ACCA (AAA)

ADVANCED AUDIT AND

ASSURANCE
COMPLETE SUBJECT NOTES
BY VERTEX LEARNING SOLUTIONS
VALID UNTIL SEP 2025
 TABLE OF CONTENTS

CHAPTER TOPIC PAGE NO.

1 Regulatory Environment 2

2 Money Laundering 28

3 Code of Ethics and Conduct 36

4 Professional Responsibility and Liability 63

5 Quality Control 76

6 Practice Management 82

7 Planning Materiality and Assessing the Risk of 96

Misstatement
8 Group and Transnational Audits 109

9 Evidence 122

10 Completion and Review 136

11 Reporting 148

12 Audit Related Services 162

13 Review of Interim Financial Statements 166

14 Prospective financial information 169

15 Due diligence 175

16 Forensic Audit 181

17 Audit Of Social, Environmental, And Integrated Reporting 187

18 INT Syllabus Only: Audit of Performance Information in 192

The Public Sector
19 UK Syllabus Only: Auditing Aspects of Insolvency 197

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Chapter 1
Regulatory Environment
Assurance professionals provide reports that give an independent opinion as to
whether the subject matter complies with pre-determined criteria.
This enables the end user of that information to place reliance on that information
when making decisions.
Decision makers within financial markets need to have the confidence to make
informed decisions. To make these decisions they need information they can trust.
Regulation of the accountancy profession was covered briefly in Audit and

Assurance at the Applied Skills level. The Advanced Audit and Assurance

syllabus looks at regulation from a broader perspective

Self-Regulation

The accountancy profession introduced standards to regulate financial reporting

and shortly afterwards auditing standards were introduced. Standards were set
by the accounting profession for the accounting profession to follow.
However, high profile corporate failures, such as Enron have led to the questioning
of self-regulation as a satisfactory mechanism.

Global Regulation

The globalization of business, professions and investment markets has been rapid.
Once businesses started to cross national borders it soon became clear that the
variation of laws and regulations in different countries made life difficult, both for
the multinationals and the professions trying to provide services to them. This
realization led to the foundation of the International Federation of Accountants
(IFAC).

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The International Federation of Accountants (IFAC)

It is the global organization for the accountancy profession. It was formed in 1977
and is based in New York. As of 1 January 2021, IFAC has more than 175 member
and associate organizations (including the ACCA), representing 3 million
accountants from 130 separate countries.

The structure of IFAC is as follows:

The IFAC Council comprises one representative from each

member body. It meets once a year and elects the board.

The IFAC Board is responsible for setting policy and overseeing the
work of the various committees.

The IFAC Nominating Committee makes recommendations

regarding the composition of IFAC boards, advisory groups and
task forces.

Corporate Governance
Corporate governance is how a company is operated and controlled.
The aim of is:
 to ensure that companies are run well in the interests of their shareholders,
employees, and other key stakeholders such as the wider community.
 to try and prevent company directors from abusing their power which may
adversely affect these stakeholder groups.

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In the US the Sarbanes Oxley Act (2002) introduced a set of rigorous corporate
governance laws. The UK Corporate Governance Code introduced a set of best
practice corporate governance initiatives into the UK.

Greater
transparency

Less likely to be Greater

mismanaged accountability
Advantages of
a company
following good
corporate
governance
principles:

Better able to Efficiency of

respond to risks operations

The Corporate Governance Code

The Organization for Economic Co-operation and Development (OECD) has
produced a set of six principles of corporate governance to guide policy makers
when setting regulations for their own country.

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 Ensuring the
basis of an
effective
corporate
governance
framework

The rights and

equitable
The treatment of
responsibilities shareholders
of the board and key
ownership
functions

The six OECD

principles are

Institutional
Disclosure investors, stock
and markets, and
transparency other
intermediaries

The role of
stakeholders
in corporate
governance

The code is split into five parts:

Composition,
Board leadership and Division of
succession and
company purpose responsibilities
evaluation

Audit, risk and internal

Remuneration
control

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The Code does not set out a rigid set of rules; instead, it offers flexibility through
the application of principles and ‘comply or explain’ provisions and supporting
guidance.

