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AUDIT AND ASSURANCEPaper
F8
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ACCA COURSE NOTESJune2015EXAMINATIONS
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ACCA Paper F8 Audit and assurance
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Syllabus
A Audit framework and regulation
B Internal audit
C Planning and risk assessment
D Internal control
E Audit evidence
F Review
G Reporting
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Examiner and Exam Format
Format of the Exam
Question 1 Application of audit procedures to a scenario 30
Question 2Short factual questions on ISAs and otherknowledge-based areas
10
Question 3Questions with short practical scenarioscovering topics such as: internal audit, risk
assessment, planning , controls, evidence,
conclusions and reporting
20
Question 420
Question 520
Total 100
June 2015 exams
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Assurance
It is often not possible to check the situation yourself
Skill? Time? Location?
Therefore rely on someone else
Standards?
How much checking?
Report
Audit is only one form of assurance
Click to edit Master title styleElements of an assurance engagement
There are the five elements in an assurance engagement:
A three party relationship involving a practitioner, a
responsible party, and intended users
An appropriate subject matter
Suitable criteria
Sufficient appropriate evidence
A written assurance report in the form appropriate
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Three party relationship
Practitioner: for example an auditor. Responsible fordetermining the nature, timing and extent of proceduresand must pursue doubts and queries
A responsible party: the person responsible for the
information and assertions
The intended users: the person(s) for whom thepractitioner prepares the assurance report. The
responsible party can be one of the intended users.
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Appropriate subject matter
Many types:
Financial performance
Non-financial performance eg the key indicators of efficiency
and effectiveness.
Physical characteristics eg capacity of a facility.
Systems and processes eg an entitys internal control or IT
system
Behaviour eg corporate governance, compliance with
regulation
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Appropriate subject matter
Must be:
Identifiable, and capable of consistent evaluation or
measurement against the identified criteria
Such that the information about it can be subjected to
procedures for gathering sufficient appropriate
evidence.
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Criteria
Criteria are the benchmarks used to evaluate ormeasure the subject matter. Without the frame ofreference provided by suitable criteria, any conclusion
is open to individual interpretation and
misunderstanding.
Examples:
Financial Statements: IFRS
Internal Control: an internal control framework.
Compliance: the applicable law, regulation or contract.
They must be available to intended users
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Suitable criteria
Suitable criteria exhibit the following characteristics:
Relevance: contribute to conclusions that assist decision-making
by the intended users.
Completeness: include all relevant factors that could affect theconclusions.
Reliability: allow reasonably consistent evaluation of the subject
matter.
Neutrality: so that conclusions that are free from bias.
Understandability: to allow conclusions that are clear,
comprehensive, and not subject to significantly differentinterpretations.
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Evidence
Professional scepticism
Sufficient, appropriate evidence
Sufficiency = quantity of evidence.
Appropriateness = quality of evidence (relevance and itsreliability)
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Assurance report
A written report containing a conclusion.
Positive form (reasonable assurance engagement): In
our opinion internal control is effective, in all material
respects, based onXYZ criteria.
Negative form (limited assurance engagement):
Based on our work described in this report, nothinghas come to our attention that causes us to believe
that internal control is not effective, in all material
respects, based onXYZ criteria.
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Assurance report
A practitioner does not express an unqualifiedconclusion for either type of assurance engagementwhen:
There is a limitation on the scope of thepractitioners work.
The assertion is not fairly stated, and the subject
matter information is materially misstated.
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Corporate governance
Corporate governance: the system by which companiesare directed and controlled
Historically:
Annual general meeting once a year
Accounts once a year
Audited once a year
Directors board meetings - often (but not always)frequently
Directors conversations and meetings - frequently
Corporate governance: the system by which
companies are directed and controlled
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Recent Corporate Failures
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OECD Principles of Corporate Governance
Fairness, including foreign and minority shareholders
Disclosure and transparency
Independence
Probity, honesty
Responsibility and accountability
Reputation
Judgement
Integrity
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The UK Corporate Governance Code
The purpose of corporate governance is to facilitate effectiveentrepreneurial and prudent management that can deliver long-
term success of the company
Main principles
Leadership
Effectiveness
Accountability
Remuneration Relations with shareholders
The comply or explain approach is the trademark of corporate
governance in the UK.
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The UK Corporate Governance Code
Leadership
Every company should be headed by an effective board which is
collectively responsible for the long-term success of the company.
