AUDIT AND ASSURANCE F8

Assurance – An engagement in which a practitioner obtains sufficient appropriate evidence in order

to express a conclusion designed to enhance the degree of confidence of the intended users other
than the responsible party about the outcome of the evaluation or measurement of a subject matter
against criteria.

5 Elements of assurance engagement –

1. Practitioner , responsible party and user – Auditor, Management and shareholders

2. Subject matter - Financial statements
3. Suitable criteria - Applicable financial reporting framework
4. Sufficient appropriate evidence - Audit procedures and review of FS
5. Written assurance report - Audit report

2 levels of assurance according to IASB – Reasonable & Limited

External Auditor – Auditor’s Report

Objective - Review the financial statements and form an independent opinion

True and Fair – Can’t test every transaction so can’t say accurate – Selects samples to review

Factual , agree with underlying records , clear, unbiased and free from material misstatements

Properly prepared – Prepared in accordance with the applicable reporting framework

Expectation Gap – Some users incorrectly believe that an audit provides absolute assurance – that
the audit opinion is a guarantee the financial statements are ‘ correct ‘. This and other
misconceptions about the role of an auditor are referred to as the expectation gap.

Acceptance

Engagement

The plan

Assess control and system

Substantive testing

Completion and review

Audit Report
Pros and Cons of external audit

ETHICS

IFAC , International federation of accountants issued a code of ethics , guidance on how to behave
morally and professionally and accountants should act in the public interest , information on ethics
can be found in a code known as the fundamental principles

OPPIC – 5 Fundamental Principles

O – Objectivity

P – Professional Behaviour

P – Professional competence and due care

I – Integrity

C – Confidentiality

ETHICS THREAT

1. Threats to objectivity or independence

2. Conflicts of interest
3. Breaking confidentiality

Each of these threats need to be considered during the acceptance stage /planning stage of the
audit

Threats to objectivity or independence

1. Self review
2. Familiarity
3. Self interest
4. Advocacy
5. Intimidation

Corporate Governance – Set of guidelines that listed companies should follow, Advice on how to run
your company well

Aim – Protect their investment from poor management decisions

CG Code – 5 main principles

 1. Leadership
2. Effectiveness
3. Accountability
4. Remuneration
5. Shareholder relationship

Chairmen and Ceo with their ed’s and ned’s create committees who take on responsibilities for the
company 1. Audit 2.Risk 3. Remunaration 4. Nomination Committees

Internal Audit

Role of the internal auditor

1. Review of control activities – A. To examine the timeliness of control information

B. Regularly review systems and ensure issues are reported
2. Value for money audits – Three E’s & A. Identifying business risks
B. Reviewing the entity and its control systems
C. Report to management and recommend how to
. reduce risk

3. Examine compliance - Support the audit committee

4. Complete special investigations requested by the entity management , includes fraud

investigations and more , these will assist the management in improving the organisation

Internal and external auditor’s differences

1. Independence
2. Scope of work
3. Objectives
4. Reporting
5. Appointment and removal
6. Legal requirement

Reliance on internal auditor’s work some considerations are

1. Scope of work
2. Technical Competence
3. Report quality
4. Independence
 First step of auditing or the audit process

Acceptance Stage

Two situations – 1. Existing client 2. New Client

Stage 1 – Preconditions of an audit stated by ISA 210

1. Is the client following an acceptable FR frame work

2. Does the client management accept their responsibility

Stage 2 – Any other considerations

1. Professional Clearance
2. Confidentiality
3. Auditor considerations (Time, skill, fee)
4. Audit risk consideration

Ethical considerations –

Identify ethical threats to objectivity –

1. Self interest
2. Self review
3. Familiarity
4. Advocacy
5. Intimidation

Engagement Letter is the second step of auditing or audit process

This is an agreement that is put in place of the start of the audit process

Purpose of EL – 1. Minimise the risk of understanding and reduce the expectation gap

2 – Explain the audit process and the terms and conditions

3. – Accepting the audit process in writing

ISA 210

Contents of engagement letter –

1. Objective and scope of the audit

2. Auditor’s responsibility
3. Client management responsibilities
4. Financial reporting framework
5. Form and contents of any reports used
AUDIT RISK

Risk of inappropriate audit opinion, i.a. there are material misstatements present in the financial
statements

Material misstatements – ISA 450

The difference between what is in the financial statements and what should be in the financial
statements in accordance with the applicable financial reporting framework.

