Summary notes

ASSURANCE
CONTENTS

Page

Overview of syllabus and exam 3

Concept of and need for assurance 4

Obtaining an engagement 6

Planning the assignment 7

Evidence and reporting 11

Internal control systems 14

Documentation 20

Evidence and sampling 21

Written representations 23

Substantive procedures: key financial statement figures 24

Codes of professional ethics 28

Integrity, objectivity and independence 29

Confidentiality 35

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 Summary notes

OVERVIEW OF SYLLABUS AND EXAM

Syllabus weighting

The concept, process and need for assurance 20%

Internal controls 25%

Gathering evidence on an assurance engagement 35%

Professional ethics 20%

Exam

 1.5 hours

 50 objective test questions worth 2 marks each

 Average 1.8 minutes per question

 Pass mark 55%

Question style

 Multiple choice – select 1 answer from 4 options

 Multiple response – select 2 or more answers from 4 or more options

 Multi-part multiple choice – select 1 from 2, 3, or 4 options, for 2 or more question parts

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 Summary notes

CONCEPT OF AND NEED FOR ASSURANCE

Elements of assurance

3 parties Subject matter Suitable criteria Evidence Written report

Practitioner E.g. financial E.g. accounting Sufficient Containing the

statements standards conclusion
Intended user Appropriate

Responsible
party

Levels of assurance

Assurance type Assurance level Opinion/ Example

conclusion

Reasonable High (not absolute) Positive Audit of financial

information

Limited Moderate Negative Review of financial

information

ISA 200 Objectives of an audit

 Obtain reasonable assurance about whether the financial statements are free from
material misstatement and properly prepared in accordance with an applicable
financial reporting framework

 Express an opinion on the financial statements

Requirements of CA 2006

Audit threshold: no audit required for small companies i.e. those which comply with 2 out of 3
requirements:

Periods beginning before 1 Periods beginning on or

January 2016 after 1 January 2016

Employees No more than 50 No more than 50

Turnover Does not exceed £6.5m Does not exceed £10.2m

Total assets Does not exceed £3.26m Does not exceed £5.1m

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 Summary notes

An auditor must be a member of a Recognised Supervisory Body (RSB)

 Qualified individual or

 Part of a firm controlled by qualified persons.

A person is ineligible to act as the auditor of a company if s/he is

 An officer / employee of the company

 A partner or employee of the above.

Benefits of assurance Limitations of assurance

 Independent scrutiny of the business  Sampling

 Added credibility  Inherent limitations of accounting and

control systems
 Subsidiary benefits e.g. deter fraud
 Evidence persuasive not conclusive
 Draws attention to issues
 Collusion to defraud
 Reduces risk of management bias
 Subjective / judgemental elements of
financial information

 Use of management representations as

evidence

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 Summary notes

OBTAINING AN ENGAGEMENT

Pre-acceptance considerations

 Professionally qualified to act (legal / ethical issues)

 Communication with previous auditors

o Ask for client permission to contact old auditor – if NO decline appointment

o Contact old auditor requesting relevant information

o Old auditor asks for client permission to reply – if NO decline appointment

o Consider response from old auditor and decide on acceptance

 Adequate resources

 Money Laundering Regulations (client due diligence)

o Individual: photo ID and document confirming name and address

o Companies: ID from Companies House

o Keep ≥ 5 years and until 5 years elapse after relationship with client ceases

 Management integrity

 Risk assessment

Post-acceptance procedures

 Ensure outgoing auditor removed / resigned properly

 Ensure new auditor appointment is vali

 Prepare letter of engagement which must include:

o Objectives of work

o Responsibilities of auditor and management

o Scope of work

o Form of reports

o Level of access to books and records

o Reporting framework

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PLANNING THE ASSIGNMENT

Audit strategy components

 Understanding the entity and its environment

 Materiality

 Risk assessment

 Nature, extent and timing of audit procedures

 Direction, supervision and review

 Other matters

Audit plan

 Converts the audit strategy into a detailed plan that staff can follow

Understanding the entity and its environment

Why What How

 Assess risk  Industry, regulatory and  Enquiries of management

 Help design and perform
audit procedures
 Develop the audit
strategy and plan
financial reporting and other client staff
framework
 Analytical procedures
 Nature of the entity
 Observation of processes
 Accounting policies
 Inspection of documents
 Objectives, strategies or assets
and business risks
 Prior knowledge of the
 Measurement of financial client
performance
 Discussions among the
 Internal controls audit team

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 Summary notes

Materiality

 A matter is material if its omission or misstatement could influence the economic

decision of users taken on the basis of the financial statements.

 Planning materiality is set for the financial statements as a whole.

 Performance materiality is set at a lower level to use when auditing individual account
balances.

 Items could be material by size or by nature

 Rules of thumb for material by size:

o 5-10% of PBT

o 0.5-1% of revenue

o 1-2% of total assets

Risk assessment

AUDIT RISK = INHERENT RISK X CONTROL RISK X DETECTION RISK

 Audit risk is the risk that the auditor gives an inappropriate opinion on the financial
statements

 Inherent risk is the risk that a misstatement occurs in a transaction, account balance
or disclosure, irrespective of the internal controls in place

 Control risk is the risk that a material misstatement would not be prevented, detected
or corrected by the accounting and internal control systems

 Detection risk is the risk that the auditor’s procedures will not detect a misstatement
that could be material (either individually or in aggregate with other misstatements)

Fraud and error

 Fraud is an intentional act involving the use of deception to obtain an unjust or illegal
advantage

 Fraud relevant to auditors includes:

o Misappropriation of assets

o Fraudulent financial reporting

 Management are responsible for the prevention and detection of fraud

 Auditors are responsible for planning, performing and reviewing their audit in light of
the risk of misstatement due to fraud

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 Summary notes

Related parties

 A related party is an individual or organisation who is influenced by, or has influence

over, the entity

 Transactions might take place that are not at arm’s length

 Related party transactions should be disclosed in the financial statements

 Related parties are a high-risk area of the audit due to:

o Possible reluctance to disclose by the directors

o Transactions may not be easy to identify

o Transactions may be concealed from the auditors in order to hide fraud

Analytical procedures

Analytical procedures may be used at different stages of the audit:

Planning Evidence Completion

Must be used to identify risk May be used as a form of Must be used as part of the
substantive procedure overall review of the financial
statements

Performing analytical procedures

 Understand the business

 Develop an expectation

 Compare actual to expectation

 Unexpected variations = risk

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 Summary notes

Some key ratios are shown below

Ratio Formula Interpretation

Gross profit margin Gross profit Assess profitability before

Revenue x 100% taking overheads into
account

Operating margin Operating profit Assess profitability after

Revenue x 100% taking overheads into
account

Return on capital Operating profit Measure of how effectively

employed Equity + Net debt x 100% resources are used to
generate profit

Current ratio Current assets Assess ability to pay current

Current liabilities liabilities from current assets

Quick ratio Current assets excluding inventory Assess ability to pay current
Current liabilities liabilities from reasonably
liquid assets

Gearing ratio Net debt Assess reliance on external

Equity finance

Interest cover Profit before interest payable Assess ability to pay interest
Interest payable charges

Trade receivables Trade receivables Assess the average time

collection period Revenue x 365 taken to collect cash from
credit customers

Inventory holding Inventory Assess the average length of

period Cost of salesx 365 time inventory is held

Trade payables Trade payables Assess the average time

payment period Purchases x 365 taken to pay suppliers

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EVIDENCE AND REPORTING

Principles of evidence

 Audit evidence must be sufficient and appropriate (relevant and reliable)

Sufficient Relevant Reliable

Enough evidence – depends
on factors such as
 Risk
 Materiality
 Level of assurance to be
given
Evidence must support one
or more of the financial
statement assertions
Transactions
 Occurrence
 Completeness
Influenced by the source and
format of evidence
Source (in decreasing order
of reliability)
 Auditor generated
 Third party

 Accuracy  Client

 Cut-off Format (in decreasing order

of reliability
 Classification
 Original / written
 Presentation
 Copy
Account balances
 Oral
 Existence

 Rights & obligations

 Completeness

 Accuracy, valuation &

allocation

 Classification

 Presentation

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 Summary notes

Audit approach

 Perform a preliminary assessment of internal controls

 Evaluate whether internal controls are expected to be effective

Expect internal controls to be effective – Do not expect internal controls to be effective

TEST OF CONTROLS – SUBSTANTIVE TESTING

 Test the system that produces the  Test the figures in the financial
financial statements statements

 Procedures include: enquiry, observation,  Procedures including analytical

and reperformance procedures and tests of detail

 If internal controls are strong then carry  Must always carry out substantive
out limited substantive procedures due to procedures on material items
inherent limitations of internal controls. If
internal controls are found to be weak
then full substantive testing must be
performed.

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Audit reports (ISA 700 / Companies Act)
Format of a standard UK audit report
Title
Addressee
Auditor’s opinion on the financial statements
Basis for opinion
Going concern section
Key audit matters (listed companies)
Other information
Management responsibilities
Auditor responsibilities
Opinion on other matters e.g. whether the
information contained in the Directors’ Report
and the Strategic Report is consistent with
the financial statements
Matters on which the auditor is required to
report on by exception under Companies Act
2006
Name and signature of the engagement
partner
Auditor’s address
Date of the report
Non-audit assurance reports
 Format and content set by the relevant ISAE / ISRE / Terms of engagement
 Often limited assurance expressed negatively (but depends on the engagement)
Summary notes
Opinions in a standard UK audit report
Express opinions – always mentioned
Opinion on the financial statements
 True and fair / properly prepared
Opinion on other matter prescribed by
CA2006
 Directors’ Report / Strategic Report
consistent with the financial statements
Implied opinions – only required to report by
exception under CA2006
 Returns adequate for our audit have not
been received from branches not visited
 Accounts are not in agreement with the
underlying accounting records
 Proper (adequate) accounting records
have not been kept
 Information and explanations required for
the audit were not received
 Directors’ remuneration disclosures
required by law were not made
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 Summary notes

INTERNAL CONTROL SYSTEMS

Purpose of internal control systems

 Internal controls help an organisation to achieve its objectives and mitigate the
business risks it faces

Limitations of internal controls

 Human error

 Unusual transactions outside the scope of control systems

 Collusions

 Small companies: more informal, limited staff for segregation of duties

Components of internal control systems

Control environment

 Governance and management functions

 Attitude, awareness, actions of management and employees

 Audit Committee

o Non-executive directors

o Requirement for listed companies

o Oversee financial statements, internal audit, external audit

 Internal audit function

Risk assessment process

 Identify relevant business risks

 Estimate the significance of the risks

 Assess the likelihood of occurrence

 Decide on actions to address the risks

Information systems

 Systems relevant to the financial reporting objectives

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 Summary notes

Control activities

Type of control Purpose Words to look for in exam

Authorisation Only valid transactions are Authorise

recorded
Approve

Signature

Performance reviews Identify unexpected items Comparison

that might indicate errors
Analysis

Information processing Check the completeness and Reconciliation

accuracy of information
IT controls

Physical controls Restriction of access to Locks

assets or data; and counts
(e.g. inventory, petty cash) Passwords

Counts

Segregation of duties Separate tasks of authorising Descriptions of systems

transactions, recording involving more than one
transactions and maintaining member of staff
custody of assets to reduce
fraud / error

Computer controls

General controls Application controls

 Controls over system design,  Sequence checks

programming and documentation
 Document counts
 Testing system performance
 One to one checking of processed output
 Staff training to source documents

 Password protection  Hash and batch totals

 Restricting physical access to central  Reasonableness tests

computers by locks/keypads
 Character checks
 Virus checks
 Range checks
 Back-up copies with extra copy stored
off-site  Periodic review of standing data

 Disaster recovery procedures  One to one checks of amendments

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 Summary notes

Monitoring controls

 Consider adequacy of internal controls in the light of changes in the environment /

business risks

 Internal audit and external audit may identify weakness

Significance of internal controls to the external auditor

 Assess control risk

 Determine the audit approach

 Should document the understanding of the client’s internal control systems using

o Narrative notes

o Questionnaires / checklists

o Diagrams / flowcharts

Internal audit

Key functions

 Monitoring internal control systems

 Monitoring risk management policy

 Examining financial and operating information

 Reviewing the economy, efficiency and effectiveness of operations

 Reviewing compliance with laws and regulations

 Special investigations e.g. fraud

Key features

 Objectivity should be promoted by:

o Internal auditors having no operational responsibility

o Organisational status – report to Audit Committee / Board of Directors

 Listed companies that do not have an internal audit function should reconsider the
need for one on an annual basis

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 Summary notes

Revenue system: typical control activities

Order taken Obtain credit checks for new customers.

Authorise credit limits.

Review credit limits regularly.

Check credit remaining before confirming orders.

Use sequentially numbered order forms.

Check inventory levels before confirming orders.

Match customer orders with despatch notes / follow up unmatched orders.

Goods Examine goods outwards for quantity, quality, condition / agree to order.
despatched
Record goods outwards on sequentially numbered GDNs.

Match GDNs to invoices and follow up unmatched GDNs.

Obtain customer signature on a copy of the GDN.

Invoice raised Use authorised selling prices to prepare invoices.

Check calculations of quantity x price for accuracy.

Check condition of goods returned and record on goods return notes.

Authorisation of credit notes.

Sale recorded Sequence checks for invoices being recorded.

Match cash receipts to invoices.

Send regular statements to customers.

Review and follow-up overdue accounts.

Authorisation of bad debt write-offs/allowance.

Reconciliation of receivables ledger control account with receivables ledger.

Cash collected Segregation of duties between recording and banking.

Safe custody of receipt books and cash/cheques.

Daily banking / regular bank reconciliations.

Reconciliation of bank paying in slips and cash book.

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 Summary notes

Purchases system: typical control activities

Order placed New suppliers must be authorised by management.

Evidence required of need for purchase before authorisation, e.g.

inventory level checked.

Sequentially numbered order forms.

Authorisation of order forms by an appropriate manager.

Central purchasing department or maintenance of approved supplier

list.

Goods received Examine goods inwards for quantity, quality, condition / agree to order.

Record goods inwards on sequentially numbered GRNs.

Match GRNs to invoices and follow up unmatched GRNs.

Physical controls over stores.

Raise a sequentially numbered returns note for all rejected/returned

goods.

Invoice received Match invoice details to GRNs.

Arithmetic checks on supplier invoices.

Claim credit notes for all goods rejected/returned and follow up

unmatched return notes.

Purchase recorded Match cash payments to invoices.

Compare monthly supplier statements to payables ledger balances.

Reconciliation of payables ledger control account.

Cash paid Segregation of duties between custody of cash / cheque books / BACS
transfer authority and recording payments.

Payment only approved after checking supporting documentations (e.g.

invoices matched to GRNs).

Invoices labelled as paid to avoid duplication.

Appropriate limits set on amounts that can be authorised, e.g.

payments over set level require two signatures.

Compare monthly supplier statements to payables ledger balances.

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 Summary notes

Employee costs system: typical control activities

Calculate wages Regular checking of wages and salaries to personnel records.

and salaries
One to one checks and authorisation of changes to standing data.

Record hours worked where appropriate by use of timesheets or

clocking in/out with controls over authorisation of hours/overtime and
range checks on hours worked.

Compare payroll to budget.

Record wages and Payroll is reviewed and authorised by appropriate manager.

salaries
Reconcile total pay and deductions to previous month totals.

Compare payroll totals recorded to budget.

Agree gross earnings and total tax deducted to tax returns.

Pay wages and Segregation of duties between maintenance of personnel records,

salaries preparation of payroll and payment of staff.