There should be a clear division between the running of the board
and the executive responsibility for the running of the companys
business. No one individual should have unfettered powers of
decision. [Split roles of CEO and Chairman]
The chairman is responsible for leadership of the board
Non-executive directors [NEDs] should constructively challenge and
help develop proposals on strategy.
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The UK Corporate Governance Code
EffectivenessAppropriate balance of skills, experience, independence and
knowledge. [NEDS !50% board; !2 in small companies ]
A formal, rigorous and transparent procedure for the appointment of
new directors to the board [Nomination committee]
All directors should be able to allocate sufficient time
Induction on joining the board and update and refresh their skills and
knowledge.
The board should be supplied in a timely manner with necessary
information.
The board should undertake a formal and rigorous annual evaluation
of its own performance and that of its committees and individualdirectors.
All directors should be submitted for re-election at regular intervals
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The UK Corporate Governance Code
Accountability
The board should present a balanced and understandable
assessment of the companys position and prospects.
The board is responsible for determining the significant risks
should maintain sound risk management and internal control
systems.
The board should establish formal and transparent arrangements for
applying the corporate reporting, risk management and internalcontrol principles, and for maintaining an appropriate relationship
with the companys auditor. [Audit committee. Must examine internal
control. Must consider need for internal audit].
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The UK Corporate Governance Code
Remuneration
Levels of remuneration should be sufficient to attract, retain andmotivate directors of sufficient quality but avoid paying more than
is necessary.
A significant proportion of executive directors remuneration should
be structured so as to link rewards to corporate and individualperformance.
There should be a formal and transparent procedure for developing
policy on executive remuneration and for fixing the remunerationpackages of individual directors. No director should be involved in
deciding his or her own remuneration. [Remuneration committee]
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The UK Corporate Governance Code
Relations with shareholders
There should be a dialogue with shareholders based on the mutual
understanding of objectives. The board as a whole has responsibility
for ensuring that a satisfactory dialogue with shareholders takesplace.
The board should use the AGM to communicate with investors and
to encourage their participation.
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Audit committee
Liaison with external auditors:
Scope of external audit
Forum to link directors/auditors
Deal with auditors reservations
Obtain information for auditors.
Review of internalaudit
Special
investigations
Review of internal controlFinancial
Statements
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Internal audit
It functions by examining, evaluating and reporting to
management and the directors on the adequacy andeffectiveness of internal control.
It is a key part of effective corporate governance.
Importance referred to in UK Combined Code of Corporate
Governance directors must review need for internal audit
department
Would normally report to the audit committee
Internal audit is an appraisal or monitoring activityestablished by management and directors for the review ofinternal control as a service to the entity.
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Internal audit
Helps achievement of corporate objectives
Aids risk assessment and management
Improves efficiency, effectiveness and economy
Designs internal control system
Checks operation of internal controls system
Value for money audits
Test IT controls
Liaises with external auditors/shares work
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Definition of an audit
An audit is the independentexamination of,and expression of opinionon, the financial
statements of an entity.
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Positive and negative assurance
Positive
The accounts show a true and fair view The cash flow forecast is correct
The appointment of the employee was fair
Negative
We have discovered nothing wrong with the accounts The basis of the forecast is not unreasonable
There is no evidence of discrimination in the appointment.
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Corporate governance the purpose of an external audit
Corporate governance: the system by which companiesare directed and controlled
Shareholders Directors
CompanyOwn
Appoint
Manage
FinancialStatements
Prepare FS
Measure
performance
AuditorAppoint independent
Adds credibility
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Stages of an audit
Assess risk of material misstatement
Plan the audit
Auditors report
Understand entity
Satisfactory
Tests of controlsReport significant deficiencies tothose charged with governance
to management and all weaknesses tomanagement
Respond to risk
Expect effective controls
Restricted substantivetests
Expect ineffective controls
Full substantivetests
Overall review of F/S
Report to management
Unsatisfactory
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Interim and final audit
1January 31December
Interim audit.Document system,
procedural tests
Final auditMoredirect checking
of balances
Planning
visit
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planned and performed the audit to obtainreasonable assurancewhether the financialstatements are free from material misstatement.
.in our opinionthe financial statements show atrue and fairview.
Auditors responsibility
No guarantees Not every error discovered
Not certifying accuracy
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Relevant to all companies?
