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Introduction to assurance
chapter Assurance services
1 Introduction to assurance
Purpose of assurance is to increase the confidence of the user in the subject matter being relied upon.
• Practitioner e.g. auditor (performs an independent
x
examination of the subject matter against the suitable
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criteria and provides a written assurance report)
In this chapter 3 Party Involvement • Intended user e.g. shareholders (user of the subject matter)
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• Assurance services. • Responsible party e.g. directors (preparer of the subject
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matter)
• Accountability, stewardship and agency.
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Subject Matter The information being examined e.g. financial statements
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C
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Suitable Criteria Subject matter is judged against the criteria e.g. IFRS
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Evidence Sufficient and appropriate to provide a basis for the conclusion
Written Assurance Report Expressing a conclusion or opinion
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Chapter 1 Introduction to assurance
The Framework permits only two types of assurance engagement to be performed: Accountability, stewardship and agency
Reasonable assurance engagements Limited assurance engagement

The practitioner: The practitioner: Accountability Stewardship
• Gathers sufficient appropriate evidence • Gathers sufficient appropriate evidence to People in positions of power can be The responsibility to take good care of resources.
x
x
• Does enough work to be able to be satisfied that the subject matter is held to account for their actions Known as a ‘fiduciary relationship’
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draw reasonable, but not absolute, plausible in the circumstances Directors are accountable to the Directors are the stewards of the company
conclusions • Gives a report in the form of a negative shareholders for the decisions they Directors are required to produce financial
• Concludes that the subject matter statement of conclusion (“nothing has make in relation to the company
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statements giving an account of their stewardship
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conforms in all material respects with come to our attention”)
identified suitable criteria
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• Gives a report in the form of a positive
statement of opinion
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Agency
When one party, the principal, employs another party, the
A
A
EXAMPLES
agent, to perform a task of their behalf
C
C
• Review of financial statements
(International Standard on Review Directors are the agents of the shareholders
AC
AC
Engagements 2400). External auditors are the agents of the shareholders
EXAMPLE • Risk assessment reports.
• Statutory audit. • Performance measurement reports.
• Systems reliability reports.
• Reports on social and environmental issues Company management are required to produce financial statements giving an account of
reviews of internal control. their stewardship of the company at regular intervals, but there was a need for some kind of
independent validation of the financial statements – the independent audit.
KAPLAN PUBLISHING 3 4 KAPLAN PUBLISHING

Chapter 1 Introduction to assurance
Benefits of audit Expectations Gap

• Helps improve quality of information. • Auditor tests everything.
• Independent scrutiny. • Auditor detects all fraud and error.
• Reduces risk of management bias, fraud • Auditor confirms the company is a going
and error. concern.
x
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• Enhances credibility of FS. • Auditor prepares the FS.
• Deficiencies in internal controls
highlighted.
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Exam focus
Limitations of audit
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• FS include subjective estimates and To practise the basics use the following test
your understandings (TYUs) Study Text:
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judgments.
• Inherent limitations of internal controls.
A • Chapter 1, TYU 1
A
• Representations from management not • Chapter 1, TYU 2
C
C
reliable. • Chapter 1, TYU 3
AC
AC
• Evidence is persuasive not conclusive.
• Do not test all transactions, only a
sample.


Rules and regulation
chapter
2
International and UK
standard setting and
regulation
IFAC
Rules and regulation
x
x
International Federation of
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Accountants
In this chapter A grouping of accountancy bodies • ISAs are adopted, and modified if
(including ACCA)
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• International and UK standard setting and regulation. necessary, by individual countries or they
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No legal standing in member's can set their own standards.
• Why have an audit. countries
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• Any modifications reflect the legislation
• Who may or may not act as an auditor.
relating to companies in the country
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• How are auditors appointed and removed. IAASB that the client is based, which may be
• Auditor’s rights and duties. different from that in other jurisdictions.
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International Audit and Assurance
Standards Board • Local law overrides ISAs.
C
C
A subsidiary of IFAC
AC
AC
Sets international standards on auditing
(ISAs)
In the EU all audits must be carried out
in accordance with ISAs for accounting
periods beginning on or after 1 January
2005
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Chapter 2 Rules and regulation
Why have an audit Who may or may not act

Legal framework as an auditor MAY NOT ACT ✗
Businesses needed
Distinction between MAY ACT ✓
can be operated owners and the business. To protect owners from Regular accounts
through to be produced. EXCLUDED BY LAW
unscrupulous managers
companies Businesses run by
x
Accounts require In Britain
managers not owners To protect the world INDIVIDUALS
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independent check – • An officer (Director or secretary) of the
Incorporation at large from owners an audit • A member of a Recognised Supervisory
Limited liability status company
taking advantage of Body (RSB) e.g. ACCA
and – an employee of the company
limited liability
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– a business partner or employee of the above.
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• Allowed by the rules of that body to be
an auditor
EXCLUDED BY ETHICS
or
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• Due to lack of objectivity or independence, for
• Therefore in most countries companies require an audit. • Someone directly authorised by the state. example, due to:
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• In many countries there is an exemption for small businesses. FIRMS – close business relationships
• Controlled by members of a suitably – personal relationships
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authorised supervisory body
– long association with the client
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Or
– fee dependency
• A firm directly authorised by the state.
AC
AC
– non audit services provided.


Chapter 2 Rules and regulation
How are auditors appointed Auditor’s rights and duties Exam focus
and removed REMOVAL
Rights To practise the basics use the following
• Simple majority at a general
meeting of the company. • Access at all times to all books and test your understandings (TYUs) from the
APPOINTMENT records Study Text:
In most jurisdictions • The law requires special notice
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x
to be given. • Receive information and explanations • TYU 1
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• The members (shareholders) of the from the officers of the company
company. • Resignation (auditors may • TYU 2
• Directors can appoint first auditor have to submit to members a • Receive notice of and attend company
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and fill a ‘casual vacancy’, but needs statement of the circumstances meetings
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members’ approval at next AGM. surrounding their resignation). • Speak at such meetings
• Appointment runs from end of AGM
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• Receive copies of any written resolutions
until the end of the next AGM.
of the company
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• Where no AGM – automatic annual
reappointment unless a shareholder • Requisition an Extraordinary General
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objects. Meeting (EGM) on resignation
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• Require notice of circumstances relating
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AC
to resignation to be circulated.
Duties
• Report to the members on whether the
financial statements give a true and fair
view and have been properly prepared.

Corporate governance
chapter
3
Corporate governance • Aligning key executive and board
remuneration
Corporate governance is about ensuring that
• Monitoring and managing potential
companies are run well in the interests of
conflicts of interest of management,
their shareholders and the wider community.
board members and shareholders
Need arose due to high profile collapses of
Corporate governance
x
companies. • Ensuring the integrity of the corporation’s
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accounting and financial reporting
In this chapter Good corporate governance is particularly systems, overseeing the process of
important for publicly traded companies.
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• Corporate governance. disclosure and communications.
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• Audit committees. Maintaining satisfactory standards of Note the term “Board” primarily to mean
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corporate governance is the responsibility of the Supervisory board in a 2 tier board
those operating a company. arrangement or the non-executive directors
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A The board and relevant sub committees in a unitary
A
board structure.
The key responsibilities of the board are:
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C
• Reviewing and guiding corporate strategy
AC
AC
• Monitoring the effectiveness of the
company’s governance practices and
making changes as needed
• Selecting, compensating, monitoring
and, when necessary, replacing key
executives
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Chapter 3 Corporate governance
Corporate governance in action

Audit, risk and • Board should ensure independence of IA and EA functions
• Effective board leadership internal control
Board leadership and • Board should manage risks and oversee internal controls
company pupose • Promote long-term sustainable success
• Audit committee must be established (min 3 INEDs)
• Directors should lead by example
x
x
• Chair should not be a member of audit committee
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• At least one member with recent and relevant experience
• Independent chair leads the board
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• CEO and chair should be 2 individuals
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Division of responsibilities
• Board should be balanced • Remuneration set by Remuneration committee (min 3 INEDs)
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• Half the board should be independent • Remuneration should promote long-term sustainable success
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• Policy for setting remuneration should be formal and
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• Board appointments made by Nomination transparent
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committee (majority INEDs) • No director should be involved in setting his own pay
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Composition, succession • Appointments based on merit – best person for • Board chair can only be a member of RC if independent on
Remuneration
and evaluation the job appointment
• Combination of skills and experience • Workforce pay should be considered when setting exec pay
• Annual re-election of all directors
• NEDs paid according to time commitments and responsibilities
• Chair must be replaced after 9 years

Chapter 3 Corporate governance
Audit committees • Reviewing and monitoring the external Risk management Exam focus
auditor’s independence and objectivity
Composition and the effectiveness of the audit All companies face risks of many kinds. Exam kit questions in this area:
• 3 independent non-executives. process.
Companies must address the risk issues Section A – Objective case questions:
• At least 1 with financial expertise. • Developing and implementing policy on and:
the engagement of the external auditor • Sistar
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Objectives • Identify the risks faced (e.g. operational,
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to supply non-audit services. • Cameron
• Public confidence in the credibility financial, legal)
• Reviewing arrangements for confidential
and objectivity of published financial reporting by employees and investigation • May maintain a risk register Section B – Constructed response questions:
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information.
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of possible improprieties – whistle • Assess the relative importance of each • Saxophone Enterprises
• Assisting directors in meeting their blowing. risk
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responsibilities in respect of financial
reporting. The audit committee and internal audit • Sometimes accept the risk as an
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inevitable part of its operations.
• Liaison with external auditors.
A The audit committee should:
A
Function • Ensure internal auditor has direct access
to the board chairman and to the audit
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C
• Monitoring integrity of the financial committee.
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AC
statements.
• Review and assess the annual internal
• Reviewing internal financial controls. audit work plan.
• Monitoring and reviewing internal audit • Receive reports on the results of internal
function. audit work.
• Making recommendations re • If no IA function in place, review need for
appointment, removal and remuneration one annually.
of the external auditor.