Misstatements can arise from error or fraud

AR = IR*CR*DR

IR = Inherent Risk

CR = Control risk

DR = Detection risk

ISA 315 Requires Auditors to perform risk assessment procedures

ISA 200 requires auditors must apply ‘professional scepticism’

Both of these standards help the auditors through the planning stage end ensures audit risk are
assessed properly

Risk assessment can be done by 2 main pieces of work

1. Understanding the entity and its environment

2. Using analytical procedures

Methods of gathering information – 1. Enquiry 2. Observation 3. Inspection

To understand the entity fully the auditor must gather the following information

1. Industry and other external factors

2. Laws and regulations
3. Client organisational structure
4. Accounting policies
5. Client business plan and risks
6. Financial performance
7. Internal controls

4 Main sources of information

 1. Within the audit firm
2. External sources
3. Client
4. Individual auditor

ANALYTICAL PROCEDURES

ISA 520 – Evaluations of financial information through analysis of plausible relationships among both
financial and non-financial data ( Comparison of Financial and non-financial data )

AP can be used at the planning stage, at the completion and review stage and for substantive testing
stage

Purpose of AP

1. Understand the business

2. Identify unusual balances, transactions and evidence
3. Identify potential material misstatements

Ratio’s

1. Profitability Ratios ( A ) Gross Profit Margin ( B ) Net Profit Margin

2. Efficiency Ratios ( a ) Receivables (B ) Payables days ( C ) Inventory days
3. Liquidity Ratios ( A ) Current Ratio ( B ) Quick Ratio
4. Return Ratios – Gearing

Laws and Regulation

IFAC – International Federation of Accountants

Works on consistency of accountants across the globe

Sub part of IFAC are

IAASB – International Audit & Assurance Standards Board

They look after the external auditor and develops ISA ( Currently 36 ) and develop ISQC ( Currently
1)

FRAUD

ISA 240 – Auditors responsibilities relating to fraud

Auditors have duty to identify and communicate any evidence found that fraud is present

Audit Strategy – Overall Plan

1. Scope
 2. Timing
3. Direction

An item is material by size as in a material misstatement if

1. Its’s 5-10% of the Profit

2. .5-1% of Revenue
3. 1-2% of Total Assets

Set Performance Materiality

If any misstatements are above the Performance Materiality, they shall be recorded in the summary
of unadjusted errors or evaluation of misstatements

Audit Planning Document shall have the following information

1. Assessment of materiality and performance materiality

2. Details from analytical review
3. Key audit risks
4. Background client information
5. Specific laws and regulation
6. Audit Team and budgets set staff
7. Overall audit strategy
8. Deadlines

Audit Documentation – ISA 230

Audit was planned and performed in accordance with auditing standards

There are 3 stages of Audit documentation

1. Planning
2. Audit Performance
3. Completion

Quality Control for an Audit of Financial Statements – ISA 220

To remember the key policies and standards use

HEAR ME

H – Human Resources

E – Ethical Requirement

A – Acceptance and Continuance of clients

R – Responsibilities of Leadership
M – Monitoring – Involves 2 types of Reviews

1. Hot Review also known as Engagement quality control review

2. Cold Review

E – Engagement Performance, there are 3 elements

1. Direction
2. Supervision
3. Review

INTERNAL CONTROL

A control is a procedure put in place to achieve company objectives, sound control system to run
well

Key Objective

1. To ensure accurate accounting records

2. To safeguard organisations assets
3. To prevent and detect fraud
4. To ensure an efficient working environment

Limitations

1. Human error
2. Fraudulent collusion
3. Abuse of authority

ISA 315 – Auditors must understand the client’s internal controls

5 components of internal control system – It is a CRIME not to have strong controls

1. Control Activities
2. Risk assessment procedures
3. Information systems
4. Monitoring of controls
5. Environment

How the auditor reviews these internal control systems to look whether their effectiveness is up to
their satisfaction

