Summary Notes AA Flashcards
What are the diff types of assurance
Reasonable, high assurance level, +ve opinion/concl. E.g. audit of FI
Limited, moderate assurance level, -ve opinion/conclusion. E.g. review of FI
What are the objectives of an audit?
Per ISA 200
Obj is to obtain reasonable assurance about whether FS are free from MM and properly prepared in accordance with an applicable financial reporting framework
Report on FS
Communicate with those charged with governance
What is the audit threshold?
CA exempts small private ltd companies from mandatory audit if they meet 2 of the following 3 criteria
- Less than 50 employees
- Turnover doesn’t exceed £10.2m
- Gross assets total doesn’t exceed £5.1m
Subsidiaries don’t need audit is parent guarantees their liabilities
What firms must have an audit, even if they meet the rules for not having one
PLCs
Insurance companies and banks
Where SH owning at least 10% ask for it
What are the benefits of an audit?
Indep scrutiny of the bus by experts
Additional assurance may be necessary for third parties e.g. banks
Growing business will need an audit one day
Subsidiary benefits of audit e.g. reports to man
Describe a statutory audit
Reports to SH
Scope determined by CA2006, ISAs and other audit regulation
Reporting opinion on FS (T&F) and certain other matters e.g. info in directors report is consistent with FS
Level of assurance is reasonable
Report circulated in public domain once the acc are filed
Describe other assurances
Reports to man usually
Scope determined by terms of eng and relevance ISAEs or ISREs
Reports a conclusion depending on nature of work performed
Level of assurance is usually limited
Circulation of report is likely to be restricted
What are man’s responsibilities
Managing the businesses to achieve comp objectives and assessing bus risks to those obj being achieved
Fulfilling stat duties under CA2006
Safeguarding comp assets
Keeping proper acc records
Preparing comp FS and delivering them to registrar
Ensuring comp complies with applicable laws and regulations
What are the auditors responsibilities?
Form an opinion on FS - T&F - properly prepared - Directors report consistent with FS Identify material misstatements (whether due to error, fraud or non-compliance)
What are the fraud procedures required?
ISA 240
Performed fraud risk assessment
Exercise professional scepticism
Discuss fraud among eng team
Respond appropriately to assessed level of fraud risk
Consider implications for other areas of audit
E.g. if fraud is suspected it may cast doubt over reliability of man respresentations
Describe the process of reporting suspected fraud
Internally
- Report to man
- If man suspected of fraud, report to those charged with gov
SH
- Only if fraud causes MM or uncertainty in FS
Third parties
- If there is a duty or right to disclose
E.g. to a regulator
What are the non-compliance procedures required?
ISA 250
Perform risk assessment
Obtain evidence about compliance
If non-compliance suspected, document and discuss with management
Describe the process of reporting non-compliance
Internal
- Report to management
- If man suspected to be involved with non-compliance, report to those charged with gov
- If there is no higher level of man, consider legal advice
SH
- Only if non-compliance causes MM or uncertainty in FS
Third parties
- if there is a duty to disclose e.g. to regulator
How must suspicions of Bribery be dealt with?
Under Bribery Act 2010
Must be reported to NCA under Proceeds of Crime Act 2002
Anti-bribery policies should focus on
- Top level culture in which bribery is unacceptable
- Risk assessment
- Due diligence procedures taking a risk-based approach
- Communication to staff including training
- Monitoring and review
What are the implications of the Sarbanes Oxley Act 2002 for management
CEO and CFO must attest to the veracity of FS (criminal penalties apply for false attestations)
Greater disclosure of the amendments made to FS during audit
What are the implications of Sarbanes Oxley Act 2002 for auditors
Stricter enforcement of auditor independence rules
Public Company Accounting Oversight Board (PCAOB) can inspect audit files of US listed companies, including major subsidiaries of US listed companies wherever the subsidiary is based
What are the party transaction procedures required?
ISA 550
Obtain list of all related parties from man
Carry out detailed tests of transactions and balances (as normal on audit but looking out for related party trans)
Review minutes of meetings of SH and directors where RP transactions may have been discussed
Review bank confirmation letters for evidence of guarantor relationships
Reviewing investment transactions e.g. identifying new subs which are RP
Confirming that correct disclosures have been made in FS
Obtain written man representations confirming the all related party transactions have been disclosed
What are money laundering responsibilities?
Reported actual or suspected money laundering to firms MLRO
MLRO reports to NCA if necessary
Must avoid tipping off client
What assurance eng regulation is applicable to all engagements
And what is additional guidance for audits?
Ethical standards
Risk assessment
Terms of eng
ISQCs
Additional guidance for audits
CA2006
ISAs
What is the role of the International Auditing and Assurance Standards Board/ (IAASB)
Subsidiary of IFAC
Develops international standards
issues ISAs, ISQCs and other standards
What is the role of the FRC?
Supervises acc related issues in UK Issues ISAs (UK) Also issues other standards and guidance for auditors - Ethical standards - Practice notes - Bulletins - Standards for reviews of interim info - Audit quality- thematic reviews
What are the role of EU Directive and Regulations 2014 provisions?
Improve quality of audit and reporting
Mandatory retendering for audits (10 yrs) and auditor rotation (20 yrs)
Ban on providing NAS to public interest entities
Cap of audit fees for NAS
What are the basic fundamental ethical principles per ICAEW Code of Ethics
Integrity Objectivity Professional competence and due care Confidentiality Professional behaviour
What are the threats to objectivity and independence?
Self-interest Self-review threat Advocacy threat Familiarity threat Intimidation threat Management threat
How must policies and procedures be designed for an audit firm?
Section 1 General requirements and guidance
Designed to ensure audit firm and covered persons act with integrity, objectivity and independence
Firm must be able to demonstrate compliance with Ethical Standards
What must leaders of audit firm establish?
