past paper content Flashcards
what is professional skepticism
-questioning mind
-alert to conditions which may indicate possible misstatement due to error and fraud
-critical assessment of audit evidence
if auditor is not skeptic
-they may not realise that something is unusual i.e red flags that indicate fraud
-may not be able to identify and assess risks accurately
-audit procedures may not be tailored to the risk at hand
-jump to hasty conclusions
-it is important part of being a competent auditor
-important to be ethically independent, objectivity
payroll supervisor says that no authorization needed for payment of temporary employees
-this assertion by him must be corroborated aka confirm if its true
-if true this is a design deficiency, include this in report to management
ghost employee situation- payroll supervisor says there r new temporary staff, management says there are no staff.
-confirm from management that there is no new temporary staff
-this could be fraud situation aka money being taken by supervisor or accomplice
-junior should raise issue with supervisor.
what are the reasons auditor might not seek re election
-lack of resources, big client, not enough staff
-competence: auditor believes they dont have expertise specially if client is operating in a specialised industry
-disagreement with client in the past eg. over accounting treatments. bad relationship, difficult to carry out audit effectively.
-ethics- fee level: fees necessary to make profit may become too high (15% of total revenue) this creates an independence problem as auditors opinion may be influenced by fear of losing client.
-management integrity: if auditor has reason to believe there is unproven fraud etc.
what matters should be included in audit tender document
-overview of audit firm’s structure including international network, history, structure, services
-areas of expertise and key staff: details of partner, their experience, team size and composition.
-assessment of client needs and how firm can meet them.
eg. if client has 6 subs, clarify that the tender includes audit of each of the subidaries and parent and group as a whole.
Many subs, big firm can handle.
-audit approach: how firm will gather knowledge of client, planning and risk assessment methods as well as procedures to gather evidence. will reliance be placed on internal controls? control testing will be done, if ir is decided that Internal controls can be relied upon , it will be a cost effective audit.
-deadline: provide details of when subs will be audited, consolidation process , audit opinion time. propose a reasonable deadline so that audit quality can be maintained. short deadline will make it difficult to obtain evidences in some areas like receivables recoverability and going concern. too much pressure will make audit team do things quickly rather than thoroughly. so things may be missed.
-fees: include proposed fees & its breakdown. how is it calculated, staff hourly rate and estimated time required. fee should be sufficient to ensure a high quality audit.
-communication with management, outline the various communications to take place throughout. Eg written report on effectiveness of internal controls.
-non audit services: any non audit services that firm wishes to provide can be included. Carefully consider ethical requirements relating to independence.
-quality control and ethics: firm should state adherance to IESBA code of ethics and ISQC. this will increase confidence of client.
Matters to consider before accepting audit
COMPETENCE:
size of client, is sufficient staff available?
-relevant expertise?
-time pressure
-any overseas subs, overseas offices, outside auditors for overseas work? their work will have to be evaluated in order to express opinion.
INTEGRITY:
-previous auditor resigned why?
-risk level
ARE ETHICAL REQUIREMENTS COMPLIED WITH?
Audit partner or manager gets a bonus from selling non audit services
There is a self interest threat. as auditor will not be willing to disagree with client during audit, as they have a financial interest.
-significance of threat depends on:
-what % is the bonus
-role of individual on audit team
-are promotions influenced by sale of such services
-key audit partner should not get this bonus as it’s against IESBA code of ethics.
-bonus can be offered to other audit team members if safeguards r in place eg. Work being reviewed by professional accountant.
If senior manager, then dont offer bonus as their role will be so imp that safeguards will not be sufficient.
-best to consider other ways to increase revenue and evaluate staff performance
Can auditor provide internal audit services to client, ethical issues
-there is a self review threat if reliance on IA, professional skepticism will be reduced. can be mitigated by using different team.
- risk of assuming management responsibility. if that is the case either withdraw from IA or EA.
Management responsibility is when auditor is designing, implementing and maintaining internal controls
For public interest entities, internal audit services cannot be provided for:
-Major controls over financial reporting
-Material amounts or disclosures in financial statements
-The accounting system that generates significant client records.
what is a transnational audit
an audit which includes FS of entities outside the auditee’s home country for purposes of lending, investment or regulatory decisions.
eg. a company listed on stock exchanges of different countries that is bound by more than one country’s rules or a company with overseas subs.
why do transnational audits have a high audit risk
-different accounting standards. lack of understanding
-different quality requirements.