Ethics and acceptance
chapter
4
Ethical principles
SOURCES
• The user needs to believe that
ACCA Code of Ethics and
assurance practitioners act in Professional Conduct
accordance with a code of ethics, and
IFAC Code of Ethics
• The practitioner needs a code of ethics
Ethics and acceptance
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x
to make sure that he or she is worthy of
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that level of trust.
In this chapter
Exam focus Similar
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• Ethical principles. conceptual
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• Independence and objectivity. frameworks
Learn the principles in the various Codes
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• Fundamental principles, threats and safeguards. of Ethics, but do not be afraid to use your
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common sense in deciding whether a
• ACCA code of ethics and conduct.
proposed action is ethically acceptable for an
• Threats and safeguards.
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auditor. CONTENTS
Fundamental principles of
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• Confidentiality.
ethical behaviour
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AC
• Acceptance of engagements.
Potential threats to ethical
• New work and the engagement letter. behaviour
Possible safeguards which
can be implemented to
counter the threats
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Chapter 4 Ethics and acceptance
Remember: Independence and Fundamental principles, threats and safeguards

• The Codes of Ethics provide guidance objectivity SAFEGUARDS
that the auditor must follow. FUNDAMENTAL
• Independence is freedom from any General
• In some cases the only viable external control or influence in making PRINCIPLES THREATS Created by the profession
safeguard is not to accept an assurance Integrity Self-interest Created in the work
decisions.
x
engagement, or to resign from it. Objectivity Self-review environment
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• Objectivity is the state of mind which has
• The ACCA reserves the right to discipline Professional competence Advocacy Specific
regard to all considerations relevant to
and due care Segregation of duties
members who infringe the rules through the task in hand but no other. Familiarity
Review
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a process of disciplinary hearings. Confidentiality
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Intimidation Rotation
Professional behaviour Ceasing to act
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Separate teams
Independent partner review
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C
C
AC
AC

ACCA Code of ethics and professional standards when providing Threats and safeguards
conduct professional services.
Members are required to apply the conceptual framework to identify threats to compliance with
• Confidentiality: Members should
Fundamental principles the fundamental principles, to evaluate their significance and, if such threats are other than clearly
respect the confidentiality of information
insignificant, to apply safeguards to eliminate them or reduce them to an acceptable level such that
The code identifies five fundamental acquired as a result of professional
compliance with the fundamental principles is not compromised.
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x
principles in professional conduct. and business relationships and should
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not disclose any such information to
• Integrity: Members should be Eliminate
third parties without proper and specific
straightforward and honest in all the threat
authority or unless there is a legal or
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professional and business relationships.
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professional right or duty to disclose. e.g. decline
• Objectivity: Members should not Either enagement
• Professional behaviour: Members
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allow bias, conflicts of interest or
should comply with relevant laws and
undue influence of others to override Apply safeguards
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regulations and should avoid any action Identify threats Assess threats
professional or business judgements. if necessary
that discredits the profession.
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• Professional competence and due
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care: Members have a continuing duty Or Reduce the
to maintain professional knowledge threat to an
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and skill to ensure that clients receive acceptable level
competent professional service e.g. second
based on current developments in partner reviews
practice, legislation and techniques.
Members should act diligently and in
accordance with applicable technical and

Example Threat Possible safeguard Confidentiality The firm must notify all affected clients of the
conflict and obtain their consent to act. The
Auditor owns shares in the client (Self-interest ) Sell the shares as soon as possible. Information confidential to a client or following additional safeguards should be
Auditor is unduly dependent on client for fees Fees from listed clients should not exceed 15% of the total employer acquired in the course of considered:
(Self-interest ) practice income for 2 consecutive years. professional work should not be disclosed to
Significant outstanding fees due from the client Don’t commence audit work until outstanding fees are paid. a third party, except where: • Advise the clients to seek independent
x
(Self-interest ) advice
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• Consent has been obtained from the
Client requests contingent fee (Self-interest) Refuse. Contingent fees are not acceptable for assurance client or employer, or • Separate engagement teams (with
engagements. different engagement partners and team
• There is a public duty to disclose, or
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Gifts or hospitality from the client (Self-interest Do not accept unless clearly trivial. Audit partner must members)
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and familiarity) authorise acceptance. • There is a legal or professional right or • Procedures to prevent access to
Audit partner has been in post for many years Partner rotation after 7 years for listed clients. May be duty to disclose. information, e.g. physical separation
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(Familiarity) extended for 1 year if audit committee approves.
Conflicts of Interest: of the team members and confidential/
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Ex-auditor now works for audit client (Familiarity) Review composition of audit team and perform EQCR. secure data filing
Close relationships between auditor and client
A Remove that person from the audit team. Where conflicts of interest exist, the firm’s
A
staff (Familiarity) work should be arranged to avoid the • Signed confidentiality agreements
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Auditor provides other services (Self-review) Separate teams for each service provided. interests of one being adversely affected by • Regular review of the application of
those of another and to prevent a breach of safeguards by an independent person of
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Don’t provide other services to audit clients where significant
reliance will be placed on the non-audit work. confidentiality. appropriate seniority.
Auditor is ex employee of the client (Self-review) Don’t assign that person to the audit team. If adequate safeguards cannot be
Client asks auditor to represent them in court Decline. No sufficient safeguard exists. implemented, the firm must decline, or resign
(Advocacy) from one or more conflicting engagements.


Acceptance of engagements New work and the engagement letter
Obtain work by:

Independence &
Professional clearance Management integrity
objectivity
x
x
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Recommendation Tender
Has risks.
Needs thorough
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Preconditions for an Money laundering
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research and The engagement letter
audit (client due diligence) includes
Issues to consider preparation.
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prior to accepting an • Responsibilities
engagement • Objective and scope of audit
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• Reference to legislation and
standards
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Reputation of the client Resources • Reference to inherent
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If offered assignment limitations of the audit
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• What communications will
Communicate with outgoing auditors.
take place
Assess independence.
• Specific planning issues, e.g.:
Assess commercial desirability of
– use of internal audit
assignment.
Professional – deadlines
Fees Risks Engagement letter.
competence – use of experts etc
• Basis for fees

• A new letter may be sent every year to

Exam focus
emphasise its importance to clients.
• A new letter must be sent if there have Exam kit questions in this area:
been changes, such as changes to: Section A – Objective case questions:
– Statutory duties • Bark & Co
x
– Professional duties
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• Miranda & Co
– Other services. • Tigger & Co
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Preconditions for an audit
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Section B – Constructed response questions:
• Acceptable financial reporting framework • Cinnamon
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in place.
• Orange Financials
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• Management understands its
responsibility for the financial
A • LV Fones
A
statements.
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• Management understands its
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AC
responsibility for internal controls.
• Management will provide the auditor with
access to all information required for the
audit.


Risk
chapter
5
Audit risk
Audit risk (AR)
Definition
Risk The risk of issuing an inappropriate audit opinion.
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In this chapter
Inherent risk (IR) Control risk (CR) Detection risk (DR)
• Audit risk.
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• Materiality.
• Significance of the risk approach. The susceptibility of a balance The risk that the client’s The risk that the auditor fails to
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to misstatement before controls fail to prevent and detect material misstatement.
• Understanding the entity and its environment. consideration of controls.
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detect misstatement.
• Risk assessment procedures.
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• Analytical procedures.
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Example Example Example
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AC
Higher risk: Higher risk: Higher risk:
• Old or ineffective accounting
• A client in a volatile industry. software. • Using inappropriate
• Rapidly changing procedures.
• Lack of segregation of
technology. accounting duties; • Misinterpreting results.
• Complex accounting • Lack of authorisation
treatment. procedures.
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Chapter 5 Risk
Materiality • Assessing materiality is a matter of Misstatement: A difference between a

professional judgement and is not a reported financial statement item and the
mechanical exercise. amount, classification, presentation, or
• Each company must be considered with disclosure that is required for the item to be
Significance reference to its unique circumstances in accordance with the applicable financial
Financial statements which are materially reporting framework. Misstatements can
x
and the informational needs of the users
misstated will not give a true and fair view.
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of the financial statements. arise from error or fraud.
Auditors must test all material balances
• In the exam, balances will be material if
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they exceed:
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Materiality Performance materiality – ½% revenue
Information is material An amount set at less than
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– 5% profit before tax
if its omission or MATERIALITY materiality for the financial
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misstatement could, statements as a whole, – 1% total assets.
either individually to reduce the risk that • Materiality should be reassessed
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A
or in aggregate, the aggregate of smaller during the audit in response to further
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influence the misstatements in individual
information or risk arising.
economic decisions account balances or classes
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AC
Determining materiality
of users taken on the of transactions could exceed
basis of the financial • Size materiality for the financial
statements. • Nature statements as a whole.


