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ACCA Passcards
Paper P7
Advanced Audit and Assurance
(International)
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Professional Paper P7
Advanced Audit and Assurance (INT)
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Preface
Contents
Welcome to BPP Learning Medias ACCA Passcards for Paper P7 Advanced Audit and Assurance (INT).
They focus on your exam and save you time.
They incorporate diagrams to kick start your memory.
They follow the overall structure of BPP Learning Medias Study Texts, but BPP Learning Medias ACCA
Passcards are not just a condensed book. Each card has been separately designed for clear presentation.
Topics are self contained and can be grasped visually.
ACCA Passcards are still just the right size for pockets, briefcases and bags.
Run through the Passcards as often as you can during your final revision period. The day before the exam, try
to go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!
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Preface
Contents
Page
1
Professional liability
Quality control
27
Page
10
77
11
85
19
12
93
13
101
33
14
Forensic audits
107
39
15
Evidence
51
59
16
121
17
Reporting
133
69
18
Current issues
145
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International regulatory
frameworks for audit and assurance
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Audit
committees
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Internal control
effectiveness
Money
laundering
Law and
regulations
IFAC
IESBA
In UK
International
Standards on
Auditing (ISAs)
IESBA
Code of
Ethics
RSBs, eg ACCA
Audit framework
The FRC regulates corporate reporting in the UK, and
issued the UK Corporate Governance Code.
The FRC issues auditing standards, practice notes and
bulletins.
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International regulatory
frameworks for audit and assurance
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Audit
committees
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Internal control
effectiveness
Money
laundering
Law and
regulations
Audit committees
Advantages
Disadvantages
Selecting suitable independent non-executive
directors can be difficult
Formality may dissuade reporting on
judgmental issues
Cost of audit committee
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International regulatory
frameworks for audit and assurance
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Audit
committees
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Internal control
effectiveness
Money
laundering
Law and
regulations
Codes of Best Practice for corporate governance are increasingly common worldwide. We focus on some UK
guidance, the UK Corporate Governance Code.
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International regulatory
frameworks for audit and assurance
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Audit
committees
Directors
Internal controls and risk management are very important
in fulfiling directors duties to the shareholders, which are:
To safeguard assets
To prevent and detect fraud
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Internal control
effectiveness
Money
laundering
Law and
regulations
Auditors
As part of their audit:
Ascertain what the controls are
Review controls
Evaluate controls
Therefore directors:
To review controls
Report to shareholders
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International regulatory
frameworks for audit and assurance
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Audit
committees
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Internal control
effectiveness
Money
laundering
Law and
regulations
Money laundering is the process by which criminals attempt to conceal the true origin and ownership of
the proceeds of their criminal activity, allowing them to maintain control over the proceeds and, ultimately,
providing a legitimate cover for their sources of income.
Money laundering is the attempt to conceal the origin of 'dirty' money by making it look legitimate or 'clean'.
There are 3 stages:
1
Placement. This is the introduction or placement of the illegal funds into the financial system.
Layering. This is passing the money through a large number of transactions or 'layers', so that it becomes
very difficult to trace it to its original source.
Integration. This is the final integration of funds back into the legitimate economy.
Exam questions in this area may require you to identify that money laundering is taking place. This means using
professional skepticism.
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International regulatory
frameworks for audit and assurance
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Audit
committees
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Internal control
effectiveness
Money
laundering
Law and
regulations
Reporting non-compliance
Management
Non-compliance should be discussed with
those charged with governance
Shareholders
Consider the impact on audit report
modified opinion
Third parties
Is there a statutory duty?
Is it in the public interest?
Obtain legal advice
Management are responsible for ensuring that laws and regulations are kept.
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Fundamental principles
and conceptual approach
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Independence
Threats
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Safeguards
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Confidentiality
Conflicts
of interest
Conflicts in
application of principles
Integrity
To be straightforward
and honest in all
professional and
business relationships.
Objectivity
To not allow bias, conflicts of
interest or undue influence
of others to override
professional or business
judgements.
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Confidentiality
To respect the confidentiality of information acquired as a
result of professional and business relationships and,
therefore, not disclose any such information to third
parties without proper and specific authority, unless
there is a legal or professional right or duty to disclose,
nor use the information for the personal advantage of the
professional accountant or third parties.
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Professional behaviour
To comply with relevant laws and regulations and to
avoid any action that discredits the profession.
Although not a fundamental principle, auditors must plan and perform the audit with professional skepticism. ISA 200
defines this as follows.
Professional skepticism is an attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
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Fundamental principles
and conceptual approach
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Independence
Threats
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Confidentiality
Safeguards
Conflicts
of interest
Conflicts in
application of principles
Independence
Independence of mind is the state of mind that
permits the provision of an opinion without being
affected by influences that compromise professional
judgement, allowing an individual to act with integrity,
and exercise objectivity and professional scepticism.
Financial
interests
Loans and
guarantees
Close business
relationships
Litigation
Threats to independence
Fees
Gifts/
hospitality
Long
Provision of
multiple services association
Family and
personal
relationships
Employment
connections with
assurance client
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Fundamental principles
and conceptual approach
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Independence
Threats
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Safeguards
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Confidentiality
Conflicts
of interest
Conflicts in
application of principles
Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances:
Threats
Self-interest threat eg financial interests, incentive compensation arrangements, undue dependence on
fees
Self-review threat eg data being reviewed by the same person responsible for preparing it
Advocacy threat
Familiarity threat eg former partner of the firm being a director or officer of the client
Intimidation threat eg threat of dismissal or replacement, being pressured to reduce inappropriately the
extent of work performed in order to reduce fees
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Fundamental principles
and conceptual approach
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Independence
Threats
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Safeguards
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Confidentiality
Conflicts
of interest
Conflicts in
application of principles
Three categories of safeguards exist: those created by regulations, those created by the individual and those created in the
work environment.
