External Audit

The objective of an external audit is to express an opinion (in terms of truth and fairness) on
whether the financial statements are prepared, in all material respects, in accordance with an
identified reporting framework (e.g. International Financial Reporting Standards) and the relevant
law.

Internal Audit
an independent, objective assurance and consulting activity designed to add value and improve an
organisation’s operations.

It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to

evaluating and improving the effectiveness of risk management, control, and governance processes.#

Assurance services – independent professional services that improve the quality of

information, or its context, for decision-makers.

External Audit – Five elements of assurance

engagement
Assurance engagement – an engagement in which a practitioner expresses 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.

As an assurance service, an external audit must include the five elements of an assurance
engagement:

1. The subject matter is the financial statements prepared under the applicable financial
reporting framework (e.g. IFRS Accounting Standards).

2. The three-party relationship includes:

o the directors, who are responsible for the financial statements;

o the practitioner (i.e. the external auditor); and

o the shareholders (and other intended users of the financial statements).

3. The criteria (benchmarks against which the subject matter can be assessed) used to evaluate
the financial statements include the financial reporting framework.

4. The external auditor plans and performs the audit engagement to obtain sufficient
appropriate evidence to support the expression of an opinion on the financial statements.

5. An opinion in an assurance report – the "independent auditor's report".

 There are two types of assurance engagements;
reasonable assurance engagements (positive form report) (AUDITS);
and limited assurance engagements (negative form report) (REVIEWS).

The essential attributes of the relationship between the directors, shareholders and auditors are
stewardship, agency and accountability.

Reasonable assurance – a high, but not absolute, level of assurance

Material – Information(whether quantitative or qualitative) is material if its omission or
misstatement could influence decisions that the primary users of general-purpose financial reports
make based on those reports.

Professional judgment (ISA 200) – the application of relevant training, knowledge and
experience, within the context provided by auditing, accounting and ethical standards, in making
informed decisions about the courses of action that are appropriate in the circumstances of the audit
engagement.

Professional scepticism (ISA 200) – an attitude that includes a questioning mind,

being alert to conditions which may indicate possible misstatement, and a critical assessment of
evidence.

The Audit Process

Audit Cycle

The audit process is often depicted as a continuous annual cycle of broad stages:
Stage Description

Engagement letter
The auditor must send all clients an engagement letter setting
out the auditor's duties and responsibilities and managements.

Planning audit work is essential to performing it to the required high standard

Planning
of skill and care. It includes establishing the overall audit strategy and
developing the audit plan.

To determine audit strategy and the nature, timing and extent of audit
Assess risk
procedures (the audit plan), auditors must identify and assess the risks of
material misstatement.

Internal controls
Regardless of the audit approach, the auditor must evaluate the design of the
system of internal control.

Control effectiveness
If the auditor decides to rely on the system of internal control, the operating
effectiveness of internal controls must be tested.

Substantive
All material assertions relating to balances, transactions and related
procedures
disclosures must be verified. For example, that transactions occurred, assets
exist and disclosures are complete.

Review and
finalisation
Audit working papers must be reviewed to ensure that audit evidence
procedures
supports the audit opinion. Procedures typically include an analytical review
of the financial statements, subsequent events and going concern reviews.
 Stage Description

The auditor asks management to formally acknowledge its responsibilities

Obtain management
(e.g. for the financial statements and internal controls). Representations may
representations
also be required to support audit evidence (e.g. all liabilities have been
recognised).

After the directors have approved the financial statements, the auditor signs
Sign auditor's report
the auditor's report. The audit opinion will usually be unmodified but may
need to be modified.

IFAC Standard-Setting Boards

 IAASB: International Auditing and Assurance Standards Board

o Sets high-quality auditing standards (e.g., ISAs).

o Aims for global uniformity.

 IESBA: International Ethics Standards Board for Accountants

o Establishes ethics guidance.

o Monitors ethical issues for responsiveness.

