Advanced Audit and Assurance
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Advanced Audit and Assurance

The Advanced Audit and assurance covers the various roles that the Auditor actually undertakes in each Audit engagement when invited by companies. The Auditor before signing an engagement letter would have to consider various factors including Independence, Professional Capacity, Knowledge about the business, Management of the business, among other things.

Apart from these, the auditor must perform his audit work according to the International Standards on Auditing as well as the generally accepted accounting principles.

The auditor will also have to design an Audit Plan and an Audit Strategy as to how the entire work will be done as well as timing and directions of the audit

Advanced Audit and AssuranceAudit and AssuranceBusiness Management and Information SystemsCorporate FinanceCorporate ReportingManagement AccountingPublic Sector Accounting and FinanceStrategic ManagementTaxation and Fiscal Policy

PREMIUM ICAG MAY 2018 MOCK EXAMINATION

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Thank you for visiting our website today. Our team of Expert Professional Educators has put together the following  mock examination questions with suggested solutions for the May 2018 examination.

Check them out and share with other colleagues to increase their chances of passing as well.

To JOIN our class next semester, fill our Online Admission Form  or send us an Email .

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FR – 2018 QUESTIONS

FR – 2018 SOLUTION

MA – 2018 MOCK

MA – MOCK 2018 SOLUTION

PSAF – 2018 MOCK QUESTION

PSAF – 2018 MOCK ANSWERS

CSEG – MOCK QUESTIONS – 2018

CSEG – MOCK ANSWERS – 2018

FM- MOCK 2018

FM – MOCK SOLUTION

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Advanced Audit and AssuranceAudit and AssuranceBusiness Management and Information SystemsCorporate FinanceCorporate ReportingFinancial ManagementFinancial ReportingManagement AccountingPublic Sector Accounting and FinanceStrategic ManagementTaxation and Fiscal Policy

JOIN OUR REVISION SESSION

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Join our revision session for ICAG May 2018 Examination.

Thank you for visiting our website today. Our team of Expert Professional Educators has put together the following documents, analysis and revision time table for the May 2018 examination.

Our revision session comes in three segment; Revision classes, Mock examination and Mock discussion.

Check them out and share with other colleagues to increase their chances of passing as well.

To sign up for the Revision Session, fill our Online Admission Form  or send us an Email .

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Read on various subjects on our Website

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Download all your notes here

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MODULE 1 – Conceptual Framework

MAY 2018 REVISION TIME TABLE

HIRE PURCHASE ACCOUNTS

FINANCIAL STATEMENTS IN THE PUBLIC SECTOR

BUDGETING AND BUDGETARY CONTROL

1522229395606_PEH-Level-three-MAY-2018

PSAF – Solution

PSAF – Questions

PEH-Level-two-MAY-2018

PEH – Level one (MAY 2018)

MODULE 7 – Public fund

MODULE 4 – Envirnmental Analysis

MODULE 3 – Regulatory Framework

POSSIBLE EXAMINABLE AREAS – Public Sector

We wish you the very best as you write your Examination.

 

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Nhyira Premium

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Advanced Audit and AssuranceAudit and Assurance

BEST GUIDE TO QUALITY ASSURANCE SERVICES [TODAY]

assurance

Introduction

The objective of a quality assurance services/engagements are the evaluation of a subject matter that is the responsibility of another party using identified suitable criteria, and to express a conclusion that provides the user with a level of assurance about that subject matter.

Elements of assurance engagements

Whether a particular engagement is an assurance engagement will depend upon whether it exhibits all the following elements:

  • a three party relationship involving:
  • a professional accountant;
  • a responsible party; and
  • An intended user (this is the party that the report is prepared for).
  • a subject matter;
  • suitable criteria: these are the standards or benchmarks used to evaluate or measure the subject matter
  • A conclusion.

The subject matter may include:

  • Information such as historic or prospective financial information, statistical information or performance indicators.
  • systems and controls
  • behaviour such as corporate governance, compliance with regulation or human resource practices

 Level of assurance provided

  •  In an attest engagement, the conclusion relates to an assertion by the responsible party. The assertion is the responsible party’s conclusion about the subject matter based on identified suitable criteria. The professional accountant can either express a conclusion about the assertion made by the responsible party, or provide a conclusion about the subject matter in a form similar to the assertion made by the responsible party.
  •  In a direct reporting engagement, the professional accountant expresses a conclusion on the subject matter based on suitable criteria, regardless of whether the responsible party has made a written assertion on the subject matter.
  •  Professional accountants ordinarily undertake engagements to provide either a high or a moderate level of assurance. Engagements are affected by various elements, for example, the degree of precision associated with the subject matter, the nature, timing and extent of procedures, and the sufficiency and appropriateness of the evidence available to support a conclusion.
  • ‘High level assurance’ means that the professional accountant has obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria.
  •  ‘Moderate level assurance’ means that the professional accountant has obtained sufficient appropriate evidence to be satisfied that the subject matter is plausible in the circumstances.

Types of assurance services

  • an audit of financial statements
  • a review of financial statements
  • risk assessment reports
  • performance measurement reports
  • systems reliability reports
  • reports on social and environmental issues (e.g. to validate an employer’s claims about being an equal opportunities employer or a company’s claims about how ‘green’ it is)
  • reviews of internal control
  • Best value/value for money work in private/public sector organisations.

The Framework permits only two types of assurance engagement to be performed:

• A reasonable assurance engagement

• A limited assurance engagement.

Reasonable assurance engagements:

In a reasonable assurance engagement, the practitioner

  • gathers sufficient appropriate evidence
  • Concludes that the subject matter conforms in all material respects with identified suitable criteria.

We will look at this in detail on audit evidence and audit procedures, but for now let us accept that it means that the practitioner has to do enough work to be able to draw rational conclusions.

  • concludes that the subject matter conforms in all material respects with identified suitable criteria
  • Gives his report in the form of positive assurance.

