position. If so, permission of expert
must be obtained.
a specialist in the audit firm;
similar work as for managements expert; and If expert refuses, seek legal advice.
used to challenge the managements expert (if he
If management unable/refuse to obtain expert evidence
cannot be relied on).
unable to obtain sufficient appropriate audit evidence.
Competence, capabilities, objectivity
If management refuse to accept auditors expert
Same as for any member of the audit team. opinions and adjust financial statements material
If an external agent, still treat as if a member of the misstatement.
audit team.
Understanding the expertise of the expert
Similar to managements expert.
Main difference is that the expert is a team member:
audit partner sets nature, timing, scope, extent and
objectives (engagement letter if external agent); and
work will be supervised and reviewed.

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EVALUATION AND REVIEW

1 AUDIT COMPLETION Key decisions on these areas are subject to challenge,


negotiation and discussions with management which
1.1 Need for
should be adequately documented together with the
Quality control process to ensure: conclusions reached and the rationale for supporting
such conclusions.
all work was carried out according to audit plan;
all material and contentious issues dealt with; 1.3 Tools
the auditors report is consistent with work
Professional scepticism.
performed;
audit work supports the audit opinion; and Review procedures.
ethical matters have been considered for audit re-
Completion checklists (supervisor, manager, partner,
acceptance.
second partner review).
1.2 Content
Final analytical procedures.
All critical matters, particularly matters of requiring
Disclosure checklists (e.g. IFRS, stock exchange,
professional scepticism and judgement:
corporate governance).
uncorrected misstatements;
Points for Partner (other names include: Matters for
going concern;
Attention of Partner, Final Review Notes, Contentious
management estimations and assertions;
Issues).
provisions and contingencies;
subsequent events; Audit team challenged about adequacy and
compliance with reporting framework; professionalism of their work.
deficiencies (weakness) letter;
written representations; and
communications to those charged with
governance.

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EVALUATION AND REVIEW

1.4 Reviews Prior periods auditors report modified


Audit section review by senior/supervisor. Impact (if any) of matters which resulted in a prior year
Audit file and seniors work reviewed by manager. modified report.
Engagement partner.
Current assets and liabilities
Second partner review (pre-issuance, hot, high-risk).
Technical review. The collection (payment) of opening accounts
Quality control review (post-issuance, cold). receivable (payable) provides evidence of the existence,
Regulator review (FRC, ACCA). rights and obligations, completeness, cut-off and
valuation of the opening balances.
2 OPENING BALANCES
Sales at the beginning of the period relate to net
2.1 Audit objectives
realisable value of inventory.
Do not contain errors that materially affect current
Opening inventory.
financial statements.
Observe a current physical inventory count;
Appropriate accounting policies are consistently applied
Reconcile back to opening quantities; and
(or changes properly accounted for and adequately
Test valuation of opening items, gross profit and
disclosed).
cut-off.
2.2 Procedures
Opening non-current assets and liabilities.
Prior reporting period audited by another auditor
Reconcile closing balances and movements in year
Opening balances are not re-audited. to opening balances;
Review most recent financial statements and auditors examine underlying records (e.g. fixed asset
report for information relevant to opening balances, registers);
including disclosures.
third party confirmation (e.g. for long-term debt
Review predecessors working papers, if available. and investments).

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EVALUATION AND REVIEW

2.3 Auditors report 3.3 Reporting


Insufficient appropriate audit evidence: Corresponding figures
qualified opinion (except for): or Prior period modification resolved:
disclaimer of opinion (material and pervasive).
Usually no reference in report.
Opening balances containing misstatements which But may be included in an emphasis of matter.
could materially affect the current periods financial
Prior period modification unresolved:
statements will result in a:
qualified opinion (except for): or
adverse opinion (material and pervasive).
3 COMPARATIVES
3.1 Reporting frameworks
Corresponding figures.
Comparative financial statements.
3.2 Auditor responsibilities
Agreeing correct reporting and appropriate
classification, for example:
accounting policies are consistent;
figures agree; and
appropriate disclosures made.

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EVALUATION AND REVIEW

4 OTHER INFORMATION Inconsistency


4.1 Auditor objectives If in financial statements and management refuses to
change modify audit opinion.
To consider whether there is a material inconsistency
between other information (issued with the financial If in other information and management refuses to
statements) and: change:
the financial statements; or discuss with those charged with governance;
the auditors knowledge of the entity and that other matters paragraph; or
obtained during the audit. withhold auditors report; and
consider withdrawal from engagement after
To respond appropriately when:
obtaining legal advice.
material inconsistencies do appear to exist; or
Misstatement of fact
other information appears to be materially
misstated. Discuss with management.
Ask management to consult with an external expert.
To consider impact on the auditors report.
Raise issue with those charged with governance.
4.2 Procedures If no change made, seek legal advice.
Obtain and read the other information to identify:
material inconsistencies (between other
information and the financial statements or the
auditors knowledge);
material misstatement of facts (unrelated to the
financial statements or auditors knowledge.

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EVALUATION AND REVIEW

4.3 Auditors report Material misstatement of other information


Standard auditors report insert Replace We have nothing to report in this regard
with:
Other information
As described below, we have concluded that such a
Management is responsible for the other information. The material misstatement of the other information exists.
other information comprises [ e.g. The Annual Report of XY [Description of material misstatement of the other
plc excluding ...]. information]
Our opinion on the financial statements does not cover the Impact of a qualified audit opinion
other information and we do not express any form of
assurance conclusion thereon. Replace We have nothing to report in this regard
with, for example:
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing As described in the Basis for Qualified Opinion
so, consider whether the other information is materially section above, we were unable to obtain sufficient
inconsistent with the financial statements or our knowledge appropriate evidence about. As this information is also
obtained in the audit or otherwise appears to be materially included in the Operating and Financial Review, we are
misstated. If, based on the work we have performed, we unable to conclude whether or not the other information
conclude that there is a material misstatement of this other is materially misstated with respect to this matter.
information, we are required to report that fact. We have
nothing to report in this regard.

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EVALUATION AND REVIEW

5 SUBSEQUENT EVENTS Before date of auditors report


5.1 Events after the reporting period Active responsibility.
Enquire of management, those charged with governance
and other relevant third parties.
Review board minutes/correspondence.
Review of after-date cash books, transactions, journals
and other records for material/unusual items.
Review of budgets, cash flow forecasts and
management reports.
Inquire of lawyers concerning litigation and claims.
If no change made for material items, qualified or
adverse audit opinion.
After date of audit report before financial statements issued

5.2 Audit procedures and effect on report No active audit role would only consider if aware
(e.g. informed by management as required by letter of
Understand managements systems for identifying engagement).
adjusting and non-adjusting subsequent events.
Auditors should discuss with management and take
action appropriate in the circumstances.

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EVALUATION AND REVIEW

If financial statements 6 GOING CONCERN


6.1 IAS 1 presentation of financial statements
Amended Not amended
(auditor thinks they should be)
Withdraw old audit report. Discuss with those charged with
governance.
Extend audit procedures,
including subsequent events If no adjustment, withdraw old
review, to new date. audit report.
Issue new report when financial Issue new report expressing a
statements approved. qualified or adverse opinion.

If amended financial statements issued, without new


report, seek legal advice how to prevent reliance on
report.
After financial statements issued
If auditor becomes aware of a fact which existed at the
date of the report which, if known at that date, may
have caused a modified report:
Take legal advice on what action may be taken; 6.2 Responsibilities
Discuss with management; and
Take appropriate action as allowed by law. Management
To assess entitys ability to continue as a going concern.
To disclose matters related to going concern.
To use the going concern basis unless there is intention
or necessity to liquidate the entity or cease operations.

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EVALUATION AND REVIEW

Auditors responsibilities Financial indicators of significant doubt


To conclude: Net liability/net current liability position.
on the appropriateness of managements use of the Withdrawal of financial support.
going concern basis;, Negative operating cash flows.
whether a material uncertainty may cast significant Adverse key financial ratios.
doubt on the entitys ability to continue as a going Substantial operating losses.
concern. Significant deterioration in value of assets.
If the auditor concludes that a material uncertainty Arrears or discontinuance of dividends.
exists: Inability to pay creditors on due dates.
to draw attention (in the auditors report) to the Difficulty in complying with terms of loan agreements.
related disclosures in the financial statements; or Change from credit to cash-on-delivery transactions
if disclosures are inadequate, to modify the reports with suppliers.
opinion. Operational indicators
6.3 Planning considerations Intention to cease operations.
Understand and assess the process used by management Loss of key management without replacement.
to assess going concern. Loss of a major market, license, principal supplier, key
If no formal process, discuss with management and customer (no appropriate alternatives).
make appropriate enquiries. Labour difficulties or shortages of key supplies.
Identify events/conditions that may cast significant Fundamental change to which the entity cannot
doubt on ability to continue as a going concern. adequately respond.

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EVALUATION AND REVIEW

Other indicators Bank borrowing facilities and suppliers credit.


Non-compliance with legal or other requirements. Managements plans for future action.
Pending legal proceedings that may bankrupt the entity.
Specific procedures
Changes in legislation or government policy.
Uninsured/underinsured catastrophes. Analyse managements assessment:
Mitigating factors assessment process;
assumptions used;
Managements plans:
plan for future action; and
Disposal of assets; feasible in the circumstances.
Debt rescheduling;
Analysing cash flow, profit and other relevant forecasts.
Obtaining capital; and
Continued support. Analysing entitys latest available interim statements.
Throughout the audit Breaches of debentures and loan agreements.
Keep alert for events and conditions that affect going Financing difficulties noted in minutes of meetings.
concern. If identified:
Existence of litigation and claims and the
perform additional procedures; and reasonableness of managements assessments.
reassess audit risk.
Third party continued support.
6.4 Audit evidence
Order books.
Sources of information
Subsequent events review.
Clients system for timely identification of warnings of
Existence, terms and adequacy of borrowing facilities.
risks/uncertainties.
Budgets, forecast information. Obtaining and reviewing reports of regulatory actions.
Obligations, covenants, guarantees with lenders, suppliers. Adequacy of any planned disposals of assets.

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EVALUATION AND REVIEW

General written representation use of going concern Going concern is appropriate and no uncertainty
basis.
Statement that the financial statements have been
Specific written representations plans that might have prepared on the going concern basis.
a significant effect on solvency in foreseeable future.
No reference made in the auditors report.
6.5 Cash flows
Going concern is appropriate, but a material uncertainty exists
Considerations
Adequate description and disclosure of:
Control systems that generate cash flow detail.
events or conditions giving rise to the doubt; and
Appropriateness of underlying assumptions.
managements plans to alleviate the uncertainty.
Additional facts/information since forecast prepared.
Comparison to historic budgets, forecasts, etc Statement that:
Comparison to current period with results achieved to
there is material uncertainty;
date.
entity may be unable to realise assets; and
6.6 Beyond the assessment period discharge liabilities in normal course of business.
Inquire of management (and obtain a written If adequate disclosure:
representation) if indicators of significant doubt beyond
express an unmodified opinion; plus
the period of assessment.
Material Uncertainty Related to Going Concern
section (before Key Audit Matters).
6.7 Conclusions and Reporting
Basic principle Material Uncertainty Related to Going Concern
The auditor should judge whether material uncertainty We draw your attention to Note X in the financial statements
about the going concern basis exists. . [summary of matter]. Our opinion is not modified in
respect of this matter.

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EVALUATION AND REVIEW

If clearly inadequate or no disclosure made express an As discussed in Note X [description] the financial
adverse opinion statements do not adequately disclose this matter.
Adverse Opinion We conducted our audit in accordance with .. [standard
wording]. We believe that the audit evidence we have
We have audited . (standard wording) obtained is sufficient and appropriate to provide a basis for
In our opinion, because of the omission of the information our qualified opinion.
mentioned in the Basis for Adverse Opinion section ..., the
Going concern matters are not included in Key Audit
financial statements do not give a true and fair view.
Matters.
Basis for Adverse Opinion
Going concern basis is inappropriate
[Description of events that indicate material uncertainly.]
Adverse audit opinion.
We conducted our audit in accordance with .. [standard
Management is unwilling or unable to assess
wording]. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for Qualified or disclaimer of opinion as insufficient
our adverse opinion. appropriate audit evidence obtained.

If some detail disclosed but considered insufficient, Communication with those charged with governance
express a qualified opinion. Report any events which may cast doubt on ability to
continue as a going concern:
Qualified Opinion
The event constitutes a material uncertainty;
We have audited . (standard wording) Appropriate use of the going concern basis;
In our opinion, except for the incomplete disclosure Adequacy of the related disclosures.
Basis for Qualified Opinion

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AUDIT OF FINANCIAL STATEMENTS

1 AUDIT AREAS What evidence is expected to be available?


1.1 Considerations Internal or external?
Written or oral?
Is the matter expected to be material? Direct or indirect?
Quantitatively or qualitatively? Do not forget Impact on auditors report
disclosures.
Modified opinion.
Has it been material historically? Is there any reason Going concern
for it to have changed this year? Emphasis of matter/Other matter paragraph.
Ensure you calculate relevant materiality as part of your 2 ASSETS
answer.
2.1 Plant, property and equipment
What are the relevant accounting standards?
Materiality
IFRS, IFRIC or best practice if not yet subject to any
particular IFRS. In most entities, will be material.
Local legislative requirements or other Regulatory Relevant accounting standards
requirements e.g. Stock Exchange rules, National IAS 16 Property, Plant and Equipment
Central Bank rules. IAS 17 Leases
What specific financial statement assertions are most at risk? IAS 20 Accounting for Government Grants ...
Transactions, events and related disclosures IAS 23 Borrowing Cost
(occurrence, completeness, accuracy, cut-off, IAS 36 Impairment of Assets
classification and presentation). IAS 37 Provisions, Contingent Liabilities and
Balances and related disclosures existence, rights and Contingent Assets
obligations, completeness, accuracy, valuation and IFRS 5 Non-current Assets Held for Sale and
allocation, classification, and presentation. Discontinued Operations

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AUDIT OF FINANCIAL STATEMENTS

Assertions most at risk Evidence


Completeness capital expense treated as revenue Fixed asset register.
expense.
Invoices for additions, disposals, repairs/improvements,
Accuracy (initial costs) self-constructed assets, other commissioning costs, own constructed assets
borrowing costs, initial costs of putting into use. (timesheets and costing records).
Classification capitalised or expensed subsequent Professionally carried out valuations.
costs.
Budgets, forecasts, strategic plans, planned asset
Occurrence of additions, disposals and impairment. management decisions, to support useful life.
Accuracy, allocation and valuation (subsequent): Plant/production management with whom valuation and
use issues can be discussed.
Appropriateness and accuracy of depreciation;
Impairment if necessary; Held for sale assets are available for immediate sale in
Revaluation of entire class of asset; present condition and that sale is highly probable:
Revaluation/impairment accounting; and
Assets held for sale (IFRS 5). management intentions, plans, board minutes;
management actions;
Presentation movements in property, plant and asking price is reasonable;
equipment and correct classification. Additional
disclosures if revaluation method used.
expected to be sold within one year; and
proof of after date disposal.
Rights/obligations consider lease agreements to
ensure if nature of a finance lease, then an asset. Estimate of fair value.