 IAESB: International Accounting Education Standards Board

o Focuses on training and research for accountants.

 IPSASB: International Public Sector Accounting Standards Board

o Develops accrual-based standards for governments and public entities.

Corporate Governance
The system by which business corporations are directed and controlled. The corporate governance
structure specifies the distribution of rights and responsibilities among different participants in the
corporation and spells out the rules and procedures for making decisions on corporate affairs. By
doing this, it also provides the structure through which the company objectives are set, and the
means of attaining those objectives and monitoring performance.

– OECD (Organisation for Economic Co-operation and Development)

Those charged with governance (TCWG) –individuals with responsibility for
overseeing the strategic direction of the entity and obligations related to the accountability of the
entity, including overseeing the financial reporting process.

– ISA 260

Management – individuals with executive responsibility for the conduct of the entity's
operations.

– ISA 260

UK Corporate Governance Code

 Purpose: Example of good corporate governance.

 Applicability:

o For listed companies; usable by any entity.

o "Comply or explain" concept.

o 18 Principles on leadership, board effectiveness, audit, risk, and remuneration.

 Support: Guidance on board effectiveness and audit committees.

Main Principles
1. Board Leadership and Company Purpose
 Effective Board: Drives long-term success and shareholder value.

 Engagement: Involve shareholders and stakeholders.

 Key Responsibilities:

o Define purpose, values, and strategy.

o Ensure resource availability.

o Manage risks with effective controls.

o Align workforce policies with company values.

o Directors must act with integrity.

2. Division of Responsibilities
 Chair Independence: Must not be an employee(during last 5 yrs), have material
relationships, or be a significant shareholder.

 Chair Role:

o Leads the board and ensures effective direction.

o Promotes openness and constructive debate.

 Board Composition:

o Mix of executive directors and NEDs to prevent dominance.

  Role Separation:

o Chairman and CEO must be different individuals.

 NED Responsibilities:

o Provide strategic guidance and accountability.

3. Composition, Succession, and Evaluations

 Appointments:

o Formal and transparent processes; independent NED majority in nomination

committee.

 Re-election:

o Annual for all directors; chair tenure limited to nine years.

 Diversity:

o Promote diverse backgrounds in appointments.

 Annual Evaluation:

o Assess board effectiveness and individual contributions.

4. Audit, Risk, and Internal Control

 Policies:

o Ensure independence and effectiveness of audits.

o Maintain integrity in financial reporting.

o Manage risks aligned with strategic goals.

 Audit Committee:

o Composed of independent NEDs.

5. Remuneration
 Policies:

o Support long-term strategy and align with company values.

 Committee:

o Independent NEDs to oversee remuneration; directors shouldn't decide their own

pay.

 Judgment:

o Directors should consider performance and broader context when authorizing

remuneration.

Audit Committee
 Purpose: Establishes formal and transparent arrangements for corporate reporting, risk
management, and internal control.
  Composition:

o At least three independent NEDs (two for smaller companies).

o At least one member with recent and relevant financial experience.

o Overall committee must have sector-specific competence.Key Points

 External Auditor Accountability: Reports to shareholders, not executive management.

 Independence: Enhances external auditor's independence; increases internal auditor's

independence.

 Risk & Controls: Reviews risks and controls over:

o Financial reporting process

o Tax, environmental, legal, and other regulatory matters impacting financial

statements.

Fundamental Principles of the Code of Ethics

The Code establishes five fundamental principles:

1. integrity;

2. objectivity;

3. professional competence and due care;

4. confidentiality; and

5. professional behaviour.

Threats to fundamental Principles

Compliance with the fundamental principles may potentially be threatened by a broad range of
circumstances which generally fall into one or more of the following categories:

 Self-interest threat;

 Self-review threat;

 Advocacy threat;

 Familiarity threat; and

 Intimidation threat.

Auditor Appointment
There are three main stages in the auditor appointment process:
1. Client screening and acceptance;
1. Is the audit firm able to audit the potential client?