This means that the report states that in the practitioner’s opinion e.g.:

  • financial statements have been prepared in accordance with applicable legislation and accounting standards
  • the company’s employment policy in respect of disabled people is in accordance with applicable legislation or guidance
  • The volume of greenhouse gasses emitting from the company’s factories is within targets set by government.

Limited assurance engagement

The practitioner:

  • gathers sufficient appropriate evidence to be satisfied that the subject matter is plausible in the circumstances
  • Gives his report in the form of negative assurance.

A NEGATIVE ASSURANCE REPORT TAKES THE FORM:

‘Nothing has come to our attention that causes us to believe that the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework’.

Not absolute assurance

It is not possible to give an absolute level of assurance because of:

  • the lack of precision often associated with the subject matter – e.g. financial statements are often subject to estimation and judgement
  • the nature, timing and extent of procedures
  • the fact that evidence is usually persuasive rather than conclusive
  • the fact that evidence is gathered on a test basis
  • even if everything reported on was examined and found to be satisfactory, there may be other items which should have been included

– The completeness problem

Work required

  • The terms of the engagement should be agreed with the party who engages the practitioner.
  •  Effective planning is required as with an audit.
  •  The criteria to be used in the engagement must be considered as they will affect the amount of work required. Suitable criteria must be relevant, reliable, neutral, understandable and complete.
  •  Sufficient appropriate evidence is required on which the conclusion is based. Sufficient documentation should be retained to provide evidence to support the conclusions reported and to show that appropriate standards were applied.

Form and content of audit reports

The international standard does not stipulate a standardised format for the report. Different wording will have to be used depending on the engagement.

A conclusion conveying a high level of assurance about the subject matter should usually be provided, with the report containing a clear expression of opinion.

Contents of audit report

The report must always include the following:

  • title;
  • addressee;
  • description of the engagement and identification of the subject matter;
  • statement to identify the responsible party and describe the accountant’s responsibilities;
  • if the report is for a restricted purpose, identification of the parties to whom it is restricted and for what purpose it was prepared;
  • identification of the standards under which the engagement was conducted;
  • identification of the criteria against which the subject matter was evaluated or measured;
  • a conclusion, including any reservations or denial of a conclusion;
  • date of the report; and
  • Name of the firm or practitioner, and the place of issue of the report.

Risk assessment

Identification of business risks and how they are managed is a favourite topic of the examiner. In practice, an audit firm might be engaged to give assurance on the management of such risks. The management of business risk is critical as directors must safeguard the assets of the entity.

Identification of risks

  • Many models are used to identify risks including:
  • Porter’s Five Forces
  • PEST analysis
  • SWOT analysis

Porter’s Five Forces

The examination of each of the five forces enable management to identify and evaluate the risks to the business. Collectively these factors determine the ability of the entity to make a profit.

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PEST Analysis

This is a way of considering external factors which may impact upon the business.

The factors are:

1.Political

  • Industry regulations
  • Taxation issues
  • Social legislation

2. Environmental/Economic

  • Inflation
  • Exchange rates
  • Interest rates

3. Social

  • Welfare issues
  • Health and safety

4. Technological

SWOT Analysis

This approach is used to analyse the business internally in order to understand its current position with a view to developing a strategic plan. The following need to be identified:

  1. Strengths
  2. Weaknesses
  3. Opportunities
  4. Threats

The idea is to match strengths with opportunities and convert weaknesses into strengths. Threats should be converted into opportunities

Analysing the risks

Risks need to be evaluated and quantified to determine how serious the risk is. ‣Risks are often prioritised as follows:

High Impact

High Likelihood

A

High Impact

Low Likelihood

B

Low Impact

High Likelihood

C

Low Impact

  • Low Likelihood
  • D

A – Immediate action is needed

B – Consider action and develop a contingency plan

C – Consider action

D – Keep under review

Control strategies will be needed to manage or mitigate the more serious risks identified.

Performance measurement

An audit firm may be asked to provide assurance on performance measures operating within a business. Performance measurement aims to establish how well something or somebody is performing in relation to previous or expected activity or in comparison with another item or body.

The ‘item’ may be a machine, a factory, a subsidiary or the business as a whole. The ‘body’ may be an employee, a manager or a group of staff.

Performance measures: Different measures are appropriate for different businesses.

Traditional financial performance measures are:

  • profit
  • revenue – costs
  • share price
  • cash flow
  • return on investment.

Financial measures do not give a full picture of a business’ performance. Increasingly entities are turning to non-financial performance measures. The Balance Scorecard is a perfect example.

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Diagram of the Balance Scorecard

Example 1

Suggest five non-financial performance measures that a manufacturing business could use internally.

Solution

Non-financial performance measures (any 5 of these)

  • Customer rejects or sales returns
  • Customer satisfaction
  • Wastage
  • Staff morale
  • Machine down time
  • Documents processed per employee

Systems reliability

Businesses are exposed to risk if their computerised systems are unreliable. An audit firm may be asked to give assurance on the reliability of the systems in operation.

Example 2

What risks is a business exposed to as a result of unreliable systems?

Solution:

Businesses are exposed to the following risks if their systems are unreliable:

  • assets are misappropriated or tampered with.
  • systems are damaged and shut down.
  • data is tampered with and unauthorised amendments made.
  • confidential data is stolen.

Electronic commerce

1.The Internet

  • Many clients now conduct their business through the Internet.

Risks associated with the Internet.

  • Entities that engage in electronic commerce are subject to additional risks. Inherent risks arising can be categorised as follows:
  • Financial: if transactions fail then an entity will have difficulty remaining in business.
  • Reputational: if the entity’s reputation is damaged, or confidence in its operations is lost, the entity will also have difficulty remaining in business.
  • Legal: new legal issues need to be faced. Breach of these could give rise to serious problems.

Entities who sell via the Internet are faced with the following potential risks:

  • customer validity: how do they know that a customer is who they say they are?
  • server reliability: the site may be subject to denial of service attacks preventing the receipt of legitimate orders.
  • data theft: firewalls can prevent this as they will deny external users the opportunity to access parts of the system.

