Other assurance assignments Flashcards
Other assurance assignments 1.1 Audit compared with assurance
Nature of work
Statutory audit
Determined by Companies
Act 2006 and ISAs. Main audit
procedures are set out in ISA
500:
Inspection
Observation
Confirmation
Recalculation
Reperformance
Analytical procedures
Enquiry
Other assurance
Scope is determined by the
terms of engagement and
relevant International Standards
on Assurance Engagements or
International Standards on
Review Engagements.
Procedures usually more
limited:
Enquiry
Analytical procedures
Written management
representations.
i.e. less work than audit
Other assurance assignments
Level of
assurance
Statutory audit
Reasonable
Other assurance
Usually limited
Other assurance assignments
Report to
Statutory audit
Shareholders
Other assurance
Usually management
Other assurance assignments
Report on
Statutory audit
Express an opinion on:
The financial statements
(whether they are true &
fair, properly prepared)
Certain other matters
e.g. the information
contained in the directors’
report and strategic report
is consistent with the
financial statements.
Other assurance
Express an opinion on:
The financial statements
(whether they are true &
fair, properly prepared)
Certain other matters
e.g. the information
contained in the directors’
report and strategic report
is consistent with the
financial statements.
Other assurance assignments
Circulation of
report
Statutory audit
In the public domain once the
financial statements are filed
Other assurance
Likely to be restricted
Other assurance assignments 1.2 Review of historical financial information (ISRE 2400)
Some clients require a review of the financial statements rather than a
full audit.
Procedures focus on:
obtaining knowledge of the entity
making enquiries
performing analytical procedures
obtaining written representations from management.
If an issue is identified, then additional procedures will be performed.
Negative assurance will be given. The negative opinion will state ‘nothing has come
to our attention to suggest that the accounts are not true and fair’. The reviewer also
states that it isn’t a statutory audit.
Example:
Independent verification required for small charities or for companies under the
audit threshold.
1.3 Review of interim financial information (ISRE 2410)
In some cases (particularly listed companies) a review of the interim
financial statements will be required. These statements will be prepared
under IAS 34 (covered in the next chapter).
This is a specific example of a review of historical information so the approach to the
engagement will be similar to ISRE 2400 above.
Other assurance assignments 1.4 Review of prospective financial information (ISAE 3400)
This is more difficult than a review of historic financial information
because it is reporting on future events.
Prospective financial information will usually take the form of budgets
and forecasts.
Examples of work required when reviewing, e.g. a business plan:
Consider the competence of the preparer (e.g. how accurate have past
forecasts been?).
Cast/recalculate to check mathematical accuracy.
Vouch to any supporting documentation there may be, e.g. contracts of sale.
Review assumptions for reasonableness. Agree estimated costs to current
actual costs and consider price rises. Discuss with management.
Statement of profit or loss: Agree that accounting policies are consistent with
the financial statements (e.g. depreciation rates), and compare contents to
identify missing costs etc. Agree b/f balances to accounting records.
Cash flows: Agree timings for amounts going in and out of the bank account
(e.g. initial outflow to purchase equipment, receipts from customers after 30-day
credit period etc.). Agree b/f cash balance to cash at bank ledger account.
Other assurance assignments 1.5 Assurance reports on controls at a service organisation (ISAE 3402)
A service organisation is an entity that provides services to user entities
that are relevant to their internal controls (e.g. controls over IT
systems).
There are two types of assurance report:
Type 1 – a report on the description and design of controls at a
service organisation.
Type 2 – a report on the description, design and operating
effectiveness of controls at a service organisation.
Other assurance assignments 2.1 What is due diligence?
Due diligence is the process of gathering information for an investor about a potential
investee in order to make an informed decision about the investment, including
whether or not to invest, and what amount to invest. It is usually performed in an
acquisition or a refinancing scenario.
The investee will have more information about its business than the investor when
setting a deal price. Due diligence helps to narrow this information gap to enable a
more informed decision by the investor on the performance, position and risks of the
target company when offering a price.
Due diligence may:
identify assets: ascertain legal title/rights, identify and value intangibles
identify and quantify potential risks
ensure the bid price is reasonable
give assurance to providers of finance
help with post-acquisition planning such as:
– identify possible areas of synergy
– identify key personnel to tie in post-acquisition
– identify key areas in need of reorganisation.
Other assurance assignments 2.2 Detailed due diligence work
Due diligence procedures are very similar to audit procedures, with a different focus.
Work should focus on:
valuation of key assets
information affecting the price (e.g. cash flow forecasts, EBITDA calcs etc.)
identifying hidden or unrecognised obligations, as well as determining the value
of recognised obligations
projections/forecasts
commercial information.
