CHAPTER 1 PROFESSIONAL ETHICS

Code of Ethics
1. Integrity – an accountant should be straightforward and honest in all professional and business relationship.
2. Objectivity – an accountant should not allow bias, conflict of interest and undue influence of others to
override professional or business judgments.
3. Professional competence and due care – an accountant has continuing duty to maintain professional
knowledge and skill at all level required to ensure that a client or employer receives competent professional
service based on current developments in practice, legislation and techniques. An accountant should act
diligently and in accordance with applicable technical and professional standards when providing professional
services
4. Confidentiality – an accountant should respect the confidentiality of info acquired as a result of professional
and business relationships and should 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. Confidential information
acquired as a result of professional and business relationships should not be used for the personal advantage
of the accountant or third parties
5. Professional behavior – an accountant should comply with relevant laws and regulations and should avoid any
action that discredits the profession

Concept of Independence
1. Independence in fact/mind – forms opinion without compromising professional judgment and acts with
integrity and objectivity
2. Independence in appearance – avoids negative public perception that individual’s integrity and objectivity had
been impaired.

Threats to independence
1. Self-interest threat – occur when conflict relating to financial or other interests of an accountant
2. Self-review threat – Occur when a previous judgment needs to be reevaluated by the auditor responsible for
that judgment
3. Advocacy threat –an auditor promotes a position or opinion to the point that subsequent objectivity may be
compromised
4. Familiarity threat – an auditor know the client to well, objectivity may be threatened because the auditor
become too trusting of the client and professional skepticism is impaired
5. Intimidation threat –an auditor may be deterred from acting objectively by threats, actual or perceived
 CHAPTER 2 ACCEPTING ENGAGEMENT

Tendering
A firm might obtain an engagement by the following methods
1. Being approached by a potential client and being asked to accept the engagement
2. Being approached by an existing client and being asked to accept the engagement
3. Being approached by a potential or existing client and being asked to tender for the engagement
The most common method of obtaining an audit is by tender

Consideration for the company in a tender process :

1. Price of the proposed engagement
2. The quality of the service the prospective auditors are likely to provide
3. The knowledge of the business they possess
4. The experience of the industry they have
5. The proposed personnel on the audit team
6. References obtained about the audit firm

Issue to consider in tendering : Lowballing

1. Lowballing is practice of charging less than the ‘market rate’ for the audit
2. A firm may quote any fee it considers acceptable
3. The practice of lowballing is not unethical in itself
4. Ethical safeguards should be considered as lowballing does increase the self-interest threat of not being able
to complete the audit to the appropriate standards in the commercial way

Risk Analysis : Matters to consider in risk analysis

1. Whether the directors/management of the company appear to have integrity – look at the prudent and
conservative in the accounting policies and the qualification of its CFO or refer to related parties (banker,
creditor etc)
2. Whether the company has a good financial record, resources and outlook – look at recent financial
performance and reports and by making enquiries from its banker
3. Whether the company appears to have good internal control, or, at minimum, a good control environment –
indicated by the existence of an internal audit department, or assessed through inquiries of management
4. Whether the company has unusual transactions – review the published financial statement

The lower risk : if the directors appear to have integrity, the financial record is strong and prospects look good,
there is a good attitude to internal control in the company and it has few unusual transactions

If a firm determines that a company is a high risk client, this does not necessarily mean that the firm will not
accept the engagement, but this preliminary assessment of risk will be incorporated into the audit procedures
when risk assessment identification and procedures are carried out on the engagement
 Acceptance and legal issues
A. Ethical Issues
1. Prospective Auditor (New Auditor)
- He should explain to the client that he has a duty to communicate with existing auditor in seeking the
information that could influence his decision in accepting the engagement
- The client should give the existing auditor a written authority to discuss with the prospective auditor
2. Existing Auditor
- They should get written authority from the client to communicate with the prospective auditor
- They should not ordinarily volunteer information as he is bound by confidentiality
3. Client Refuse Permission
- If the client refuses to grant the existing auditor to discuss client’s affair with the new auditor, the existing
auditor should report to the proposed auditor
- The new auditor should carefully consider the impact on his decision to accept the appointment

B. Legal Issues
1. Appointment of auditors by the members
2. Appointment of auditor by the directors
3. Appointment of auditors by the Secretary of State
4. Removal of auditors
5. Resignation of auditors
6. Statement by auditor ceasing to hold office as auditor
 CHAPTER 3 AUDIT PLANNING

The need to plan

1. To obtain sufficient competent evidence or the circumstances (important work might not be done at all)
2. To help keep audit costs reasonable (not wasting time doing the wrong work)
3. To avoid misunderstanding with the client

Business Risk
1. The risk inherent to the company in its operations
2. There are 3 general categories of business risk
- Financial risk – risks arising from the financial activities or financial consequences of an operation
- Operational risk – risks arising with regard to operation
- Compliance risk – risks that arises from non-compliance with laws and regulations that surround the
business

Risk that the company accepts has a direct impact on the risk of the investment that anyone purchasing
shares in a camping or loaning money to a company is making.