2. Does the audit firm want to be associated with the potential client?

3. Is the potential client financially viable?

2. Engagement acceptance;
The prospective auditor should do the following to determine whether the client can be
properly served:

1. Understand the entity's business.

2. Assess the specific requirements of the engagement and the purpose, nature, and
scope of the work to be performed (e.g. laws and regulations, use of experts, assurance
from controls, reliance on internal audit).

3. Assess the logistics (e.g. locations, competent audit staff, time frame).

3. Professional appointment.
The significance of any threat to the fundamental principles should be evaluated (e.g. threats
to professional competence if an engagement is accepted without understanding all the relevant
facts).

An essential safeguard is communicating with the existing auditor to determine whether there are
any professional or other reasons not to accept the engagement.

Preconditions for an audit – management and, where appropriate, TCWG use an

acceptable financial reporting framework to prepare the financial statements and agree to the
premise on which an audit is conducted.

ISA 220 (Revised 2020)

ISA 220 (Revised 2020) focuses on quality management at the engagement level for financial
statement audits, emphasizing the responsibilities of the engagement partner. Key points include:

 Quality management, ensures:

o Compliance with professional standards and legal requirements.

o Appropriateness of the auditor's report.

The engagement partner is responsible for:

1. Leadership: Overall responsibility for audit quality.

2. Ethical Compliance: Ensuring the audit team meets ethical standards.

3. Engagement Acceptance: Following proper procedures for accepting or continuing the audit.
 4. Resource Management: Appropriately using assigned resources.

5. Engagement Performance:

o Directing and supervising the audit team.

o Consulting on complex issues.

o Conducting engagement quality reviews.

6. Monitoring and Remediation: Staying vigilant for quality management deficiencies and
addressing them.

Documentation Techniques
 Narrative Notes: Commonly used for recording business history, processes, controls,
interviews, and results.

 Graphics: Includes flowcharts, organization charts, and various types of graphs to visualize
information.

 Questionnaires: Primarily Internal Control Questionnaires (ICQs) and Evaluation

Questionnaires (ICEQs) to aid auditors.

 Checklists: Used to document procedures and ensure critical tasks are completed.
 Electronic Media: Utilized for audit tools and documentation production.

Permanent Audit File (PAF):

o Contains documents of enduring significance related to the audit and the client's
business.

o Provides a historical record of important audit-related matters.

o There is only one PAF per client.

Current Audit File (CAF):

o Contains information pertinent to the current audit at any stage.

o There is one CAF for each audit stage (interim, year-end, final) for each year.

Standard Procedures for Working Papers

Each individual working paper should include the following information:

 Client name

 Reporting date (financial year end)

 Subject of working paper (e.g. "Existence of non-current assets")

 Schedule reference
  Date of preparation

 Preparer's identification (e.g. initials)

 Date of review

 Identification of reviewer (e.g. initials)

Retention period
Working papers should be retained for a period sufficient to meet the needs of the audit practice and
in accordance with legal and professional requirements. The IAASB requires at least five years.

Audit Procedure
Auditors must adhere to all RELEVANT ISAs and cannot report compliance unless all have been
followed.

 Potentially Irrelevant ISAs:

o ISA 600: Only for group audits (not examinable).

o ISA 610: Not applicable without an internal audit.

o ISA 620: Only relevant if the auditor employs their own expert.

 Deviations: Auditors may deviate from ISA requirements only in exceptional circumstances,
using alternative procedures to meet the requirement's intent.

The relevant standard for audit planning is ISA 300 Planning an Audit of Financial Statements.

Planning Cycle
Planning starts after the previous audit and continues through the current one(interim stage).

 Adaptation to Changes: Auditors must adjust plans based on changes in

the business and regulatory environment.
  Interim Results Impact: Findings from interim audits can influence final audit procedures.

 Efficiency Focus: Identifying effective audit procedures before year-end is crucial.

