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