Existence physically inspected by the auditor.

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AUDIT OF FINANCIAL STATEMENTS

2.2 Intangible assets Valuation (subsequent):


Materiality Estimate of finite useful life this is especially
difficult for intangible assets and will be a major
Most likely in group accounts following acquisition of
item for inclusion in a letter of representation.
company with previously unrecognised intangible.
Intangibles carried at an indefinite life will require
Deferred development expenditure is a highly material
an annual impairment review.
asset in the pharmaceuticals sector.
Rights difficult as no physical form.
Relevant accounting standards
Existence:
IAS 38 Intangible Assets
IAS 36 Impairment of Assets Documents of title and similar.
Assertions most at risk Physical inspection of the results of development
work.
Occurrence as for non-current assets especially
impairment of development expenditure assets as a Carrying value must be recoverable through future
result of technical or market changes. economic benefits, otherwise impairment.
Valuation (initial measurement) must meet all of the Evidence
strict conditions for asset recognition. Where valuation
Specialist valuations.
models used, the reasonableness of the assumptions
used and the correct application of the model will Management representations, corporate plans, etc that
require testing. confirm the period of economic life.
Presentation with the required disclosures of IAS 38. Market research studies, correspondence with potential
customers, initial orders placed.
Invoices and time sheets for the costs that have been
incurred and capitalised.

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AUDIT OF FINANCIAL STATEMENTS

2.3 Goodwill Recognition and measurement of intangible assets


not recognised in the individual financial
Materiality
statements of the newly acquired component (e.g.
Can be high where based on human capital rather customer lists, contingent liabilities).
than other tangible assets.
Appropriate allocation of goodwill to a cash
Can be highly subjective and often difficult to identify generating unit (not necessarily related to the
with reasonable precision, resulting in a high risk of component acquired) - CGU.
material error.
Valuation (subsequent) for example:
Relevant accounting standards
Correct application of impairment tests where
IFRS 3 Business Combinations evidence exists of impairment;
IAS 36 Impairment of Assets
Correct approach to impairment when non-
Assertions most at risk controlling interests are valued at the proportionate
share of the identifiable net assets; and
Completeness of amortisation, or perhaps impairment,
may be of concern. Appropriateness of managements assertion of
indefinite useful life.
Valuation (initial measurement):
Rights/obligations for restructuring an acquired
Provisions set up for restructuring.
business must be tested in line with IFRS 3 and IAS 37.
Inappropriate application of the detailed fair value Existence:
rules of IFRS 3.
What type of investment is being accounted for
Inappropriate use of present values and expected
subsidiary, associate, joint venture (JV), special
values to the calculation of the fair value of purpose entity (SPE).
deferred (and possibly contingent, consideration).
Share certificates, and confirmation of entries in the
investees share register.

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AUDIT OF FINANCIAL STATEMENTS

Evidence Assets and liabilities acquired (at fair value):


Legal correspondence and fee notes. A statement of financial position drawn up at the
date of acquisition, or calculations supporting a
Specialists and due diligence reports to assess fair
reasonable pro-rating of the result for the year, to
values of assets and liabilities and useful economic life
attribute net asset values at the date of acquisition.
of resulting goodwill.
Ensure identified assets and liabilities have been
Firm plans and costing for any restructuring provisions.
valued in accordance with the fair value guidance
New acquisition - evidence given in IFRS 3.
Review board minutes and agreements between the If seeking to rely on specialist reports, apply ISA
parties to identify the basis of the acquisition and the 500 and ISA 620.
date that control was obtained.
Other due diligence reports to help assess fair
Review all legal correspondence to confirm the values of assets and liabilities and potential for
substance over form of the acquisition. impairment at some stage in the future.
Purchase consideration (at fair value): Assess managements procedures to identify all
assets and liabilities (including contingent
Cash records, share price, contract detailing liabilities) of the component.
deferred and contingent consideration.
Components plans, costings and management approval
Review fair value calculation of deferred (before commencement of the acquisition process) for
consideration, basis of discount rate and ability to restructuring provisions.
pay, if cash.
That all acquisition costs have been charged directly
Review agreement on contingent consideration through the acquirers profit or loss and are not
(earn-out) and recalculate fair value based on capitalised as part of goodwill.
auditors assessment of the facts and
circumstances existing at the date of acquisition.

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AUDIT OF FINANCIAL STATEMENTS

On-going goodwill - evidence Assertions most at risk


Understanding entity and its environment to identify Completeness (e.g. rental income and gains/losses from
indicators of goodwill impairment. fair value re-measurement).
Managements annual review for impairment of Occurrence fall in fair values (or impairment) if the
goodwill and reperformance: cost model is used. Client may be reluctant to admit.
Testing CGUs with goodwill. Valuation follow IAS 16 re initial measurement.
Subsequent expenditure does it enhance or simply
Timing of impairment tests.
restore the originally assessed economic benefits?
Correct treatment of impaired goodwill allocated
Presentation transfers in or out of investment
to non- controlling interests.
properties.
Disposal of operation in a CGU to which goodwill
Valuation (subsequent).
has been allocated.
Rights IAS 17 may on occasion cause some difficulty.
Recalculation and correct treatment (through profit or
loss) of the unravelling of the discount rate on fair value Evidence
for deferred consideration.
Real estate agents contracts and completion statements.
2.4 Investment properties Legal documents confirming transfer of title, risks and
rewards.
Materiality
Real estate agents/property valuers reports.
Will be for property company (income also).
Board minutes.
Relevant accounting standards
The receipt of rental income can be verified by reference
IAS 40 Investment Property.
to rental contracts and bank account entries.
IAS 16 Property, Plant and Equipment.
IAS 36 Impairment of Assets for cost model. Analytical procedures for rental income.

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AUDIT OF FINANCIAL STATEMENTS

2.5 Investments Evidence


Materiality Brokers purchase/sale contract notes supported by
authority to purchase/dispose (e.g. in board minutes).
Unless investment company, unlikely to be material.
Securities certificates. Possibly held by bank or
Relevant accounting standards
solicitor.
IAS 40 Investment Property for real estate
Stock Exchange quotations at the reporting date.
IAS 36 Impairment of Assets
Independent information services (Extel, Stubbs,
IAS 18 Revenue Moodys, etc) to agree the events that have occurred
during the year (dividends declared, payment date, rights
IAS 27 Separate Financial Statements requires an or scrip issues, stock splits, etc).
investment in a subsidiary, associate or joint venture to
be accounted for at cost or in accordance with IAS Income received (verified by reference to published
39/IFRS 9 Financial Instruments. reference guides) corroborates existence and ownership.
Assertions most at risk Management representation (e.g. about intention to hold
or sell).
Completeness of dividend income and related
enhancements (rights, bonuses, etc). 2.6 Inventories
Valuation (initial measurement) acquisition Materiality
(transaction) expenses should be included as part of the
For trading/manufacturing companies, high.
cost of acquisition when first recognised.
Relevant accounting standards
Valuation (subsequent) disclosure (or accounting under
IAS 39/IFRS 9) of fair values of investments at the year IAS 2 Inventories.
end or use of fair value models for unlisted investments. IAS 23 Borrowing Costs.
Presentation IAS 32 and IFRS 7 checklists.

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AUDIT OF FINANCIAL STATEMENTS

Assertions most at risk After date sales invoices and pricing lists.
Cut off GRNs, despatch and WIP records.
Completeness double counting during physical count.
Subsequent events indicating NRV difficulties.
Cut-off deliberate procedures to manipulate profits. Returns, warranty claims.
Analytical procedures.
Omission when items are in transit between locations
Perpetual inventory counting system.
or held at third party premises.
2.7 Receivables
Valuation (initial measurement) application of
appropriate cost formulas to obtain an approximation to Materiality
cost.
Where the granting of credit is normal, it is likely that
Valuation (subsequent) lower of cost and net realisable the total of trade receivables will be material.
value (NRV).
Relevant accounting standards
Rights Reservation of Title clauses.
IAS 1 Presentation of Financial Statements current and
Existence . inventories held at third parties. non-current distinctions.
Evidence IAS 21 The Effects of Changes in Foreign Exchange
Rates retranslation at year end using closing rate.
Inventory count observation instructions from client.
Assertions most at risk
Attendance at physical count.
Completeness recording of the related revenue and any
Third-party confirmations. related allowance for doubtful debts.
Use of experts. Occurrence as occurrence is confirmed when cash is
Finalised and supporting inventory count sheets, received, only those sales made and not yet paid require
inventory records, costing records, raw material confirmation of occurrence.
purchase invoices, overhead expenses and Cut-off link to inventory and sales.
apportionment, payroll and timesheets.

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AUDIT OF FINANCIAL STATEMENTS

Presentation the identification and separate disclosure Relevant accounting standards


of any receivables due after more than 12 months may be
There is no IFRS dealing uniquely with cash and bank
an issue.
balances.
Valuation (subsequent) bad debts.
Assertions most at risk
Rights unless the company has factored any of its
Completeness bank overdraft.
receivables, there is not usually any issue as to the rights
to receive the benefit from the debt. Occurrence opening/closing accounts, charging or
crediting interest and exceptional banking activities.
Existence the potential for overstated trade receivables
(that do not exist) may arise. Valuation conversion of foreign balances.
Evidence Presentation no offset unless agreed by bank.
Aged debtors listing. Rights/obligations possible use of a company bank
Direct confirmation letters. account for laundering money.
Dispute correspondence.
Evidence
Invoices, contracts, orders, despatch notes,
correspondence, credit reports, remittance advices. All bank statements on all accounts open/closed.
Standard bank enquiry letter.
2.8 Cash and bank balances
Bank reconciliations.
Materiality Cash book(s) and systems.
Petty cash vouchers/operation of an imprest system.
Cash-in-hand and bank balances are not usually
Physical counting of cash.
material, but susceptible to theft.
Board minutes (authorising cheque signatories).
Regard as material by nature. Direct debit (DD)/standing order (SO) mandates.
Proof in total interest payable/receivable.

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AUDIT OF FINANCIAL STATEMENTS

Bank reports for audit purposes 3 LIABILITIES


Balances on accounts. 3.1 Lease obligations
Facilities loans/overdrafts/guarantees.
Materiality
Securities (including set-off arrangements).
Additional banking relationships. Often monetarily material.
Supplementary information may include: Disclosures of the obligations outstanding in respect of
non-cancellable operating leases present a user with a
Trade finance letters of credit, acceptances, bills,
highly material indication of the true level of gearing.
bonds, guarantees and indemnities.
Relevant accounting standards
Derivatives and commodity trading foreign exchange
contracts, forward rate agreements, financial futures, IAS 17 Leases.
swap arrangements and option contracts. IAS 16 Property, Plant and Equipment.
Custodian arrangements the nature and quantity of any Assertions most at risk
assets held but not charged.
Completeness finance leases may be argued to be
Other information copy bank statements/paying-in operating, thus off statement of financial position.
slips, returned paid cheques, stopped cheques,
Classification/valuation whether to recognise a new
authorised signatories.
lease arrangement as operating or finance.
Bank disclaimers
Presentation extensive disclosures required checklist.
Standard wording on most replies from bank.
Valuation (subsequent) interest rate implicit in lease.
Rights/obligations look to substance of the agreement and
risks and rewards.
Existence external confirmation with the leasing
company to confirm details of the agreement.

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AUDIT OF FINANCIAL STATEMENTS

Evidence Evidence
Terms of lease contract. Tax computations and review by audit firms specialists.
Correspondence with lessor and legal advisers. Correspondence with tax authorities.
Revenue expenditure (e.g. insurance, maintenance, Deferred taxation working schedule.
repairs). 3.3 Provisions
3.2 Taxation (including deferred taxation) Materiality
Materiality Dependent on industry and circumstances.
Application of IFRS 1.
Current balance may not be material. Deferred may be.
Calculation may be subjective.
The tax expense (current plus deferred plus Relevant accounting standards
adjustments) would usually be material.
IAS 37 Provisions, Contingent Liabilities and
Relevant accounting standards Contingent Assets
IAS 12 Income Taxes Assertions most at risk
Assertions most at risk Completeness understatement may be difficult to
Completeness - risk of understatement of the liability if audit. Legal obligations are usually evidenced,
all differences between the carrying amount and the tax constructive obligations not so.
base of assets and liabilities are not identified. Occurrence difficulty in establishing the trigger event.
Valuation recognition of a deferred tax asset; what tax Valuation (initial measurement) whether or not a
rate to use to apply to the temporary differences. provision should be recognised and if so, how much.
Presentation as required by IAS 12. Discounting where the effect is material.
Allocation and valuation (subsequent) impairment of Expected value methods, where the provision
deferred tax asset. concerns future events of some uncertainty.