-different laws governing auditors
-different laws like tax laws, company law, securities etc.
-listing requirements of each country is diff
-different corporate governance requirements
-exchange rate risks
rules vs principles based auditing
rules based: when auditor follows prescribed rules on how to audit a particular area, but does not use any judgement on how to apply to rules
principles based: where no detailed rules are prescribed. auditor must use guiding princples to the area being audited.
rules based auditing pros and cons
pros:
-improved clarity and understanding. no doubt.
-improvement in audit quality
-clear standard for benchmarking
-easy for regulatory body to monitor quality
-decreased audit risk
cons:
-reduces auditor’s ability to take into account individual circumstances
-danger of just applying rules when more might be required.
-there may might not be a rule for a particular situation. can be problematic for complex clients.
-danger that rules based might lower quality of audit.
what is an intimidation threat
-threat to compliance of fundamental principle of “OBJECTIVITY” which is crucial part of independence.
-eg. client threatening to replace auditor if they issue qualified opinion
when auditor identifies there is a threat to independence, safeguards should be applied to counter it by taking guidance from framework.
rules for advertising accounting services and fees
-ad should not bring acca into disrepute or bring discredit to the professional accountant, firm or the accountancy profession
-dont discredit the services offered by others, by claiming superiority
-ad should not be misleading either directly or by implication
-ad shouldn’t fall short of any local regulatory or legislative requirements
Advertising fees:
It is risky to refer to fees in an advertisement, as confusion may arise as to what a potential client might expect to receive in return for that fee
-if reference is made to the fees, BASIS (hourly, other charging rates etc) on which the fees is calculated should be CLEARLY STATED.
-comparasion to other firms fees may be made, but shud not be misleading. Reference to fees shud be factual and justifiable.
acceptable publicity includes:
-Appointments and awards
-Seeking employment
-Professional directories
-Books, article, interviews, lectures, media appearances
-Training courses and seminars
use of the acca logo
-only members with current and valid certificate can use it
-a firm with at least one acca member as partner or director may use acca logo on letterheads, stationary and internet websites. the firm must be controlled by holders of recognised accountancy qualifications
-use appropriately, shudnt be confused with firm’s own logo
what is lowballing
lowballing means tendering for an audit for a very low fee, hoping to under cut competitors and winning the audit tender.
code of ethics says that members can quote whatever fee is deemed appropriate
ethical implications:
-low fee so client will have to be retained to recover initial loss, creates self interest threat
-professional competence and due care may not be applied if fee is too low, lack of quality control
-this can be seen as unprofessional as it means smaller practices can not compete.
-lowballing is allowed but it does not mean firm can cut costs by doing less audit work.
-same amount of work must be done as any other audit, which is, the amount of work required to provide reasonable assurance that FS r not MMS.
safeguard:
if firm has lowballed, it must be able to demonstrate that audit has been conducted in accordance with auditing standards. (i.e appropriate staff has been used, appt time spent, standards and qc met)
-make client aware of the terms of the engagement, fee basis, assigning apt. time and staff
can audit firm and client work on a business project together? for eg. making a audit software?
-this would create significant threats to independence.
-its a ‘close business relationship” as per IESBA.
-self interest threat unless immaterial and insignificant project. no safeguards would be enough.
-say no to project or audit.
-as per IESBA, independence includes independence in appearance. so even if ethical, it looks bad so must be ruled off.
-carefully make decision, long term goals, expertise, risks from diversifying in an unknown area.
can audit firm sell it’s joint venture accounting /tax software to clients?
-self interest threat- safeguard: disclose to clients abt joint venture and benefits.
-self review threat if clients use the software to make FS. expert can be used but it wud be expensive and impractical cuz pervasive.
-non audit service, it creates perception of taking audit responsibilities. for public interest entities, auditor shud not be calculating tax
diff b/w audit and limited assurance review
-audit is mandatory except for some small companies below a certain threshold, review isnt required by law.
-scope of audit procedures is decided by firm only in acc with ISAs. The scope for review is agreed by both client and firm. still any standards must be followes.
-audit: wide range of procedures including TOC and SP (AEIOU). review: narrow range, focus on enquiry and analytical procedures.
