Audit & Assurance
ICAEW Fundamental Principles
Integrity
Should be straightforward and honest in all
professional and business relationships
Should not be associated with any information
where there is belief that it
-contains a materially false or misleading
statement
-contains statements or information furnished
recklessly
-omits or obscures information required to be
included, where such omission or obscurity
would be misleading
Objectivity
Should not allow bias, conflict of interest or the
undue influence of others to override
professional or business judgements
Should avoid relationships that bias or unduly
influence the professional judgement
Professional Competence and Due Care
Should have a continuing duty to
-maintain professional knowledge and skill at the
level required to ensure that clients or employers
receive competent professional service based on
current developments in practice, legislation and
techniques
-act diligently in accordance with the applicable
technical and professional standards when
providing professional services
Should apply the exercise of sound judgement in
applying professional knowledge and skill to
provide a competent professional service
Confidentiality
Should respect the confidentiality of information
acquired as a result of professional and business
relationships and refrain from
-disclosing such information without proper and
specific authority unless there is a legal or
professional right or duty to disclose (see pg 2)
-using such information for their personal
advantage or the advantage of third parties
Should extend this to a social environment,
remaining aware of the possibility of inadvertent
disclosure, including information within the firm
and prospective and past clients and employers
Professional Behaviour
Should comply with relevant laws and
regulations and avoid any action that discredits
the profession
Should consider actions which a reasonable and
informed third party, having knowledge of all
relevant information, would conclude negatively
affects the good reputation of the profession
Should conduct with courtesy and consideration,
without making exaggerated or disparaging
claims of themselves and others respectively
Ethics (Principles, Threats & Conflicts)
Threats and Safeguards
Threats
Should evaluate any threats as soon as they are
known, including both qualitative and
quantitative factors in considering the
significance of any potential threat
Self-interest
-may occur as a result of the financial or other
interests of a professional accountant or of an
immediate or close family member
Self-review
-may occur when a previous judgement needs to
be re-evaluated by the professional accountant
responsible for that judgement
Advocacy
-may occur when a professional accountant
promotes a position or opinion to the point that
subsequent objectivity may be compromised
Familiarity
-may occur when, because of a close relationship,
a professional accountant becomes too
sympathetic to the interest of others
Intimidation
-may occur when a professional accountant may
be deterred from acting objectively by threats,
actual or perceived
Safeguards
Safeguards that may be created by the
profession, legislation or regulation include
-educational, training and experience
requirements for entry into the profession
-continuing professional development
requirements
-corporate governance regulations
-professional standards
-professional or regulatory monitoring and
disciplinary procedures
-external review by a legally empowered third
party of the reports, returns, communications or
information produced by the professional
accountant
Certain safeguards may increase the likelihood of
identifying or deterring unethical behaviour
within the work environment include
-effective, well publicised complaints systems
operated by the employing organisation, the
profession or a regulator, which enable
colleagues, employers and members of the
public to draw attention to unprofessional or
unethical behaviour
-an explicitly stated duty to report breaches of
ethical requirements
A professional accountant should consider what
a reasonable and informed third party, having
knowledge of all the relevant information,
including the significant of the threat and the
safeguards applied, would conclude to be
unacceptable
Revision Notes
Conflicts of Interest
Threats
Should take reasonable steps to identify
circumstances that could pose a conflict of
interest, which may give rise to threats to
compliance with the fundamental principles
A conflict may arise between the firm and the
client or between two conflicting clients being
managed by the same firm, for example
-a client which has specific interests which
conflict with those of the firm
-financial involvements between the client and
the firm, such as loans
-both a husband and wife in divorce settlement
-a company and its directors in their personal
capacity
-a partnership and its partners in their personal
capacity
-two competing businesses
Evaluation of the threat includes consideration as
to whether the professional accountant has any
business interests or relationships with the client
or a third party that could give rise to threats
Safeguards
Safeguards should ordinarily include
-notifying all parties involved
-setting out the potential conflict of interest
-obtaining consent to act
Where a professional accountant has requested
consent which has been refused, then they must
not continue to act for one of the parties giving
rise to the conflict of interest
Consider
-the use of separate engagement letters
-procedures to keep information separate (such
as physical separate of teams and secure filing)
-clear guidelines to members of the engagement
team on security and confidentiality matters
-the use of actual and perceived confidentiality
agreements signed by employees and partners of
the firm
-regular review of the application of safeguards
by a senior individual not involved with the
relevant client engagements
Regulatory Requirements
Professional Indemnity Insurance
Every qualified member of the ICAEW in public
practice is required to have professional
indemnity insurance, remaining in place for two
years after ceasing to be in public practice
If the gross fee income of a firm is below
£600,000, cover must be for at least 2.5 times
the gross fee income (minimum £100,000),
otherwise the minimum is £1,500,000