Step by step approach

1. Understand control system – Enquiry, Inspection, Observation

2. Document system – Detailed Notes, Flow chart
3. Assess the system
4. Control test
 5. Substantive procedures
6. Reporting issues

Internal Control Deficiencies

1. System reviewed by auditor

2. System documented for evidence
3. Whether system can cause material misstatement
4. Issues with the way system works
5. Missing control activities
6. Opportunity to find deficiencies

Terms used for report

Report to those charged with governance

Management letter

Management report

ISA 265 States

Guidance on communicating deficiencies

Significant deficiencies in writing

Letter or report format

Control cycles

The cc we learn about are systems linked to the financial statements

1. Sales
2. Purchases
3. Assets
4. Inventory
5. Payroll
6. Cash

Sales cycle System Stages

1. Received order
2. Dispatched goods
3. Sent invoices
4. Transaction recorded in financial statements
5. Received cash
Purchases cycle system stages

1. Requisition
2. Order is placed
3. Goods are received
4. Received invoice from supplier
5. Invoice is recorded on accounts system
6. Sent payment to supplier

Control system for assets would work same as purchase system with some additional controls
required due to the size of the values spent on these items in comparison to the standard goods
such

1. Authorization of costs
2. Use of asset register, this should be updated and reviewed regularly and compared to the
accounting system to ensure there are no errors

Inventory Cycle

1. Make order for inventory

2. Receive inventory in warehouse
3. Sales will be made
4. Dispatch inventory to customers
5. More good required
6. Back to step 1

Storage controls, Inventory counting

Payroll cycle

1. Fixed and variable data regarding employees is recorded

2. Calculations are made by the system
3. Outputs from system are created
4. Payments are made to employees and government

Cash System

1. Payment for item is requested

2. Payment is authorized
3. Payment is made and receipts come in
4. Recorded in books and records

Objectives

Risks
Effective control

Financial statement assertions and audit evidence

Financial statement assertions represent the objectives of substantive procedures

If a substantive procedure doesn’t address an assertion, it does not assist in forming an audit opinion

To remember the assertions use

CRAVE POCC

C – Completeness

R – Rights and obligations

A – Accuracy

V – Valuation and allocation

E – Existence

Are used to test assets, liabilities and equity

P – Presentation

O – Occurrence

C – Classification

C – Cut off

Are used to test income and expenses

BOLD can be used in both

Gathering Evidence

2 main areas for audit procedures for evidence are

1. Control Procedure
2. Substantive procedure

Control procedures are procedures which identify whether the control systems being reviewed
actually work

Substantive procedures which identify material misstatements present in financial statements

ISA 500 – Sufficient appropriate evidence

Sufficient = Enough evidence

Appropriate = Relevant and Reliable

Control procedure = The evidence should be such that it helps to identify whether the control
system operates effectively

Substantive procedure = The evidence should at least achieve one of the financial statements
assertions so that these assertions can help auditor conclude whether financial statements are true
and fair

Evidence should be

Independent

Obtained directly

Strong control system

Written

Original form

Methods available to auditor to find sufficient appropriate evidence

ISA 500 = 8 methods to design audit procedures for both controls and substantive testing

1. Analytical procedures = Comparison of data in financial statements

2. Enquiry = Talking to client and management
3. Inspection = Inspecting documentation that confirms balances and transactions
4. Observation = Observing process at client to understand and review reliability
5. Recalculation = Recalculating transactions and balances for accuracy
6. Confirmation = Written confirmation of balances and transactions
7. Re-performance = Carrying out the procedure the client has performed

Sampling ISA 530

The application of audit procedure to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of selection in order to provide the auditor
with a reasonable basis on which to draw conclusions about the entire population

Sampling Risk, sample size should be sufficient to reduce sampling risk to an acceptable level

Different methods of sampling

Statistical Sampling Method

 Auditor has not influenced the selection of transactions, these are random samples and are
based of Probability Theory