Should it be a legal requirement that the financial statementsof small entities be subjected to an audit?
Small entities:
Managers and owners the same
Simple trading
Simple records
Limited internal controls which management can override
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Auditors rights
Access to records
Information and explanations
Attendance at and notice about general meetings
Right to speak at general meetings on relevant matters
Rights to receive proposed resolutions
Right to resign before audit completion
Right to have information circulated to the shareholders
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Auditors duties
Typical duties:
To issue an audit report, giving opinions on:
>truth and fairness of the Financial Statements
>whether the Financial Statements are properly prepared
>any other opinions required.
When leaving a client, to issue a Statement of Circumstances After resignation, to supply information to the new auditors.
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Appointment, resignation and removal
Appointment
Resolution at each general meeting (re-appointment notautomatic).
Directors pre first GM and to fill casual vacancy.
Secretary of State
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Appointment, resignation and removal
Resignation
Auditors give written notice and statement of circumstances
Written notice sent to regulatory authority by company
Statement of circumstances sent to members by company;regulatory authority by auditors.
Auditors can require directors to call an EGM.
Auditors can receive all notices relating to general meetingsrelating to their resignation and can speak at those meetings.
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Appointment, resignation and removal
Removal
Special notice (28 days) sent to auditor
Auditors can make representations about why they should stay in
office.
If resolution passed, company must notify regulatory authority.
Auditors must deposit statement of circumstance at companys
office + sent to regulatory authority.
Auditors can receive notice and speak at GM where their term ofoffice would have expired.
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Who can be an auditor?
Must pass an approved set of professional examinations, set by
a Recognised Qualifying Body (RQB)eg the ACCA
Must become a member (and stay a member!) of a
Recognised Supervisory Body (RSB)eg the ACCA
The auditor must not be adirector or employee of the
company, or of any associated companies
The auditor must not be anemployee or business partner of a
director or employee of the company, or of any associated
companies.
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Regulation of auditors
International level
National level
The profession
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Regulation of auditors
Education and work experience
Eligibility,
such asmembership
of a supervisory
body
Supervisionand monitoring
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Auditing standards and Quality Control
Recognised Statutory Body
For example ACCA
National StandardsIn UK, set by Auditing Practices Board
International Standards on AuditingSet by International Auditing and Assurance Standards
Board (IAASB) part of the International Federation odAccountants (IFAC)
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Professional ethics and ACCAs Code
Fundamental
principles
Threats Safeguards
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Fundamental Principles: ACCAs Code
Integrity - straightforward and honest
Professional competence and due care currentdevelopments, legislation and techniques
Confidentiality should not disclose information unlessa legal or professional right or duty.
Professional behaviour comply with the law andavoid any action which discredits the profession
Objectivityavoid bias, conflict of interest, undueinfluence
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Threats to objectivity, integrity and independence
Threats arise from:
Self-interest
Self-review
Familiarity
Advocacy
Intimidation
Management
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Threats to objectivity, integrity and independence
Self-interest threats Financial. For example, owning shares in the client,
Close business relationships. For example,
Employment (ex-partners >2 years)
Partner on client board
Family and personal relationships
Loans and guarantees
Overdue fees
Contingent fees
High percentage fees
Low-balling
Recruitment for the client
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Threats to objectivity, integrity and independence
Self-review threats Recent service with assurance client
Other services
Preparing accounting records and accounts
Valuation services
Taxation services
Internal audit services
Corporate finance
Other service
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Threats to objectivity, integrity and independence
The problem of supplying multiple services
For example: taxation, payroll, IT, management consultancy.
A controversial issue: pros and cons.
Large firms can use separate departments.
In the US listed companies are not allowed to obtain other
services from their auditor.
In most jurisdictions, no hard and fast rules.
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Threats to objectivity, integrity and independence
Familiarity threats
Because of a close relationship, members of the assurance
firm become too sympathetic to members of the client firm,
so that objectivity and scepticism are lost
Care needed where senior audit staff have a long
association with the client.
ACCA suggest that the lead partner should be changed at
least every 5 years.
Other partners involved changed at least every 7 years.
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Threats to objectivity, integrity and independence
Advocacy threats Where the assurance firm promotes a point of view or
opinion to the extent that subsequent objectivity iscompromised
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Threats to objectivity, integrity and independence
Intimidation threats
Where the assurance team is deterred from acting properlyby actual or perceived threats.
