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ACCA COURSE NOTES

June 2015 EXAMINATIONS

Paper

F8

AUDIT AND ASSURANCE

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Click toPaper ACCA edit Master F8 – Audit title style and assurance

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Click to edit Master title style Syllabus A

Audit framework and regulation

B

Internal audit

C

Planning and risk assessment

D

Internal control

E

Audit evidence

F

Review

G

Reporting

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Click to edit Examiner and Master Examtitle Format style

Format of the Exam

Question 1 Question 2 Question 3 Question 4 Question 5 Total

Application of audit procedures to a scenario Short factual questions on ISAs and other knowledge-based areas

30 10 20

Questions with short practical scenarios covering topics such as: internal audit, risk assessment, planning , controls, evidence, conclusions and reporting

20 20 100

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Click to edit Master title style 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 4

Click to edit Elements of Master an assurance title style 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

Click Three to party edit Master relationship title style • Practitioner: for example an auditor. Responsible for determining the nature, timing and extent of procedures and must pursue doubts and queries • A responsible party: the person responsible for the information and assertions • The intended users: the person(s) for whom the practitioner prepares the assurance report. The responsible party can be one of the intended users.

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Click Appropriate to edit Master subjecttitle matter style 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 entity’s internal control or IT system • Behaviour eg corporate governance, compliance with regulation

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Click to edit Master Appropriate subject title matter style 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.

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Click to edit Master title style Criteria Criteria are the benchmarks used to evaluate or measure the subject matter. Without the frame of reference 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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Click Suitable to edit criteria Master title style 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 the conclusions.

•

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 different interpretations.

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Click to edit Master title style Evidence • Professional scepticism • Sufficient, appropriate evidence Sufficiency = quantity of evidence.

Appropriateness = quality of evidence (relevance and its reliability)

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Click to editreport Assurance Master title style A written report containing a conclusion.

Positive form (reasonable assurance engagement): “In our opinion internal control is effective, in all material respects, based on XYZ criteria.”

Negative form (limited assurance engagement): “Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria.”

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Click Assurance to edit report Master title style A practitioner does not express an unqualified conclusion for either type of assurance engagement when: • There is a limitation on the scope of the practitioner’s work.

• The assertion is not fairly stated, and the subject matter information is materially misstated.

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Click to editgovernance Corporate Master title style Corporate governance: the system by which

Corporate governance: the system by which companies companies directed and controlled areare 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 14

Click to Corporate Recent edit MasterFailures title style

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Click toPrinciples OECD edit Master of title Corporate style Governance • Fairness, including foreign and minority shareholders • Disclosure and transparency • Independence • Probity, honesty • Responsibility and accountability • Reputation • Judgement • Integrity

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ClickUK The to edit Corporate MasterGovernance title style Code The purpose of corporate governance is to facilitate effective entrepreneurial and prudent management that can deliver longterm 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. 17

ClickUK The to edit Corporate MasterGovernance title style Code 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 company’s 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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ClickUK The to edit Corporate MasterGovernance title style Code Effectiveness • Appropriate 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 individual directors.

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

ClickUK The to edit Corporate MasterGovernance title style Code Accountability • The board should present a balanced and understandable assessment of the company’s 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 internal control principles, and for maintaining an appropriate relationship with the company’s auditor. [Audit committee. Must examine internal control. Must consider need for internal audit].

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ClickUK The to edit Corporate MasterGovernance title style Code Remuneration • Levels of remuneration should be sufficient to attract, retain and motivate 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 individual performance.

• There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration. [Remuneration committee] 21

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ClickUK The to edit Corporate MasterGovernance title style Code 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 takes place.

• The board should use the AGM to communicate with investors and to encourage their participation.

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Click to Audit committee edit Master title style

Financial Statements Liaison with external auditors: • Scope of external audit

Review of internal audit Review of internal control Special investigations

• Forum to link directors/auditors • Deal with auditors’ reservations • Obtain information for auditors.

