Orientation

AUDIT AND ASSURANCE

 Orientation

COURSE CONTENT

• ETHICS AND ACCEPTANCE

• CORPORATE GOVERNANCE
• INTERNAL AUDIT
• AUDIT RISK
• INTERNAL CONTROL SYSTEMS
• SUBSTANTIVE PROCEDURES
• REVIEW & REPORTING
 Orientation

EXAM FORMAT

• SECTION A = 30 Marks

3 OTQs (Each OTQ will have 5 questions worth 2 marks)

• SECTION B = 70 Marks
• Overall, 3 Questions in Section B
• Q16 = 30 Marks
• Q17 = 20 Marks
• Q18 = 20 Marks
 Orientation

Why Students fail in Audit Assurance?

1) Poor Typing speed

2) Lack of exam practice
3) Poor score in section A.
4) Scoring nothing or below average in Knowledge based
(Section B).
5) Exam technique issues in three major areas.
6) Ignoring minor areas during preparation.
7) Final Mock Exam Not marked
 Orientation

My Plan:

• Step 1: ETHICS CG IA
• Step 2: Questions relevant to Ethics - CG & IA
• Step 3: RISK & Questions relevant to RISK
• Step 4: CONTROLS & Questions relevant to CONTROLS
• Step 5: Substantive PROCEDURES & Questions relevant to
Procedures
• Step 6: Review and Reporting and Questions relevant to
Review and reporting

• Step 7 : MOCK EXAM

 Introduction to Assurance

What is assurance?
An assurance engagement is: 'An engagement in which a
practitioner obtains sufficient appropriate evidence in order to
express a conclusion designed to enhance the degree of confidence
of the intended users other than the responsible party about the
outcome of the evaluation or measurement of a subject matter
against criteria.’
 Introduction to Assurance

Elements of an Assurance Engagement

There are five elements of an assurance engagement:
(1) Three party involvement
Practitioner – Auditor
Intended users – Shareholders
Responsible party – Directors

(2) Appropriate subject matter - Financial statements

(3) Suitable criteria - Financial reporting Framework

(4) Sufficient appropriate evidence

Sufficient appropriate evidence is needed to provide a
basis for the opinion/conclusion.

(5) Written assurance report - Independent auditor’s report

 Introduction to Assurance

Assurance Engagements
Examples of assurance engagements include:
• Audit of financial statements

• Review of financial statements

• Systems reliability reports

• Verification of social and environmental information

• Review of internal controls

• Value for money audit in public sector organizations

 Introduction to Assurance

Types of Assurance Engagement

1. Reasonable Assurance Engagements

The practitioner:

• Gathers sufficient appropriate evidence to be able to

Draw reasonable conclusions
• Performs very thorough procedures
• Concludes that the subject matter conforms in all
material respects with identified suitable criteria
• Gives a positively worded assurance opinion
• Gives a high level of assurance (confidence)
• In our opinion, the financial statements give a true and
fair view
 Introduction to Assurance

2. Limited Assurance Engagements

The practitioner:
• Gathers sufficient appropriate evidence to be able to draw
Limited conclusions
• Performs significantly fewer procedures, mainly enquiries
and analytical procedures
• Concludes that the subject matter, with respect to identified
Suitable criteria, is plausible in the circumstances
• Gives a negatively worded assurance conclusion
• Gives a moderate or lower level of assurance than that of an
audit
• Nothing has come to our attention that causes us to believe
That the financial statements
 Introduction to Assurance

The confidence inspired by a reasonable assurance report is

designed to be greater than that inspired by a limited
assurance report.
Therefore:
• There are more regulations/standards governing a
reasonable assurance assignment.
• The procedures carried out in a reasonable assurance
Assignment will be
• more thorough.
• The evidence gathered will need to be of a higher quality.
External Audit Engagements
An external audit is an example of a reasonable assurance
engagement
 Introduction to Assurance

Review Engagements
A review engagement is an example of a limited assurance
engagement
 Introduction to Assurance

Objectives of the auditor

The objectives of an auditor are to:

• Obtain reasonable assurance about The FS
• Express an opinion
 Introduction to Assurance

Need for external audit???

AGENCY RELATIONSHIP

SHAREHOLDERS VS DIRECTORS =
EXTERNAL AUDIT
 Introduction to Assurance

Benefits of an Audit

• Higher quality information which is more reliable

• Independent scrutiny and verification may be valuable to
management.
• Reduces the risk of Frauds & Errors
• Enhances the credibility of the financial statements
• Deficiencies in the ICS
 Introduction to Assurance

Expectation Gap

Some users incorrectly believe that an audit provides absolute

assurance – that the audit opinion is a guarantee the financial
statements are 'correct'. This and other misconceptions about
the role of an auditor are referred to as the
Expectation gap
Examples of the Expectation Gap

• A belief that auditors test all transactions and balances

• A belief that auditors are required to detect all fraud
• A belief that auditors are responsible for preparing the
financial statements
 Introduction to Assurance

Review engagements

A review engagement is an example of a limited assurance

engagement

Purpose and objective of a review engagement:

A company which is not legally required to have an audit may
Choose to have a review of its financial statements instead.
The review will still provide some assurance to users but is
likely to cost less and be less disruptive than an audit.
The procedures will mainly focus on analytical procedures
and enquiries of management.
 Introduction to Assurance

Stakeholder groups with an interest in the financial statements:

• Shareholders
• Employees
• Those charged with governance
• Customers
• Suppliers
• Lenders
• The government
 Rules and regulation
LEARNING OUTCOMES

1. Which companies are required to have an audit

2. Who can and cannot carry out an audit
3. Auditor appointment, resignation and removal
4. The rights and duties of an auditor
 Rules and regulation

Who needs an audit and why?

• LEGAL REQUREMENT
• EXEMPTIONS
• REGULATED SECTORS
 Rules and regulation

Who may act as auditor?

A member of RSB
OR
Someone directly authorized by the state
 Rules and regulation
Who appoints the auditor?