Work environment
Regulations
Individual
Recruitment procedures
Appropriate disciplinary processes
Leadership that stresses the importance of ethical
behaviour
Policies and procedures to implement and monitor the
quality of employee performance
quality control of engagements
Using different partners and teams for the provision of
non-audit services to assurance clients
Discussing ethical issues with those charged with
governance
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Fundamental principles
and conceptual approach
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Independence
Threats
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Safeguards
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Confidentiality
Conflicts
of interest
Conflicts in
application of principles
Accountants owe their clients a professional duty of confidence, except in the following situations:
Obligatory disclosure
If a member knows or suspects his client to have committed a
terrorist offence, an offence of treason or a money laundering
offence he is obliged to disclose all the information at his
disposal to a competent authority. In the UK, he is required to
report a suspicion of money laundering. Local legislation may
also require auditors to disclose other infringements.
Voluntary disclosure
In certain cases voluntary disclosure may be made by the
member where:
Disclosure is reasonably required to protect the members
interests
Disclosure is required by process of law
There is a public duty to disclose
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Areas of controversy
Conflicts of interest
Insider dealing
Safeguards to consider
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Fundamental principles
and conceptual approach
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Independence
Threats
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Safeguards
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Confidentiality
Conflicts
of interest
Conflicts in
application of principles
Auditors should identify potential conflicts of interest as they could result in the ethical codes being breached.
Safeguards include:
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Fundamental principles
and conceptual approach
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Independence
Threats
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Safeguards
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Confidentiality
Conflicts
of interest
Conflicts in
application of principles
The general principles of the Code may conflict in some circumstances. This is because the Code is principlesbased (not rules-based). Rather than simply following a rule, auditors must ensure they are independent by
judging how best to apply the fundamental principles. This sometimes involves balancing the principles
against each other. For example:
Auditor encounters a fraud
Matters to consider where there is a
conflict:
Relevant facts
Ethical issues involved
Fundamental principles related to
the matter in question
Established internal procedures
Alternative courses of action
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Notes
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3: Professional liability
Topic List
Legal liability and negligence
Restricting liability
Fraud and error
The expectations gap
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Legal liability
and negligence
AUDITOR LIABILITY
In contract
and tort
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Restricting
liability
The expectations
gap
In criminal law:
Insider dealing
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Cheaper
Quicker
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Legal liability
and negligence
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Restricting
liability
The expectations
gap
Incorporation
Auditors can incorporate in UK, and can obtained stock exchange listings.
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Legal liability
and negligence
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Restricting
liability
The expectations
gap
Exam focus
Look for factors in questions which might indicate a
risk of fraud. These could include:
3: Professional liability
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Restricting
liability
The expectations
gap
REPORTING FRAUD
Reporting to
those charged
with governance
If the auditors suspect or detect any fraud (even if immaterial), as soon as they can they
should tell:
Reporting to
members
In terms of the audit opinion given on the financial statements, if the auditor feels that
the financial statements are materially misstated as a result of fraud, he should modify
his report accordingly.
If the auditor feels he has to withdraw from the engagement as a result of his discovery,
he should consider whether there is a professional or legal requirement to report to the
person who appointed him.
Reporting to
third parties
When the auditors discover or suspect a fraud they should consider whether there is a
duty to disclose.
The auditors would in practice seek legal advice to ensure that they were not breaching
their ethical duties regarding confidentiality.
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Legal liability
and negligence
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Restricting
liability
The expectations
gap
Expectations gap
Any gap between the expectations of users of audited financial statements, and those auditors.
Fraud is a common area where expectations diverge: it is sometimes incorrectly thought that the purpose of the
audit is to detect fraud.
Logically, there are 2 ways of narrowing the gap:
Educating users
Eg improve audit reports
explanation of audit
process
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Extending auditors
responsibilities
Eg Requiring auditors to report
on the adequacy on fraud
prevention controls
3: Professional liability
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Notes
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4: Quality control
Topic List
Quality control: firm level
Quality control: individual audit
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Quality control:
firm level
Quality control:
individual audit
Safeguards
Bad publicity
to competitors
RISK OF BUSINESS
FAILURE FOR
AUDIT FIRM
Observing
acceptance
procedures and
not accepting
difficult clients
Instituting client
care procedures
Key man
insurance
Setting up a
system of quality
control
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ISQC 1.11
Quality control systems, policies and procedures are the responsibility of the audit firm. Under ISQC 1, the firm has
an obligation to establish and maintain a system of quality control to provide it with reasonable assurance that:
(a) The firm and its personnel comply with professional standards and applicable legal and regulatory requirements;
and
(b) The reports issued by the firm or engagements partners are appropriate in the circumstances
Leadership responsibilities
Sufficient and appropriate experience
Ability to carry out the job
Authority to carry out the job
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Human resources
Recruitment
Capabilities
Career development
Compensation
Performance evaluation
Competence
Promotion
Estimation of personnel needs
4: Quality control
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Quality control:
firm level
Direction
Supervision
Review
Consultation
Resolution of disputes
Quality control:
individual audit
Monitoring
QC procedures must be:
Relevant
Adequate
Operating effectively
Complied with
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Quality control:
firm level
Quality control:
individual audit
Engagement performance
Direction. Informing staff about:
The work to do Potential problems
Nature of client Responsibilities
Supervision. Overall by engagement partner but
more practical supervision given within the audit
team
Review. Includes consideration of whether:
Work complies with required standards
Significant matters/conclusions documented
Evidence is sufficient and appropriate
Consultation. Contentious matters must be
discussed and properly reviewed
Quality Control review. Evaluation of:
Significant judgements
Conclusions
4: Quality control
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Notes
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Topic List
Change in auditor
Ethical issues
Practice management issues
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Change in
auditor
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Advertising, fees
and tendering
Acceptance
Percieved not to
be value for money
Perceived to be
too high
Interested in whether
price is negotiable
Audit fee
Not competetive
Size
Clients business
expands beyond
auditors capacity
CHANGE IN AUDITOR
Agreeing
terms
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Change in
auditor
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Advertising, fees
and tendering
Acceptance
Agreeing
terms
Tendering
Fees
No prescribed basis
%/contingency only if unrelated to audit
Quoting too low a fee may introduce threat to
competence and due care
Fair and reasonable re:
Seniority of staff
Time
Risk/responsibility
Fees
Staff
Location
Background information
Prepare proposal
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Change in
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Advertising, fees
and tendering
Acceptance
Agreeing
terms
ISQC 1 requires that a firm carry out the following steps when deciding whether to accept an audit:
Step 1 Obtain relevant information (eg from previous auditors, from other firm personnel)
Step 2 Identify relevant issues (eg clients integrity, firms competence to carry out engagement)
Step 3 If resolvable issues exist, resolve them and document that resolution
Money laundering
Firms must carry out Know Your Client (KYC) procedures in order to comply with Anti-Money Laundering
regulations. Examples include obtaining information such as the source of the client's funds, its business model,
and expected patterns of business.