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AUDIT OF FINANCIAL STATEMENTS

Presentation movements in each provision are Assertions most at risk


required to be disclosed.
Completeness funding requirements may be
Allocation and valuation (subsequent) calculation and underestimated, elements may be omitted and
disclosure of the unwinding of the discount rate. calculations are complicated.
Obligations fundamental. Valuation complex procedures for calculation of
liabilities. Need to rely on an expert.
Existence big bath provisions, risk of profit
smoothing. Presentation extensive requirements in IAS 19.
Evidence Evidence
Correspondence files legal, insurers, specialists. Review board minutes, company secretarial minutes,
employee contracts of employment, salary records and
Schedule for each provision b/f, increases during year,
bank payments to identify new post-employment
utilised during year, interest, reversals and c/f.
benefits and changes made to established benefits.
Need to re-perform provision from first principles.
Wages and salaries audit confirming calculations and
3.4 Pension funds deductions of pension benefits and payment to schemes
(to include analytical review).
Materiality
Actuarys report reliance on the use of an expert.
Defined contribution schemes likely to be immaterial.
Includes assumptions, agreement to company records,
Defined benefit schemes funding liabilities on whole verifying market values, agreement of fair values.
firm schemes are likely to be material. Application in accordance with IAS 19, treatment of net
Relevant accounting standards gains and losses, calculation and treatment.
IAS 19 Employee Benefits and IAS 37 Provisions,
Contingent Liabilities and Contingent Assets

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AUDIT OF FINANCIAL STATEMENTS

3.5 Payables Evidence


Materiality Suppliers statements, invoices, credit notes and clients
GRNs and purchase requisitions.
In total, may be material. Individually, not so.
Supplier confirmations and other correspondence.
Relevant accounting standards
Bank records confirming payments made, especially
No specific IFRS IAS 1, IAS 21 and IAS 28 all deal
after the year end.
with payables as they do with receivables. IAS 32 and
IAS 39 deal with presentation and measurement of debt Detailed cut-off testing.
and convertible debt.
Intermediaries (e.g. warehousing agents).
Assertions most at risk
Analytical procedures.
Completeness as with all liabilities, can be high risk.
4 EVENTS
Cut-off failure to accrue for goods received just before
4.1 Revenue from contracts with customers
the year end, but not invoiced until after the year end.
Materiality
Presentation ensuring correct analysis between < 12
months and > 12 months. For trading entities, total revenue will be material.
Valuation closing rate foreign currency retranslation. Transactions with a particular customer over the year
may be material.
Existence fraud risk of fictitious suppliers and related
transactions. ISA 240 considers revenue to be a significant risk.
Relevant accounting standards
IFRS 15 Revenue from Contracts with Customers

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AUDIT OF FINANCIAL STATEMENTS

Assertions most at risk 4.2 Segment reporting


Completeness usually tested for understatement Materiality
(related trade receivables for overstatement) but also
By definition and requirement of IFRS 8, segments are
overstatement if specific risk identified.
material.
Cut-off must tie in with inventory, receivables.
Relevant accounting standards
Occurrence client deliberately overstates revenue.
IFRS 8 Operating Segments
Valuation (initial measurement) cut-off, deferred
Assertions most at risk
payment terms, barter transactions, use of fair value to
measure revenue. Valuation and allocation (measurement, recognition):
Presentation extensive IFRS 15 requirements. Based on management information reported to the
chief operating decision maker.
Evidence
Management information may not be supported by
Confirmation.
robust processes and controls or subject to external
Contracts, orders, invoices, signed despatch notes, audit.
reciprocal populations (e.g. purchases of new motor
Underperforming segments must be shown
vehicles for sale).
separately.
Substantive analytical review.
Completeness commercially sensitive or potentially
Correspondence. detrimental segment information may be omitted.
Accuracy information presented to management must
meet the accepted criteria for useful information.
Understandability clear and informative.
Presentation extensive requirements of IFRS 8.

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AUDIT OF FINANCIAL STATEMENTS

Evidence 4.3 Borrowing costs


Identification of chief operating decision maker Materiality
(CODM).
The amount of borrowing costs capitalised with
Understanding of the internal management reporting qualifying assets is unlikely to material to the statement
system. of financial position.
Testing of the reporting systems controls. The impact of capitalisation on interest expense in profit
or loss is often highly material especially to the
Established segments and new segments realised in the
income gearing measure interest cover.
year with supporting criteria.
The amount of interest capitalised can also affect
Agreement of quantitative disclosures to the CODM
whether a company apparently does, or does not,
reporting detail with overall reconciliation to relevant
comply with ratios included in any loan covenant.
totals in the financial statements (e.g. sales, profit or
loss, assets). Relevant accounting standards
Consideration (using professional judgement and IAS 23 Borrowing Costs
scepticism) of qualitative disclosures supported by audit
Assertions most at risk
evidence already on file.
Completeness over capitalisation of interest on
Comparison to prior year to ensure consistency (or
qualifying assets is more likely the risk.
improvement) of disclosure.
Occurrence interest costs on external financing were
Disclosure checklist and management representations.
incurred. Construction work has commenced (and not
been suspended or completed).
Valuation (initial costs) appropriate interest rate and
the qualifying expenditure.
Presentation disclosures of IAS 23.

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AUDIT OF FINANCIAL STATEMENTS

Evidence Valuation in the circumstance where a grant may


become repayable, a contingent liability may be
Bank statements and other interest payments.
required.
Bank and other loan agreements to confirm the interest
Valuation (initial) non-monetary grants may be at
rates.
nominal value (e.g. cost) or fair value.
Construction costing records, fixed asset cost records or
Presentation clear accounting policy notes.
inventory records, to confirm the amount of expenditure
during the year that precipitated the need to borrow. Evidence
4.4 Government grants Correspondence with government.
Materiality Bank statements to confirm receipt.
The receipt of a government grant, especially in the Correspondence with legal advisers and other
context (as is often the case) of a relatively young and specialists to confirm:
growing company, is often a highly material amount of
Eligibility for application for a grant; and
cash.
Continuing compliance with the terms of it.
Relevant accounting standards
4.5 Discontinued operations
IAS 20 Accounting for Government Grants and
Materiality
Disclosure of Government Assistance
Highly material information for use by the
Assertions most at risk
analyst/broker community and other users.
Allocation have all grants received been correctly
Any costs associated with the closure (redundancy,
allocated to the statements of financial position and
contracts terminated, assets to be sold off, etc) will
comprehensive income.
usually be separately disclosed as, by definition, they
are material.

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AUDIT OF FINANCIAL STATEMENTS

Relevant accounting standards Assertions most at risk


IFRS 5 Non-current Assets Held for Sale and Completeness lack of disclosure of events to the
Discontinued Operations auditor.
Assertions most at risk Valuation (initial) future cash flows or net sales
proceeds correctly calculated using appropriate cost of
Completeness disclosure requirements are triggered
capital.
when the operation meets the criteria of held for sale or
the operation is sold. Valuation (subsequent) correct application of the rules
of IAS 36 in terms of the sequence of write back for a
Presentation extensive disclosure requirements.
cash generating unit.
Evidence
Evidence
Minutes of directors/management meetings/co-ordinated
Details of the event resulting in the impairment.
plan.
Management/directors minutes identifying and
That the discontinued operation is separately
quantifying the extent of impairment
identifiable.
Budgets, forecasts and projections for the remaining
Schedules separating the operating performance of the
useful life of the asset or cash generating unit (CGU)
target segment from the remaining business.
concerned.
4.6 Impairment of assets
Detail of recoverable amount as an estimation.
Materiality
Calculations of value in use (including evidence on cash
Impairment almost certainly has material financial flows and cost of capital).
impact.
Formal schedules of impairment review.
Relevant accounting standards
IAS 36 Impairment of Assets

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AUDIT OF FINANCIAL STATEMENTS

4.7 Earnings per share Statutory returns showing changes in the number of
shares in issue during the year.
Materiality
Minutes/authorisation of convertible loan stock,
Because of the importance of the earnings per share
convertible preferred shares, options, warrants and other
figure to the investment community, the amount is an
convertible instruments.
important disclosure.
Disclosures made in accordance with IAS 33.
Relevant accounting standards
4.8 Sale and leaseback
IAS 33 Earnings Per Share
Materiality
Assertions most at risk
Where the transaction involves land and buildings, will
Completeness number of shares in issue (basic EPS)
usually be material. There is also a risk that appropriate
and potential ordinary shares (diluted).
disclosures will not be made, thus a potentially material
Occurrence changes in share structure. qualitative error.
Valuation (initial) measurement of the EPS and Relevant accounting standards
diluted EPS.
IAS 17 Leases
Presentation reluctance to presenting diluted EPS with
IAS 24 Related Party Disclosures (if sale and leaseback
preference to present headline EPS figures to reduce
with a related party).
the prominence of IAS 33 required disclosures.
Assertions most at risk
Evidence
Completeness that the sale and leaseback is
Schedules showing the calculation of basic and diluted
recognised. Finance lease liabilities recognised and
EPS, in particular potential shares for diluted EPS.
correctly calculated. Disclosures fully made.
Consistency of calculation and measurement.
Discussions with management if changes made.

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AUDIT OF FINANCIAL STATEMENTS

Classification correctly recognised as a finance or 4.9 Share based payments


operating lease arrangement. This can be difficult if the
Materiality
lease is embedded lease within another transaction (e.g.
payment for sole rights to generating capacity). Impact of expensing share options is on average
between 5% - 10% of net profit after tax. For
Valuation and allocation any finance lease asset and
technological based entities, this is between 20 and 25%
liability are correctly calculated (e.g. fair value, rental
of net profit after tax.
revenue, finance rate implicit in the lease) and allocation
(e.g. depreciation and interest charges) made. The processes that apply are complex and challenging
and extensive disclosures are required.
Occurrence, rights and obligations failure to correctly
recognise and present a finance transaction. Relevant accounting Standards
Evidence IFRS 2 Share-based Payment
IAS 19 Employee Benefits
Board minutes and contracts.
IAS 33 Earnings Per Share
Review of cash book for lease evidence (e.g. proceeds
Assertions most at risk
from original sale, rental payments, finance payments).
Classification may be recognised as:
Risks and rewards of ownership (control).
Equity-settled payment transactions;
Confirmation from counterparty on lease terms.
Cash-settled payment transactions; or
Comparison to market rentals re fair value rent paid. Settlement of transactions where either party may
choose a cash-based or equity-based settlement.
Recalculation of carrying (fair) values, relevant deferred
gains/losses, presentation in statement of profit or loss. Classification in complex arrangements, transactions
may be recognised as share-based payments, when they
are not.

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AUDIT OF FINANCIAL STATEMENTS

Classification goods or services received are Evidence and procedures


recognised when the goods are obtained and as services
For new options granted during the reporting period,
are received.
directors approval for employees and shareholder
Valuation can be very complicated, if a market value approval for directors.
is not freely available. All transactions are measured at
fair value. A suitable valuation model used in the Obtain deed granting the option and details of
absence of an active market, may require the use of an performance conditions/period of service and, if
auditors expert. appropriate, market conditions.

Accuracy particularly for employee share-based Obtain details of numbers of vested employees and
transactions with vesting conditions, the allocation of options.
the expense over the vesting period can cause Check option valuation. It is unlikely that there is an
significant calculation and allocation problems. active market, so an appropriate option valuation model
Understandability ensuring that disclosures are should be used. Expert valuation procedures may
relevant, complete, meaningful and understandable can apply.
be a significant task. The three main groups of Ensure option price is within taxation rules, see tax
disclosures are: office approval if appropriate, and consider deferred tax
the nature and extent of share-based payment implications, if relevant.
arrangements; Assess reasonability and check mathematical accuracy
the valuation of share-based payment of companys projection of granted employees expected
arrangements; and to leave during vesting period.
the impact on the financial statements of share- Consider probability of achievement of market
based payment transactions. performance conditions, and agree to revision of
projections.
Occurrence for example, the granting of options,
exercise during the year of options, and forfeiture.

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AUDIT OF FINANCIAL STATEMENTS

For options exercised during the year, check to share Assertions most at risk
issue and registration documentation.
Completeness failure to present /disclosure an
Check accounting entries in general ledger: instrument can lead to material misstatement.
employee/director remuneration and equity.
Completeness/Accuracy high volumes and complexity
Directors remuneration disclosure (if appropriate) of the transactions can make confirming completeness
verified to ensure options included. and accuracy very difficult.
Earnings per share: ensure correct number of Completeness/Occurrence risk of unauthorised
outstanding options is included in fully diluted earnings transactions, hidden transactions, traders exceeding
per share calculation and reperform calculation. authority limits, taking excess risks, etc.
4.10 Financial instruments Valuation this can be extremely difficult, especially
where a previously liquid market becomes illiquid.
Materiality
Disclosure very complex and detailed and
Potentially considerable.
requirements under IFRS undergo frequent revisions.
Going concern basis past events have demonstrated
Discursive disclosures include estimation uncertainty,
adequately the inherent risks to company health of
related risks and uncertainties. May also be included as
derivatives and other financial instruments.
a Key Audit Matter in the auditors report.
Relevant accounting standards
Evidence
IAS 32 Financial Instruments: Presentation
Fully understanding the financial instruments used by
IFRS 7 Financial Instruments: Disclosure
the entity, the risk management and monitoring
IFRS 9 Financial Instruments
procedures.
IFRS 13 Fair Value measurement
Assessing the understanding of the financial
instruments of senior management and the board.

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AUDIT OF FINANCIAL STATEMENTS

Reviewing the approval, recording and tracking process Relevant accounting standards
that ensures all financial instruments, hedges and
IAS 21 Effects of Changes in Foreign Exchange Rates
derivatives are completely and accurately recorded.
Auditors expert. IFRS 7 and IFRS 9 deal with most foreign
currency derivatives as well as hedge accounting
Contracts and counterparty agreements for each for foreign currency items.
instrument.
Assertions most at risk
Confirmation from counterparties.
Classification monetary or non-monetary items,
Test fair value where active market exists. functional currency.
Test fair value models where used for appropriateness, Valuation correct exchange rate used on initial
assertions, assumptions and sensitivity using experts as recognition and at period end.
required.
Allocation exchange differences treated correctly:
Ensure allocation of instruments to category appropriate
and that conditions have not been breached. Monetary items go through profit or loss;
Non-monetary items at fair value through profit or
Use IFRS 7 checklist. loss; and
Verify risk disclosures (credit, market, liquidity risk etc) Non-monetary items at fair value through
to knowledge of the client and the environment the (revaluation) reserves (equity) go through equity
client operates within. (and not profit or loss).

