AA Flashcards
TP Payment Period
TP/Credit purchases * 365
inventory Turn over
COS/Inventory
Net Asset Turnover
Revenue/Capital Employed
Gearing Ratio
Net debt/equity
Quick ratio
(rec+current inv + cash)/liabilities
Return on SH Funds
Net profit for period/(Share cap+Reserves)
ROCE
PBIT/(Equity + net debt)
Business Risk
Risk resulting from significant conditions, events, circumstances, actions or inactions that could affect entities ability to achieve objectives and strategies or setting inappropriate objectives or strategies
Inherent Risk
Risk faced by client that balance/transaction/disclosure has error that is material either individually or in aggregate
Inherent Risk Factors
Complexity,
Subjectivity,
Change.
Uncertainty
Bias/other fraud risk
Non-Sampling risk
Possibility of coming to wrong conclusion about the FS for non-sampling reasons:
- Not understanding nature
- using invalid techniques or making inappropriate conclusions
- failure to investigate a class of assets/liabilities/transactions
Integrity
Being straightforward and honest in all professional and business relationships
Directors responsibilities CA 2006
Safeguard Assets
Maintain books and records
Prepare and deliver FS (accounting policies, judgement, compliance, going concern)
Comply with laws and regulations
Auditors Responsibility CA 2006
Give an independent opinion on T&F of FS
Give opinion on whether FS prepared in accordance with CA 2006
State in opinion information in SR and DR is consistent with FS
Review of work - features
Consider if done in line with audit strategy
Performed in accordance with professional standards, regulation and legal requirements
significant matters raised for further consideration
Appropriate conversations had and conclusions documented and implemented
the need to revise nature, timing and extent
whether work supports conclusions
SAE to support report
Objective of procedures achieved§
Considerations when tendering
Quality of service could provide
knowledge of business
experience of industry
proposed personnel on team
reference obtained
location, size and culture
Cold review if failure identified
Communicate finding in firm
additional training and professional development
change to policies and procedures
disciplinary actions if repeated failure to comply with firm requirements
Who completes a Cold review
Process - partners review each others work
by team specifically contracted to conduct reviews
By qualified external consultant
Hot review considerations
Independence
SR identified and responses
Judgements made
Consultation on issues
Significant corrected/uncorrected misstatements
Matters to be communicated to the client
whether documentation supports conclusion
appropriateness of proposed report
Supervision features ISA 220
Progress tracking
consider competence and capabilities
address significant audit matters arising
identify matters for consultation and consideration by more experienced team members during the audit
ISCQ1 - EP allocate appropriate staff with:
Understanding of and practical experience with similar engagements
understanding of relevant professional and legal requirements
knowledge of industry
technical knowledge
ability to apply professional judgement
understanding of QC procedures and policy
Engagement Partner & Staff allocations re clients
Clients informed of EP identity
EP capable, competent, has authority and time to perform role
Responsibilities EP clearly defined and communicated to the team
ISQC 1 - HR
Employ and retain appropriate staff
recruitment
performance evaluation
capabilities
competence
development
promotion
compensation
ISQC 1 - Quality Control System
Leadership responsibilities for quality
Ethical requirements
acceptance and continuance HR
Engagement Performance
Monitoring
Quality control procedures
Only suitable clients taken on and retained
partners and staff have necessary knowledge and competence
ethical guidance
communication skills
briefing and supervising skills
professional skepticism and judgement
monitoring
Basis for fee disclosed and determined with reference to
Seniority and experience of team
time spent
risk and responsibility of work
nature of business and complexity
priority and importance of work
expenses incurred
Acceptance Considerations
Risk analysis
Ethical issues
sufficient experience and resources
legal requirements regarding appointment and removal are met
PC and DC
Duty to maintain professional knowledge and skill and ensure deliver competent professional service
act diligently and in accordance with applicable technical professional standards
Objectivity
not allow bias conflict of interest undue influence of others to override professional judgement
Current Ratio
CA/CL
Net margin
PBIT/Revenue
Gross profit %
Gross profit/revenue
audit risk
risk auditor expresses inappropriate audit opinion when FS are MM
= ROMM * DR
ROMM = IR*CR
Detection RIsk
Risk procedures do not detect misstatement that exists and could be material alone or in aggregate
Sampling risk
Risk that conclusions drawn from a sample are different than if had looked at entire population
Confidentiality
Respect confidentiality of information acquired and do not disclose to third parties without proper authority and do not use for personal gain
Professional behaviour