Examples are actual/threatened litigation. In some casesthere might be physical intimidation.
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Threats to objectivity, integrity and independence
Management threats
Where the auditor begins to make management decisionsfor the client.
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Acceptance procedures
Ensure professionally qualified to act: legal/ethical
Adequate resources: staff, time
The fee
Obtain references: investigate directors
Audit risk
Is the accounting reporting framework acceptable?
Money laundering regulations
Expertise and competence
Credit rating of client
Communicate with present auditors.
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Appointment flowchart
Approach by new audit client
1staudit?
Permissionto contact old auditor?
Write for information
Permission for oldauditors to reply?
Relevant informationprovided?
Make own decision
Decline appointment
Give old auditor noticeand use information
obtained in other ways
Accept/reject
No
No
No
No
Yes
Yes
Yes
Yes
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Engagement letters
Define auditors/management responsibilities
Written evidence of auditors acceptance
Send to board of directors/or audit committee prior tofirst audit
Identify any reports to be produced in addition to audit
report
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Engagement letters
Objective of audit Management responsibilities
Applicable reporting framework
Test nature inherent responsibilities
Unrestricted access to records
Confidentiality of reports
Planning
Fees
Internal audit.
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Stages of an audit
Assess risk of material misstatement
Plan the audit
Auditors report
Understand entity
Satisfactory
Tests of controlsReport significant deficiencies tothose charged with governance
to management and all weaknesses tomanagement
Respond to risk
Expect effective controls
Restricted substantivetests
Expect ineffective controls
Full substantivetests
Overall review of F/S
Report to management
Unsatisfactory
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ISA 300 Audit planning
Plan audit work..effective manner General strategy detailed approach
Planning objectives are:
Appropriate attention to important areas
Identify potential problems
Work completed expeditiously
Proper staffing and work assignment
Coordination with other parties
Facilitate review
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Risk
Total risk
Business risk
Financial risk
Operational risk
Compliance risk
Audit risk = risk of inappropriate opinion
ISA 315 auditor should obtain an understanding of the entityand its environmentsufficient to identify and assess the risk ofmaterial misstatement in the financial statements..
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Risk assessment audit risk model
AR = IR x CR x DR
Control risk
Risk of material misstatement
Audit Risk
Non-sampling RiskSampling Risk
Detection RiskInherent Risk
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Assessing risk ISA 330
To reduce audit risk to an acceptable level determineresponses at the financial statement level and theassertion level
Financial statement level: more experienced staff, more
supervision, professional scepticism
Assertion level: design and perform audit procedures
whose nature, timing and extent are responsive to theassessed risks of material misstatement.
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Risk assessment audit risk model
Inherent risk susceptibility tomisstatement that could be
materialassuming no related
internal controls
Complex transactions,inexperienced staff, cash-based
business, pressure to perform
Control risk risk that a materialmisstatement will not be
prevented, detected or
corrected
Control environment
Design of internal control
Operation of internal control
Detection risk failure of the
auditor to detect a material
misstatement
Auditors experience, new
client, time/fee pressure, poor
planning, industry knowledge
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Analytical procedures
Ratio analysis: comparison with previous years, industry
standards, budgets.
Risk assessment eg risk of misstatement
Are FS consistent with our understanding of entity?
Source of substantive testing eg do figures look
reasonable?
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Analytical procedures
Ratio analysis: comparison with previous years, industrystandards, budgets.
Reason
Artefact
Test
Implications
Other effects
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Analytical procedures - RATIO
Gross profit %
2009 21%
2008 30%
Reason
Artefact
Test
Implications
Other effects
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Analytical procedures - RATIO
Receivables collection period
2009 54 days
2008 40 days
Reason
Artefact
Test
Implications
Other effects
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Materiality
A matter is material if it omission or misstatement wouldreasonably influence the economic decisions users.