Data Protection
Anyone who handles personal information has a
number of legal obligations
Audit & Assurance
Ethical Conflict Resolution
Conflict Resolution Process
When initiating either a formal or informal
conflict resolution process, a professional
accountant should consider the following six
factors
-relevant facts
-relevant parties
-ethical issues involved
-fundamental principles related to the matter in
question
-established internal procedures
-alternative courses of action
Having considered these issues, the appropriate
course of action can be determined which
resolves the conflict with all or some of the five
fundamental principles
If the matter remains unresolved, a professional
accountant should consult with other
appropriate persons within the firm or with
those charged with governance for help in
obtaining a resolution, documenting the issue
and details of any discussions held or decisions
taken concerning the issue
If a significant conflict cannot be resolved,
professional advice may be sought without
breaching confidentiality, such as the ICAEW
ethics helpline service
If after all possibilities have been exhausted, the
conflict remains unresolved, a professional
accountant should refuse to remain associated
with the matter creating the conflict
Disclosure of Information
Disclosure
Generally, a professional accountant may
disclose confidential information if such
disclosure is permitted by law and is authorised
by the client or the employer
In addition, information may, or must be
disclosed in the following situations
Right to Disclose Duty to Disclose
Comply with quality Money laundering
review or technical
standards and ethical
standards
Respond to inquiry Order under HMRC
from member body statutory powers
To defend the firm Order by a court
Factors to Consider
Should consider the following
-whether the interests of all parties, including
third parties, could be harmed
-whether all the relevant information is known
and substantiated
-the type of communication that is expected and
to whom it is addressed
-whether the information is privileged
-the legal obligations and possible implications
-that all facts have been confirmed and recorded
Ethics (Resolution, Taxation & Money Laundering)
Ethics Relevant to Taxation
Engagement Letters
This should make it clear in what capacity the
professional accountant is acting, including
whether they are acting as agent or principal
Authority to disclose HMRC errors should be
included in the engagement letter
Capacity as Agent
The professional accountant prepares documents
on the client’s behalf, with the client retaining
the responsibility for its accuracy, such as tax
compliance work
The professional accountant takes no
responsibility for any information which they
pass to the tax authorities and is not normally
liable for any information proven to be incorrect
Hence this is considered a low-risk activity
There is no disclosure unless authorised by the
taxpayer (subject to disclosure duties above)
Capacity as Principal
The professional accountant provides advice to
the client as to the taxation consequences of
different courses of action, such as advisory work
The professional accountant takes full
responsibility for the advice given and may be
liable to the taxpayer in the event the advice
turns out to be incorrect or inappropriate
Hence this is considered a low-risk activity
HMRC Errors
A professional accountant may discover an error
in relation to tax paid/unpaid, either
-one of law
-a calculation or clerical error
-a misunderstanding of the facts presented
Where authority to disclose errors to HMRC has
been included in the engagement letter (as
advised), no further consent is required from the
client
If no such authority is included, the following
procedures should be followed
-refer the matter to the client
-ask the client to give authority to disclose to
HMRC
-warn of the possible legal consequences of
refusal to give authority, including interest,
penalties and possible imprisonment
-advise that if authority is refused, the
professional accountant may cease to act for the
client
-keep a written record of all advice in connection
with HMRC errors
Where there is a deliberate attempt to benefit
from an error that constitutes a criminal offence,
this is within the scope of money laundering
Revision Notes
Tax Evasion and Avoidance
Tax Evasion
Tax evasion is illegal and consists of seeking to
mislead HMRC by either
-suppressing information they are entitled to
-providing deliberately false information
Minor cases are usually settled out of court by
payment of penalties, although those more
serious may fall under money laundering law
Tax Avoidance
Tax avoidance is a legal way of organising tax
affairs to minimise a tax liability
Promoters of certain tax avoidance schemes and
taxpayers using such schemes should disclose
these to HMRC
Money Laundering
Introduction
Professional accountants are required to comply
with the Proceeds of Crime Act 2002, as updated
by the Money Laundering Regulations 2007
Definition
Money laundering is the term used for a number
of offences involving the proceeds of crime or
terrorist funds
-includes possessing, or in any way dealing with,
or concealing, the proceeds of any crime
Obligation
Where a professional accountant suspects that a
client is involved in money laundering, they
should report this to the Serious Organised Crime
Agency in the form of a suspicious activity report
(through MLRO)
Tipping Off
Care should be taken not to tip off money
launderers, as this will constitute an offence
This includes
-when there is knowledge or suspicion that a
suspicious activity report has been made
-if any disclosure is made which is likely to
prejudice any investigation by the authorities
Procedures
Businesses must maintain the following
-register with a supervisory authority, eg ICAEW
-appoint a money laundering reporting officer
-implement internal reporting procedures
-provide training to staff
-establish money laundering control (prevention,
detection, correction) procedures
-carry out due diligence on all new clients
-monitor existing clients
-report suspicions
-maintain records for five years
Penalties
Offences tried in the Crown Court can attract
unlimited fines and up to either 2, 5 or 14 years
for procedure, reporting and offence respectively
Audit & Assurance Ethics (Audit) Revision Notes

