Mod 16: Planning 3: Dealing with specific matters (ISA 250)

Question 1

Exam tip

Answer 1

Scenario may indicate that particular laws and regulations are critical to the organisation
e.g. health and safety acts, terms of a licence, financial services and environmental regulation

Where it is clear that a company is highly regulated and info provided indicates non-compliance may have occurred => REFER TO ISA 250A

• relevant fact should be explained in terms of impact on the financial statements e.g. GC or unrecognised liabilities/judgemental provisions

Question 2

RP: Risk of material misstatement is low

Answer 2

ROMM is low => few additional substantive procedures may be performed. May be the case where controls over the identification of RP transactions and balances are expected to be effective. The auditor may then:

• test operating effectiveness of controls
• perform substantive analytical review of the transactions and balances

Question 3

ISA 550 requires auditors to:

Answer 3

• obtain WRITTEN REPRESENTATIONS that mgmt have disclosed all relevant related party transactions/relationships
• communicate with TCWG any significant matters in relation to RP
• document the names of identified RPs and nature of RP relationships

Question 4

Service organisations - impact on audit

Answer 4

May impact the auditors ability to acquire SUFFICIENT APPROPRIATE EVIDENCE to report on the FS

Question 5

Service organisation: Type 1 report

Answer 5

looks at description and DESIGN of the controls in place in the organisation

Question 6

Service organisations: Type 2 report

Answer 6

Looks at description and DESIGN as well as the OPERATING EFFECTIVENESS over a given period

Question 7

Using the work of an expert: examples of experts in areas other than audit and accounting

Answer 7

VALUATION of certain assets e.g. land and buildings
MEASUREMENT of work completed (and to be completed) on contracts in progress
ACTUARIAL VALUATIONS of defined pension plans
BRAND VALUATIONS in business combinations
Performing DCF ANALYSIS as part of an impairment assessment of a business

Question 8

Management’s expert

Answer 8

Employed by the CLIENT to provide specialist advice on a particular matter which affects the FS

Question 9

Auditor’s expert

Answer 9

Individual or organisation EMPLOYED BY THE AUDITOR in order to obtain sufficient audit evidence regarding certain FS assertions

Can be employed by the firm or external to the firm and can be used where an expert may be required to obtain sufficient, appropriate evidence

Question 10

Exam tip

Answer 10

Scenario may include info about asset valuations, stock items that require estimation, stage of completion for construction contracts, legal cases etc. => complex, judgemental areas that may require estimation

=> audit risk the amounts are misstated
Approp audit response = use an expert (refer to ISA 500 or ISA 620)

Question 11

Other laws that and regulations that DO NOT have a DIRECT EFFECT on the FS but compliance with which may be FUNDAMENTAL to operations of the business or non-compliance may result in material penalties

Answer 11

• an entity’s operating licence (ISA 250, pg 353)
• health and safety regulations in the food mfing industry
• The UK Bribery Act 2010, particularly for entities trading overseas
• Environmental regulations at a chemical manufacturing company

Question 12

Ways in which auditor can obtain an understanding of comp compliance include:

Answer 12

• DISCUSSION with mgmt to identify the relevant laws and regulations and their processes for monitoring compliance with them
• ENQUIRIES with the entity’s head of legal and/or other mgmt with responsibility for compliance matters if appropriate
• READING THE OTHER INFORMATION disclosed in the Annual Report to identify relevant laws and reg the entity must comply with

Audit team should UNDERSTAND the CONTROLS put in place relating to compliance with laws and regulations. Auditor should assess D&I regarding the entity’s POLICIES relating to compliance with laws and regulations, ethical behaviours and whistleblowing

Question 13

Entity and specific laws and regulations

Answer 13

Number of entities will have very specific laws and regulations => auditor needs to be aware of these as part of UotE

Question 14

Regulated financial sector entities

Answer 14

A duty to report to a regulator in the UK exists from legislation such as the Financial Services and Markets Act 2000 and the Financial Services Act 2012

Auditor needs to be AWARE of such legislative guidance and consider whether non-compliance could present a ROMM to FS.
Auditor needs to be aware of any regulatory reporting responsibilities they may have in the case that a breach of laws and regulation is identified.
E.g. auditing insurance companies, non compliance with laws => need to report to FCA

Auditor may have to provide ASSURANCE over compliance with specific matters specified in legislation. May take the form of a DIFF REPORT

Question 15

Accounting estimate

Answer 15

MONETARY AMOUNT for which the MEASUREMENT is subject to ESTIMATION UNCERTAINTY

Question 16

Relying on the work of a service auditor

Answer 16

Auditor may choose to place reliance on the work carried out by another auditor over the design and operating effectiveness of controls if this is deemed relevant for the audit

Question 17

Who can get involved in audit planning

Answer 17

for complex clients, a tax expert would participate in audit planning to identify audit risks around areas such as deferred tax as well as auditing the client’s deferred tax calc

Question 18

Work of internal audit may overlap external auditors work

Answer 18

to AVOID duplication of effort, auditing standards allow work already undertaken by internal audit to be used as audit evidence, providing certain criteria are met. This is considered at planning stage.

Where internal audit is used, external auditor still has SOLE RESPONSIBILITY for the audit opinion expressed on a set of FS => NET of external procedures remain sole responsibility of the external auditor

If internal audit procedures only cover 6 months => external auditor must extend testing for remaining 6 months

Question 19

Specific standards for….

IN TOLLEY

Answer 19

RP
Service organisations 
Use of internal auditors
Auditors expert
Consideration of Laws and regulations
Auditors statutory right of duty to report to regulators of PIEs
Auditing accounting estimates