A number of business risks are also faced including:

  • cash flow difficulties due to investment in the systems
  • loss of competitive advantage in a fast-moving market place if systems or processes fail or are suspended
  • failure of systems development
  • lack of profitability
  • customer dissatisfaction due to poor service

Assessment of internal controls

The assessment of controls becomes more complex as technology advances. The audit firm must consider the following in order to assess the system properly:

  • how many servers does the entity have?
  • what processing methods are used?
  • how is the network configured?
  • how are customers and suppliers authenticated?
  • what security methods are used?
  • how good are the general internal controls?

2. E-mail

E-mail reduces paperwork and results in speedier communication. However, there is a risk that unauthorised e-mails could result in unauthorised processing. Therefore, access controls over the system are paramount.

3. Electronic data interchange (EDI)

EDI refers to the exchange of electronic business documents between trading partners. The exchange of a fully integrated EDI system involves no papers and no human input.

The organisation needs to have controls in place to ensure that the data exchanged is authentic and secure.

Web trust

Webtrust is designed to create confidence in consumers and entities who conduct business transactions over the Internet. Having the Webtrust seal on a business web site provides some assurance that the site owner has systems in place to preserve the confidentiality and security of a credit card holder.

The owner of a web site can engage a specially licensed accountant to provide the. Web trust assurance service. This accountant must conduct an updated assurance examination of the procedures in place at the site at least once every three months.

ETHICS AND ACCEPTANCE OF APPOINTMENT

The formal definitions of the fundamental principles are as follows:

  • Integrity: Members should be straightforward and honest in all professional and business relationships.
  • Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.
  • Professional competence and due care: Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.
  • Confidentiality: Members should respect the confidentiality of information acquired as a result of Professional and business relationships and should not disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties.
  • Professional behaviour: Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.

General safeguards

  • Safeguards created by the profession (these might include education, training and experience requirements for entry into the  profession, professional development requirements, corporate  governance regulations, professional standards, monitoring, external  review of work and reports).
  • Safeguards in the work environment (such as oversight structures,  ethics and conduct programmes, good recruitment procedures, strong  internal controls, disciplinary procedures, strong ethical leadership,  policies and procedures to promote quality control, culture of strong  ethics in the organisation).
  • Safeguards created by individuals (complying with professional  development requirements, keeping records of contentious issues,  keeping a broader perspective, using a mentor, keeping in contact with  professional bodies).

Threats and there safeguards Auditing Practices Board (APB) Ethical standards ­ General Threats to objectivity

General threats to objectivity

  • Self-interest
  • Self-review
  • Familiarity
  • Advocacy
  • Intimidation
  • Management

In order to guard against the threats or perceived threats the firm needs procedures to enable it to:

  • identify possible threats
  • evaluate the risk arising from the threat
  • evaluate whether the necessary safeguards are in place
  • take corrective action if necessary.

Audit Procedures

If offered an audit role, the auditor should:

  • ask the client for permission to contact the outgoing auditor (reject role if client refuses)
  • contact the outgoing auditor, asking for any professional reasons why they should not accept appointment (if the client has caused problems, you may wish to say no to the appointment). If a reply is not received, the prospective auditor should always try and contact the outgoing auditor by other means e.g. by telephone or in perso.Even if there are professional reasons or if a reply is still not received, the prospective auditor may still choose to accept but must proceed with care and be  alert to increased risk
  • ensure that the legal requirement in relation to the removal of the previous auditors and the process is complete.
  • carry out checks to ensure the firm can be independent, is competent to do this audit and has the necessary resources
  • assess whether this work is suitably low risk (a sound knowledge of the client will be required in order to make this assessment, see below)
  • assess the integrity of the company’s directors
  • as a commercial organisation, the firm should also ensure that this client is one it wants (e.g. right industry, suitable profit margin available, etc.)
  • not accept the appointment, where it is known in advance a limitation will be placed on the scope of their audit (likewise, if a restriction is imposed during an audit, resignation should be considered). In general, the question of what constitutes a reason for not accepting nomination is one of judgement for the prospective auditor and will primarily depend on the level of risk willing to be accepted.

Engagement letters – main considerations

This is a letter written by the Auditor to management upon the acceptance of the Audit assignment after performing the initial procedures.

  • The engagement letter will be sent before the audit.
  • It specifies the nature of the contract between the audit firm and the client.
  • It minimises the risk of any misunderstanding of the auditor’s role.
  • It should be reviewed every year to ensure that it is up to date but does not need to be reissued every year unless there are changes to the terms of the engagement.
  • The auditor must issue a new engagement letter if the scope or context of the assignment changes after initial appointment.
  • Many firms of auditors choose to send a new letter every year, to emphasise its importance to clients.

The contents of the engagement letter

The contents of a letter of engagement for audit services will include the following:

  • Objective of the audit.
  • Management’s responsibility for the financial statements.
  • The scope of the audit including reference to legislation and professional standards.
  • A description of audit procedures including their inherent limitations (e.g. for the discovery of fraud and irregularities)
  • The form of reports to be issued.
  • Use of the work of internal audit.
  • Risk assessment matters.
  • The auditor’s use of specialists.
  • Deadlines.
  • Access to information.
  • Communications between the auditor and the client (e.g. form of audit report, management representations, letter of weakness, etc.).
  • A reference to other services (normally covered in a separate letter).
  • The basis of fees.
  • Complaints procedures and jurisdiction.
  • The need for co­operation and agreement of terms.

How the Auditor accepts the Audit

Professional Appointment:

1.Factors:

These are the various factors that we have to consider in relation to the audit work to be undertaken. These include:

Build up knowledge:

The auditor must have knowledge of the client’s business. That’s the nature of the business, the nature of operations, the industry, and the risks likely to be associated with such businesses and have well informed understanding of the client. We can obtained the knowledge of the business from what we already know, what management tells us, what industrial analysts have published and also from third parties.

Expertise:

Depending of the nature of the business as our knowledge of the business, we must consider the experts we will be using in our audit. Example; legal, special valuation, information system experts, among others. This has the effect on how much we charge for the audit.