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Click to edit Internal auditMaster title style Internal audit is an appraisal or monitoring activity established by management and directors for the review of internal control as a service to the entity.

• It functions by examining, evaluating and reporting to management and the directors on the adequacy and effectiveness 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 24

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Click to edit Internal auditMaster title style • 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

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Click to edit Definition of Master an audittitle style

An audit is the independent examination of, and expression of opinion on, the financial statements of an entity.

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Click to edit Positive andMaster negative title assurance style 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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Click to editgovernance Corporate Master title–style the purpose of an external audit Corporate governance: the system by which companies are directed and controlled Appoint independent

Auditor Adds credibility

Measure performance

Financial Statements

Prepare FS

Appoint

Shareholders Own

Directors Manage

Company

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Click to of Stages edit anMaster audit title style Plan the audit Understand entity Assess risk of material misstatement Respond to risk

Expect effective controls Tests of controls

Expect ineffective controls Unsatisfactory

Satisfactory Restricted substantive tests

Report significant deficiencies to those charged with governance to management and all weaknesses to management Full substantive tests

Overall review of F/S Report to management

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Auditor’s report

Click to and Interim edit final Master audit title style

1January

Planning visit

Interim audit.

Document system, procedural tests

31December

Final audit More direct checking of balances

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Click to editresponsibility Master title style Auditors’ … planned and performed the audit to obtain reasonable assurance whether the financial statements are free from material misstatement…. ….in our opinion the financial statements show a true and fair view….

• No guarantees • Not every error discovered • Not certifying accuracy

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Click to edit Relevant to all Master companies? title style Should it be a legal requirement that the financial statements of 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

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Click Auditors’ to edit rights Master title style • 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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Click Auditors’ to edit duties Master title style 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.

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Click to edit Master Appointment, resignation title style and removal Appointment • Resolution at each general meeting (re-appointment not automatic).

• Directors pre first GM and to fill casual vacancy.

• Secretary of State

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Click Appointment, to edit Master resignation title style and removal 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 meetings relating to their resignation and can speak at those meetings.

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Click to edit Master Appointment, resignation title style and removal 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 company’s office + sent to regulatory authority.

• Auditors can receive notice and speak at GM where their term of office would have expired.

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Click can Who to edit be Master an auditor? title style •

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 a director or employee of the company, or of any associated companies

•

The auditor must not be an employee or business partner of a director or employee of the company, or of any associated companies.

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Click Regulation to edit of Master auditors title style International level National level

The profession

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Click Regulation to edit of Master auditors title style Education and work experience

Eligibility, such as membership of a supervisory body

Supervision and monitoring

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Click Auditing to edit standards Master title and style Quality Control Recognised Statutory Body For example ACCA National Standards In UK, set by Auditing Practices Board International Standards on Auditing Set by International Auditing and Assurance Standards Board (IAASB) – part of the International Federation od Accountants (IFAC)

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Click to edit Master Professional ethics and title style ACCA’s Code Fundamental principles

Threats

Safeguards

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Click to edit Master Fundamental Principles: title style ACCA’s Code •

Integrity - straightforward and honest

•

Professional competence and due care – current developments, legislation and techniques

•

Confidentiality – should not disclose information unless a legal or professional right or duty.

•

Professional behaviour – comply with the law and avoid any action which discredits the profession

•

Objectivity – avoid bias, conflict of interest, undue influence

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Click to edit Threats to objectivity, Master title integrity style and independence Threats arise from: • Self-interest • Self-review • Familiarity • Advocacy • Intimidation • Management

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Click to edit Threats to objectivity, Master title integrity style and independence 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 45

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Click to edit Threats to objectivity, Master title integrity style and independence 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 46

Click to edit Threats to objectivity, Master title integrity style and independence 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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Click to edit Threats to objectivity, Master title integrity style and independence 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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Click to edit Threats to objectivity, Master title integrity style and independence Advocacy threats • Where the assurance firm promotes a point of view or opinion to the extent that subsequent objectivity is compromised

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Click to edit Threats to objectivity, Master title integrity style and independence Intimidation threats • Where the assurance team is deterred from acting properly by actual or perceived threats.