APB Ethical Standards Fraud

Overview
The following specific provisions of the APB ethical standards are relevant to audits in addition to the Overview
IFAC Code of Ethics for audits carried out under ISA’s (practically identical to the ICAEW Code of Ethics) Fraud is an intentional act using deception to
obtain an unjust or illegal advantage
Ethical Standard Specific Threats Safeguards -it is a key contributing factor to business risk
ES1 Integrity, Sets out All firms should have an ethics policy
Objectivity and requirements for Where a major fraud cause company failure it is
Independence firms to have Matters that bear on the auditors’ objectivity and common for the auditor to be accused of
policies and independence should be communicated to client management
negligence
procedures relating
to ethics The firm should appoint an ethics partner
Comparative Responsibilities
For listed clients, compliance with ethical standards should be With regards to fraud, the following summarises
reviewed by an independent partner the responsibilities of directors and auditors
ES2 Financial, Beneficial interest in Audit partner and staff cannot hold shares in audit client
Business, shares Directors Auditors
Employment Mutual business Should not go into business with audit client Prevent and detect Plan and perform the
and Personal interest fraud through audit to identify material
Relationships Staff moving from Firm should resign as auditors if partner becomes client implementing a misstatements however
audit firm to client management within 2 years of being involved in the audit system of internal caused and to remain
control sceptical
For other staff, the firm must consider independence
implications Role of Auditor
If an auditor discovers fraud, they should
All partners and staff should disclose intention to move to
-report to an appropriate level of management
client and be removed from audit team
-consider impact on the audit report
Client staff joining Should not be allowed to work on the audit for 2 years
audit firm -report to regulators (where applicable)
ES3 Long Acting for a Rotate staff as follows -report where there is no duty, but it would be in
Association with prolonged period on -engagement partner 5 years (7 yrs involvements if parties the public interest to do so (seek legal advice)
Audit listed clients agree) with key audit partners and senior staff 7 years -consider resignation in exceptional
Engagement Acting for a Rotate staff as follows circumstances
prolonged period on -engagement partner 10 years
non-listed clients -rules more relaxed for other partners and staff
Auditor Liability
ES4 Fees, Dependence on Fees for services to clients should not exceed the following
An auditor could be liable as a result of
Remuneration client percentages of firm’s fee income (for recurring work)
and Evaluation -listed 10% (review at 5%) legislation (such as Insolvency Act, money
Policies, -non-listed 15% (review at 10%) laundering or insider dealing) or negligence
Litigation, Gifts Loans Not allowed loans or guarantees (overdue fees akin to a loan)
and Hospitality Hospitality or other Firm should have a policy of only accepting modest gifts Negligence is a common law concept, where the
benefits injured party must prove
Litigation Firm should resign as auditor if there is actual or potential -a duty of care existed
litigation between the audit firm and the client
-the duty of care was breached
ES5 Non-Audit Other services Consider the impact of non-audit services and then
-the breach caused a loss that can be measured
Services -establish safeguards to counter any threats
Provided to -communicate with those charged with governance reliably
Audit Clients -document rationale for decisions taken
-do not prepare accounts for listed clients unless emergency A claim of negligence by an audit client is where
-do not provide recruiting services (modest involvement ok) -the client is the shareholders as a body
-do not carry out internal audit or valuation work where the -a duty of care exists under contract law
external audit opinion will place heavy reliance upon this work
-breach and loss must be proved
ES PASE Small entities Relaxed provisions available
-the auditor may be found negligent if the
Changes in Professional Appointment Duty to Report Misconduct opinion is one that no reasonably competent
auditor would have been likely to reach
Outgoing Auditor Duty to Report
Reply to requests for information from incoming IACEW members have a duty to report possible A claim of negligence by another party is where
auditor, assuming the client gives permission misconduct of other members to the ICAEW -they have no contract with the audit firm
Professional Conduct Directorate in writing -therefore the existence of duty of care must be
Incoming Auditor -may wish to seek legal advice first proved (historically no duty of care is implied,
Write to client asking permission to contact the -no need to investigate before reporting but but case law can suggest otherwise)
previous auditors need facts over suspicion
-if client declines, do not accept engagement The profession has lobbied for
-if client accepts, write to previous auditor asking Examples of when to report include -proportionate liability (split between auditors
them about matters that may be relevant to -committed offence involving dishonesty, fraud and directors based on fault)
acceptance or cheating -capped liability (maximum limit for damages)
-breach of regulations, including money
Follow up any non-replies laundering Under Companies Act 2006, limited liability
-if received, consider reply (such as unpaid fees, -gross incompetence agreements can be put in place where
disagreements) -members of company authorise
-if not received, can accept engagement but Note that failure to report is grounds for -specified liability (sum, multiples or proportion)
must remain sceptical disciplinary action -new agreement made and authorised each year
Audit & Assurance Corporate Governance Revision Notes

Underlying Concepts Accountability  Annual Report should show a balanced and

understandable assessment of the company’s position
Concept Explanation and prospects
Fairness Decisions and systems of the company should be fair to all  Maintain a good system of controls to safeguard
stakeholders shareholders investments
Transparency Financial statements and other voluntary disclosure helps  Establish an Audit Committee whose responsibilities
shareholders understand the company include maintaining a relationship with the company’s
auditor.
Independence Independent non-executives promote the interests of
shareholders and other stakeholders by challenging the Remuneration  Enough to attract high calibre candidates
executives  Not excessive (good basic – bonus rated on performance)
 Formal and transparent procedure for fixing
Honesty Do not mislead stakeholders
remuneration (including recommendations of
Responsibility Systems in place that penalise mismanagement and takes
remuneration committee)
corrective action
Accountability Board accountable to shareholders, who should also Relations with  Board Responsible for ensuring satisfactory dialogue
exercise their voting rights and take some responsibility Shareholders takes place with shareholders
 AGM should be used to communicate with shareholders
Reputation Often very valuable and should be promoted
and to encourage their participation
Judgement Board should make decisions that enhance the company’s
prosperity
Integrity Straightforward dealing which requires honesty and The code also contains a schedule relating to institutional shareholders and
professionalism their role in corporate governance
-They have a responsibility to use their votes
Features of Poor Corporate Governance. -They should be prepared to enter into dialogue with companies
-Domination by single individual
-Lack of involvement by the Board The UK Stewardship Code
-Lack of adequate control function
- Lack of supervision Overview
-Lack of independent scrutiny
-Lack of contact with shareholders Issued in July 2010, aiming to enhance quality of engagement between
-Emphasis on short term profitability (short term gains rather than R&D investors and companies by giving clear guidance to institutional investors.
investment) Hence companies that hold money on behalf of others
-Misleading accounts and information
Principles of the Code
The UK Corporate Governance Code -Disclosure of how they will discharge their stewardship responsibilities in
relation to UK Governance Code – are they following it?
Overview -Disclosure of policy to monitor conflicts of interest in relation to
Was issued in June 2010, and replaces the Combined Code. stewardship
The code applies to all companies with a Premium Listing (FTSE 350+), -Regular monitoring of investee companies
although other companies can also adopt, as it is seen as best practice -Clear guidelines on when they may escalate their activities in order to
UK incorporated companies listed on the main LSE must disclose in their protect and enhance shareholder value
annual reports how they have complied with the Code. -Willingness to act collectively with other institutional investors
Companies either confirm that they comply with the codes provisions or -Disclosure of clear voting policy
provide an explanation where they do not (hence a comply or disclose code) -Periodic reporting to their clients regarding stewardship and voting activities