Control systems of the client company:

The strength and reliability of the control systems of the client will also have to be considered. If the control systems are strong and reliable, it pre-supposes that less work may be done. However, if the control system is weak and unreliable, it means the auditor must carry out a lot of audit procedures to reach a reasonable conclusion and that also affects the fees to be charged.

Opening balance of Financial statements:

This is basically where the client company is now having its accounts audited for the first time since operations. It means that the balances brought forward from previous years may contain errors or misstatements which need to be adjusted. This also affects how much fees charged.

Management style:

The style of management or management philosophy to the preparation and presentation of financial statements as well how things are done in the organisation must be taken into consideration since this has great effect on the kind of internal controls which will be in place and how effective these control systems are.

Existing Client Relationship:

This is from the auditor’s perspective. That’s if we are auditing a super market client and then we receive appointment from a firm like West Hills Mall, then we have to ask permission from the existing client if they agree that we take the audit. If the existing client disagrees, we then have to decide which of these firms in the same industry to audit. Why are we doing this? To avoid any conflict of interest, because there may be issues that is important to each of these firms.

Pressure on Fees:

As auditors, we have to consider any pressure by the client in relation to the fees. Example; if the client says firm says unless we issue an unqualified audit report, we are not going to be paid. This may pose a lot of threats on us.

Reputation of Client Entity:

The reputation of the client company will also have effect on the audit firm when it audits the client. It means that when the client firm is having a bad reputation, the then that reputation will also have an effect on the audit firm; the reverse is true.

Advocacy Threats:

When the audit firm renders other services to the client entity, then it has to make sure that it is not perceived to be promoting the client’s business and remain independent.

Competent and Confidentiality:

The auditor firm must make sure that it has all the competent expertise to render or carry out the audit work and also be mindful of confidentiality.

Time and Deadline:

If we are require meeting a deadline by the client’s company, then we cannot lower our audit quality but allocate enough staff to audit the client entity. This is because we must keep the audit quality.

Integrity:

We must make sure that management is going to be honest and straight forward with us.

Staff and Resources:

The audit firm must ensure that the required staff and resources are available to render the audit services to the client.

Easy:

The complexity of the clients business and system will also have to be considered. This has to do with risk associated with the business.

NOTE:

This is highly examinable area and you must be able to at least list five of the above and explain them thoroughly.

To remember these, we can say “BECOME PRACTISE”.

2. Professional Clearance:

We have to make sure that we hear from the outgoing auditor and see to it that he was properly removed before we accept the audit. How do we do this?

  1. Seek client’s permission to contact the outgoing auditor (he knows what’s going on in the company).
  • If the company refuses to give us the permission or say no, then we must decline the appointment.
  • If the company grants us the permission to contact the outgoing auditor, we ask him “….. Are there any matter we should consider to become incoming auditors………?”
  • If the outgoing auditor answers “Yes” and tell us what we should consider, we as the incoming auditors will have to ask the client to explain away the issue raised by the outgoing auditor.
  • If the client cannot explain, we must decline the appointment
  • If the client explains the issue raised by the outgoing client to the best of our understanding, then we accept the appointment.
  • if the outgoing auditor answers “NO”, then we can go ahead and accept the appointment.

2. Ethics :

This is where we consider the fundamental ethics issued by The International Federation of Accountants (IFAC) and adopted by ICA-GH/ACCA-UK. These include:

Independence:

The auditor must be seen as independent both in

  • Facts: This is the real state of mind of the auditor. Example; not have any direct or indirect financial interest in the client company.
  • Appearance: The auditor should not have any close familiar relationship with the client company.

Common threats to Independence are:

  • Undue dependence on any single client or group of client
  • Overdue fees
  • Family and other personal relationships
  • Beneficial interest in shares and other investments
  • Acceptance of goods and services or hospitality

Further threats include:

  • Self – interest: for example, having a financial interest in a client
  • Self- review: for example, auditing financial statements prepared by the audit firm
  • Advocacy threat: for example, promoting the shares in a listed entity when that entity is a financial statement audit client.
  • Intimidation threat: for example, threat of replacement due to disagreement.

Another threat to independence is the provision of other services to client

  • Specialist valuation
  • Second opinion

Professional duty of Confidentiality

The general rule is that information acquired in the course of professional work not be disclosed to third parties without first obtaining the client’s permission.

Subject to the above, there are two circumstances where disclosure without client’s permission can be possible. These include:

Obligatory :

This is where members are bound to disclose information. This is under the process of the law where they are served with court summons or called as a witness to a case involving the client.

Voluntary:

These are circumstances where members are free to disclose information

In the public interest: There is no definition of “public interest”, therefore, legal advice should be taken in order to decide whether disclosure will be justified or not.

To protect a member’s interest

Authorised by statute: example; auditors are supposed to report any non- compliance with law or regulation to the proper authority.

To non- governmental bodies: This is where the NGO has a statutory power.

Quality Control:

Members must ensure that the audit work being carried out is of a high level of quality. That’s applying the International Standards on Auditing (ISA) during auditing. We can consider this from two stages:

Firm as a whole: This means when the audit firm is recruiting auditors, it must ensure that they are qualified and of good quality to perform audit work.

Individual engagement letter: We must endure as auditors that the client company is legal, has a good reputation or is not involved in any money laundering issues.

Read also: This blog, pwc-gh, kpmg – gh, accaglobal,

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Advanced Audit and AssuranceAudit and Assurance

BEST GUIDE TO BENEFITS OF AUDIT PLANNING

audit planning

INTRODUCTION

Audit Planning involves establishing the overall audit strategy for the engagement and developing an audit plan. Adequate planning benefits the audit of financial statements in several ways, including the following: (Ref: Para. A1–A3)

• Helping the auditor to devote appropriate attention to important areas of the audit.

• Helping the auditor identify and resolve potential problems on a timely basis.

• Helping the auditor properly organize and manage the audit engagement so that it is performed in an effective and efficient manner.

• Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks, and the proper assignment of work to them.

• Facilitating the direction and supervision of engagement team members and the review of their work.

• Assisting, where applicable, in coordination of work done by auditors of components and experts.

The objective of the auditor is to plan the audit so that it will be performed in an effective manner

REQUIREMENTS

Involvement of Key Engagement Team Members

 

The engagement partner and other key members of the engagement team shall be involved in planning the audit, including planning and participating in the discussion among engagement team members. (Ref: Para. A4)

PRELIMINARY ENGAGEMENT ACTIVITIES

The auditor shall undertake the following activities at the beginning of the current audit engagement:

(a) Performing procedures required by ISA 220 regarding the continuance of the client relationship and the specific audit engagement; 1

(b) Evaluating compliance with relevant ethical requirements, including independence, in accordance with ISA 220; 2 and

(c) Establishing an understanding of the terms of the engagement, as required by ISA 210.3 (Ref: Para. A5–A7)

Planning entails developing a general strategy and a detailed approach for the expected nature, timing and extent of the audit.

The primary objective of audit planning is to reduce audit risk to an acceptable level.

THE OBJECTIVES OF PLANNING ARE TO:

  • ensure that appropriate attention is devoted to the different areas of the audit;
  • ensure that potential problems are identified; and
  • facilitate review.

COMPONENTS OF AUDIT PLANNING

  1. Audit strategy
  2. Audit plan

The audit plan is the detailed procedures you will use in your audit depending on what the strategy is. This includes nature, timing and extent of audit tests that will be undertaken to gain comfort over the financial statement balances. For example- if you decide the organization is new and doesn’t have proper controls in place, you will decide not to rely on any controls and perform only substantive testing- this is AUDIT STRATEGY.

AUDIT STRATEGY

The audit strategy relates to the overall approach you will take to the audit, it decides the scope of the audit. It includes understanding the entity the risk it faces, legal framework it operates in, financial reporting standards used, among others.

Elements of Audit Strategy

Audit scope:

This refers to the amount of time and documents which are involved in an audit, is an important factor in all auditing. The audit scope, ultimately establishes hoe deeply an audit is performed. An audit scope can range from simple to complete, including all company documents.

This simply means; how much work to be done.

The work to be done depends on the financial statements as well as the auditors’ reliability on the client’s internal controls (internal audit).

Timing

This refers to when to start and end the audit as well as the time of visits.

When to start and end the audit work:

If the organisation is planning to be listed on the Stock Exchange Market (SEM), then we have to add more staff to the audit team to audit the financial statements as soon as possible. This is done to ensure that quality audit work is carried out. Due to this, the client will be charged an extra amount or higher audit fees.

      1. Time to communicate with those Charged with Governance:

The audit firm (audit team) must decide the appropriate time to communicate with those charged with governance and management. This is because; we must communicate with them before starting the audit work in order not interrupts with the day-to-day activities of the organisation.

Direction of the Audit:

This refers to how we undertake the audit. The direction of the audit depends on two things:

  1. Understanding the client company
  2. Materiality level

Understanding the Client Company:

ISA 315- Assessing the risk of material misstatement by understanding the client entity says “there are five things to do or understand about a client in order to assess the risk of material misstatement “.

When the auditor understands these five aspects, she can then assess the Risk of Material Misstatement. These include:

  1. Internal Control System:

The internal control system refers to the processes, procedures and activities designed and implemented by the management and those who are charged with governance to enable them prepare reliable financial statements.

The strength and reliability of internal control systems will affect the risk of materiality. The auditor must ask the management whether bank reconciliation statements are prepared regularly or the risk that cash balance may be misstatement.

2. External factors:

These are the factors that are in the environment or industry of the organisation or client which may cause management to be involved in some fraud or misstatements. These include the following:

  • Competition :

When the competition within an industry is high, this may reduce the profitability of the client company. As such, since management wants to satisfy shareholders and put the organisation in right standing, they may try to overstate the closing inventory. This is a risk of material misstatement.

Due to this, we can assess there will be a risk of material misstatement in closing inventory.

  • Laws and Regulation:

When there is a likelihood of new laws or regulation in the jurisdiction or industry of operation of the client company to be passed, then the activity of the company may not be conforming. This means that there should be at least a contingent asset or liability provisions in the financial statements as per IAS 37.

  • Disclosure and provisions:

There may be a risk of material misstatement on the disclosure of transactions in the financial statement of the client company as well as the provisions of the value.

Understanding company structure and Accounting policy:

The structure of the client business will have an effect on the risk of material misstatement. If the structure of the client company is such that, it has branches across the globe; Asia, Africa or Europe, and we are auditing the Consolidated Financial Statements, there may be a risk of material misstatement due to inherent risk. And this may mean the accounting policies are complex.

Company’s Performance Measurement:

How the client company assesses the performance of management to pay bonuses affects hoe financial statements will be prepared. If management’s performance is measured base on profit before tax to earn bonus, then management will try to overstate that figure. This means there is a risk of material misstatement in the profit before tax figure (a lot of mis-statements).

Company’s Strategy, Business Plan and Related Business Risks:

The client company wants to gain a competitive advantage within the industry of operations. As such, it will devise a lot of strategies to gain the competitive advantage and will have a business plan to execute the business strategy.

For example; the client company may have a strategy to become the market leader in the industry and the business plan may be to diversify in order to become the market leader (by opening new markets, outlets and reaching new customers), but as a result the new market may fail. As such, the cost will rise and revenue falls below expectation. There would be a risk of material misstatement in the profit due to overstatement of the closing inventory.

THE BIG QUESTION: “HOW CAN THE AUDITOR ASSESS THE RISK OF MATERIAL MISSTATEMENT BY UNDERSTANDING THE ENTITY?”

THE ANSWER:

To enable the auditor to assess the risk of material misstatement by understanding the client, the auditor carries out the following audit procedures:

a. Analytical procedures

The auditor should apply analytical procedures at the planning stage, throughout the audit and at the overall review stage of the audit.