• Members (shareholders)

• Directors

• Secretary of State
 Rules and regulation

Removing the Auditor

Resigning as Auditor
 Rules and regulation
The Auditor’s Rights
During appointment as On resignation
auditor
1. Access to the company’s 1. To request a General
books and records Meeting
2. To receive information and 2. To require the company to
explanations circulate the notice of
3. To receive notice of and circumstances
attend any meetings
4. To be heard at such
meetings
5. To receive copies of any
written resolutions of the
company.
 Ethics

Ethics

One of the PER performance objectives (PO1)

Is ethics and professionalism.
 Ethics

IESBA Code
of Ethics
ACCA Code
of Ethics and
Conduct
Conceptual Fundamental
Framework Principles

Threats

Safeguards
 Ethics

The Fundamental Principles

ICOPP
• Integrity
• Confidentiality
• Objectivity
• Professional behavior
• Professional competence and due care
 Ethics
Threats and Safeguards:
ASSIF
• Advocacy threats
Promoting the position of a client or representing them in some
way would mean the audit firm is seen to be 'taking sides' with the
client
• Self-interest threats
Where the auditor has a financial or other interest that will
Inappropriately influence their judgment or behavior
• Self-review threats
Where non-audit work is provided to an audit client and is then
subject to audit, the auditor will be unlikely to admit to errors in
their own work, or may not identify the errors in their own work
• Intimidation threats
Actual or perceived pressures from the client, or attempts to
exercise undue influence
• Familiarity threats
When the auditor becomes too sympathetic or too trusting of a
client and loses professional skepticism, or where the relationship
between the auditor and client goes beyond professional
boundaries
 Ethics

Advocacy Threats
• Representing the client in court

• Negotiating on the client's behalf for finance.

• Valuation services

• Tax services
 Ethics

Self-Interest Threats
• Fee dependency
• Gifts and hospitality
• Owning shares/financial interests
• Loans and guarantees
• Overdue fees
• Business relationships
• Potential employment with an
• Audit client
• Contingent fees
 Ethics

Self-Review Threats
• Accounting and bookkeeping

• Services

• Internal audit services

• Tax services (Tax return preparation VS Tax

calculations)

• IT services

• Temporary personnel assignments

• Client staff joins audit firm (recent service with an
Audit client)
 Ethics

Intimidation Threats
• Fee dependency

• Gifts and hospitality

• Family and personal relationships

• Recruitment services

• Employment with an audit client

• Litigation between the audit firm and client

 Ethics

Familiarity Threats
• Long association of senior

• Personnel

• Family and personal relationships

• Recruitment services

• Employment with an audit client

 Ethics

Conflicts of Interest
A conflict of interest arises when the same audit firm
is appointed for two companies that interact with each
other, for example:

• Companies which compete in the same market

• Companies which trade with each other.

A conflict of interest may create a threat to the

fundamental principles of objectivity and
confidentiality
 Ethics

Professional accountants should always act in the best interests of the

client.
In order to ensure this, the firm must disclose the nature of the
conflict to the relevant parties and obtain consent to act

The following additional safeguards should be implemented

1. Separate engagement teams
2. Review of the key judgments
3. Limit access to client files
4. Physical separation
5. Confidentiality agreements
6. Specific training and communication
 Acceptance

Accepting/continuing an audit engagement

• An audit firm should only take on clients and work of an

appropriate level of risk.

• For this reason, the firm will perform 'client screening’.

• The firm will consider the following matters before accepting a

New engagement or client.

• P P P R R R I M MF
 Acceptance

CLIENT SCREENING:
• Professional clearance
• Professional competence
• Preconditions for an audit
• Resources
• Risk
• Reputation of the client
• Independence and objectivity
• Management integrity
• Money laundering (client due diligence)
• Fees
 Acceptance

Preconditions for an audit

• Before accepting (or continuing with) an engagement, the

auditor must establish whether the preconditions for an audit
are present

1. Preparation of the financial statements in accordance with the

applicable financial reporting framework.
2. Internal control necessary for the financial statements to give
a true and fair view.
3. Providing the auditor with access to all relevant information
and explanations.
 Acceptance

Continuance

• Once the engagement is complete, the audit firm must

revisit the acceptance considerations again to ensure it is
appropriate to continue for the following year. If any
significant issues have arisen during the year, such as
disagreements with management or doubts over
management integrity, the firm may consider resigning
 Acceptance

Engagement letters

• The engagement letter specifies the nature of the contract

between the firm and client. The letter will be sent before the
audit commences

• PURPOSE?
1. Minimize the risk of any misunderstanding
2. Confirm acceptance
3. Set out the terms and conditions
 Acceptance

Changes to the engagement letter

• Reasons for changes would include :

• Changes to statutory duties due to new legislation

• Changes to professional duties, for example, due to new or
updated ISAs
• Recent changes in senior management
• A significant change in ownership
 Acceptance

The contents of the engagement letter

• The objective and scope of the audit of the financial statements

• The responsibilities of the auditor
• The responsibilities of management
• Identification of the applicable financial reporting framework
• Limitations of an audit
• Expectation that management will provide written
Representations
• Basis on which the fees are calculated
 Corporate governance

Corporate governance

• Corporate governance is the means by which a company is

operated and controlled

• The aim of corporate governance is to ensure that

companies are run well in the interests of their shareholders,
employees, and other key stakeholders such as the wider
community

• The aim is to try and prevent company directors from

abusing their power which may adversely affect these
stakeholder groups
 Corporate governance

Advantages of a company following good

Corporate governance principles
• Greater transparency

• Greater accountability

• Efficiency of operations

• Better able to respond to risks

• Less likely to be mismanaged

 Corporate governance

High profile corporate failures

1. Carillion

2. Enron
 Corporate governance

The Corporate Governance Code

• The Organization for Economic Co-operation and

Development (OECD) has produced a set of six principles
of corporate governance to guide policy makers when
setting regulations for their own country
 Corporate governance

The UK Corporate Governance Code reflects the OECD principles.

• The code is split into five parts:

• Board leadership and company purpose

• Division of responsibilities
• Composition, succession and evaluation
• Audit, risk and internal control
• Remuneration
 Corporate governance

Committees

• Remuneration committee

• Risk committee

• Nomination committee

• Audit committee
 Corporate governance

The audit committee

• The audit committee is able to view company’s affairs in a

detached and independent way and liaise effectively
between the main board of directors and the internal and
external auditors.