4.11 Foreign currency transactions Allocation, cut-off where a period transaction is not
settled until after the period end, the total exchange
Materiality difference is correctly allocated to each period.
Where an entity conducts the majority of its business Completeness, classification and understandability
involving foreign currency transactions or has extensive disclosures in accordance with IAS 21.
foreign currency denominated loans.

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AUDIT OF FINANCIAL STATEMENTS

Evidence and procedures Agree that non-monetary items at fair value have been
translated at the period end exchange rate and that the
Understand control systems for determining foreign
exchange difference has been correctly treated through
currency transactions and conversion into functional
profit or loss, or equity, depending on nature of the non-
currency (and reporting currency, if different).
monetary item.
Test controls and/or separate transactions to ensure
Where presentation currency is different to the
correct exchange rate used.
functional currency, ensure the correct procedures of
Where average rate used for profit or loss, confirm IAS 21 followed: assets and liabilities translated at the
closing rate (including comparatives), income and
rate is not materially different to actual rate; and
expenses at actual or average rate, exchange differences
actual rates over the reporting period were
recognised in other comprehensive income.
reasonably stable.
Agree functional currency consistent with prior year
and that it represents the economic effects of the
underlying transactions of the entity.
If management have changed the functional currency,
establish reasons why and that the change reflects
changes to the economic effects of the underlying
transactions of the entity.
Ensure that the transition requirements of IAS 21 have
been correctly applied.
Agree that non-monetary items at historic cost are
recorded at the historical translated rate of exchange.

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GROUP AUDITS

1 ISA 600 1.2 Group engagement partner


1.1 Definitions Responsibilities are the same as if auditing an
individual company but from a group perspective,
Group engagement partner auditor with the
including:
responsibility for reporting on group financial
statements. planning (understanding the group businesses,
group structure, group-wide controls);
Component auditor an auditor who, at the request of
the group engagement team, performs work on financial consolidation process.
information related to a component of the group.
Must determine whether sufficient appropriate audit
Component an entity or business activity whose evidence can reasonably be expected to be obtained in
financial information is included in the group financial relation to the consolidation process and the financial
statements. information of the components on which to base the
group audit opinion, for example:
Significant component A component identified by
the group engagement team that: the materiality of the portion of the group financial
statements they audit;
(i) is of financial significance to the group; or
their level of knowledge regarding the business of
(ii) is likely to include significant risks of material
the components (i.e. the whole group);
misstatement of the group financial statements
(due to its specific nature or circumstances). the risk of material misstatements in the financial
statements of components audited by another; and
the performance of additional procedures
regarding the components audited by the other
auditor resulting in the principal auditor having
significant participation in such audit.

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GROUP AUDITS

Assess the other auditors professional competence in 2 SPECIFIC APPROACH


the context of the specific assignment, for example:
2.1 Component auditors
perform procedures to obtain sufficient
The approach to the component auditor is more or less
appropriate audit evidence that their work is
the same as a standard audit using any member of staff.
adequate for the principal auditors purposes;
Obtain an understanding of the entities audited by the
consider their significant findings; and
other auditor(s). Consider the overall risk and
consider the impact of their work when reporting materiality of each company and its components to the
on the group financial statements. group as a whole.
If the other auditor qualifies his opinion, consider its For all material group companies, obtain the clients
impact on the group as a whole. If material to the permission to contact the other auditors.
group, then qualify the group opinion accordingly.
Assess the professional codes of ethics and behaviour
Where the component is material to the group and the followed by the other auditors. If inappropriate discuss
other auditors work cannot be relied upon and with parents management and consider impact on
insufficient alternative work cannot be carried out, the reliance on other auditors work and group audit report.
principal auditor should express a qualified opinion
Consider matters such as integrity, objectivity,
based upon limitation of scope.
independence (from group), confidentiality, conflicts of
interest, recruitment, training, professional
qualifications and CPD. If inappropriate, as above.
Review audit methodologies, technical manuals and
working papers used by other auditor. If inappropriate,
consider use of own systems/tailored programmes
(provided other auditor competent to use).

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GROUP AUDITS

Plan approach to group as a whole. Consider, for Review the other auditors working papers to ensure
example: that appropriate auditing standards have been applied
Changes in group structure effective date, audit and their work can be relied upon in reaching a group
arrangements, accounting policies adopted, opinion. This includes the management letter and
auditing standards used by auditors, non- matters for manager/partner attention.
coterminous year ends. Review completed consolidation questionnaire
Inter-company transactions (trading, non-current (equivalent to a typical manager/partner closedown
assets, management charges, dividends, loans, review checklist) covering matters requested at the
other), unrealised profits on such transactions, planning stage together with closedown documentation.
inter-company balances. The consolidation questionnaire may be sufficient
Related party transactions between group without a detailed review of the working papers (e.g.
companies. where the other auditor is part of the principal auditors
network and applies exactly the same procedures).
Inter-company guarantees and security (e.g. bank
loans guarantees, rights of set-off, pledged assets). Carry out a group subsequent events review. As the
These will need to be disclosed. group auditors report may be signed a while after the
completion of the other auditors work the other
Group accounting instructions. auditors need to conduct this review on their clients.
Plan with/review audit plan (strategy and work Going concern
programme) of other auditors. Principal auditor must
be satisfied that all matters required to be able to reach a Review on basis of the group as a whole.
group opinion have been included (e.g. inter-company
Where group companies depend on the support of their
transactions, group accounting policies). parent, obtain a letter of support (comfort letter).
Ensure other auditors report any potential problems as This confirmation should be audited (e.g. approved by
soon as they arise so that the group audit plan can be re-
board of parent, parents financial strength and cash
assessed as necessary (i.e. basically supervision). flows support their assertion of support).

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GROUP AUDITS

2.2 Consolidation audit work Recalculate all consolidation.


Audit procedures include evaluating: Agree consolidation approach is consistent with prior
year.
whether all components have been included in the
group financial statements; Agree accounting policies consistently applied from
prior year.
the appropriateness, completeness and accuracy of
consolidation process and adjustments and Recalculate any accounting policy adjustments from
reclassifications; and subsidiary to group basis.
whether any fraud risk factors or indicators of Agree correct treatment of impairment of goodwill (if
possible management bias exist. any).
Consolidation schedule Reconcile movements on reserves and for non-
controlling interests.
Assess design and implementation of controls over
preparing the consolidation and gain assurance through Additions in year
testing key controls (e.g. the mathematical accuracy of
Confirm date of control used by management as
the model/programme used).
appropriate.
Agree all subsidiaries are included (none excluded
Recalculate pre-acquisition reserves and post-
unless control lost).
acquisition revenue and expenses.
Cast and cross-cast all consolidation schedules.
Ensure correct treatment of cash flows.
Agree opening balances and permanent consolidation
Recalculate goodwill on acquisition.
adjustments to prior year and consolidation audit
working papers. Ensure that each balance of the acquisition is correctly
included in the consolidation.
Agree basic detail to audited component financial
statements and/or audited consolidation returns.

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GROUP AUDITS

Ensure appropriate treatment of dividends paid/declared Confirm all assets (including goodwill) and liabilities of
by subsidiary. the disposed entity removed on consolidation.
Agree (if a listed group) the impact on segmental Consider if the disposal should be treated as a
reporting. discontinued operation.
Agree correct reason and treatment of entity if not Agree correct accounting treatment if disposal does not
consolidated. result in loss of control or the remaining interest is that
of an associate or joint venture.
Disposals in year
Statement of cash flows
Confirm date of the loss of control used by management
as appropriate. Agree make up of group statement of cash flow to the
supporting financial statements of the group.
Agree sales proceeds to sales contracts and other
supporting records (e.g. cash books). Agree, to supporting audited group returns, that
intercompany cash flows have been correctly identified
Agree correct treatment of any deferred or contingent
and eliminated.
elements of sales proceeds, including fair value
calculations. Agree correct treatment of cash flows relating to non-
controlling interests and associates.
Recalculate profit or loss on disposal and confirm the
correct treatment in the group financial statements. Confirm, to supporting documents correct cash flow
treatment of subsidiary net assets, purchase/disposal of
Agree correct treatment (disposal of an investment) in subsidiary and cash impact on acquisition or disposal.
the individual financial statements of the parent,
Agree to management and working documents, cash
including taxation issues. Reconcile profit or loss on
flow disclosures made relating to the purchase/disposal
disposal to the group figure.
of subsidiaries.
Agree that results up to the date of disposal have been
correctly treated, including cash flows.

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GROUP AUDITS

Reporting date, year end Agree reconciliation of opening equity foreign


exchange reserve to closing balance for both the parent
Where a subsidiary has a non-coterminous reporting
and non-controlling interest (through other
date discuss with management that the reasons are still
comprehensive income).
appropriate.
Ensure goodwill is treated as an asset in the financial
If the entity has prepared additional financial information
statements of the subsidiary with related exchange rate
to enable it to be consolidated at the group reporting date,
difference accounted for through other comprehensive
agree that this information has been correctly incorporated
income.
into the group financial statements.
Where a foreign subsidiary is disposed of during the
If no additional information has been prepared, agree
year, ensure related exchange reserve is reclassified
that the reporting date is within three months of the
through profit or loss. If a partial disposal, agree that
group reporting date and obtain confirmation that no
only the proportionate accumulated exchange difference
material matters have arisen that need to be
is included in profit or loss.
incorporated.
Agree that foreign associates are similarly accounted for
Foreign translation
Agree accounting and disclosure requirements of IAS
21 applied.
Test check that assets and liabilities translated into the
presentation currency at the closing exchange rate.
Test check that income and expenses translated at actual
rates.
Where average rate used for profit or loss, agree that
this rate is acceptable compared to actual rates
throughout the year.

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GROUP AUDITS

3 DEVELOPING COUNTRIES
Potential audit problems
Constraints on access to accounting information given
to the auditors.
Non-compliance with certain IFRSs may be significant.
Some IFRS terms do not easily translate.
External confirmations may be less readily available if
the countrys infrastructure is underdeveloped and
communication with third parties is hindered. A
banking system which is not westernised may be
relatively inflexible in meeting the needs of the auditor.
Specialist accounting personnel may be lacking.
Experts and professional advisors (e.g. lawyers and
valuers) may not be available.
International firms may be required to set up a joint
practice with a local firm in order to be licensed. (Local
audit staff may lack experience and training in more
sophisticated auditing techniques).
Systems of controls are likely to be much weaker (e.g.
no internal audit, audit committees, etc).
Risks in developing countries include: environmental,
financial, legal, taxation, ethical, intellectual property,
security, managerial logistics and human resources.

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ASSURANCE SERVICES

1 ASSURANCE SERVICES 1.2 The professional accountant


1.1 Overview Must be a member of an IFAC member body and hence
the IESBA Code of Ethics applies.
Independent professional services that improve the
quality of information, or its context, for decision Must ensure that the pre-conditions for an assurance
makers and intended to provide high or moderate levels engagement are relevant.
of assurance.
1.3 Subject matter
May take many forms, for example:
Data e.g. historical, prospective, statistical,
performance indicators.
Systems and processes e.g. internal controls,
recruitment, quality control.
Behaviour e.g. corporate governance,
compliance with regulations, ethics.
Must be identifiable, capable of consistent evaluation or
measurement (against the suitable criteria) and in a
form that can be subjected to procedures for gathering
evidence (to support the evaluation or measurement).
The professional accountant evaluates or measures a
subject matter that is the responsibility of another party
against identified suitable criteria, and expresses a
conclusion that provides the intended user with a level
of assurance about that subject matter.

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ASSURANCE SERVICES

1.4 Criteria Reasonable assurance assurance engagement risk has


been reduced to an acceptably low level as the basis for
Standards or benchmarks used to evaluate or measure
a positive expression (i.e. the subject matter conforms in
the subject matter of an assurance engagement.
all material respects with identified suitable criteria).
Need to be suitable to enable reasonably consistent
Limited assurance sufficient appropriate evidence has
evaluation or measurement of the subject matter .
been obtained (to be satisfied that the subject matter is
Examples plausible in the circumstances) as the basis for a
negative form of expression.
IFRS for financial statements.
Internal procedure manual for operation of a procedure. 1.7 Attestation engagements
Internal control framework for internal controls.
The conclusion relates to a statement (assertion) made
Laws and regulations for compliance.
by the responsible party.
Contract terms and conditions for performance under
that contract. The professional accountant:
1.5 Engagement process expresses a conclusion about the statement; or
provides a conclusion about the subject matter in a
Very similar to audit process agree terms, understand
form similar to the statement made (e.g. the
the business (in context of the engagement), consider
auditors report confirms the directors assertion
materiality and engagement risk, plan and conduct the
of a true and fair view).
engagement to obtain sufficient appropriate evidence
and apply professional judgement to express an opinion. 1.8 Direct reporting engagements
1.6 Conclusion The professional accountant expresses an opinion on the
Provides a level of assurance whether the subject matter subject matter, based on suitable criteria, regardless of
conforms in all material respects with the identified whether the responsible party has made a written
criteria. statement on the subject matter (e.g. compliance with an
agreed quality control programme).