Analytical procedures include the following type of comparisons:

  • prior periods
  • budgets and forecasts
  • predictive estimates
  • industry information
  • relationships between elements of financial information i.e. ratio analysis
  • financial and non-financial information e.g. the relationship between payroll costs and the number of employees.

b. Enquiry from management

c. Inspection (some specific documents)

d. Observation (a process)

e. Recalculation or re-performance. (AEIOU)

MATERIALITY LEVEL

A misstatement or omission can be considered material if, individually or in aggregate, it would reasonably be expected to influence the economic decisions of users of the financial statements.

Materiality is concerned not just with size / value but also with the nature of the matter and the circumstances of the entity.

Materiality can be seen in two ways;

  1. Preliminary Materiality Level:

The auditor set materiality for the financial statements as a whole. However, a figure can be material or significant based on two things:

    1. By nature (IAS 24 related party transactions): a failure to disclose this will be material to the auditor.
    2. By amount: a figure can be material in the Statement of Financial Position or the Statement of Comprehensive Income.

The level of materiality set at the planning stage will always be a matter of professional judgment. Most firms set criteria for guidance – a benchmark. For example:

  • between 1/2% and 1% turnover( SOCI)
  • between 1% and 2% of net assets (SOFP); or
  • between 5% and 10% of net profit.(SOCI)

If using a benchmark approach, the auditor should consider:

  • The elements of the financial statements
  • Whether there are matters upon which users are likely to focus
  • The nature of the entity, its life cycles and the industrial / economic environment
  • The ownership structure and the way the entity is financed
  • The relative volatility of the benchmark

EXAMPLE;

If a balance is 5% of total assets and 0.3% of revenue and 6% of Profit before Tax (PBT).

Is the amount material to SOFP?

YES: The amount exceeds the preliminary level set by the auditor hence material.

Is the amount material to SOCI?

YES: This is because; it exceeds the 5% of PBT the auditor has set even though it is below the percentage set for revenue.

If a balance is 0.3% of revenue, is it material?

Answer: No. this is because it does not exceed the 0.5% of total revenue the auditor has set.

  1. Performance Materiality :

This is the materiality level that the auditor sets, when performing the audit work which is quite below the preliminary materiality level.

For instance; since the auditor has to perform his audit work with an attitude of professional scepticism, and the auditor sets a preliminary materiality of say “8%”, he then sets the performance materiality level as say “5%”. So any amount between this is considered material and would require more audit procedures.

NOTE: The levels chosen for materiality and for performance materiality will depend on the confidence the auditor has in the client’s figures. Therefore, the level of risk attaching to the client will influence the levels of materiality used.

The materiality level will impact on three areas:

        1. the nature and extent of audit tests.
        2. whether to seek adjustments; and
        3. the degree of any audit report qualification.

Nature:

The nature of the audit is that we are performing the audit as per International Standards on Auditing (ISA) to do the work. And we must issue or give positive assurance to the client.

What is the difference between Positive Assurance and Negative Assurance?

Positive Assurance:

It means the auditor has performed a lot of audit work. It will usually take the audit team about three to four months to complete the audit work. It means the audit has been performed according to ISA.

Negative Assurance:

It means the audit team hasn’t done a lot of work. It is usually a short time. It means the audit team performed the audit according to International Standards on Review Engagement (ISRE).

Purpose

The auditor must determine why the audit work is been carried out. The reason for the audit to the audit firm may be;

 

  • Business common sense; the audit firm wants to make money
  • The audit firm must ensure that ethical issues are appropriately dealt with.

Importance of Audit Strategy

It is used to direct the entire audit process. The importance of the audit strategy may include:

  • To determine which audit approach to adapt. Either a control testing or substantive testing approach.
  • To determine the allocation of resources to enable the audit team carry out an efficient and effective audit work to enhance audit quality.
  • To enable the auditor to have a detailed audit plan for the audit.

AUDIT PLAN

The audit plan is the detailed procedures you will use in your audit depending on what the strategy is. The audit strategy will enable the auditor to have a detailed plan for the audit.

There are three issues to be considered when deciding on the audit plan. These include:

  1. Risk assessment
  2. Materiality
  3. Audit procedures
  4. Risk Assessment ( Risk Equation):

ISA 400 states that the Auditors should

  • obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach and,
  • use professional judgement to assess audit risk and to design audit procedures to ensure it is reduced to an acceptably low level.

Audit risk (AR) is the ultimate risk that the audit opinion is inappropriate, after completion of all audit procedures.

It is made up of two component parts:

  • material misstatement risk, and
  • detection risk (DR)

Material misstatement risk is the combination of inherent risk (IR) and control risk (CR)

Let us now take these risks one after the other and explore on them.

Audit Risk

This is the risk that the auditor may give inappropriate audit opinion on financial statements.

Inherent Risk

This is the risk that there may be material misstatement in the financial statements due to the complex nature of the entity.

This is the susceptibility of an account balance or class of transaction to material misstatement either individually or when aggregated with misstatement in other balances or classes assuming that there were no related internal controls.

EXAMPLE 1

Suggest circumstances or factors that would cause you to believe that the level of inherent risk attaching to your client was higher than usual.

Solution

Factors indicating a high level of inherent risk

  • Lack of integrity among directors and management
  • Lack of experience and knowledge among management and staff
  • Changes in management during the year
  • Usual pressure on management
  • A complex business
  • high technology inventory being held
  • multiple locations
  • industry factors such as new competitors entering the market
  • a high volume of cash transactions
  • poor quality accounting systems

Control Risk

This is the risk that the financial statements may be materially misstated due to the inadequacy of the internal controls to prevent, detect and control material misstatements or fraud.

The auditor should make a preliminary assessment of control risk and should plan and perform tests of control to support that assessment.

Detection Risk

It is the risk that the auditors’ audit procedures may not be able to detect material misstatements in the financial statements if they exist.

It can also be defined as the risk that the auditors’ substantive procedures fail to detect a material misstatement in an account balance or class of transaction. It is primarily a consequence of the fact that the auditors do not, and cannot, examine all available evidence.