1. Random Number Table

2. Systematic Selection
3. Block selection
4. Monetary unit selection
5. Haphazard Methods

Smaller entities and Not for profit organisations

Use TOAD for assertions

T = Trial Balance

O = Opening Balance

A = Add up and re-calculate

D = Disclosure check

For Auditing of Non-current assets

1. Financial Statements
2. Asset Ledger
3. Trial Balance and ledger accounts

Key assertions for NCA

1. Completeness
2. Rights and obligation
3. Valuation
4. Existence

Current Assets & their key assertions

1. Bank – Existence, Valuation

Audit Evidence - Bank Statement, Bank Report, Bank Reconciliation
2. Receivables -
Trade receivables – Tests – 1. Circularization 2. Cash received after year end 3. Cut off
3. Estimates
Provision for bad debts – Key Assertion – Valuation
4. Inventory
Key Assertions – Valuation, Existence, Completeness, Rights and Obligations

IAS 2 –
 Inventory should be valued at the lower of
1. Cost
2. NRV

Audit of Liability Balances

Key Assertion – Completeness

Other Assertions – Rights and Obligations, & Valuation

1. Accruals
2. Provisions – IAS 37
Remote Chance – Include Nothing
Possible Chance – Include contingent liability note
Probable Chance – Include Note and provision
3. Other payables
Sales Tax
Employee Tax
Payroll
Bank Overdraft
4. Trade Payables
Total Balance of all outstanding balances owed to trade suppliers
Audit procedures will include
1. Cut-off testing
2. Reconciling supplier statements
3. Post year end invoice review
4. Analytical Procedure

Auditing Balances in statement of Profit and loss – Directors and Equity

Payroll , Revenue , Purchases or other expenses

Director Emoluments

Key Assertions

1. Cut-off
2. Occurrence
3. Completeness
4. Classification
5. Accuracy

Additional Audit Procedures

Substantive analytical procedures

Specific work to verify assertions

CAAT

Computer Assisted Audit Techniques

Test Data – Live and Dead Data

Auditors can rely on

1. Control tests
2. Risk assessment
3. Special investigation

Subsequent event review

This is carried out after the completion of the review stage

Aim

Identify events that have happened post year end but that impact current audited financial
statements

Auditor must identify any posterior events and apply them to post year events to IAS 10

Carry out audit procedures during the review of the audit using = IAS 560

Identify and discuss any changes needed in the financial statements

Consider the event’s impact on audit report

IAS 10

1. Adjusting Events = Discovered after the year end = Evidence existed at reporting date
Customer communicated inability to pay after year end
2. Non adjusting events = Material events where conditions did not exist at the reporting date
but arose after, they are material enough that they need to disclosed in the report to the
users

Include subsequent event by following the accounting standard

The auditor must review and obtain evidence of the event, they do this with the guidance
ISA 560

Going Concern Review

Written representation = Letter of representation

Guidance for written representation is taken from ISA 580

Refusal to provide written representation, some specific steps must be followed by the auditor
 1. Discuss with management the reason for not providing WR and explain the importance of
WR to the client
2. Consider integrity of the client and the reliability of the internal evidence
3. No sufficient appropriate evidence if the WR is not provided to the auditor therefore the
auditor will have to modify the audit report with disclaimer stating that they are unable to
form an opinion

Audit Finalization and The Final Review

Final Outstanding Issues

1. Overall Review
2. Evaluation of misstatements
3. Subsequent event review
4. Going Concern Review
5. Obtaining Written Representation Review

THE AUDIT REPORT

Final report at the end of the audit process, given to the management and the shareholders of the
entity

Regulations

ISA 700 Revised = Objectives and Format

Objectives = Form opinion on FS, Express opinion with written report

Opinion is true and fair = Unmodified Opinion

No issues to address = Unmodified Audit Report

If the FS are not true and fair

Why?

Material Misstatement or Lack of sufficient evidence

Therefore, they will have to modify the audit report with qualified opinion

Then they will have to decide whether it is material or material and pervasive

Material stating it is important to users

Material and pervasive meaning it is significant to users, in simple terms it makes the matter is so
fundamental that the FS are unreliable
ISA 260 and ISA 265

Formal Communication Channels

1. Engagement letter
2. Management Letter
3. Audit Report