• Examples are actual/threatened litigation. In some cases there might be physical intimidation.

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Click to edit Threats to objectivity, Master title integrity style and independence Management threats • Where the auditor begins to make management decisions for the client.

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Click to edit Master Acceptance procedures title style • 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.

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Click to edit Master Appointment flowchart title style Approach by new audit client 1st audit?

Yes Make own decision

No Permission to contact old auditor?

No

Yes Write for information Permission for old auditors to reply?

Decline appointment No

Yes Relevant information provided?

No

Give old auditor notice and use information obtained in other ways

Yes Accept/reject 53

Click to edit Master Engagement letters title style • Define auditors’/management responsibilities • Written evidence of auditors’ acceptance • Send to board of directors/or audit committee prior to first audit • Identify any reports to be produced in addition to audit report

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Click to edit Master Engagement letters title style • 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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Click to of Stages edit anMaster audit title style Plan the audit Understand entity Assess risk of material misstatement Respond to risk

Expect effective controls Tests of controls

Expect ineffective controls Unsatisfactory

Satisfactory Restricted substantive tests

Report significant deficiencies to those charged with governance to management and all weaknesses to management Full substantive tests

Overall review of F/S Report to management

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Auditor’s report

Click300 ISA to edit Audit Master planning title style • 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 57

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Click to edit Master title style Risk ISA 315 – auditor should obtain an understanding of the entity and its environment…sufficient to identify and assess the risk of material misstatement in the financial statements..

Business risk • Financial risk Total risk

• Operational risk • Compliance risk Audit risk = risk of inappropriate opinion

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Click assessment Risk to edit Master – audit title style risk model Risk of material misstatement

AR = IR x CR Audit Risk

x DR

Control risk Inherent Risk

Detection Risk

Sampling Risk

Non-sampling Risk

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Click to editrisk Assessing Master ISA 330 title style • To reduce audit risk to an acceptable level determine responses at the financial statement level and the assertion 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 the assessed risks of material misstatement.

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Click assessment Risk to edit Master – audit title style risk model Inherent risk – susceptibility to misstatement that could be material…assuming no related internal controls

Complex transactions, inexperienced staff, cash-based business, pressure to perform

Control risk – risk that a material Control environment misstatement will not be Design of internal control prevented, detected or Operation of internal control corrected Detection risk – failure of the auditor to detect a material misstatement

Auditor’s experience, new client, time/fee pressure, poor planning, industry knowledge

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Click to edit Analytical procedures Master title style 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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Click to edit Analytical procedures Master title style Ratio analysis: comparison with previous years, industry standards, budgets.

• Reason • Artefact • Test • Implications • Other effects

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Click to edit Analytical procedures Master title- style RATIO Gross profit % 2009 2008

21% 30%

• Reason • Artefact • Test • Implications • Other effects

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Click to edit Analytical procedures Master title- style RATIO Receivables collection period 2009 2008

54 days 40 days

• Reason • Artefact • Test • Implications • Other effects

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Click to edit Master title style Materiality • A matter is material if it omission or misstatement would reasonably 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 • ½ - 1% of revenue • 1 – 2% of total assets • 5 – 10% of profit before tax

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Click to edit Master Performance materiality title style • 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

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Click to editofMaster Evaluation misstatements title style 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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Click to edit Gaining an understanding Master title style 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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Click to of Stages edit anMaster audit title style Plan the audit Understand entity Assess risk of material misstatement Respond to risk

Expect effective controls Tests of controls

Expect ineffective controls Unsatisfactory

Satisfactory Restricted substantive tests

Report significant deficiencies to those charged with governance to management and all weaknesses to management Full substantive tests

Overall review of F/S Report to management

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Auditor’s report

Clickuse The to edit of assertions Master title(ISA style 315) Accuracy Completeness Cut off Allocation Classification and understandability Occurrence Valuation Existence Rights & obligations (ownership) (ACCA COVER) 71