There are five main principles of the code: Turnbull Report

Principles Overview
Type Explanation This gives guidance on how to apply the Combined Code with regards to
Leadership –  Effective board should lead and control the company internal control and encourages a risk based approach
(have Exec  Chairman (head NED) and CEO (head ED) roles should be
and Non Exec separate, public justification required for combining roles Directors should consider the control environment, risk assessment,
Directors –  Chairman is responsible for leading the board and information systems, control procedures and monitoring
E.D know the promoting culture of openness
company and  Non-Exec’s, involved with strategic proposals, monitoring
N.E.D know managements performance, and reporting on Disclosure
the outside performance as well as remuneration and board A statement should be included in the annual report disclosing that there is a
perspective) appointments process for identifying, evaluating and managing risks
 Majority of non-executives independent
 Regular re-election
Effectiveness  Appropriate balance of Exec and Non-Exec Directors (at
least 50% N.E.D)
 Nomination committee, should lead process for board
appointments (maj of members being independent
N.E.D)
 Full time executive director should not also have more
than one non-exec directorship of FTSE 100 company or
be Chairman of such company
 Company secretary responsible for ensuring information
flows to board and advising on corporate governance
issues.
 Directors should submit themselves for re-election at
least once every 3 years (larger company’s should be
each year).
Audit & Assurance Corporate Governance Revision Notes

Audit Committees -Communicate any weaknesses found during audit promptly (management
letter)
UK Corporate Governance Code guidelines are as follows:
Responsibilities relating to Internal Controls
Membership -report by exception as an emphasis of matter if problems arise
-report in directors report -include in the audit report, “we are not required to consider whether the
-have at least one member with financial experience board’s statement on internal controls covers all risks and controls, or form
-have all members trained an opinion on the effectiveness of the company’s corporate governance
-have at least 3 members of independent non-executive directors procedures or its risk and control procedures”

Procedures for Going Concern

Duties
-they should review internal control system (ICS)
-monitor and review internal audit effectiveness
-monitor and review the independence, objectivity and effectiveness of the
external auditors
-review documentation explaining basis of the directors conclusion with
respect to going concern
-evaluate consistency of statement with auditors own knowledge
-does statement meet FRC guidance?

APB Advice
The relationship between the auditors and the audit committee should
consist of open communication and there should be a discussion at the end
of the audit about
-non-compliance with laws and regulations
-control environment
-significant adjustments to the financial statements
-how differences between management and the auditors were resolved

Sarbanes-Oxley Act

Principles
Audit committee responsible for the accuracy of the annual report
Increased financial statement disclosures
Internal code of ethics required
Restrictions on share trading by company officers

Provisions from an Audit Perspective

New regulator to set standards, with disciplinary power (PCAOB)
Auditing standards tightened
Provision of other services severely restricted (ban bookkeeping, valuation
and internal audit, all other services require audit committee review)
Auditors to discuss accounting policies, management letter and unadjusted
audit differences with audit committee
Increased whistleblower protection in case of fraud

Auditors’ Responsibilities

Overview
The auditors are required by Stock Exchange listing rules to review parts of
the director’s statements on the code concerning:
-responsibilities of directors and auditors
-effectiveness of risk management and internal controls
-provisions relation to audit committees
-going concern
-remuneration of directors

APB Bulletin identifies procedures to perform:

Generally:
-Review Board Minutes
-Review Supporting documents prepared by the board
Make enquiries of directors
-Attend Meetings of the audit committee at which annual report is
considered
On Board Review and report on effectiveness of ICS
-concentrate on review carried out
-review the statement by directors, and make enquiries and review
supporting documentation
Audit & Assurance Audit Process Revision Notes

Role and Context of Modern Auditing Planning and Risk Assessment Audit Evidence

Overview of the Audit Process Overview Basic Principles

Client acceptance or continuance
Establish engagement terms
Plan the audit
Develop the audit approach
Obtain audit evidence
Evaluate results
Issue audit report
Auditors’ Responsibilities
The following are responsibilities of the auditor
under Companies Act 2006
-form an opinion on the truth and fairness of the
financial statements
-confirm financial statements are adequately
prepared in accordance with Companies Act
-confirm that the directors’ report is consistent
with the financial statements
In addition the auditor is required to report by
exception on
-returns received from branches not visited
-accounts agree with underlying records
-proper accounting records kept
-information and explanations received
-directors’ transactions properly disclosed
This should be a top down approach starting with Audit evidence must be sufficient and
an understanding of the business and working appropriate
down to the financial statements, focussing on
problems which may give rise to material Sufficient
misstatements -is there enough evidence?
-is this based on risk and materiality?
Proper planning can lead to a more efficient
audit by increasing focus on high level tests of Appropriate
control and substantive analytical procedures -is it relevant to financial statement assertions?
and reducing detailed substantive testing -is it reliable? (consider nature and source)
An audit can either be controls based, on which Financial Statement Assertions
reliance is placed on the internal controls of the Type P&L B/S
entity, or substantive based, where no reliance is Inclusion? Occurrence Existence
placed on the internal controls of the entity Cut-off Rights & Obligations
Amount? Accuracy Valuation
Risk Classification Complete? Completeness Completeness
Presented? Allocation Classification
Financial risk
-risks of financial activities or financial
consequences of operations
Operating risk
-risks arising from business operations
Compliance risk
-risks arising from non-compliance with laws and
regulations