Chapter 5 Risk
Definition Significance of the risk Understanding the entity and • The measurement and review of the
approach its environment entity’s financial performance.
Sampling risk arises from the possibility that • Inherent risk and control risk cannot be • The internal controls relevant to the
the auditor’s conclusion, based on a sample Auditors are required to obtain an audit.
directly influenced by the auditor. understanding of their client, including their
may be different from the conclusion reached
• The auditor can, however, manipulate internal controls. This is often referred to as (ISA 315 Identifying and Assessing the Risks
x
x
if the entire population were subjected to the
of Material Misstatement.)
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same audit procedure. detection risk. If they assess that Knowledge of the Business, or “KOB.” This
inherent and control risk are high (i.e. generally includes.
The purpose of acquiring this knowledge
ISA 530 increased risk of material misstatement) • Relevant industry, regulatory and other is to identify the risks that the business is
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they can lower detection risk through the external factors;
Non-sampling risk is the risk the auditor exposed to and, ultimately, how could these
following means:
reaches an inappropriate opinion despite a • The nature of the entity, including: lead to a risk of material misstatement in the
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representative sample being chosen. – Increasing substantive testing; financial statements.
– its operations;
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– Increasing sample sizes;
– its ownership and governance
– Using more experienced staff;
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structures;
– Increasing levels of supervision;
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– the types of investment it makes; and
– Increasing review procedures.
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– the way it is structured and financed.
• By performing a more thorough audit • The entity’s selection and application of
there is less risk that the auditor fails to accounting policies.
detect material misstatement.
• The entity’s objectives, strategies and
related business risks.

Chapter 5 Risk
Risk assessment procedures • Involve calculating ratios, computing The main ratios
trends, proving figures in total, and
ISA 315 requires auditors to perform the Area Ratio Calculation
making comparisons.
following procedures to understand the entity Profitability Gross profit % (Gross profit x 100) / Sales
• May disclose anomalies; these must be
and its environment. Net profit % (Profit before tax x 100) / Sales
investigated.
• Enquiries with management and others Efficiency
x
Receivables days (Receivables x 365) / Sales
• Used to corroborate answers to
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within the entity. Inventory turn (Inventory x 365) / Cost of sales or Cost of Sales /
enquiries.
• Analytical procedures. Inventory
• Involves comparisons – an individual Payables days (Payables x 365) / Purchases
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• Observation (e.g. of control procedures) ratio, for example, is meaningless unless
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and inspection (e.g. of key strategic Liquidity Current ratio Current assets / Current liabilities
compared to (e.g.) previous years,
documents and procedural manuals). Quick ratio Current assets – Inventory / Current liabilities
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another similar company, actual v budget
etc. Gearing Share capital + Reserves : Borrowings
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Analytical procedures Return ROCE (Return On (Profit before interest and tax) / Share capital + Reserves
• When making comparisons make sure
Capital Employed) + Borrowings
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A
The basics calculations use comparable numbers
(e.g. numbers with similar components
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• Compulsory for planning and risk
from one year to the next).
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assessment (ISA 315).
• Can be an efficient and effective source
of substantive evidence.
• Compulsory in the final review to make
sure the numbers make sense (ISA 520).


Chapter 5 Risk
• Aquamarine
Exam focus
• Venus
For a question on audit risk you must ensure
• Sycamore
that your answer is based on the scenario
facts and not just provide a standard answer. • Recorder Communications
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• Kangaroo Construction
You must give audit risks, not business risks.
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• Redsmith
Audit risk will either be risk of material
misstatement or detection risks.
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Exam kit questions in this area:
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Section A – Objective case questions:
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• Flute
• Epica
A
A
C
C
AC
AC
• Darjeeling
• Blackberry
• Prancer Construction
• Hurling
• Sitia Sparkle

Planning
chapter
6
Meet AUDIT Use their
deadlines PLANNING time
properly
Planning
x
Set Identify
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timetable problem The right
In this chapter areas people
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• Benefits of planning.
• Audit strategy and the plan.
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Build in Knowledge
• Interim v final audit. review process of the business
Assess and
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• Fraud and error (ISA 240).
A address risk Analytical review
A
• Responsibilities.
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C
• Laws and regulations (ISA 250). Assess Efficiency
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AC
• Quality control (ISA 220). materiality and
• Documentation. effectiveness
How much Design Potential

evidence needs appropriate impact of
to be gathered procedures fraud
41

Chapter 6 Planning
Benefits of planning Audit strategy and the plan

Adequate planning helps to ensure that: Planning involves establishing the overall audit strategy for the engagement and developing an
• Attention is paid to the important areas audit plan.
of the audit
• Scope:
x
x
• Potential problems are identified and Establish – engagement characteristics;
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resolved on a timely basis overall audit – reporting objectives;
strategy – significant engagement factors;
• The audit engagement is organised and – preliminary activity results; and
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managed in order to be performed in an – the resources needed.
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efficient and effective manner • Timing of when to deploy resources;
• Management, direction and supervision of resources (including meetings, debriefs,
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• Work is properly assigned to the
individual team members reviews etc).
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• Reduces risk of giving the wrong opinion. Develop an
A
A
audit • Nature, timing and extent of risk assessment procedures.
plan
C
C
• Nature, timing and extent of further audit procedures, including:
– what audit procedures;
AC
AC
– who should do them;
Start to carry – how much should be done; and
out audit – when the work should be done.
procedures • Other necessary procedures.
The audit strategy and audit plan should be updated and revised as necessary during the course of
the audit.
Chapter 6 Planning
Interim v final audit Interim audit Final audit

Interim audit Final audit Work • Documenting systems • Obtaining evidence that the controls
performed • Evaluating controls tested at the interim audit have
Timing • Performed before the year-end • Performed after the year-end
continued to operate during the
• Early enough not to interfere with • Assessing risks that will impact final
period since the interim audit took
x
year-end procedures audit
place.
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• Early enough to give adequate • Attending perpetual inventory counts
• Testing of:
warning of specific problems • Testing of:
− SOFP balances
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• Late enough to ease the pressure on − transactions for the year to date
− SOPL transactions
the final audit. − material transactions, e.g.
− Year-end journals.
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Purpose Allows the auditor to spread out their To obtain sufficient appropriate evidence purchase of new non-current
G
procedures. in respect of the financial statements. assets • Completion activities:
Useful when there is increased detection The auditor’s report will be issued once − Going concern
A
A
risk due to a tight reporting deadline. the final audit complete. − Subsequent events reviews
C
C
− Overall review of the financial
AC
AC
statements
− Communication of misstatements
to client.


Chapter 6 Planning
Fraud and error (ISA 240) Definitions Fraud risk assessment procedures Laws and regulations
Fraud: An intentional act involving the use
• Engagement teams should discuss the (ISA 250)
risk of fraud. • Obtain an understanding of the legal
RISK OF of deception to obtain an unjust or illegal
FRAUD HIGH advantage. • Consider the results of controls tests and and regulatory framework governing the
analytical procedures. client.
x
x
Error: An unintentional mistake.
• Enquire of client how they assess, and
Bo
Bo
• Perform procedures to identify instances
Maybe Reduce Professional scepticism: An attitude that respond to, fraud risk. of non-compliance which may affect the
reduce reliance reliance on includes a questioning mind, being alert to • Enquire if client is aware of actual or FS, e.g. unrecorded fines and provisions.
l
l
internally
ba
ba
on management the risk of fraud, and a critical assessment of suspected fraud. • Obtain written representation from
representations. generated evidence. management that they have informed
evidence. • Consider incentives to commit fraud e.g.
lo
lo
performance related bonuses. the auditor of all instances of non
Responsibilities
G
G
compliance.
Directors Reporting of fraud
Increase Reduce the • If non-compliance is identified, report to
A
A
focus on materiality. • Prevent and detect fraud and error by • To management management and those charged with
externally
C
C
implementing effective internal controls • To those charged with governance governance.
generated
AC
AC
Auditors if auditor suspects management are • Consider whether non-compliance
evidence.
Increase involved in the fraud was deliberate and casts doubt over
level of testing. • Obtain reasonable assurance that the
financial statements are free from material • To third parties if there is a duty to report management integrity.
misstatement, whether caused by fraud or • Modify the audit opinion if the fraud is
error. material
• Maintain an attitude of professional
scepticism throughout the audit
Chapter 6 Planning
Quality Control (ISA 220) Quality control during the engagement comprises
ISA 220 Quality Control for an Audit of

Direction Supervision Review
Financial Statements
The firm should have a system of quality Informing team members of: • Tracking the progress of Checking the audit work to
the audit to ensure the ensure:
x
control to ensure: • Their responsibilities
timetable can be met
Bo
Bo
• Compliance with professional standards, • Objectives of the work to • The work has been
and be performed • Considering the performed in accordance
competence of the team with professional
l
• Reports issued are appropriate in the • The nature of the
ba
ba
• Addressing significant standards
circumstances. business
matters arising and • Appropriate consultations
lo
lo
The engagement partner takes overall • Risks.
modifying the planned have taken place
G
responsibility for the overall quality of the approach accordingly • The work performed
engagement including the direction, supervision
A • Identifying matters for supports the conclusions
A
and performance of the engagement. consultation. reached
C
C
An engagement quality control reviewer must • The evidence obtained is
AC
AC
be assigned for listed entities and high risk sufficient and appropriate
engagements focusing on significant matters to support the auditor’s
and areas involving significant judgment. report.
The firm’s quality control processes must
be monitored to ensure they are relevant,
adequate and operating effectively.