Board Leadership and Company Purpose

Principles
 A successful company is led by an effective board.
 The board should establish the company’s purpose, values, and strategy.
 The directors should lead by example and promote the desired culture.
 The board should ensure that the necessary resources are in place for the
company to meet its objectives.
 The board should establish a framework of effective controls to enable risk
to be assessed and managed.
 The board should ensure effective engagement with and encourage
participation from shareholders and stakeholders.
 The board should ensure that workforce policies and practices are
consistent with the company’s values.
Main provisions
 The board should describe in the annual report how opportunities and risks
to the future success of the business have been considered and addressed.
 The board should assess and monitor culture.
 In addition to formal general meetings, the chair should seek regular
engagement with major shareholders.
 The board should understand the views of the shareholders.
 When 20% or more of votes have been cast against the board
recommendation for a resolution, the company should explain what
actions it intends to take to understand the reasons behind the result.

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  The board should understand the views of the company’s other key
stakeholders and describe how their interests have been considered in
board discussion
 The workforce should be able to raise concerns in confidence and
anonymously (‘whistleblowing’).
 The board should take action to manage conflicts of interest.
 Directors’ concerns about the operation of the board or management of
the company that cannot be resolved should be minute.
 On resignation, a NED should provide a written statement to the chair for
circulation to the board if they have any concerns.

Board Composition

The chief Non-executive

The chair’s role Executive directors
executive’s role directors (NEDs)

•Leads the board •Ensures the •The executive •The NEDs monitor
of directors. effective operation directors have the executive
of the company. responsibility for directors and
•Enables flow of
running the contribute to the
information and •Head of the
company on a overall strategy
discussion at board executive
day to day basis. and direction of
meetings. directors. the organisation.
•Ensures satisfactory
•They are usually
channels of
employed on a
communication
part-time basis and
with the external
do not take part in
auditors.
the routine
•Ensures effective executive
operation of board management of
sub-committees. the company.
•The chair should •NEDs will
be independent to participate at
enhance board meetings.
effectiveness
•They will bring
experience, insight
and contacts to
assist the board.
•They sit on sub-
committees as
independent,
knowledgeable
parties.

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  Advantages of participation by NEDs
 Oversight of the whole board.
 As they are independent, they act as a ‘corporate conscience’.
 They bring external expertise to the company.

 Disadvantages
 It may be difficult to find the right NEDs who have the relevant skills and
experience required by the company.
 They, and the sub-committees, may not be sufficiently well informed or
have time to fulfill the role competently.
 They are subject to the accusation that they are staffed by an ‘old boys’
network and may fail to report significant problems and approve unjustified
pay rises.
 The cost. NEDs are normally remunerated, and their fees can be quite
expensive.

Division Of Responsibilities

Principles

 The chair leads the board and is responsible for its overall effectiveness.
 The chair should ensure effective contribution of all board members.
 The chair should ensure that directors receive clear, accurate and timely
information.
 The board should be balanced.
 NEDs should have sufficient time to meet their board responsibilities
 The board should ensure it has the policies, processes, information, time,
and resources it needs to function effectively and efficiently.
Main provisions
 The chair should be independent on appointment.

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  The chair and chief executive roles should not be taken by the same
individual.
 The chief executive should not become the chair of the same company.
 At least half the board, excluding the chair should be independent NEDs.
 The board should identify the independent NEDs in the annual report.
 One of the independent NEDs should be appointed as a senior
independent director to provide a sounding board for the chair.
 The NEDs and the senior independent director should meet without the
chair present at least annually to appraise the chair’s performance.
 NEDs appoint and remove executive directors and scrutinize performance
against agreed performance objectives.
 The responsibilities of the chair, chief executive, senior independent
director, board, and committees should be set out in writing and publicly
available.
 The annual report should set out the number of meetings of the board and
its committees and the attendance of each director.
 New appointments to the board should consider other demands on the
director’s time. Full time executive directors should not take on more than
one NED role in a FTSE 100 company or other significant appointment.
Appointments should not be made without prior approval of the board.

