Chapter 1: The concept of audit and other assurance engagements

1) Explain the five elements of an assurance engagement

In accordance with ISAE 3000 Assurance Engagements other than Audits or Reviews of Historical Financial
Information, an assurance engagement will involve three separate parties:
The intended user who is the person who requires the assurance report.
The responsible party, which is the organisation responsible for preparing the subject matter to be
reviewed.
The practitioner (i.e. an accountant) who is the professional who will review the subject matter and provide
the assurance.
A second element is a suitable subject matter. The subject matter is the data that the responsible party has
prepared and which requires verification.
Suitable criteria are required in an assurance engagement. The subject matter is compared to the criteria in order
for it to be assessed and an opinion provided.
Sufficient appropriate evidence has to be obtained by the practitioner in order to give the required level of
assurance.
An assurance report is the opinion that is given by the practitioner to the intended user and the responsible party.

2) Explain the kind of assurance you could give in the context of the request by the bank.
You would inform management that it would not be possible to give a report on the accuracy of the cash fl ow
forecast. The forecast is an assessment of cash fl ows in the future which is uncertain, particularly in the second
year.
The bank should be informed that the kind of report that you could give is a limited assurance or negative
assurance report.
You would be able to state in your report the kind of work you had carried out, the assumptions that management
had made and then to give a negative form of assurance in which you would state, among other things, that
nothing had come to your attention that would cause you to believe that the assumptions do not provide a
reasonable basis for the cash forecast. You could then go on to say that the forecast has been properly prepared on
the basis of the assumptions.
This is assuming that this kind of opinion is appropriate in the light of the work you have performed.

3) Identify and explain the level of assurance provided by an external audit and other
review engagements
Levels of assurance
The level of assurance provided by audit and other review engagements is as follows:
Audit
External Audit A high but not absolute level of assurance is provided, this is known as reasonable assurance. This
provides comfort that the financial statements are true and fair and are free of material misstatements.
Other review engagements
Other review engagements where an opinion is being provided, the practitioner gathers sufficient evidence to be
satisfied that the subject matter is plausible; in this case negative assurance is given whereby the practitioner
confirms that nothing has come to his attention which indicates that the subject matter contains material
misstatements.

4) Explain the concept of TRUE and FAIR presentation

True and Fair presentation
Financial statements are produced by management which give a true and fair view of the entitys results. The
auditor in reviewing these financial statements gives an opinion on the truth and fairness of them.
Although there is no definition in the International Standards on Auditing of true and fair it is generally considered
to have the following meaning:

True Information is factual and conforms with reality in that there are no factual errors. In addition it is assumed
that to be true it must comply with accounting standards and any relevant legislation. Lastly true includes data
being correctly transferred from accounting records to the financial statements.
Fair Information is clear, impartial and unbiased, and also reflects plainly the commercial substance of the
transactions of the entity.

Chapter 2: Statutory audit and regulation

1) Explain the status of International Standards on Auditing
International Standards on Auditing
International Standards on Auditing (ISAs) are issued by the International Auditing and Assurance Standards Board
(IAASB) and provide guidance on the performance of an audit.
ISAs only apply to the audit of historical financial information. They are written in the context of an audit of
financial statements by an independent auditor.
The ISAs contain basic principles and essential procedures together with related guidance in the form of
explanatory material and appendices. It is necessary to consider and understand the entire text of an ISA to
understand and apply the basic principles and essential procedures.
The basic principles and essential procedures of an ISA are to be applied in all cases. If in exceptional cases the
auditor deems it necessary to depart from an ISA to achieve the overall aim of the audit, then this departure must
be justified.
Chapter 3: Corporate Governance

1) Explain what is meant by corporate governance and why it is important

Corporate governance
Corporate governance is the system by which companies are directed and controlled. According to the UK
Corporate
Governance Code the purpose of corporate governance is to facilitate effective, entrepreneurial and prudent
management that can deliver the long-term success of the company.
Corporate governance considers the responsibilities of directors, how the board of directors should be run and
structured, the need for good internal controls and the relationship with external auditors.
It is important for companies to consider good corporate governance principles as often it is management or those
charged with governance who run the company, but the owners are the shareholders and they are not involved in
the running of the business.
For these shareholders their only opportunity to raise concerns is at the annual general meeting, which only occurs
once a year and often attendance is low.
Shareholders need to ensure that their needs are taken into account by management, and that there is a process in
place for them to be informed as to how the business is operating.

2) Discuss the benefits to Conoy Co of forming an audit committee.

Benefits of audit committee in Conoy Co
Assistance with financial reporting (no finance expertise)
The executive directors of Conoy Co do not appear to have any specific financial skills as the financial director has
recently left the company and has not yet been replaced. This may mean that financial reporting in Conoy Co is
limited or that the other non-financial directors spend a significant amount of time keeping up to date on financial
reporting issues.
An audit committee will assist Conoy Co by providing specialist knowledge of financial reporting on a temporary
basis at least one of the new appointees should have relevant and recent financial reporting experience under
codes of corporate governance. This will allow the executive directors to focus on running Conoy Co.
Enhance internal control systems

The board of Conoy Co do not necessarily understand the work of the internal auditor, or the need for control
systems. This means that internal control within Conoy Co may be inadequate or that employees may not
recognise the importance of internal control systems within an organisation.
The audit committee can raise awareness of the need for good internal control systems simply by being present in
Conoy Co and by educating the board on the need for sound controls. Improving the internal control climate will
ensure the need for internal controls is understood and reduce control errors.
Reliance on external auditors
Conoy Cos internal auditors currently report to the board of Conoy Co. As previously noted, the lack of financial
and control expertise on the board will mean that external auditor reports and advice will not necessarily be
understood and the board may rely too much on external auditors
If Conoy Co report to an audit committee this will decrease the dependence of the board on the external auditors.
The audit committee can take time to understand the external auditors comments, and then via the non-executive
director, ensure that the board take action on those comments.
Appointment of external auditors
At present, the board of Conoy Co appoint the external auditors. This raises issues of independence as the board
may become too familiar with the external auditors and so appoint on this friendship rather than merit.
If an audit committee is established, then this committee can recommend the appointment of the external auditors.
The committee will have the time and expertise to review the quality of service provided by the external auditors,
removing the independence issue.
Corporate governance requirements best practice
Conoy Co do not need to follow corporate governance requirements (the company is not listed). However, not
following those requirements may start to have adverse effects on Conoy. For example, Conoy Cos bank is already
concerned about the lack of transparency in reporting.
Establishing an audit committee will show that the board of Conoy Co are committed to maintaining appropriate
internal systems in the company and providing the standard of reporting expected by large companies. Obtaining
the new bank loan should also be easier as the bank will be satisfied with financial reporting standards.
Given no non-executives independent advice to board
Currently Conoy Co does not have any non-executive directors. This means that the decisions of the executive
directors are not being challenged by other directors independent of the company and with little or no financial
interest in the company. The appointment of an audit committee with one non-executive director on the board of
Conoy Co will start to provide some non-executive input to board meetings. While not sufficient in terms of
corporate governance requirements (about equal numbers of executive and non-executive directors are expected)
it does show the board of Conoy Co are attempting to establish appropriate governance systems.
Advice on risk management
Finally, there are other general areas where Conoy Co would benefit from an audit committee. For example, lack of
corporate governance structures probably means Conoy Co does not have a risk management committee. The
audit committee can also provide advice on risk management, helping to decrease the risk exposure of the
company.

3) Describe TWO specific responsibilities of those charged with governance

Those charged with governance are responsible for overseeing:
the strategic direction of the entity
obligations related to the accountability of the entity. This includes overseeing the financial reporting
process.
promotion of good corporate governance
risk assessment processes
the establishment and monitoring of internal controls
compliance with applicable law and regulations
Implementation of controls to prevent and detect fraud and errors.

4) Explain FOUR examples of matters that might be communicated to them by the auditor
General audit matters that might be communicated to those charged with governance are addressed in ISA 260:
(1) The auditors responsibilities in relation to financial statement audit.
This would include:

A statement that the auditor is responsible for forming and expressing an opinion on the financial
statements.
That the auditors work is carried out in accordance with ISAs and in accordance with local laws and
regulations.

(2) Planned scope and timing of the audit.

This would include
The audit approach to assessing the risk of serious misstatement, whether arising from fraud or error.
The audit approach to the internal control system and whether reliance will be placed on it.
The timing of interim and final audits, including reporting deadlines.
(3) Significant findings from the audit.
This heading could include:
Significant difficulties encountered during the audit, including delays in obtaining information from management.
Material weaknesses in internal control and recommendations for improvement.
Audit adjustments, whether or not recorded by the entity that have, or could have, a material effect on the
entitys financial statements. For example, the bankruptcy of a material receivable shortly after the yearend that should result in an adjusting entry.
(4) A statement on independence issues affecting the audit.
This would include:
That the audit firm has ensured that all members of the audit team have complied with the ethical standards of
ACCA.
That appropriate safeguards are in place where a potential threat to independence has been identified.
(Tutorial note: The lists of examples listed under the above headings are not exhaustive and in practice many more
specific matters would be communicated to those charged with governance such as:
Modifications to the audit report.
Any management representation points requested.
Cases of suspected/actual fraud.)

5) Explain why it is important that auditors communicate throughout the audit with those
charged with governance
Importance of reporting to those charged with governance
In accordance with ISA 260 Communication with Those Charged with Governance, it is important for the auditors to
report to those charged with governance as it helps in the following ways:
(1) It assists the auditor and those charged with governance in understanding matters related to the audit, and in
developing a constructive working relationship. This relationship is developed while maintaining the auditors
independence and objectivity.
(2) It helps the auditor in obtaining, from those charged with governance, information relevant to the audit. For
example, those charged with governance may assist the auditor in understanding the entity and its environment, in
identifying appropriate sources of audit evidence and in providing information about specific transactions or events.
(3) It helps those charged with governance in fulfilling their responsibility to oversee the financial reporting process,
thereby reducing the risks of material misstatement of the financial statements.

6) Describe THREE examples of matters that the auditors may communicate to those
charged with governance.

Matters to be communicated to those charged with governance

The auditors responsibilities with regards to providing an opinion on the financial

statements and that they have carried out their work in accordance with International
Standards on Auditing.
The auditor should explain the planned approach to the audit as well as the audit
timetable.
Any key audit risks identified during the planning stage should be communicated.
In addition, any significant difficulties encountered during the audit should be
communicated.

Also significant matters arising during the audit, as well as significant accounting
adjustments.
During the audit any significant deficiencies in the internal control system identified
should be communicated in writing or verbally.
Those charged with governance should be notified of any written representations
required by the auditor.
Other matters arising from the audit that are significant to the oversight of the financial
reporting process.
If any suspected frauds are identified during the audit, these must be communicated.
If the auditors are intending to make any modifications to the audit opinion, these
should be communicated to those charged with governance.
For listed entities, a confirmation that the auditors have complied with ethical standards
and appropriate safeguards have been put in place for any ethical threats identified.

Chapter 4: Professional Ethics