Chapter 6 Planning
Documentation • Working papers are usually split into two Benefits of documentation • If it cannot be understood, it might as
separate files: well not have happened (working papers
• Provides evidence of the auditors basis
Definition – permanent file – matters of must be clear).
of conclusion.
continuing interest eg loan • Should enable an experienced auditor
Documentation means the material (working • Provides evidence the audit was planned
agreements, title deeds, systems with no previous connection to the
papers) prepared by, or for, or obtained and and performed in accordance with ISAs.
x
x
documentation audit to understand the work done and
retained by, the auditor in connection with
Bo
Bo
• Assists with direction, supervision and conclusions reached.
the performance of the audit. Such material – current file – matters of this year’s
review of work.
may be in the form of paper or electronic interest eg bank letter, results of
audit tests. • Enables the engagement team to be Custody and retention
l
l
media.
ba
ba
accountable for its work. • They are the property of the auditor.
• The working papers must be sufficiently
Contents of working paper • Retains a record of matters of continuing
complete and detailed to provide an • Must be kept secure (implications for
lo
lo
overall understanding of the audit. • Reporting date significance for future audits. safe custody of paperwork and also
G
G
• In particular, the working papers should • File reference for work kept on computers and other
The basics
record the auditor’s reasoning on all electronic storage media).
A
A
• Name of preparer/date • Required:
significant matters which require the • Audit documentation should be retained
C
C
• Name of reviewer/date – as evidence of work done
exercise of judgement, and the auditor’s for 5 years from completion of the audit
AC
AC
conclusions thereon. • Subject of working paper – as part of quality control, there is (ISA 230).
• Objective work to review.
• Work performed • If it’s not recorded it didn’t take place (no
• Results and conclusions drawn evidence of the audit activity).

Chapter 6 Planning
Exam focus

x
• Veryan
Bo
Bo
• Autumn
l
ba
ba
• Specs4You
To practise the basics use the following test
lo
lo
your understandings (TYUs) Study Text:
G
Chapter 6: A
A
• TYU 1
C
C
• TYU 2
AC
AC
• TYU 3
• TYU 4


Evidence
chapter
7
Type of audit evidence Less reliable More reliable
The auditor should obtain sufficient Obtained from Obtained from
appropriate audit evidence to be able to draw inside the entity independent sources
outside the entity
reasonable conclusions on which to base the
audit opinion (ISA 500). Obtained Obtained directly by
Evidence
x
x
indirectly or by the auditor
Bo
Bo
inference
In this chapter Audit evidence Oral Exists in
representation documentary form
l
l
• Type of audit evidence.
ba
ba
Photocopy of a Original document
• Audit procedures. document
lo
lo
• Assertions.
Sufficient Appropriate
G
G
• Computer assisted audit techniques. Substantive procedures: procedures
• Sampling. designed to detect material misstatement at
A
A
an assertion level. Can be tests of detail or
C
C
• Relying on the work of others. Quantity Quality
analytical procedures.
AC
AC
Tests of controls: procedures to test the
Affected by: operating effectiveness of the internal control
• Reliable system at preventing, detecting or correcting
• Risk
• Relevant to the material misstatements at an assertion level.
• Materiality
FS assertions
• Reliability
55
Chapter 7 Evidence
Audit procedures Assertions

Management is responsible for the preparation of financial statements which give
Inspection of records or May give direct evidence of the existence of an asset, ownership, a true and fair view.
documents that a control is operating, about cut-off.
Inspection of tangible Conclusive evidence of existence, may give evidence of valuation. For each item in the financial statements, management are making assertions.
x
assets
Bo
Bo
Observation Involves looking at a process or procedure: may provide evidence
that a control is being operated. TRANSACTION ACCOUNT
& EVENTS BALANCES
l
Enquiry Enquiry is a major source of audit evidence but the results of
ba
ba
enquiries usually need to be corroborated.
Confirmation Usually consist of obtaining confirmation regarding balances or
lo
lo
representations made by management directly from an external
G
third party.
Recalculation Checking the arithmetical accuracy of the client’s calculations. 1 EXISTENCE
A
A
1 OCCURRENCE 2 RIGHTS & OBLIGATIONS
Reperformance Includes re-performing management or accounting procedures,
C
C
2 COMPLETENESS 3 COMPLETENESS
such as year-end reconciliations. 3 ACCURACY 4 ACCURACY, VALUATION
AC
AC
Analytical procedures Comparisons of sets of data to identify unusual relationships or 4 CUT-OFF AND ALLOCATION
variances that could indicate fraud or error. Results of analytical 5 CLASSIFICATION 5 CLASSIFICATION
reviews need to be corroborated by other forms of test. 6 PRESENTATION 6 PRESENTATION


Chapter 7 Evidence
Analytical procedures as substantive Computer assisted audit Considerations affecting use

procedures techniques • Computer knowledge of the audit team.
• The suitability of this approach depends • Cost/benefit analysis.
on: Test data Audit software
• Time available (CAATs take a long time
– the assertions being tested (maybe to set up).
x
x
good for valuation, bad for existence)
Bo
Bo
– the reliability of the data (unsuitable
if controls are weak as numbers Test data is Software
data generated by
l
l
could be wrong) specially designed
ba
ba
the auditor which for audit purposes.
– the degree of precision possible is then processed
lo
lo
(more suited to regular transactions using the client’s
than one off items) computer systems.
G
G
– the amount of variation which is
A
A
acceptable (some numbers in It is used for:
Put dummy Selecting samples.
C
C
financials require greater accuracy data through the Checking
AC
AC
than others). system and make computations and
sure the controls calculations by
within operate as reperformance.
they should. Comparing two or
Valid data should be more different files.
accepted Performing detailed
Invalid data should analytical review.
be rejected.

Chapter 7 Evidence
Sampling • all transactions in a particular area are of Evaluating the sample results • The auditor is still responsible for
great monetary significance The auditor carries out audit procedures obtaining sufficient and appropriate audit
Audit sampling involves the application evidence.
• population is non-homogeneous. on each item selected and documents the
of audit procedures to less than 100% of • Experts must be independent, objective,
results. Errors identified in the sample are
the items within a class of transactions Designing the sample competent and experienced.
then projected across the population as a
or account balance such that each has a
x
The auditor must choose between statistical whole. • Unmodified audit reports do not refer to
chance of selection.
Bo
Bo
and non-statistical sampling. Statistical the use of experts.
Sampling Methods:
Audit sampling is usually preferable to sampling involves random selection of a
• Random Before work is performed by expert.
testing all items, because: sample and then the use of probability
l
ba
ba
theory to evaluate the sample results. Any • Haphazard • Agree nature, scope and objectives.
• it would be prohibitively expensive and
time-consuming to test every single item other sampling approach is non-statistical • Agree roles and responsibilities.
• Monetary Unit Sampling
lo
lo
sampling. • Agree nature, timing and extent of
• users of the financial statements are • Systematic
G
looking for reasonable assurance, not communication.
Selecting the sample • Block
100% accuracy • Agree the need for the expert to
A
A
• Statistical sampling requires random
• full substantive testing of the accounting Relying on the work of observer confidentiality.
C
C
selection, e.g. using random number
records will not verify that all transactions tables or a computer program to
others Evaluating the work of an expert
AC
AC
are recorded (i.e. it does not prove generate random numbers. Use of auditor’s experts (ISA 620) • Relevance and reasonableness of
completeness). • Non-statistical sampling requires the • Auditors cannot delegate responsibility findings.
However audit sampling is not appropriate if: auditor to use judgement to select the to experts. • Relevance and reasonableness of
sample items to be representative of the assumptions.
• population is small • Examples include: surveyors, valuers,
population.
expert inventory counters, actuaries etc. • Relevance, completeness and accuracy
of source data.

Chapter 7 Evidence
Using the work of internal audit (ISA 610) • Work has been properly supervised and • Internal auditors must keep the external – Type 1 or Type 2 report from service
reviewed. auditor’s information confidential. organisation auditors.
The external auditor may wish to rely on
the work of internal audit in order to reduce Using internal audit to provide direct • External auditor will provide direction, • If controls are expected to operate
the amount of detailed testing that they (the assistance supervision and review of the internal effectively:
external auditor) must perform. auditor's work. – Obtain a Type 2 report
• Internal audit function can provide direct
x
x
assistance to the external auditor under • External auditor should remain alert to – Perform tests of controls at the
Bo
Bo
Assessing the internal audit function
their supervision and review. the risk that the internal auditor is not service organisation
Before any reliance is made, assess the objective or competent.
• Cannot be provided where laws and – Use another auditor to perform tests
l
l
internal audit function in terms of:
ba
ba
regulations prohibit such assistance. Service organisations of controls.
• Organisational status
• The competence and objectivity of the ISA 402 Audit Considerations Relating to an • Reporting
lo
lo
• Scope of function internal auditor must be considered. Entity Using a Service Organisation. – Modify the auditor’s opinion if
G
G
• Technical competence • Must not do work which involves sufficient appropriate evidence has
• Obtain an understanding of the service
• Due professional care. significant judgement, a high risk of organisation (nature of services not been obtained.
A
A
material misstatement or with which the provided and relationship with the client, – The use of the service organisation
C
C
Assessing the internal audit work internal auditor has been involved. materiality of transactions) to assess the or their auditor is not mentioned in
AC
AC
When the external auditor intends to use • Planned work must be communicated risk of material misstatement. This can the report.
specific work of internal audit, they should with those charged with governance. be obtained through:
perform audit procedures on that work to • Cannot make excessive use of internal – Inquiries with client
confirm its adequacy for auditing purposes. auditor. – Confirmations from the service
• Sufficient appropriate evidence obtained. • Management must not intervene in that organisation and their auditors
• Conclusion are valid. work. – Visits to the service organisation

Chapter 7 Evidence
Exam focus

• Hemsworth
x
Bo
Bo
• Delphic
l
ba
ba
• Lily Window Glass
lo
lo
G
G
A
A
C
C
AC
AC

Systems and controls
chapter Internal control systems
8 Systems and controls

Definition
Internal control is the process designed and effected by the directors and others to enable the
achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness
x
x
and efficiency of operations, and compliance with applicable laws and regulations.
Bo
Bo
In this chapter
l
l
• Internal control systems. More reliable The auditor
ba
ba
The more effective
• The auditor and controls. systems of must: and reliable the
control mean Understand the system the lower the
lo
lo
• Sales cycle. lower risk system. audit risk and the
G
G
• Purchase cycle. of material Understand the greater the reliance
misstatement. controls within the auditor can seek
• Payroll system.
A
A
Reliable systems the system. to place upon the
Test whether the
C
C
• Cash system. contain stronger system.
controls. controls work.
AC
AC
• Inventory.
• Communications on internal controls.
More reliable system = Lower audit risk = Less substantive testing
67
Chapter 8 Systems and controls
Internal control consists of the following 5 4 Control activities (APIPS) IT Controls

Exam focus
components (ISA 315): • Authorisation
IT Controls
1 Control environment • Performance reviews Understanding the system is key. In nearly
• This includes the attitude and • Information processing every recent exam at least one question
philosophy of management with • Physical controls have required an understanding of systems
Application
x
regard to control e.g. a commitment • Segregation of duties General IT specific to the scenario client.
controls
Bo
Bo
to integrity and ethical values, a controls
5 Monitoring of controls • Both IT and manual systems have
formal organisation structure and
• Management must monitor controls strengths and weaknesses in specific
proper training of staff.
l
to be sure that they are operating situations.
ba
ba
2 Entity’s risk assessment process and are effective. Controls Polices and
procedures that relate • With manual systems because
• A more robust risk assessment built into the
lo
lo
The 5 components can be remembered with system to many applications information is transferred from one
process will reduce the risk of document to another and people make
the mnemonic CRIME (control activities, risk and support the
G
misstatement.
assessment process, information system effective functioning of mistakes, the auditor has to assume that
3 Information system relevant to relevant to FR, monitoring, environment) application controls things will go wrong unless controls such
A
A
financial reporting as segregation of duties are in place.
C
C
• The auditor should obtain an • Arithmetic • With computer systems (because
AC
AC
understanding of the information checks • Data centre and network computers are good at calculations and
system, including the related • Range operations
are usually consistent) it is therefore
business processes, relevant to checks • System software acquisition
• Change and maintenance possible to make a more positive
financial reporting. • Validation
• Access security – passwords, assumption that things will be correct
checks
door locks, swipe cards unless there is a threat of some kind.
• Backup procedures


• With automated systems, activities are • The auditor needs to:

triggered by specified criteria. It is vital
that such criteria are set properly (e.g. ASCERTAIN THE SYSTEM DOCUMENT THE
price levels, stock levels etc.) Possible methods: SYSTEM
• Examine previous audit Possible methods:
EVALUATE THE SYSTEM
The auditor and controls work • Narrative notes
x
x
• Client’s own documentation • Organisation chart
Bo
Bo
• The auditor can alter the mix of tests • Complete an Internal
of the system
between substantive test and tests of • Interview client staff Control Questionnaire
controls to build up the required level of (ICQ or ICE)
l
l
• trace a transaction
ba
ba
assurance. through the system • Flowcharts.
• Some substantive procedures must be (walkthrough test)
lo
lo
carried out on all material balances. • Observe procedures.
G
G
• Remember that with tests of controls, the
auditor is interested in whether controls • ICQ v ICE
A
A
are operating effectively – the values of
C
C
the transactions are irrelevant. ICQ ICE
AC
AC
• List of possible controls • List of control objectives
• With a substantive test, the auditor is
• Ask client whether the • Ask client what controls they have
trying to gain assurance directly about a controls are in place in place to achieve the objective.
figure in the financial statements. • Yes / No answer.

Sales cycle Sales system Purchase cycle Purchase system

The objectives of controls in the sales The objectives of controls in the purchase
Stage 1 Order received system are to ensure that: Stage 1 Order placed system are to ensure that:
• Goods are only supplied to customers • All purchases are of the appropriate
who pay promptly and in full quality and price
x
Bo
Bo
• Orders are despatched promptly and in • Only necessary goods/services are
Stage 2 Goods despatched full to the correct customer Stage 2 Goods received procured
• Only valid sales are recorded • All purchases and related payables are
l
ba
ba
• All sales and related receivables are recorded
recorded • Expenditure is recorded in the period to
lo
lo
Stage 3 Invoice sent • Revenue is recorded in the period to Stage 3 Invoice received which it relates
G
which it relates • Expenditure is recorded accurately and
related payables are recorded at an
A
A
• Sales are recorded accurately and
appropriate value.
C
C
related receivables are recorded at an
Stage 4 Transactions recorded in books appropriate value. Stage 4 Transactions recorded in books
AC
AC
Stage 5 Cash received Stage 5 Cash payments


Payroll system Payroll system Cash system Cash cycle
Clock cards submitted and The objectives of controls in the payroll The objectives of controls in the cash cycle
Stage 1 Stage 1 Request for payment
input system are to ensure that: are to ensure that:
• Only genuine employees are paid • Petty cash levels are kept to a minimum,
preventing theft
x
x
• Employees are only paid for work done
Gross pay, deductions and Stage 2
Bo
Bo
Stage 2 net pay calculated • Employees are paid at the correct rates Payment authorisation • Payments can only be made for
of pay legitimate business expenditure
• Cash and chequebooks are safeguarded
l
l
• Gross pay is calculated and recorded
ba
ba
Stage 3 Other amendments input accurately Stage 3 Payment made Receipts • Receipts are banked on a timely basis
lo
lo
• Net pay is calculated and recorded • Cash movements are recorded on a
accurately; and timely basis.
G
G
Final payroll calculated and • Correct amounts owed are recorded and
Stage 4
A
A
payslips produced paid to the taxation authorities.
C
C
Stage 4 Payment and receipts recorded
AC
AC
Payments to employees
Stage 5 and tax authorities
Payroll costs and

Stage 6 payments recorded

Inventory Inventory system Communications on internal Appendix

The objectives of controls in the inventory controls Lists (often in tabular form):
Stage 1 Goods Goods Deficiencies.
system are to ensure that: The external auditor is not responsible for
received despatched Consequences.
• Inventory levels meet the needs implementing or maintaining internal controls Recommendations.
of production (raw materials and but needs to:
x
Space for management's response.
Receipt Despatch components) and customer demand
Bo
Bo
Stage 2 • Assess the effectiveness of internal
recorded recorded (finished goods) controls
• Inventory levels are not excessive, • Report significant deficiencies in Exam focus
l
ba
ba
preventing obsolescence and internal controls to those charged with
unnecessary storage costs Questions usually focus on the content of the
governance in accordance with ISA 265
lo
lo
appendix for a given scenario rather than a
Stage 3 Movements posted to nominal • Inventory is safeguarded from theft, loss
Communications will be by management covering letter.
G
ledger and inventory cards or damage
letter or report, which is usually in two parts.
• Inventory movements are recorded on a
A
A
timely basis Covering letter
C
C
• All inventory is recorded States that:
AC
AC
Only covers deficiencies identified during
• Inventory is valued at lower of cost and audit work.
NRV. For sole used of the company.
No disclosure to third parties without
agreement.
No responsibility assumed to any other
parties.