Control env within the firm that ensures compliance with standards
What must audit Ethicals Partner be responsible for?
Responsible for the firm’s policies and procedures relating to integrity objectivity and indep
What action must be taken for breaches against general requirements?
Must be assessed by eng partner and ethics partner
Can auditors be involved in management / decision making?
No!
When should eng partner consider threats to objectivity?
At all stages of audit Acceptance/continuing Planning Forming an opinion Considering whether to provide NAS When threats are reported to them
What should a partner do when a threat is identified?
Assess the effectiveness of the available safeguards
Decline or discontinue the eng if safeguards are not effective
When is an EQCR required?
For a listed company or high risk company
Expanded EQCR can be used when there are high risk areas
What must be communicated to those charged with governance?
All significant matters that bear upon the auditor’s objectivity
Can auditors hold shares in the firm and why?
No shares can be purchased by the partners or persons closely associated with self
Because of self-interest
Can audit firms make loans to client?
NO
Unpaid audit fees for previous year can act like a loan
So should aim to have last years fees paid before starting new audit
Can audit firm/ their employees accept a loan from a client and why?
No
Unless the client is a bank and the loan is made in the ordinary course of business
Self interest
Intimidation threats
Can audit firm enter into business relationships with the client?
Audit firm, covered persons and closely associated with them shouldn’t enter into bus relationships.
Self-interest
Advocacy
Intimidation
Is dual employment allowed and why?
Audit firm can’t employ someone who is also employed by audit client
Management
Self-review
Can loaned staff from audit firm be involved in the audit and why?
After completing loan staff assignment, partner or employee must not have any role on short period of time and care must be taken to comply with Section 5
Management
Self-review
What must be done re potential employment with clients and why?
Partner and members team must notify the firm of any potential employment with client
Firm seal remove the indiv from audit team and review the work carried out by them on the current audit
Self-interest
Familiarity
Intimidation threats
What action must be taken when partner (eng/QCR) leaves the firm to become director/key man at audit client?
Firm must resign as auditor and can’t accept reappointment for 2 year period
What action must be taken when audit team member other than partner (eng/QCR) leaves the firm to become director/key man at audit client?
Audit firm must consider the composition of the audit team
What must be done if a member of the audit team has a person closely associated with them/close family member employed by audit client and why?
They may need to be removed from the team
Audit staff should report close family or personal relationships with client staff to the eng partner
Familiarity
Self-interest
Intimidation
Can audit partner or employee of audit firm perform role of auditor and why?
No!
Management
Self review
How must audit procedures be created in ref to fraud?
Must design so they have a reasonable chance of detecting material frauds
i.e. must think about fraud risk
E.g. do they sell desirable item that increases likelihood of them being stolen
E.g. Small firm that can’t segregate duties
What action should be taken if fraud was detected in the previous year?
Check opening bal are correct
Was it corrected properly last year
Was internal control put in place to prevent it occurring again?
Heighten testing/sample size/ audit expertise in that area
Less likely to rely on internal controls in that area
How does non-compliance potentially affect the FS
May need to account for a provision
Fines upcoming?
Sued by employees if lack health and safety
May lose license to trade, could have GC implications
How do you answer an ethics questions?
Identify the threat
Explain the threat and how it impacts the obj/integrity (MOST MARKS FOR THIS)
List the applicable safeguards
FRC Bulletin can help with this in exam
What action is restricted when former director/employee of audit client joins the audit firm?
Can’t be involved in audit of that client for 2 years
period may need to be extended in some circumstances
Self Interest
Self review
Familiarity
What are ‘persons closely associated’?
immediate family members
e.g. spouse and dependents
What are ‘other close family relationships’?
Comprises of parents, non-dependent children and siblings
Why are persons closely associated and other close family relationships included in limitations?
As they are generally presumed to be aware of matters concerning persons closely associated with them and be able to influence their behaviour
How should eng partner deal with use of external consultants involvement in audit?
Should consider the integrity and objectivity of any external consultants involved in the engagement and document the rationale for the conclusion
Why must the auditor monitor the length of time the partners and senior staff work on a client?
Self-interest
Self-review
Familiarity
What are the safe-guards that can be implemented to deal with threats to length of time partners have been in place?
Rotation of partners
Involve another partner not previously involved on eng to review work done by partner and other senior staff members
EQCR (expanded if PLC and require EQCR anyway)
How often must non-listed client eng partners be rotated and what safeguards can be put in place
After 10 years, should review their ability to continue as eng partner Safeguards: Apply safeguards (rotation, EQCR, indep partner review) Document reasoning and communicate with those charged with governance at the client
How often should eng partner of a listed company be rotated?
Rotate every 5 years
No return within 5 years
Can stay for additional 2 years if there has been a major change in company (e.g. FD left) to maintain audit quality
Must disclose extension to SH
Must have safeguards in place e.g. EXPANDED EQCR
What are the rules for eng partner if they have already been eng partner and firm becomes listed?
If they have been eng partner for 4 or more years, can stay on for max of another 2 years
Must implement safeguards
How often must EQCR and other key partners involved in the audit be rotated for a listed company?
Every 7 years
No return within 5 years for EQCR and 2 years for key partners involved
How often must partners/senior staff be rotated on listed companies?
Rotated every 7 years
Can fees be influenced by NAS?
No
How must staff members be selected for an audit?
Should select staff that have sufficient time and skills to complete the audit, regardless of fee charged
Prevents self-interest
Are contingent fees permitted and why?
No
Due to self-interest
What must be done if last years audit fee amount is still outstanding?
last years fee and payment plan must be agreed with client before accepting next appointment
If fees are overdue and amount is not trivial, the audit firm should consider whether they can continue (self-interest)
It is ‘akin to a loan’ and audit firm can’t provide a loan to the client
What must be done if fees charged for NAS exceed audit fee for that year?