comply with relevant laws and regulations and avoid action that discredits professiong
audit threshold
2/3
employees < 50
Rev < 10.2m
Gross Assets <5.1m
Interest Cover
PBI / Interest
Operating Cost %
Operating Cost / revenue
COS %
COS / Revenue
Control Risk
Risk that a misstatement could occur material alone or in aggregate and will not be prevented or detected and corrected
Significant risk
ROMM - either
Auditor judges IR close to upper end of spectrum (likelihood or impact)
Required to tread as SR by ISA
Materiality RAP
Revenue 0.5-1%
Assets 1-2%
PBT 5-10%
TR collection Period
TR/Rev * 365
Threats MASSIF Co
Management
Advocacy
Self Interest
Self review
Intimidation
Familiarity
Conflict of interest
Consequences of issuing wrong opinion
Want to avoid litigation
Reputational damage
Pay damages
Lose clients
Liability Limitation
Become LLP
Agree liability cap – max amount – fair reasonable and approved by SH
Proportional liability agreement apportioning blame between guilty partners
Bannerman paragraph – report for company members only and no other party (liability disclaimer)
Have to do:
- Get PI insurance
- Clarify responsibilities in audit report and engagement letter
Reduce liability – less likely to get sued as reduces expectation gap
Could also do a good job – less likely to get sued
Consideration during tender/acceptance - TRIM ROT
T – technical competence – do we have relevant skills to do the work, review who have in firm, do they have right skills, do they need training, do we need an expert
R – resources
I – Independence – safeguards – ethical threats
M – Money laundering – any indicators of dodgy transactions – client ID checks
R- reference
O – outgoing auditor
T – term of engagement – signed engagement letter prior to starting work
Process for contacting outgoing auditors
- Explain to client have duty to contact outgoing auditors
- Obtain client permission to contact
- If not given – don’t accept – could suggest there are issues
- Send letter to outgoing auditors
- Replies mentoring anything untoward
- No reply chase
- No reply still inform them take silence of evidence no issues and intend to perofrm audit
Benefits of assurance
- Enhance credibility of information reported on
- Reduce risk of management bias error or even fraud in the inof being reported on
- Draws users attention to deficiencies in the information being reported on
- Credibility to wider share market
Ensure high quality, reliable information is circulating in the market
Give investors added faith in the market
Improve reputation of organisation trading in the market - Business scrutinised by another set of professional eyes
- Assurance to third parties (e.g. Tax) that FS are reliable
- Growing business will one day need an audit
- May recommend improvements to systems
Disadvantages of assurance (entity pov)
- Cost
- Staff time
- Disruption to business
- Time spent on initial appointment
- Dealing with confidentiality
- Expectations gap especially re fraud detection
- Inherent limitations of audit
ISA 500 procedures (ROADIE)
Recalc/reperform
Observe
Analytical procedures
Documentation inspect
Inspect assets
External communication
Enquiry
ISRE 2400 Procedures
Inquiry (accounting principals, systems material assertions)
Analytical procedures
ISAE 3400
- Assess assumptions
- Re-computation
- Written representation
Assurance Engagement
one which a practitioner expresses 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 subject matter against criteria
Auditor rights under CA 2006
- Access at all time to books and accounts
- Right to obtain any information necessary for the audit from any officer or employee of the company
- Right to attend any general meeting of the company
Completion Tasks
On FS - Analytical Procedures & CA 2006 checklist
On working Papers - Check SAE, Compare audit plan with working papers/procedures performed, Ensure procedures performed correctly, Ensure issues are resolved/explained
Communication - ISA 260 v 265
260 – general communication – guidance for communicating anything
- Significant audit matters/ matters that have come to your attention
265- specifically for control deficiencies – for management report
Matters reported by exception - RAPID
Returns from branches not visited have been received and are adequate
Accounts agree to underlying records
Proper accounting records have been maintained
Information and explanation shave been received
Directors transactions have all been correctly disclosed and loans or transactions with tehm have been disclosed correctly
Duties re SR and DR
Read other info (inc dr and sr) and if inconsistencies seek to resolve
state in report if consistent and prepared in accordance with applicable legal requirements
If inconsistent, explain inconsistencies in ‘Opinions on other matters prescribed by CA2006’
If not prepared in accordance with applicable legal requirements ‘Matters we are required to report on by exception’
Reasonable v limited assurance
Level
Reasonable = positive - highest level of assurance not absolute, auditor satisfied subject matter conforms in all material respects with criteria. Accounts give a T&F view
Limited - Negative - limited assurance, given negatively
Why are reasonable and limited assurance engagements different
- Level of work undertaken