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Change in
auditor
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Advertising, fees
and tendering
Acceptance
Agreeing
terms
It is vital to agree terms with a client so that there is no misunderstanding as to what the service will be, to prevent problems later on.
This is usually achieved through the engagement letter.
Books/documents
Working papers are owned by the
auditor. The client has no right of access
to them.
In a new audit situation, the old auditors
may grant the new auditors access to
their papers, however they are not yet
required to do so by law or professional
regulations. However, UK law is
changing to give new auditors access by
right.
ISA 210 requires that auditors do not accept the engagement where written representations are not provided by management
on their responsibilities.
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Notes
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Topic List
Methodologies
Materiality
Risk
Materiality
Risk
Analytical procedures
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Materiality
Methodologies
ISA 315.15
Risk
Analytical
procedures
Risks of material
misstatement
Going concern
Receivables recoverability
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Advantages
Added value to client as business focused
Audit efficiency/cost is reduced
Focuses on corporate governance
Lower engagement risk as the auditor
understands the clients business
6: Planning and risk assessment
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Methodologies
Systems audit
Auditors always ascertain and evaluate the systems of
an audit entity. If auditors conclude systems are:
Effective, they will undertake tests of controls and
aim to reduce substantive testing
Ineffective, they will not test controls and will
undertake detailed substantive testing instead
Exam focus
If auditors have judged that systems at a client are
ineffective, they may choose the transactions approach
to the audit so that the transactions which have gone
through the poor systems can be substantiated.
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Materiality
Risk
Analytical
procedures
REMEMBER
Substantive testing can
never be eliminated entirely
from an audit.
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Directional testing is an approach to testing used within a substantive approach. It is a methodology which
gives assurance using the double entry accounting system.
Primary test also gives comfort on
Type of account
Assets
Liabilities
Income
Expenses
Overstatement (O)
Understatement (U)
Understatement (U)
Overstatement (O)
Assets
Liabilities
Income
Expenses
U
U
U
U
O
O
O
O
O
O
O
O
U
U
U
U
Summary
The auditor will choose the audit approach which best fits the situation at the client, but may use a combination
of the approaches discussed here. Therefore, directional testing can be used in a cycles or balance sheet
approach, an analytical approach can be used with a business risk approach, etc.
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Methodologies
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Materiality
Risk
Analytical
procedures
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Relevant factors
General matters: The construction industry is subject to volatility and is therefore likely to be particularly hard
hit if economic conditions are poor. Given shareholders expectations re. dividends, this could lead to profit
manipulation by creative accounting to give the best-case picture in the accounts. The auditors may want to
render materiality with regard to profit/loss quite low, particularly if the result is marginal. The issue of going
concern should also be considered if revenue is low, profits have been affected and if this has affected or will
adversely affect the share price.
Inventory: The fact that revenue on already built homes is low may mean that the company has high levels of
inventory, which should be investigated for obsolescence. The general increase due to poor economic
conditions might hide specific and different selling problems with individual sites. Inventory affects profit.
Land: How should the transaction be accounted for? Timing of purchase: commitment or asset? Do the rights
themselves have value? How have these transactions been accounted for before? Has the company entered
into such transactions before or is it designed to affect the accounts?
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Methodologies
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Materiality
Risk
Analytical
procedures
Performance materiality is the amount or amounts set by the auditor at less than the materiality for the
financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole or in a
particular class of transaction, account balance or disclosure.
Materiality is an expression of the relative significance or importance of a particular matter in the context of
the financial statements as a whole.
Criteria of Materiality
An item might be material due to its:
(a) Nature eg transactions related to directors, such as remuneration or contracts with the company.
(b) Value eg land with a value which comprised three-quarters of the asset value of the company.
(c) Impact eg a proposed journal which is not material in itself could convert a profit into a loss.
Exam focus
In P7, calculating materiality will never get many marks by itself it is likely to be startingpoint for discussing
other issues from the question scenario.
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Rules on materiality
Materiality is judgemental, but a number of generally accepted rules exist.
An example is the range of percentage values commonly applied. When
assessing materiality in exam questions calculate the relevant matter as a
percentage of the relevant indicator (profit, revenue, total assets) and
assess whether it falls within these ranges.
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Methodologies
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Risk
Materiality
Analytical
procedures
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Risk arising from the
Risk that arises from
financial activities or
non-compliance with
financial consequences
laws and regulations.
of an operation.
Risk arising with
regard to operations.