Must be disclosed to ethics partner
Consider the need for safeguards
For a listed and unlisted client, what are the limits for fees for accepting the client?
Where regular fees are expected to exceed
10% must refuse audit for listed (15% for unlisted)
5% - should put safeguards in place but can still accept. Must disclose to TCWG and Ethics partner (10% for unlisted)
when should external QC reviewers be used?
When new firms find the economic dependence requirements difficult to comply with
Can audit staff be paid based on their cross-selling ability?
NOT ALLOWED
Can hospitality ever be accepted and why?
Audit firm, partners, covered persons and persons closely associated with them shouldn’t ever accept non-trivial gifts or hospitality
Self interest
Familiarity
What must be done if there is litigation between audit firm and client and why?
Resign
Self interest
Advocacy
Intimidation
What are the requirements for those providing an NAS to an audit client?
Must communicate details of this to audit engagement partner
What test can help decide if obj and indep has been achieved?
Consider whether a reasonably informed third party would consider the relationship obj and independent
When should NAS not be accepted?
Where safeguards can’t mitigate the threats sufficiently
What are the general safeguards for NAS services?
Separate teams
EQCR to review audit work and conclusions of audit team in relation to NAS services
Consider whether there is informed management
What should be done to consider whether there is informed management?
Important for NAS
Objective and indep info is provided to the client
Client has a genuine opportunity to decide between alternate courses of action
Member of man designed to receive the result of NAS- this indiv must have the capability to make judgements and decisions based on info provided
Without informed man, it is unlikely that any safeguards can be effective against the management threat
What must you consider re a management threat and why?
Whether there is informed management in place
Without informed man, it is unlikely that any safeguards can be effective against the management threat
What matters must be communicated to TCWG re NAS?
Any matters that have a bearing on auditors objectivity and independence related to the provision of the NAS
What must be documented when considering NAS?
All reasoning and safeguards related to NAS
What are the threats to indep and obj re NAS?
Self-review : reviewing own work
Management threat/advocacy : NAS are giving advice
Self-interest: doing more work for client
Familiarity - on site more for NAS
What NAS services are prohibited for listed clients?
Tax services
Taking part in man/decision making
Bookkeeping and preparing acc records/FS
Payroll services
Design and implementation of internal controls, risk man procedures or info technology procedures re to FI
Valuation services (including actuarial valuation)
Legal services
Internal audit
Corporate finance services (incl financing, investment strategy and promoting/dealing in or underwriting shares)
Human Resources services
All set out in Section 5
What is the general requirement re fees for audit
EQCR if regular fees are expected to exceed 10% regularly for non-listed (5% for listed) and can’t accept if above 15% (10% for listed clients)
What are the provisions available for audit of small entities?
No requirement for EQCR if fees exceed 10% but not over 15%, must just disclose to Ethics partner and TCWG
Not required to apply safeguards to address self-review threat providing there is
- Informed management
- More regular ‘cold review’ of audits where NAS are provided
- Disclosure of NAS in audit report
if an audit partner joins the client, not restricted to not be able to do the audit for 2 years. Can continue as auditor providing there is no significant threat to audit teams integrity, obj and independence, and disclosure of partner joining client must be made in audit report
What does the confidentiality requirement mean for auditors?
Should not disclose client info unless there is a right or a duty to do so
Should take all reasonable steps to maintain confidentiality
Should not use confidential info for personal advantage
When is there a duty for auditors to disclose info?
Required by regulator
Ordered by a court
Money laundering / terrorism
When is there a right for auditors to disclose info?
Client permission granted
Public interest
To defend the firm in legal proceedings
What must be done when a conflict of interest arises?
Firm should notify the clients of the situation and seek their consent to continue to act
Confidentiality is key issue, as leakage of info could be detrimental
If continue to act, should implement safeguards
Separate teams
Info barriers
Confidentiality agreement signed by employees and partners
review of the application of safeguards by INDEPENDENT partner
When can conflict of interest arise?
2 competitors
Supplier and customer
Suing each other
What are the consequences of poor quality controls for audit firms?
From ICAEW
Fines
Disciplinary action
Withdrawal of the firms authorisation to carry out audits
Other
Claims of negligence
Payments of damages
Impact on reputation (bad press, lose customer)
CA2006 offence of recklessly causing audit report to be misleading/false
What are the components of a system of good quality control? (how do you ensure auditors give the correct audit opinion)
Leadership take responsibility for the quality within the firm
Ethical requirements followed
Acceptance and continuance of client relationships and specific engagements
Human resources
Engagement performance
Monitoring - check if working and improve if not
Documentation of procedures
What work should be done before acceptance/continuance of eng with clients?
Due diligence and money laundering - affects audit firm reputation and may indicate poor man integrity
Contact prev auditor/assess prev years work for issues
Consider if have enough staff/resources/expertise
Consider ethical requirements
Do they work in highly regulated industry? Will this increase likelihood of provisions/fines
What are the 2 types of additional review and monitoring other than everyone having their work reviewed by someone more senior?
EQCR (Hot review)
Monitoring (cold review)
Describe an EQCR
Hot review
Indep valuation of significant judgements the team has made and conclusions it reached in forming the opinion
Aim to prevent inappropriate opinion being issued
Issued before the opinion is used
Done to all listed/high risk clients
Describe the process of monitoring as a review
Cold review
Ensures compliance with firm’s procedures and ISAs, ethical standards and other regulation
Identifies areas for improvement
Done on an ongoing basis
Partners should review annual report of the results of monitoring activities
Done on a sample of clients
What does the UK Corp Gov Code require audit committee of listed companies to review and monitor?
The indep, objectivity and effectiveness of external auditor
How can firms limit their liability ?
DIFF TO HOW TO ENSURE THEY GIVE CORRECT AUDIT OPINION
Professional indemnity insurance - gets pay out for fines, but doesn’t cover loss of time, court expenses etc
Being an LLP - limits liability of partners to amount they originally invested
Liability caps (require SH approval and only cover 1 year)
- Agreed with new client ahead of time
- Note: third party can attempt to sue, but Bannerman para protects against this
What are the results of a cold review?