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 Independence would be deemed to be affected if a
director:
is, or has been, an employee of the company or group within the lastn five
years
has, or has had within the last three years, a material business relationship
with the company either directly, or as a partner, shareholder, director or
senior employee of a body that has such a relationship with the company

has received or receives remuneration from the company in addition to a

director’s fee, participates in the company’s share option or a performance-
related pay scheme, or is a member of the company’s pension scheme

has close family ties with any of the company’s advisers, directors or senior
employees

holds cross-directorships or has significant links with other directors through

involvement in other companies or bodies represents a significant
shareholder

− has served on the board for more than nine years from the date of their first
appointment.

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Composition, Succession, And Evaluation
Principles

 Appointments to the board should be subject to a formal, rigorous, and

transparent procedure.
 An effective succession plan should be maintained for board and senior
management.
 Appointments and succession should be based on merit and objective
criteria and should promote diversity.
 The board and its committees should have a combination of skills,
experience, and knowledge.
 Annual evaluation of the board should consider its composition, diversity
and how effectively members work together to achieve objectives.

Main Provisions

 A nomination committee should be established to appoint board

members.
 A majority of the committee members should be independent NEDs.
 The chair should not be a member of the committee when the committee
is dealing with the appointment of their successor.
 All directors should be subject to annual re-election.
 The chair should not remain in post for more than nine years from the date
of their first appointment.
 Open advertising and/or an external search consultancy should be used
for the appointment of the chair and NEDs.
 There should be a formal and rigorous annual evaluation of the
performance of the board, its committees, the chair, and the individual
directors.

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  The chair should consider having a regular external board evaluation at
least every three years for FTSE 350 companies, and the external evaluator
should be identified in the annual report.
 The annual report should describe the work of the nomination committee.

Nomination Committee

 The role of the nomination committee is to decide on appointments of

board directors and senior management. Most of this committee should be
independent NEDs.

Advantages

 Reduces the risk of 'jobs for the boys'.

 Reduces the risk of improperly affecting board decisions. Executives might
appoint people to the board they know will vote in favor of the same
decisions as them and can therefore influence board decisions which may
not be in the best interests of the company.

Audit, Risk, And Internal Control Including Audit Committees

Principles

 The board should establish formal and transparent policies and procedures
to ensure the independence and effectiveness of internal and external
audit functions
 The board should present a fair, balanced and understandable assessment
of the company’s position and prospects.
 The board should establish procedures to manage risk.

Main Provisions

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  The board should establish an audit committee of independent NEDs, with
a minimum membership of three, or in the case of smaller companies, two.
 The chair of the board should not be a member of the audit committee.
 At least one member must have recent and relevant financial experience.
 The committee must have competence relevant to the sector in which the
company operates.
The main roles and responsibilities of the audit committee include:
1. Monitoring the integrity of the financial statements.
2. Providing advice on whether the annual report and accounts are
fair, balanced, and understandable
3. Reviewing the company’s internal financial controls and risk
management systems.
4. Monitoring and reviewing the effectiveness of the internal audit
function.
5. If there is no internal audit function in place, they should consider
annually whether there is a need for one and make a
recommendation to the board.
6. Making recommendations in relation to the appointment and
removal of the external auditor and their remuneration.
7. Reviewing and monitoring the external auditor’s independence and
objectivity and the effectiveness of the audit process.
8. Developing and implementing policy on the engagement of the
external auditor to supply non-audit services.

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 The annual report should describe the work of the audit committee
including:
1. Significant issues considered relating to the financial statements.
2. How it has assessed the independence and effectiveness of the
external audit process.
3. Where there is no internal audit function, an explanation for the
absence and how internal assurance is achieved.
4. An explanation of how auditor independence and objectivity are
safeguarded, if the external auditor provides non-audit service
 The directors should explain in the annual report their responsibility for
preparing the annual report and accounts.
 The board should carry out a robust assessment of the company’s
emerging and principal risks.
 The board should confirm in the annual report that it has completed this
assessment, including a description of its principal risks these are mitigated.
 The board should monitor the company’s risk management and internal
control systems and, at least annually. The monitoring and review should
cover all material controls, including financial, operational and
compliance controls.
 The board should state whether it considers it appropriate to adopt the
going concern basis of accounting in preparing the financial statements.
 The board should explain in the annual report how it has assessed the
prospects of the company, over what period it has done so and why it
considers that period to be appropriate.
 The board should state whether it has a reasonable expectation that the
company will be able to continue in operation and meet its liabilities as
they fall due over the period of their assessment.