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ASSURANCE SERVICES

2 REASONABLE ASSURANCE ENGAGEMENTS 2.1 Report


ISAE 3000 provides specific standards to be applied on Should be tailored to the specific engagement
reasonable assurance engagements. These are very circumstances.
similar to those for an audit.
ISAE 3000 does not require a standardised format.
ISAs will be referred to as necessary on assurance
Minimum information requirements (ISAE 3000)
engagements (e.g. ISA 500 and ISA 620).
Title and addressee.
Additional elements relevant to understanding the
Framework include: Description of engagement and identification of subject
matter.
Only accept engagement if the subject matter is
identifiable, can be subjected to evidence gather Identification of responsible party and a description of
procedures and is the responsibility of another the practitioners responsibilities.
party (e.g. as evidenced by a written
acknowledgement, legislation or a contract). Where applicable, identification of parties to whom the
report is restricted and for what purpose it was prepared.
Criteria may be established (e.g. laws and
regulations) or specifically developed. Identification of standards followed.

Criteria will be suitable when relevant, reliable, Identification of criteria so readers can understand the
basis for the conclusions.
neutral (i.e. free from bias), understandable and
complete. Practitioners conclusion, including any reservations or
denial of a conclusion.
Report date.
Name of firm or practitioner and place of issue of the
report.

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ASSURANCE SERVICES

The conclusion should clearly express circumstances where: Because of the inherent limitations of any internal control
one, some or all aspects of the subject matter do not structure, errors or irregularities may occur and not be
conform to the identified criteria (disagreement); detected. Also, projections of any evaluation of internal
control to future periods are subject to the risk that the
the statement prepared by the responsible party is internal control may become inadequate ...
inappropriate in terms of the identified criteria
This Assurance engagement has been undertaken in
(disagreement); or
accordance with the International Standard on Assurance
sufficient appropriate evidence to evaluate one or more Engagements 3000 ...
aspects of the subject matters conformity with the
identified criteria cannot be obtained (scope limitation). These procedures have been undertaken to determine whether
the internal control structure has been adequately designed
Reasonable level assurance report (extracts)
and operated effectively based on the [Framework] of the
Committee of Sponsoring Organisations of the Treadway
The objective of this Assurance engagement is to report on
Commission. Based on our engagement procedures, the
the effectiveness of the internal control structure for financial
inherent limitations outlined above and the evidence
reporting of ... The directors ... are responsible for
collected, we conclude that Jasper Inc maintained, in all
maintaining an effective internal control structure ... The
material respects, an effective internal control structure in
directors assertion about the effectiveness of the internal
relation to financial reporting for the period ... to ... in
control structure for financial reporting is included ...
accordance with [Framework]
Our responsibility is to express a conclusion on the
effectiveness of the internal control structure ... to ... This
conclusion is based on the procedures that we determined to
be necessary for the collection of sufficient appropriate
evidence, that evidence being persuasive rather than
conclusive in nature, in order to obtain a reasonable level of
assurance as to the effectiveness of the internal control
structure.

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ASSURANCE SERVICES

Limited level direct report (extracts) It was noted that the need for and the benefits arising from
redundancies are not well planned or measured, and there is
The objective of this Assurance engagement is to report on no comparison of the costs of the redundancy program to
the implementation of the Groups national voluntary benefits. In the case of the Zt83 Division, the decision to
redundancy program during the period ... to ... The Chief outsource the IT function, resulting in 50 personnel being
Executive Officers are responsible for the implementation of categorised as surplus to requirements and taking voluntary
the program. redundancy, did not meet competitive tendering requirements
Our responsibility is to express to the Groups Audit and was not subject to cost/benefit analysis.
Committee a conclusion on whether the voluntary
Based on our engagement procedures and the evidence
redundancy program has been complied with. This
collected, except for the above reservations, nothing has
conclusion is based on the application of limited procedures
come to our attention that causes us to believe that the
that we determined to be necessary for the collection of
voluntary redundancy program has not, in all material
sufficient appropriate evidence in order to provide a
respects, been implemented during the period ... to ... in
moderate level of assurance; that evidence being persuasive
accordance with the Groups Managed Redundancy
rather than conclusive in nature.
Program Policy.
This Assurance engagement has been undertaken in
accordance with ... This involved the selection of five
operating divisions based on the materiality of redundancy
expenditure. These divisions represented 67% of the number
of redundancies and 73% of the expenditure on redundancy
packages during the period ... to ...
Our procedures were restricted to a review of documentary
evidence and analytical procedures ... The evidence provided
by these procedures to identify the existence, adequacy and
implementation of the Groups Managed Redundancy
Program Policy, restricts the assurance to a limited level.

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ASSURANCE SERVICES

3 RISK ASSESSMENT 4 SYSTEMS QUALITY AND RELIABILITY


Assurance that an entitys profile of business risks is Assurance that information systems provide reliable
comprehensive and evaluation of whether the entity has information for operating and financial decisions.
appropriate systems in place to effectively manage Focuses on how well the system fulfils its role.
those risks.
Information integrity and controls.
Independent assessments of the likelihood of adverse Internal control effectiveness.
events of a significant magnitude and measurement of
Evolving into continuous, real-time assurance, thus
the possible magnitudes of the events if they occur.
implying embedded monitoring of systems or direct
Include: regular enquiries.
identification and assessment of primary potential Need for pro-active monitoring rather than re-
risks faced by an entity; active monitoring.
independent assessment of risks identified by an Mind-set must be quality-by-design and
entity; and continuous improvement rather than inspection-
rejection-rework.
evaluation of an entitys systems for identifying
and limiting risks. 4.1 Systems quality
Provides users with assurance that a system has been
designed and operated to produce reliable data. Involves
testing (continuously) the integrity of an information
system.

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ASSURANCE SERVICES

4.2 Systems reliability 5.1 Materiality


Provides an indication of the quality of information Relates to system being reported on, not the financial
coming out of the organisations systems over a period statements.
of time (evolving to be continuously).
Type 1 = qualitative; Type 2 = qualitative and
Data from which the information is provided may be quantitative.
internally or externally generated.
Whilst a deviation may not be significant to the service
Covers both internal (e.g. management corporate provider, it may be to the service user.
governance) and external (e.g. customer or surfer) use
5.2 Evidence for Type 1 report
of the data store (e.g. database, website) to provide
information. Control objectives stated in the service organisations
description of its system are reasonable in the
5 SERVICE ORGANISATIONS
circumstances.
Type 1 approach deals with the design and
Controls identified in that description were
implementation of the control systems and should
implemented.
always be available as part of understanding the control
system. Risks to control objectives being achieved identified.
Type 2 approach covers the effectiveness of the control Controls suitably designed to meet objectives and
system and is obtained when audit assurance is sought contain risks.
from reliance on control effectiveness of the service
provider.

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ASSURANCE SERVICES

5.3 Evidence for Type 2 report 5.4 Written representations


Apply standard testing for operating effectiveness, Reaffirm the assertion accompanying the description of
taking into account: the system given by the service organisation;
performing other procedures in combination with that it has provided the service auditor with all
inquiry to obtain evidence about how the control relevant information and access agreed to; and
was applied, the consistency with which the that it has disclosed to the service auditor any of
control was applied and by whom or by what the following of which it is aware:
means the control was applied; (i) Non-compliance with laws and regulations,
controls to be tested depend upon other controls fraud, or uncorrected deviations attributable
(indirect controls) and, if so, whether it is to the service organisation that may affect
necessary to obtain evidence supporting the one or more user entities;
operating effectiveness of those indirect controls; (ii) Design deficiencies in controls;
the characteristics of the population to be tested (iii) Instances where controls have not operated
(number of controls, frequency of application and as described; and
the expected rate of deviation); and (iv) Any events subsequent to the period
covered by the service organisations
determining means of selecting items for testing description of its system up to the date of
that are effective in meeting the objectives of the the service auditors assurance report that
procedure (e.g. apply standard sampling could have a significant effect on the
approach). service auditors assurance report.

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ASSURANCE SERVICES

5.5 Other information If the service auditor is aware of such an event, and
ISA 720 the service auditor must read any other information about that event is not disclosed, then
information that is contained in a document containing disclose the information in the assurance report.
the description of the service organisations system and The service auditor has no obligation to perform any
the service auditors assurance report to identify any procedures regarding the description of the service
material inconsistencies with that description organisations system, or the suitability of design or
If found, and the service organisation refuses to remove operating effectiveness of controls, after the date of the
or correct, further actions by the service auditor may assurance report.
take include: 5.7 Example report
Requesting the service organisation to consult
with its legal counsel as to the appropriate course Independent Service Auditors Assurance Report to
of action; XYZ Service Organisation on the Description of
Controls, their Design and Operating Effectiveness
Describing the material inconsistency or material
misstatement of fact in the assurance report; Scope
We have been engaged to report on XYZ Service
Withholding the assurance report until the matter
Organisations description at pages [bb-cc] of its [type or
is resolved.
name of] system for processing customers transactions
Withdrawing from the engagement. throughout the period [date] to [date] (the description), and
5.6 Subsequent events on the design and operation of controls related to the
control objectives stated in the description.
Inquire whether the service organisation is aware of any
events subsequent to the period covered by its
description of the system up to the date of the assurance
report, that could have a significant effect on the
assurance report.

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ASSURANCE SERVICES

XYZ Service Organisations Responsibilities An assurance engagement to report on the description,


design and operating effectiveness of controls at a service
XYZ Service Organisation is responsible for: preparing the organisation involves performing procedures to obtain
description and accompanying assertion at page [aa], evidence about the disclosures in the service organisations
including the completeness, accuracy and method of description of its system, and the design and operating
presentation of the description and assertion; providing the effectiveness of controls. The procedures selected depend
services covered by the description; stating the control on the service auditors judgment, including the assessment
objectives; and designing, implementing and effectively of the risks that the description is not fairly presented, and
operating controls to achieve the stated control objectives. that controls are not suitably designed or operating
Service Auditors Responsibilities effectively. Our procedures included testing the operating
effectiveness of those controls that we consider necessary to
Our responsibility is to express an opinion on XYZ Service provide reasonable assurance that the control objectives
Organisations description and on the design and operation of stated in the description were achieved. An assurance
controls related to the control objectives stated in that engagement of this type also includes evaluating the overall
description, based on our procedures. We conducted our presentation of the description, the suitability of the
engagement in accordance with International Standard on objectives stated therein, and the suitability of the criteria
Assurance Engagements 3402 Assurance Reports on specified by the service organisation and described at page
Controls at a Service Organisation issued by the [aa].
International Auditing and Assurance Standards Board. That
standard requires that we comply with ethical requirements We believe that the evidence we have obtained is sufficient
and plan and perform our procedures to obtain reasonable and appropriate to provide a basis for our opinion.
assurance about whether, in all material respects, the
description is fairly presented and the controls are suitably
designed and operating effectively.

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ASSURANCE SERVICES

6 ELECTRONIC COMMERCE
Limitations of Controls at a Service Organisation Assurance that systems and tools used in e-commerce
XYZ Service Organisations description is prepared to meet provide appropriate data integrity, security, privacy and
the common needs of a broad range of customers and their reliability.
auditors and may not, therefore, include every aspect of the Encompasses privacy and security transactions and
system ... . Also, because of their nature, controls ... may communications and web assurance.
not prevent or detect all errors or omissions in processing or
reporting transactions. Also, the projection of any 6.1 Integrity services
evaluation of effectiveness to future periods is subject to the
Provide assurance that:
risk that controls may become inadequate or fail.
the elements of a transaction or document are as
Opinion agreed among the parties; and
Our opinion has been formed on the basis of the matters
the systems that process and store transactions and
outlined in this report. The criteria we used are described at
documents do not alter those elements.
page [aa]. In our opinion, in all material respects:
(a) The description fairly presents [type or name of] 6.2 Security services
system as designed and implemented throughout the Provide assurance that:
period from [date] to [date];
the parties to transactions and documents are
(b) The controls related to the control objectives stated
authentic and that such transactions and
in the description were suitably designed throughout
documents are protected from unauthorised
the period from [date] to [date]; and
disclosure; and
(c) The controls tested, which were those necessary to
provide reasonable assurance that the control the systems that support transaction processing
objectives stated in the description were achieved, and storage provide appropriate authentication and
operated effectively throughout the period from protection.
[date] to [date]

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ASSURANCE SERVICES

7 PUBLIC SECTOR PERFORMANCE


INDICATORS
That part of an economy that provides basic
government services.
Performance measures are based on stakeholder
requirements and the relationships between inputs,
outputs and outcomes (e.g. value for money).
A performance audit is an independent examination of
efficiency and effectiveness, having regard for
economy.
An audit of performance information aims to assess the
relevance and reliability of reported information data
reliability (accurate, complete), quality of content
(relevant, comparable, verifiable) and compliance with
reporting requirements (timely).

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REVIEWS AND RELATED SERVICES

1 OTHER ENGAGEMENTS Understand the nature of the assignment and the


form of report that may be given.
1.1 Comparison
Issue an engagement letter.
Auditing Other
Plan the work carried out, for example:
Audit Review Agreed upon Compilation
procedures Understand the business including its
organisation, accounting systems, assets,
liabilities, revenues and expenses.
Reasonable, Limited No assurance No assurance
but not assurance Assess risk of giving inappropriate report.
absolute Consider materiality.
assurance
Do the work in accordance with appropriate ISAs.
Positive Negative Factual Identification Review the work.
assurance assurance findings of of
Consider subsequent events.
report report procedures information
compiled Issue the appropriate report/statement.
1.3 Terms of engagement
1.2 Approach
The form of a professional accountants letter of
The professional accountants approach to any assignment engagement is basically the same regardless of the
is broadly the same regardless of the assignment: service being carried out.
Comply with the ethical code (note independence
only applies to assurance engagements where a
reasonable or limited level of assurance is
required).

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REVIEWS AND RELATED SERVICES

Basic elements would include: 1.4 Reports for limited assurance engagements
Nature and objective of the service being Title.
performed. Where this is not an audit this must be
Addressee.
made very clear.
Opening or introductory paragraph:
Managements responsibility for subject matter.
reason for engagement;
Scope of assignment work (e.g. nature, timing and
identification of subject matter; and
extent of the procedures to be applied) including
statement of responsibilities.
reference to ISAs.
Scope paragraph.
Access to records, documentation and other
information requested (or as agreed) in connection Applicable auditing standards (e.g. ISAs).
with the assignment.
Limitation of work carried out (supports level of
A sample of the report expected to be rendered. assurance provided).
Statement that the engagement cannot be relied Audit not performed, procedures provide less assurance
upon to disclose errors, illegal acts or other than an audit.
irregularities (e.g. fraud or defalcations) that may
A statement of negative assurance.
exist.
Date of report.
Statement that an audit is not being performed and
that an audit opinion will not be expressed. Auditors address.
Limitation of distribution of report. Auditors signature.

