Professional Documents
Culture Documents
Lecture 1
TUTOR:
Learning Objectives
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Introduction to Paper F 8 Examination
The aim of Paper F8, Audit and Assurance is to develop knowledge and
understanding of the process of carrying out the assurance engagement and
its application in the context of the professional regulatory framework.
Examination Structure
This question will always be based on a scenario, and will be broken down
into a series of sub-questions, which will examine a range of audit
procedures. Candidates will need to analyse the scenario to identify the
appropriate points to make in their answers.
The use of computers will be present and questions on this area will be based
on computerised systems. Detailed knowledge of how to use computer-
assisted audit techniques (CAATs) will not be expected. Questions will focus
on specific income statement and balance sheet entries. Possible questions
will cover audit procedures, identification of system weaknesses, writing of
management letters, and whether systems meet their objectives (internal
audit focus).
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2. Short factual questions based on International Standards on Auditing
(ISAs) and other key areas (10 marks)
Do not rote learn ISAs, but understand the key principles underlying auditing.
Use columnar format where appropriate and break down answers into
manageable sections.
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The purpose of assurance for financial and non-financial information.
Levels of assurance
What is an audit?
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True = information is
Fair = Information is
Materiality:
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Materiality depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement.
It is important that the auditors ensure that the financial statements are free
from material error for the following reasons:
1. Not objective
2. Items checked on a sample basis.
3. Provides opportunity for collusion or fraud.
4. There is a time lag between preparation of financial statements and
the audit report.
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Types of Audits
1. External audit:
(i) The external audit derives from the separation of the ownership and
management of
assets. Those who own assets wish to ensure that those to whom they have
entrusted control are using those assets efficiently. This is known as the
‘stewardship’ function.
(ii) The requirement for an independent audit helps to ensure that financial
statements are free of bias and manipulation for the benefit of users of
financial information.
(iv) The requirement for a statutory audit is a public interest issue: the public
is invited to invest in enterprises, it is in the interests of the capital markets
(and society as a whole) that those investing do so in the knowledge that
they will be provided with ‘true and fair’ information about the enterprise.
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This should result in the efficient allocation of capital as investors are able to
make rational decisions on the basis of transparent financial information.
(v) The requirement for an audit can help prevent investors from being
defrauded, although there is no guarantee of this because the external audit
has inherent limitations. Reducing the possibility of false information being
provided by managers to owners is achieved by the requirement for external
auditors to be independent of the managers upon whose financial statements
they are reporting.
2. Internal audit:
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An audit is distinguished from the following engagements:-
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2 2. Understand the entity being audited.
3 3. Assess risk.
4 4. Plan the audit and make assessments of materiality.
5 5. Gather Audit evidence.
6 6. Make judgements and express opinion.
Audit Committee
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The advantages of an audit committee:
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1. As the audit committee will be made up mainly from non-executive
directors, the board may see this as a means of decreasing their power
and possibly letting other people run the company. Or the audit
committee must be seen as fulfilling a supporting role for the main
board.
2. Cost. The audit committee will increase the expenditure of the
company as the non-executive directors will require some
remuneration due to their additional responsibilities.
1. Appointment of auditors
- The directors may appoint the first auditor until the next AGM.
- The directors have a power to fill any casual vacancy before the next
AGM as a result of death, removal or resignation of the auditors.
- The shareholders are ultimately responsible for appointing auditors at
each AGM.
- The director’s of the company on behalf of the shareholders fixes the
auditor’s remuneration.
2. Removal of auditors:
1 (i) Those shareholders wishing to remove the auditors must give special
notice of an ordinary resolution.
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3 (ii) The auditor has the right to speak at the meeting.
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2 (iii) On removal, the auditors have a duty to make a written statement of the
circumstances connected with the removal which they think should be
brought to the attention of the shareholders’ and creditors’.
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4 (iv) The directors must circularise this to all shareholders and file a copy with
the regulatory authority.
5 (v) The ex-auditor has the right to attend the AGM at which their office would
normally have ended.
4. Auditor’s duties:
- Give a true and fair view of the company’s financial statements and also the
going concern of the company.
- The auditor should consider whether the director’s report is consistent with
the information in the financial statements.
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- The financial statements are properly prepared in accordance company
legislation and relevant accounting standard.
6. Qualifications of auditors:
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4 - Individual should hold appropriate qualification.
5 - The audit practice should be controlled by qualified accountants who
are the members of ACCA or ICA.
6 - Must be registered as an auditor with the ACCA or ICA.
7 - The auditor should be a fit and proper person and comply with
professional rules of conduct.
1. Integrity
2. Objectivity
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A professional accountant should be fair and should not allow prejudice or
bias, conflict of interest or influence of others to override objectivity.
Objectivity principle requires that member’s objectivity must be beyond
question and this can only be assured if the member is and is seen to be
independent.
Family include spouse, minor children, brothers and sisters and their
spouses, adult children and their spouse, relatives to whom regular
financial assistance is given and ex-employees.
1 2. The firm, its partners or staff have any financial interest in an audit
client;
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4 6. There are overdue fees.
Members should carry out their professional work with due skill, care,
diligence and expedition and with proper regard for the technical and
professional standards expected of them.
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not use or disclose any such information without proper and specific authority
or unless there is a legal or professional right or duty to disclose.
The actual disclosure will depend on the laws of the jurisdiction where the
auditor is located.
The auditor may also be obliged to provide information where a court
demands disclosure. Refusal to provide information is likely to be considered
contempt of court with the auditor being liable for this offence.
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2 - The obligation to refrain from any conduct which might bring discredit
to the profession requires IFAC member bodies to consider, when
developing ethical requirements, the responsibilities of a professional
accountant to clients, third parties, other members of the accountancy
profession, staff, employers, and the general public.
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4 Technical Standards professional accountant should carry out
professional services in accordance with the relevant technical and
professional standards.
6. Conflicts of interest
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and it may be difficult for one of the companies to find a new
auditor, quickly.
(iii) The auditor should not resign unless forced to do so – this might be
prejudicial to the interests of one of the clients.
(iv) It is important in such cases that different teams of staff, and
different engagement partners work on the respective audits.
(v) Internal procedures within the firm should be set up to prevent
confidential information from one client being transferred to the
other and the interests of one firm damaging the interests of the
other. Such procedures are known as ‘Chinese Walls’.
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1 (ii). A member of the assurance team being, or having recently been,
an employee of the assurance client in a position to exert direct and
significant influence over the subject matter of the assurance engagement;
1 (iii). Performing services for an assurance client that directly affect the
subject matter of the assurance engagement; and
Example of self review threat: If the auditors are to implement new control
systems then they will also be auditing those systems as part of the statutory
audit. They must therefore ensure that different staff implement and audit
the systems. Preferably different departments in the firm should undertake
the work. If insufficient staff are available then the audit firm must refuse the
additional systems work.
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2. Familiarity threat: occurs when, by virtue of a close relationship with
an assurance client, its directors, officers or employees, a firm or a
member of the assurance team becomes too sympathetic to the
client’s interests.
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a position to exert direct and significant influence over the subject matter
of the assurance engagement.
4 (iii) A former partner of the firm being a director, officer of the assurance
client or an employee in a position to exert direct and significant influence
over the subject matter of the assurance engagement.
5 (iv) Long association of a senior member of the assurance team with the
assurance client.
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1 (iii). Undue dependence on total fees from an assurance client.
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5. Advocacy threat: This arises when member of the audit team promotes
or seems to promote an audit client opinion or position (for example
selling or underwriting in financial matters for audit client or acting as
the clients advocate in a legal proceeding).
6. Association Threat: This arises when the audit firm is likely to associate
itself with a client whose business has yet to be confirmed as being legal or
ethical. If the client is extending their product line, the auditors will have to
determine the likelihood that the product is legal. The audit firm may not
wish to be associated with a company producing illegal products.
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Before accepting an appointment, the auditor should ensure that they
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Letter of Engagement
ISA 210 The letter of engagement must define the terms of Audit
Engagement
Purpose:
Steps:-
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Contents of letter of engagement:
(i). Report to the members whether the financial statement prepared by the
directors is showing true and fair view.
(ii). To check whether the directors keep books and records adequately and
that relevant information is received from the director’s with regards to the
branches not visited.
1 (iv) To ensure that they have received all the relevant information and
explanation from the directors of the company before an opinion is formed.
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3 (v) To check the directors report is consistent with the financial statements.
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(i). Audit work must comply with auditing standards.
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Internal Audit Function
The internal activity is designed to add value to and improve the operations
of an organisation. The internal auditor reports to management.
On the other hand, the external auditor expresses an opinion on the financial
statements and reports to the shareholders.
Internal Auditors should be assumed to members of the ACCA and are bound
by the rules of professional conduct.
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1. Risk Management Role– this involves monitoring the overall process of
risk management and in providing assurance that the systems have
been designed to meet objectives and that they operate effectively. A
large part of the management of risks, and the proper exercise of
stewardship, involves the maintenance of proper controls over the
business. Controls over the business as a whole, and in relation to
specific areas, include the effective operation of an internal audit
function.
Fraud is a key business risk and internal auditor can assist in prevention
and detection of fraud.
Internal audit can help management manage risks in relation to fraud and
error, and exercise proper stewardship by:
1. Commenting on the process used by management to identify and classify
the specific fraud and error risks to which the entity is subject and help
management to develop and implement that process.
2. Commenting on the appropriateness and effectiveness of actions taken by
management to manage the risks identified and help management to
develop appropriate actions by making recommendations.
3. Periodically auditing or reviewing systems or operations to determine
whether the risks of fraud and error are being effectively managed.
4. Monitoring the incidence of fraud and error, investigate serious cases and
make recommendations for appropriate management responses.
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2. Monitoring Role - Value for money audit (VFM): is an assignment that
internal audit can undertake on behalf of management as part of the
monitoring role. VFM audit can be carried out on any area of the business.
Since a VFM audit is concerned with obtaining the best possible combination
of products/services for the least resources, it measures three qualities:-
Besides VFM, internal audit can also monitor best value to ensure that the
authority has systems in place to achieve best value. Best value implements
4 C’s instead of the 3 E’s of a VFM audit.
• Challenge – monitor how well and why a service is provided.
• Compare – to other authorities.
• Consult – targets should be set in consultation with tax payers and
service users.
• Compete – involve in fair competition.
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development process, change management, networks, asset
management, capacity management, access control, operational
system and E-business.
Outsourcing the Internal Audit Function to an outside source. Audit firms offer
internal audit services as part of their portfolio.
Advantages of outsourcing:-
1. Service provider can provide the necessary expertise for internal audit
work. They may be able to provide a broader range of expertise and
specialist skills and as they serve many different clients therefore staff
may be available for specialist work that the company may not be able
to afford.
2. If internal audit is only required for specific functions or particular jobs
each year then the expertise can be purchased as required. This will
minimise the companies in-house costs.
3. They can direct their own work and educate management as to the
service required.
4. Provides an immediate team.
5. Can be appointed for a specific timescale
6. Outsourcing will remove the need for training internal staff. Effectively
training will be provided for ‘free’ as the outsourcing firm will be
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responsible for keeping staff up-to-date with new auditing techniques
and processes.
7. An independent view will be provided that may identify control
weaknesses that the internal audit department may miss.
Disadvantages of outsourcing
Internal audit department can assist the directors with the implementation of
good corporate governance in an organisation through:
(i) Reviewing reports to the board and reports produced by the board
to ensure that they do present a balanced assessment of the
company’s position and prospects. The internal audit department
will have good knowledge of the operations of the company as well
as access to accounting information. The department can
effectively ‘audit’ board reports to ensure they are accurate and
understandable.
(ii) Internal controls. The board need to maintain a sound system of
internal control. The internal audit department will be able to
review existing controls and recommend improvements to ensure
this objective is met.
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(iii) Application of ISA and IASs. The board need to have a policy for
applying appropriate International Statements on Auditing (ISA) and
International Accounting Standards (IAS) to the organisation.
Internal audit will be aware of new auditing standards and will have
the technical expertise to identify changes required by accounting
standards.
(iv) Amendments to control systems for new auditing standards and
financial accounting systems for new accounting standards can
therefore be recommended.
(v) Communication with external auditors. The corporate governance
code requires communications with external auditors normally be
via the audit committee, although the board must maintain an
appropriate relationship with the external auditors. However,
internal and external auditors can also work together to ensure that
the internal control system is sufficient; possibly by external audit
delegating work to internal audit, and each auditor reviewing the
work of the other auditor. The board will therefore receive reports
from both sets of auditors which will be accurate because they have
been properly checked.
(vi) Communication to the board. The internal auditor can also check
that appropriate information is provided to the board from the
external auditor. ISA 260 Communications of audit matters with
those charged with governance provides a list of matters which
should be communicated to the board and the internal auditor can
work with the external auditor to ensure that this information is
provided.
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Role of external auditor in respect to evaluating and testing the work of the
internal auditor include:
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