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Audit Committees
 The audit committee will take responsibility for financial reporting and
internal control matters.
 The audit committee can view a company’s affairs in a detached and
independent way
 They liaise effectively between the main board of directors and the internal
and external auditors.
 Appointments should be for a period of up to 3 years, extendable by no
more than two additional 3-year periods.

•Minimum of 3 NED(2 for smaller companies)

Composition •Atleast 1 with financial expertise

•Increase public confidence

Objectives •financial awareness of non-exec
•Liaison wuth external auditors

•Financial statements
•Controls
Function •Internal audit
•Externa;audit
•Whistle blowing

Problems
Difficulties recruiting the right non-executive directors who have relevant skills,
experience, and sufficient time to become effective members of the committee
The cost. Non-executive directors are normally remunerated, and their fees can
be quite expensive.

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Benefits of an audit committee

•Improved credibility of the financial statements through an impartial

review of the financial statements and discussion of significant issues wi
th the external auditors.
•Increased public confidence in the audit opinion as the audiit
committee will monitor the independence of the external auditors.
•Stronger control environment as the audit committee help to create a
culture of compliance and control.
•The skills, knowledge and experience (and independence) of the
audit committee members can be an invaluable resource for a
business.
•It may be easier and cheaper to arrange finance, as the presence of
an audit committee can give a perception of good corporate
governance.
•It will be less of a burden to meet listing requirements if an audit
committee (which is usually a listing requirement) is already
established.
•The internal audit function will report to the audit committee
increasing their independence and adding weight to their
recommendations.

Annual Reports
The audit committee should:
 Review and report to the board on the significant financial reporting issues
and judgments made in connection with the preparation of the financial
statements.
 Consider the appropriateness of significant accounting policies, significant
estimates, and judgments.
 Review the annual report and accounts and advise the board on whether
they are fair, balanced, and understandable.

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Internal Audit
Internal audit has an important role to play in assisting the board, and audit
committee, fulfill their corporate governance responsibilities.
Internal audit will work closely with the audit committee. The audit committee will:
 Ensure that the internal auditor has direct access to the board chair and to
the audit committee and is accountable to the audit committee.
 Review and assess the annual internal audit work plan.
 Receive periodic reports on the results of internal audit work.
 Review and monitor management’s responsiveness to the internal auditor’s
findings and recommendations
 Meet with the head of internal audit at least once a year without the
presence of management.
 Monitor and assess the effectiveness of internal audit in the overall context
of the company’s risk management system.

External Audit Process

 FTSE 350 companies should put the audit out to tender at least once every
ten years to enable the audit committee to compare the quality and
effectiveness of the services provided by the incumbent auditor with those
of other firms.
 The audit committee has primary responsibility for the appointment of the
auditor including the tendering process and selection procedures
 An annual assessment should be made of the qualifications, expertise,
resources, and independence of the external auditor.
 If the external auditor resigns, the audit committee should investigate the
issues giving rise to the resignation.
 The audit committee should approve the remuneration and terms of
engagement.

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  The audit committee should monitor compliance with the Ethical Standards
including the level of fees, former employees of the audit firm who now
work for the company, partner rotation and non-audit services.
 The audit committee should set and apply a formal policy specifying the
types of non-audit services which are approved.
 At the start of the audit, the audit committee should ensure that
appropriate plans are in place for the audit including whether the planned
materiality level and the resources are consistent with the scope of the work
to be performed.
 The audit committee should discuss with the external auditor any matters
which could affect audit quality.
 The audit committee should review and monitor management's
responsiveness to the external auditor's findings and recommendations and
should also review the written representation letter before it is signed.
 The audit committee should assess the effectiveness of the external audit
process including:

asking the auditor to explain the risks to audit quality

whether the auditor has met the agreed audit plan

obtaining feedback from key people involved such as the finance

director about the conduct of the audit

reviewing the content of the management letter and whether

recommendations have been acted upon.