Produce report and communicate any issues
Monitor that it has been put in place
Update the policy
Discipline those if not meeting them
How should fees be set?
Based on Personnel Time Risk Complexity Expenses
What must be considered before accepting appointment as auditors?
Do a risk analysis
Consider ethics barriers- ICAEW CoE section 210 changes in professional appointment
Consider practical issues (resources/competence)
Consider legal issues- whether appointment (and removal of prev auditors if relevant) was carried out in accordance with CA2006
What risk analysis should be done?
Identify clients that are too high risk to take on
Determines fee
Develops initial understanding of risk areas
Who can auditors be appointed by and when is this appropriate?
By Directors
- To fill casual vacancy (e.g. auditor retired during year or first appointment of auditors)
By the members
- By passing an ordinary resolution at GM (>50% of votes)
- Appointment must be made within 28 days after latest day for filing of FS (or existing auditor is deemed to be reappointed)
By Secretary of State
- In rare circs where no auditor has been appointed by relevant time
What is the process for removing an auditor?
Ordinary resolution at GM
What is the duty of an outgoing auditor?
Prepare and submit statement of circs to companies Registered House (statement of matters to be brought to attention of SH, or creditors, or statement that there is no such circumstances - not allowed for listed)
What are the rights of an outgoing auditor when being removed?
prepare written representations to be circulated to members
Attend and speak at meeting where appointment is considered
What is the process for auditor resignation?
Submit written notice to Companies registered office
What are the rights of an outgoing auditor when resigning?
prepare written representations to be circulated to members
Right to request, attend and speak at an extraordinary general meeting (EGM)- this can be called at short notice (max of 4 weeks after it is called)
How should the terms of engagement be communicated?
In writing
What should the engagement letter cover?
Objective and scope of audit of FS (ref applicable law, regs, fin reporting framework and auditing standards)
Management responsibilities
Auditor’s responsibilities
Form and content of reports and communications on the audit
Auditor’s right to access records, docs and info required on the audit
Expectation that man will provide written representations
May also cover: fees, practicalities and timetable of audit
How often should an engagement letter be sent?
For recurring audits, not required every year.
Auditor should consider whether a new eng letter is required
What would indicate that a new eng letter was required?
If terms of engagement need to be revise
If client need to be reminded (e.g. if there has been a change in client management)
What should be included as terms of eng for other assurance work?
Terms should be set out in writing
Should cover
- Work that will be carried out
- Form and contents of any reports
Why should an auditor always plan (and for assurance work!)?
Ensures devote attention to important areas of audit
Identify and resolve potential problems on a timely basis
Organise the audit to ensure it is performed efficiently and effectively
Select staff with appropriate competence
Direct, supervise and review audit work (elements of system of quality control)
Helps to co-ordinte work done by auditors of components or experts
What are the materiality size thresholds
0.5-1% revenue
1-2 % of gross assets
5-10% of profit before tax
Give some examples of materiality by nature
Matters relating to directors or related parties
Small amounts that impact critical points e.g. prof to loss, net assets to net liabilities, affect thresholds of small/medium company per CA2006
Descriptions (e.g. of acc policies that are misleading)
How are analytical procedures used throughout the process?
Planning - must be used as part of risk assessment process
Evidence- can be used as a form of substantive procedure
Overall review- must be used to assist in forming overall audit conclusion about whether FS are consistent with auditor’s understanding of the entity
What are the limitations of analytical procedures?
Require sound knowledge/experience of the entity which might be limited in first year
High-level procedure: requires staff at appropriate level
Depends on reliability of the data source
Overall approach may hide inconsistencies- requires a division of data
How do you perform analytical procedures?
Gain an understanding of the business
Develop an expectation
compare to actual expectation
Unexpected variations are risks that require further attention in the audit
What are the key ratios
Gross profit margin operating profit margin Return on capital employed Current ratio Quick ratio Interest cover Trade receivables period Inventory holding period Trade payables period
Define the gross profit margin calc and its interpretation
Gross profit/turnover x 100
Assesses profitability before OH are accounted for
Define the operating margin calc and its interpretation
Operating profit/turnover x 100
Assesses profitability after OH are accounted for
Define the return on capital employed calc and its interpretation
Operating profit / (equity + net debt) x 100
Measures how effectively resources are used to generate profit
Define the current ratio calc and its interpretation
Current assets / current liabilities
Assesses ability to pay for current liabilities using current assets
Define the quick ratio calc and its interpretation
Current assets less stock / current liabilities
Assesses ability to pay for current liabilities using liquid assets
Define the interest cover calc and its interpretation
Profit before interest payable / interest payable
Shows how many times over you could pay interest
Define the trade receivables collection period calc and its interpretation
trade receivables / revenue x 365
How long on average it takes for credit customers to pay in days
Define the trade payables payment period calc and its interpretation
Trade payables / revenue x 365
Assesses average time taken to pay suppliers for purchases on credit in days
Reflects ability to pay
Define the inventory holding period calc and its interpretation
Inventory / CoS x 365
Assesses average number of days inventory of held for
How do you answer an audit planning question?
Split by areas of high risk
1. Justification
Identify relevant info in Q
State appropriate acc treatment for that info
Show whether makes it under or over stated
Use data to back up info
- Procedures
Explain how would test for this as if you’re explaining to an audit junior
Explain specifics and why you are doing it
Why must auditor understand the entity and its environemtn
Risk assessment required by ISAs requires an understanding of the client
Assesses the skills and competence the audit team needs
Helps plan an efficient audit
Assesses the internal control systems which enables an assessment of control risk
Assess any significant risks that require special attention
Perform analytical procedures
What info is required on nature of the industry to help understand the entity and its env?