• Minimum 3 NEDs

• At least 1 with Financial expertise

 Corporate governance

The objectives of the audit committee

• Increasing public confidence

• Assisting Eds

• Liaison with external auditors

 Corporate governance

Benefits of an audit committee

• Improved credibility of the financial statements

• Increased public confidence in the audit opinion
• Stronger control environment
• It may be easier and cheaper to arrange finance
• It will be less of a burden to meet listing requirements
• The internal audit function will report to the audit
Committee
 Corporate governance

EXAM REQUIREMENT

(i) Explain SIX corporate governance deficiencies

(ii) Recommend the changes necessary to overcome each

deficiency.
 Internal audit

Internal audit

• One of the PER performance objectives (PO19) is to collect

and evaluate evidence for an audit

• Internal audit is an independent, objective assurance and

consulting activity designed to add value and improve an
organization’s operations.
 Internal audit

The need for internal audit

• Scale and diversity of activities.

• Complexity of operations.

• Number of employees.

• Cost/benefit considerations.

• The desire of senior management.

• The current control environment

 Internal audit
The difference between internal and external auditors
External audit Internal audit

Objective Express an opinion on the Improve the company's

truth and fairness of the operations by reviewing the
financial statements in a efficiency and effectiveness
written report of internal controls
Reporting Reports to shareholders Reports to management or
those charged with
governance
Availability Publicly available Not publicly available
of
report
Scope of Verifying the truth and Wide in scope and
work fairness of the financial dependent on management's
statements requirements
Appointment By the shareholders of the By the audit committee or
and removal company board of directors
Relationship Must be independent of the May be employees or an
company outsourced function
 Internal audit

The role of the internal audit function

Key activities:
• Assessing whether the company is demonstrating best practice in corporate
Governance.
• Evaluating the company's risk identification and management processes.
• Testing the effectiveness of internal controls.
• Assessing the reliability of financial and operating information.
• Assessing the economy, efficiency and effectiveness of operating activities
(Value for money).
• Assessing compliance with laws and regulations.
• Providing recommendations on the prevention and detection of fraud.
Most of these activities can be seen as helping management comply with
Corporate governance requirements
 Internal audit

Additional roles For Internal auditors

• Fraud investigations

• IT systems reviews

• Mystery shopper visits

• Asset verification

• Providing direct assistance to the external auditor

• Contract audits
 Internal audit
Qualities of an effective internal audit function
• Sufficiently resourced

• Well organized

• Independent and objective

• The chief internal auditor

• No operational responsibilities

• The audit committee should set the plan of work

• No limitation on the scope of their work

 Internal audit

Limitations of internal audit

• Internal auditors may be employees

• In smaller organizations in particular, internal audit may

be managed as part of the finance function

• Familiarity threat
 Internal audit

Acceptable levels of independence can be achieved

• Reporting channels separate from the management of the main

financial reporting function.

• Reviews of internal audit work by managers independent of the

function under scrutiny.

• Outsourcing the internal audit function to a professional third party

 Internal audit
Outsourcing the internal audit function

• Outsourcing is where the company uses an external

company to perform its internal audit service instead of
employing its own staff.
 Internal audit

Advantages
• Independent of the client

• Broader range of expertise

• Specialist skills readily available

• Professional firms can be employed on a flexible basis

• Employment costs of permanent staff are avoided

• The risk of staff turnover is passed to the outsourcing firm

 Internal audit

Disadvantages
• Professional firms lack the intimate knowledge and
understanding

• The decision may be based on cost

• Fees charged by professional firms may be high

• Lack of control over the quality of service

• An ethical threat may arise if the service is provided by the

external audit firm
 Internal audit

Internal audit assignments

• Internal auditors perform many different types of assignment.
Common examples include

• Value for money assignments

• Operational audits

• The audit of IT systems

• Financial audit.
 Risk

Risk

• One of the PER performance objectives (PO18) is to is to

prepare for and plan the audit process
 Risk
Learning outcomes:
• Audit risk

• Professional skepticism

• Materiality

• Understanding the entity and its environment

• Analytical procedures
 Risk

AUDIT RISK: Audit risk is the risk that the auditor expresses an inappropriate opinion
when the financial statements are materially misstated

• Audit risk comprises the risk of material misstatement and

detection risk

• Risk of material misstatement: ROMM is the

risk that the financial statements are
materially misstated prior to the audit.
• Due to fraud or errors
• Client specific risk
 Risk

What is a misstatement?

• A difference between the reported amounts, classification,

presentation, or disclosure of a financial statement item and the
amount, classification, presentation, or disclosure that is required
for the item to be in accordance with the applicable financial
reporting framework. Misstatements can arise from error or
fraud
 Risk

Categories of misstatement

• There are three categories of misstatements:

1. Factual misstatements

2. Judgmental misstatements

3. Projected misstatements
 Risk
The risk of material misstatement comprises inherent risk and
Control risk.
• INHERENT RISK
• Inherent risk is the susceptibility of an assertion about a class
of transaction, account balance or disclosure to misstatement
that could be material, before consideration of any related
controls

• CONTROL RISK
• Control risk is the risk that a misstatement that could occur
and that could be material, will not be prevented, or detected
and corrected on a timely basis by the entity's internal controls
 Risk

Detection risk:
Detection risk is the risk that the procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement
that exists and that could be material

• Detection risk comprises sampling risk and non-sampling risk

• Sampling risk

• Non-sampling risk
 Risk

Professional skepticism

• Professional skepticism is: 'an attitude that includes a

questioning mind, being alert to conditions which may indicate
possible misstatement due to fraud or error, and a critical
assessment of audit evidence.’

• How to apply professional skepticism?

 Risk

Materiality

• What is materiality?
• Misstatements, including omissions, are material if they,
individually or in the aggregate, could reasonably be expected
to influence the economic decisions of users taken on the basis
of the financial statements
 Risk

What is the significance of materiality

• If the financial statements contain material misstatement, they

cannot be deemed to show a true and fair view.

