summary last session

7/31/2019 Summary Last Session

http://slidepdf.com/reader/full/summary-last-session 1/81

P.7 - Advanced Audit andAssurance Services

(International)

SUMMARY



Objective

• To analyse, evaluate and conclude on theassurance engagement and other auditand assurance issues in the context of

best practice and current issues.

• It builds on F8 – Audit and Assurance, P2 – Corporate Reporting and other financial

reporting papers.



Syllabus

The syllabus is divided into SEVEN main sections

• Regulatory Environment – recognise the legal andregulatory environment and its impact on audit andassurance practices.

• Professional and ethical considerations –demonstrate the ability to work effectively on anassurance or other service engagement within aprofessional and ethical framework.

• Practice management – assess and recommendappropriate quality control policies and procedures inpractice management and recognise the auditor‟sposition in relation to the ace



Syllabus…

• Audit of Historical Financial Information – Identify andformulate the work required to meet the objectives of theaudit assignment and apply the International Standardson Auditing.

• Other assignments – identify and formulate the workrequired to meet the objectives of non –auditassignments.

• Reporting – evaluate findings and the results of workperformed and draft suitable reports on assignments.

• Current Issues and developments – understand thecurrent issues and developments relating to theprovision of audit related and assurance services.



Format of Exam

• Section A: Two compulsory questions 50-70 marks

• Section B: Choice of two from three questions 30 –50 marks.

• Time allowed: 3 hours. (Time is whatmakes or breaks you in paper, take it veryseriously.)



Regulatory Environment



Objective

• To understand the International Regulatoryenvironment for audit and assurance services.

• Money laundering – to explain the

responsibility of professional accountants in thisarea and to outline the procedures that auditfirms should implement.

• Laws and regulations – auditors responsibility

in respect of laws and regulations that apply toan audit client. (Topic can be built into a practicalcase study question.)



International Standards ofAuditing (ISA)

• International Standards of Auditing (ISA) areproduced by the International Audit andAssurance Standards Board (IAASB), a

technical standards committee of theInternational Federation of Accountants (IFAC).

• See List of current on page 6 of BPP Text.

• Exam Tip – understand how to apply ISAs inpractice and refer to them when answeringquestions.



Audit committees

Audit committees are made up of non –executive directors and areperceived to increase confidence in financial reports.

Duties and responsibility of the audit committee.

• To monitor integrity of financial statements• To review the company‟s internal financial control system• To monitor and review the effectiveness of the company‟s internal

audit function.• To recommend appointment, remuneration and liaise with the

external auditors.

• Review management accounts and recommend improvements.



Internal Controls (IC)

• Internal controls serve the following purpose. – Safeguard the company‟s assets

– Help to prevent and detect fraud – Safeguard the shareholders‟ investments.

• Directors responsibility – ultimate responsibility of ICslies in the hands of the Board of directors. assess therisk, monitors, reviews, reports and corrects.

• Auditors responsibility – shall gain an understandingof the controls due to the work on the accounts;

• The review required by auditing standards is narrower inscope than the review performed by directors. Auditorstherefore don‟t assess whether the directors reviewcovers all risks and controls and whether the risks aresatisfactorily addressed by the internal controls.



Money Laundering

Money laundering is the process by whichcriminals attempt to conceal the true originand ownership of the proceeds of their

criminal activity, allowing them to maintaincontrol over the proceeds and, ultimatelyproviding a legitimate cover for their

source of income. ACCA Code of Ethics and Conduct



Code of Ethics and Conduct



ACCA Code of Ethics and Conduct

Fundamental Principles• Integrity – straight forward and honest

• Objectivity – should not allow bias, conflict ofinterest and undue influence of others.

• Professional Competence and due care –

professional knowledge/skill and act diligently.

• Confidentiality – should not disclose unless

there is a legal or professional right to do so.• Professional behaviour – comply with relevant

laws and regulations and avoid actions thatdiscredit the profession.



Threats to compliance withFundamental Principles

There are five sources of threats• Self-interest threat (e.g. financial interest in

client)

• Self-review threat (e.g. auditing F.S. preparedby the firm.)