Laws and regulations
The market
Competition
Technology
What info is required on nature of the business to help understand the entity and its env?
operations Ownership and governance Investments Structure Accounting policies Objectives and strategies System of internal control Use of outsourcing
To understand an entity and its environment, where can info be sourced from and give some examples of info you can get from these sources?
External sources
- Credit reference agencies
- Industry publications of surveys
- Companies House searches
- Industry regulators
Audit firm
- Previous years working papers
- Knowledge held by man/partner
- Tax working papers
- Firms industry specialist
Client
- Discussion
- Board minutes / internal audit reports/ website/ brochures
- Observing processes
- Analytical procedures
What is the audit risk model?
Audit risk = inherent risk x control risk x detection tis
Audit risk = risk that auditor expresses an inappropriate audit opinion
Inherent risk = susceptibility of an assertion about transactions, balances or disclosures to a misstatement that could be material
Control risk = misstatement not corrected, detected or prevent by internal control systems
Detection risk = risk auditor won’t detect a misstatement in testing.
What are the significant indicators of risk in a client?
Fraud risk Complexity Related party transactions Subjectivity Transactions outside the normal course of business
What should the auditor’s overall response to assessed risks be?
Per ISA 330
Emphasise that staff need to maintain professional scepticism
Assign extra or more experienced staff
Use the work of experts, internal auditors or other auditors
provide more supervision on the audit
Incorporate more unpredictability into audit procedures
What responses must the auditors give to assessed risk at assertion level?
Nature, extent and timing of audit procedures should be responsive to the assessed risks
Nature - type of test
Extent - use of sampling
Timing - During the year or post ye
Can auditors rely on the work of others?
Yes, but audit has sole responsibility to form an opinion on T&F of FS, so if they want to place reliance on the work of others, must consider
General assessment of the party upon whom the auditor wishes to place reliance: are they competent and objective?
Specific assessment on work: has it been properly planned and performed, and are the conclusions appropriate?
What must be done when using the work of internal auditors?
- Assess internal audit function
- Is it objective, competent and does it take a systematic and disciplined approach? - Assess the specific work upon which reliance is to be laced
- Was work properly planned, performed, supervising, reviewed and documented
- Was there sufficient audit evidence?
- Where the conclusions reached appropriate - The auditor should test the work of internal audit and conclude on its adequacy for the purposes of external audit
What should auditor consider when wanting to use the work of an expert?
- Assess the expert’s competence, capability and objectivity
- Assess the specific work upon which reliance is to be placed
- Relevance and reasonableness of the expert’s findings, and their consistency with other audit evidence
- Reasonableness of assumptions and methods used
Relevance, completeness and accuracy of source data used - Evaluate the adequacy of the audit evidence
How do you monitor if internal committee is worth its role?
Look at cost savings vs cost of internal auditor
Compare with external auditor findings on internal control deficiencies, Shouldn’t be missing significant issues
Look at number of reports vs budgeted reports
What should the auditors overall response to assessed risks be?
Emphasise to staff that they need to maintain their professional scepticism
Assign extra or more experienced staff
Use the work of experts, internal auditors or other auditors
Provide more supervision to the audit
Incorporate more unpredictability into the audit
What are the responses to assessed risks at assertion level?
Nature, extent and timing of audit procedures should be responsive to the assessed risks
Nature - type of test
Extent - use of sampling
Timing - during the year or post year-end
How must can auditors rely on the work of others?
The auditor of comp has sole responsibility to form opinion on T&F of FS, so if they want to place reliance on others they should carry out the following:
- General assessment of party upon whom the auditor wishes to place reliance: are they competent and obj?
- Specific assessment of the work upon which the auditor wishes to place reliance: has it been properly planned and performed, and are the conclusions appropriate?
Why is an audit committee beneficial?
As its made up of independent execs who don’t work at the firm
Easier for internal auditors and external auditors to report deficiencies of managements (more difficult for them to admit to their bosses that their internal controls are crap)
How must auditors use the work of internal auditors?
- Assess the internal audit function’s obj, competence and systematic and disciplined approach
- Assess the specific work upon which reliance can be placed
- Whether work was properly planned, performed, supervised reviewed and documented.
- Whether there is sufficient appropriate audit evidence
- Where conclusions reached are appropriate - The auditor should test the work of internal audit and conclude on its adequacy for the purposes of the external audit
How can auditors use the work of auditor’s expert?
- Assess the expert’s competence, capability and objectivity
- Assess the specific work upon which reliance is to be placed
- Relevance and reasonableness of the expert’s findings, and their consistency with other audit evidence
- Reasonableness of assumptions and methods used
- Relevance, completeness and accuracy of source data used - Evaluate the adequacy of the work as audit evidence
What must an auditor do if they discover the client has outsourced functions? Give an example of what could be outsourced
E.g. payroll
Auditor should
- Obtain an understanding of the services outsourced
- Consider access to sources of evidence
- Assess the risks arising
- Review any assurance reports prepared for the service organisation to provide assurance to user clients and their auditors
What are the objectives of a parent company auditor of a group?
Should determine whether to act as the auditor of the group FS
If acting as the auditor of the group FS:
- Communicate clearly with competent auditors
- Obtain sufficient appropriate audit evidence re the FI of components and the consolidation process to express an opinion on the group FS
What must an auditor do to achieve the objectives of a group audit?
- Consider whether the group auditor can obtain sufficient appropriate audit evidence e.g. if significant components are audited by other auditors
- Obtain an understanding of the group, its components, and their env
- Obtain an understanding of the component auditor’s independence, competence and regulation
- Set group materiality, which should be higher than component materiality
- Determine the type of work to be performed by the component auditor in response to assessed risks
- Communicate with the component auditor
Evaluate the sufficiency and appropriateness of evidence obtained - Form an opinion on the parent company and group FS
What should the group audit team communicate its requirements to the component auditors
Work to perform
Form and content of any communications
Request confirmation that the component auditor will co-opeate with group auditor
Ethical requirements relevant to the group audit
Materiality
Signif risks of misstatement that are relevant to the component audit
Listed of related parties
What should the component auditors communicate to the group auditor?