Affected by size and nature of misstatement
Based on consideration of the common financial information
needs of users as a group
"- 1% of revenue
1 2% of total assets
5 10% of profit before tax
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Performance materiality
Materiality for financial statements as a whole
Additionally, a lesser amount when designing audit
procedures to reduce the risk that misstatements in
aggregate exceed FS materality (performance materiality)
Allows percentages (benchmarking) but take into account:
Items where users focus
Nature of entity/life cycle/environment
Ownership/structure/financing
Volatility of benchmark
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Evaluation of misstatements identifies
All communicated to management
Management asked to correct them or explain why not
Assess materiality of uncorrected misstatements
Obtain written representations from management that they
believe uncorrected misstatements are not material:
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Gaining an understanding of the entity (ISA 315)
Nature of the entity Industry, regulator
Accounting policies
Objectives and strategies
Internal controls
Control environment
How entity identifies business risks
Measurement of financial performance.
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Stages of an audit
Assess risk of material misstatement
Plan the audit
Auditors report
Understand entity
Satisfactory
Tests of controlsReport significant deficiencies tothose charged with governance
to management and all weaknesses tomanagement
Respond to risk
Expect effective controls
Restricted substantivetests
Expect ineffective controls
Full substantivetests
Overall review of F/S
Report to management
Unsatisfactory
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The use of assertions (ISA 315)
Accuracy
Completeness
Cut off
Allocation
Classification and understandability
Occurrence
Valuation
Existence
Rights& obligations (ownership)
(ACCA COVER)
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The use of assertions
ISA 315, Audit evidence divides assertions into
Transactions and events
Account balances
Presentation and disclosure
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The use of assertions
If it relates to a transaction,then verify (controls andsubstantive evidence) the assertions of:
Occurrence
Completeness
Accuracy
Cutoff
Classification
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The use of assertions
If it relates to a year end balancethen verify (controls andsubstantive tests) the assertions of:
Existence
Rights and obligations
Completeness
Valuation
Allocation
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The use of assertions
If it relates to the presentation and disclosurein the FS:
Occurrence
Rights and obligations
Completeness
Classification and understandability
Accuracy
Valuation
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Sources of evidence
Procedures for obtaining audit evidence
Analytical Procedures
Enquiry and confirmation
Inspection
Observation
recalcUlation and reperformance
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How much audit evidence?
ISA500: Sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base an audit opinion.
Sufficient = quantity Appropriate = relevant and reliability
External better than entitys records
Auditor-direct obtained better than indirect evidence
Entity better if a good internal control system
Written better than oral
Originals better than photocopies
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Relying on 3rdparties
Experts (eg estate agents, actuaries, lawyers)
Internal auditors
External auditors
Should be:
Qualified
Experienced
Independent
Professional
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Relying on 3rdparties
Should agree the following in writing:
Nature, scope and objectives of work
Respective responsibilities
Nature, scope and timing of communications
That the expert observes confidentiality
Auditor must examine the experts work with respect to:
Consistency with other evidence
Assumptions made
Use and accuracy of source data.
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Audit documentation
It is essential that the entire audit process is documented to:
Document show that the audit work has been done properly
Enable senior staff to review the work of junior staff
Help the audit team in future years
Encourage a methodical, high-quality approach.
Working papers will be retained for some years (at least 7) for safety.
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Sampling
ISA 530consider objectives of audit procedure and the
attributes of the populationConsider nature and
characteristics of audit evidence, possible error conditions andthe rate of expected error.
Sampling risk
Audit risk
Non-sampling risk
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Types of sampling
Random selection
Systematic selection
Haphazard selection
Sequence/block selection
Monetary unit sampling
Stratification
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Monetary unit sampling say 4 items wanted
80 80
70 150
400 550
90 640
1,600 2,240
20 2,260
700 2,960
50 3,100
1,010 4,020
80 4,100
30 4,130
600 4,730
380 5,110
5,000/4 = 1,250
Choose first at random say, 605Then:
1,855
3,105
4,455
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Size of sample
Sampling risk: risk that conclusion based on sample is
different to conclusion if all items examined.Reduced as
sample size increased.
Non-sampling risk: risk of wrong conclusion arising from
reasons other than sampling. Reduced by proper planning
supervision and review
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Sampling risk tests of control
Risk of
Under-reliance: sample does not support auditors
assessment of control risk, actual compliance rate would
support that assessment.
Over-reliance: sample does support auditors
assessment of control risk, but actual compliance rate
would not support that assessment.
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Sampling risk substantive procedures
Risk of
Risk of incorrect rejection: sample implies balance
materially misstated, but actually not materially misstated.
Risk of incorrect acceptance: sample implies that
balance is non materially misstated, but in fact it is
materially misstated.