Financial risk
Compliance risk
Operational risk
Examples of risks
Cash flow issues
Overtrading
Capital issues
Going concern
Breakdown of accounting systems
Credit risk
Loss of key supplier/customer
Loss of key employees
Physical disasters
Poor brand management
Breach of law/regulation: fines
Tax problems: fines
Environmental law: fines/compensation
It is vital that you do not confuse audit risk with business risk
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Materiality
Methodologies
Analytical procedures
Analytical procedures consist of comparing items
expected to have a relationship. Analytical
procedures can be used in three ways during an
audit:
Risk assessment procedures
Substantive procedures
Overall review
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Risk
Analytical
procedures
Analytical approach
Is taken in situations where:
Auditor expects little change in figures
Auditor has high degree of knowledge of
expected changes
Reasonableness
checks
Comparison
Trend
analysis
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7: Evidence
Topic List
Revision: audit evidence
Related parties
Written representations
Using the work of others
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Revision: audit
evidence
Accuracy
Completeness
Cut-off
Allocation
Classification (understandability)
Occurrence
Valuation
Existence
Rights and obligations
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Related parties
Written
representations
Audit procedures
Inspection of assets/documentation
Observation
Enquiry
Confirmation
Recalculation
Reperformance
Analytical procedures
Audit automation tools
Appropriate
Source?
Oral?
Written?
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Related parties
Written
representations
Related party
A related party is either:
(a) A related party as defined in the applicable financial reporting framework; or
(b) Where the applicable financial reporting framework establishes minimal or no related party requirements:
(i)
A person or other entity that has control or signiicant influence, directly or indirectly through one or
more intermediaries, over the reporting entity;
(ii) Another entity over which the reporting entity has control or significant influence, directly or indirectly
through one or more internediaries; or
(iii) Another entity that is under common control with the reporting entity through having:
Common controlling ownership
Owners who are close family members; or
Common key management
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7: Evidence
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Related parties
Written
representations
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Issues
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Evidence
There are two key problems with regard to evidence:
May be limited
May be created by the related party
Sources of evidence
7: Evidence
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Related parties
Written
representations
ISA 580.9
The auditor shall request written representations from management with appropriate responsibilities for the
financial statements and knowledge of the matters concerned.
General representations
Management fulfilled responsibility for preparation
and presentation of FS
FS prepared and presented in accordance with
applicable FR framework
All relevant information provided
All transactions recorded and reflected
Description of managements responsibilities
Specific representations
Due to provisions of other ISAs
To support audit evidence
Where sufficient appropriate audit evidence
cannot be obtained independently
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Related parties
Written
representations
ISA 620 Using the work of an auditors expert, distinguishes between two types of expert that may be used by the auditor:
Auditors expert An individual or organisation with expertise is an area outside auditing or accounting. An auditors
expert may be an internal expert (ie belong to the auditors firm or network firm) or an external expert.
Managements expert An individual or organisation with expertise in an area outside auditing or accounting who
will assist the entity in the preparation of the financial statements.ISA 620 identifies four issues
for an auditor to assess.
1 Whether it is
necessary to use an
auditors expert
2 Competence and
objectivity of the
auditors expert
3 The auditors
experts scope of
work
4 The actual work of
the auditors expert
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Topic List
Revision: Review procedures
Revision: Opening balances and
comparatives
Revision: Other information
Revision: Subsequent events
Revision: Going concern
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Overall review
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Revision:
Other information
Revision:
Subsequent events
Revision:
Going concern
Analytical procedures
Exam focus
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Revision:
Other information
Revision:
Subsequent events
Revision:
Going concern
Opening balances are those account balances that exist at the beginning of the period, reflecting the effect
of transactions of the preceding period and its accounting policies.
Auditors shall obtain sufficient appropriate audit
evidence that:
Opening balances correctly b/f
They do not contain misstatements material to
current year figures
Accounting policies are consistently applied or
changes adequately disclosed
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Incoming auditors
Testing opening balances can be difficult for new
auditors because they did not audit the prior year
figures. They should:
Ascertain whether prior report was unqualified
Undertake discussions with management about
opening figures
Undertake substantive procedures on opening
figures if concerns arise
8: Evaluation and review (i)
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Revision:
Other information
Revision:
Subsequent events
Revision:
Going concern
Corresponding figures are the corresponding amounts and other disclosures from the preceding period
which are part of the current years financial statements. They are distinguished from comparative
financial statements which the auditors report should refer to separately if they exist.
Continuing auditors
Check balances b/f correctly
If unresolved prior year problem is material to
CY, qualify report due to opening balances and
comparatives
If material to CY but opening balances are not
affected, report should refer to comparatives
Modification
Emphasis of matter paragraph
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Other information
Financial and non-financial information other than
the financial statements and the auditors report,
which is included, either by law, regulation or
custom, in a document containing audited
financial statements and the auditors report
thereon.
Example
Financial summaries/highlights
Employment data
Report by management/directors on operations
Planned capital expenditures
Financial ratios
Names of officers/directors
Selected quarterly data
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Revision:
Other information
Revision:
Subsequent events
Revision:
Going concern
A misstatement of fact
An inconsistency with the audited financial statements
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Revision:
Other information
Revision:
Subsequent events
Revision:
Going concern
Subsequent events
Audit procedures
Enquiries of management
(Status of judgemental issues, new
commitments, unusual accounting
adjustments etc)
Reading minutes of meetings
Reviewing most recent financial information
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After FS issued
Auditors have no obligation to perform procedures or
make enquiries regarding the financial statements
after they have been issued.
When management revise the financial statements the
auditor shall:
(a) Carry out necessary audit procedures
(b) Review steps taken by management to ensure
anyone in receipt of the previously issued financial
statements is informed
(c) Extend the audit procedures to the date of the
new auditors report
(d) Issue a new report on the revised financial
statements
The amended auditors report should contain an
emphasis of matter or other matters paragraph.