 Continuous Reassessment: Auditors should regularly reassess strategies based on new

information and findings.

Planning activities

The auditor should develop an audit plan for the audit to reduce audit risk to an acceptably low level.
The plan will include a description of:

 The nature, timing and extent of risk assessment procedures, as determined under ISA 315.

 The nature, timing and extent of audit procedures at the assertion level to address identified
risks, as determined under ISA 330.

 Other audit procedures that must be carried out so that the engagement complies with ISAs

Time Table

Stages of an Audit
Interim Audit Final Audit

Timing Before year end At or after year end

 Interim Audit Final Audit

Required No Yes

Primarily tests of controls with Primarily substantive procedures or, when

some substantive procedures appropriate or necessary, a combination of
when risk is low, and evidence is substantive procedures and tests of
Procedures available. controls.

Evidence gathered during the final audit

Only when combined with can be used as the basis for the audit
Basis for evidence gathered during the opinion, even when no interim procedures
audit opinion final audit. have been performed.

Direction
 Purpose: Inform engagement team members about:

o Their responsibilities

o Nature of the business

o Risk-related issues

o Detailed approach to performance

o Objectives of their tasks

o Potential problems

o Matters affecting audit procedures

 Communication Tools:

o Engagement team briefing (documented, e.g., in a planning memo)

o Overall audit strategy and plan

o Audit programme

o Staffing and time budgets

Supervision
 Monitoring Progress: Ensure:

o Assistants have necessary skills and competence

o Instructions are understood and followed

o Work aligns with audit plan, programme, and budget

 o Significant accounting/auditing issues are identified and acted upon

o Differences in professional judgment are resolved

Review
 Responsibilities of Review Personnel:

o Check if work meets standards and follows the audit plan

o Assess need to revise work's nature, timing, and extent

o Ensure results are adequately documented

o Confirm audit objectives are achieved

o Validate that evidence supports the auditor's report

o Address significant audit matters and ensure resolution

o Document relevant consultations and conclusions

o Ensure conclusions are consistent with work results

o The review process should be documented as part of the working papers.

Audit Strategy and Plan Documentation

Auditors must document the overall audit strategy and plan, including any significant changes.

Audit Strategy
 Captures key decisions for planning and communication, summarized in a “planning
memorandum” detailing the scope, timing, and conduct of the audit.

Audit Plan
 Must demonstrate the planned:

o Nature, timing, and extent of risk assessment procedures

o Audit procedures for transactions, account balances, and disclosures

o Planning procedures

 Use of tailored audit programmes and checklists is essential.

Changes to the Audit Strategy and Plan

 Document reasons for any updates to the strategy and plan, including auditor responses to
new events or findings.

 Ensure the audit file supports the audit opinion.

Identifying and Assessing Risks
The relevant standard is ISA 315 (Revised 2019), Identifying and Assessing the Risks of Material
Misstatement.

The auditor must identify and assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels, thereby providing a basis for designing and
implementing responses to the assessed risks of material misstatement.

Key Steps
1. Risk Assessment Procedures:

o Understand the entity, its environment, and accounting policies.

o Identify inherent risk factors (susceptibility to misstatement).

2. Evaluate Accounting Policies:

o Ensure appropriateness and consistency with the financial reporting framework.

3. Understand Internal Controls:

o Gain insight into the components of the internal control system.

4. Identify Risks:

o Determine risks at the assertion level and financial statement level.

5. Assess Risks:

o Evaluate if any risks are significant.

6. Control Risk Assessment (Optional):

o Assess if planning to test control effectiveness.

7. Plan Audit Procedures:

o Design audit procedures per ISA 330.

Conclusion
 Auditors must understand the entity to assess the risk of material misstatement
(RoMM) and create a work programme to test for misstatements, following ISA 330 and ISA
500.

Risk Assessment Procedure

Identifies and assesses risks of material misstatement due to fraud or error.