Examples:
Financial due diligence – giving assurance on the financial position, financial
risk and projections.
Commercial due diligence – giving assurance on markets and external
economic environment.
Operational due diligence – considering the operational risks and potential
improvements that can be made in a target company.
Technical due diligence – giving assurance on new technologies (will probably
involve the use of experts).
IT due diligence – giving assurance on the nature, reliability and risks of IT
systems and IT skills.
Legal due diligence – giving assurance on legal rights and obligations including
the acquisition contract (will probably involve placing reliance on lawyers).
HR due diligence – giving assurance on staff skills and HR contracts, including
whether key skilled workers can be retained and what the cost of potential
redundancies might be.
Tax due diligence – any tax liabilities and their impact on the new group. Tax
structuring of acquisition and finance.
Other assurance assignments 2.3 Warranties
The vendor may give warranties to the purchaser. Warranties are a type of insurance
whereby the vendor compensates the purchaser if the warranties are breached.
Examples of warranties include:
sales contracts exist and are current
all contingent liabilities have been disclosed
tax has been paid or accrued for.
Other assurance assignments Forensic accounting
The term ‘forensic accounting’ covers any investigative assignment into financial
matters. Examples include:
fraud investigations
professional negligence claims
insurance claims
assessing damages in a litigation
financial disputes, e.g. partnership disputes or matrimonial disputes.
Forensic investigation is the steps taken to perform a particular forensic accounting
assignment from start to finish. It will include:
planning
gathering evidence (this stage is called forensic auditing)
reviewing and concluding
issuing a report.
Forensic accountants are often called to give evidence in court as an expert witness.
The main aspect of forensic accounting for the exam is fraud investigation.
Other assurance assignments Forensic accounting 3.1 Fraud
There are three main categories of fraud:
Corruption – conflict of interest, bribery, extortion.
Asset misappropriation – e.g. theft, false billing, payroll fraud.
Financial statement fraud – e.g. deliberate profit misstatement, bias.
Other assurance assignments Forensic accounting 3.2 Conducting a fraud investigation: considerations Acceptance
Do we have the necessary skills and experience?
Ethical threats if the investigation is for an audit client: self-review, advocacy,
management. Do not accept appointment unless there are robust safeguards.
Commercial – firms can charge a high fee for forensic assignments because of
the high level of risk involved and the degree of expertise needed.
Other assurance assignments Forensic accounting 3.2 Conducting a fraud investigation: considerations Planning
Ensure that the forensic accountant understands the specific objectives of the
engagement, for example:
identify the type of fraud, how long it has been operating, how it was concealed
identify the fraudster
quantify the loss
gather evidence for a court case
advise on how to prevent recurrence in the future
obtain an understanding of the circumstances and events surrounding the
engagement, the context of the engagement, the resources available and any
limitation on the scope of the engagement
consider the use of data analytic software, or other ways to gather evidence.
Other assurance assignments Forensic accounting 3.2 Conducting a fraud investigation: considerations Gathering evidence
Evidence must be robust and conclusive as it may be challenged in court.
Procedures must be tailored to the specific type of fraud and how it was
committed.
Techniques include:
– test controls for weaknesses
– analytical procedures – look for trends
– Data analytic software – when were the details altered?
– talk to employees
– ascertain responsibilities and access to identify which individuals may
have been involved
– substantive techniques (reconciliations, cash counts, review docs and
accounting records, comparisons etc.)
– review CCTV footage for evidence of how/when/who/how much etc.
Must approach all information and documentation with a sceptical attitude as it
may be biased, false or incomplete. Look for complementary or contradictory
evidence to support/disprove conclusions.
Other assurance assignments Forensic accounting 3.2 Conducting a fraud investigation: considerations Reporting
Summary of evidence and conclusion.
Quantify amount of loss suffered.
Outline how the fraud was conducted.
Advise how to prevent a similar fraud in the future.
Other assurance assignments Forensic accounting 3.2 Conducting a fraud investigation: considerations Appearing in court as an expert witness
Need to be independent and not biased towards any particular point of view.
Confine evidence to matters which lie within the accountant’s expertise and
which are material to the matter in hand.
Other assurance assignments Sustainability 4.1 Implications for the statutory audit of the financial statements
The UK statutory audit does not include the audit of any disclosures provided under
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial
Information and IFRS S2 Climate-related Disclosures.
However, this does not mean that there are no implications for the auditor.
Impact on the financial statements
Auditors need to understand the environmental, social and governance issues facing a
company to assess the impact on the financial statements and the audit in general,
including:
potential impairment of assets
costs of non-compliance, e.g. fines, compensation, remediation
constructive obligations, contingent liabilities and provisions
impact on going concern status
motives for manipulation of figures to achieve targets or covenants
weaknesses in sustainability risk management by those charged with
governance.