8: Evaluation and review (i)
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Revision:
Other information
Revision:
Subsequent events
Revision:
Going concern
Auditor responsibilities
Risk assessment
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Examples
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Evaluation
Financial
Net liabilities
Fixed term borrowing approaching maturity
without realistic prospect of renewal/repayment
Negative operating cash flows
Adverse financial ratios
Substantial operating losses
Inability to finance new products
Operating
Loss of key management/markets/franchise
Labour difficulties/supply shortage
Emergence of highly successful competitor
Other
Major legal proceedings/non-compliance
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Revision:
Other information
Revision:
Subsequent events
Revision:
Going concern
Reporting
Adequate disclosure
Adequate disclosure
Qualified/adverse opinion:
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Fair value
Materiality
Risk
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Inventory and
construction contracts
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Accounting estimate
An approximation of a monetary amount in the
absence of a precise means of measurement. The
term is used for an amount measured at fair value
where there is estimation uncertainty as well as for
other amounts that require estimation.
The auditor is required to assess the entitys process for
determining accounting estimates including fair value
measurements and disclosures and the related control
activities and to assess the arising risks of material
misstatement.
Once the auditors have assessed the risks associated
with determining fair value, they should design further
procedures to address those risks.
Financial
instruments
Foreign
exchange rates
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Fair value
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Inventory and
construction contracts
Financial
instruments
Foreign
exchange rates
Standard costs
Procedures
Is calculation correct?
Check maths
Consider if reasonable
Verify to invoices, personnel records, nominal
expense accounts
Use analytical procedures?
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Fair value
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Inventory and
construction contracts
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Financial
instruments
Foreign
exchange rates
Audit procedures
Depreciation
Disposals
Revaluations
Impairments
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Goodwill (IFRS 3)
Positively purchased goodwill should be
capitalised as an asset. Internally
generated goodwill (including brands)
should not be capitalised.
Audit tests
Prepare analysis of movements
Obtain any third party
confirmations
Review specialist valuations
Inspect purchase documentation
Confirm authorisation
Review sales returns for income
Identify any indicators of
impairment
Review calculation of recoverable
amount
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Fair value
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Inventory and
construction contracts
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Financial
instruments
Foreign
exchange rates
Financial instruments
Classification
Valuation
Amortised cost
Fair value
Existence
Examine certificates of title
Third party confirmations
Transfer documents
Purchase invoices/contracts
Sales invoices
Other aspects
Investment income
Completeness/occurrence/measurement
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construction contracts
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Financial
instruments
Foreign
exchange rates
Individual company
Risk is that IAS 21 The effects of changes in foreign exchange rates is not complied with.
Audit procedures:
Check monetary items in SOFP are translated at Closing Rate
Check non-monetary items translated at Historical Rate
Check SoPLOCI items translation at Historical Rate
Groups
If a parent has a different functional currency from its subsidiaries, then:
Check that assets & liabilities translated at Closing Rate
Check that income statement items translated at Historical Rate (or average rate)
Check that exchange differences are reported in equity.
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Notes
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Income
Materiality
Risk
Liabilities
Expenses
Disclosure and other issues
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Liabilities
Expenses
Disclosure and
other issues
Revenue recognition
Accounting treatment found in IAS 18 Revenue. Revenue is often audited by analytical procedures as it has
predictable relationships and there is generally lots of available information about it.
ISA 240 states that auditors must presume there is a risk of fraud in revenue recognition.
Revenue
Check classification
Agree to documentation (eg letter/application)
Agree receipt to bank statements
Capital
Accounting basis comparable to PY?
Discuss with directors
Agree any transfers between SoFP and
SoPLOCI (This should be like testing
depreciation.)
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Liabilities
Expenses
Disclosure and
other issues
Deferred tax is the tax attributable to temporary differences, which are differences between the carrying amount of
an asset or liability in the statement of financial position and its tax base.
Deferred tax
Obtain a copy of the deferred tax workings and the tax computation
Check the arithmetical accuracy of the deferred tax working
Agree the figures used to calculate timing differences to those on the tax computation and the financial
statements
Consider the assumptions made in the light of your knowledge of the business and any other evidence
gathered during the course of the audit to ensure reasonableness
Agree the opening position on the deferred tax account to the prior year financial statements
Review the basis of the provision to ensure:
It is in line with accounting practice under IAS 12 Income taxes
It is suitably comparable to practice in previous years
Any changes in accounting policy have been disclosed
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10: Evaluation and review (iii): matters relating to specific accounting issues
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Income
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Liabilities
Expenses
Disclosure and
other issues
Audit procedures
The auditors have to assess the
treatment of provisions against the
adjacent criteria. This will involve
considering such evidence as:
Reviewing correspondence
Discussion with the directors
Referring to comparable past
events
Seeking verification from
solicitors
Recalculating provisions for
accuracy
Considering the nature of the
business
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Liabilities
Expenses
Disclosure and
other issues
Equity-settled
Dr asset/expense
Cr equity
Cash-settled
Choice of
equity-settled
or
cash-settled
Dr asset/expense
Cr liability
10: Evaluation and review (iii): matters relating to specific accounting issues
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Liabilities
Expenses
Audit procedures
Types of plans
Defined contribution
accruals basis
no actuarial assumptions
Disclosure and
other issues
Defined benefit
more complex
actuarial assumptions to
estimate future liabilities
Assess reasonableness of
assumptions
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Liabilities
Segmental information
Expenses
Disclosure and
other issues
Discontinued operations
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10: Evaluation and review (iii): matters relating to specific accounting issues
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Liabilities
Expenses
Borrowing costs
Accounting treatment found in IAS 23 Borrowing
costs.