Compliance with ethical requirements
Compliance with group audit team requirements
Identification of FI on which the component auditor reports
Info on non-compliance
Indicators of man bias
list of uncorrected misstatements
What is included in the financial statement review upon audit completion?
- Do the FS comply with CA and acc standards
- Use checklists to determine whether disclosures have been properly made - Do the FS make sense?
- Use analytical procedures, as a sense check
- Use analytics to
- - Interpretation - review the FS considering absolute figures and ratios
- - Investigation - unusual movements or number should have been identified as audit risks so the answers to questions should be in the audit working papers
- - Corroboration- if answers can’t be found in working papers then further work is required
How should auditors evaluate misstatements identified in the audit?
Should accumulate the misstatements identified and
- inform man
- reassess materiality
- determine whether corrected misstatements are material, individually or in aggregate
- seek written man representations to confirm that the effect of uncorrected misstatement is immaterial
What must be considered regarding opening balances on initial audit engagements?
Must consider whether there is sufficient evidence to support the opening balance figures
Carry out procedures such as
- Agree b/f figures to last years FS
- Assess acc policies applied to LY opening balances
Perform at least 1 of the following
- Review prev auditors WP
- Consider whether this years audit tests provide evidence over opening balances
- Perform specific procedures on opening balances
What must an auditor confirm regarding comaprative information
Must obtain sufficient evidence that comparatives are true and fair
If there was a misstatement in LY FS and matter remains unresolved, then auditor should consider the need to modify their opinion in this years audit report
What are the 3 options for preparing accounts in relation to GC?
GC basis is used, unless man intends to cease operations and liquidate the entity, or has no realistic alternative but to do so
If there are doubts over company’s ability to continue as GC, the doubts must be disclosed in FS
If the company is not GC, the FS should be prepared on break up basis
What are the significant differences when preparing accounts on the break up basis?
No LT assets or liabilities
Assets valued at recoverable amount
Provisions may be required for new costs e.g. redundancies
When should GC be considered?
Planning stage
- Understand the entity and its env
- Identify GC risk
Evidence stage
- Assess the company’s ability to continue as GC including reviewing cash flow, prof and other relevant forecasts, reading minutes of meeting of SH and directors
- Confirm existence and adequacy of borrowing facilities
Reporting stage
- Consider the implications for the audit report
What are the 2 possibilities for subsequent events?
Adjusting and non-adjusting
How do subsequent adjusting events affect the audit and why?
Give some examples
They provide evidence of conditions that existed at the date of FS
The FS should be adjusted
Examples
- Evidence over NRV of inventory when sold after ye for lower than cost, impairment is required
- Liquidation of customer who owes money, need to write off debt
- Post y/e credit notes reveal reversal of sale
How should non-adjusting events be dealt with and why?
They provide evidence of conditions that arose after the date of the FS
The event should be disclosed in the FS
But if the non-adj event is so significant as to mean the company is no longer a GC then it should be restated
How should audit respond to subsequent events between year end and audit report sign-off?
Active responsibility to carry out procedures to identify events that require adjustment or disclosure
Should seek written man representations that all subsequent events have been included in the FS
How should audit respond to subsequent events after signing off the audit report?
If the auditor becomes aware of sub events, ask directors to amend the FS
What are written representations
Man representation letter should be signed before the audit report is signed
When reporting on an audit eng, what should be communicated to TCWG?
- Responsibilities of the auditor in relation to FS audit
- An overview of the planned scope and timing of the audit
- Signif findings of audit
- For listed clients, matters that have a bearing on auditor independence and the safeguards that have been put in place to eliminate them
How should communication be carried out?
In any appropriate form
But matters re independence for listed clients must be communicated in writing
What is required to be communicated in writing to TCWG for listed companies?
Issues re independence matters
What does a report to management when communicating deficiencies in internal control to TCWG generally include?
Covering letter Appendices showing, typically in a table: - Control deficiencies - Implications -Recommendations for improvement
Describe the table shown when communicating internal control deficiencies in a report to management
Deficiency - Statement of fact, (in the exam this is normally given so doesn't need to be repeated) Consequences - Cost to the business e.g. losses, adverse impact on gash flow, loss of customer goodwill - Possibility of misstatement in FS Recommendations - Specific (who/what where/ how) - Commercially feasible
What are the options for audit reports
Unmodified reports (nothing has changed)
Modified report
- Unmodified opinion on FS (Emphasis of matter or Other Matter)
- Modified opinion (Qualified, ‘except for’, adverse or disclaimer)
What are the components of an audit report?
Title Addressee Auditor's opinion Basis for opinion GC Key audit matters (listed companies only) Application of materiality Other info Responsibilities of management Auditor's responsibilities Opinion on other matters prescribed by CA2006 Matters on which the auditor is required to report by exception Sign off - Eng partner name & signature - Address - Date
What opinions must always be expressed in an audit report?
Whether FS give T&F view
Whether FS are properly prepared in acc w CA2006 and relevant fin rep framework
Whether Directors’ Report and Strategic Report are consistent with FS
What are the implied opinions that are reported by exception under CA2006 for the audit report?
Adequate acc records kept
Returns adequate for audit have been received from branches not visited
FS are in agreement with acc records
Disclosures of directors’ remunerations have been made
We have received all info and explanations nec for audit
What are the UK Corp Gov Code requirements for the audit report
Report by exception if no Corporate Governance Statement is included
Report on the company’s compliance with the provisions of the UK Corp Gov Code
What is in the Bannerman para?
No liability is accepted to anyone other than the company and SH as a body
Describe the Emphasis of Matter para in the audit report
Used in a modified report with an unmodified opinion
Used to highlight a matter which has been properly disclosed in FS
Para:
- Headed up Emphasis of Matter
- Describes the matter and refers to the disclosures made in the FS
- States that the audit opinion is not modified in this respect
Describe the ‘Other Matter Paragraph’ in the audit report
Used in a modified report with an unmodified opinion
Used to highlight a matter not included in the FS
Headed up ‘Other Matter’
Describe the matter
When is a modified opinion given and what action should be taken?
If the client doesn’t make the required adjustment for the misstatement, or no alternative
audit report will:
- Show a modified opinion
- Explain the reason for the modification after the opinion in a ‘basis for modified opinion’ para
Describe the modified opinion types
Qualified except for opinion - material but not pervasive & with materially misstated/inability to obtain sufficient appropriate audit
Adverse opinion - material and pervasive & FS are materially misstated
Disclaimer opinion - material and pervasive & inability to obtain sufficient appropriate audit evidence
What is the wording for a qualified ‘except for’ opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified paragraph, the FS give a T&F view
What is the wording for an adverse opinion?
In our opinion, because of the significance of the matter described in the Basis for Adverse paragraph, the FS do not give a T&F view
What is the wording for a disclaimer opinion?
Because of the significance of the possible impact of the uncertainties, described in the Basis for Disclaimer of Opinion para, we do not express an opinion on the FS
When reporting on GC, what is the impact on the audit report of the following situation?
The company is not a GC, but the directors have prepared the FS on the GC basis
Material and pervasive misstatement
Adverse opinion
When reporting on GC, what is the impact on the audit report of the following situation?
The comp is not a GC, and the directors have prepared the FS on break-up basis, with adequate disclosure of the basis of preparation
FS are not misstated
Emphasis of matter para is used to HL the disclosure to the users of FS
When reporting on GC, what is the impact on the audit report of the following situation?
The GC status of the company is uncertain and the directors have made adequate disclosure of the uncertainty
FS are not misstated
A separate section included in auditors report under heading ‘Material Uncertainty Related to GC’ to:
- Draw attention to disclosure note
- State that the material uncertainty may cast signif doubt on the entity’s ability to continue as GC
- State that the auditor’s opinion isn’t modified in this respect
When reporting on GC, what is the impact on the audit report of the following situation?
The GC status of the company is uncertain and the directors haven’t made adequate disclosures of the uncertainty
Material misstatement
May be considered pervasive in some circ
Generally qualified ‘except for’ opinion
When reporting on GC, what is the impact on the audit report of the following situation?
Directors have based their assessment on forecasts prepared for a period of less than 12 months
Limitation on scope which may be considered pervasive
Qualified ‘except for’ opinion or disclaimer of opinion
If the directors don’t disclose the fact that they have prepared forecasts for a period of less than 12 months then the auditor should report the fact in their audit report
What are the additional requirements for listed entity audits for the auditors?
Must read the directors’ statement on GC in the annual report
Consider whether anything needs highlighting in the audit report
When is the ‘other Information’ paragraph used?
If the auditor identified inconsistencies between other info and the FS, it is important to highlight the inconsistencies to the users of the FS
What info must be given in the other Information paragraph relating to the Directors’ report/strategic report?
CA2006 requires that the audit report always concludes on whether the info contained in the reports is consistent with FS
What info must be given in the other Information paragraph of the audit report relating to the other info published with the FS?
ISA 700 requires that the audit report includes a sep section with the heading ‘Other info’
This must include:
- Management is responsible for other information
- The audit opinion doesn’t over other info
The auditor reads the other information
- A statement that there is nothing to report, or details of any material misstatement
What are the different audit requirements for charities according to the thresholds?
Gross income over 1 m OR gross assets over 3.26m and gross income over 250,000 - requires audit
Gross income between 25k - 1m - indep verification of FS (must be by qualified acc if income over 250,000)
Gross income less than 25,000 - send copy of accounts to charity commission
What are the principles of public sector audit?
Indep of public sector auditors from the bodies they audit
Wide scope of audit in public sector
Ability of public sector auditors to make their results available to the public
What is the scope of the public sector audit?
Covers FS and review internal control systems
Regularity- transactions are carried out in acc with legislation and regulations
Propriety - transactions and business are carried out ethically, with integrity and according to any existing standards of conduct
Value for money - best use is being made of the resources
i. e. the audit evaluates the use of public resources in terms of
- Economy (spend less)
- Efficiency (spend well)
- Effectiveness (spend wisely)
What are the different types of assurance engagements?
Examination of prospective financial info
Engagements to review FS
Reporting on assurance engagements
Reporting on GHG statements
What procedures are carried out by assurance provider when examining prospective financial info?
Consider man competence regarding the preparation of forecasts - HAVE WE DEALT WITH THEM BEFORE?
Assess the reasonableness of assumptions made KEY PHRASE
Check the forecasts have actually been prepared on the basis of these assumptions
Check mathematical accuracy
If any of the period of the forecast has already elapsed, compared to historic info
Seeking written man representations that they have prepped forecasts - reduces expectations gap.
We want to know what the forecasts are being used for (usually loan application) - how does this affect risk?
NOT GATHERING AUDIT EVIDENCE
What work is done for engagements to review FS?
As this is a limited assurance eng, usually limited to
- Enquiries of man
- Analytical and other review procedures
- Seeking man representations
Describe the process of reporting on assurance engagements
Work done is likely to be limited to
- Enquiry of man
- Analytical and other review procedures
- Seeking written man representations
Limited assurance is given
Negatively expressed conclusion ‘nothing has come to our attention that would suggest the FS don’t give a T&F view’
If the report is on prospective fin info, then a caveat should be included (actual results are likely to differ to forecasts because of unforeseen circumstances)
What are the requirements for companies re GHG emissions?