Key Procedures

1. Inquiry: Engage with TCWG, management, and others.

2. Observation: Monitor daily activities and behaviors (e.g., audit meetings).

3. Inspection: Review external sources, internal documents, and management reports.

 4. Analytical Procedures: Compare internal/external information and identify unusual trends.

Audit risk
the risk that the auditor expresses an inappropriate audit opinion when the financial statements are
materially misstated. It is a function of the risks of material misstatement and detection risk. (ISA
200)

Risks of Material Misstatement

The auditor must consider whether the risks of material misstatement identified exist at:

 the financial statement level (i.e. affecting the financial statements overall or as a whole); or
 the assertion level for classes of transactions, account balances and disclosures (i.e.
existence, completeness, occurrence, valuation, presentation, etc of line items in the
financial statements).

By definition, risks at the financial statement level affect many assertions, which is termed
“pervasive”.

Audit Risk Model

The traditional audit risk model consists of three key components:

1. Inherent Risk (IR)

2. Control Risk (CR)
3. Detection Risk (DR)

IR and CR are assessed separately, but their combined effect indicates the risk of material
misstatement—the likelihood that controls fail to detect misstatements arising from inherent risk.

DR is often termed residual risk.

Audit firms typically set an acceptable level of audit risk (e.g., 5%), indicating a 5% chance of
undetected material misstatements or a 95% assurance that none exist.
IR and CR can be qualitatively categorized as high, medium, or low, with DR inversely related. For
instance, if both IR and CR are high, DR should be minimized through rigorous audit procedures.

Inherent risk – the susceptibility of an assertion about a class of transaction, account balance
or disclosure to a misstatement that could be material (either individually or when aggregated with
other misstatements) before considering any related controls.

-ISA 315

Control risk – the risk that a misstatement that could occur in an assertion (about a class of
transaction, account balance or disclosure) and that could be material (either individually or in
aggregate with other misstatements) will not be:

 prevented; or

 detected and corrected, on a timely basis,

-ISA 315

Detection risk – the risk that audit procedures performed to reduce audit risk to an acceptably
low level will not detect a misstatement that exists and that could be material (either individually or
in aggregate).

-ISA 200

System of internal control

The system designed, implemented and maintained by TCWG, management and other personnel to
provide reasonable assurance about:

 the reliability of financial reporting;

 the effectiveness and efficiency of operations; and

 compliance with applicable laws and regulations.

1. Control environment – includes:

 the governance and management functions; and

 the attitudes, awareness and actions of TCWG and management concerning internal
control.
 2. Entity’s Risk Assessment Process
The auditor must obtain an understanding of the entity’s risk assessment process including
how the entity:

 Identifies risks relevant to financial reporting objectives;

 Assesses the significance (including the likelihood of occurrence) of those risks; and

 Addresses those risks.

3. Information System
An information system consists of:

 physical and hardware (if IT-based) infrastructure;

 software (if IT-based);

 people;

 procedures; and

 data.

4. Control Activities
policies or procedures to achieve the control objectives of management or those charged
with governance.

5. Monitoring Process
Monitoring is a process that evaluates the effectiveness of controls and identifies and
rectifies control deficiencies.

Performance materiality
the amounts set by the auditor at less than materiality for the financial statements as a
whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the financial statements
as a whole.

 The auditor must apply the concept of materiality appropriately in planning

and performing the audit.
 Materiality is an expression of the relative significance or importance of a
particular matter in the context of the financial statements as a whole.

ISA 240 – Fraud & Error

 Error – unintentional mistakes in financial statements, including the omission of an amount
or disclosure.
  Fraud – an intentional act by one or more individuals that uses deception to obtain an
unjust or illegal advantage.

 Fraud risk factors – events or conditions that indicate an incentive or pressure to

commit fraud or provide an opportunity to commit fraud.