Disclosure and
other issues
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Topic List
Group auditors and component
auditors
Consolidation process
Auditing foreign subsidiaries
Transnational audit
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Component
An entity whose financial
information is included in the group
financial statements.
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Consolidation
process
NO reference to component
auditors in the report.
Auditing foreign
subsidiaries
Transnational
audit
Component auditors
An auditor who, at the request of
the group engagement team,
performs work on financial
information of a component for the
group audit
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Consolidation
process
Auditing foreign
subsidiaries
Transnational
audit
The group engagement team shall determine the type of work to be performed on the financial information of components in
response to assessed risks
Significant components
(Full) Audit of
financial
information
One of:
(full) audit of financial information using
component materiality
audit of one or more account balances
or classes of transaction relating to the
likely risks
specified audit procedures relating to
the likely risks
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Consolidation
process
Auditing foreign
subsidiaries
Transnational
audit
1 Check the transposition from the audited accounts of each subsidiary/associate to the consolidation schedules.
2 Check that adjustments made on consolidation are appropriate and comparable with the previous year.
This will involve:
Recording the dates and costs of acquisitions of subsidiaries and the assets acquired
Calculating goodwill and pre-acquisition reserves arising on consolidation
Preparing an overall reconciliation of movements on reserves and non-controlling interests
The appropriateness of the date used as the date for disposal. This can be agreed to sales documentation.
Whether the results of the investment have been included up to the date of disposal, and whether figures used are
reasonable
11: Group audits and transnational audits
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Consolidation
process
Auditing foreign
subsidiaries
Transnational
audit
Consider whether previous treatment of existing subsidiaries or associates is still correct (consider level of influence,
degree of support)
Review the consolidated accounts for compliance with legislation, accounting standards and other relevant regulations.
Care will need to be taken where:
Review the consolidated accounts to confirm that they give a true and fair view in the circumstances.
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Consolidation
process
Auditing foreign
subsidiaries
Transnational
audit
A significant component of the group may be a foreign subsidiary. A full audit may encounter the following issues.
Issues
Language difficulties
Permit to work
Cultural differences
The auditors must ensure that they have sufficient support in their base office to help them.
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Consolidation
process
Auditing foreign
subsidiaries
Transnational
audit
A transnational audit is an audit of financial statements which are or may be relied upon outside the
audited entitys home jurisdiction for purposes of significant lending, investment or regulatory decisions; this
will include audits of all financial statements of companies with listed equity or debt and other public interest
entities which attract particular public attention because of their size, products or services provided.
Transnational audit examples
Private company in UK raising debt finance in
Canada
International charity taking donations through
various national branches and making grants
around the world
Private internet betting company registered in BVL,
which operates from Costa Rica and takes wagers
by credit card on a worldwide basis via internet
Project financial statements for the construction of
an electrical generation facility in Nigeria using
funds loaned by the World Bank
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Audit-related
services
Assurance
engagements
Risk
assessments
Audit firms may be engaged to perform a variety of engagement types other than the statutory audit.
Engagements
Assurance
engagements
Historical financial
information
Reasonable
assurance
eg Statutory audit
(ISAs)
Limited
assurance
eg Voluntary
audit (ISREs)
Non-assurance
engagements
Other
information, eg
reviews of:
Prospective
Financial
Information (PFI)
KPIs
Internal controls
E-commerce
VFM audits
Review
engagements:
Compilation
assignments
Agreed-upon
procedures
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Audit-related
services
Assurance
engagements
Risk
assessments
Audit-related services
Agree terms with relevant parties
Report:
No assurance expressed
Report factual findings
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Audit-related
services
Accepting appointment
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Ethics/quality control
Competent?
True assurance engagement?
Agree terms
Planning
Risk
assessments
Elements
Assurance
engagements
Strategy/plan
Professional scepticism
Understanding of the entity/environment
Criteria suitable?
Materiality/risk
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Audit-related
services
Assurance given
A reasonable level of assurance is given as the
accountant is evaluating specific criteria. Absolute
assurance cannot be given.
Agreed-upon procedures
Compilations
Tax return preparation
Management/tax consulting
Other advisory services
Assurance
engagements
Risk
assessments
Evidence
Reporting
Express conclusion giving
reasonable/limited level of assurance
Describe criteria
State if restricted purpose
Clearly state qualifications or limitations
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Audit-related
services
Assurance
engagements
Responsibility
Responses to risk
Assessing risks
Contractual risks (important customers not agreeing
to given contractual terms)
Operational risks (scarce raw materials, risks arising
through storage and use)
Physical risks (for example, health and safety
compliance)
Product distribution (logistics, networks, outlets)
Regulation (different jurisdictions, internet trading)
Reputation (brands and staff profile)
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Risk
assessments
Avoid risk
Mitigate risk
Accept risk
The key way to mitigate risk is to create controls to
prevent risk arising, ie the system of internal
controls in the business.
Assurance services
Relating to:
Directors risk assessment
Design of control system
Operation of control system
12: Audit-related services and other assurance services
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Notes
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Topic List
Accepting an engagement
Procedures
Expressing an opinion
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Reporting on prospective
financial information
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Accepting an
engagement
Procedures
Expressing
an opinion
Some definitions
Forecast: PFI prepared on the basis of
assumptions about expected future events and
management actions (best estimate).
Projection: PFI prepared on the basis of:
Hypothetical assumptions
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Reporting on prospective
financial information
ISAE 3400
The auditor should not accept/withdraw from
an engagement where the assumptions are
clearly unrealistic or when the auditor believes
the PFI will be inappropriate for its intended
use.
The auditor and the client should agree on the
terms of the engagement.
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Accepting an
engagement
Procedures
Expressing
an opinion
Factors to consider
Intended use of the information
Intended distribution of the information
(limited vs public)
Nature of the assumptions made in the PFI
(hypothetical/known/best estimate)
Elements to be included in the information
Period covered by the PFI (6 months ... 10
years?)