Clickuse The to edit of assertions Master title style ISA 315, Audit evidence divides assertions into • Transactions and events • Account balances • Presentation and disclosure

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Clickuse The to edit of assertions Master title style If it relates to a transaction, then verify (controls and substantive evidence) the assertions of: • Occurrence • Completeness • Accuracy • Cutoff • Classification

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Clickuse The to edit of assertions Master title style If it relates to a year end balance then verify (controls and substantive tests) the assertions of: • Existence • Rights and obligations • Completeness • Valuation • Allocation

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Clickuse The to edit of assertions Master title style If it relates to the presentation and disclosure in the FS: • Occurrence • Rights and obligations • Completeness • Classification and understandability • Accuracy • Valuation

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Click to edit Sources of evidence Master title style Procedures for obtaining audit evidence Analytical Procedures Enquiry and confirmation Inspection Observation recalcUlation and reperformance

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Click much How to editaudit Master evidence? title style 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 entity’s 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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rd parties Click to edit Relying on 3Master title style

• Experts (eg estate agents, actuaries, lawyers) • Internal auditors • External auditors Should be: • Qualified • Experienced • Independent • Professional 78

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rd parties Click to edit Relying on 3Master title style

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 expert’s work with respect to: • Consistency with other evidence • Assumptions made • Use and accuracy of source data.

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Click to Audit documentation edit Master title style 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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Click to edit Master title style Sampling ISA 530…consider objectives of audit procedure and the attributes of the population…Consider nature and characteristics of audit evidence, possible error conditions and the rate of expected error.

Sampling risk Audit risk Non-sampling risk

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Click toofedit Types sampling Master title style • Random selection • Systematic selection • Haphazard selection • Sequence/block selection • Monetary unit sampling • Stratification

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Click to edit Monetary unit Master sampling title style – 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, 605 Then: 1,855

3,105 4,455

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Click of Size to sample edit Master title style • 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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Click to edit Sampling risk Master – teststitle of style control

Under-reliance: sample does not support auditor’s assessment of control risk, actual compliance rate would support that assessment.

Risk of

Over-reliance: sample does support auditor’s assessment of control risk, but actual compliance rate would not support that assessment.

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Click to edit Sampling risk Master – substantive title styleprocedures

Risk of incorrect rejection: sample implies balance materially misstated, but actually not materially misstated.

Risk of Risk of incorrect acceptance: sample implies that balance is non materially misstated, but in fact it is materially misstated.

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Click to Tests ofedit control Master title style • 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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Click to edit Master Components of internal title style control • Control environment • Control activities/procedures • Risk assessment process • Information system • Monitoring controls

What can go wrong? How can we stop it?

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Click to activities Control edit Master title style • • • • • • • •

Segregation of duties Comparison Authorisation Accounting reconciliations Computer controls Arithmetic controls Physical Maintaining a trial balance and control accounts

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Click to edit Inherent limitations Master of title internal style control • Human error • Collusion • Bypass of controls • Costs > benefits • Non-routine transactions

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Click to editand Recording Master assessing title style 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

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Click to editinternal Assessing Mastercontrol title style • Record the system • Assess the system • Test the system • Consider changing to substantive testing • Report weaknesses in a management letter (emphasise that other problems might also exist).

Weakness

Consequences Recommended action to remove weakness

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Click to edit Master Communicating weaknesses title style in internal control • Significant deficiencies should be communicated to those 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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Click to objectives, Control edit Masterprocedures, title style 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.

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Click to Tests ofedit control Master - methods title style • Enquiries, including management views • Inspection • Observation • Re-calculation and re-performance

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Click tosystem Sales edit Master title style Ordering/granting - Despatch/invoicing - Recording/credit credit control

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Click to editsystem Purchases Master title style Ordering/granting – Receipt/invoicing - Recording/payment

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Click to system Wages edit Master title style • 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

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Click to expenditure Capital edit Master title system style • Expenditure authorised • Tenders received • Goods received • Invoices authorised • Recorded as capital expenditure in main ledger and fixed asset (non-current asset) register • Physical inspection

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Click to Cash system edit Master title style • All monies are received, banked, recorded and safeguarded against loss/ theft.