ISA 250 Consideration of Laws and Regulations in an

Audit of Financial Statements.
The auditor is required:

 To obtain sufficient appropriate audit evidence regarding compliance with provisions of laws
and regulations that have a direct effect on material amounts and disclosures in financial
statements;

 To perform specified audit procedures to help identify instances of non-compliance that may
have a material effect on the financial statements; and

 To respond appropriately to identified or suspected non-compliance identified during the

audit.

IT environment
The IT applications and supporting IT infrastructure, and the IT processes and personnel
involved in those processes, that are used to support business operations and achieve
business strategies.

General IT controls – controls over the IT processes that support the continued proper
operation of the IT environment, including the continued effective functioning of information
processing controls and the integrity of information (i.e. the completeness, accuracy and validity of
information) in the informationmm,,,,0

4
Information processing controls
Controls relating to the processing of information in IT applications or manual information processes
that directly address risks to the integrity of information (i.e. the completeness, accuracy and
validity of transactions and other information).

5 key skills

Control Objectives (C2A2VE)

At the assertion level, control objectives aim to ensure that only:

 authorised (Valid – V) transactions are

 promptly recorded (Complete – C) in the

 correct amount (Accurate – A) in the

 appropriate (A) accounts in the

 proper accounting period (Cut-off – C) and that

 recorded assets exist (Existence – E).

ISA 260 Communication with Those Charged with
Governance
Under ISA 260, the auditor should:

 communicate clearly with TCWG the auditor's responsibilities for the financial statement
audit, and an overview of the planned scope and timing of the audit;

 obtain from TCWG information relevant to the audit;

 provide TCWG with timely observations arising from the audit that are significant and
relevant to the auditor's responsibility to oversee the financial reporting process; and

 promote effective two-way communication between themselves and TCWG.

ISA 265 Communicating Deficiencies in Internal Control

to Those Charged with Governance and Management.
Deficiency in internal control – exists when:
 A control is designed, implemented or operated in such a way that it is unable to prevent, or
detect and correct, misstatements in the financial statements on a timely basis; or

 A control necessary to prevent or detect and correct misstatements in the financial

statements on a timely basis is missing.

Internal Audit
*has been defined at the start*

key elements related to Internal Audit and Management:

Key Elements of Internal Audit and Management

 Add Value: Organizations create value for stakeholders. Internal auditors identify operational
improvements through risk assessment.

 Control: Actions by management and the board enhance risk management and goal
achievement.

 Adequate Control: Management ensures risks are managed and objectives are achieved
effectively and economically.

 Governance Process: Stakeholders oversee risk and control processes administered by

management.
Challen
 Why and how a service is provided.
ge

 Local taxpayers, service users, partners and the wider business community in setting new performance
targets.
Consult

Compar
 Benchmark against the performance of others across a range of relevant indicators to aim to improve.
e

Compet
 Consider fair competition as a means of securing efficient and effective services.
e
Value for money auditing – the evaluation of management's achievements in terms of the
economy, efficiency and effectiveness (the "3 Es") of operations.

Best value – a duty to deliver services to clear standards – covering both cost and quality – by
the most effective, economical and efficient means available.

The best value audit has evolved from VFM auditing in the public sector and local and central
government. It seeks to secure continuous improvement in how its functions are exercised regarding
economy, efficiency and effectiveness. It incorporates the "4 Cs":

Audit evidence
All the information used by the auditor in arriving at the conclusions on which the audit opinion is
based. It includes information contained in the accounting records underlying the financial
statements and information from other sources.

 To remember the list of all of the assertions, use the mnemonic ACCA COVER OP:

ACCA COVER OP

 Accuracy  Classification  Obligations

 Completeness  Occurrence  Presentation

  Valuation

 Cut-off  Existence

 Allocation  Rights

Assertions by Category

Account Balances ("CARE PC") Transactions and Events ("COCO AP")

Completeness Completeness

Accuracy, Valuation and Allocation Occurrence

Rights and Obligations Classification

Existence Cut-Off

Presentation Accuracy

Classification Presentation

Analytical procedures
Evaluations of financial information through analysis of plausible relationships between both
financial and non-financial data, identified fluctuations or relationships that are inconsistent with
other relevant information or that differ from expected values by a significant amount.