Directors’ Responsibilities Audit Risk Model

Enlightened shareholder value
-promote the success of the company for the
benefits of the members as a whole
Duty of skill and care
Conflicts of interest to be avoided
-if the company suffers loss as a result of a
director’s conflict of interest, the director is
personally liable to the company
Fraudulent and wrongful trading
-see insolvency section
Theft
-it the company deceives with consent of
directors, then both the company and directors
will be liable
Keep adequate accounting records
Prepare and file annual accounts
Safeguard assets
-implement system of internal controls
The audit risk model can be summarised as:
Audit risk=Inherent risk ×Control risk ×Detection risk
Audit risk (AR)
-fixed risk that an auditor is prepared to accept
Inherent risk (IR)
-risk of susceptibility to material misstatements
Control risk (CR)
-risk that controls don’t prevent or detect
misstatements
Detection risk
-risk that material misstatements will not be
detected
-this is managed by auditors by changing the
nature, timing and extent of procedures

Materiality
Transactions can be material by nature
(qualitative), size (quantitative) or impact

Quantitative materiality can be estimated as

-½% to 1% of revenue
-2% to 5% of gross profit
-5% to 10% of profit before tax
-½% to 1% of total assets
-1% to 2% of net assets / Equity

The most appropriate basis should be used for

each transaction
Audit & Assurance Audit Process Revision Notes

Audit Completion ISA 800 Reporting on Agreed Upon Procedures

ISA 700 Elements of Audit Report Overview

Title Addressee Introduction Agreed upon procedures are special purpose
Disclaimer Responsibilities Basis of opinion audit engagements
Opinion Signature Date
They generally consist of giving an opinion on
Opinion
financial statements prepared under a special
Each of the auditors’ responsibilities is asserted
purpose framework, such as
to in the opinion, with an additional opinion in
-regulator’s financial reporting provisions
respect of IFRS’s where applicable
-cash basis for creditors
-tax basis to accompany tax return
The decision on what opinion to give can be
summarised as
The auditor may report on whether the special
purpose financial statements are prepared, “in all
Nature Disagreement Limitation of Scope material respects, in accordance with the
Immaterial Clean audit Clean audit opinion
identified basis of accounting”
opinion
Material Except for Except for
qualification qualification An opinion on summary financial statements
Pervasive Adverse Disclaimer of should only be given after the audit is complete
opinion opinion

There may also be significant uncertainty, which

will require adequate disclosure in the accounts
-if this is done, then give a clean opinion but
include an emphasis of matter
-if this is not done, then give an adverse opinion
as a disagreement over disclosure

Going Concern – Current developments

When applying ISA 570, and looking at current
economic climate, certain items should be
addressed.
-impact of recession on entity’s business, the
business of its suppliers and customers, and the
availability of finance.
-any issues to do with going concern that relate
to the entity (specifically), and not just the wider
environment.
-auditors should take account of the current
economic conditions at all stages of the audit
-auditors need to be aware that banks are more
reluctant to provide positive confirmation
relating to the future availability of funds to
entities.

ISA 260 Reports to Management

Control weaknesses should be reported to
management, with a covering letter
-to management
-dated soon after completion of the audit
-including a disclaimer (not comprehensive, for
management use only and no disclosure to third
parties without prior consent)
-thank staff for their co-operation

The appendix will detail control weaknesses as

fact, consequences and recommendation

Other matters that should also be included

-matters that have a bearing on objectivity
-related safeguards
-total fees charge for other services
-written confirmation of independence
Audit & Assurance Other Audit & Assurance Issues Revision Notes

IT Environment Directors’ Loans and Other Transactions Assurance and Related Services