• How is materiality determined?

• The determination of materiality is a matter of professional
Judgment
 Risk

Material by size

• ½ – 1% revenue

• 1 – 2% total assets

• 5 – 10% profit before tax

 Risk
Material by nature
• Materiality is not a purely financial concern. Some items may be material by nature.
• Examples of items which are material by nature or material by impact include:

• Misstatements that affect compliance with regulatory requirements.

• Misstatements that affect compliance with debt covenants.

• Misstatements that, when adjusted, would turn a reported profit into a loss for the year or
net-asset position into a net-liability position.

• Transactions with directors, e.g., salary and benefits, personal use of assets, etc.

• Disclosures in the financial statements relating to possible future legal claims or going
concern issues
 Risk

Performance materiality

• The amount set by the auditor at less than 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
 Risk

Understanding the entity and its environment

1. Relevant industry, regulatory and other external factors

2. Nature of the entity
3. Entity's selection and application of accounting policies
4. Entity's objectives, strategies and related business risks
5. Measurement and review of the entity's financial performance
6. Internal controls relevant to the audit
 Risk

SOURCES OF INFORMATION:

• YOUR PAST EXPERIENCE

• AUDIT FIRM

• CLIENT

• EXTERNAL
 Risk

Analytical procedures

• Evaluations of financial information through analysis of

plausible relationships among both financial and non-financial
data and investigation of identified fluctuations, inconsistent
relationships or amounts that differ from expected values by a
significant amount

• Analytical procedures include comparisons of the entity’s

Financial information with, for example
• prior periods
• Anticipated results
• industry information
 Risk
EXAM REQUIREMENT?
• Using the information provided, describe 5/6/7/8 audit risks and
explain the auditor's response to each risk in planning the audit.

• Marking Scheme
1- Describe Audit Risk = Identify + Explain
• Identification of Audit Risk= 0.5 Mark
• Explanation of Audit Risk= 0.5 Mark

2- Auditor’s Response= 1 Mark

 Risk

How to describe Audit Risk? (ROMM)

• 1- Which FS items are at RISK of MM
(overstated/understated/Misstated)? 0.5 mark

• 2- Why you as an Auditor thinks that client’s A/C

TREATMENT is wrong or could be wrong? 0.5 mark

• There is a risk that……………..

• This is not correct…………
 Risk

How to describe Audit Risk? (Detection Risk)

• Auditor might not be able to detect the MM in the FS because:

• New Audit Client

• Time Pressure
• Lack of Resources
• Competence
• Use of 3rd party services by the client
 Risk

How to explain Auditor’s Response? (1 mark / response)

• 1- It’s the Auditor’s reaction against the RISK

• 2- The response must be a response of the AUDITOR, not the

CLIENT & must directly relate to the risk YOU have given

• 3- As an Auditor, you should VERIFY the Risk through your

RESPONSE

• It is your plan of action

 Risk

Audit Risk Exam Questions are of two types

1. SCENARIO ONLY

2. SCENARIO PLUS EXTRACT OF FINANCIAL

STATEMENTS (RATIOS)

EXAM REQUIREMENT WILL BE SAME IN BOTH THE

CASES
 Planning
Chapter 08

Planning

• One of the PER performance objectives (PO18) is to is to

prepare for and plan the audit process
 Planning
Chapter 08

Learning outcomes:

1. AUDIT PLANNING

2. FRAUDS AND ERRORS

3. LAWS AND REGULATIONS

4. QUALITY CONTROL
 Planning
Chapter 08
Purpose of planning
The objective of the auditor is to plan the audit so that it will be performed
in an effective manner

• Benefits of planning:
• Devotes appropriate attention to important areas of the audit.
• Identifies and resolves potential problems on a timely basis.
• Organizes and manages the audit so that it is performed in an
effective and efficient manner.
• Selects team members with appropriate capabilities and
Competencies.
• Directs and supervises the team and reviews their work.
• Effectively coordinates the work of others, such as experts and
Internal audit.
 Planning
Chapter 08

The planning process

• Planning consists of a number of elements. They can be

summarized as:
1. Preliminary engagement activities
2. Planning activities

– Developing the audit strategy

– Developing an audit plan
 Planning
Chapter 08
The audit strategy

• The audit strategy sets the scope, timing and direction of the audit

• The audit strategy allows the auditor to determine:

• The resources to deploy for specific audit areas (e.g. experience level, external
experts).
• The amount of resources to allocate (i.e. number of team members).
• When these resources are to be deployed.
• How the resources are managed, directed and supervised, including the timings
of meetings, debriefs and reviews.
 Planning
Chapter 08

The audit plan

• The strategy sets the overall approach to the audit; the plan fills in the
operational details of how the strategy is to be achieved
• The audit plan should include specific descriptions of:

• The nature, timing and extent of risk assessment procedures.

• The nature, timing and extent of further audit procedures, including:

• What audit procedures are to be carried out

• Who should do them

• How much work should be done

• When the work should be done
 Planning
Chapter 08

The relationship between the audit strategy and the audit plan

• Audit Strategy : Determines scope and direction of audit and

determines its development

• Audit Plan : Will consider increase level of detail and shows

how the overall strategy will be implemented
 Planning
Chapter 08

Interim and final audit

• The auditor must consider the timing of audit procedures such as

whether to carry out an interim audit and a final audit, or just a final
audit.

• For an interim audit to be justified, the client normally needs to be of a

sufficient size because this may increase costs. However, an interim
audit should improve risk assessment and make final procedures more
efficient.

• It is important to note that the interim audit and final audit are two
stages of the same audit.
 Planning
Chapter 08

Interim audit vs Final audit

1. Timing
2. Purpose
3. Work performed

Impact of interim audit work on the final audit

 Planning
Chapter 08

Fraud and error

• Misstatement in the financial statements can arise from either fraud or

error. The distinguishing factor is whether the underlying action that
resulted in the misstatement was intentional or unintentional.