The auditors’ control risk assessment, together with their assessment of inherent risk will influence the nature, timing and extent of substantive procedures needed to reduce detection risk, and therefore overall audit risk, to an acceptable level.

The detection risk comes from two sources:

Sampling risk:

This is one of the many types of risks an auditor faces when performing the necessary procedures of audit sampling. Audit sampling exists because of the impractical and costly effects of examining all or 100% of client’s records or books. As a result, a sample of the client’s accounts is examined.

Non – sampling risk

This is the opposite of sampling risk. It is an aspect of audit risk that results from an incomplete examination of the available data. It is the failure of an auditor to catch a mistake or a misstatement in the financial statements. This may be caused by either misinterpreting the evidence or misapplying procedures that are inappropriate.

EXAMPLE 2:

You are the audit manager for Vortex Ltd, an entity involved in the manufacture and sale of clothing for teenagers. Half of its sales are on credit to a variety of outlets and the other half are through its own chain of shops. Staff are chosen for their youth, enthusiasm and knowledge of the fashion scene.

Identify the inherent risks that may arise and suggest appropriate controls to reduce the impact of these risks.

Answer

Risks

• Inventory may be unsaleable due to its nature

• Staff may be unreliable

• Sales are on a cash basis

• There are numerous locations

Controls Needed

• Market research to identify trends and reduce the risk of unsold inventory.

• Obtaining character references for staff together with careful interview procedures.

• Regular reports to head office coupled with visits from the internal auditors.

• Staff training on accounting and entity policies.

THE BIG QUESTION:

In The Exams Hall, How Can You Find And Threat Issues In Relation To Audit Risk, Inherent Risk Or Control Risk?

THE BIG ANSWER:

TO DO THAT,

  1. State the accounting issues
  2. The risk of material misstatements.

EXAMPLE

“The government paid a grant of $10m when the client company purchased an asset of $100m in Nov. 2009. The useful life of the asset is 10 years. “- an extract from ACCA past question

Required: state the audit risk.

Solution

To answer this question, we first consider

  1. The accounting issues: That’s how the transaction should be treated in the financial statement.

According to IAS 20 – Government Grants, on receipt of grant it should be deferred over the useful life of the asset.

On receipt:

Particulars Debit ($) Credit ($)
Property, Plant & Equipment 100
Cash (cost of asset) 100
Cash 10
Deferred income (grant received ) 10

At the end of year 1

Particulars Debit ($) Credit ($)
Income statement (Depreciation- 100/10) 10
Property, Plant & Equipment 10
Deferred income – $10/10 years 1
Income statement 1

Risk: This simply means, what could go wrong in the treatment of the government grant in the financial statements of the client company?

The accountant may be inefficient or competent and may recognise the total amount of the government grants as income in the year 1’s financial statements. There is a risk that the grant hasn’t been deferred over the life of the asset and this will lead to an understatement of liability and overstatement of the profit figure. This is the impact this misstatement will have on the financial statements of the client.

Example:

The auditor is the first to audit this company”. State the audit risk.

There is an audit risk that because of lack of experience of an auditor, the auditor may fail to detect the fraud and errors within the client’s entity since this is a first audit work of the client.

Understand the business risk: to do this,

  • Have information about the business risk
  • State why it is a business risk
  • There may be a risk that revenue or profit may fall
  • There may be a risk that the reputation of the client entity may be impaired or damage
  • The risk that shareholders’ wealth will be decrease as well.

Example: BUSINESS RISK

“There are some significant breaches in hygiene standards in the kitchen following a health and safety inspection. “ – What’s the business risk?

ANSWER: To answer this question, we must do two things; copy the information & state why it is a business risk.

So how do we then write our answer to the above question?

A failure to comply with health and safety inspection would be a business risk that the company would end up paying penalties or fines and this will decrease the profit as well.

Materiality

The auditor must decide whether an item or a transaction in the financial statements is material or not. For instance; if there is a share- based payment expenses of say $5m, then we have to take the amount and consider the materiality against profit or revenue; and if the PBT is $10m, then it accounts for about 50% of PBT and hence material to the Statement of Comprehensive Income (SOCI).

Audit Procedures

These are the various activities that the auditor undertakes in order to understand the client company as well as gather evidence to express an opinion of the financial statements. These include:

Analytical procedures:

The auditor should apply analytical procedures at the planning stage, throughout the audit and at the overall review stage of the audit.

 Analytical procedures include the following type of comparisons:

  •  prior periods
  • budgets and forecasts
  • predictive estimates
  • industry information
  •  relationships between elements of financial information i.e. ratio analysis
  •  financial and non-financial information e.g. the relationship between payroll costs and the number of employees

The auditors should apply analytical procedures at the planning stage to assist in understanding the entity’s business and in identifying areas of potential risk.

 When intending to apply analytical review as a substantive procedure, the auditor needs to consider the following factors

  •  objectives of the analytical review procedures
  •  the nature of the information and the degree to which the information can be sub- divided e.g. apply procedures to divisions or products rather than the overall results.

 

  • the comparability, availability, reliability and source of information
  1. Enquiry :

The auditor must enquire from management and those charged with governance about the internal controls as well as how financial statements are prepared to well understand the client entity.

  1. Inspection:

The audit must inspect specific documents in relation to the client company at the planning stage as well as throughout the audit work.

  1. Observation :

With this, the auditor observes how a certain process is carried out within the client company.

  1. Recalculation or Re performance

With this, the auditor checks the arithmetic accuracy of transactions in the financial statements as well as other documents such as invoices among others.

WHEN THE AUDIT IS CARRING OUT THE AUDIT PROCEDURES, HE MUST DECIDE AMONG OTHERS;

  • The actions to take
  • The documents to consider
  • The assertions to be tested.

Further reads: accaglobal, icaew, this blog

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Advanced Audit and AssuranceAudit and Assurance

REPORTING FRAUD

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REPORTING FRAUD

Reporting fraud that may come to the notice of the auditor during her audit procedures to gather sufficient and appropriate audit evidence has to be reported to the right party or authority.