Audit Risk
1. Inherent risk – the susceptibility of an assertion to misstatement that could be material, individually or when
aggregated with other misstatements, assuming that there were no related internal controls
2. Control risk – the risk that a misstatement that could occur in an assertion and that could be material,
individually or when aggregated with other misstatements, will not be prevented or detected and corrected
on a timely basis by the entity’s internal control
3. Detection risk – the risk that an auditor’s procedures will not detect a misstatement that exists in an assertion
that could be material, individually or when aggregated with other misstatements

Materiality
1. Definitions : information is material if its omission or misstatement could influence the economic decisions of
users taken on the basis of the financial statement.
2. It depends on the size of the item or error judged in the particular circumstances of its omission or
misstatement
3. It also provides a threshold or cut-off point rather than being a primary qualitative characteristic which
information must have if it is to be useful.
4. Steps in applying materiality
- Set preliminary judgment about materiality
- Allocate preliminary judgment about materiality to segments
- Estimate total misstatement in segment
- Estimate the combined misstatement
- Compare combined estimate with judgment about materiality
 Analytical Procedures
The auditor should use analytical procedures in risk assessment in order to obtain an understanding of the
entity and its environment.
Benefits of Analytical Procedures
1. Identifies item for attention that detailed test may miss
2. Uses info outside accounting records
3. Allows comparison of data from different sources
Limitations of Analytical Procedures
1. A good knowledge of the business is required to understand results
2. Consistency of results may conceal a material error
3. There may be a tendency to carry out procedures mechanically, without appropriate professional skepticism
4. Requires an experienced member of staff to be done properly
5. Reliable data may not be available

Going concern
- The auditor’s responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of
management’s use of the going concern assumption
- The risk of the client not being a going concern will need to be considered and planned for at the planning
stage.
- A list of possible symptoms of going concern problems
1. Financial indications
 Negative operating cash flows indicated by historical financial statements
 Adverse key financial ration
 Inability to pay creditors on due dates
2. Operating indications
 Management intentions to liquidate the entity or to cease operations
 Loss of key management without replacement
 Labor difficulties
 Shortages of important supplies
3. Other indications
 Pending legal proceedings against client with high possibilities to win
 Changes in law/policy that expected to adversely affect the client
 CHAPTER 5 COMPLETION OF AUDIT

Reliance on Controls
1. Carry out tests of controls under two sets of circumstances
2. When they are intending to rely on controls to reduce audit risk
3. When they are unable to derive sufficient evidence from substantive procedures
4. Test of Control includes the following procedures
- Make inquiries of appropriate client personnel
- Examine documents/records/reports
- Observe control-related activities
- Re-perform client procedures
- Walkthrough test

Substantive Approach
Auditor must carry out the following substantive procedures
- Agreeing the financial statements to the underlying accounting records
- Examining material journal entries
- Examining other adjustments made in preparing the financial statements

Audit Objectives
1. Occurrence and rights and obligations – disclosed events and transactions have occurred and pertain to the
entity
2. Completeness – all disclosures that should been included in the financial statements have been included
3. Classification and Understandability – financial info is appropriately presented and described and disclosures
are clearly expressed
4. Accuracy and valuation – financial and other info are disclosed fairly and at appropriate amounts

Auditor’s Opinion
1. Unmodified opinion – the auditor is satisfied that the evidence obtained is sufficient and appropriate and
supports the view presented in the financial statement prepared by the company’s management
2. Modified opinion – the auditor is either not satisfied with the sufficiency or appropriateness of the evidence
that has been obtained, compared with what could reasonably be expected, or has issues with the content of
the financial statements

Modified Opinion with Modified Report

1. Qualified Opinion – The auditor shall modify the opinion in the auditor’s report when :
- The auditor concludes that based on the audit evidence obtained, the financial statements as a whole are
not free from material misstatement disagreement with management about (i) accounting policy, (ii)
accounting treatment, (iii) disclosure in the FS
- The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement
2. Adverse Opinion – When the auditor having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate are both material and pervasive to the financial statement
3. Disclaimer Opinion – when the auditor is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, and the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive