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AUDIT AND ASSURANCEPaper

F8

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Click to edit Master title style

1

ACCA Paper F8 Audit and assurance

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2

Syllabus

A Audit framework and regulation

B Internal audit

C Planning and risk assessment

D Internal control

E Audit evidence

F Review

G Reporting


3

Examiner and Exam Format

Format of the Exam

Question 1 Application of audit procedures to a scenario 30

Question 2Short factual questions on ISAs and otherknowledge-based areas

10

Question 3Questions with short practical scenarioscovering topics such as: internal audit, risk

assessment, planning , controls, evidence,

conclusions and reporting

20

Question 420

Question 520

Total 100

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4

Assurance

It is often not possible to check the situation yourself

Skill? Time? Location?

Therefore rely on someone else

Standards?

How much checking?

Report

Audit is only one form of assurance

Click to edit Master title styleElements of an assurance engagement

There are the five elements in an assurance engagement:

A three party relationship involving a practitioner, a

responsible party, and intended users

An appropriate subject matter

Suitable criteria

Sufficient appropriate evidence

A written assurance report in the form appropriate


6

Three party relationship

Practitioner: for example an auditor. Responsible fordetermining the nature, timing and extent of proceduresand must pursue doubts and queries

A responsible party: the person responsible for the

information and assertions

The intended users: the person(s) for whom thepractitioner prepares the assurance report. The

responsible party can be one of the intended users.


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7

Appropriate subject matter

Many types:

Financial performance

Non-financial performance eg the key indicators of efficiency

and effectiveness.

Physical characteristics eg capacity of a facility.

Systems and processes eg an entitys internal control or IT

system

Behaviour eg corporate governance, compliance with

regulation


8

Appropriate subject matter

Must be:

Identifiable, and capable of consistent evaluation or

measurement against the identified criteria

Such that the information about it can be subjected to

procedures for gathering sufficient appropriate

evidence.


9

Criteria

Criteria are the benchmarks used to evaluate ormeasure the subject matter. Without the frame ofreference provided by suitable criteria, any conclusion

is open to individual interpretation and

misunderstanding.

Examples:

Financial Statements: IFRS

Internal Control: an internal control framework.

Compliance: the applicable law, regulation or contract.

They must be available to intended users


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10

Suitable criteria

Suitable criteria exhibit the following characteristics:

Relevance: contribute to conclusions that assist decision-making

by the intended users.

Completeness: include all relevant factors that could affect theconclusions.

Reliability: allow reasonably consistent evaluation of the subject

matter.

Neutrality: so that conclusions that are free from bias.

Understandability: to allow conclusions that are clear,

comprehensive, and not subject to significantly differentinterpretations.


11

Evidence

Professional scepticism

Sufficient, appropriate evidence

Sufficiency = quantity of evidence.

Appropriateness = quality of evidence (relevance and itsreliability)


12

Assurance report

A written report containing a conclusion.

Positive form (reasonable assurance engagement): In

our opinion internal control is effective, in all material

respects, based onXYZ criteria.

Negative form (limited assurance engagement):

Based on our work described in this report, nothinghas come to our attention that causes us to believe

that internal control is not effective, in all material

respects, based onXYZ criteria.


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13

Assurance report

A practitioner does not express an unqualifiedconclusion for either type of assurance engagementwhen:

There is a limitation on the scope of thepractitioners work.

The assertion is not fairly stated, and the subject

matter information is materially misstated.


14

Corporate governance

Corporate governance: the system by which companiesare directed and controlled

Historically:

Annual general meeting once a year

Accounts once a year

Audited once a year

Directors board meetings - often (but not always)frequently

Directors conversations and meetings - frequently

Corporate governance: the system by which

companies are directed and controlled


15

Recent Corporate Failures


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16

OECD Principles of Corporate Governance

Fairness, including foreign and minority shareholders

Disclosure and transparency

Independence

Probity, honesty

Responsibility and accountability

Reputation

Judgement

Integrity


17

The UK Corporate Governance Code

The purpose of corporate governance is to facilitate effectiveentrepreneurial and prudent management that can deliver long-

term success of the company

Main principles

Leadership

Effectiveness

Accountability

Remuneration Relations with shareholders

The comply or explain approach is the trademark of corporate

governance in the UK.


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Leadership

Every company should be headed by an effective board which is

collectively responsible for the long-term success of the company.

There should be a clear division between the running of the board

and the executive responsibility for the running of the companys

business. No one individual should have unfettered powers of

decision. [Split roles of CEO and Chairman]

The chairman is responsible for leadership of the board

Non-executive directors [NEDs] should constructively challenge and

help develop proposals on strategy.


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EffectivenessAppropriate balance of skills, experience, independence and

knowledge. [NEDS !50% board; !2 in small companies ]

A formal, rigorous and transparent procedure for the appointment of

new directors to the board [Nomination committee]

All directors should be able to allocate sufficient time

Induction on joining the board and update and refresh their skills and

knowledge.

The board should be supplied in a timely manner with necessary

information.

The board should undertake a formal and rigorous annual evaluation

of its own performance and that of its committees and individualdirectors.

All directors should be submitted for re-election at regular intervals


20


Accountability

The board should present a balanced and understandable

assessment of the companys position and prospects.

The board is responsible for determining the significant risks

should maintain sound risk management and internal control

systems.

The board should establish formal and transparent arrangements for

applying the corporate reporting, risk management and internalcontrol principles, and for maintaining an appropriate relationship

with the companys auditor. [Audit committee. Must examine internal

control. Must consider need for internal audit].


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Remuneration

Levels of remuneration should be sufficient to attract, retain andmotivate directors of sufficient quality but avoid paying more than

is necessary.

A significant proportion of executive directors remuneration should

be structured so as to link rewards to corporate and individualperformance.

There should be a formal and transparent procedure for developing

policy on executive remuneration and for fixing the remunerationpackages of individual directors. No director should be involved in

deciding his or her own remuneration. [Remuneration committee]


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22


Relations with shareholders

There should be a dialogue with shareholders based on the mutual

understanding of objectives. The board as a whole has responsibility

for ensuring that a satisfactory dialogue with shareholders takesplace.

The board should use the AGM to communicate with investors and

to encourage their participation.


23

Audit committee

Liaison with external auditors:

Scope of external audit

Forum to link directors/auditors

Deal with auditors reservations

Obtain information for auditors.

Review of internalaudit

Special

investigations

Review of internal controlFinancial

Statements


24

Internal audit

It functions by examining, evaluating and reporting to

management and the directors on the adequacy andeffectiveness of internal control.

It is a key part of effective corporate governance.

Importance referred to in UK Combined Code of Corporate

Governance directors must review need for internal audit

department

Would normally report to the audit committee

Internal audit is an appraisal or monitoring activityestablished by management and directors for the review ofinternal control as a service to the entity.


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25

Internal audit

Helps achievement of corporate objectives

Aids risk assessment and management

Improves efficiency, effectiveness and economy

Designs internal control system

Checks operation of internal controls system

Value for money audits

Test IT controls

Liaises with external auditors/shares work


26

Definition of an audit

An audit is the independentexamination of,and expression of opinionon, the financial

statements of an entity.


27

Positive and negative assurance

Positive

The accounts show a true and fair view The cash flow forecast is correct

The appointment of the employee was fair

Negative

We have discovered nothing wrong with the accounts The basis of the forecast is not unreasonable

There is no evidence of discrimination in the appointment.


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Corporate governance the purpose of an external audit

Corporate governance: the system by which companiesare directed and controlled

Shareholders Directors

CompanyOwn

Appoint

Manage

FinancialStatements

Prepare FS

Measure

performance

AuditorAppoint independent

Adds credibility


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Stages of an audit

Assess risk of material misstatement

Plan the audit

Auditors report

Understand entity

Satisfactory

Tests of controlsReport significant deficiencies tothose charged with governance

to management and all weaknesses tomanagement

Respond to risk

Expect effective controls

Restricted substantivetests

Expect ineffective controls

Full substantivetests

Overall review of F/S

Report to management

Unsatisfactory


30

Interim and final audit

1January 31December

Interim audit.Document system,

procedural tests

Final auditMoredirect checking

of balances

Planning

visit


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31

planned and performed the audit to obtainreasonable assurancewhether the financialstatements are free from material misstatement.

.in our opinionthe financial statements show atrue and fairview.

Auditors responsibility

No guarantees Not every error discovered

Not certifying accuracy


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Relevant to all companies?

Should it be a legal requirement that the financial statementsof small entities be subjected to an audit?

Small entities:

Managers and owners the same

Simple trading

Simple records

Limited internal controls which management can override


33

Auditors rights

Access to records

Information and explanations

Attendance at and notice about general meetings

Right to speak at general meetings on relevant matters

Rights to receive proposed resolutions

Right to resign before audit completion

Right to have information circulated to the shareholders


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Auditors duties

Typical duties:

To issue an audit report, giving opinions on:

>truth and fairness of the Financial Statements

>whether the Financial Statements are properly prepared

>any other opinions required.

When leaving a client, to issue a Statement of Circumstances After resignation, to supply information to the new auditors.


35

Appointment, resignation and removal

Appointment

Resolution at each general meeting (re-appointment notautomatic).

Directors pre first GM and to fill casual vacancy.

Secretary of State


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Resignation

Auditors give written notice and statement of circumstances

Written notice sent to regulatory authority by company

Statement of circumstances sent to members by company;regulatory authority by auditors.

Auditors can require directors to call an EGM.

Auditors can receive all notices relating to general meetingsrelating to their resignation and can speak at those meetings.


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Removal

Special notice (28 days) sent to auditor

Auditors can make representations about why they should stay in

office.

If resolution passed, company must notify regulatory authority.

Auditors must deposit statement of circumstance at companys

office + sent to regulatory authority.

Auditors can receive notice and speak at GM where their term ofoffice would have expired.


38

Who can be an auditor?

Must pass an approved set of professional examinations, set by

a Recognised Qualifying Body (RQB)eg the ACCA

Must become a member (and stay a member!) of a

Recognised Supervisory Body (RSB)eg the ACCA

The auditor must not be adirector or employee of the

company, or of any associated companies

The auditor must not be anemployee or business partner of a

director or employee of the company, or of any associated

companies.


39

Regulation of auditors

International level

National level

The profession


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Regulation of auditors

Education and work experience

Eligibility,

such asmembership

of a supervisory

body

Supervisionand monitoring


41

Auditing standards and Quality Control

Recognised Statutory Body

For example ACCA

National StandardsIn UK, set by Auditing Practices Board

International Standards on AuditingSet by International Auditing and Assurance Standards

Board (IAASB) part of the International Federation odAccountants (IFAC)


42

Professional ethics and ACCAs Code

Fundamental

principles

Threats Safeguards


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Fundamental Principles: ACCAs Code

Integrity - straightforward and honest

Professional competence and due care currentdevelopments, legislation and techniques

Confidentiality should not disclose information unlessa legal or professional right or duty.

Professional behaviour comply with the law andavoid any action which discredits the profession

Objectivityavoid bias, conflict of interest, undueinfluence


44

Threats to objectivity, integrity and independence

Threats arise from:

Self-interest

Self-review

Familiarity

Advocacy

Intimidation

Management


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Self-interest threats Financial. For example, owning shares in the client,

Close business relationships. For example,

Employment (ex-partners >2 years)

Partner on client board

Family and personal relationships

Loans and guarantees

Overdue fees

Contingent fees

High percentage fees

Low-balling

Recruitment for the client


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Self-review threats Recent service with assurance client

Other services

Preparing accounting records and accounts

Valuation services

Taxation services

Internal audit services

Corporate finance

Other service


47


The problem of supplying multiple services

For example: taxation, payroll, IT, management consultancy.

A controversial issue: pros and cons.

Large firms can use separate departments.

In the US listed companies are not allowed to obtain other

services from their auditor.

In most jurisdictions, no hard and fast rules.


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Familiarity threats

Because of a close relationship, members of the assurance

firm become too sympathetic to members of the client firm,

so that objectivity and scepticism are lost

Care needed where senior audit staff have a long

association with the client.

ACCA suggest that the lead partner should be changed at

least every 5 years.

Other partners involved changed at least every 7 years.


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Advocacy threats Where the assurance firm promotes a point of view or

opinion to the extent that subsequent objectivity iscompromised


50


Intimidation threats

Where the assurance team is deterred from acting properlyby actual or perceived threats.

Examples are actual/threatened litigation. In some casesthere might be physical intimidation.


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Management threats

Where the auditor begins to make management decisionsfor the client.


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Acceptance procedures

Ensure professionally qualified to act: legal/ethical

Adequate resources: staff, time

The fee

Obtain references: investigate directors

Audit risk

Is the accounting reporting framework acceptable?

Money laundering regulations

Expertise and competence

Credit rating of client

Communicate with present auditors.


53

Appointment flowchart

Approach by new audit client

1staudit?

Permissionto contact old auditor?

Write for information

Permission for oldauditors to reply?

Relevant informationprovided?

Make own decision

Decline appointment

Give old auditor noticeand use information

obtained in other ways

Accept/reject

No

No

No

No

Yes

Yes

Yes

Yes


54

Engagement letters

Define auditors/management responsibilities

Written evidence of auditors acceptance

Send to board of directors/or audit committee prior tofirst audit

Identify any reports to be produced in addition to audit

report


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Engagement letters

Objective of audit Management responsibilities

Applicable reporting framework

Test nature inherent responsibilities

Unrestricted access to records

Confidentiality of reports

Planning

Fees

Internal audit.


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Stages of an audit


Plan the audit

Auditors report

Understand entity

Satisfactory



Respond to risk







Unsatisfactory


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ISA 300 Audit planning

Plan audit work..effective manner General strategy detailed approach

Planning objectives are:

Appropriate attention to important areas

Identify potential problems

Work completed expeditiously

Proper staffing and work assignment

Coordination with other parties

Facilitate review


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Risk

Total risk

Business risk

Financial risk

Operational risk

Compliance risk

Audit risk = risk of inappropriate opinion

ISA 315 auditor should obtain an understanding of the entityand its environmentsufficient to identify and assess the risk ofmaterial misstatement in the financial statements..


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Risk assessment audit risk model

AR = IR x CR x DR

Control risk

Risk of material misstatement

Audit Risk

Non-sampling RiskSampling Risk

Detection RiskInherent Risk


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Assessing risk ISA 330

To reduce audit risk to an acceptable level determineresponses at the financial statement level and theassertion level

Financial statement level: more experienced staff, more

supervision, professional scepticism

Assertion level: design and perform audit procedures

whose nature, timing and extent are responsive to theassessed risks of material misstatement.


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Risk assessment audit risk model

Inherent risk susceptibility tomisstatement that could be

materialassuming no related

internal controls

Complex transactions,inexperienced staff, cash-based

business, pressure to perform

Control risk risk that a materialmisstatement will not be

prevented, detected or

corrected

Control environment

Design of internal control

Operation of internal control

Detection risk failure of the

auditor to detect a material

misstatement

Auditors experience, new

client, time/fee pressure, poor

planning, industry knowledge


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Analytical procedures

Ratio analysis: comparison with previous years, industry

standards, budgets.

Risk assessment eg risk of misstatement

Are FS consistent with our understanding of entity?

Source of substantive testing eg do figures look

reasonable?


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Analytical procedures

Ratio analysis: comparison with previous years, industrystandards, budgets.

Reason

Artefact

Test

Implications

Other effects


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Analytical procedures - RATIO

Gross profit %

2009 21%

2008 30%

Reason

Artefact

Test

Implications

Other effects


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Analytical procedures - RATIO

Receivables collection period

2009 54 days

2008 40 days

Reason

Artefact

Test

Implications

Other effects


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Materiality

A matter is material if it omission or misstatement wouldreasonably influence the economic decisions users.

Affected by size and nature of misstatement

Based on consideration of the common financial information

needs of users as a group

"- 1% of revenue

1 2% of total assets

5 10% of profit before tax


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Performance materiality

Materiality for financial statements as a whole

Additionally, a lesser amount when designing audit

procedures to reduce the risk that misstatements in

aggregate exceed FS materality (performance materiality)

Allows percentages (benchmarking) but take into account:

Items where users focus

Nature of entity/life cycle/environment

Ownership/structure/financing

Volatility of benchmark


68

Evaluation of misstatements identifies

All communicated to management

Management asked to correct them or explain why not

Assess materiality of uncorrected misstatements

Obtain written representations from management that they

believe uncorrected misstatements are not material:


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Gaining an understanding of the entity (ISA 315)

Nature of the entity Industry, regulator

Accounting policies

Objectives and strategies

Internal controls

Control environment

How entity identifies business risks

Measurement of financial performance.


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Stages of an audit


Plan the audit

Auditors report

Understand entity

Satisfactory



Respond to risk







Unsatisfactory


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The use of assertions (ISA 315)

Accuracy

Completeness

Cut off

Allocation

Classification and understandability

Occurrence

Valuation

Existence

Rights& obligations (ownership)

(ACCA COVER)


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The use of assertions

ISA 315, Audit evidence divides assertions into

Transactions and events

Account balances

Presentation and disclosure


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If it relates to a transaction,then verify (controls andsubstantive evidence) the assertions of:

Occurrence

Completeness

Accuracy

Cutoff

Classification


74


If it relates to a year end balancethen verify (controls andsubstantive tests) the assertions of:

Existence

Rights and obligations

Completeness

Valuation

Allocation


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If it relates to the presentation and disclosurein the FS:

Occurrence

Rights and obligations

Completeness

Classification and understandability

Accuracy

Valuation


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Sources of evidence

Procedures for obtaining audit evidence

Analytical Procedures

Enquiry and confirmation

Inspection

Observation

recalcUlation and reperformance


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How much audit evidence?

ISA500: Sufficient appropriate audit evidence to be able to draw

reasonable conclusions on which to base an audit opinion.

Sufficient = quantity Appropriate = relevant and reliability

External better than entitys records

Auditor-direct obtained better than indirect evidence

Entity better if a good internal control system

Written better than oral

Originals better than photocopies


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Relying on 3rdparties

Experts (eg estate agents, actuaries, lawyers)

Internal auditors

External auditors

Should be:

Qualified

Experienced

Independent

Professional


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Relying on 3rdparties

Should agree the following in writing:

Nature, scope and objectives of work

Respective responsibilities

Nature, scope and timing of communications

That the expert observes confidentiality

Auditor must examine the experts work with respect to:

Consistency with other evidence

Assumptions made

Use and accuracy of source data.


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Audit documentation

It is essential that the entire audit process is documented to:

Document show that the audit work has been done properly

Enable senior staff to review the work of junior staff

Help the audit team in future years

Encourage a methodical, high-quality approach.

Working papers will be retained for some years (at least 7) for safety.


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Sampling

ISA 530consider objectives of audit procedure and the

attributes of the populationConsider nature and

characteristics of audit evidence, possible error conditions andthe rate of expected error.

Sampling risk

Audit risk

Non-sampling risk


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Types of sampling

Random selection

Systematic selection

Haphazard selection

Sequence/block selection

Monetary unit sampling

Stratification


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Monetary unit sampling say 4 items wanted

80 80

70 150

400 550

90 640

1,600 2,240

20 2,260

700 2,960

50 3,100

1,010 4,020

80 4,100

30 4,130

600 4,730

380 5,110

5,000/4 = 1,250

Choose first at random say, 605Then:

1,855

3,105

4,455


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Size of sample

Sampling risk: risk that conclusion based on sample is

different to conclusion if all items examined.Reduced as

sample size increased.

Non-sampling risk: risk of wrong conclusion arising from

reasons other than sampling. Reduced by proper planning

supervision and review


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Sampling risk tests of control

Risk of

Under-reliance: sample does not support auditors

assessment of control risk, actual compliance rate would

support that assessment.

Over-reliance: sample does support auditors

assessment of control risk, but actual compliance rate

would not support that assessment.


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Sampling risk substantive procedures

Risk of

Risk of incorrect rejection: sample implies balance

materially misstated, but actually not materially misstated.

Risk of incorrect acceptance: sample implies that

balance is non materially misstated, but in fact it is

materially misstated.


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Tests of control

Evaluation of systems (enquiry, analytical procedures,

observation, inspection)

Tests of controls should be carried out if suitable

controls exist.

Controls must be operating effectively

Otherwise:

Substantive procedures

Substantive procedures might be more efficient if there

are relatively few large transactions.


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Components of internal control

Control environment Control activities/procedures

Risk assessment process

Information system

Monitoring controls

What can go wrong? How can we stop it?


89

Control activities

Segregation of duties

Comparison

Authorisation

Accounting reconciliations

Computer controls

Arithmetic controls

Physical Maintaining a trial balance and control accounts


90

Inherent limitations of internal control

Human error Collusion

Bypass of controls

Costs > benefits

Non-routine transactions


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Recording and assessing the accounting system

Narrative notes

Flowcharts

Questionnaires

Internal control questionnaires (ICQs)

How good is the system? Yes = good; No = bad

Internal control evaluation questionnaires (ICEQs).

Can specific problems occur? Yes = bad; No = good


92

Assessing internal control

Record the system

Assess the system

Test the system

Consider changing to substantive testing

Report weaknesses in a management letter (emphasisethat other problems might also exist).

Weakness Consequences Recommendedaction to

removeweakness


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Communicating weaknesses in internal control

Significant deficiencies should be communicated tothose charged with governance. Defined as:

When a control is designed, implemented, or operated is

unable to prevent or detect misstatements on a timely basis;

or

Such a control is missing

Other weaknesses to management


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Control objectives, procedures, tests

Control objective: unauthorised overtime cannot be paid

Control procedure: all time sheets are authorised by a manager

Control tests: auditor inspects time sheets, enquires of the wages

department, traces large payments of wages back to authorised

time sheets.


95

Tests of control - methods

Enquiries, including management views

Inspection

Observation

Re-calculation and re-performance


96

Sales system

Ordering/granting - Despatch/invoicing - Recording/creditcredit control


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Purchases system

Ordering/granting Receipt/invoicing - Recording/payment


98

Wages system

Hiring and rates authorised

Correct employees paid

Paid authorised amounts for work done

Deductions properly made and recorded

Deductions paid to authorities; net paid to employees


99

Capital expenditure system

Expenditure authorised

Tenders received

Goods received

Invoices authorised

Recorded as capital expenditure in main ledger and fixedasset (non-current asset) register

Physical inspection


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100

Cash system

All monies are received, banked, recorded and safeguardedagainst loss/ theft.

All payments are authorised and made to correct payees.

Payments are not made twice for same liability.


101

Inventory system

All inventory movements authorised

Inventory properly recorded

Cut-off correct

Physical safeguards against loss, theft, damage

Proper valuation procedures

Reasonable levels of inventory


102

Fraud

Fraudulent financial reporting Misappropriation of assets

Managers responsible for prevention or detection

Auditors should be aware of material misstatement due

to fraud.


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103

Non-current assets

Physical inspection. Additions: check to invoices.

Disposals: check to receipts.

Check major additions/disposals to board minutes.

Scrutinise repairs and maintenance account

Re-perform depreciation calculations.

Verify documents of title.

Check that no assets need to be written down faster/valuation


104

Inventory counts

Plan in advance: instructions, briefing, tidy inventory.

Identify damaged and third party inventories.

Pre-number shelves, inventory locations.

Issue sequentially pre-numbered inventory sheets.

Sign off each location as counted.

Check: inventory sheet.

Account for all inventory sheets.

Check prices. Re-perform calculations, check additions.

Inventory is difficult to audit: quantity, description, condition,value, ownership


105

Cut-off - purchases

Included in?

Purchases

Payables

Inventories

Included in?

Purchases

Payables

Inventories

GRN GRN

!

!!

X

X

X

Year end

Before After


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106

Cut-off - sales

GDN GDN

Included in?

Sales

Receivables

Inventories

!

!X

Included in?

Sales

Receivables

Inventories

X

X!

Year end

Before After


107

Two types:

Positive: want a reply from everyone written to.

Negative: want a reply only if balance out of agreement. (Notrecommended by ISA 505)

Replies should go directly to auditors offices so that auditorretains control

Can stratify sample so that a large percentage covered.

Ask about old debts. Ask about Cr balances

Receivables circularisations

Write to selected debtors and ask for confirmation ofamounts owing.


108

Receivables

Reconcile ledger to control account

Aged listings

Correspondence

Board minutes

Collection period

Receipts after year end


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109

Payables

Reconcile ledger to control account Correspondence

Board minutes

Payables period

Statement reconciliation

Payments after year end


110

Prepayments/accruals

Compare to last year

Payments after year end

Invoices paid last few months

Letter of representation


111

Cash

Bank certificate

Bank reconciliation

Cash count if material


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112

Computer systems

General controls development, prevention of unauthorisedchanges etc., backup. Can be classified as development and

administrative controls.

Application controls initiation, recording, processing and

recording transactions.


113

Computer systems

Input controls

Processing controls

Controls over standing data

Controls over output


114

Real-time systems

Access controls Controls over passwords

Programming controls

Firewalls

Transaction logs

File controls

Balancing

Pre-processing authorisation

System development/maintenance controls


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115

Computer assisted audit techniques (CAAT)

Audit programmes: interrogate accounting data.Select samples to investigate

Re-perform calculations

Look for unusual items

Test data: operated on by clients programs.

Are programs operating correctly?

Are controls operating?


116

Audit report

Definition

A clear expression of opinion on the financial

statements as a whole.

Based on review and assessment of conclusions drawnfrom evidence obtained in the course of the audit.

The financial statements should have been prepared in

accordance with the International Financial Reporting

Standards (IFRSs) or International Accounting Standards

(IASs) where there is not yet an IFRS.


117

Financial statements

Statement of financial position Income statement

Statement of changes in equity

Cash flow statement

Notes

Any other material identified as being part of the financial

statements


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118

Basic Unqualified Report

INDEPENDENT AUDITOR'S REPORT

(To the members of ABC Company plc)

Report on the Financial Statements

We have audited the accompanying financialstatements of ABC Company plc, which comprise

the statement of financial position as at December

31, 20X8, and the income statement, statement ofchanges in equity and cash flow statement for the

year then ended, and a summary of the significant

accounting policies and other explanatory notes.

TitleAddressee

Financial

statements

auditedIntroductoryparagraph


119

Concepts in reporting

Auditor's Responsibility

Our responsibility is to express an opinion on these financialstatements based on our audit. We conducted our audit inaccordance with International Standards on Auditing. ThoseStandards require that we comply with ethical requirementsand plan and perform the audit to obtain reasonableassurance whether the financial statements are free frommaterial misstatement.


120

Basic Unqualified Report (contd)

OpinionIn our opinion, the financial statements give a true and fair view

of ("or present fairly, in all material respects,") the financialposition of ABC Company as of December 31, 20X8, and of its

financial performance and cash flows for the year then ended in

accordance with International Financial Reporting Standards.


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121

Basic Unqualified Report (contd)

We believe the audit evidence we obtained is sufficient andappropriate to provide a basis for our audit opinion.

In our opinion, the financial statements give a true and fair

view of ("or present fairly, in all material respects,") thefinancial position of ABC Company as of December 31, 20X1,

and of its financial performance and cash flows for the year

then ended in accordance with International Financial

Reporting Standards.

Report on Other Legal and Regulatory Requirements

[Form and content of this section will vary depending on the

nature of the auditor's other reporting responsibilities.]

AUDITOR

Date:

Address:

Opinion

paragraph

Auditors

signature

Equivalent terms


122

True, fair and reasonable assurance

True:the information is factual and conforms with reality.

Fair:Information is free from discrimination and bias and is in

compliance with expected standards and rules. Reflect the

commercial substance of the transactions.

An audit gives reasonable assurancethat the accounts are

free from material misstatement auditors judgement is

vital.

A matter is material if it omission or misstatement would

reasonably influence the decisions of an addressee of the

audit report


123

Implications of audit report

Proper records kept Proper returns from branches not visited

Accounts agree with the records and returns

All necessary explanations received

Details of directors emoluments properly disclosed

Details of directors loans and other transactions correct

Information in directors report consistent with theaccounts.


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124

Auditors Reports

Emphasis of matterand other matters

Matters that donotaffect the

auditors opinion

Matters that doaffect the

auditors opinion

Qualified opinion: Do contain a material misstatement; or

Unable to obtain sufficient appropriate auditevidence to conclude FS free from material

misstatement

Unmodified, or Modified

Modified


125

Emphasis of matter

A paragraph in an auditors report used when the auditorspecifically wishes to draw the readers attention to somematter already properly and clearly disclosed within thefinancial statements and which is fundamental ti usersunderstanding of the FS

Such a paragraph does notconstitute a qualification of theauditors opinion.

Without qualifying our opinion above, we draw attention toNote 10 to the financial statements. Five days before the

directors formally approved the financial statements, thecompany received notification that they are to be named asdefendants in a proposed legal action . At this early stageit is not possible to estimate the ultimate outcome of thismatter, and no provision has been included within thefinancial statements.


126

Other matters

A paragraph in an auditors report used to refer to a matternot presented or disclosed in the FS that is relevant tousers understanding of the audit, auditors responsibility orthe audit report.

Such a paragraph does notconstitute a qualification of theauditors opinion.

Without qualifying our opinion above, we draw attention tothe fact that we were appointed as auditors 11 months intothe financial year


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127

Going concern

Should assess going concern over the 12 months from thebalance sheet date

Negative operating cash flows

Inability to pay suppliers when due

Operating losses

Borrowing facilities not agreed

Loss of key staff/key customers

Technology changes

Legislative changes

Non-compliance with regulations


128

Going concern

Effect on audit report if going concern in doubt:

If disclosed emphasis of matter

If not disclosed disclaimer, adverse, limitation in scope ifdirectors do not adequately make an assessment of goingconcern


129

Qualification matrix

Nature of

circumstance

Material but

not pervasive

Pervasive

FS contain amaterial

misstatement

Except formight

Adverse opinion

Unable toobtain

sufficient,

appropriate

evidence

Except for Disclaimer ofopinion


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130

Insufficient evidence qualified opinion

Except as discussed in the following paragraph

We did not observe the counting of inventories at

31/12/200Xunable to determine inventory quantities by

other methods

In our opinion, except for the effects of such adjustments to

inventory, if any, had we been able to satisfy ourselves as to

physical inventory. The financial statements give a true andfair view


131

Insufficient evidence disclaimer of opinion

Except as discussed in the following paragraph

We were not able to observe all physical inventories at

31/12/200Xunable to determine inventory quantities byother methods

Because of the significance of of the matters discussedwe

do not express an opinion on the financial statements.


132

Material misstatement qualified opinion

As discussed in paragraph 13, no depreciation has beenprovidednot in accordance with International Accounting

Standards

The provision for the year should have been X.profits

would be decreased by Y.

In our opinion, except for the matter referred to above the

financial statements give a true and fair view


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133

Material misstatement adverse opinion

As discussed in paragraph 14, no bad provision forirrecoverable debts has been established for a major customer

owing 2M and who has gone into liquidation with little

prospect of substantial recovery of amounts owed.

In our opinion, because of the effects of the matter referred to

above the financial statements do not give a true and fair

view


134

ISA 560 Events after the reporting period

Adjusting events: evidence of conditions that existed at thedate of the statement of financial position.

Non-adjusting events:conditions arose after the date of thestatement of financial position.

If accounts already issued, may have to take steps to prevent

users relying on the accounts

Events occurring between the period end and the date ofthe auditors report and also facts discovered after the

audit report has been issued


135

IAS 37 Contingent liabilities and assets

Present obligation probablyrequiring outflow of resources:

provision recognised and disclosures required

Possible obligation, or present obligation that willprobably not

require outflow of resources: no provision, but disclosure

Possible obligation, or present obligation where likelihood of an

outflow is remote: no provision, no disclosure.

Contingent liability: possible liability arising from pastevents. existence confirmed by future events


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136

IAS 37 Contingent liabilities and assets

Inflow of economic benefits virtually certain: asset is notcontingent

Inflow of economic benefits is probablebut not virtually certain:no asset recognised but disclosures

Inflow is not probably: no asset recognised and no disclosure

Contingent asset: possible asset arising from pastevents. existence confirmed by future events


137

Management representations

Should be obtained on specific matters and also on

matters material to the FS when other appropriate audit

evidence cannot be reasonably obtained.

Cannot substitute for other audit evidence except:

Where knowledge is confined to management

Reliance on judgement/opinion

Otherwise:

Corroboration

Consistent

Reasonable


138

Written representations

Examples of letter of representation paragraphs: No material irregularities

Disclosed all liabilities

No subsequent events

No plan to shut down any part of operations

No inventory is valued an more than its NRV

All charges on assets have been disclosed


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139

You have a VeSTeD interest in good answers

Verbs

Scenario

Time

Detail


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