Reporting to third parties

  • Auditors should also consider whether the matter should be reported to a proper authority in the public interest (e.g. regulatory or enforcement agencies).
  • If, after obtaining legal advice, the auditors conclude that the matter ought to be reported to an appropriate authority in the public interest, they should notify the directors in writing of their view and, if the entity does not report the matter or is unable to provide evidence that the matter has been reported, they should report it themselves.
  • Where a suspected or actual instance of fraud casts doubt on the integrity of the directors, auditors should make a report direct to the proper authority in the public interest without delay, informing the directors in advance.
  • The following matters should be taken into account when deciding whether disclosure is justified in the public interest:

 

  1. the extent to which the suspected or actual fraud is likely to affect members of the public
  2. whether the directors have rectified the matter or are taking, or are likely to take, effective corrective action.
  3. the extent to which non-disclosure is likely to enable the suspected or actual fraud to recur.
  4. the seriousness of the matter; and
  5. the weight of evidence and the degree of the auditor’s suspicion that there has been an instance of fraud.

 

 

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Advanced Audit and AssuranceAudit and Assurance

PROFESSIONAL APPOINTMENT

Audit-Procedures-and-Techniques – Copy

PROFESSIONAL APPOINTMENT

Professional appointment refers to the process through which an auditor is appointed and the various factors that the auditor must consider before accepting the audit.

  1. Factors (continued)
  • Pressure on Fees:

As auditors, we have to consider any pressure by the client in relation to the fees. Example; if the client says firm says unless we issue an unqualified audit report, we are not going to be paid. This may pose a lot of threats on us.

  • Reputation of Client Entity:

The reputation of the client company will also have effect on the audit firm when it audits the client. It means that when the client firm is having a bad reputation, the then that reputation will also have an effect on the audit firm; the reverse is true.

  • Advocacy Threats:

When the audit firm renders other services to the client entity, then it has to make sure that it is not perceived to be promoting the client’s business and remain independent.

  • Competent and Confidentiality:

The auditor firm must make sure that it has all the competent expertise to render or carry out the audit work and also be mindful of confidentiality.

  • Time and Deadline:

If we are require meeting a deadline by the client’s company, then we cannot lower our audit quality but allocate enough staff to audit the client entity. This is because we must keep the audit quality.

  • Integrity:

We must make sure that management is going to be honest and straight forward with us.

  • Staff and Resources:

The audit firm must ensure that the required staff and resources are available to render the audit services to the client.

  • Easy:

The complexity of the clients business and system will also have to be considered. This has to do with risk associated with the business.

 

 

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Advanced Audit and AssuranceAudit and Assurance

PROFESSIONAL APPOINTMENTS

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PROFESSIONAL APPOINTMENTS

Professional appointments are very important since it inform the auditor about the various factors that must be considered before accepting an audit appointment.

  1. Factors:

These are the various factors that we have to consider in relation to the audit work to be undertaken. These include:

  • Build up knowledge:

The auditor must have knowledge of the client’s business. That’s the nature of the business, the nature of operations, the industry, and the risks likely to be associated with such businesses and have well informed understanding of the client. We can obtained the knowledge of the business from what we already know, what management tells us, what industrial analysts have published and also from third parties.

  • Expertise:

Depending of the nature of the business as our knowledge of the business, we must consider the experts we will be using in our audit. Example; legal, special valuation, information system experts, among others. This has the effect on how much we charge for the audit.

  • Control systems of the client company:

The strength and reliability of the control systems of the client will also have to be considered. If the control systems are strong and reliable, it pre-supposes that less work may be done. However, if the control system is weak and unreliable, it means the auditor must carry out a lot of audit procedures to reach a reasonable conclusion and that also affects the fees to be charged.

  • Opening balance of Financial statements:

This is basically where the client company is now having its accounts audited for the first time since operations. It means that the balances brought forward from previous years may contain errors or misstatements which need to be adjusted. This also affects how much fees charged.

  • Management style:

The style of management or management philosophy to the preparation and presentation of financial statements as well how things are done in the organisation must be taken into consideration since this has great effect on the kind of internal controls which will be in place and how effective these control systems are.

  • Existing Client Relationship:

This is from the auditor’s perspective. That’s if we are auditing a super market client and then we receive appointment from a firm like West Hills Mall, then we have to ask permission from the existing client if they agree that we take the audit. If the existing client disagrees, we then have to decide which of these firms in the same industry to audit. Why are we doing this? To avoid any conflict of interest, because there may be issues that is important to each of these firms.

 

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Advanced Audit and AssuranceAudit and Assurance

AUDIT PROCEDURES

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AUDIT PROCEDURES

Audit procedures are the various procedures that the auditor use in the gathering of audit evidence.

If offered an audit role, the auditor should:

  • ask the client for permission to contact the outgoing auditor (reject role if client refuses)
  • contact the outgoing auditor, asking for any professional reasons why they should not accept appointment (if the client has caused problems, you may wish to say no to the appointment). If a reply is not received, the prospective auditor should always try and contact the outgoing auditor by other means e.g. by telephone or in perso.Even if there are professional reasons or if a reply is still not received, the prospective auditor may still choose to accept but must proceed with care and be  alert to increased risk
  • ensure that the legal requirement in relation to the removal of the previous auditors and the process is complete.
  • carry out checks to ensure the firm can be independent, is competent to do this audit and has the necessary resources
  • assess whether this work is suitably low risk (a sound knowledge of the client will be required in order to make this assessment, see below)
  • assess the integrity of the company’s directors
  • as a commercial organisation, the firm should also ensure that this client is one it wants (e.g. right industry, suitable profit margin available,  etc)
  • not accept the appointment, where it is known in advance a limitation will be placed on the scope of their audit (likewise, if a restriction is imposed during an audit, resignation should be considered). In general, the question of what constitutes a reason for not accepting nomination is one of judgement for the prospective auditor and will primarily depend on the level of risk willing to be accepted.

 

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