Risks in Computerised Systems Overview Assurance

Business risks The aim of Companies Act 2006 is to prevent An assurance engagement is where a practitioner
-breakdown due to virus or similar directors abusing their position, by requiring expresses an opinion designed to increase the
-invasion by unauthorised user (either affecting disclosure to and approval by the members of confidence in the use of the information
system operation or obtaining sensitive data) the company when significant loans or other
-data protection issues transactions between the company and its Assurance given may be
-contingency plans for system recovery directors take place -reasonable (positive, but not absolute opinion)
-poor management information preventing quick -limited (negative)
reaction to problems within the entity There is also the Combined Code and other
corporate governance requirements to prevent Review Engagements
Audit risk directors from abusing their power The procedures focus on
-any problems with the IT system may result in a -obtaining knowledge of the entity
material misstatement in the financial Approval Limits -making enquiries
statements The following give the revised approvals under -performing analytical procedures
Companies Act 2006
Assessing the IT System Type All Co’s Relevant Co’s A negative opinion is given, “nothing has come to
Type Consideration Member Loans >£10,000 (with Rules our attention to suggest that the accounts are
Management Does management have a written Approval details and purpose extended to not true and fair” and it is clearly stated that this
Policy policy, compatible with other disclosed) cover quasi- is not an audit
areas? loans
Is the policy up to date, sufficient, Substantial property >£10,000 and
transactions lower of Credit Examples include
effective and is it adhered to?
>£100,000 or transactions -independent verification for small charities
Segregation Is there adequate segregation of
of Duties duties, such as data input? >10% of net assets >£15,000 -review of prospective financial information
Are systems controls adequate? (£5,000 de minimus) -due diligence
Security Is there a security policy in place?
Is the policy up to date, sufficient, Long service Review of Prospective Financial Information
effective and is it adhered to? contracts >2 years
This is inherently more difficult than a review of
Other Advances for Rules
Info legitimate business extended to historic information and only a negative opinion
E-Commerce can be given
expenses allowed up connected
There are a number of risks for auditors to to £50,000 persons
consider in e-commerce, such as Examples of work required include
Business Risk Audit Implication Audit Risk -checking accuracy
Non-compliance with Possibility of unrecorded The audit of such transactions is high risk due to -agreeing that policies are consistent
tax, legal and other liabilities for fines and -materiality (qualitative) -comparing contents to identify missing items
regulatory issues legal costs
-complexity of rules -vouching information where possible
Contractual issues as Impact on recoverability
to whether legally of receivables, possibility -potential lack of documentation -review assumptions for reasonableness
binding agreements of unrecorded liabilities,
have been formed such as legal costs to Disclosures Warranties
over the internet establish position The disclosure requirements are for all The vendor may give a warranty to the purchaser,
Risk of technological Potential impact on going transactions which is a type of insurance where the vendor
failure resulting in concern and impact on -statement that transaction existed in the year compensates the purchaser if the warranties are
business interruption analytical procedures
-name of director or connected person breached, such as
Loss of transaction Data protection issues
-principal terms -sales contracts exist and are current
integrity and potential loss of audit
trail -amount of transaction and any repayments -all contingent liabilities have been disclosed
Security risks Weak controls may -tax has been paid or accrued for
impact on the nature and For contracts that a director has an interest in
extent of procedures -declare interest to the board Due Diligence
necessary -step down from negotiations This usually takes place in an acquisition or
Inappropriate Examples include -disclosed in financial statements if material refinancing scenario, where objectives may be
accounting policies treatment of website
-confirming accuracy of information
development costs, point
at which title transfers, Also, as these are a related party transaction, the -providing an independent assessment
translation of foreign disclosure requirements of IAS 24 apply, -identifying and quantifying areas of commercial
currency and revenue although these are generally less than the and financial risk
recognition Companies Act disclosures required above -giving assurance to finance provider

See Reference (1) for a summary of due diligence

work.
Audit & Assurance Financial Difficulties Revision Notes

Insolvency Winding Up Calculations

Going Concern Net Property

The auditor should challenge the entity’s use of the going concern basis The first step is to determine the total assets distributable on winding up the
-should be used unless the company is in liquidation or there is no real company and to set up a net property working
prospect of avoiding it
-indicators of going concern risk may be financial, operational or legal Net property proforma
£ £ Notes
Accounting Treatment Assets of the company X
In considering the going concern assumption, the accounting treatment of Less amounts paid to
1) Liquidators X
certain items is particularly important
2) Fixed charge holders X Proceeds of charged assets
-IAS 36 Impairments (consider the need for impairment of assets or cash 3) Preferential creditors X Employees
generating units due to changes in market, technological, economic or legal (X)
environment) Net property X
-IAS 37 Provisions (consider likelihood of transfer of economic benefits)
-ISA 260 Use of Expert (consider the need for the use of an expert in If the resulting net property after payments to liquidators, fixed charge
valuations or interpretations of legal documents for example) holders and preferential creditors is greater than £10,000, then a prescribed
part is calculated to set aside some funds for unsecured creditors from any
Assurance Work floating charge holders
An auditor may be asked to evaluate prospective financial information,
generally cash flow and profit forecasts Prescribed Part Proforma
£ £ Notes
In doing so, they should consider accuracy, management ability, accounting De minimus 5,000
policies, reasonableness of assumptions, consistency with historic Add adjusted net property
performance and sensitivity analysis Net property X Maximum of £2,985,000
Deduction (10,000)
X
Risks to Directors
Allowance @ 20% X Maximum of £595,000
A director may be disqualified from holding the office of director Prescribed part X Maximum of £600,000

In the following situations, they could be held personally liable and ordered This gives a prescribed part, subject to a maximum of £600,000 that is set
to contribute to the assets of the company aside for unsecured creditors
Situation Description
Wrongful Trading unintentionally whilst the company is insolvent The floating charge holders are not entitled to participate in the prescribed
Trading Extends to shadow directors, so could also be a risk to part as an unsecured creditor to make up any shortfall under its floating
auditors
charge, therefore if there is insufficient net property after deduction of the
Directors should take steps to appoint an insolvency
practitioner at earliest possible stage to show they acted prescribed part, the floating charge holders will not receive any further funds
in creditors’ best interests, or inject their own finance
Fraudulent Civil and criminal offence where there is intentional Repayment Proforma
Trading trading whilst the company is insolvent £ £ Notes
Undervalue If took place in 2 years before liquidation, unless entered Assets of the company X
Transactions into in good faith for benefit of company’s trade Less amounts paid to
Preferences If company gives preference to a creditor so they will 1) Liquidators X
benefit if the company goes into liquidation within 6 2) Fixed charge holders X Proceeds of charged assets
months (or 2 years in the case of a connected person) 3) Preferential creditors X Employees
Floating Charge If created within 1 year before winding up (2 years if (X)
connected person), they may be void Net property X
Deduct prescribed part (X)
The above are civil offences, other than fraudulent trading, which is also a X
criminal offence Less amounts paid to
4) Floating charge holders X Any excess is lost
(X)
Risks to Auditors
Add prescribed part X
There is the possibility of being covered by the wrongful trading provisions X
above, if the auditor acted as a shadow director Less amounts paid to
5) Unsecured creditors X Includes unpaid fixed charge
There is also the possibility of being sued for negligence if the auditor failed 6) Preference holders X
to identify going concern problems, subject to negligence requirements, (X)
documented within fraud above Ordinary shareholders X