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REVIEWS AND RELATED SERVICES

1.5 Reports where no assurance is given Procedures


Additional elements include: Inquire of persons having responsibility for financial
and accounting matters whether all transactions have
Auditor is not independent of entity (where
been recorded; whether financial statements prepared in
relevant);
accordance with basis of accounting indicated and of
Report restricted to parties that have agreed to changes in business activities and accounting principles
procedures; and practices.
Report relates to specific subject matter and not to Carry out analytical procedures covering comparison of
any other elements; financial statements with prior periods & anticipated
results and financial position, and study of relationships
No assurance give reporting element often a of elements of financial statements that would be
statement of fact; expected to conform to a predictable pattern.
No audit or review (if not a review) carried out; Inquire concerning actions taken at meetings that may
and
affect the financial statements.
Had an audit or review been carried out, other Read financial statements to consider whether they
matters might have come to light and been appear to conform with the basis of accounting
reported.
indicated.
2 REVIEW ENGAGEMENT (ISRE 2400) Obtain reports from other auditors, if any.
To enable an auditor to state whether, on the basis of Obtain written management representations when
procedures which do not provide all the evidence that
appropriate.
would be required in an audit, anything has come to the
auditors attention that causes the auditor to believe that Inquire about subsequent events.
the financial statements are not prepared, in all material
respects, in accordance with an identified financial
reporting framework (negative assurance).

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REVIEWS AND RELATED SERVICES

2.1 Programme of work 2.2 Example work programme trade payables


Typical general tests Inquire about the accounting policies for initially
recording trade payables and whether the entity is
Inquire whether all financial information is recorded
entitled to any allowances given on such transactions.
completely, promptly and is authorised.
Obtain and consider explanations of significant
Inquire about accounting policies and consider whether
variations in account balances from previous periods or
they comply with IFRS, have been applied
from those anticipated.
appropriately and consistently.
Obtain a schedule of trade payables and determine
Inquire about the existence of transactions with related
whether the total agrees with the trial balance.
parties, how they have been accounted for and that they
have been properly disclosed. Inquire whether balances are reconciled with creditors
statements and compare with prior period balances.
Inquire about contingencies and commitments.
Compare turnover with prior periods.
Inquire about plans to dispose of major assets and
Consider whether there could be material unrecorded
business segments.
liabilities.
Obtain explanations from management for any unusual
Inquire whether payables to shareholders, directors and
fluctuations or inconsistencies in the financial
other related parties are separately disclosed.
statements.

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REVIEWS AND RELATED SERVICES

2.3 Report (extracts) 2.4 Qualified reports (extracts)


We have reviewed the accompanying statement of financial Material, but not adverse
position of
Management has informed us that inventory has been stated
Our responsibility is to issue a report . based on our at its cost which is in excess of its net realisable value.
review. Managements computation, which we have reviewed, shows
that inventory, if valued at the lower of cost and net
We conducted our review in accordance with
realisable value as required by International Accounting
A review is primarily limited to inquiries of company Standard 2 ..
personnel and analytical procedures and thus provides less
Based on our review, except for the effects of overstatement
assurance than an audit.
of inventory described in the previous paragraph, nothing has
We have not performed an audit, and accordingly, we do not come to our attention ..
express an audit opinion.
Adverse
Based on our review, nothing has come to our attention that
causes us to believe that the accompanying financial As noted in X, these financial statements do not reflect the
statements do not give a true and fair view in accordance consolidation of the financial statements of subsidiary
with International Accounting Standards companies .
Based on our review, because of the pervasive effect on the
financial statements . The accompanying financial
statements do not give a true and fair view

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REVIEWS AND RELATED SERVICES

3 REVIEW OF INTERIM FINANCIAL 3.2 Going concern


STATEMENTS
The auditor should consider whether any significant
The objective of the engagement is to conclude factors identified at the previous audit have changed to
whether, on the basis of the analytical procedures such an extent as to affect the appropriateness of the
applied and inquiries made, anything has come to the going concern basis.
auditors attention that suggests that the information is
Particular attention should be given to the period since
not prepared in all material respects in accordance with
reporting on the last full financial statements.
an identified financial reporting framework
Enquiries may be limited to discussions with
3.1 Procedures
management about changes to cash flow and banking
Interim financial information will not usually include arrangements where there are no significant concerns.
sufficient information to give a true and fair view. The
3.3 Report (extracts)
scope of the review involves less work than a full audit
and therefore provides a lower (moderate) level of We have reviewed the accompanying statement of financial
assurance. position of (etc)
The review work will be broadly similar to that detailed On the basis of our review we are not aware of any material
above. modifications that should be made to the financial
The review will not include: information as presented for the six months ended 30 June
20X5.
tests of accounting records through inspection,
observation or confirmation;
obtaining corroborative evidence in response to
enquiries; or
other typical audit tests (e.g. test of controls or
detailed testing of assets and liabilities).

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REVIEWS AND RELATED SERVICES

4 DUE DILIGENCE In comparing the audit of receivables, the due diligence


work on receivables may be:
The process of systematically obtaining and assessing
information in order to identify and contain the risks detailed testing (as for an audit); or
associated with a transaction (e.g. buying a business) to
a review of debt-aging, collectability, allowances
an acceptable level.
for doubtful debt and bad debt write-offs; or
A due diligence review may merely validate
seller representations and warranties (which might
information previously obtained. For example:
introduce purchase price hold backs).
from a set of audited financial statements;
5 AGREED-UPON PROCEDURES (ISRS 4400)
a review of tax returns; or
an examination of accounting and administrative Procedures of an audit nature to which the auditor, the
practices. entity and any appropriate third parties have agreed and
to report on factual findings.
Or it may consider specific non-financial matters (e.g.
organisational, business risk, HR or cultural fits). Standard audit procedures may be used, but as the scope
of the work is based on the clients requirements, the
The scope of a due diligence assignment usually varies
work is not an audit.
between:
No level of assurance is given. The report is based on
a review concentrating on financial and specific
the factual findings of the auditor. The recipients of the
operations matters (e.g. inventory control or
report must draw their own conclusions from the
manufacturing processes); and
auditors findings.
a comprehensive review on every aspect of the
sellers company (financial and non-financial).

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REVIEWS AND RELATED SERVICES

5.1 Report (extracts)


We have performed the procedures agreed with you and
enumerated below with respect to Our engagement was
undertaken in accordance with the International Standard on
Related Services (ISRS) 4400 . The procedures were
performed solely to assist you in . and are summarised as
follows: ..
We report our findings below: ..
Because the above procedures do not constitute either an
audit or a review we do not express any assurance on .
Had we performed additional procedures or had performed
an audit or review . Other matters might have come to our
attention that would have been reported to you.
Our report is solely for the purpose set out in the first
paragraph . and is not to be used for any other purpose or
to be distributed to any other parties.

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PROSPECTIVE FINANCIAL INFORMATION

1 PROSPECTIVE FINANCIAL INFORMATION 1.2 Accepting the engagement


(ISAE 3400) Considerations
Financial information based on assumptions about Form of PFI and its intended use.
events that may occur in the future and possible actions
by an entity. Can be in the form of a: Professional accountants own competence and
experience.
forecast;
projection; or The business its economic substance and stability.
combination (e.g. a one year forecast plus a five
Managements competence, integrity and past record in
year projection).
preparing PFI.
Relates to a future period or an expired period where
Whether information will be for general or limited
the auditor has yet to report.
distribution.
1.1 Objectives
Form of opinion and recipient.
To ensure that:
The nature of assumptions (i.e. best-estimate or
Assumptions are not unreasonable and consistent hypothetical).
with purpose of information;
The elements to be included in the information.
PFI is properly prepared on the basis of the
The period covered by the information.
assumptions; and
Time available.
PFI is properly presented and all material
assumptions are adequately disclosed (as best- The acceptability of any limitations.
estimate or hypothetical assumptions).
Do not accept (or withdraw from) an engagement if the
PFI is prepared on a consistent basis with assumptions are clearly unrealistic or the PFI will be
historical financial statements, using appropriate inappropriate for its intended use.
accounting principles.

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PROSPECTIVE FINANCIAL INFORMATION

1.3 Knowledge of the business 1.4 Period covered


Must be sufficient to evaluate whether all significant Considerations
assumptions required for the preparation of the PFI
Operating cycle (e.g. time required to complete a major
have been identified.
construction project).
Consider:
The degree of reliability of assumptions (e.g. short
Internal controls over preparation of PFI and prospective periods for introducing new products).
expertise and experience of persons involved.
The needs of users (e.g. time required to generate
(Meet management to ascertain how PFI is
sufficient funds to repay a loan).
prepared);
Assumptions become more speculative as the length of
Nature of documentation supporting
the period covered increases.
managements assumptions;
1.5 Examination procedures
Extent to which statistical, mathematical and
computer-assisted techniques are used; The likelihood of material misstatement.
Methods used to develop and apply assumptions; Knowledge obtained during any previous engagements.
Accuracy of PFI prepared in prior periods and Managements competence in preparing PFI.
reasons for significant variances; and
The extent to which PFI is affected by the
Extent of reliance on historical financial managements judgment.
information (Audited? Prepared using acceptable
Adequacy and reliability of the underlying data.
accounting principles? Modified reports?).

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PROSPECTIVE FINANCIAL INFORMATION

Procedures 1.6 Presentation and disclosure


Assess source and reliability of evidence supporting Whether presentation of PFI is informative and not
assumptions; misleading.
Consider significant implications of hypothetical Whether accounting policies are clearly disclosed in the
assumptions; notes to the PFI.
Make clerical checks such as recomputation; Sensitivity in material areas.
Review internal consistency of amounts based on Whether assumptions are adequately disclosed.
common variables (e.g. interest rates);
The date as of which the PFI was prepared.
Focus on areas particularly sensitive to variation that
The basis of establishing points in a range.
will have a material effect on the PFI;
Any change in accounting policy since the most recent
Consider the interrelationship of other components in
historical financial statements.
the financial statements;
When any elapsed portion of the current period is
included in PFI, consider the extent to which procedures
need to be applied to historical information; and
Obtain written management representations regarding
intended use of PFI, completeness of significant
management assumptions and managements
acceptance of responsibility for PFI.

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PROSPECTIVE FINANCIAL INFORMATION

1.7 Report format 1.8 Modified opinions


Title. The reporting accountants opinion should be modified
if, for example:
Addressee.
the PFI is inappropriate for its intended use
Identification of the PFI.
(adverse opinion or withdraw from the
A reference to ISAE 3400 (or equivalent). engagement);
A statement of managements responsibility for the PFI significant assumptions appear unrealistic (adverse
including assumptions. opinion depending on circumstances);
Reference to the purpose and/or restricted distribution there is a serious lack of information to support
of the PFI. reasonableness (disclaim, limitation of scope);
A statement of negative assurance as to whether information is omitted such that the statement
assumptions provide a reasonable basis for the PFI. could be misleading (adverse or withdrawal from
engagement); or
State whether evidence suggests assumptions do not
provide a reasonable basis for PFI. presentation and disclosure is inadequate
(qualified or adverse opinion or withdraw from
An opinion whether PFI is properly prepared on basis of engagement).
assumptions and presented in accordance with relevant
financial reporting framework.
Appropriate caveats concerning achievability of results
indicated by the PFI (as actual are likely to differ).
Date of report on which procedures completed.
Auditors address.
Auditors signature.

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PROSPECTIVE FINANCIAL INFORMATION

1.9 Report examples Example 2 Report on a projection (extracts)


Example 1 Report on a forecast We have examined the projection of the profits .
Management is responsible for ..
We have examined the companys profit forecast covering
the twelve months ending on the 30th June 20X7 in This projection has been prepared for . As the entity is in
accordance with International Standard on Assurance a start-up phase the projection has been prepared using a set of
Engagements (ISAE) 3400 The Examination of Prospective assumptions that include hypothetical assumptions about future
Financial Information. events and managements actions that are not necessarily
expected to occur. Consequently, readers are cautioned that this
Management is responsible for the forecast including the projection may not be appropriate for purposes other than that
assumptions set out in Note X on which it is based. described above.
Based on our examination of the evidence supporting the Based on our examination of the evidence supporting the
assumptions, nothing has come to our attention which causes assumptions, nothing has come to our attention which causes us
us to believe that these assumptions do not provide a to believe that these assumptions do not provide a reasonable
reasonable basis for the forecast. basis for the projection, assuming that sales growth of 10% is
achieved and costs are contained to a growth rate of 6% per
Further, in our opinion the forecast is properly prepared on annum.
the basis of the assumptions and is presented in accordance
with [relevant financial reporting framework]. Further, in our opinion the projection is properly prepared on the
basis of the assumptions and is presented in accordance with
Actual results are likely to be different from the forecast generally accepted accounting principles.
since anticipated events frequently do not occur as expected
Even if the events anticipated under the hypothetical
and the variation may be material.
assumptions described above occur, actual results are still likely
to be different from the projection since other anticipated events
frequently do not occur as expected and the variation may be
material.