-audit: level of assurance is reasonable, in review: moderate
-wording is different
WORDING IN AUDIT AND REVIEW
in audit:
‘in our opinion, the FS present fairly, in all material aspects, the financial position of the company, its financial performance and its cash flows for the year ended in accordance with the IFRS”
the wording is positive in audit
in review:
“based on the review performed, nothing has come to our attention which causes us to believe that FS dont present fairly, in all material aspects… in accordnce with the IFRS”
negative wording
advantages and disadvantages to client of having an audit than a review
advantages:
-SH trust and accountability
-financing facilities negotiation from bank
-good quality information management can use for decision making
-review of internal controls, auditor reports deficiencies to management. help to make change.
-increased stakeholder trust, eg. suppliers and customers
disadv:
-more expensive
-may be unnecessary
-more invasive, disruptive, requires staff time.
can external auditor perform a review of internal controls for client after signing audit report?
-reviewing controls which are part of financial reporting system may create a self review threat, as this will later also be done in external audit
-design, implementation and maintenence of internal controls are management responsiblities, if auditor helps it may be considered thet are assuming management reponsiblities, IESBA says this is a potential self reviewm self interest and familarity threat.
-no safeguards, like separate team, are enough for assuming mgmnt responsiblities.
-advise client to hire competent personnel who can review internal controls and implement auditor’s recommendations.
-code says that if client is listed and also an external audit client, then firm shall not provide IA services which relate to a significant part of internal controls relevant to financial reporting. given that this is the main expertise of an audit firm, it is likely they will be required to do some work in this area. thus, the service would not be appropriate
-if client wants review of internal controls not related to reporting, the firm shud consider if they have the professional competencies to do it to maintain quality standards
also:
communicate with audit committee - as this might impact audit opinion. if internal controls arent working then can they be relied upon? more details required
it has come to knowledge after signing report that internal controls are deteriorating , what to do?
-one of the key responsibilities of auditor is to evaluate design and implementation of client’s controls which are relevant to the audit, to identify risks of material misstatement.
-if deficiencies are indentified, auditor has to assess the potential impact on FS, and design a suitable response in order to reduce risk to an acceptable level.
-auditor is also resp for communicating to management the deficiencies
-
-if these deficiencies relate to systems that were relevant to the audit, this means auditor failed to detect, ineffective audit planning.
-risk that procedures were inappropriate
-risk that auditor failed to identify MS.
-maybe inappropriate audit opinion (worst case scenario)
-its not clear, audit file and documentation should be reviewed, assess communications to management and TCWG.
-concerns raised by audit committee shud be noted for next yrs audit
-further clarfiiciation should be consulted on which deficiences are identified.
firm provides bookkeeping, payroll, tax services to client. client is non listed. can the firm provide an audit for this company?
-this is a self review threat due to impact of other services on FS.
-NOT prohibited by code as the company is not listed.
-can be considered assuming management responsibilities, if it was listed, no safeguards. but in this case
it is permissible to provide these services to a non listed client, however safeguards must be in place and threat must be reduced to an acceptable level.
for listed, these services that impact fs can not be provided.
-firm has already been preparing the accounts. a separate team must be used for audit, and an engagement quality control review must be done before signing audit report.
-firm must ensure sufficient staff is available for segregation of duties, inform client that diff staff will be used
if management responsibilites have been assumed, they must be stopped. and it is likely firm will have to wait a year before auditing, as it will impact the FS. this must be communicated to client and obtain written confirmation that client understands and accepts this.
-this might change which services can be provided, so new engagement letters must be issued in that case.
can we provide audit and tax services to a client?
-self review threat to objectivity
-if its non listed then we can provide, if safeguards are implemented like separate teams
no response from outgoing auditor
isa 220 quality control for audit says that
firm must obtain sufficient info about a range of matters about client before accepting.
one such matter is integrity of owners and management
talking to outgoing auditors is one procedure to do this.
if engagement partner is not satisfied that enough info is obtained, then dont accept engagement
client is suing outgoing auditor for damages, because they gave modified opinion.
reason for modified opinion was disagreement over accounting treatment and material misstatements
-if management is applying wrong acc treatment and impact on fs is material, it will lead to modified opinion in future as well. if management is not accepting responsibility to apply proper accounting treatment they are not meeting the preconditions. so reject the engagement
-management integrity is doubtful as auditors are experts. this shows mgmgnt is unwilling to accept IFRS or trying to manipulate FS. if auditor is not satisfied with integrity of mgmgnt, reject.
-lawsuit shows maybe management is innocent. if auditor is the one negligent, then no reason to reject engagement. further info must be obtained. it is likely legal correspondence has taken place, so review it.
-if no legal correpondence, use own expertise to determine if acc treatment was correct or not
-before accepting, consult own legal team, and senior executive partners
one client asks you to perform share valuation of another client, they plan to buy it
2 threats:
1-a conflict of interest threat arises when a firm provides a service in relation to two or more clients whose interests in respect of the matter are in conflict.
In this case, P and S interests will be conflicting. as buyer will want low price, seller will want high
-due to nature of this engagement, there is a risk confiedtial information will be revealed, whci auditor knows but buyer isnt aware of. giving buyer unfair advantage to bargain over price.
-safeguard for this threat would be to use different teams
2- self review threat as the auditor will later audit the consolidated accounts of buyer, they will be reveiweing their own work
-safeguad is to use different team
if client is listed, the firm should not provide valuation service if the valuation is material to the consolidated accounts which will be audited after.
Before accepting, consider impact, if material, decline.
client refused to increase audit fees even though they r expanding so more hours r required
action?
-this is an intimidation threat to objectivity
-according to IESBA code, this means accountant wont be able to act objectively due to actual or perceived pressures.
-audit firm is being pressired to reduce inappropriately the extent of work performed in order to match the fee they r getting.
ACTION
-discuss with audit committee
-stress the fact that expansion increases the scope of the audit
-tell them fee should be increased
-inform audit firm’s partner for ethics
client had expanded but wont increase fees so materiality level has been increased
-materiality is inceased presumably to reduce the number of audit procedures and the cost
-this increases risk that insufficient evidence was obtained, and some review procedures may not have been perfomed
-this shows that quality control procedures have not been applied to the audit
ISA 220 quality control states that audit partner must review documentation and must be satsisfied that enough work is done to obtain sufficient appropriate evidence befoe the audit report is issued
1-samples were selected based on judgement rather than statistical methods.
2- only parts of the population being tested were included, eg some locations were not included in the non current asset sample selected for physical verification
-quality control issue
-using judgemental sampling may result in smaller sample size or not represenative sample.
-ISA says sample size shud be sufficient to reduce sampling risk to acceptably low level
-ISA also says sample shud be selected in such a way that whole population has equal selection chance
there is a risk that use of judgement has led to inappropriate audit conclusions being made.
2- some items are totally excluded which means procedures werent performed, relevant assertions not covered by audit testing. NCA may be overstated in financial statements
client’ former finance director is now an audit partner at the firm
he updated the audit partner of the client with info
-potential threats to objectivity
-CODE says that if a member of the audit team recently served as a director, officer or employee (who had significant influence over accounting records) of the firm, self interest, self review or familarity threats may be created and that person may not be included in the audit team
-even though he is not in team, he helped the audit partner by giving info, this is wrong.
-matter shud be discussed with firm’s partner for ethics
-also with client’s audit committee as they r responsible for auditor independence.
some audit work is being performed by overseas office of firm, who performs it at lower cost.
-low risk and non judgemental work like minutes meeting and numerical checks on documentation were given
-increasingly common for low cost
-no regulation to prohibit this practice
-IF its only low risk and non judgemental work, risk to audit quality is low
-review of board minutes is a subjective task, should be performed by an auditor with sufficient knowledge of client maters, so they can identify relevant matters
-it is unlikely abroad person will be able to identify relevant matters
-controls must be put in place to ensure that only appropriate tasks are off shored
-monitoring and review must be done to give comfort
-firm must ensure that firm wide policies adhere to ISQC 1
-a high quality audit is more imp than cutting costs
a person appointed as a partner in audit firm, retained shareholding in client till 6 months after his appointment
-self interest threat to objectivity
-code says that audit team member must dispose immediately
-not member of audit team but an auditor of firm, must dispose as soon as possible
-6 months is a long period, firm shud have procedures in place to ensure these matters are monitored and resolved quickly
action:
-review firm policies
-ask guy why shares werent disposed immediately