Repayment on Winding Up
On winding up a company, any assets realised should be used to settle
outstanding liabilities or return funds to shareholders in the following order
1) Liquidators fees
2) Fixed charge holders (out of proceeds only of assets under charge)
3) Preferential creditors (employees, subject to limits)
4) Floating charge holders (subject to prescribed part)
5) Unsecured creditors (including any unpaid fixed charge holders)
6) Preference shareholders
7) Ordinary shareholders
Note that at no point can this proforma be taken to a negative position, so
take care to restrict payments where necessary
Once all assets have been distributed, those creditors and shareholders not
yet paid do not receive any funds
Questions may ask to calculate the expected repayment of an unsecured
creditor, so complete the proforma to determine the total payments to
unsecured creditors and then calculate as a percentage of total unsecured
creditors and apply to the particular creditor in question
Audit & Assurance Company Size and Structure Revision Notes

Small Company Audits To meet their responsibilities, the principal auditor must consider the following
Consideration Description
Audit Exemption Whether to Considerations include
An audit is required if two of the following accept -materiality of part of group not audited by them
conditions are met for two out of the three appointment -degree of knowledge of components
-risk of material misstatements in components audited by other auditors
preceding years
-performance of additional procedures regarding other auditors
-annual turnover >£6.5m Legal rights The principal auditors have legal right to
-gross assets >£3.26m -information and explanations from the auditors of UK subsidiaries
-employees >50 -assistance from the parent company in obtaining information and explanation from
auditors of foreign subsidiaries
In addition a company should have an audit, Reliance on The principal auditor must evaluate
irrespective of size, if it is a regulated company or work of other -professional qualifications
auditors -membership of a professional body
if a shareholder requests it under Companies Act
-experience and reputation
2006 -adequacy of resources
Communication The principal auditor must communicate
If no audit is required, they may still be assurance with other -independence requirements
provided in the form of auditors -audit plan, including timetable and risk areas
-a voluntary audit Review work Considerations include
-a review of the financial statements done by other -discuss procedures
auditors -review written summary
-obtain written representations
Risk of Small Company Audits
Report of group This is the responsibility of the principal auditor alone
Business risks financial
-overtrading statements
-problems raising finance
-embryonic management Auditing Consolidations
-lack of accounting and legal knowledge The key risk when auditing consolidations is that auditors may undertake the consolidation audit purely
as an arithmetic exercise, whereas problems are more likely to arise from the adjustments and
Audit risks accounting treatment of components, particularly where there have been changes in the year to either
-going concern issues business combinations or accounting standards that would impact on the consolidation
-weak controls
-lack of comparatives The following are key considerations when auditing consolidations
-incentive to manipulate data to obtain or Consideration Description
continue receiving finance Audit Work Compare audited accounts of components to consolidation schedules
-reliance by bank on audited accounts Consider potential alignments of accounting policies
Review consolidation adjustments
Small companies often struggle to raise finance Compare consolidation adjustments with those made in the prior year
as they have a lack of assets available for security Review accounting treatment of combinations and disposals
Consider whether the treatment of existing combinations is appropriate
and do not have audited accounts and where
Check mathematical accuracy
finance is available, it is often more expensive
Review consolidated accounts for compliance and to confirm truth and fairness
due to the increased risk taken by the investor
Best Practice Get organised
for Group Analyse the group structure
Business Structures and Global Enterprises Audits Focus on quality of other auditors
Focus the group audit on high risk areas
Audit Risks Understand internal control across the group
The structure of a business has accounting and Ensure staff understand technical complexities
auditing implications and can give risk to specific Review other auditors’ working papers
risks, such as Related Transactions with consolidated subsidiaries need not be disclosed
Parties Related parties are only those related to the consolidated group
-impact of corporate change
Letters of The auditor of a subsidiary with going concern issues may use a support letter from the
-need to deal with other auditors
Support parent that the company is a going concern
-complexity
-geographical spread
The best practice for audit groups is taken from an ICAEW publication
-internal control systems
Global Enterprises
ISA 600 Other Auditors
Entities within a group may have different
Overview
auditors (component auditors)
These are particularly affected by the following
Type Description -financial risks (especially inflation, interest rates, exchange rates and currency restrictions)
Principal The auditor with responsibility for
-political risks
Auditor reporting on the financial
statements of the group -regulatory risks
Other The auditor with responsibility for
Auditor reporting on the financial Audit Considerations
statements of a component of the The following will need to be taken into account on the audit of global enterprises
group -internal control will need to take into account the varying local requirements
Component Division, branch, subsidiary, joint -international business strategy will have to pay attention to compliance
venture, associate or other entity,
-local auditors may not be of adequate quality to place reliance upon
whose results are included in the
-reliance may be placed upon the audited financial statements by many parties in different countries
group financial statements
-risk of widespread damage to the audit firm’s reputation in the event of problems
Audit & Assurance Specific Audit Procedures
Standard Specific Audit Tests
IFRS 2 Consider the use of valuation specialists
Share-based Check method used for valuation is appropriate, such as an
Payment option pricing model (Black-Scholes)
Agree share price, exercise price, time to expiry, volatility,
interest rates and dividend yields to documentation
Confirm that the assumptions appear reasonable
Confirm assumptions are consistent with prior year
Verify the vesting conditions to documentation
Estimate the likelihood of vesting conditions being met
Confirm that the estimate of the number of options
expected to vest is appropriate based on conditions
IFRS 5 Confirm the assets or operations meet the criteria of IFRS 5