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FORENSIC AUDITING

1 FORENSIC AUDITING Negligence


1.1 Definitions Personal injury, fatal accident, medical negligence,
professional negligence, personal negligence in causing
Forensic accounting engagements that result from
damage to others property
actual or anticipated disputes or litigation.
Identify circumstances and impact
Forensic audit The process of gathering, analysing
and reporting on data, in a pre-defined context, for the Establish financial compensation required (e.g. for loss
purpose of finding facts and/or evidence in the context of earnings through injury).
of financial/legal disputes and/or irregularities and
Insurance claims
giving preventative advice in this area
Establishing loss of profits due to business interruption.
1.2 Forms
Investigating and establishing quantity and value of a
Fraud investigation (corruption, asset misappropriation and
destroyed asset (e.g. inventory in a fire).
financial statement fraud)
Other
Prove or disprove suspicions.
Contract, copyright, royalty and matrimonial disputes.
Identify the individuals involved.
Asset tracing (e.g. money laundering and proceeds of
Identify motive, opportunity and rationale.
crime).
Quantify losses.
Provide the evidence for appropriate criminal
proceedings.
Identify risks of fraud and advice on managing the risks
to an acceptable level.

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FORENSIC AUDITING

1.3 Approach
Broadly the same approach as to any assurance
engagement under ISAE 3000 as many auditing
techniques will be used during the investigation.
Ethics, quality control, engagement, planning, obtaining
evidence and reporting.
Integrity and objectivity must be of the highest order.
The risks of self-review, advocacy and management
threats to objectivity must be managed to ensure an
acceptably low level.
Competence covers legal, auditing, investigative,
interview, interrogation, personal skills and court
proceedings (including acting as an expert witness
under cross-examination).
The scope of the investigation, objectives,
managements responsibilities, use of assumptions,
estimates and judgement, form and content of the final
report, timescale of investigations and report, access to
information and people must all be established and
encapsulated in an engagement letter.
The report will be of a factual nature and is unlikely to
provide any assurance (e.g. a true and fair view).

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AUDITOR REPORTS

1 BASIC PRINCIPLES 1.1 Basic elements (ISA 700)


Audit objectives: Addressee
Opinion
to form an opinion based on the audit evidence
Basis for opinion
obtained; and
Going concern (where applicable)
express it clearly in a written report. Key audit matters
Other information
Considerations Responsibilities those charged with governance
Sufficient appropriate evidence obtained. Auditors responsibilities
Name of engagement partner (listed companies)
Uncorrected misstatements are not material. Auditors address and signature
Prepared in accordance with financial reporting Date of report
framework (e.g. IFRS). * Never before approval of financial statements.
Adequate disclosure of significant accounting policies. 1.2 Modified reports
Accounting policies are consistent with the financial Material uncertainty relating to going concern.
reporting framework and statutory requirements. Emphasis of matter.
Accounting estimates are reasonable. Other matter.
Modified opinion.
Information presented is relevant, reliable, comparable
and understandable. 1.3 Modified opinions

Adequate disclosure of all material matters. Qualified except for.


Adverse.
Terminology used is appropriate. Disclaimer of opinion.
Fair presentation achieved.

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AUDITOR REPORTS

2 KEY AUDIT MATTERS Determine matters to be included in their report as part


of the final review with those charged with governance.
2.1 Definition and scope
3 UNMODIFIED OPINIONS (EXTRACTS)
Those matters that, in the auditors professional judgement,
were of most significance in the audit ... selected from matters INDEPENDENT AUDITORS REPORT TO ...
communicated with those charged with governance. Opinion
Enhances auditors report by providing greater We have audited ... [financial statements].
transparency about the audit and assists users In our opinion, the financial statements present fairly
understanding of those matters. Basis for Opinion
Not a separate opinion. We conducted our audit in accordance with ... We are
independent we have fulfilled our ethical requirements
Not a substitute for: We believe that the audit evidence we have obtained is
necessary disclosures; sufficient and appropriate to provide a basis for our audit
expressing a modified opinion; or opinion.
reporting on going concern. Key Audit Matters
2.2 Determining and communicating Key audit matters are those matters that These matters
were addressed in the context of our audit and we do not
Require significant auditor attention (e.g. high risk, provide a separate opinion on these matters.
significant management judgements).
[Description in accordance with ISA 701]
Disclose in auditors report:
why each matter was considered significant; and
how it was addressed in the audit.
Discuss potential matters with those charged with
governance as part of planning the audit.

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AUDITOR REPORTS

Responsibilities of Management and Those Charged with 4 MODIFIED OPINIONS


Governance for the Financial Statements 4.1 Circumstances
... for the preparation and fair presentation of these financial
statements in accordance with ... and internal control ... Financial statements are not free from material
[preparation of financial statements that are free from misstatement.
material misstatement, whether due to fraud or error]. Unable to obtain sufficient appropriate audit evidence.
assessing ability to continue as a going concern
4.2 Basis for modification
[disclosing matters related to going concern and using the
going concern basis unless intention to cease operations]. Separate heading and section, following the opinion, to
overseeing the financial reporting process. explain the reasons for the modification.
Auditors Responsibility for the Audit of the Financial 4.3 Standard forms summary
Statements
to obtain reasonable assurance whether the financial
statements are free from material misstatement
[explanations of what reasonable assurance and material Misstatement Lack of evidence

QUALIFICATION
GROUNDS FOR
misstatement mean].
we exercise professional judgment and maintain Inappropriate Inadequate disclosure Imposed by entity Imposed by circumstances
accounting method (e.g. failure to comply (auditor would not (e.g. inadequate records)
professional skepticism We also [detailed explanation with IFRS) normally accept
of additional responsibilities undertaken]. engagement)

Report on Other Legal and Regulatory Requirements (or


other appropriate title)
EXPRESSIONS OF

Material and pervasive Material Material and pervasive Material


Engagement partner name
OPINION

qualified opinion is not QUALIFIED unable to express QUALIFIED


adequate OPINION opinion OPINION
Signatures (audit firm, partner or both) ADVERSE Except for DISCLAIMER Except for

Address Describe in a Basis of Opinion section

Date

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AUDITOR REPORTS

If misstatement basis of opinion should include: Pervasive lack of sufficient appropriate evidence
a clear description of the reasons; and disclaimer of opinion
quantification of possible effects, when practicable.
Disclaimer of Opinion (Note change in opening wording)
If lack of sufficient appropriate evidence:
We were engaged to audit . (no change to remaining
describe limitation; and words)
indicate possible adjustments.
Because of the significance of the matters described ..., we
4.4 Sample standard opinions have not been able to obtain sufficient appropriate audit
Lack of sufficient appropriate evidence qualified opinion evidence to provide a basis for an audit opinion.
Accordingly, we do not express an opinion ...
Qualified Opinion
Basis for Disclaimer of Opinion
We have audited ... (standard wording) [Description of circumstances]
In our opinion, except for the possible effects of the matter Responsibilities of Management and Those Charged with
described in the Basis for Qualified Opinion section of our Governance for the Financial Statements
report, the financial statements present fairly, in all material
respects, ... Auditors Responsibilities for the Audit of the Financial
Statements (Note change in wording)
Management is responsible for Our responsibility ... [all
standard wording]. Our responsibility is to conduct an audit of the Companys
financial statements in accordance with International
Basis for Qualified Opinion Standards on Auditing and to issue an auditors report.
[Description of items affected, including amounts] However, because of the matter described ... , we were not
able to obtain sufficient appropriate audit evidence ...
We were unable to obtain sufficient appropriate audit
evidence about ... [amounts described above] because We are independent of the Company (no change in
[reason]. Consequently, we were unable to determine words).
whether any adjustments to these amounts were necessary.

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AUDITOR REPORTS

Materially misstated but not pervasive qualified opinion 5 EMPHASIS OF MATTER AND OTHER MATTER

Qualified Opinion 5.1 Distinction


To draw users attention to:
We have audited ... (standard wording)
A matter that is fundamental to understanding the
In our opinion, except for the effects of the matter described financial statements; or
in the Basis for Qualified Opinion section of our report, the
financial statements present fairly, in all material respects Any other matter that is relevant to understanding
. the audit, auditors responsibilities or report.
Basis for Qualified Opinion Must not include going concern issues or Key Audit
Matters.
[Description of items in financial statements affected,
including amounts] Emphasis of matter Other matter
Immediately after Usually after Key
Materially misleading and pervasive adverse opinion Basis for Opinion or Audit Matters
Adverse Opinion Key Audit Matters
Headed Emphasis of Headed Other Matter
We have audited (standard wording)
Matter
In our opinion, because of the significance of the matter Clear reference to State clearly that
discussed in the Basis for Adverse Opinion section of our matter and where matter is not required
report, the financial statements do not present fairly ... relevant disclosures to be presented and
Basis for Adverse Opinion can be found disclosed

[Description] Indicate that audit Do not include matters


opinion is not prohibited by law or
modified in respect of required to be given by
this matter. management.

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AUDITOR REPORTS

5.2 Circumstances when used Opinion


Emphasis of matter Unmodified opinion
Significant uncertainty (other than going concern). Basis of Opinion
Early application of a new accounting standard.
A major catastrophe having significant effect on the Emphasis of matter
entitys financial position. We draw attention to Note X to the financial statements ...
Other matter paragraph [description]. Our opinion is not modified in respect of this
matter.
Material matter that does not affect financial statements.
Key Audit Matters
Where the auditor wishes to withdraw from an
engagement but cannot do so because of law. Other Matter
To describe additional statutory reporting The financial statements of ABC Company for the year
responsibilities. ended December 31, 20X0, were audited by another auditor
who expressed an unmodified opinion on those statements on
March 31, 20X1.
Responsibilities of Management

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ADDITIONAL READING

ARTICLES
The following technical articles written by members of the P7/auditing examining team can be found on the ACCA website at:
http://www.accaglobal.com/ubcs/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-
articles.html
Exam technique
Examiners approach update
Continue to be rest assured
Exam technique for P7
The importance of financial reporting standards to the auditor
How to tackle audit and assurance case study questions Part 2
How to tackle audit and assurance case study questions Part 1
Topic specific
Performance information in the public sector
Audit quality a perpetual current issue
Professional scepticism
Using the work of internal auditors
Staying on the right side of ethics
Accounting issues
Forensic accounting
Internal controls of companies (June 2013)
A question of ethics (Nov 2012)
Planning an audit (Oct 2012)
Completing the audit (Oct 2011)
Group audits (Apr 2011)

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ADDITIONAL READING

WEBSITES
The higher skills required for the professional papers include analysis, interpretation, commercial awareness and professional
commentary. Your ability to enhance these skills will be greatly improved by regular research of key websites.
Websites to be considered as favourites include:
ACCAglobal.com
IFAC.org (International Federation of Accountants)
Accountancyage.com (Accountancy Age)
Integratedreporting.org

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EXAMINERS REPORT SEPTEMBER/DECEMBER 2015

From December 2015 onwards the ACCA publishes ! Pay attention to the time-frame, the stage in the audit cycle
hybrid exam papers containing a sample of questions from and the type of assignment.
the September and December exams (and subsequently from
the March and June exams). Common issues that contributed to disappointing pass rate
Past exam papers can be found at: Writing too little for the marks available.
http://www.accaglobal.com/gb/en/student/exam-support-
resources/professional-exams-study-resources/p7/past-exam- Failing to develop points beyond simple identification
papers.html of facts given. Answers lacked evaluation and
assessment of issues that is required at this level.
The full examiners reports can be found at:
http://www.accaglobal.com/gb/en/student/exam-support- Lack of knowledge of certain fundamental syllabus
resources/professional-exams-study-resources/p7/examiners- areas such as auditors reports.
reports.html Lack of basic accounting knowledge (e.g. how
General Comments transactions are recorded and whether accounting errors
would lead to the over or understatement).
Candidates managed their time well but ...
Section A
Overall performance continues to be disappointing.
Question 1 (35 marks)
Many weaker scripts indicated that candidates had
Set at the planning phase of the audit for a listed company.
limited knowledge of auditing principles and struggled
Information included the companys background, a meeting
to appropriately apply knowledge to the scenarios.
with the audit committee and a preliminary analytical review.
A major reason for poor marks from well-prepared Part (a) evaluate audit risks (18 marks) and recommend
candidates is failing to read and remain focused on the additional information relevant to the evaluation (5 marks).
requirement in order to provide specific relevant
answers. Performance on evaluating audit risks was good.

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EXAMINERS REPORT SEPTEMBER/DECEMBER 2015

Those who identified specific areas of the financial Professional marks (4)
statements that would be affected and whether risk was
Most secured good marks.
over or understatement tended to score highest marks.
Question 2 (25 marks)
A significant minority thought that the client was new
and wasted time on opening balances and new client A two part question relating to two separate clients.
procedures which were not relevant.
Part (a) dealt with going concern (15 marks).
! Read the question carefully and think in the context Well attempted and high marks scored.
of the scenario before answering.
Poorer candidates overlooked audit procedures that did
Candidates did well on identifying additional not arise from a specific scenario standpoint.
information relevant to the evaluation.
Part (b) focused on the audit of performance information (10
Part (b) required explanations on principal audit procedures marks).
for work in progress and government grants (8 marks).
Well-prepared candidates (who had clearly read the
Candidates often cited the need for an expert to value recent examiners article) dealt with this part well.
WIP rather than focus on components of cost and NRV.
Some did not focus on the question requirement and
Many requested written representations on WIP despite attempted to describe the theory of public sector KPIs.
the figure not being an issue and knowledge not
Many were unprepared and omitted this requirement
confined to management.
altogether.
! Written representation is not a suitable substitute for Section B
sufficient appropriate evidence.
Question 3 (20 marks)
Audit procedures relevant to the grant were generally This question on due diligence was the most popular of the
well described. option questions.

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EXAMINERS REPORT SEPTEMBER/DECEMBER 2015

Part (a) dealt with the purpose and scope of a due diligence All parts were generally well answered.
assignment (6 marks).
Question 5 (20 marks)
The majority demonstrated sound knowledge of this
This question dealt with auditors reports, group audits and
area of the syllabus.
quality reviews.
Part (b) concerned the valuation of two intangible assets and
Part (a) required a critical review of a draft auditors report.
a contingent liability (14 marks).
Answers were generally good.
Candidates produced the strongest answers with respect
to the valuation of a purchased licence. Some confused contingent liabilities with contingent
consideration.
The valuation of an internally-generated database was
harder as many just quoted financial reporting rules. Part (b) examined the impact of a qualification in a
subsidiarys auditors report.
For the contingent liability, many lost sight of the
assignment and commented on financial statement Stronger candidates identified that the issue was not
disclosure requirements. material to the group.