• Familiarity threat ( e.g. audit team memberhaving family at the client.)

• Intimidation threat (e.g. threat of replacementdue to disagreement.)

• Advocacy threat (e.g. promoting shares in a

listed entity when the entity is a F.S. audit client.)



Available Safeguards

Three(3) categories of safeguards:

• Created by the profession, legislation orregulation.

• In the work environment.

• Created by the individual.

S f d t d b th



Safeguards created by theprofession, legislation or

regulation:• Educational training and experience;

• Continuing professional developmentrequirements;

• Corporate governance regulations;

• Professional standards;

• Professional or regulatory monitoring and

disciplinary procedures (ICPAU);• External reviews by legally empowered

third parties. (e.g.USE, BoU)



Safeguards in the workenvironment

• Second partner review• Consulting an independent third party

• Appropriate disciplinary processes

• Timely communication of policies and

procedures• Using different partners and engagement teams

for provision of non-assurance services.

• Discussion ethical issues with those chargedwith governance.

• Disclosing to those charged with governance thenature of service and extent of fees charged.

• Involving another firm to perform or re-performengagement.



Safeguards created by theIndividual

• Complying with continuing professionaldevelopment requirements.

• Keeping records of contentious issues and

approach to decision making.• Maintaining a broad perspective to how

similar organisations work.

• Using an independent mentor.• Maintaining contact with legal advisors

and professional bodies.



Professional Liability



Negligence

Auditor may have a professional liability ofnegligence if injured party can prove;

– A duty of care which is enforceable by law

– This duty of care was breached

– The breach caused the injured party loss

The parties likely to bring action include the

company, shareholders, bank, otherlenders and other interested third parties.



Fraud and Error

• Fraud is an intentional act by one or moreindividuals among management, those chargedwith governance (management fraud),employees (employee fraud) or third partyinvolving the use of deception to obtain anunjust or illegal advantage.

• Auditors concern is fraud that causes materialmisstatement to financial statements.

• Error is when material misstatement is causedby mistake.



Types of fraud

• Fraudulent financial reporting – manipulation,falsification and alteration of records,misrepresentation of events/transactions andintentional misapplication of accountingprinciples.

• Misappropriation of assets – theft of assets,embezzlement, paying for foods not received,using assets for personal use.

Note: Management/charged with governance areprimarily responsible for preventing anddetecting fraud.



Quality Control



QC at AUDIT FIRM LEVEL – ISQC 1

• Organisations forms include sole practitioners,partnership and LLP

• Policies to ensure that ALL audits are conductedin accordance with ISAs, National standards and

applicable regulatory and legal requirementsFactors to consider in determining the nature,

timing and extent of policies

• Size and nature of practice

• Geographic dispersion• Organization• Appropriate cost/benefit considerations



Elements to consider in thepolicies and procedures

• Firm and Leadership responsibility for quality – internal culture of quality, Ethical requirements

• Human resources – sufficient personnel whoare capable, competent and ethical. Continuous

professional development, work experience andcoaching. Assigning of engagement teams

• Engagement performance – Direction,Supervision, review, consultation, resolution of

disputes• Monitoring - Q.C. procedures must be relevant,adequate, operating effectively and compliedwith.



Q.C. on an Individual Audit – ISA220

• ISA 220 requires firms to implement Q.Cprocedures over individual audit engagements.

• The engagement partner is responsible for the

overall quality of each audit.• Independence, Acceptance, assignment of

engagement team, engagement performance,consultations and engagement reviews areresponsibilities of the partner



Professional Appointments



Change of Auditors

Reasons for Change

• Audit Fees

• Size• Personality

• Audit rotation

• Auditor doesn‟t seek re-election



Advertising

• Promotional advertisement allowed (US andUK)

• May contain any factual statement the truth ofwhich can be justified.

Generally prohibited• Discredit ACCA, members, firms or

accountancy profession• Claim superiority

• Mislead• Fall short of standards regarding legality,decency, clarity, honesty and truthfulness.



Lowballing/Predator pricing

• “Lowballing” or “predator pricing” is where

a firm seeks to increase its market shareby dropping its quote for an audit fee or

undercutting its competitors.

• NOT disallowed as long as client is notmisled.



New appointments

Client acceptance procedures –put in placeto avoid clients that have unprofessionalattitudes towards acquiring professional

work and “risky” clientsThey include;

• Client screening procedures

• Professional “clearance” procedures• Independence checks



Planning, Materiality and

Risk



ISA 300 Planning an audit offinancial statements

ISA refers to two documents:

• Overall audit strategy (scope, timing anddirection)

• Audit plan (specific procedures to becarried out)

Audit Planning sets the tone and direction of

the audit. It ensures that the rightresources are allocated to high risk areasat the appropriate time.



Understanding the entity and itsenvironment

Methods used• Make inquiries of management• Analytical procedures• Observe (operations) and inspect• (business plans)• Read reports prepared by management and

those charged with governance

• Other procedures (walk through, visit premises)• Update prior year info• Review interim FS



Materiality

• ISA 320 materiality in planning andperforming an audit.

• ISA 450 Evaluation of misstatementsidentified during the audit.

• Materiality – Information is material if itsomission or misstatement could influence

the economic decision of users taken onthe basis of the financial statements…



Percentage guidelines formateriality

• Planning materiality – “preliminary”

materiality

• 5 – 10% profit

• .5 – 1% net assets

• 1 - 2% total assets

• .5 – 1% revenue.Exam note: always compute materiality

related to case area.(i.e. BS item - use

total assets)



Business Risk

• Risk that the entity will not be able to achieve itsobjectives and execute its strategies.

• As a result of how entity is managed(operating

environment, customer bases, employee base,ownership, legal, regulatory)

• Risk assessment procedures recognizebusiness risks.

• Risk can be in various groups. Applicable to allcompanies, arise from strategies adopted andindustry specific.



Financial statement risk

• Risk that that financial statements aremisstated.

• Many misstatements could involve;

– Errors in the amounts recorded in the FS.

– Errors in or omissions from the disclosurenotes.

• Many, if not all Business risks produceFinancial statement Risks



Audit Risk

• The risk that the auditor gives an inappropriateaudit opinion when the FS are materiallymisstated.

• Audit is designed to provide “reasonable”assurance that FS as a whole are free ofmaterial misstatement.

• Reasonable implies risk exists.

• Risk reduced to an acceptable level.

• Audit risk is considered at two levels

– FS materially misstated prior to audit.

– Auditor will not detect such misstatement.



Audit risk model

• Material misstatement must be consideredat:

– Overall financial statement level

– Transaction, balance and disclosure

Audit risk = inherent risk * controls risk *

detection risk(residual risk)



Analytical Procedures

• Meaning – analysis of significant ratios andtrends including the resulting investigations offluctuations and relationships that areinconsistent with other information or which

deviate from predictable amounts.• Purpose – To assist in understanding business – To identify areas of potential risk – To plan nature, timing and extent of other audit

procedures

• Ratio Analysis• Expectation and performance measures



Audit Evidence



FS Assertions

• Accuracy(during period, presentation/disclosure)

• Completeness(during period, period end, presentation)

• Cut off(during period)

• Allocation(period end)• Classification(during period, presentation/disclosure)

• Occurrence(during period, presentation/disclosure)

• Valuation(period end, presentation/disclosure)

• Existence(period end)• Rights and obligations(period end,

presentation/disclosure)



Audit procedures

Inspection of assets Confirms existence, gives evidence ofvaluation but does NOT confirm rights andobligations.Confirmation that assets seen are recordedin accounting records gives evidence ofcompleteness.

Inspection ofDocuments

Confirm completeness, cut-off(checkingtransactions after year end), valuation, rightsand obligation(contracts) andpresentation/disclosure.

Observation Involves watching a procedure. (Limited usesince it can only confirm procedure took placewhen auditor was watching.)

Enquiries Seek information from client staff or externalsources. Depends on integrity and knowledgeof source.



Audit procedures

Confirmation Seeking confirmation from another source.(Bank confirmation)

Recalculation Checking arithmetic of client‟s records, forexample, adding up ledger accounts.