- Amount of evidence
- Procedures performed
Off shelf IT package threats/responses
self review & management
If used for accounting system/FS prep refuse engagement as prohibited - if not can accept with safeguards
Recruitment & remuneration services threats and response
Familiarity and Management
Not allowed to provide recruitment services for directors and no remuneration advice deline
Importance of attending an inventory count
SAE on quantity
Evidence of existence
Observe to ensure adherence
Test calculations for accuracy
ROMM if wrong
If don’t adhere reperform/report on deficiencies
Overdue fees threats
Self interest threat due to independence
if offer unmodified opinion may feel more likley to collect fees
Ideally arrange settlement of overdue fees
Consider resigning if not settled
If do not resign need safeguards (second review and ethics partner)
Auditing Competitors consideration
Confidentiality & Conflict of interest
hard to act in best interest of both clients
staff need to be aware of issues, cerity they are aware of proceeders, obtain informed consent of and inform both client, different partner and teams, independent review of arrangements
information barriers in place
Auditor responsibilities re fraud
Not responsible for preventing
Responsible to detect MM in FS whether due to fraud/error
Design audit procedures to obtain reasonable assurance FS as a whole are free from MM whether due to fraud or error
If discover - ML discovery requirements report them
Do not tip off the client
Management responsibility re fraud
Responsible to prevent and detect
Implement IC suitable for business and monitor them
Responsible for safeguarding assets
Why should external auditors be objective and independent
FS preparation is subjective, auditor must be unbiased in forming opinion as directors judgement may be biased or inappropriate
opinion should only be based on available evidence
Independence increases likelihood auditor is objective
Lack of independence may decrease public confidence in audit work, reducing credibility and reliability of reports
Required by CA 2006
Procedures for allowances/estimates
Enquire - reason for estimate & method for calculation
Inspect - evidence of why need allowance and calculation performed
Recalculate using management method & logic and auditors method and logic
Use a third party expert
Auditor Appointment - PLC
Done at AGM where resolution is passed by >50% of shareholders, if no auditor appointed Secretary of State will appoint
Auditor appointment - private company
No AGM required, auditor is automatically reappointed unless 5% or more SH register notice to change auditors
resolution of 50%+ shareholders to pass required
Removal of auditor
Anytime if SH pass ordinary resolution
Auditor given notice
Auditor must deposit statement of circumstances at registered office of company explaining removal (not listed ‘there are no circumstances)
Return all books and records
maintain confidentiality
Company responsible to inform companies house
Auditor resignation requirements
Prepare resignation letter
Contact Auditors authority
Deposit statement of circumstances at companies registered office explaining removal
return all books and records
maintain confidentiality
Cooperate with incoming auditors
Data Analytics BRAVE
Breakdown - analyse by product line
Reperform - three way matching
Aged analysis
Variance Analysis
Exception Report
+ test 100%
Benefits of Data Analytics
Enhances quality of work and understanding of entity
Perform work more efficiently, staff can focus on risky areas
Test up to 100% of transactions
timing of engagement can be changed (more work in same period)
Facilitates analysis of relationships
Identify outlying transactions
Facilitates items at risk of misstatement/ fraud
SFP Assertions (CRAVE)
Completeness
Rights and Obligations
Accuracy / Allocation
Valuation
Existence
P&D
PL Assertions COCOA
Completeness
Occurrence
Classification
(cut)-Off
Accuracy
P&D
When relying on someone else’s work STRIP
Scope - in accordance with IFRS ? Inspect engagement letter to confirm measurement base
Technical Competence - review qualifications/training
Resources - inspect report to determine if work is appropriate and detailed
Independence - obtain list of SH and confirm expert independent
Professionalism - Is the expert taken seriously? review board minutes and identify actions implemented
Matters to be communicated to component auditor ISA 600
Timetable and dates of planned visits
Work to be performed
Ethical requirements
Component Materiality
List of Related Parties/work on intragroup transactions
Significant Risks
Timely communication
Matters to be communicated by component to group ISA 600
Confirm compliance and understanding of instructions and cooperation with group auditor
Confirm allow group auditor to be involved in work
Allow group auditor to evaluate and use work
Understand Ethical Requirements
Understand ISA
Audit Completion Summary
Overall Financial Statement Review
Summary of unadjusted misstatements (ISA 450)
Opening balances (ISA 510)
Comparatives (ISA 710)
Going Concern - ISA 570
Subsequent Events - ISA 560
Written representations - ISA 580
Communicate deficiencies in internal Control ISA 265
Other parts of annual report - ISA 720