• Fraud: Fraud is an intentional act by one or more

individuals among management, those charged with
governance, employees or third parties, involving the use of
deception to obtain an unjust or illegal advantage
 Planning
Chapter 08

Fraud can be split into two types

1. Fraudulent financial reporting – deliberately misstating

the financial statements to make the company's
performance or position look better/worse than it actually
is.
2. Misappropriation – theft of a company’s assets such as
cash or inventory
 Planning
Chapter 08

Error

• An error can be defined as an unintentional misstatement in

financial statements, including the omission of amounts or
disclosures.
 Planning
Chapter 08

Responsibilities in respect of fraud

1. Directors

2. Internal auditors

3. External auditors

The auditor’s role is two-fold:

• Assess the risk of material misstatement due to fraud, and

• Respond to the assessed risks

 Planning
Chapter 08

Reporting of fraud and error

• Appropriate level of management

• Those charged with governance

• Seek legal advice

• Outside the entity?

• Shareholders via Audit opinion

 Planning
Chapter 08
Consideration of Laws and Regulations in an
Audit of Financial Statements.

1. Responsibilities of management

2. Responsibilities of the auditor

 Planning
Chapter 08

Audit procedures to identify instances of non-compliance

• Obtaining a general understanding of the legal and

regulatory framework applicable to the entity and the
industry

• Enquiring of management and those charged with

governance

• Inspecting correspondence with relevant licensing or

regulatory authorities

• Remaining alert
 Planning
Chapter 08

Audit procedures when non-compliance is identified

• Enquire of management of the penalties to be imposed.

• Inspect correspondence with the regulatory authority to

Identify the consequences.

• Inspect board minutes for management's discussion on

Actions to be taken regarding the non-compliance.

• Enquire of the company's legal department as to the

possible impact of the non-compliance.
 Planning
Chapter 08
Reporting non-compliance
• To management and those charged with governance

• If the auditor believes the non-compliance is intentional and material,

the matter should be reported to those charged with governance

• To the audit committee or supervisory board

• If the non-compliance has a material effect on the financial

Statements, a qualified or adverse opinion should be issued

• Consider whether they have any legal or ethical responsibility to

report non-compliance to third parties
 Planning
Chapter 08
NOCLAR

• The IESBA Code of Ethics for Professional Accountants sets out new
ethical requirements in relation to an entity’s compliance with laws and
regulations

• The additional requirements have been introduced to address concerns

that the duty of confidentiality was acting as a barrier to the disclosure
of potential NOCLAR to public authorities in the appropriate
circumstances

• The aim is to generate an earlier response by management or those

charged with governance, and timelier intervention from public
authorities on reports of potential NOCLAR, thereby mitigating
adverse consequences for stakeholders and the general public
 Planning
Chapter 08

Quality control

• ISA 220 Quality Control for an Audit of Financial

Statements requires the firm to establish a system of quality
control to ensure the firm complies with professional
standards and issues reports that are appropriate in the
circumstances

• Policies and procedures should be established which

Address

• H A L E EM
 Planning
Chapter 08

Human resources

• The engagement partner should ensure that the engagement team

collectively have the competence and capabilities to perform the
audit in accordance with professional standards

• Acceptance and continuance of client

Relationships

• PPP RRR I MM F
 Planning
Chapter 08

Leadership

• The engagement partner takes responsibility for the overall

quality of the engagement

• Ethical requirements

• The firm should ensure compliance with the requirements of

The ACCA Code of Ethics and Conduct
 Planning
Chapter 08

Engagement performance

• Engagement performance comprises direction, supervision and

Review of the engagement

• Monitoring

• Quality control policies alone do not ensure good quality

work. Firms should carry out post-issuance or 'cold' reviews
to ensure that quality control procedures are adequate,
relevant and operating effectively
 Systems and controls
Chapter 09
Systems and controls
 Systems and controls
Chapter 09
Learning Outcomes

• Components of an internal control system

• Documenting client systems

• THE SIX ICS

• EXAM REQUIREMENTS
 Systems and controls
Chapter 09
Components of an internal control system
• CRICM

1. Control environment

2. Risk assessment process

3. Information system

4. Control activities

5. Monitoring of controls
 Systems and controls
Chapter 09
Documenting client systems
• The auditor must document the client’s control systems before evaluating
Whether the system is adequate and working effectively.
Possible ways of documenting systems include:
• Narrative notes – a written description of a system.
• Flowcharts – a diagrammatical representation of the system.

• Questionnaires – a prepared list of questions in relation to the clients control

system.
• There are two types of questionnaire that can be used:
1. Internal Control Questionnaire (ICQ) – a list of controls is given to the client
And they are asked whether or not those controls are in place.
2. Internal Control Evaluation Questionnaire (ICEQ) – the client is asked to
describe the controls they have in place for a given control objective.
 Systems and controls
Chapter 09
TYPES OF INTERNAL CONTROL SYSTEMS IN AA:

• (i) The sales system

• (ii) The purchases system

• (iii) The payroll system

• (iv) The inventory system

• (v) The cash system

• (vi) Non-current assets

 Systems and controls
Chapter 09
OBJECTIVES OF ICS
i) SALES SYSTEM
• Goods are only supplied to customers who pay promptly and in
Full.
• All orders are processed
• Orders are dispatched promptly and in full to the correct
customer
• All orders are dispatched
• All goods dispatched are invoiced
• Invoices are raised accurately
• Only valid sales are recorded
• Overdue debts are followed up on a timely basis
 Systems and controls
Chapter 09
OBJECTIVES OF ICS
ii) PURCHASE SYSTEM
• All purchases are made with suppliers who have been checked
for quality, reliability and pricing.
• Purchases are only made for a valid business use
• Only goods ordered by the company are accepted.
• Goods received are recorded promptly.
• Invoices received are correct in terms of quantities, prices,
Discounts
• All purchases and related payables are recorded
• Purchases are recorded in the period to which they relate.
• Purchases and payables are recorded in the correct accounts
• Payments are only made for goods received
 Systems and controls
Chapter 09
OBJECTIVES OF ICS
iii) PAYROLL SYSTEM
• Employees are only paid for work actually done.
• Only genuine employees are paid.
• Employees are paid at the correct rates of pay.
• Gross/Net pay is calculated and recorded accurately.
• Standing data is kept up to date.
• Access to standing data is restricted to prevent fraud
• All payroll amounts are recorded & accurately
• Payroll costs are recorded in the period to which they relate
• Correct amounts are paid to the employees and taxation authorities
• Payments are made on time
 Systems and controls
Exam Requirements: Chapter 09
You should be prepared for all possible exam requirements.