• All payments are authorised and made to correct payees.

• Payments are not made twice for same liability.

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Click to edit Inventory system Master title style • All inventory movements authorised • Inventory properly recorded • Cut-off correct • Physical safeguards against loss, theft, damage • Proper valuation procedures • Reasonable levels of inventory

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Click to edit Master title style 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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Click to edit Master Non-current assets title style • 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

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Click to edit Inventory counts Master title style Inventory is difficult to audit: quantity, description, condition, value, ownership

• 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.

104

Click to-edit Cut-off purchases Master title style

Year end Before

After

GRN

GRN

Included in?

• Purchases !

• Payables !

• Inventories !

Included in?

• Purchases • Payables • Inventories

X X X

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Click to-edit Cut-off sales Master title style

Year end Before

After

GDN

GDN

Included in?

• Sales • Receivables • Inventories

! !

X

Included in?

• Sales • Receivables • Inventories

X X !

106

Click to edit Master Receivables circularisations title style Write to selected debtors and ask for confirmation of amounts owing.

• Two types: Positive: want a reply from everyone written to.

Negative: want a reply only if balance out of agreement. (Not recommended by ISA 505) • Replies should go directly to auditors’ offices so that auditor retains control • Can stratify sample so that a large percentage covered.

• Ask about old debts.

• Ask about Cr balances

107

Click to edit Master title style Receivables • Reconcile ledger to control account • Aged listings • Correspondence • Board minutes • Collection period • Receipts after year end

108

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Click to edit Master title style Payables • Reconcile ledger to control account • Correspondence • Board minutes • Payables period • Statement reconciliation • Payments after year end

109

Click to edit Master title style Prepayments/accruals • Compare to last year • Payments after year end • Invoices paid last few months • Letter of representation

110

Click to edit Master title style Cash • Bank certificate • Bank reconciliation • Cash count if material

111

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Click to edit Computer systems Master title style • General controls – development, prevention of unauthorised changes etc., backup. Can be classified as development and administrative controls.

• Application controls – initiation, recording, processing and recording transactions.

112

Click to edit Computer systems Master title style • Input controls • Processing controls • Controls over standing data • Controls over output

113

Click to edit Real-time systems Master title style • Access controls • Controls over passwords • Programming controls • Firewalls • Transaction logs • File controls • Balancing • Pre-processing authorisation • System development/maintenance controls

114

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Click to edit Computer assisted Master audit title style techniques (CAAT) • Audit programmes: interrogate accounting data.

Select samples to investigate Re-perform calculations Look for unusual items • Test data: operated on by client’s programs.

Are programs operating correctly?

Are controls operating?

115

Click to Audit report edit Master title style Definition • A clear expression of opinion on the financial statements as a whole.

• Based on review and assessment of conclusions drawn from 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.

116

Click to edit Financial statements Master title style • 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

117

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Click to Basic Unqualified edit Master Report title style Title INDEPENDENT AUDITOR'S REPORT

Addressee

(To the members of ABC Company plc)

Report on the Financial Statements We have audited the accompanying financial statements of ABC Company plc, which comprise the statement of financial position as at December 31, 20X8, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of the significant accounting policies and other explanatory notes.

Financial statements audited

Introductory paragraph 118

Click to edit Concepts in Master reporting title style Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

119

Click to Basic Unqualified edit MasterReport title style (cont’d) Opinion In our opinion, the financial statements give a true and fair view of ("or present fairly, in all material respects,") the financial position 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.

120

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Click to Basic Unqualified edit Master Report title style (cont’d)

Opinion paragraph

We believe the audit evidence we obtained is sufficient and appropriate 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,") the financial 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: 121

Equivalent terms Auditor’s signature

Click to True, fairedit and Master reasonable title style 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 assurance that 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

122

Click to edit Master Implications of audittitle report style • Proper records kept • Proper returns from branches not visited • Accounts agree with the records and returns • All necessary explanations received • Details of director’s emoluments properly disclosed • Details of directors’ loans and other transactions correct • Information in directors’ report consistent with the accounts.