• Lily Window Glass

Exam focus
• Pear International
• Greystone
Section A – Objective case questions: • Shiny Happy Windows
• Coastal
x
x
Bo
Bo
• Halestorm
• Primrose
l
l
ba
ba
• Camomile
lo
lo
• Raspberry
G
G
• Comet Publishing
• Equestrian
A
A
• Heraklion
C
C
• Lemon Quartz
AC
AC
• Bronze
• Trombone
• Oregano
• Fox Industries

Internal audit
chapter
9
Internal audit What do internal auditors do?
Definition of internal audit: an

independent, objective assurance and ROLE OF
consulting activity designed to add value INTERNAL
and improve an organisation’s operations. AUDIT
Internal audit
x
Bo
Bo
The need for internal audit depends on:
In this chapter • Scale, diversity and complexity of
l
• Internal audit. activities
ba
ba
• Comparison of internal and external audit. • Number of employees Is Are
financial systems and
lo
lo
• Outsourcing the internal audit function. • Cost/benefit considerations
information controls operating
G
• Producing an internal audit report. • The desire of senior management to reliable? effectively?
A have assurance and advice on risk
A
and control.
C
C
Are Fraud
AC
AC
procedures being investigations
followed?
Compliance Value for

with law money
81

Chapter 9 Internal audit
Comparison of internal and external audit To work the internal audit department must Advantages
be: • Emphasis on cost and efficiency of the
Internal audit External audit • Sufficiently resourced function.
Status Employees or outsourced function Independent • Well organised • Expertise range of staff (including
• Independent and objective. specialist skills).
Appointed by Audit committee Shareholders
x
x
• Staffing risks and costs passed to
Bo
Bo
Reports to Audit committee Shareholders Limitations of the internal audit function provider.
Reports on Controls, VFM, IT True and fair view of FS The main limitations of internal audit are: • May improve objectivity of function.
l
l
ba
ba
Standards Internal audit standards ISAs, Code of Ethics • Independence (or lack of) • Access to new audit technologies.
• Variation of standards – relatively new • Reduced management time.
lo
lo
profession.
Disadvantages
G
G
Outsourcing the internal • Threat to objectivity if provided by
A
A
external auditor.
audit function
C
C
• Potential lack of knowledge of the
Outsourcing means finding an external
AC
AC
organisation’s objectives, culture or
service provider to perform the role, rather business.
than sourcing and managing the role ‘in
• Cost focus may reduce the effectiveness
house’.
of the function.
• Service provider may not be as flexible
as an in-house function.
• Lack of control over standard of service.
Chapter 9 Internal audit
Internal audit assignments Audit of information technology Producing an internal audit Exam focus
The general approach • Do the systems provide a reliable report
basis for the preparation of financial Exam kit questions in this area:
• Identify key risk areas. • Similar to report to management.
statements? Section A – Objective case questions:
• Are there any procedures to mitigate the • Describe deficiencies.
• Do internal controls reduce the risk of • Sistar
x
risk? • Explain the consequences to the
misstatement?
Bo
Bo
• Are the procedures being followed? organistion. Section B – Constructed response questions:
• Does the system represent value for
• Are the procedures effective? money/best value? • Provide a recommendation for • Goofy
improvement.
l
ba
ba
• Report and recommend. • Are the controls over awarding contracts • Montehodge
for IT installations effective?
Value for money audits
lo
lo
Financial internal audit
3 Es
G
• Do the records and evidence support
• Economy – least cost.
financial and management reporting?
A
A
• Efficiency – best use of resources.
C
C
• Are there errors and/or fraud?
• Effectiveness – best results.
AC
AC
• Does the analysis of information
identify trends and potentially significant
variations from the norm?


Procedures
chapter Audit of receivables Prepayments procedures:
10 Procedures
Trade receivables procedures:
• Obtain aged receivables listing, cast and
agree to FS.
•
•
Inspect invoices to confirm expenditure
relates to subsequent period.
Recalculate the prepayment to verify
accuracy.
x
x
• Request direct confirmation from
• Inspect bank statement to confirm it was
Bo
Bo
customers to confirm existence and
paid before year end.
In this chapter rights.
l
l
• Audit of receivables. • Inspect GDNs and invoices included in
ba
ba
the listing to confirm amounts.
• Inventory.
lo
lo
• Inspect cash received post year end to
• Audit of liabilities.
confirm valuation.
G
G
• Audit of bank and cash.
• Calculate receivables days and compare
• Audit of tangible non-current assets.
A
A
with credit terms.
C
C
• Accounting estimates. • Enquire with management about any
long overdue debts.
AC
AC
• Statement of profit or loss procedures.
• Smaller entities. • Inspect correspondence with customers
for disputes.
• Not-for-profit organisations.
• Recalculate the allowance for
irrecoverable debts and compare with
level of old debts to assess adequacy.
87
Chapter 10 Procedures
Inventory During the count After the count • Review calculations of overheads
• Observe the conduct of the count to • Inspect the inventory listing to ensure included in WIP and ensure only
• Can be raw materials, work in progress
ensure instructions being carried out damaged/obsolete items have been production related overheads are
and finished goods.
properly. written down to NRV. included.
• Main test areas:
• Make limited test counts to check the • Inspect the inventory listing for the items
– existence / completeness – attend
x
accuracy of the count. on the last GRNs and GDNs obtained to
Bo
Bo
inventory count
• Make notes of any damaged or possibly ensure cut-off is correctly applied.
– valuation.
obsolete inventory. • Trace items on the count sheets obtained
l
Attendance at the inventory count during the count into the inventory listing
ba
ba
• Record document numbers for
subsequent test of cut-off – see below. to ensure the quantities have not been
Where inventory is material the auditor
lo
lo
changed.
should attend the inventory count unless • Reach a conclusion as to whether the
• Calculate inventory days ratio and
G
impracticable. count was carried out satisfactorily.
compare with prior year to identify any
Before the count • Trace goods in the warehouse to the
A
A
slow moving items requiring write down.
count sheets of completeness.
C
C
• Review the previous year’s working • Inspect the aged inventory listing for
• Trace goods on the count sheets to the
old items and discuss the need for write
AC
AC
papers for issues.
warehouse for existence.
down with management.
• Review the client’s instructions issued to
the counters for adequacy. • Inspect purchase invoice to verify cost.
• Identify any problem areas and discuss • Inspect post year end sales invoices to
them with the client. verify NRV.


Exam focus Audit of liabilities Accruals procedures Loans and overdraft procedures
You must be clear about the two separate • Obtain the list of accruals, cast and • Agree balances outstanding to bank
Trade payables procedures
tasks facing the auditor: agree to FS. confirmation letter and/or loan statement.
• Obtain aged payables listing, cast and
• Does the inventory exist? Attend the • Compare the accruals list with prior year • Inspect the loan agreement for terms and
agree to FS.
inventory count to find out. to identify any missing accruals and conditions such as restrictive covenants.
x
x
• Inspect purchase invoices and GRNs discuss with management. • Recalculate the split of current and non-
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Bo
• Is the inventory correctly valued? included on the listing to confirm
• Agree corporation tax accrual to tax current liabilities and agree to FS.
accuracy of recording.
The two tasks are inter-related, i.e. the computation. • Review FS disclosure is adequate.
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auditor can identify damaged or dusty • Obtain/perform supplier statement
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ba
• Agree payroll tax accrual to payroll • Recalculate any interest accrual to verify
(slow-moving) inventory at the count, and reconciliations to identify discrepancies.
records. accuracy.
then confirm that these inventory lines have
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lo
• Obtain direct confirmation of balances
been written down to NRV in the valuation • Inspect post year end bank statements • Inspect bank statements for loan and
from suppliers where supplier statements
G
G
exercise. for payments of accruals to confirm the interest payments.
are not available.
amount is reasonable.
A
A
• Inspect post year end bank statements
• Inspect invoices received post year end
for payments made which may indicate
C
C
to confirm amount of the accrual.
unrecorded liabilities.
AC
AC
• Calculate payables days ratio and
compare with credit terms given to
identify unusual differences and discuss
with management.
• Inspect GRNs for before the year end to
ensure completeness.

Provisions and contingencies Audit of bank and cash • Inspect the bank letter for any other • Inspect title deeds, registration
details requiring disclosure such as documents for the client’s name.
Procedures Procedures security over assets.
• Enquire with management the basis of • Obtain listing of bank and cash balances, Accounting estimates
the provision to assess reasonableness. cast and agree to FS. Audit of tangible non-current
An accounting estimate is an approximation
x
• Recalculate the provision to confirm • Obtain a bank confirmation letter for all assets of the amount of an item in the absence of a
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Bo
arithmetical accuracy. bank accounts held.
Main procedures precise means of measurement.
• Obtain written representation from • Obtain bank reconciliations for all bank
management as to the adequacy and • Select a sample of assets from the
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accounts and cast to confirm accuracy. Examples of accounting estimates.
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completeness of the provision. asset register and physically inspect
• Agree the balance per the cash book to them (existence). • Depreciation charges (since the
• For a legal provision obtain confirmation
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the ledger. useful life and residual value of a
from lawyers regarding amount and • Select a sample of assets visible at the
• Agree the balance per the bank fixed asset are only estimates).
G
probability. client premises and inspect the asset
statement to the bank letter. register to ensure they are included • Provision for a loss from a court case.
• Inspect board minutes to confirm an
A
A
• Agree unpresented cheques to the post (completeness). • Provision to meet warranty claims.
obligation exists at year end.
C
C
year end bank statements to confirm • Reperform depreciation calculations or
• Review subsequent events for further they have cleared in a reasonable time.
AC
AC
perform a predictive analytical review In accordance with ISA 540 use one or a
evidence.
• Agree outstanding lodgements to the calculation on depreciation figures. combination of the following approaches.
paying in book and post year end bank • Note the condition of assets when • Review and test the process used by
statements. inspecting them and relate to valuation. management to develop the estimate.
• Perform a cash count for any material • Review any valuers’ reports to confirm
cash balances or where fraud may be valuation.
suspected.


• Use an independent estimate and Purchases • Recalculate a sample of employee’s pay Smaller entities
compare this with management’s • Compare purchases to prior year, to confirm accuracy.
estimate. Clients that are small businesses exhibit
investigate significant differences. • Agree a sample of names from several characteristics. They are usually:
• Review subsequent events which provide • Compare purchases against budget, employee contracts into payroll listing to
evidence about the estimate. confirm completeness. • lower risk assignments
investigate significant differences.
x
x
• under the direct control of owner
• Calculate GPM and compare to prior Exam focus
Bo
Bo
Statement of profit or loss managers (who know what is going on)
year.
procedures This chapter includes many examples • have simpler systems.
• Inspect GRNs before and after year end of typical procedures. When answering
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Revenue to confirm cut-off. questions don’t note down everything you But there are potential problems with:
• Compare revenue to prior year, • Inspect purchase invoices to confirm can think of. Auditing requires professional • possibility of management override
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investigate significant differences. accuracy. judgement so always consider when • lack of segregation of duties.
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G
• Compare revenue against budget, • Trace GRNs into purchase listing to answering a question:
There should be no change in the application
investigate significant differences. confirm completeness. • risks involved
A
A
of risk based auditing (assuming that they
• Calculate GPM and compare to prior • the nature of the items being tested
C
C
Payroll require, under current legislation, an audit).
year. • assertions being tested.
AC
AC
• Compare payroll to prior year, investigate
• Inspect GDNs before and after year end significant differences.
to confirm cut-off. Every exam paper contains questions
• Compare payroll against budget, requiring audit procedures.
• Inspect sales invoices to confirm investigate significant differences.
accuracy.
• Agree a sample of amounts from the
• Trace GDNs into sales listing to confirm payroll listing to payslips to confirm
completeness. accuracy.
Not-for-profit organisations Income can be a serious problem for the

Exam focus
auditor, since it is usually accounted for
• Small not for profit organisations have
on a cash basis, with little accompanying Exam kit questions in this area:
many of the attributes of other small
documentation. Detailed analytical
entities mentioned earlier. Section A – Objective case questions:
procedures and written representations from
• But such organisations tend to be staffed managers can assist, but the auditor may • Eagle Heating
x
by volunteers.
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Bo
struggle to gain sufficient audit evidence of • Hawk
• Their culture is more likely to be one of the completeness of income.
• Swandive
trust rather than accountability.
Expenditure. The NFP is likely to have
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• Hightown
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• Therefore documentation and controls certain stated aims, so expenditure must be
may be less formal. consistent with these aims. Section B – Constructed response questions:
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Audit approach • Jasmine
• Review the post year end period to
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compare to actual performance. • Gooseberry
In principle, the approach should be exactly
A
A
as studied so far, in accordance with • Recalculate balances and cast. • Dashing
C
C
auditing standards. The same ideas of • Review board minutes. • Airsoft
audit planning, risk assessment, testing of
AC
AC
• Elounda
controls, etc can be applied.
• Andromeda
• Hawthorn
• Pineapple Beach Hotel


Completion and review
chapter
11 Completion and review

Overall review Subsequent events
x
x
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In this chapter
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• Final review.
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• Evaluation of misstatements.
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• Subsequent events. Going concern Completion and review
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G
• Going concern.
• Written representations.
A
A
C
C
AC
AC
Evaluation of
misstatements
Written representations

99
Chapter 11 Completion and review
Final review Evaluation of misstatements

Do the FS Are the FS The reviewer should ask: (ISA 450)
comply with statute consistent with our Is the quality of the • Has the work has been performed in • All identified errors should be recorded
and accounting knowledge of the audit work up to on a working paper set up for the
accordance with professional standards
standards? business? standard? purpose.
and regulatory and legal requirements?
x
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Bo
• What significant matters have been • Individually immaterial errors may,
raised for further consideration? in aggregate, amount to a material
difference.
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• Have appropriate consultations taken
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place and the resulting conclusions been • Management should be requested to
documented and implemented? adjust all identified misstatements.
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Final review • All uncorrected misstatements should
• Is there a need to revise the nature,
G
timing and extent of the work performed? be communicated to those charged
A with governance and a description of
A
• Does the work performed support the the implications for the audit report, if
conclusions reached?
C
C
appropriate.
• Is the work appropriately documented?
AC
AC
Have Do the • If any material misstatements remain
appropriate financial statements Have the firm’s • Is the evidence obtained sufficient and unadjusted the auditor will modify the
accounting policies give a true and fair procedures been appropriate to support the auditor’s audit opinion.
been followed? view? followed? report?
• Have the objectives of the engagement
procedures have been achieved?


Subsequent events (ISA 560) • Up to the date of the auditor’s report, the Going concern (ISA 570)
auditor must watch out for subsequent
Definition events that might require adjustment or The going concern concept
disclosure in the financial statements. Definition
Subsequent events are events occurring and facts discovered between the period end and the
date the financial statements are authorised for issue. • After the date of the auditor’s report, the
A company is assumed to be a going
x
x
auditor has no duty to actively search for
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Bo
subsequent events. However, if he does concern if it is likely to continue trading for
Adjusting events Non-adjusting events the foreseeable future.
learn of subsequent events, he should
Provide additional evidence about Provide evidence about conditions arising discuss the matter with the directors and • When preparing financial statements, the
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conditions existing at the statement of after the statement of financial position consider whether amended financial directors should assess whether there
financial position date. date. statements are necessary. are significant doubts about an entity’s
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Require adjustment Require disclosure if material • Procedures involve: ability to continue as a going concern.
G
G
• Trade receivables become irrecoverable • Fire destroys inventory after the year- – enquiry and discussion • The auditor’s responsibility is to consider
debts end the appropriateness of management’s
A
A
– review of minutes use of the going concern assumption,
• Inventory held at year-end is sold for • Injury resulting in legal action occurs
C
C
– review of budgets, management and whether there are adequate
less than cost after year-end after year-end
AC
AC
accounts, other financial data disclosures regarding uncertainties about
• Estimate for a provision is revised • Takeover – written representation the entity’s ability to continue as a going
IAS® 10 Events After the Reporting Period concern.
– normal procedures (looking at after
date cash receipts, payments, cutoff
etc.).

Typical indicators of going concern • Inspect correspondence from lawyers Written representations (ISA Examples of matters included in a written
problems regarding outcome of legal cases which 580) representation
• Net current liabilities. could impact going concern.
Confirmation from management that they
• Inspect board minutes for management’s Definition
• Necessary borrowing facilities not agreed. have fulfilled their responsibilities in respect
plan address GC issues. of the following:
• Significant liquidity or cashflow problems. Written representations are representations
x
• Obtain written representation from • preparing the financial statements in
Bo
Bo
• Substantial operating losses. made by management to the auditor during
management that they believe the the course of the audit, either unsolicited or accordance with an applicable financial
• Inability to pay debts (eg, tax payments) company is a going concern. in response to specific enquiries. reporting framework.
as they fall due.
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• Representations from management are a • providing the auditor with all relevant
• Loss of key management or staff.
source of audit evidence. information and access to records.
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• Loss of key suppliers or customers.
• ISA 580 requires that the auditor should • recording all transactions and reflecting
G
Typical audit procedures obtain written representations from them in the financial statements.
• Review cash flow forecasts and post- management on matters material to the
Specific matters
A
A
year-end management accounts to financial statements when other sufficient
C
C
appropriate audit evidence cannot • That management believe the
analyse trends in performance.
assumptions used for areas of
AC
AC
reasonably be expected to exist.
• Review correspondence with major judgement are reasonable.
customers for evidence of disputes. • As part of the completion process
the auditors will write to the client’s • That provisions and liabilities are
• Inspect correspondence from the bank to management stating the issues about complete.
assess the likelihood of obtaining further which they are seeking representations. • That a particular product line is going to
finance.
continue.