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Risk Committee
The risk committee will be responsible for advising the board on the company’s
risk appetite, reviewing, and approving the risk management strategy and
advising the board on risk exposures. Types of Risks a company might face:

The risk of losing key staff.

The risk of a catastrophic failure of IT systems.

The risk of changes in government policy.

The risk of fire or natural disaster.

The risk that products become technologically obsolete.

The risk that products become technologically obsolete.

A risk map enables the company to assess the likelihood or probability of a risk
occurring and the likely impact to the company.

A risk that ranked as highly likely to occur and high potential impact to the
business would be prioritized as requiring immediate action. A risk that was
considered both low likelihood and low impact might be ignored or insured
against
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Risk management can involve:
 Transferring the risk to another party e.g., by buying insurance or
outsourcing part of the business.
 Avoiding the risk by ceasing the risky activity.
 Reducing the risk by implementing effective systems and controls.
 Accepting the risk and bearing the cost and consequence if the risk
happens. This may be likely for risks which are deemed low in terms of
probability or impact to the company.

One way of minimizing risk is to incorporate internal controls into a company’s

systems and procedures.
Director's responsibilities in respect of Auditor's responsibilities in respect of
risk risk
 It is the director's responsibility to  Auditors are not responsible for
implement internal controls and the design and implementation
monitor their application and of their clients' control systems.
effectiveness.  Auditors must assess the
 The main aim of risk effectiveness of controls for
management is to protect the reducing the risk of material
business from unforeseen misstatement of the financial
circumstances that could statements.
negatively impact the  They incorporate this into their
profitability of the company and overall audit risk assessment,
stop it achieving its strategic which allows them to design
goals. their further audit procedures.

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Remuneration
Principles

 Remuneration should be designed to promote the long-term sustainable

success of the company. Executive remuneration should be aligned to the
company purpose, values, and long-term strategy.
 The board should establish formal and transparent procedures for
developing the policy for executive directors' remuneration.
 No director should be involved in setting his own pay.
 Directors should exercise independent judgment and discretion when
authorizing remuneration, taking account of company and individual
performance, and wider circumstances

Main provisions

 A remuneration committee comprising a minimum of three independent

NEDs should be established.
 The chair cannot chair the committee and can only be a member if they
were independent on appointment.
 The remuneration committee should determine the policy for executive
director remuneration and set remuneration for the chair, executive
directors, and senior management.
 The committee should review workforce remuneration and related policies
taking these into account when setting the policy for executive director
remuneration.
 NED remuneration should be determined by the board. It should reflect
time commitment and responsibilities of the role and should not include
share options or other performance related elements.
 Remuneration schemes should promote long-term shareholdings by
executive directors. Shares awards should be released for sale on a phased

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 basis and be subject to a total vesting and holding period of five years or
more.
 Remuneration schemes should include provisions that enable a company
to recover or withhold sums or share awards and specify the circumstances
in which it would be appropriate to do so.
 Only basic salary should be pensionable and pension contribution rates
should be aligned with those available to the workforce.
 Notice or contract periods should be one year or less. If it is necessary to
offer longer periods to new directors, the period should reduce to one year
or less after the initial period.
 When determining the executive director remuneration policy and
practices the committee should ensure remuneration arrangements are
transparent, easy to understand, predictable, proportionate, and aligned
to culture.
 The work of the remuneration committee should be described in the annual
report.

Remuneration Committee

 The role of the remuneration committee is to set the remuneration

packages for the chair, executive directors, and senior management.
 This is to ensure that they are paid fairly, but not excessively.

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Advantages include:
1. Decisions are based on agreement of several people, reducing the risk of
bribes from directors in return for a higher package.
2. No director is involved in setting his own pay which could lead to excessive
amounts being paid.
3. Long-term performance related elements will be included to avoid the risk
that directors are rewarded for poor performance or rewarded for taking
decisions which may have a positive outcome in the short-term but would
not be good for long-term success of the company

After studying the long rules of good corporate governance, you may be
wondering its importance to the underlying subject of external audit. Let’s make
a link:

If a company complies with

corporate governance best If the company, including the
practice, the control environment audit committee, demonstrates
of the company is likely to be good corporate governance, this
stronger. There will be a greater should result in the company
focus on financial reporting and taking more responsibility for its
internal controls which should actions, the independence of the
reduce control risk and inherent auditor being greater, and the
risk which together reduce the risk overall quality of the audit being
of material misstatements in the higher.
financial statements.