-ISA 520 Analytical Procedures

Uses of Substantive Analytical Procedures

 Evidence: Provide suitable and sufficient audit evidence.
 Transaction Assertions: Test completeness, occurrence, classification, cut-off, and
accuracy.

 Balance Assertions: Test completeness, allocation and valuation, and existence (not
rights and obligations).

Auditor Steps
1. Assess Suitability and Sufficiency: Determine if analytical procedures are
appropriate for specific assertions.

2. Evaluate Data Reliability: Check the source, comparability, nature, relevance, and
preparation controls of the data.

3. Develop Independent Expectations: Create precise expectations of recorded

amounts or ratios to identify misstatements.
 4. Acceptable Differences: Establish the threshold for differences that can be accepted
without further investigation.

Precision in Auditor Evaluations

1. Expected Results Accuracy:
Greater consistency in gross profit margins than in discretionary
expenses (e.g., R&D, advertising).

2. Information Disaggregation:
More effective with individual operational sections than overall financial statements.

3. Information Availability:
Assess if relevant financial and non-financial data (e.g., budgets, forecasts, units
produced/sold) is available and reliable.

ISA 540 Auditing Accounting Estimates and Related

Disclosures
Accounting estimate – an approximation of a monetary amount in the absence of a precise
means of measurement.

Estimation uncertainty – the susceptibility of an accounting estimate and related

disclosures to an inherent lack of precision in its measurement

Response to Assessed Risk

The auditor should use one or a combination of the following three approaches:

1. Obtain audit evidence from subsequent events;

2. Test how management made the accounting estimate;

3. Develop an auditor’s point estimate or range.

AFTER CHAPTER 19

ISA 580 – Written Representation

Written representations – a written statement by management provided to the auditor to
confirm certain matters or to support other audit evidence.

Written representations in this context do not include financial statements, the assertions therein, or
supporting books and records.
 AFTER CHAPTER 21

Assertions for Property, Plant, and Equipment

(PPE) using "CARE":
1. Completeness
 Risks:

o Expenditures posted to expense accounts.

o Unrecorded disposals.

2. Accuracy, Valuation, and Allocation

 Key Points:

o Annual depreciation required.

o Revaluations must be verifiable; gains recognized in equity.

o Impaired assets must be written down.

o Self-constructed assets include all relevant costs.

3. Rights (Control)
 Considerations:

o Control indicated by possession, but not conclusive for ownership.

o Ownership may exist without possession (e.g., leased assets).

4. Existence
 Risks:

o Overstatement if assets do not exist (e.g., stolen).

o Overstatement from unrecorded disposals.

Assertions for Intangible Assets

1. Completeness
o Capitalize development expenditure per IAS 38.

o Disposed assets may not be recorded.

2. Accuracy, Allocation, and Valuation

 Considerations:

o Differentiate between research and development costs.

o Use appropriate valuation models.

o Calculate and expense amortization.

 o Revaluation requires active market fair value.

o Non-use may indicate impairment.

3. Rights (Control)
 Evidence:

o End-user licenses confirm usage rights.

o Income from copyrights/patents supports ownership.

4. Existence
 Verification:

o Use documentation and legal rights to confirm existence.

AFTER CHAPTER 25

Audit Considerations for Account Balances

1. Completeness
Requirement: Obtain a bank letter to confirm all balances, including loans and overdrafts.

2. Rights and Obligations

Confirmation: Bank letters should verify ownership of cash and obligations for loans and overdrafts.

3. Existence
Verification: Use direct confirmation from banks to confirm balances; physical cash in registers can be
inspected.

4. Presentation
Guideline: Loans and overdrafts should not offset bank deposits unless legally allowed by the bank
contract.

5. Classification
Classification: Ensure cash, bank accounts, and loans are classified as current or non-current in
the financial statement.