Exam tip! Review each question as a whole to consider how Weaker candidates did not.
the different sections and requirements fit together. A significant proportion still propose adding other
! Think before writing to demonstrate a better understanding. matter or emphasis of matter paragraphs to draw
attention to immaterial items that need not be disclosed.
Question 4 (20 marks)
Part (c) required a discussion on quality control procedures.
A typical evaluate the issues described, commenting on the
ethical and professional issues raised question. This was very poorly answered.

Issues covered advertising, overdue fees, an intimidation Again many missed the specific requirement.
threat and conflict of interest.

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EXAMINERS REPORT SEPTEMBER/DECEMBER 2015

Conclusion
Almost all candidates are able to identify at least some
relevant issues to a particular requirement from a scenario,
but not all can adequately explain, discuss or describe their
points in sufficient depth or detail.
Candidates must ensure that they answer the specific
requirement which has been set and focus their answer points
on the scenario.
Candidates are also reminded that although it is important to
have good knowledge of financial reporting, they must be
able to link this to the appropriate audit issues that arise in
the question scenarios.
Candidates are encouraged, as always, to practise past exam
questions and carefully review the model answers and
examiners reports. This is important to gauge the style of
question requirement that regularly appears in this paper, and
to gain an appreciation of what it means to explain an answer
point rather than just identify an answer point.

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ANALYSIS OF PAST EXAMINATIONS

Topic June Dec June Dec June Sept Dec


2013 2013 2014 2014 2015 2015 2015
Ethics Q1/Q2 Q4 Q4 Q1/Q4 Q4 Q1* Q4
Corporate governance Q5*
Professional liability Q4 Q4*
Money laundering Q2 Q2*
Auditor appointment, tendering Q4 Q2*
Initial engagements Q2*
Professional scepticism Q3
Business risk Q1 Q1*
Risk of material misstatement Q1 Q1 Q1*
Audit risk Q1 Q1 Q1 Q1
Group/joint audit Q2/Q5 Q1 Q1 Q2 Q2/Q3
Quality control Q2 Q4 Q4 Q5
Due diligence Q2 Q3
Forensic investigations & fraud Q2 Q3 Q4*
PFI, forecasts Q5 Q2
Work of an expert, internal audit Q1/Q3

* These questions are referred to in the full examiners reports but were NOT published in ACCAs hybrid
September/December 2015 exam.

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ANALYSIS OF PAST EXAMINATIONS

Topic June Dec June Dec June Sept Dec


2013 2013 2014 2014 2015 2015 2015
Equity investments Q3*
Fraud, Laws and regulations Q3 Q2 Q4*
Segmental reporting Q3*
Grants Q1
Financial instruments Q4
Provisions and liabilities Q3 Q1*
Inventory Q1
Non-current assets, leases, intangibles Q3 Q3 Q3 Q1/Q3 Q2
Discontinued operations Q3*
Earnings per share Q1
Going concern Q3/Q5 Q2
Environmental and social performance Q3 Q2
Audit completion Q3 Q2/Q5 Q5
Auditors report Q5 Q5 Q5 Q5 Q5 Q5 Q5*

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EXAMINATION TECHNIQUE

TECHNIQUE IN AUDITING QUESTIONS Instructions


(1) Understand the requirements Describe i.e. set out the characteristics of. Use
brief sentences but give more depth than if the
Before attempting any question, and in order to impress
instruction was state (see below).
the markers, you need to understand the examiners
requirements. Explain i.e. make plain, clarify, elucidate. For
example, defining a term does not explain it, but
Read the requirement
providing an illustration may do so.
Always read the requirements (at the end of the
State i.e. express in words. Use one short sentence
question) first, never the scenario. This will put the
(bullet point) to make each answer point.
scenario into context and reduce the risk of answering
the question you wanted to see (often enforced if you Discuss i.e. give balanced views on and conclude
read the scenario first) rather than the question set by (where appropriate).
the examiner.
List i.e. make a list of like things.
Highlight Instruction and Content
Justify i.e. give reasoning.
Nearly all requirements (and parts thereof) have an
Identify e.g. from the scenario. This requirement is
instruction (e.g. describe) and content (e.g.
often implied rather than expressly stated. For example,
procedures).
Describe the risks . requires that the risks be
The instructions tell you how your answer should be identified before they can be described.
written; the content tells you what you should be
Comment i.e. make observations, appraise and/or
writing about, for example:
examine (critically).
Suggest i.e. propose or put forward.

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EXAMINATION TECHNIQUE

Content Evidence i.e. what you want to know, as auditor. To


generate ideas think about:
Procedures and Work (may be preceded by the
word audit) i.e. what you should do requires sources of evidence (i.e. internal, external,
actions. For example, Analyse, Enquire, Inspect, written, oral, auditor-generated)
Observe and compUte (mnemonic: AEIOU). Do not
the procedures by which they are obtained
be constrained (boxed in) by such ideas lists in P7
(AEIOU above); and
think of similar and related actions (e.g. review, ask,
confirm, circularise, compare, calculate, etc). the financial statement assertions about which
evidence is sought completeness, occurrence
Matters, Factors (also Issues and
measurement, presentation and disclosure,
Considerations) are things to be taken account of
appropriate carrying value, rights and obligations
which must therefore be of relevance (note that they are
existence.
not Procedures). In the context of a planning
question these might include risks (see below), Implications, Effect, Impact and Consequences
materiality, reliance on internal controls, timescale, etc. i.e. what difference, if any, does it make?
Internal controls (or simply controls or internal Risks e.g. of misstatement in the financial statements
control procedures) i.e. what the entity (not the (from an auditing perspective in that an assertion is not
external auditor) should be doing to prevent things true) or of failure of a business objective due to, for
going wrong. example, unavailable e-commerce systems, credit
facilities not renewed.
Remember that this covers the control environment (e.g.
audit committee, organisational structure, management Why and Reasons call for justification. Think
supervision, internal audit and segregation of duties) because or due to ..
and the control procedures (e.g. authorisation, control
Enquiries i.e. questions (Begin, for example, with
accounts, controlling documents, limiting physical
access). What, How, Why and end with a ?)

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EXAMINATION TECHNIQUE

Objectives e.g. of controls. For ideas consider The nature of the clients business. If relevant,
CAVe i.e. Completeness, Accuracy and Validity (of this will give you an insight into the potential
transactions) and Existence (of resulting assets and factors and problems which you will be required
liabilities). One way of addressing objectives is to to discuss.
respond To ensure that good things happen (or bad
For example, a heavy industrial engineering
things do not happen).
business is likely to have complex inventory and
Weaknesses, Limitations Disadvantages etc. work in progress while a travel agent would have
Respond with negative words like no, poor, minimal inventory but would require a system to
difficult. Similarly for Advantages, Benefits etc deal with advance bookings, the taking of deposits
use positive words like good, easy. (2) Read and the calculation of commission.
the scenario
The extent to which the client operates a
Ensure that you appreciate the following: computerised system, which will affect the tone
and jargon of your answer to a question
Your role in the scenario (e.g. as senior,
concerning, for example, internal controls.
manager, reporting partner gives an indication of
authority and decision making capabilities). Taking a few minutes to read, highlight and annotate
the scenario to pick up such points should be time well-
The dates involved (e.g. the year end, reporting
spent.
deadline, current date, etc). Paper P7 is set in
real time so if you are sitting an exam in
December and planning an audit for the year
ending 31 December that is imminent and you
will not have yet attended the inventory count.
The status of the client e.g. whether it is new or
existing; large or small; likely to have an internal
audit department.

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EXAMINATION TECHNIQUE

(2) Plan your answer Ensure that you read the question thoroughly, as
discussed above. Highlight key points or note them
The importance of adequate planning cannot be over-
down to ensure that you incorporate them in your
emphasised.
answer.
Adequate planning leads to an organised logical
Plan your answer in whatever way you prefer, but at
structure to your answer, incorporating all the points
least plan.
you can come up with and highlighting your powers of
analysis and communication. If you jot down an answer plan do so on your answer
script, rather than your question paper, so you can
A lack of planning leads to a disorganised illogical
submit it. Clearly head up the page answer plan or
jumble of scraps of thoughts and ideas, causing you to
workings.
omit key elements of the question and repeat answer
points already made. Never write sentences in a plan there is no time
for them in answer planning and no place for them in
How much planning is needed on each question
writing out your answer.
depends, in the main, on just two factors:
(3) Write the answer
(i) How much the requirement and scenario are
broken down into parts the more detailed this Use underlined HEADINGS and subheadings
is in the question, the less you need to do. (generated by the requirement and any breakdown of
the scenario into parts) to produce a logical and
(ii) The mark allocation. In general, the more marks
structured answer.
the more planning will be required.
This approach is effective in providing focus for your
When you are practiced in exam technique, planning
answer and enhances presentation.
many questions should take only five minutes.
The examiner positively discourages rewording of
requirements into introductory sentences because it
wastes valuable time and does not earn marks.

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EXAMINATION TECHNIQUE

Maintain a sentence structure and keep sentences and (4) Practise


paragraphs short and succinct.
When attempting an exam style and standard question,
Explain and define where necessary (e.g. if writing to a always practise exam technique so that it is second
layman, explain phrases such as inherent risk briefly: nature to you by the time of the real exam.
inherent risk, that is the susceptibility of an item in the
Spend time thoroughly reviewing your answer against
accounts to misstatement ...).
the model answer and make a note of the points you
Try to achieve a good standard of English. Note that missed. (Do not be despondent if some of the answers
although you will not lose marks for spelling mistakes you encounter do not follow this guidance historically
and poor grammar, you may lose marks if your answer model answers are written solely to convey technical
points cannot be understood by the marker. content rather than exam technique.
Allow plenty of space to present your answer and, if Study the examiners comments on candidates
your writing is difficult to read, write on every other performance in previous exams, areas of weakness and
line. suggestions for improvements.
WARNING: Restrict the use of underlining to headings and
sub-headings (and use a ruler). Do not waste time
underlining what you consider to be the key words it is
quite unnecessary and may interfere with the marking
process. Only use black or blue ink. Do not use any other
colour ink. Do not use any highlighter, regardless of the
colour!

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EXAMINATION TECHNIQUE

Summary
Remember the key elements to examination technique:
Read: first the requirements to put the scenario into
context, then the main body to provide the
facts to trigger your knowledge.
Think: without this planning process you will not be
able to convey the higher level skills of
comprehension, application and analysis.
Write: concentrate on your style of writing to address
the examiners requirements as directly as
possible, answer the Q set and think about the
relevance of what you are writing. If it does
not add value, why write it?
A trusted answer approach, in the context of this article,
has always been: point, explain example. For every
point made, explain why it has been made and then give
examples for support.
For example Obtain management representations
has no meaning in P7 unless you state the representation
required, the context it is required in and why it is
required.

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FREQUENTLY ASKED QUESTIONS

1) Q: Do I really need to go back to Paper P2 and Again, the examiner often comments on the
revise all the IFRSs again? absence of these higher level skills in candidates
answers. Many candidates fail to provide the
A: YES no escape. The audit approach to IFRS is
necessary depth of understanding, analysis and
now highly examinable, as made clear by the
professional comment and just answer the
examiners article
question as if it were from Paper F8.
An often repeated comment by the examiner in
3) Q: As I am an auditor, surely there is no need to do
her reports is the poor understanding of IFRS and
that much studying?
basic accounting principles by a significant
number of candidates. Its as if F7/P2 are in A: Do not be lulled into a false sense of security.
distant memory never to be visited again! Whilst your day-to-day work provides excellent
practical experience in some areas of the syllabus
2) Q: As I have passed Paper F8 all I need do is to
it is unlikely that your range of work will cover
learn the new bits of the P7 syllabus (e.g. group
all the areas that will be examined in sufficient
audits, assurance services, etc). Right?
depth, (e.g. professional appointments, assurance
A: Wrong! Professional papers test a higher set of services, current issues).
skills than those required for F8 (e.g. in-depth
Study Text application and external research are
comprehension, analysis, interpretation,
essential.
evaluation, judgement, application of theory to
practice, inferences, commercial awareness,
professional commentary, thinking outside of
the box etc). You must be able to demonstrate
the use of these skills when dealing with the
assumed in-depth knowledge of Papers F7, F8
and P2.

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FREQUENTLY ASKED QUESTIONS

4) Q: Are the Study Text and question banks sufficient 5) Q: How critical are the articles in Student
to get me through? If I learn everything in the Accountant written by the examiner?
Study Text, will I learn enough to pass? A Very! Examiners, in general, are very busy
A: The Study Text and question banks are as a people. They will therefore only write articles
comprehensive a set of material that you will be with a purpose (i.e. the subject is very likely to
able to find. be examined at some stage in the future).
However, you must supplement your studies by Note that the Exam Notes state that whilst topics
reading all relevant Student Accountant articles of EDs are examinable, a detailed knowledge of
and reviewing appropriate websites (e.g. ACCA, the EDs will only be examined to the extent that
IFAC, IASB) and the financial press (e.g. relevant articles are published in Student
Financial Times, Economist) to keep yourself Accountant. So if you do not read these articles
abreast of current developments.
Very few marks will be gained just by rote
learning the Study Text or articles in Student
Accountant.
The key is to be able to apply the underlying
theory and knowledge learnt from the Study
Text, together with your practical experience and
research, to the practical environment demanded
by the exam.
Past P7 question practice is critical to be able to
understand how the examiner thinks and works.

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For Examinations to June 2017

Revision Essentials Handbook includes:

ACCA syllabus aim and main capabilities


Core topics checklist
Summary of essential facts and theory
Further reading
Relevant articles
Comprehensive analysis of past examinations
Examiners' feedback for the last exam session
Exam technique

www.becker.com/ACCA | acca@becker.com
2016 DeVry/Becker Educational Development Corp. All rights reserved.
Revision Essentials are not qualify assured by ACCA but their content is substantially derived from materials which have been quality assured by ACCA.