Audit Framework Flashcards
Assurance engagement - 5 elements
- three party involvement
- practitioner, intended users, responsible party
- appropriate subject matter
- suitable criteria
- sufficient appropriate evidence
- written assurance report in appropriate form
Fundamental principles
- integrity
- objectivity
- Professional competence and due care
- confidentiality
- professional behaviour
Steps prior to accepting the audit
- independence: assess issues which threaten compliance with code of ethics or local regulations
- competence: resource quantity and quality
- integrity of management: reputation and integrity
- level of risk: is it acceptable to the firm. Is the fee sufficient
- assess conflict with other existing clients
- comms with outgoing auditor (after they obtained permission from mgmt).
- permission to contact old auditor
- old auditor permission to respond
- review response carefully
Threats to fundamental principles
- self interest
- self review
- familiarity
- advocacy
- intimidation
Preconditions for the audit
- determine if financial reporting framework is acceptable based on entity, nature of FS and laws and regulations
- obtain agreement from mgmt that:
- responsible for prep of FS
- internal controls
- access to information
- decline if framework unacceptable
- decline if agreement if responsibilities not obtained
Responsibility of External Audit for prevention of fraud
- obtain reasonable assurance that financial statements are free from material misstatement due to fraud or error
- identify and assess the risks of material misstatement
- obtain sufficient appropriate evidence
- respond appropriately to fraud or suspected fraud during the audit
- maintain professional scepticism
- brief engagement team about risks and roles and responsibilities for fraud and error
What is included in audit engagement letter
- objectives and scope
- responsibility of auditor
- responsibility of mgmt
- FS framework
- form and content of reports
- form of comms of results
- that material misstatement may not be detected
- arrangements re planning if audit
- expectation that mgmt will provide written representations
- basis for fee computation
- request for mgmt to acknowledge receipt of the audit engagement letter
- involvement of IA
- restrictions of auditor liability
- arrangements to make available draft of FS
Quality control
- brief the team properly to understand the client
- supervision of juniors
- assign engagement QC reviewer
Benefits of audit committee
- improve quality of fin reporting
- improve internal control environment of the company
- non-execs bring outside experience
- audit committee appoints external auditor
- improves independence of IA
- provides advice on risk mgmt to exec directors
Reasons for and against IA department
FOR
- can do VFM audits
- audit systems
- audit internal control systems
- external audit van place reliance on IA reducing audit fees
- image to clients
- IA can recommend policies for better corporate governance
- IA helps review compliance with regulations
- assistance to FD with fin reporting
AGAINST
- can be seen as a waste if there is no statutory requirements for IA
- if privately owned no need to provide assurance to wide group of shareholders
- cost
Advantages of outsourcing of IA department
- staff recruitment
- skills
- set up time
- costs
- flexibility
Disadvantages of outsourcing IA department
- staff turnover
- external auditors (self review)
- cost
- confidentiality
- control
Misstatement
A difference btw amount, classification, presentation or disclosure of a reported 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.
Three categories:
- Factual - misstatements about which there is no doubt
- Judgemental - auditor considers mgmts estimates unreasonable
- Projected - extrapolation from audit sample
Auditor must accumulate all misstatement firing audit. Consider whether audit strategy and plan should be reviewed.
Consider whether uncorrected misstatements are material in aggregate or individually.
All misstatements must be communicated to mgmt and requested to be corrected. Else auditor should consider impact on report.
Written representation from mgmt that unadjusted misstatements are immaterial.
Reliance on independent expert
- evaluate competence, capability and objectivity
- consider qualifications (member of prof body)
- meet and discuss experience and expertise
- assess independence and threats of self interest such as share ownership
- expert work should be evaluated, assumptions reviewed
Subsequent events procedure
-enquire with mgmt if they are aware of any events
- enquire into mgmts procedures and systems for identification of subsequent events
- reading minutes from members and directors meetings
- review accounting records including budgets, cash flow, mgmt accounts and interim information
- obtain written representation
Inspect correspondence with legal advisors
- consider external info eg news
- inspect after date receipts that were not recognised as receivable
- inspect after date cash book for payments not accrued for
- inspect sales price of inventory
Types of assurance engagement
Reasonable
- sufficient and appropriate evidence to draw reasonable conclusions
- positively worded opinion
- high level assurance
- “in our opinion”
Limited
- sufficient and appropriate evidence to draw limited conclusions
- concludes that subject matter is plausible
- gives negatively worded conclusion
- moderate or low level of assurance
Benefits of audit
- higher quality financial info
- independent verification
- reduces risk of bias, fraud or error
- enhances credibility of FS
- highlights deficiencies in internal controls
Understanding an entity
- industry (fin rep framework, competition, legislation)
- entity (products, customers, suppliers, ownership, governance)
- selected accounting policies
- objectives and strategies
- performance
- internal controls
Purpose of audit planning
- focus on important areas
- foresee potential problems
- organises the audit
- selects right people
- directs the team and reviews their work
- coordinates work of others (e.g. experts)
Planning process
Preliminary activity
- procedures on continuance of engagement
- compliance with ethical standards
- ensure no misunderstanding with the client
Planning activities
- audit strategy
- audit plan
Audit strategy
- characteristics of engagement (FR framework, IA function, timing of audit work, CAAT, availability of client staff)
- resources (selection of audit team, budget)
- reporting objectives (comms with client/team/3rd pty)
- significant factors (materiality, risks, changes in laws/standards)
Audit plan
- risk assessment procedures
- audit procedures
Work done during interim and final audit
Interim
- document systems
- evaluate controls
- test specific transactions
- attend perpetual inventory counts
Final
- FS
- transactions testing of transactions occurred after interim audit
- year end journals/adjustments
- obtain evidence that controls stayed effective
- completion of going concern, subsequent events review, overall review of FS, comms of misstatement to mgmt)
Engagement quality control review
Hot
- discussion of significant matters
- review of FS and audit report
- review selected audit docs related to significant judgements made (risks and responses, materiality, uncorrected misstatements)
- evaluation of conclusions reached
Cold
- audit firms policies and procedures were followed during engagement (evidence collected, working papers on file)
Working paper
Client Period end Subject Reference Preparer Date Objective Work performed Results Conclusions Reviewer Date reviewed
Sampling
Statistical
- random
- systematic
- monetary unit selection
Non- statistical
- haphazard selection
- block selection
Components of internal control system
- control environment
- risk assessment
- information system (business processes relevant to financial reporting)
- control activities
- monitoring of controls
Control activities
- authorisation
- performance review
- information processing (reconciliations, batch totals)
- physical controls (cash in safe, password)
- segregation of duties
Documenting internal control system
Narrative notes
Advantages - simple to record - understandable Disadvantages - time consuming for complex systems - harder to id missing controls
Flow charts
Advantages - easy to view the whole system - easy to spot missing controls Disadvantages - difficult to amend - still need narrative notes
ICQ
Advantages - quick to prepare - can ensure all controls are present Disadvantages - controls may be overstated - unusual controls not included
ICEQ
Advantages - quick to prepare - captures controls in place Disadvantages - client may overstate controls - checklist may have control objectives not relevant to client
Audit report’s sections and order
Title
Addressee
Opinion (qualified, adverse disclaimer of)
Basis for (qualified, adverse disclaimer of) opinion
(Material uncertainty related to going concern)
(Emphasis of matter: basis other than GC, significant uncertainty re outcome of litigations, early adoption of acc standard)
Key audit matters (significant risks, judgements, events, transactions)
Other information (chairman’s report)
Responsibilities (mgmt/auditor)
Signature
Date
Address