Knowledge of the business (sufficient?)
Assurance on figures or conclusions drawn by
management?
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Reporting on prospective
financial information
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Accepting an
engagement
Procedures
Expressing
an opinion
There are four general matters which the auditor should review.
Business: nature/background
Is the forecast consistent with the business?
Is forecasting ordinary or extra-ordinary?
Current activities/products/customers
Procedure followed
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Procedures
Profit forecasts
Verify income figures to evidence (such as income from current projects/market prices)
Verify expenditure figures to evidence (quotes/estimates/current bills/market prices)
Capital expenditure
Check cap ex projections for reasonableness:
Costs verified to quotations/estimates where possible
Other reasonableness tests such as prevailing market price (eg for property)
Cash forecasts
Ensure that timings involved are reasonable
Check that cash forecast is consistent with other forecasts (profit/cap ex)
Where no other forecasts exist, check income/expenditure as outlined above
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Reporting on prospective
financial information
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Accepting an
engagement
Procedures
Expressing
an opinion
ISAE 3400
ISAE 3400 recommends negative assurance that:
Assumptions are reasonable basis for PFI
PFI is properly prepared (assumptions/framework)
The report should also include caveats as to the
achievability of the forecasts.
An important point to remember is that responsibility for the PFI rests with management.
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Topic List
Definitions
Applications
Ethical principles
Procedures
Reports
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Applications
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Ethical
principles
Procedures
Reports
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Applications
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Ethical
principles
Main applications
Procedures
Other disputes
Fraud investigations
Shareholder
Negligence cases
Partnership disputes
Insurance claims
Contract disputes
Terrorist financing
Expert witness
Matrimonial disputes
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Reports
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Definitions
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Applications
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Ethical
principles
Procedures
Reports
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Applications
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Ethical
principles
Procedures
Reports
The procedures used in forensic work are likely to be very similar to those used in other types of audit and
assurance assignment.
Key considerations
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Applications
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Ethical
principles
Procedures
Reports
Reports
Expert witness reports
Key elements:
CV of expert
Instructions and issues
Documentation
Chronology factual evidence
Opinion with explicit reasons
Other reports
Form and content of report will depend on the
terms of the assignment.
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Stakeholders and
implications for management
Directors
The company
Society
The environment
Secondary impact products.
Regulated by law/consumer
opinion.
Turnbull report stated that
directors were responsible for
risk assessment and mitigation
as part of corporate governance.
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Shareholders
10:10 PM
Society is made up of
consumers.
Many make green aware
purchases.
May speak on behalf of the
environment.
Risks
Bad publicity
Illegal products
Health and safety
Employee protection
Implications for
the statutory audit
Implications for
assurance services
Lenders
Employees
Rely on the company for
livelihood and safety at work.
Also form part of society, ie
are potential consumers.
Controls
IS0 14001
Employment policies
H and S policy
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Case Study
Social and environmental issues are important to Shell for
various reasons: use of earths natural resources,
environmental legislation, employees working in risky
environments, varied approach to human rights worldwide.
In response to these issues, the company has set targets of
performance relating to social and environmental issues.
The company also has a set of general sustainability principles:
Sustainability principles
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Implications for
the statutory audit
Implications for
assurance services
Social
Zero work-related employee deaths
Not exploit child labour
Pursue equal opportunities
Environmental
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Implications for
the statutory audit
Implications for
assurance services
Social audits
Environmental audits
Discussion
Observation
Walkthrough tests
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Planning
Knowledge of the business (ISA 315)
Inherent risk assessment (ISA 315 and 330)
Review
Particularly the impact on going concern
(ISA 570)
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Implications for
the statutory audit
Implications for
assurance services
Substantive procedures
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Implications for
the statutory audit
Implications for
assurance services
Remember
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Public sector
performance information
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Incentives
May give rise to perverse incentives
(behaviours meet targets but are worse for
stakeholders)
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Public sector
performance information
Planning
Identify the organisations objectives
Plan procedures to test whether objectives
achieved
Keep documentation of planning and evidence
obtained
Concluding
No specific form of words
May take form of an integrated report,
alongside the information itself
Procedures
These may include:
Analysis of quantitative data
Review of user experience surveys
Surveys of key management
Case studies
Literature reviews
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Topic List
Revision: internal audit
Other internal audit issues
Outsourcing
Outsourcing internal audit
Outsourcing finance and accounting
functions
Implications of outsourcing on audit
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Outsourcing
Outsourcing
internal audit
Corporate governance
Guidelines relating to:
Internal controls
Managing risks
Monitoring
Internal auditors have a role in assisting
directors, particularly with regard to internal
controls and monitoring.
Control risks
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Outsourcing finance
and accounting functions
Implications of
outsourcing on audit
Proficiency/training of staff
Supervision/documentation/review
Sufficient/appropriate evidence
Appropriateness of conclusions
Consistency of reports
Amendments to our programme?
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2 Control risks
1 Identify risks
A detailed review of the following systems will be
required:
Information flow
Document trail
Training/communication
Risk awareness at all levels
Risk policies
Potential risks
Include
Contractual risks
Operational risks
Physical risks
Product distribution
Regulation
Reputation
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3 Monitor risks
The entire process needs to be monitored to ensure
that the process is followed continuously. Internal
auditors are well placed to monitor. Alternatively this
could be an external assurance service.
16: Internal audit and outsourcing
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Outsourcing
internal audit
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Outsourcing finance
and accounting functions
Implications of
outsourcing on audit
Multi-site operations
Operational audits are audits of the operational
processes of the organisation and check not only
compliance with controls but also the effectiveness
of the controls.