Non-current Confirm assets are valued in accordance with IFRS 5
Assets Held Make enquiries of management regarding intentions
For Sale & Review minutes for evidence of a firm plan to sell
Discontinued Review sales information or estate agent contracts
Operations Compare sales price to sales information or contract
Enquire of estate agents as to likelihood of prompt sale
Perform a subsequent events review
IAS 8 Determine assumptions and assess for reasonableness
Accounting Check mathematical accuracy
Policies,
Consider management ability to prepare such estimates by
Changes in
reference to past experience
Accounting
Consider the use of independent expert opinion
Estimates &
Determine accuracy of previous estimates made
Errors
Perform a subsequent events review
IAS 11 Determine whether the outcome of the contract can be
Construction measured reliably, in particular the assessment of the
Contracts directors that payment will be received under the contract
If this is not the case, confirm that revenue is only
recognised to the extent that costs are recoverable
Check the calculation of the overall expected outcome for
the project, including where loss making
Agree total revenue to sales contract
Agree costs incurred schedule to supporting documentation
Review calculation of costs to complete, assess the validity
of any assumptions made by management and compare the
overall expected profitability with similar projects
Assess the basis on which profit is recognised and establish
the way in which stage of completion has been measured,
including determining whether this appears reasonable
Where stage of completion is based on costs incurred to
date, assess if this is a fair representation
Confirm that any costs accounted for as contract work in
progress are recoverable under the contract
Assess the likelihood of recovery of revenue recognised but
not yet received
IAS 12 Obtain a copy of the deferred tax workings and the
Income Taxes corporation tax computation
Check the arithmetical accuracy of the deferred tax workings
Agree the figures used to calculate temporary differences to
those on the tax computation and the financial statements
Consider the assumptions made in light of 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
IAS 12, suitably comparable to practice in previous years and
that any changes in accounting policy have been disclosed
IAS 19 Consider the qualifications of the actuary
Employee Review the actuary’s assumptions
Benefits Review the validity and accuracy of the actuarial valuation
Review correspondence between company and actuary
Agree contributions paid into the scheme
Obtain confirmation of the scheme assets from the
investment custodian
Ask the directors to provide a reconciliation of the valuation
of the scheme assets from the scheme year-end to the
company year-end
Check disclosures for compliance with IAS 19
Agree actuarial valuation to reported figures
Obtain written representations from directors
Revision Notes
Standard Specific Audit Tests
IAS 21 Confirm historic rate to initially record transactions and
The Effects ofconfirm closing rate for monetary assets and liabilities
Changes in Re-perform calculations to confirm yearend balances
Foreign Recalculate gains and losses on settled and unsettled
Exchange transactions
Rates Confirm closing rates to translate subsidiary balances into
the presentational currency and confirm actual or average
rates for translating the income statement
IAS 24 Ask management if there may be undisclosed transactions
Related Party Review prior year working papers for known related parties
Transactions Review shareholder records, annual returns, bank
confirmations and legal letters
Look for transactions with abnormal terms of trade, no
logical business reason or non-routine invoicing/processing
Obtain written representations from management
IAS 32 Consider the use of specialist audit staff
Financial Confirm the appropriate classification by reviewing terms of
Instruments: the instrument
Presentation Confirm financial assets and liabilities included at fair value
or at appropriate amortised cost
IAS 39 Calculate fair value using an appropriate model or where an
Financial active market exists, compare to quoted market prices
Instruments: Compare fair value with recent transactions
Recognition Confirm purchase price and any transactions costs and that
& these are correctly accounted for
Measurement Confirm that amortised cost has been calculated using an
appropriate effective interest rate
IFRS 7 Confirm contractual terms of any derivative
Financial
Review post year-end events to confirm the valuation
Instruments:
Check disclosures for compliance with IFRS 7
Disclosures
Where hedging, confirm that derivatives used satisfy the
requirements of IAS 39, particularly the documentation at
inception and ongoing calculation of hedge effectiveness
Confirm the appropriate hedge has been used
Confirm appropriate treatment of any gains or losses
IAS 36 Consider indicators at planning and risk assessment stage
Impairment Review management’s impairment review
of Assets Agree realisable value to those of similar assets if there is
active market
Consider use of expert in estimation of realisable value
Audit all assumptions used in the calculation of value in use
Re-perform management calculation
Consider allocation of any shared assets or costs
Assess management competence in cash flow projections
Compare to competitors’ published information and to
previous calculations for consistency
Compare discount rate to published market rates
Ensure that impairments have been appropriately allocated
against specific assets, goodwill and then on a pro rata basis
IAS 37 Obtain details of all provisions and contingencies disclosed
Provisions, Obtain a detailed analysis and reconciliation of all provisions
Contingent Determine the present obligation arising from a past event
Liabilities & Review correspondence relating to the item
Contingent Discuss with directors if a valid expectation has been created
Assets with other parties that they will discharge the obligation
Obtain written representations as to completeness
IAS 38 Obtain confirmation of all patents and trademarks held by a
Intangible patent agent
Assets Verify payment of annual renewal fees
Review specialist valuations in accordance with ISA 620
Inspect purchase agreements for additions
Verify amounts capitalised of patents developed by the
company with supporting costing records
Check computation and reasonableness of amortisation
IAS 40 Consider the use of an audit valuation specialist
Investment Confirm all are classified in accordance with IAS 40
Property Assess management intentions to confirm classification
Check compliance with IAS 16 where cost model is adopted
Check that fair value reflects conditions at reporting date
Agree valuation to valuation certificate and confirm that
basis of valuation is reasonable
Recalculate gain or loss on change in fair value and agree to
balance in the income statement
Audit & Assurance Issues in Question Banks Revision Notes