Listed companies have to disclose GHG emissions from April 2013
Voluntary for other comapnies
Describe the process of reporting on greenhouse gas emissions
Short form Q or short form Q only
Level of assurance could be
- Reasonable (opinion on whether GHGS has been prepared in acc with acceptable criteria)
- Limited (conclusion on whether anything has come to practitioners attention to indicate the GHGS has not been prepared in acc with acceptable criteria)
Eng is likely to be complex, involves multidisciplinary teams (e.g. scientific expertise) and subject to uncertainty due to difficulty of estimation and measurement
What are the modifications required to an assurance report?
REVIEW ENGAGEMENT
Where there are problems in assurance eng (e.g. matters have come to attention/insufficient evidence), then a modification similar to modified opinion report is required.
BUT DESCRIBED AS A QUALIFIED CONCLUSION NOT OPINION (EXTRA HALF MARK)
FORECAST
ISAE 3400 - FINAL 3 PARAGRAPHS
Describe the use of analytical procedures
Analytical procedures are REQUIRED at planning stage as part of the risk assessment process
- Vital to identify risks and help to understand areas for focus
Can be used as form of substantive procedures in the evidence gathering stage
- Only one thats not necessary
- Means will calc proof in total to help assist the auditor in forming an overall conclusion on FS IMPORTANT
- Proof in total helps to obtain reliable evidence and detect material misstats (as compare to number expecting to see)
- Hugely help with efficiency of audit, as reduce the need for tests of detail and sample sizes
At conclusion
- MUST be used in overall review to assist in forming overall conclusion about FS are consistent w auditors understanding of the entity
- As some of the numbers have moved since planning, as original are just drafts
- Adjustments will have occurred, so need to do a final sense check
- i.e. redo gross profit movement etc., and check that it is reasonable in acc with audit work
- check everything is as expected
- Should be able to understand all the movements, otherwise not done enough work
What are substantive analytical procedures?
The analytical procedures used at the evidence gathering stage
Analytical procedures generally are used throughout the whole audit process
What must you be careful with in forecasting questions?
Whether it relates to
PROFIT (only issues that affect income and expenses)
CASH (receipts of money in and out)
Must make sure the points you make apply to P&L or Bal sheet
What must you make sure you describe limited assurance as?
Negative CONCLUSION
- shouldn’t say opinion, as get half mark for conclusion wording
What kind of assurance is given for assurance engagements on prospective financial info
Always limited assurance
negative conclusion
‘Nothing has come to our attention’.. is enough- don’t need full Q
As they are all forward looking
Limited amount of what can be done
Can only really look at whether the forecasts are sensible
What should be considered when doing a forecast
What expenses and income do you have currently
Then have to adjust these for expansion/closing of dept etc. / any changes being made.
Are all other costs and income likely to be incurred included?
Must also consider if man is competent to do the forecasts (have we dealt with them before in audit/NAS to give an indication)
are they sensible - ‘assess the reasonableness of the assumptions man have made’ KEY PHRASE
Give some examples of issues to look at in a forecast review
Forex exchange rates- is it fluctuating massively
Have they tried to predict the future exchange rates
Bank interest %- is it reasonable with market
What must you do when describe a liability cap
explain what is it used for and why
- A liability cap can be agreed, to put a maximum figure on the damages tat the firm is liable for in the result of a negligence claim
Identify matters to include in eng letter for examining cash flow forecasts in respect of
Man responsibilities
- They are responsible for producing the forecast and for the identification and disclosure of the assumptions on which the forecast is based
- Will provide the reporting acc with all relevant info used in developing the assumptions, and provide written representations on the
- Intended use of the forecasts
- Completeness of the signficant assumptions
- Its acknowledgement of the responsibility for the forecasts
Identify matters to include in eng letter for examining cash flow forecasts in respect of
Purpose and scope of the work
- That they as the reporting accountant will examine the cash flow forecast for 3 years ending 31 December 20X8
- Purpose is to test the reasonableness of the assumptions in teh forecast 1/2 mark
- Limited assurance can be given, which will be in a negative layout ‘nothing has come to our attention’ 1/2 mark
- Whether the eng is to be conducted in accordance with provisions of ISAE 3400
- That there could be differences between the forecasts and actual performance due to unforeseen circumstances
- THIS IS NOT AN AUDIT
Identify matters to include in eng letter for examining cash flow forecasts in respect of
Ways to limit firms liability
- A liability cap can be agreed, to put a maximum figure on the damages tat the firm is liable for in the result of a negligence claim
- Distribution restrictions to ensure third parties don’t rely on the work produced without their specific permission 1/2 mark
How are engagement review Qs usually stated and how should it be tackled?
Global company asking you to look at UK branch
How to tackle:
Perform analytical procedures
Speak to management about them, i.e. anything strange
Need to follow the subheadings given, using the order of the data given
Usually to prepare briefing notes
Why has x area gone up by x when … has occurred. Is it due to …
How are engagement review Qs usually stated and how should it be tackled?
Global company asking you to look at UK branch
How to tackle:
Perform analytical procedures
Speak to management about them, i.e. anything strange
Need to follow the subheadings given, using the order of the data given
Usually to prepare briefing notes
Why has x area gone up by x when … has occurred. Is it due to …
When looking at engagement review questions, what must you be careful of when looking at changes in revenue and gross profit margin?
They don’t correlate
E.g. if revenue has gone up 10%, wouldn’t also expect gross profit margin to increase by 10%- would still expect it to be the same.
So if gross profit has changed, its not due to additional revenue, its a change in sales margin, maybe bulk buying discounts
What are the additional requirements to include in an audit report when it is a listed company?
Key audit matters (In Open text book)
Describes the key risk areas which had the biggest impact on the audit strategy
How the auditor responded to these risk areas
Statements to make about compliance Corporate Governance Code