Approaches:
Compliance approach
Cyclical
Risk-based
Process-based approach
Cyclical
Risk-based
Practical considerations
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Outsourcing
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Outsourcing finance
and accounting functions
Implications of
outsourcing on audit
Outsourcing is the process of purchasing key functions from an outside supplier contracting-out certain
functions. Insourcing, is when an organisation decides to retain a centralised department for the key function,
but brings experts in from an external market on a short-term basis to account for "peak" and "trough" periods.
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ACCOUNTING
FUNCTION
or any
elements
HUMAN
RESOURCES
FUNCTION
or any
elements
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Outsourcing
internal audit
Advantages of outsourcing
Cost. It is often cheaper to contract a service
out than it is to conduct it in-house.
Specialist service. Specialists are used to
provide the service.
Indemnity. The service organisation may
provide indemnity in the event of problems
arising.
Cash flow. It may assist with cash flow, as the
contract will represent a flat fee. The cost of
providing the service in-house might lead to
fluctuating costs.
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Outsourcing finance
and accounting functions
Implications of
outsourcing on audit
Disadvantages of outsourcing
The company loses control over function to an
extent.
The initial cost of outsourcing may be
substantial, if an aspect of the decision is to close
a current department of the business, for example,
potential redundancies.
The contract has to be managed to ensure that
the service being provided is appropriate and in
accordance with the contract. This may take a
disproportionate amount of time.
The contract might limit the liability of the
contractor, leading to problems if the contract is not
performed well. This might even result in court
action being required.
The above could cause the cost of outsourcing to
outweigh the benefit.
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Advantages to client
Disadvantages to client
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processing
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Outsourcing finance
and accounting functions
Implications of
outsourcing on audit
Disadvantages There may be logistical difficulties in outsourcing data processing, due to the
high level of paper involved (invoices, goods received notes etc). This
information will have to be given to the service organisation.
A secondary, and more important, effect is that the company might not always
have control of its key accounting documentation and records. It is a legal
requirement that the directors maintain this information. While they may
delegate the practicalities, they are still responsible for maintaining the records.
Pensions are a specialist area and there is merit in getting a specialist to
operate the companys pension provision.
Disadvantages Pensions are closely related to the payroll and the company will need to share
sensitive information with the pension provider, which may make the situation
complicated.
Pensions
Advantages
Due
diligence
Advantages
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Information Advantages
technology
A key advantage of outsourcing all, or elements of, the IT function is that this
will enable the company to keep pace with rapid technological advances.
It also allows the company to take advantage of the work of specialists in a field
that many people still find difficult but which they use regularly to carry out their
business.
Outsourcing can provide a useful safety net of a technical helpline or indemnity
in the event of computer disaster.
It is also possible that through outsourcing, the company will be able to obtain
added-value, such as new ways of doing business identified (for example,
e-commerce).
Taxes
Advantages
Disadvantages The disadvantage of outsourcing tax work is that while the work can be
outsourced, the responsibility cannot. The tax authorities will deal with the
responsible person, not the agent, so the loss of control is particularly risky in
this case.
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Outsourcing finance
and accounting functions
Implications of
outsourcing on audit
A service organisation is an organisation that provides services to another organisation. A user entity is the
entity which purchases those services and whose financial statements are being audited.
Planning
Know what is outsourced
Understand the contract
Risk of misstatement
Contract nature
Degree of authority delegated
Quality assurance
Nature of assets involved
Reputation of service provider
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Procedures
Inspecting records and documents held by the
user entity
Establishing the effectiveness of internal control
Obtaining representations to confirm balance
and transactions from the service organisation
Performing analytical review on
Using reports
If the auditor makes use of a report on the service organisation, he should consider the reputation/skill of the
service provider (eg auditor), and what the report is about. He must not refer to the report in his audit report.
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17: Reporting
Topic List
Auditors opinion
Auditors report
Reports to management
Actions when modified opinion is
expressed
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Auditors report
Reports to
management
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Question 1
Have all the procedures necessary to meet auditing standards and to obtain all the information and explanations
necessary for the audit been carried out?
Question 2
Have the financial statements been prepared in accordance with IFRS?
Question 3
Are the financial statements fairly presented?
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Reports to
management
The process of forming an audit opinion can be summarised in a step format, as follows:
1
Even if the answers to steps 3 and 5 are yes, you must still carry out step 8 and make an overall assessment of
whether the financial statements are fairly presented in order to conclude that an unmodified opinion is appropriate.
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You should be aware of the various modifications to an auditors opinion (qualified, adverse, disclaimer) from
your previous studies.
Why?
Engagement partner reviewing the file
Auditor asked for second opinion
Peer or pre-issuance review
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Reports to
management
Auditor's responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit
in accordance with International Standards on Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.
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An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments,
the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion the financial statement present fairly, all material aspects (or give a true and fair value of) the financial
position of ABC Company as at December 31, 20X1, and of it is financial performance and its cash flows for the year
then ended in accordance with International Financial Reporting Standards.
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Auditors report
Reports to
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Reports to
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Auditors report
Reports to
management
When the auditor expresses a modified opinion, simply issuing the auditors report is not the end of the story.
External consulation
Consult with:
Legal counsel
(confidentially)
ACCA
(anonymously)
Management
integrity?
Especially if scope of
audit is limited
Reconsider if
representations are
reliable
Possibly perform
'hot' review
Withdrawal from
engagement
Only if matter is very
serious
Consult with legal
counsel
If limitation on prior your
audit means disclaimer of
opinion this year, do not
accept engagement
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Topic List
Update
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Update
Auditors reports
There has been extensive debate over possible
improvements to the auditors report.
The IAASB has suggested an extensive Auditor
Commentary for public interest entities. This
would highlight the matters the auditor
considers most important to users
understanding of the financial statements.
Some respondents expressed concerns that this
would extend auditors responsibilities too far,
and that this is the proper responsibility of
management.
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