• 1- List 3/4 Control objectives of sales/purchase system.

• 2- Identify & Explain 5/6/7/8 deficiencies in company’s system

• 3- Provide recommendations to address deficiencies

• 4- Identify and explain 5 Key Controls (Good Controls)

• 5- Describe a Test of Control the Auditor should perform.

 Systems and controls
Chapter 09
Marking Scheme

• 1- Identification of Deficiencies = 0.5 Mark

• 2- Explanation of Deficiencies= 0.5 Mark

• 3- Recommendation= 1 Mark

• 4- TOC= 1 Mark

• 5- Identification of Key Control= 0.5 Mark

• 6- Explanation of Key Control= 0.5 Mark

 Systems and controls
Chapter 09
How to Identify Deficiencies? (0.5 Mark)
• 1- Weak segregation of Duties.

• 2- Seniority of staff

• 3- No Authorization

• 4- No Review of work.

• 5- Manual VS Automation

• 6- Look for No/Not in the question

• 7- Documentation Issues
 Systems and controls
Chapter 09
How to Explain the Deficiencies? 0.5 Mark

• 1- Loss of future sales

• 2- Loss of Customer Goodwill.

• 3- Cash Flow problems.

• 4- Increase in Cost (Negative Impact on the Business)

• * This could result in

• * There is a risk that
 Systems and controls
Chapter 09
How to Explain the Recommendations? (1 Mark)

• 1- Do not just repeat the deficiency.

• 2- Try to add value

• 3- Who should perform the activity

• 4- When it should be performed

• 5- Frequency?
 Systems and controls
KEY CONTROLS = GOOD CONTROL Chapter 09
(It’s the opposite of deficiencies)

• 1- Key Control are actions that management has taken to reduce

The risk of FRAUD & ERROR.
• 2- For the full mark, explain the RISK that the control is
designed to mitigate.
• * This minimizes/reduces the risk of …..
• * This ensures that

• MARKING SCHEME:
• IDENTIFICATION OF KEY CONTROL = 0.5 MARK
• EXPLAINATION = 0.5 MARK
 Systems and controls
Test of Control (1 Mark) Chapter 09

• 1- Inquire of Management.

• 2- Observe the process/activity

• 3- Use test data/dummy data.

• 4- Inspect the documents/reports - look for signatures

 Substantive Procedures
Chapter 10
Substantive Procedures

• One of the PER performance objectives (PO19) is to collect and

evaluate evidence for an audit

• This is the most important Chapter of the syllabus

 Substantive Procedures
Chapter 10
Writing good audit procedures

• It should contain an ACTION applied to a SOURCE to

achieve an OBJECTIVE.

• Read the procedure back and consider whether a person

with no audit experience will understand it.
 Substantive Procedures
Chapter 10
Exam requirement:

• Describe the substantive procedures the auditor should

perform to verify the . . . . . .
• Describe the substantive procedures the auditor should
perform in order to obtain sufficient appropriate evidence in
relation to . . . . . . .
 Substantive Procedures
Chapter 10
Marking scheme:

• 1 mark per procedure

• But the procedure should be a well explained one.

 Substantive Procedures
Substantive Procedure Chapter 10

A Analytical Procedures

E Enquiries & Confirmation

I Inspection

O Observation

U Recalculation & Reperformance

 Substantive
Chapter 10 Procedures
ASSERTIONS:

• THE CLAIMS OF THE MANAGEMENT REGARDING

THE FINANCIAL STATEMENTS.
• ASSERTIONS ARE VERIFIED BY THE AUDITOR BY
APPLYING SUBSTANTIVE PROCEDURES.
 Substantive Procedures
Chapter 10
SOFP

• E = EXISTENCE
• V= VALUATION
• C= COMPLETENESS
• R= RIGHTS & OBLIGATIONS
 Substantive Procedures
Chapter 10
SOPL

• C=COMPLETENESS
• O=OCCURRENCE
• C= CUT-OFF
• C= CLASSIFICATION
• A= ACCURACY
 Substantive Procedures
Chapter 10
EVIDENCE

• DADA3

• D = DIRECTORS

• A = ASSETS

• D = DOCUMENTS

• A = ACCORDING BOOKS & RECORDS

• 3 = 3rd PARTIES (BANK, LAWYER, DEBTORS, PAYABLES)

 Substantive Procedures
Chapter 10
Bottom-line:

• We will apply AEIOU on DADA3 to verify EVCR or

COCCA to score one mark
 Substantive Procedures
Chapter 10
NON-CURRENT ASSETS

• Sources of evidence:
• Non-current asset register
• Purchase invoices (additions)
• Sales invoices / capital disposal forms (disposals)
• Bank statements and cash book
• Physical assets
• Ownership documents including title deeds & registration
documents
• Depreciation policy and rates
• Capital expenditure budgets / capital replacement plans
 Substantive
Chapter 10 Procedures
Inventory
• Sources of evidence:

• Aged inventory listing

• Inventory assets
• Inventory count sheets
• Purchase invoices
• Goods received notes
• Sales invoices
• Goods dispatch notes
• Client calculations of overhead & work-in-progress
 Substantive Procedures
Chapter 10
Receivables

• Sources of evidence:

• Aged receivables listing

• Sales invoices
• Goods dispatch notes
• Receivables circularization letters
• Post year end bank statements
• Policy for allowance for doubtful receivables
 Substantive Procedures
Chapter 10
Bank and cash

• Sources of evidence:

• Bank confirmation letter

• Bank reconciliation

• Cash book

• Bank statements
 Substantive Procedures
Chapter 10
Payables and accruals

• Sources of evidence:

• Aged payables listing

• Purchase invoices
• Goods received notes
• Post year end bank statements
• Supplier statements
• Supplier circularizations
 Substantive Procedures
Chapter 10
Intangible non-current assets

• Sources of evidence:

• Breakdown of expenditure during the year

• Purchase invoices
• Bank statements and cash book
• Timesheets
• Development expenditure / project plans
• Project test / trial results
• Cash flow forecasts
• License agreement
• Third party valuation report e.g., for brand names and trademarks
• Amortization policy and rates
 Substantive Procedures
Chapter 10
Non-current liabilities

• Sources of evidence:

• Loan agreement

• Cash book

• Bank statements

• Bank confirmation letter

 Substantive Procedures
Chapter 10
Revenue

• Sources of evidence:

• Revenue control account

• Sales daybook
• Sales invoices
• Customer contracts
• Goods dispatch notes
• Sales orders
 Substantive Procedures
Purchases and other expenses Chapter 10

• Sources of evidence:

• Purchase control account

• Purchase daybook
• Purchase invoices
• Supplier contracts
• Goods received notes
• Purchase orders
HOW TO DEVELOP AND PRACTICE SUBSTANTIVE Substantive Procedures
PROCEDURES? Chapter 10

• THE POWER OF 5

• IDEA NUMBER 1: THINK ABOUT PROCEDURES = TRY TO APPLY EACH AND

EVERYONE IF IT IS CONVENIENT (AEIOU)

• IDEA NUMBER 2: THINK ABOUT ASSERTIONS = THAT WILL GENERATE IDEAS IN

YOUR MIND. (EVCR & COCCA)

• IDEA NUMBER 3: THINK ABOUT TYPICAL SOURCES OF EVIDENCE MENTIIONED

IN THE STUDY TEXT (DADA3)

• IDEA NUMBER 4: GET CLUES/HINTS/IDEAS FROM THE STORY ITSELF

• IDEA NUMBER 5: THINK ABOUT THE RELEVANT ACCOUNTING TREATMENT

AND THE SEEK TO VERIFY IT
 EVIDENCE
Chapter 11
EVIDENCE

• One of the PER performance objectives (PO19) is to collect

and evaluate evidence for an audit.
 EVIDENCE
Chapter 11
Relying on the work of others

• There are two types of expert an auditor may use:

• (1) Management's expert – an employee of the client or

someone engaged by the audit client who has expertise
that is used to assist in the preparation of the financial
statements.

• (2) Auditor's expert – an employee of the audit firm or

someone engaged by the audit firm to provide sufficient
appropriate evidence
 EVIDENCE
Chapter 11
Relying on the work of an auditor's expert

• Evaluating competence

• Evaluating objectivity

• Agreeing the work

• Evaluating the work

• Reference to the work of an expert

 EVIDENCE
Chapter 11
Relying on internal audit

• Evaluating the internal audit function

• Evaluating objectivity

• Evaluating competence

• Evaluating the internal audit work

• Using the internal audit to provide direct assistance

• Documentation
 EVIDENCE
Chapter 11
Use of service organizations

• Many companies use service organizations to perform

business functions such as:

• Payroll processing
• Receivables collection
• Pension management

• If a company uses a service organization, audit evidence will

need to be obtained from the service organization instead of,
or in addition to, the client.
 EVIDENCE
Audit Considerations Relating to an Entity Using a Service Chapter 11
Organization:

• Planning the audit

• Sources of information about the service organization

• Responding to assessed risks

• Impact on the auditor's report

• Benefits to the audit

• Drawbacks
 EVIDENCE
Chapter 11
Automated tools and techniques:
1. Test data
2. Audit software
3. Data analytical tools

TEST DATA:
Test data involves the auditor submitting 'dummy' data into the
client's system to ensure that the system correctly processes it and
that it prevents or detects and corrects misstatements
• LIVE VS DEAD
 EVIDENCE
Chapter 11
Audit software:

• Audit software is used to interrogate a client's system

• Off-the-shelf vs Bespoke

• Can scrutinize large volumes of data

 EVIDENCE
Chapter 11
Specific procedures they can perform include:
• Calculating ratios

• Casting ledgers

• Recalculation

• Preparing reports

• Stratification of data

• Identifying changes to standing data

• Produce letters to send out to customers and suppliers

• Extracting samples according to specified criteria

 EVIDENCE
Chapter 11
Other types of computer-assisted audit techniques

• Integrated test facilities

• Embedded audit software

• Auditing around the computer

 EVIDENCE
Chapter 11
Data analytical tools
• Data analytics:
• Data analytics (DA) is the science and art of discovering and analysing patterns,
deviations and inconsistencies, and extracting other useful information in the data of
underlying or related subject matter of an audit

• Big data: Big data refers to data sets that are large or complex

• Big data technology allows the auditor to perform procedures on very large
Or complete sets of data rather than samples
 EVIDENCE
Chapter 11
Benefits and Limitations of data Analytics:
 Reporting
Chapter 12
Reporting

• One of the PER performance objectives (PO20) is to review and

report on the findings of an audit
 Reporting
TYPES OF AUDITOR’S REPORT Chapter 12

• There are two types of audit reports

1. Un-modified Audit Report

2. Modified Audit Report

Modified Audit Report can further be divided into two types

 Reporting
Unmodified Independent’s Report: Chapter 12

1. Title
2. Addressee
3. Auditor's Opinion
4. Basis for Opinion
5. Key Audit Matters
6. Other Information
7. Responsibilities of Management and TCWG for the FS
8. Auditor's
9. Responsibilities for the Audit of the Financial Statements
10. Report on Other Legal and Regulatory Requirements
11. Signature
12. Auditor's address
13. Date
 Reporting
Key Audit Matters section Chapter 12

• Key audit matters are those that in the auditor's professional judgment were of
Most significance in the audit

• The purpose of including these matters is to assist users in understanding the

entity

• Each key audit matter should describe why the matter was considered to be
significant and how it was addressed in the audit.

• Key audit matters include:

• Areas of higher assessed ROMM
• Significant judgmental areas
• significant events or transactions
 Reporting
Other Information section Chapter 12

• Other information refers to financial or non-financial information, other than

the financial statements and auditor's report thereon, included in the entity's
annual report

• Examples of other information include:

• Chair's report
• Operating and financial review
• Social and environmental reports
• Corporate governance statements
 Reporting
Chapter 12
Modified Audit Report

• There are two types of Modified reports:

• Modified Audit Report without Modifying the Audit

Opinion (3 CASES )

• Modified Audit Report with Modified Opinion ( 4 CASES )

 Reporting
Chapter 12
Modified Audit Report without Modifying the Audit Opinion
• Additional communications will modify the audit report without modifying
Audit opinion.