UK Syllabus
The UK government ordered a review of the UK regulator, the Financial Reporting
Council (FRC), by Sir John Kingman.

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Kingman Report Findings

 The FRC is not fit for purpose, outdated and in need of being rebuilt from
the ground up. A new regulatory body is required to change the culture
and increase effectiveness.
 Appointments of key staff requires are often made without open
advertising or the use of external consultants. Recruitment processes
therefore require overhauling.
 The FRC is funded partially by a levy on audit firms and is too close to those
it is supposed to regulate which reduces its independence and
effectiveness. The Audit, Reporting and Governance Authority (ARGA), the
proposed new regulator should have statutory recognition and funding to
overcome this conflict. The FRC is currently in transition to ARGA, with the
transition expecting to be completed in 2023.
 Auditors should have a duty to report viability or other serious concerns to
try and prevent corporate failures, like the system in France.
 ARGA should be given the power to make recommendations to a
company’s shareholders that they act such as dismissing senior staff or
cutting dividends in serious cases which required intervention.
 ARGA must be more proactive in acting against firms who fail to uphold the
reputation of the profession.
In addition to the Kingman Report, an independent review of the quality and
effectiveness of audit has been carried out by Sir Donald Brydon.

Brydon Report Findings

The Brydon Report contains a range of proposals for audit reform including:
 Redefining audits and requiring auditors to provide decision useful
information to users of the auditor’s report.

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  A statement to be provided by the auditor that they are acting in the
public interest and have regard to the interests of users other than
shareholders.
 The auditing profession should be independent of, rather than an extension
to, the accounting profession. ARGA should be the statutory regulator of
the auditing profession.
 Professional suspicion should be introduced in addition to professional
skepticism and professional judgement.
 The auditor’s report should include a statement from the auditor on
whether the director’s section 172 statement is based on observed reality,
increasing the scope of the audit beyond the financial statements.
 Providing the shareholders with a formal opportunity to influence the scope
of the audit and hold the audit committee and auditor to account.
 Replacing the true and fair wording with the term ‘present fairly in all
material respects.
 Introducing new reporting requirements for directors in the form of a
Corporate Audit & Assurance Policy, a Resilience Statement, and a Public
Interest Statement on which the auditor would be required to provide
assurance.
 Similar requirements to those of Sarbanes Oxley Act in respect of CEO and
CFO attestation of the internal controls of the company.
 Increased responsibilities in relation to fraud detection and prevention.
 Greater disclosure by the auditor of the profitability of the audit work, the
remuneration of the audit engagement partner, the hours spent on each
audit by grade, clear reasons for resignation, dismissal, or decision not to
retender.
 ARGA should work with auditors to increase the use of technology and
data analytics to promote increased audit quality.

Note:
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 In accordance with the Companies Act 2006 those companies falling below the
small company threshold are not required, in law, to have an annual audit.
Companies may still choose to have one voluntarily.
The main criteria for audit exemption which apply from 1 January 2016 are:

Turnover not exceeding £10.2 million

Gross assets not exceeding £5.1 million

The number of employees must not exceed 50

To qualify, the company must meet two out of the three criteria.

Current Issues and Developments Affecting the Profession

Current issues and developments by their nature are constantly evolving and
therefore, you should be prepared to do your own research and keep up to date
with developments affecting the profession.
The ACCA website is a good resource to start with as it contains:
 Technical articles are published by the examining team on the ACCA
website and in Student Accountant magazine. You should make sure you
read any new articles published in the weeks and months before your
exam.
 A list of examinable documents for Advanced Audit & Assurance is
available in the AAA study resources section of the website. These
examinable documents are summarized and included in the relevant
chapters.
 Examinable documents include exposure drafts and recent publications
issued by regulatory authorities such as the International Auditing and
Assurance Standards Board (IAASB) and the Financial Reporting Council
(FRC).

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  The Professional Insights section of the website which looks at how the
accountancy profession might look in the future, emerging technologies
that might be used and the role of the accountant in the future.

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