Re-performance Auditors independent execution of procedures or

controls.(manual or CAATs)

Analytical procedures Evaluation of financial information by comparingfinancial and non-financial information

•Audit evidence should be sufficient and appropriate.•Sufficiency is the measure of the quantity of auditevidence.•Appropriateness is the measure of the quality or

reliability of the audit evidence.

C d Obj i i f



Competence and Objectivity ofthe auditor’s expert

• Auditor should assess the expert‟scompetence, capability and objectivity foraudit purposes.

• Competence – professional certification, licensing, membership,

– experience and reputation

• Objectivity

– Employed by entity

– Related to entity in any manner(financiallydependant.)

A i h k f h



Assessing the work of theauditor’s expert

• ISA 620 The auditor shall evaluate the adequacy ofthe auditor‟s expert‟s work for the auditor‟s purposesincluding….the relevance and reasonableness of theexpert‟s findings or conclusions.

• Other considerations include – Source of data used – Assumptions and methods used – When the expert carried out the work – The reason for any changes in assumptions and

methods – The results of the expert‟s work in the light of the auditors‟

overall knowledge of the business.

ISA 610 U i k f I t l



ISA 610 Using work of InternalAudit

Scope and organization of Internal audit functionmust be considered. The following factors must beconsidered.

• Proficiency and training

• Level of supervision, review and documentation• Sufficiency and appropriateness of evidence

• Appropriateness of conclusions drawn

• Consistency of the report prepared to work

performed• Whether the work necessitates amendment to the

external audit program



Evaluation and Review

• Opening Balances

• Comparatives

• Subsequent Events

• Going Concern




– Inventory and construction contracts

– Standard costing systems

– Non current assets

– Fair value – Impairment

– Intangible assets

– Financial Instruments

– Investment properties – Assets held for sale and discontinued operations

– The effect of foreign exchange rates.




– Statement of cash flows

– Changes in accounting policies

– Taxation(including deferred tax)

– Segmental reporting

– Leases – Revenue recognition

– Employee benefits

– Government grants

– Related parties

– Earning per share

– Provision, contingent liabilities and contingent assets

– Share-based payments transactions

– Business combinations



Reporting

E h i f M tt d Oth



Emphasis of Matter and Othermatters paragraph.

• ISA 706 Emphasis of matter and other matterparagraphs in the independent Auditor‟s report (newISA)

• Emphasis of matter paragraph – a paragraph included

in the auditor‟s report that refers to a matter appropriately presented or disclosed in the FS that, inthe auditor‟s judgment, is of such importance that it is

fundamental to users‟ understanding of the FS.

• Other matters paragraph – a paragraph included in theauditor‟s report that refers to a matter other than thosepresented or disclosed in the FS that, in the auditor‟s

judgment, is relevant to users‟ understanding of the

audit, the auditor‟s responsibilities or the auditor‟s

reports.

E h i f tt



Emphasis of matter• Must be used if

– Financial report framework prescribed bylaw/regulation would be unacceptable but for the factthat it is prescribed by law.(ISA 210 Agreeing theterms of audit engagements).

– Existence of a material uncertainty relating to eventsor condition that may cast doubt on entity’s goingconcern.

• It may be used – uncertain outcome to litigation,early application of an accounting standard thathas pervasive effect on the FS in advance of

effective date, a major catastrophe that has hadand continues to have devastating effect on FS)• Emphasis of matter follows opinion – „ we draw

your attention to Note X in the FS …….‟

Oth tt



Other matter

• Paragraph must be used:

– Where prior period FS were audited by apredecessor auditor.(ISA 710)

– Where prior period FS were not audited (ISA 710)

– Where reporting on prior period FS in connectionwith the current period‟s audit, if auditor‟s opinion

on such prior period FS differs from the opinion

the auditor previously expressed.(ISA 710)

– If revision of the other information is necessaryand management refuses to make therevision.(ISA 720)

M difi d i i



Modified opinion• ISA 705 Modifications to the opinion in the

independent auditor‟s report.• The objective of the auditor is to expressclearly an appropriate modified opinion on theFS that is necessary when:

• The auditor concludes, based on the auditevidence obtained, that the FS as a wholeare not free from material misstatement.