• There are 3 possible additional communication paragraphs:

1. Material Uncertainty Related to Going Concern

2. Emphasis of Matter paragraph

3. Other Matter paragraph

 Reporting
Chapter 12
Modified Audit Report with Modified Audit Opinion:

• There are 4 possible types of modified opinions.

(a) the financial statements are not free from material misstatement

1. Material but not pervasive = Qualified opinion

2. Material and pervasive = Adverse Opinion

 Reporting
Chapter 12
Modified Audit Report with Modified Audit Opinion:

• There are 4 possible types of modified opinions.

(b) Auditor is unable to obtain sufficient appropriate evidence

3. Material but not pervasive = Qualified opinion

4. Material and pervasive = Disclaimer of opinion

 Reporting
Basis for Opinion section Chapter 12

• The basis for opinion section refers to the professional standards the auditor has followed
in order to be able to form an opinion on the financial statements.

• When the auditor modifies the opinion, this section will also explain the reason why the
opinion is modified e.g. which balances are misstated, which disclosures are missing or
inadequate, which balances the auditor was unable to obtain sufficient appropriate
evidence over and why
 Reporting
Chapter 12

Material but Not Material &

Pervasive Pervasive

Financial statements Qualified Opinion Adverse Opinion.

Are materially Except for ... FS do not give a
Misstated Basis for qualified true and fair view.
opinion Basis for adverse
Opinion
Inability to obtain Qualified Opinion Disclaimer of Opinion.
sufficient appropriate Except for ... Do not express an
audit evidence Basis for qualified Opinion.
opinion Basis for disclaimer
of opinion
 Completion & Review
Chapter 13
Completion and review

• One of the PER performance objectives (PO20) is to review

and report on the findings of an audit
 Completion & Review
Chapter 13
Learning outcomes:

1. Subsequent events
2. Going concern
3. Written representations
4. Audit finalization and the final review
 Completion & Review
Subsequent events Chapter 13

• A subsequent event is: An event occurring between the date of the financial
statements and the date of the auditor’s report,
And facts that become known to the auditor after the date of the auditor’s report.

IAS 10 Events after the Reporting Period identifies two types of event after the
reporting period:
1. Adjusting
• These are events that provide additional evidence relating to conditions
existing at the reporting date
1. Non-adjusting
• These are events concerning conditions which arose after the reporting date.
 Completion & Review
Auditor responsibilities Chapter 13

1. ACTIVE DUTY

2. PASSIVE DUTY
 Completion & Review
Subsequent events procedures Chapter 13

1. Enquiring of management
2. Enquiring into management procedures
3. Reading minutes of members’ and directors’ meetings
4. Reviewing accounting records including budgets, forecasts and interim information
5. Obtaining a written representation
6. Inspection of correspondence with legal advisors
7. Inspecting after date receipts from receivables
8. Inspecting the cash book after the year-end
9. Inspecting the sales price of inventories after the year-end
 Completion & Review
Chapter 13
EXAM REQUIREMENT

• STEP 1 DISCUSS THE ISSUE FROM THE QUESTION

• STEP 2 APPLY IAS 10 ( ADJUSTING VS NON-ADJUSTING )

• STEP 3 APPLY ISA 320 MATERIALITY ( RAP ) ( ½ - 1 - 5 )

• STEP 4 RECOMMEND CORRECT ACCOUNTING

TREATMENT IN ORDER TO AVOID MODIFIED OPINION
 Completion & Review
Chapter 13
Going concern

• Going concern is the assumption that the entity will continue in business for
the foreseeable future.

• Financial statements are prepared using the going concern basis of

accounting, unless management either intends to liquidate the entity or to
cease trading, or has no realistic alternative but to do so.

• Where the assumption is made that the company will cease trading, the
financial statements are prepared using the break-up or liquidation basis
 Completion & Review
Responsibilities for going concern Chapter 13

• Director's responsibilities in respect of going concern

• Auditor's responsibilities in respect of going concern

 Completion & Review
Indicators of going concern problems Chapter 13

• Net current liabilities

• Borrowing facilities not agreed
• Defaulted loan agreements
• Unplanned sales of non-current assets
• Missing tax payments
• Failure to pay the staff
• Negative cash flow
• Legal claims
• Loss of key staff
• Major technology changes
• Changes in laws and regulations
 Completion
Chapter 13 & Review
Audit procedures

• Analyze and discuss cash flow, profit and other relevant

forecasts with management
• Analyze and discuss the entity’s latest available interim
Financial statements
• Review the terms of debentures and loan agreements
• Read minutes of meetings
• Enquire of the entity’s lawyer
• Review events after the year-end
• Review correspondence ( customers-suppliers-banks )
• Obtain written representation from management
 Completion & Review
Chapter 13
Disclosures

• Disclosures relating to going concern are required to be

made by the directors in the following circumstances:

1. Material uncertainty over the future of a company

2. Where the directors have been unable to assess going
concern in the usual way
3. Breakup basis
 Completion & Review
Chapter 13
Reporting implications
 Completion & Review
Chapter 13
Written representations

• A written representation is a written statement by management

provided to the auditor to confirm certain matters or to support
other audit evidence

• Written representations cannot be a substitute for more reliable

evidence that should be available and do not constitute sufficient
appropriate evidence on their own
 Completion & Review
Chapter 13

• Process for obtaining a written representation

• Reliability of written representations

• Steps if written representations are inconsistent with other evidence

• Steps if management refuse to provide written representations

• Audit reporting implications

 Completion & Review
Overall review of the financial statements Chapter 13

• Before forming an opinion on the financial statements and deciding on the

wording of the auditor's report, the auditor should conduct an overall review

• The auditor should perform the following procedures

1. Review the financial statements

2. Perform analytical procedures
3. Review the aggregate of the uncorrected misstatements