Review of other information presented with the financial statements
Remember that ISA (UK) 700 requires the audit report to include a separate section
with a heading ‘Other information’ addressing any additional information provided
with the company’s financial statements.
ISA (UK) 720 states that if the other information contains a material misstatement
and the directors refuse to correct it, the uncorrected misstatement must be
described in the ‘other information’ section of the audit report.
Other assurance assignments Sustainability 4.2 Sustainability audits
Companies may choose to have an assurance engagement performed with respect
to any social and environmental reports which they prepare.
Planning and performance of the engagement will be very similar to other assurance
engagements. Assurance firms may make use of AA1000 Assurance Standard
issued by AccountAbility – a global non-profit organisation.
AccountAbility also produce AA1000 Accountability principles which sets out the
following principles for sustainability reporting:
Inclusivity – participation of stakeholders in developing and achieving an
accountable and strategic response to sustainability.
Materiality – determine the significance of an issue to an organisation and its
stakeholders.
Responsiveness – how an organisation responds to stakeholder issues that
affect its sustainability performance by its decisions, actions and performance
as well as communication with stakeholders.
Impact – the effect of behaviour/performance/outcomes on the
economy/environment/society/stakeholders/the organisation itself.
The AA1000 Assurance Standard provides the following guidance on related
assurance engagements:
Objective – evaluate and provide conclusions on adherence to AA1000
Assurance Standard principles and the quality of the disclosed information.
Reports:
– there is no set wording for the assurance statement but a list of the
minimum information required is given in the standard.
– Type 1 reports: The assurance provider evaluates the nature and extent of
an organisation’s adherence to the four AA1000 Accountability Principles.
The focus is on how the organisation manages sustainability performance
and communicates, but does not provide assurance on the reliability of
the information provided.
– Type 2 reports: The assurance provider evaluates the nature and extent of
an organisation’s adherence to the four AA1000 Accountability Principles
and evaluates the reliability of the information provided.
Other assurance assignments Sustainability 4.3 Greenhouse gas emission statements (ISAE 3410)
Companies listed on the main market of the London Stock Exchange are required to
make a disclosure of greenhouse gas emissions (GHG Statement).
The level of assurance could be:
– reasonable – an opinion on whether the GHG Statement has been
prepared in accordance with the acceptable criteria
– limited – a conclusion on whether anything has come to the practitioner’s
attention to indicate that the GHG Statement has not been prepared in
accordance with the acceptable criteria.
The engagement is likely to be complex, involving multidisciplinary teams and
subject to uncertainty due to the difficulty of estimation and measurement.
In addition to assurance skills, the team will require skills relating to laws,
regulations, along with quantification and reporting.
Other assurance assignments Internal audit
Internal auditors are employed by the directors of the company to add value by
improving the organisation’s operations.
Internal auditors are usually employees but the function could be outsourced to an
external provider.
Internal auditors may be members of the Institute of Internal Auditors (IIA). If so, they
are governed by the following standards issued by the IIA:
The Code of Ethics: integrity, objectivity, confidentiality, competency.
The International Standards for the Professional Practice of Internal Audit:
setting out the professional attributes the IA must have (including having a
defined purpose, and approaching work with proficiency and professional care),
and how an IA should perform his or her work (including proper planning,
performance and communication).
Typical IA assignments:
Value for Money audits (see s5.1)
Operational audits (see s5.2)
Financial audits – similar to the activities of the external auditor, and involves
obtaining evidence to substantiate the financial information in the management
accounts and financial statements.
Project audits – assessing whether a specific project performed efficiently and
achieved its objectives.
Social and environmental audits (see earlier)
Management audits – assessing the performance of management and the
management structure.
Other assurance assignments 5.1 Value for Money (VFM) audits
A VFM audit focusses on whether the best combination of services has been
obtained for the lowest level of resources. It will focus on the following three areas:
Economy – keeping the cost of resources to a minimum.
Efficiency – the relationship between the output from goods and services and
the resources used to produce them.
Effectiveness – how well the organisation’s objectives have been achieved.
Ultimately the company will aim to produce the best quality at the lowest cost.
Other assurance assignments 5.2 Operational audits
An operational audit consists of reviewing a company’s policies over a particular
functional or operational area (e.g. procurement, HR etc.) to ensure that they are
adequate, and that they operate effectively. To do this the IA will:
ascertain and review the department’s policies by obtaining documented
policies and discussing with staff/management
assess if the policies are adequate and advise upon improvements
test effectiveness by observing staff and through tests of controls
IT audits – testing the IT controls over a particular aspect of a company’s
computer system.