• The auditor is unable to obtain sufficient

appropriate audit evidence to conclude thatthe FS as a whole are free from materialmisstatement.

M difi d i i



Modified opinionsTYPE OF OPINION Old ISA 700(pre-clarity

project)New Isa 705(post-clarity Project)

Modified („except for‟) Qualified due to adisagreement

Qualified due to amaterial misstatement

Modified („except for‟) Qualified due to alimitation on scope

Qualified due to aninability to obtainsufficient appropriate

audit evidence.Adverse Adverse opinion due to

material and pervasivedisagreements.

Adverse opinion due tomaterial and pervasivemisstatements.

Disclaimer of opinion disclaimed opinion dueto material andpervasive limitation onscope.

disclaimed opinion dueto material andpervasive inability toobtain sufficientappropriate auditevidence.



Group Audits and

Transnational Audits



Group accounting

• A group is a parent and all its subsidiaries.• A parent is an entity that has one or more

subsidiaries.

• A subsidiary is an entity, including anunincorporated entity such as a partnership,that is controlled by another entity.

• Non-controlling interest is the equity in asubsidiary not attributable, directly orindirectly, to a parent.

A di f



Audits of groups• ISA 600 Special considerations – audits of

group financial statements (including work ofcomponent auditors) says the objective ofthe group auditor is: – Determine whether to act as the auditor of the

group financial statements. – Communicate clearly with component auditorsabout scope and timing of their work.

– Obtain sufficient appropriate audit evidence aboutthe Financial information of the components.

• Group auditor has to ensure that the otherauditors are professionally qualified, meetquality control and ethical requirements.

D fi iti



Definitions• Component – and entity or business activity for which

the group or component mgt prepare financialinformation that should be included in the group financialstatements.

• Component auditor – an auditor who, at the request of

the group engagement team, performs work on financialinfo related to the component.

• Component materiality – materiality level for acomponent determined by the group engagement team,

• Significant component – a component identified by thegroup engagement team: (a) that is of individualsignificance to the group, or (b) that due to specificnature or circumstances, is likely to include significantrisks of material misstatement of the group FS.

J i A di



Joint Audits• A joint audit is one „where two or more auditors

are responsible for an audit engagement and jointly produce an audit report to the client‟.

• Reasons for joint audits – Takeover (parent company auditors act jointly with

those of new subsidiary) – Political problems (Need to employ local auditors to

satisfy the laws of the country) – Locational problems (Companies operate from

widely dispersed locations)

– Companies may prefer to use local accountants whileenjoying the wide range of services provided by alarge national firm.

T ti l A dit



Transnational Audits• Transnational audits are audits of FS which may be

relied upon outside an entity‟s home jurisdiction for thepurpose of significant lending, investment or regulatorydecisions(Including audit of FS of companies withlisted equity, debt and other public interest entitieswhich attract particular public attention because oftheir size, products or services). (TAC)

• Forum of Firms (FoF) was formed by networks thatcarry out transnational audits (e.g. KPMG, Deloitte,E&Y, PwC…) and they have agreed to promote highquality audit practices worldwide (use of ISA) andmaintain quality control standards in accordance with

International standards on Quality Control issued byIAASB.



Audit-related services and

other assurance services

R i



Reviews• Two types of assurance engagement which can

be applied to review.

• Attestation engagement – accountant declaresthat a given premise is either correct or not.(e.g.

accounting policies used are consistent withthose in the prior year, no material modificationsto the interim financial information.)

• Direct reporting engagement – accountant

reports on issues that have come to his attentionduring the course of his review.(e.g. duediligence)

Due diligence



Due diligence• A due diligence engagement – an advisor is

engaged by one company planning to take overanother to perform an assessment of thematerial risks associated with the transaction, toensure that the acquirer has all the necessary

facts and that the perceived businessopportunities are in fact real. Helps determinethe purchase price. Due diligence may be

requested by seller.• Auditor uses enquiry and analytical review.

Get a lower level of assurance.

Enquiries of Due diligence



Enquiries of Due diligence• Structure(ownership and organization)

• Financial health

• Credibility of owners, directors and seniormanagers.

• Future potential, reflected in the strength of itsproducts or services and the probability ofearnings growth over the medium to long term.

• Assessment of the risk to the acquiringbusiness, in terms of market, strategy and likelyfuture events.

• Business plan (Is it realistic)

Agreed upon procedures



Agreed-upon procedures• Agreed-upon procedures assignment – an

auditor is engaged to carry our procedures of anaudit nature to which the auditor and the entityand any appropriate third parties have agreedand reports on factual findings. The recipients of

the report must form their own conclusions fromthe report by the auditor.

• The report is restricted to those parties that haveagreed to the procedures to be performed sinceothers, unaware of the reasons for theprocedures, may misinterpret the results.



Forensic audits

D fi iti



Definitions• Forensic auditing – The process of gathering,

analyzing and reporting on data, in a pre-definedcontext, for the purpose of finding facts and/or evidencein the context of financial/legal disputes and/orirregularities and giving preventive advice in this area.

• Forensic investigation – carried out for civil or criminalcases. These can involve fraud or money laundering.

• Forensic accounting – undertaking a financialinvestigation in response to a particular event, where the

findings of the investigation may be used as evidence incourt or to otherwise help resolve disputes.

Application of forensic



pp cat o o o e s cauditing

• Fraud – quantifying losses from theft of cash or goods,

identifying payments or receipts of bribes, identifyingintentional misstatements in financial information andinvestigating intentional misrepresentations made to auditors.

• Negligence – investigating the work done to provide evidenceas to whether auditor met the standards in case client hassued the auditor.

• Insurance claims – validate the amounts of losses beingclaimed in order to resolve a dispute between the companyand the claimant.

• Other disputes – shareholder disputes, partnership disputes,contract disputes, business sales and purchase disputes andmatrimonial disputes.



Prospective Financial

Information

T f PFI



Types of PFI• Forecasts – PFI based on assumptions as to future

events which management expects to take place and theactions management expects to take (best-estimateassumptions).

• Projection – PFI based on hypothetical assumptions

about future events and management action, or amixture of best estimate and hypothetical assumptions.

• Hypothetical illustration – PFI based on assumptionsabout uncertain future events and management actions

which have not yet been decided on.• Target – PFI based on assumptions about the future

performance of the entity.



Internal Audit and

Outsourcing

Outsourcing



Outsourcing• Outsourcing is the process of purchasing

key functions from an outside supplier.(e.g.Internal audit, information technology)

• Insourcing is when an organization decidesto retain a centralized department for the keyfunctions, but brings experts in from anexternal market on a short-term basis toaccount for „peak‟ and „trough‟ periods. It is a

business decision that is often made tomaintain control of certain critical productionand competences.

Reasons for outsourcing



Reasons for outsourcing

• Financial efficiency – improved costcontrol, may reduce the number ofemployees or reshape the entity‟s financialstatements(selling some of the assets.)

• Change management – smooth runningof mergers of two firms with differentaccounting systems, restructuring.

• Strategy – refocus on core competences,improve technical services or entre amarket in the most low risk way.



Current Issues

S f i



Summary of current issues

• Professional, ethical, regulatory andcorporate governance topics.

• Information technology

• Going concern

• Audit documention

• Social and environmental auditing

How to tackle exam: a



How to tackle exam: amarker’s perspective

• Practice your handwriting, in three-hoursessions.

• Read widely, keep up to date, be aware of

global trends and issues.

• Read question before the scenario

• Allocate your time properly

• Pay attention to the number of marks

• Read the question very carefully – what isthe requirement?

How to tackle exam: a



How to tackle exam: amarker’s perspective…

• Make sure the answers are easy to readand mark

• Not explaining points in sufficient detail

• Desire for success.

by Sean Purcell – part of P3 marking team

SUCCESS IN YOUR PAPER



SUCCESS IN YOUR PAPER