Auditors Report 12 points
Opinion
Basis of Opinion
Conc re GC
Approach of audit - KAM
Application of Materiality
Other info (materially consistent)
Opinions on other matters prescribed by ca
Matters on which we are required to report on my exception
Directors responsibilities
Auditors Responsibilities
Other Matters
Signature
Benefit of assurance CHRIS D
Credibility (Subj and wider investment)
Help business (get loan)
Reputation
Investors confidence in market
Subsequent audit easier
Deficiencies identified
Why Group auditor evaluates evidence obtained by component auditor
Required by ISA 600
Group auditor responsible for audit opinion on Group FS
Reduces risk of Material misstatement in group FS/Inappropriate opinion
Determine whether work undertaken supports firms opinion, additional procedures are required
How group auditor evaluates evidence obtained by component
Questionnaires
Review working papers
Inspect summary of conclusions
Evaluate uncorrected misstatements
Implications for auditors report if no written representations obtained
- Auditor cannot obtain SAE/ There is a limitation on scope
- Written representations are required by ISA 580
- Matter is pervasive
- Modified Opinion issued
- Disclaimer of opinion
- Basis for disclaimer of opinion paragraph explaining the matter after opening section
- Report by exception – not received all information / explanations / inadequate accounting records
Purpose of cold review
Continuing part of quality control procedures to assess effectiveness of procedures and compliance with ISA, Ethical Standards, Legal requirements and audit regulation
- Assess if appropriate report was issued
- Identify where changes to procedures or additional training are needed
- Prevent problems in future audits
- Minimise damage to the firm
Government / regulator response to audit criticism
- Kingman review – review of role of FRC
- CMA review – review of audit market – proposed joint audits
- Brydon review – review existing model for auditing/reduce expectation gap
- BEIS report – future of audit, break up big 4 separate Audit / non-audit
- FRC increasing number of reviews
Communicating internal control deficiencies (ISA 265)
- Timely to allow management to act promptly
- Clear language to avoid misunderstanding
- Communicated to those in authority who can take corrective action
- Include description of deficiency, consequences and recommendation to ensure sufficient information
- Form and frequency should be appropriate to size and nature of organisation points should be sufficiently important and useful
- Management comments should be included to indicate if accepted and aid understanding of TCWG
- Disclaimer included to reduce likelihood third party reliance stating purpose of audit is to express opinion on FS, no opinion is expressed on effectiveness of IC and matters reported are only those identified during audit
Purpose of quality control measures
Ensure engagements carried out in manner that:
- Meet users’ expectations/provide reliable service
- Work is performed to high standard/provides VFM is efficient and cost effective
- Requirement of inspection units/auditing standards satisfied
- Enhance reputation/increase confidence in the profession
Protect against
- Negligence Claims
- Disciplinary procedures
Ensure firm only accepts engagements that it has necessary competencies for
Types of business risk
Operational, financial and compliance
Benefits of planning
- To ensure the audit is carried out in an efficient (do quickly) and effective (right opinion) manner
- Objectives – devote appropriate attention to important areas,
- identify and resolve potential problems,
- complete work quickly and effectively,
- proper assignment of work to staff
- Facilitate direction/supervision and review of work
- Coordinate work done by experts/other auditors
What goes in audit strategy (BS SMART)
Business Information
Systems Information
Staffing
Materiality
Analytical procedures
Risk
Timing
Audit Strategy
always comes first,
is a framework,
provides an overview of the audit,
overall direction
Audit Plan
Comes second
Converts the audit strategy into an audit plan
Detailed
List of procedures
Nature timing and extent of procedures
Nature timing & extent
Nature – type of procedure
Timing – when are you going to do the procedure – data used – when
Extent – amount of procedure – depends on the level of risk
Material by nature
Related parties
Directors Emoluments
Materiality is…
an expression of significance
Types of Materiality
Performance Materiality (substantive testing - create sample, identify material errors) - different % for different accounts
Overall / Planning materiality - identify significant accounts/risk areas - audit risk - detection
Completion Materiality - used in evaluating misstatements
When are analytical procedures used
Planning - mandatory (ISA 315) - comparison ratio analysis trend in total
Completion - mandatory - just usually ratios and comparison
ISA 520 can use as substantive procedure - SAP - proof in total and trend analysis and unusual item review
Why UTB so important
- Use risk based approach to audit (identify and focus on risk areas) to do so need to do a risk assessment and identify risky areas, to be effective, need to understand the business.
- Compliance with ISA / professional standards - avoids risk
How Understand the Entity?
- External (to the auditor and client)
o Credit searches, industry info HMRC and companies house - In house (auditor)
o Acceptance records, previous files and staff - Client
o Discussion with staff, review board minutes and correspondence, inspection of forecast and internal audit reports
Overall responses to risk
Apply professional scepticism
Consider using more and/or more experienced auditors including use of experts, internal audit and other auditors
Provide more supervision
incorporate more unpredictability into procedures
Perform more testing
What consider before testing estimates
- Estimation uncertainty
- Complexity
- Subjectivity
- Other inherent risk factors
Procedures for auditing estimates
Enquire with management the reason for the estimate & the method of the estimate
Inspect evidence for the reason of the estimate and the method and compare
Recalculate based on management logic (above) and auditor logic and compare
May need to use an expert - to test estimate and calculate
CAATs
- Test data - test of control (use data to test IC - payroll)
- Audit Software - substantive procedure - routine transaction - programme (ticking and bashing)
- Audit Data Analytics - inflow - identify risk areas - don’t have to programme - can be used TOC and SP
When use internal audit?
Understand entity and information on internal controls
Perform tests of control
Do substantive procedures
What do on IA work before using?
Perform walkthrough test of system to confirm system works as expected
When do TOC - reperform a sample and try to replicate results
Substantive - reperform sample - can’t mention in report and important that SP are performed correctly so don’t get wrong opinion
What to do to IA before using them?
Audit them - competence, capabilities, objectivity
Procedures on expert work:
read work results (do you understand and areas to query)
Ask queries (didn’t understand / check they did the work)
Use another expert (to audit their work or re perform)
Matters to consider on expert work
Data
Method
Logic
Conclusion
Results
EQCR attributes
technically competent
experienced in client industry & listed companies
independent of engagement team and client
respected individual with authority to undertake the role
Role of EQCR
ensure professional standards and legal and regulatory requirements have been met by:
Discussing sig matters with EP
Review selected documentation, FS proposed report
Review judgements especially materiality and SR
Evaluate conclusions
Evaluate independence
consider whether appropriate consultation undertaken on contentious matters, significance of uncorrected misstatement, matters to be communicated to TCWG
EQCR purpose
To reduce the level of engagement risk on audits of listed entities and for other audits where the firm has determined a review is required, for example, engagements where risk is assessed as high
Role of the ethics partner in external audit firm
Responsible for adequate policies and procedures regarding integrity, objectivity and independence, firms compliance with FRC ethical standard, effectiveness of communication on ethical matters to partners and staff
Provide ethical guidance and advice to individual partners and teams
Considers whether policies and procedures are properly covered during training
Provides guidance where difficult and objective judgement needs to be made or a consistent position reached
Assess breaches of FRC ethical standard
Determines whether safeguards can be put in place or need to resign
Responsibilities as outgoing auditor
obtain authority to discuss with new auditor, answer request promptly and record discussion with new auditor in writing,
confirm matters they ought to be aware of and explain meaningfully (honestly and unambiguously) include description of differences of opinion
if not given permission report that fact
When can auditor disclose confidential information
- Required by law – legal proceedings, suspect terrorist activities, suspected ML to NCA, suspected bribery
- Permitted by Law
- Professional right/duty to disclose not prohibited by law – comply with quality review by regulator, respond to enquiry/investigation by regulator, to protect professional interest in legal proceedings, comply with technical standards/ethical requirements