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Tests of control
Evaluation of systems (enquiry, analytical procedures,
observation, inspection)
Tests of controls should be carried out if suitable
controls exist.
Controls must be operating effectively
Otherwise:
Substantive procedures
Substantive procedures might be more efficient if there
are relatively few large transactions.
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Components of internal control
Control environment Control activities/procedures
Risk assessment process
Information system
Monitoring controls
What can go wrong? How can we stop it?
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Control activities
Segregation of duties
Comparison
Authorisation
Accounting reconciliations
Computer controls
Arithmetic controls
Physical Maintaining a trial balance and control accounts
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Inherent limitations of internal control
Human error Collusion
Bypass of controls
Costs > benefits
Non-routine transactions
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Recording and assessing the accounting system
Narrative notes
Flowcharts
Questionnaires
Internal control questionnaires (ICQs)
How good is the system? Yes = good; No = bad
Internal control evaluation questionnaires (ICEQs).
Can specific problems occur? Yes = bad; No = good
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Assessing internal control
Record the system
Assess the system
Test the system
Consider changing to substantive testing
Report weaknesses in a management letter (emphasisethat other problems might also exist).
Weakness Consequences Recommendedaction to
removeweakness
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Communicating weaknesses in internal control
Significant deficiencies should be communicated tothose charged with governance. Defined as:
When a control is designed, implemented, or operated is
unable to prevent or detect misstatements on a timely basis;
or
Such a control is missing
Other weaknesses to management
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Control objectives, procedures, tests
Control objective: unauthorised overtime cannot be paid
Control procedure: all time sheets are authorised by a manager
Control tests: auditor inspects time sheets, enquires of the wages
department, traces large payments of wages back to authorised
time sheets.
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Tests of control - methods
Enquiries, including management views
Inspection
Observation
Re-calculation and re-performance
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Sales system
Ordering/granting - Despatch/invoicing - Recording/creditcredit control
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Purchases system
Ordering/granting Receipt/invoicing - Recording/payment
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Wages system
Hiring and rates authorised
Correct employees paid
Paid authorised amounts for work done
Deductions properly made and recorded
Deductions paid to authorities; net paid to employees
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Capital expenditure system
Expenditure authorised
Tenders received
Goods received
Invoices authorised
Recorded as capital expenditure in main ledger and fixedasset (non-current asset) register
Physical inspection
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Cash system
All monies are received, banked, recorded and safeguardedagainst loss/ theft.
All payments are authorised and made to correct payees.
Payments are not made twice for same liability.
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Inventory system
All inventory movements authorised
Inventory properly recorded
Cut-off correct
Physical safeguards against loss, theft, damage
Proper valuation procedures
Reasonable levels of inventory
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Fraud
Fraudulent financial reporting Misappropriation of assets
Managers responsible for prevention or detection
Auditors should be aware of material misstatement due
to fraud.
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Non-current assets
Physical inspection. Additions: check to invoices.
Disposals: check to receipts.
Check major additions/disposals to board minutes.
Scrutinise repairs and maintenance account
Re-perform depreciation calculations.
Verify documents of title.
Check that no assets need to be written down faster/valuation
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Inventory counts
Plan in advance: instructions, briefing, tidy inventory.
Identify damaged and third party inventories.
Pre-number shelves, inventory locations.
Issue sequentially pre-numbered inventory sheets.
Sign off each location as counted.
Check: inventory sheet.
Account for all inventory sheets.
Check prices. Re-perform calculations, check additions.
Inventory is difficult to audit: quantity, description, condition,value, ownership
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Cut-off - purchases
Included in?
Purchases
Payables
Inventories
Included in?
Purchases
Payables
Inventories
GRN GRN
!
!!
X
X
X
Year end
Before After
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Cut-off - sales
GDN GDN
Included in?
Sales
Receivables
Inventories
!
!X
Included in?
Sales
Receivables
Inventories
X
X!
Year end
Before After
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Two types:
Positive: want a reply from everyone written to.
Negative: want a reply only if balance out of agreement. (Notrecommended by ISA 505)
Replies should go directly to auditors offices so that auditorretains control
Can stratify sample so that a large percentage covered.
Ask about old debts. Ask about Cr balances
Receivables circularisations
Write to selected debtors and ask for confirmation ofamounts owing.
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Receivables
Reconcile ledger to control account
Aged listings
Correspondence
Board minutes
Collection period
Receipts after year end
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Payables
Reconcile ledger to control account Correspondence
Board minutes
Payables period
Statement reconciliation
Payments after year end
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Prepayments/accruals
Compare to last year
Payments after year end
Invoices paid last few months
Letter of representation
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Cash
Bank certificate
Bank reconciliation
Cash count if material
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Computer systems
General controls development, prevention of unauthorisedchanges etc., backup. Can be classified as development and
administrative controls.
Application controls initiation, recording, processing and
recording transactions.
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Computer systems
Input controls
Processing controls
Controls over standing data
Controls over output
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Real-time systems
Access controls Controls over passwords
Programming controls
Firewalls
Transaction logs
File controls
Balancing
Pre-processing authorisation
System development/maintenance controls
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Computer assisted audit techniques (CAAT)
Audit programmes: interrogate accounting data.Select samples to investigate
Re-perform calculations
Look for unusual items
Test data: operated on by clients programs.
Are programs operating correctly?
Are controls operating?
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Audit report
Definition
A clear expression of opinion on the financial
statements as a whole.
Based on review and assessment of conclusions drawnfrom evidence obtained in the course of the audit.
The financial statements should have been prepared in
accordance with the International Financial Reporting
Standards (IFRSs) or International Accounting Standards
(IASs) where there is not yet an IFRS.
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Financial statements
Statement of financial position Income statement
Statement of changes in equity
Cash flow statement
Notes
Any other material identified as being part of the financial
statements
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Basic Unqualified Report
INDEPENDENT AUDITOR'S REPORT
(To the members of ABC Company plc)
Report on the Financial Statements
We have audited the accompanying financialstatements of ABC Company plc, which comprise
the statement of financial position as at December
31, 20X8, and the income statement, statement ofchanges in equity and cash flow statement for the
year then ended, and a summary of the significant
accounting policies and other explanatory notes.
TitleAddressee
Financial
statements
auditedIntroductoryparagraph
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Concepts in reporting
Auditor's Responsibility
Our responsibility is to express an opinion on these financialstatements based on our audit. We conducted our audit inaccordance with International Standards on Auditing. ThoseStandards require that we comply with ethical requirementsand plan and perform the audit to obtain reasonableassurance whether the financial statements are free frommaterial misstatement.
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Basic Unqualified Report (contd)
OpinionIn our opinion, the financial statements give a true and fair view
of ("or present fairly, in all material respects,") the financialposition of ABC Company as of December 31, 20X8, and of its
financial performance and cash flows for the year then ended in
accordance with International Financial Reporting Standards.
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Basic Unqualified Report (contd)
We believe the audit evidence we obtained is sufficient andappropriate to provide a basis for our audit opinion.
In our opinion, the financial statements give a true and fair
view of ("or present fairly, in all material respects,") thefinancial position of ABC Company as of December 31, 20X1,
and of its financial performance and cash flows for the year
then ended in accordance with International Financial
Reporting Standards.
Report on Other Legal and Regulatory Requirements
[Form and content of this section will vary depending on the
nature of the auditor's other reporting responsibilities.]
AUDITOR
Date:
Address:
Opinion
paragraph
Auditors
signature
Equivalent terms
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True, fair and reasonable assurance
True:the information is factual and conforms with reality.
Fair:Information is free from discrimination and bias and is in
compliance with expected standards and rules. Reflect the
commercial substance of the transactions.
An audit gives reasonable assurancethat the accounts are
free from material misstatement auditors judgement is
vital.
A matter is material if it omission or misstatement would
reasonably influence the decisions of an addressee of the
audit report
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Implications of audit report
Proper records kept Proper returns from branches not visited
Accounts agree with the records and returns
All necessary explanations received
Details of directors emoluments properly disclosed
Details of directors loans and other transactions correct
Information in directors report consistent with theaccounts.
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Auditors Reports
Emphasis of matterand other matters
Matters that donotaffect the
auditors opinion
Matters that doaffect the
auditors opinion
Qualified opinion: Do contain a material misstatement; or
Unable to obtain sufficient appropriate auditevidence to conclude FS free from material
misstatement
Unmodified, or Modified
Modified
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Emphasis of matter
A paragraph in an auditors report used when the auditorspecifically wishes to draw the readers attention to somematter already properly and clearly disclosed within thefinancial statements and which is fundamental ti usersunderstanding of the FS
Such a paragraph does notconstitute a qualification of theauditors opinion.