For cash payments, physical controls over the safe custody of cash and
payslips.

For bank transfers, comparison of payments to payroll and

authorisation by appropriate manager.

Reconciliation of wages and salaries control account.

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 Summary notes

DOCUMENTATION

Working papers

 Paper, film, electronic or other media

 Complete and detailed enough to support the conclusion, provide an understanding

of work done, and evidence of compliance with relevant laws and standards

Must include the following:

 Client name  Name of reviewer / date  Sample size

 Reporting date  Subject  Work performed
 File reference  Objective  Results / conclusion
 Name of preparer / date  Source of information  Analysis of errors

Retention of working papers

 Keep securely (principle of confidentiality)

 Registered Auditors should keep all audit working papers required by auditing
standards for at least six years from the end of the accounting period to which they
relate

 Working papers are the property of the assurance provider

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EVIDENCE AND SAMPLING

ISA 500 Substantive procedures

 Inspection of assets or documents

 Observation

 Inquiry

 Confirmation

 Recalculation

 Reperformance

 Analytical procedures

Computer assisted audit techniques

Test data Audit software Data analytics

 Auditor data is put into the  Client data is 

client’s system put into the
auditor’s
 Data: real or dummy system

 System: live or a copy  Basic data analysis

 Test the controls in the  Substantive testing

system
Analytical procedures

Performing analytical procedures

 Understand the business

 Develop an expectation

 Compare actual to expectation

 Unexpected variations = make enquiries of management, corroborate explanations

with other evidence

Directional testing

 Overstatement: start with the accounts, trace to supporting evidence

 Understatement: start with the reciprocal population, trace back to supporting

evidence and the figure in the accounts

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 Summary notes

Audit of accounting estimates

Estimates are high risk due to their subjective nature and the risk of management bias.

Typical audit procedures:

 Review and test the process used by management to develop the estimate.

 Use an independent expert to make an estimate for comparison with the company's
figure.

 Review subsequent events for confirmation of the accuracy of the estimate.

 Test the operating effectiveness of the controls over how management made the
estimate.

Sampling

Identify the population Entire set of data from which a sample is selected

Identify the sampling Individual items constituting a population

unit

Select a sample Statistical methods:

 Random: all items have an equal chance of selection

 Systematic: random start then constant interval between

selections

 Money Unit Sampling: every £1 in the population has an

equal chance of selection

Non-statistical methods:

 Haphazard: auditor selects a sample they think will be

representative, without the use of probability theory

 Sequence or block selection: tends to be used for tests of

control

Identify errors and Consider

draw conclusions
 Nature of errors

 Cause of errors

 Impact on other parts of the audit

 Probable misstatement in the population

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 Summary notes

WRITTEN REPRESENTATIONS

Management representations are a form of evidence and can be oral or written.

Purpose

 Avoids confusion and disagreement

 More reliable.

ISA 580 management representation letter

The auditor will usually:

 Prepare a draft management representation letter

 Ask the directors to sign it

 Require its return as evidence before the audit report is signed.

The letter should be dated as near as possible before the date of the audit report.

The auditor is required to seek written representations on the following:

General matters The auditor may obtain specific

representations

Confirmation that management has fulfilled
its responsibility for the preparation of the
financial statements in accordance with the
relevant financial reporting framework
Confirmation that all relevant information has
been provided to the auditor
Confirmation that all transactions have been
recorded and reflected in the financial
statements
Where other ISAs require representations to
be obtained (e.g. ISA 450 requires the
auditor to obtain representations that the
sum of unadjusted misstatements is
immaterial)
If the auditor decides that written
representations are required to support other
audit evidence

Reliability

Written representations are more reliable than oral representations.

There may be doubts over the reliability of management representations, for example where:

 The auditor has concerns about the competence, integrity of diligence of

management

 Where written representations are inconsistent with other audit evidence

Written representations cannot be used instead of other evidence which the auditor expects
to exist.

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 Summary notes

SUBSTANTIVE PROCEDURES: KEY FINANCIAL STATEMENT FIGURES

Non-current assets

Assertion Audit procedures

Existence Physical verification of assets selected from the non-current

asset register.

Rights and obligations Inspection of, for example

 Title deeds for property

 Vehicle registration documents

 Share certificates

 Purchase invoices

Completeness Trace a sample of assets seen in use to the non-current

assets register

Valuation Inspect purchase invoices for cost

Inspect surveyor’s report for revaluations

For self-constructed assets:

 Agree labour costs to payroll records

 Agree subcontract costs to invoices

 Consider the reasonableness of assumptions

underlying overhead calculations, and reperform the
calculations

Consider appropriateness of depreciation policy by

investigating significant profits or loss on disposal

Recalculate the depreciation charge.

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 Summary notes

Inventory

Assertion Audit procedures

Existence Take a sample of items already counted by the client from the
count sheets, and agree to the number of items in the
warehouse.

Rights and obligations Seek confirmation from third parties about inventory held on
their behalf at the client, or held at their premises for the client

Completeness Take a sample of items in the warehouse and count them,

then agree to the client’s count sheets.

Valuation To obtain evidence over cost:

Agree costs to purchase invoice

For inventory manufactured by the company:

 Agree materials costs to invoice

 Agree labour costs to payroll

 Evaluate the reasonableness of assumptions

underlying overhead calculations, and reperform the
calculations.

To obtain evidence over net realisable value:

Inspect post year-end sales invoices for evidence of actual

selling prices

For items not sold by the time of the audit, inspect order books
/ price lists

At the inventory count, look for old or damaged items which

may indicate obsolescence

Review the aged inventory listing to identify old or slow-moving

items, and discuss the need for impairment with client
management.

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 Summary notes

Receivables

Assertion Audit procedures

Existence Obtain direct confirmation of receivables balances from

customers:
Rights and obligations
 Positive: ask customer to reply either confirming
balance or providing their own balance

 Negative: ask customer to reply only if they dispute the

balance (use only where low risk of misstatement,
strong controls, large number of small balances)

Valuation For a sample of receivables selected from the receivables

ledger, inspect the post year-end bank statements to identify
cash received from customers.

Discuss the allowance for doubtful debts with client

management.

Evaluate the reasonableness of their assumptions and

reperform any calculations.

Bank and cash

Assertion Audit procedures

Valuation Agree the reconciling items in the bank reconciliation to the

post year-end bank statements to confirm they are reasonable.

Rights and obligations Confirm bank balances directly with the bank.

Existence Count material cash balances held at the client.

Confirm bank balances directly with the bank.

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 Summary notes

Payables

Assertion Audit procedures

Completeness Obtain a sample of supplier statement reconciliations

performed by the client and test the reconciling items.

Inspect the post year-end bank statements and identify

payments to suppliers. Trace these to GRNs and, if they relate
to pre year-end receipts of good / services, check they are
included in the payables balance.

Long-term liabilities

Assertion Audit procedures

Completeness Obtain direct confirmation from lenders of balances, accrued

interest and any security held against the loan.

Inspect board minutes for evidence of any new loans.

Confirm repayments are in accordance with loan agreements.

Presentation and disclosure Recalculate the split of the loan between current and long-
term.

Inspect the financial statements disclosure note for adequacy.

Accuracy and cut-off Verify interest charged for the period and the adequacy of
accrued interest.

Statement of profit or loss items

Perform a combination of:

 Tests of control

 Analytical procedures

 Tests of detail

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 Summary notes

CODES OF PROFESSIONAL ETHICS

IFAC Code of Ethics

Applies to all professional accountants and contains five fundamental principles:

Principle Description

Integrity Members should be straightforward and honest in all

professional / business relationships.

Objectivity Members do not allow bias or conflict of interest in business

judgements.

Professional competence There is a duty to maintain professional knowledge and skill at

and due care an appropriate level and to follow professional standards.

Confidentiality Information on clients must not be disclosed without appropriate

authority, or used for personal advantage.

Professional behaviour Members must comply with relevant laws and avoid actions that
would discredit the profession.

ICAEW Code of Ethics

Applies to ICAEW members and trainees

FRC Ethical Standard

Apply to UK auditors

Threats to independence and objectivity

Threat Definition

Self-interest The auditor is reluctant to take actions that are adverse to the interests of
the audit firm

Self-review The auditor is predisposed to accept / reluctant to question the work done
by others in the audit firm

Familiarity The auditor is predisposed to accept / reluctant to question the work done
by the audit client

Advocacy The auditor takes management’s side, adopting a position closely aligned
with management

Intimidation The auditor’s conduct is influenced by fear

Management The auditor becomes closely aligned with the views and interests of
management

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INTEGRITY, OBJECTIVITY AND INDEPENDENCE
Self-interest threat
Financial interest
Business relationships
Employment with audit firm
and client
Audit partner leaves to take
up employment with a client
Employee of audit firm
negotiating employment with
a client
Close personal and family
relationships
Gifts and hospitality
Loans
Overdue fees (akin to a loan)
Contingent fees
Fee dependence (non-listed
client)
Summary notes
The audit firm, any partner in the firm or member of the audit
team must not hold a financial interest in a client.
The audit firm must not participate in a business relationship
with a client.
Dual employment is prohibited.
The firm should resign as auditor.
Cannot take on the audit again for two years.
Employee to inform audit firm.
Firm to remove the employee from the engagement and
perform a review of their recent work on the client.
Staff with close personal or family relationships with a
member of client staff should not work on the engagement.
Do not accept gifts or hospitality from a client unless the
value is trivial.
Loans from the auditor to client are prohibited.
Loans from client to auditor are prohibited unless made by a
bank in the normal course of business.
Consider resignation if fees remain unpaid.
Contingent fees are prohibited.
When regular fee income exceeds 10% of the firm’s fee
income:
 Disclose to Ethics Partner
 Disclose to those charged with governance at the
client
 Implement independent quality control review of the
audit.
When regular fee income exceeds 15% of the firm’s fee
income:
 Cannot act as auditor.
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 Summary notes

Fee dependence (listed When regular fee income exceeds 5% of the firm’s fee
client) income:
 Disclose to Ethics Partner
 Disclose to those charged with governance at the
client
 Implement independent quality control review of the
audit
 Seek to reduce fees.

When regular fee income exceeds 10% of the firm’s fee

income:
 Cannot act as auditor.

Lowballing Firm may charge any audit fee but the engagement partner
should document that adequate resources have been
allocated in order to comply with Auditing and Ethical
Standards.

Fee cap for listed clients Total fees from non-audit services must be no more than
70% of the average audit fee of the last 3 years.

Self-review threat

Client staff joins the audit No involvement in the audit for two years.
firm

Audit staff complete loan Prohibited unless:

assignment to client
 Loan is for a short period of time only
 They do not take on a management role
 Client management acknowledge their responsibility
for work done.

On returning to the audit firm the employee is not involved in

the audit of this client.

Accounting services offered Non-listed clients: allowed with safeguards:

to an audit client
 Separate teams
 Mechanical/technical work only
 Quality control review of audit.

Listed clients: not allowed.

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Valuation services offered to
an audit client
Preparing tax calculations for
accounting entries in an audit
client
Internal audit services
offered to an audit client
IT services offered to an
audit client
Summary notes
Non-listed clients: not allowed if material and subjective.
If immaterial item, allowed with safeguards.
 Separate teams
 Second partner review
 Management acknowledge responsibility for valuation.
Listed clients: not allowed if material.
Non-listed clients: allowed with safeguards:
 Separate teams
 Review of tax work by independent tax partner
 Quality control review of audit.
Listed clients: do not prepare tax calculations for the purpose
of making material accounting entries.
Non-listed clients: not allowed if the audit firm expects to
place significant reliance on internal audit work as part of the
statutory audit; otherwise allowed with safeguards:
 Separate teams
 Second partner review of the audit to ensure internal
audit work has been properly assessed.
Listed clients: do not provide internal control or risk
management services relating to the accounting records or
financial statements.
Non-listed clients: allowed with safeguards:
 Separate teams
 Second partner review of the audit to ensure the IT
work has been properly assessed
Listed clients: do not provide IT services that form a
significant part of the controls over financial reporting or
generate information which is significant to the financial
statements.
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 Summary notes

Familiarity threat

Recruitment services Listed clients: not allowed to provide recruitment services for
provided to an audit client key management positions.

Close family or personal Audit firm employees who have close relationships with client
relationships staff should not work on the audit.

Long association scenarios

Non-listed: engagement Review independence after 10 years. Either rotate or

partner continue with safeguards:
 Document reasons
 Disclose to client
 Consider other safeguards.

Listed: engagement partner Rotate off after five years (can extend to seven with Audit
Committee approval).

No return for five years.

Listed: quality control review Rotate off after seven years.

partner
No return for five years.

Non-listed client becomes Take previous service into account.

listed: engagement partner
If already served more than four years can only continue for
two more.

No return for five years.

Listed: other senior staff Review independence after seven years.

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Advocacy threat
Corporate finance services
offered to audit client
Legal services offered to an
audit client
Representing an audit client
in a tax tribunal or court to
resolve a tax dispute
Intimidation threat
Close family or personal
relationships
Business relationships
Audit partner leaves to take
up employment with a client
Actual or threatened litigation
Summary notes
The firm is not allowed to promote, deal in or underwrite a
client’s shares.
Non-listed clients: other work may be carried out if the audit
firm considers safeguards will be effective:
 Separate teams
 Disclosure of nature of services provided to the Audit
Committee of the client.
Listed clients: not allowed unless there is no material effect
on the financial statements.
An audit firm must not act as a solicitor representing the
client in a legal case.
Non-listed clients: may offer litigation support with
safeguards, e.g. separate teams, second partner review.
Listed clients: not allowed to offer litigation support.
This is prohibited if the issue is material to the financial
statements.
Otherwise it may be carried out with safeguards:
 Separate teams
 Obtain advice from an external tax professional.
Audit firm employees who have close relationships with client
staff should not work on the audit.
The audit firm must not participate in a business relationship
with a client.
The firm should resign as auditor.
Cannot take on the audit again for two years.
Disclose to those charged with governance at the client.
Consider resignation.
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Management threat
Any additional non-audit
service provided to an audit
client where the auditor may
take on a management role
Summary notes
Do not take on management roles.
Use the engagement letter to clarify the responsibility of
management for decision making and to limit the involvement
of the audit firm to work of a more mechanical or technical
nature.
Establish informed management (where the auditors believe
that the member of management designated by the audit
client to receive the results of a non-audit service provided by
the auditor has the capability to make independent
management judgements and decisions on the basis of the
information provided).
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 Summary notes

CONFIDENTIALITY

Safeguards

 Physical and electronic security

 Staff training to ensure they understand the importance of confidentiality

and the procedures in place to prevent accidental disclosure

Disclosure

Right to disclose Duty to disclose

Client permission obtained If ordered to disclose by a court

Where disclosure is in the public interest If required by a regulator e.g. Financial

Conduct Authority, Charity Commission
To defend the firm in a negligence claim
Suspicions of money laundering should be
reported to the National Crime Agency

Suspicions of terrorist activities should be

reported to the police.

Conflicts of interest

 Notify the relevant clients of the situation

 Seek their consent to continue to act for both parties.

If the firm continues to act for two clients whose interests are in conflict then
safeguards should be implemented to preserve confidentiality:

 Separate teams

 Information barriers

o Ensure no overlap between different teams

o Physical separation of teams

o Procedures for maintaining security of paper and electronic records

 Confidentiality agreements signed by employees and partners

 Review of the application of safeguards by an independent partner.

If adequate safeguards cannot be implemented, the firm may have to cease to act for
one or both of the clients.
Summary notes