123

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Click to edit Auditors’ Reports Master title style • Unmodified, or • Modified Modified Matters that do not affect the auditor’s opinion

Matters that do affect the auditor’s opinion Qualified opinion:

Emphasis of matter and other matters

• •

Do contain a material misstatement; or Unable to obtain sufficient appropriate audit evidence to conclude FS free from material misstatement

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Click to edit Emphasis ofMaster matter title style • A paragraph in an auditor’s report used when the auditor specifically wishes to draw the readers’ attention to some matter already properly and clearly disclosed within the financial statements and which is fundamental ti user’s understanding of the FS • Such a paragraph does not constitute a qualification of the auditor’s opinion.

“Without qualifying our opinion above, we draw attention to Note 10 to the financial statements. Five days before the directors formally approved the financial statements, the company received notification that they are to be named as defendants in a proposed legal action …. At this early stage it is not possible to estimate the ultimate outcome of this matter, and no provision has been included within the financial statements.”

125

Click tomatters Other edit Master title style • A paragraph in an auditor’s report used to refer to a matter not presented or disclosed in the FS that is relevant to users’ understanding of the audit, auditor’s responsibility or the audit report.

• Such a paragraph does not constitute a qualification of the auditor’s opinion.

“Without qualifying our opinion above, we draw attention to the fact that we were appointed as auditors 11 months into the financial year…

126

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Click toconcern Going edit Master title style Should assess going concern over the 12 months from the balance 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

127

Click toconcern Going edit Master title style Effect on audit report if going concern in doubt: • If disclosed – emphasis of matter • If not disclosed – disclaimer, adverse, limitation in scope if directors do not adequately make an assessment of going concern

128

Click to edit Master Qualification matrix title style Nature of circumstance

Material but not pervasive

Pervasive

FS contain a material misstatement

Except for… might

Adverse opinion

Unable to obtain sufficient, appropriate evidence

Except for…

Disclaimer of opinion

129

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Click to editevidence Insufficient Master title – qualified style opinion

…Except as discussed in the following paragraph…

We did not observe the counting of inventories at 31/12/200X…unable 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 and fair view…

130

Click to editevidence Insufficient Master title – disclaimer style of opinion

…Except as discussed in the following paragraph…

We were not able to observe all physical inventories at 31/12/200X…unable to determine inventory quantities by other methods…

Because of the significance of of the matters discussed…we do not express an opinion on the financial statements.

131

Click to edit Material misstatement Master title–style qualified opinion

…As discussed in paragraph 13, no depreciation has been provided…not 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…

132

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Click to edit Material misstatement Master title–style adverse opinion

…As discussed in paragraph 14, no bad provision for irrecoverable 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…

133

Click560 ISA to edit – Events Masterafter titlethe style reporting period Events occurring between the period end and the date of the auditors’ report and also facts discovered after the audit report has been issued • Adjusting events: evidence of conditions that existed at the date of the statement of financial position.

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

If accounts already issued, may have to take steps to prevent users relying on the accounts

134

Click37 IAS to–edit Contingent Master title liabilities style and assets Contingent liability: possible liability arising from past events…. existence confirmed by future events • Present obligation probably requiring outflow of resources: provision recognised and disclosures required • Possible obligation, or present obligation that will probably 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.

135

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Click37 IAS to–edit Contingent Master title liabilities style and assets Contingent asset: possible asset arising from past events…. existence confirmed by future events • Inflow of economic benefits virtually certain: asset is not contingent • Inflow of economic benefits is probable but not virtually certain: no asset recognised but disclosures • Inflow is not probably: no asset recognised and no disclosure

136

Click to edit Master Management representations title style 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 137

Click to representations Written edit Master title style 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

138

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Clickhave You to edit a VeSTeD Master title interest style in good answers

• Verbs • Scenario • Time • Detail

139

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