Without qualifying our opinion above, we draw attention toNote 10 to the financial statements. Five days before the
directors formally approved the financial statements, thecompany received notification that they are to be named asdefendants in a proposed legal action . At this early stageit is not possible to estimate the ultimate outcome of thismatter, and no provision has been included within thefinancial statements.
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Other matters
A paragraph in an auditors report used to refer to a matternot presented or disclosed in the FS that is relevant tousers understanding of the audit, auditors responsibility orthe audit report.
Such a paragraph does notconstitute a qualification of theauditors opinion.
Without qualifying our opinion above, we draw attention tothe fact that we were appointed as auditors 11 months intothe financial year
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Going concern
Should assess going concern over the 12 months from thebalance sheet date
Negative operating cash flows
Inability to pay suppliers when due
Operating losses
Borrowing facilities not agreed
Loss of key staff/key customers
Technology changes
Legislative changes
Non-compliance with regulations
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Going concern
Effect on audit report if going concern in doubt:
If disclosed emphasis of matter
If not disclosed disclaimer, adverse, limitation in scope ifdirectors do not adequately make an assessment of goingconcern
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Qualification matrix
Nature of
circumstance
Material but
not pervasive
Pervasive
FS contain amaterial
misstatement
Except formight
Adverse opinion
Unable toobtain
sufficient,
appropriate
evidence
Except for Disclaimer ofopinion
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Insufficient evidence qualified opinion
Except as discussed in the following paragraph
We did not observe the counting of inventories at
31/12/200Xunable to determine inventory quantities by
other methods
In our opinion, except for the effects of such adjustments to
inventory, if any, had we been able to satisfy ourselves as to
physical inventory. The financial statements give a true andfair view
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Insufficient evidence disclaimer of opinion
Except as discussed in the following paragraph
We were not able to observe all physical inventories at
31/12/200Xunable to determine inventory quantities byother methods
Because of the significance of of the matters discussedwe
do not express an opinion on the financial statements.
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Material misstatement qualified opinion
As discussed in paragraph 13, no depreciation has beenprovidednot in accordance with International Accounting
Standards
The provision for the year should have been X.profits
would be decreased by Y.
In our opinion, except for the matter referred to above the
financial statements give a true and fair view
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Material misstatement adverse opinion
As discussed in paragraph 14, no bad provision forirrecoverable debts has been established for a major customer
owing 2M and who has gone into liquidation with little
prospect of substantial recovery of amounts owed.
In our opinion, because of the effects of the matter referred to
above the financial statements do not give a true and fair
view
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ISA 560 Events after the reporting period
Adjusting events: evidence of conditions that existed at thedate of the statement of financial position.
Non-adjusting events:conditions arose after the date of thestatement of financial position.
If accounts already issued, may have to take steps to prevent
users relying on the accounts
Events occurring between the period end and the date ofthe auditors report and also facts discovered after the
audit report has been issued
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IAS 37 Contingent liabilities and assets
Present obligation probablyrequiring outflow of resources:
provision recognised and disclosures required
Possible obligation, or present obligation that willprobably not
require outflow of resources: no provision, but disclosure
Possible obligation, or present obligation where likelihood of an
outflow is remote: no provision, no disclosure.
Contingent liability: possible liability arising from pastevents. existence confirmed by future events
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IAS 37 Contingent liabilities and assets
Inflow of economic benefits virtually certain: asset is notcontingent
Inflow of economic benefits is probablebut not virtually certain:no asset recognised but disclosures
Inflow is not probably: no asset recognised and no disclosure
Contingent asset: possible asset arising from pastevents. existence confirmed by future events
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Management representations
Should be obtained on specific matters and also on
matters material to the FS when other appropriate audit
evidence cannot be reasonably obtained.
Cannot substitute for other audit evidence except:
Where knowledge is confined to management
Reliance on judgement/opinion
Otherwise:
Corroboration
Consistent
Reasonable
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Written representations
Examples of letter of representation paragraphs: No material irregularities
Disclosed all liabilities
No subsequent events
No plan to shut down any part of operations
No inventory is valued an more than its NRV
All charges on assets have been disclosed
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You have a VeSTeD interest in good answers
Verbs
Scenario
Time
Detail
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