Matters required by other ISAs • Written management representations

Exam focus
• All known and suspected frauds have are documentary evidence, obtained
been communicated to the auditor directly by the auditor. However, the Exam kit questions in this area:
(ISA 240). evidence is not independent. So the
auditor uses professional judgement to
• All instances of non-compliance with • Humphries
assess the value of such representations
x
x
laws and regulations have been
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and consider management’s competence • Greenfields
communicated to the auditor (ISA 250).
to make the representations and
• Management believe the effects management’s integrity. Section B – Constructed response questions:
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of uncorrected misstatements are
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• Clarinet
immaterial (ISA 450).
• Panda
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• All subsequent events have been
G
G
• All going concern issues have been
A
A
C
C
AC
AC

Reporting
chapter
12
The auditor’s report Elements of an auditor’s
• The auditor’s report is the output of the report
audit. • Title
• It contains the auditor’s opinion as to • Addressee
whether the financial statements give a
Reporting
x
• Auditor’s opinion
true and fair view.
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Bo
• Basis for opinion
In this chapter • Key audit matters (if listed)
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• The auditor’s report.
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ba
• Other information
• Elements of an auditor’s report. • Responsibilities of management
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• Example of an auditor’s report. • Auditor responsibilities
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• Modified opinions. • Other reporting responsibilities
• Additional communications.
A
A
• Name of the engagement partner
C
C
• Signature
AC
AC
• Auditor’s address
• Date

109

Chapter 12 Reporting
Example of an auditor’s report

accordance with these requirements. We believe that the audit evidence we have obtained is
INDEPENDENT AUDITOR’S REPORT sufficient and appropriate to provide a basis for our opinion.
To the Shareholders of ABC Company Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most
x
x
Opinion
significance in our audit of the financial statements of the current period. These matters were
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We have audited the financial statements of the ABC Company (the Company), which addressed in the context of our audit of the financial statements as a whole, and in forming our
comprise the statement of financial position as at 31 December, 20X4, and the statement of opinion thereon, and we do not provide a separate opinion on these matters.
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comprehensive income, statement of changes in equity and statement of cash flows for the
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year then ended, and notes to the financial statements, including a summary of significant [Description of each key audit matter in accordance with ISA 701]
accounting policies.
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Other information
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In our opinion, the accompanying financial statements present fairly, in all material respects, (or Management is responsible for the other information. The other information comprises the
give a true and fair view of) the financial position of the Company as at December 31, 20X4, Chairman’s statement, but does not include the financial statements and the auditor’s report
A
A
and its performance and its cash flows for the year then ended in accordance with International thereon.
C
C
Financial Reporting Standards.
Our opinion on the financial statements does not cover the other information and we do not
AC
AC
Basis for Opinion express any form of assurance conclusion thereon.
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our In connection with our audit of the financial statements, our responsibility is to read the other
responsibilities under those standards are further described in the Auditor’s Responsibilities information and, in doing so, consider whether the other information is materially inconsistent
for the Audit of the Financial Statements section of our report. We are independent of the with the financial statements or our knowledge obtained in the audit or otherwise appears to
Company in accordance with the ethical requirements that are relevant to our audit of the be materially misstated. If, based on the work we have performed, we conclude that there is a
financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in

material misstatement of this information, we are required to report that fact. We have nothing material misstatement when it exists. Misstatements can arise from fraud or error and are
to report in this regard. considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial statements.
Responsibilities of Management and Those Charged With Governance for the Financial
Statements As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
x
professional scepticism throughout the audit. We also:
Management is responsible for the preparation and fair presentation of these financial
Bo
Bo
statements in accordance with International Financial Reporting Standards, and for such • Identify and assess the risks of material misstatement of the financial statements, whether
internal control as management determines is necessary to enable the preparation of financial due to fraud or error, design and perform audit procedures responsive to those risks, and
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statements that are free from material misstatement, whether due to fraud or error. obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
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ba
The risk of not detecting a material misstatement resulting from fraud is higher than for
In preparing the financial statements, management is responsible for assessing the Company’s one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
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ability to continue as a going concern, disclosing as applicable, matters related to going misrepresentations, or the override of internal control.
G
concern and using the going concern basis of accounting unless management either intends to
• Obtain an understanding of internal control relevant to the audit in order to design audit
liquidate the Company or to cease operations, or has no realistic alternative but to do so.
procedures that are appropriate in the circumstances, but not for the purpose of expressing
A
A
Those charged with governance are responsible for overseeing the Company’s financial an opinion on the effectiveness of the Company’s internal control.
C
C
reporting process. • Evaluate the appropriateness of accounting policies used and the reasonableness of
AC
AC
Auditor’s Responsibilities for the Audit of the Financial Statements accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of
Our objectives are to obtain reasonable assurance about whether the financial statements as accounting and, based on the audit evidence obtained, whether a material uncertainty exists
a whole are free from material misstatement, whether due to fraud or error, and to issue an related to events or conditions that may cast significant doubt on the Company’s ability
auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, to continue as a going concern. If we conclude that a material uncertainty exists, we are
but is not a guarantee that an audit conducted in accordance with ISAs will always detect a required to draw attention in our auditor’s report to the related disclosures in the financial


statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are Report on Other Legal and Regulatory Requirements
based on the audit evidence obtained up to the date of our auditor’s report. However, future
events or conditions may cause the Company to cease trading as a going concern. [As required by local law, regulation or national auditing standards]
• Evaluate the overall presentation, structure and content of the financial statements, The engagement partner on the audit resulting in this independent auditor’s
including the disclosures, and whether the financial statements represent the underlying report is ....
x
x
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Bo
transactions and events in a manner that achieves fair presentation.
Signature
We communicate with those charged with governance regarding, among other matters,
Address
the planned scope and timing of the audit and significant findings, including any significant
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l
ba
ba
deficiencies in internal control that we identify during our audit. Date
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lo
We also provide those charged with governance with a statement that we have complied with The opinion should be modified under the following circumstances:
relevant ethical requirements regarding independence, and to communicate with them all
G
G
• the financial statements are NOT free from material misstatement; or
relationships and other matters that may reasonably be thought to bear on our independence,
• the auditor was unable to obtain sufficient appropriate evidence.
A
A
and where applicable, related safeguards.
C
C
From the matters communicated with those charged with governance, we determine those The wording of the opinion then depends upon whether the material is:
AC
AC
matters that were of most significance in the audit of the financial statements of the current • material but not pervasive (i.e. isolated to certain elements of the financial statements); or
period and are therefore the key audit matters. We describe these matters in our auditor’s • material and pervasive (i.e. infiltrates so much of the financial statements that they are
report unless law or regulation precludes public disclosure about the matter or when, in unreliable as a whole).
extremely rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be expected to If the opinion is being modified, a ‘basis for’ paragraph will be included to explain the reason for the
outweigh the public interest benefits of such communication. modification.

Modified Opinions Additional communications Key audit matters
Material uncertainty relating to going Key audit matters are those that in the
Auditor’s Judgement about the Pervasiveness of the Matter concern auditor’s professional judgment were of most
significance in the audit and are selected
Nature of the Matter Material but NOT Pervasive Material AND Pervasive Included where the directors have made from matters communicated to those
x
adequate disclosure of material uncertainties charged with governance.
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Bo
Qualified opinion Adverse opinion relating to going concern to draw the user’s
Financial statements are Examples:
attention to the disclosure.
materially misstated (“...except for...”) (“...do not present fairly...”) • Significant risks of material misstatement
l
Emphasis of matter
ba
ba
• Significant areas of judgement
Disclaimer of opinion Included to draw the user’s attention to a
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lo
Unable to obtain Qualified opinion note disclosed in the financial statements
• Significant events or transactions
sufficient appropriate (“...we do not express an
G
(“...except for...”) (usually in relation to fundamental Other information
audit evidence A opinion...”) uncertainties/contingencies).
A
Other information is defined as financial
Other matters and non-financial information included in
C
C
a document containing audited financial
AC
AC
Included to draw the user’s attention to
statements and the auditor’s report.
other matters not related to the financial
Examples include a Chairman’s Statement
statements. e.g. further information about the
and Directors’ Report.
auditor’s responsibilities.


The auditor must read this information to

Exam focus
identify any inconsistencies between the
information and the financial statements or Exam kit questions in this area:
their knowledge of the client.
If the other information is received before • Mississippi
x
x
the date of the auditor’s report, a separate
Bo
Bo
section should be included in the audit report • Pacific
under the heading ‘Other Information’. In this • Magical Mystery Tour
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l
section the auditor should: • Paddington
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ba
• Identify the other information obtained
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prior to the date of the auditor’s report.
• Paprika
• State that the auditor has not audited the
G
G
other information and accordingly does • Violet
A
A
not express an opinion or conclusion on • Minnie
that information.
C
C
• Include a description of the auditor’s
AC
AC
responsibilities with respect to other
information.
• State either that the auditor has nothing
to report, or a description of the material
misstatement.


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• Practitioner e.g. auditor (performs an independent

Written Assurance Report Expressing a conclusion or opinion

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Reasonable assurance engagements Limited assurance engagement

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Benefits of audit Expectations Gap

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Why have an audit Who may or may not act

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Corporate governance in action

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Remember: Independence and Fundamental principles, threats and safeguards

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Acceptance of engagements New work and the engagement letter

Obtain work by:

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• A new letter may be sent every year to

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Materiality • Assessing materiality is a matter of Misstatement: A difference between a

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How much Design Potential

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Benefits of planning Audit strategy and the plan

Interim v final audit Interim audit Final audit

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ISA 220 Quality Control for an Audit of

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Exam kit questions in this area:

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Audit procedures Assertions

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Analytical procedures as substantive Computer assisted audit Considerations affecting use

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Exam kit questions in this area:

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8 Systems and controls

More reliable system = Lower audit risk = Less substantive testing

Internal control consists of the following 5 4 Control activities (APIPS) IT Controls

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• With automated systems, activities are • The auditor needs to: