Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

P7
Advance Audit and
Assurance
Comprehensive Notes

P7

Advance Audit and Assurance

TABLE OF CONTENT

CHAPTER 1: REGULATORY ENVIONMENT----------------------------------------------------------------------2
CHAPTER 2: PROFESSIONAL AND ETHICAL CONSIDERATION--------------------------------------------11
CHAPTER 3: PRACTICE MANAGEMENT------------------------------------------------------------------------37
CHAPTER 4: RISK, EVIDENCE AND WRITTEN REPRESENTATION----------------------------------------46
CHAPTER 5: GROUP AUDIT----------------------------------------------------------------------------------------67
CHAPTER 6: REPORTING-------------------------------------------------------------------------------------------74
CHAPTER 7: OTHER ASSIGNMENTS-----------------------------------------------------------------------------81

1 | Page

P7

Advance Audit and Assurance

Chapter 1

Regulatory Environment

What’s in this chapter?

1
...
Money laundering
•
•
•
•
•

Definition
How money is laundered
Money Laundering and accountants
Money laundering procedures
Change in Audit firm

2 | Page

P7

Advance Audit and Assurance

Laws and Regulations:
Effect on the determination of material amounts and disclosures in the FSs
...
Those that have a direct effect
They could relate to the following:
• The form and content of financial statements
• Industry specific financial reporting issues
• Accounting for transactions under government contracts
• The accrual or recognition of expenses for income tax or pension costs
((Obtain sufficient appropriate evidence regarding compliance))
2
...

In accordance with ISA 315, the auditor shall obtain a general understanding of:
➢
➢
➢
➢

The applicable legal and regulatory framework
How the entity complies with that framework
Use the existing knowledge of the entity's industry and business
Enquire of management concerning the entity's policies and procedures
regarding compliance with laws and regulations
➢ Enquire of management as to the laws or regulations that may be expected
to have a fundamental effect on the operations of the entity (i
...
they may
cause the entity to cease operations or call into question the entity's
continuance as a going concern
...
g
...

Discuss with management the policies or procedures adopted for
identifying, evaluating and accounting for litigation claims and assessment
Enquiring of management and, where appropriate, those charged with
governance, as to whether the entity is in compliance with such laws and
regulations
Inspecting the correspondence, if any with the relevant licensing or
regulatory authorities
Read board minutes
Making enquiries of management and in house/external legal advisor
regarding litigation, claims and assessment
Performing test of details of transactions, account balances, or disclosures
Obtain written representation regarding all known instances of noncompliance or suspected non-compliance with laws and regulations whose
effect should be considered when preparing the FSs have been disclosed to
the auditor
...


•

If the auditor suspects that those charged with governance are involved in noncompliance, they should communicate the matter with the next higher level of
authority at the entity e
...
the audit committee or supervisory board
...


•

To the users of the auditor's report: lf the auditor concludes that the non-compliance
has a material effect on the FSs, and has not been adequately reflected in the FSs, the
auditor shall express qualified opinion or an adverse opinion or disclaimer on the FSs
...
The auditor may consider it
appropriate to obtain legal advice to, determine appropriate course of action
...

How money is laundered:
There are essentially 3 stages in laundering money:
1
...
E
...
using cash intensive business, such as betting shop or a
used car dealership, to disguise ‘dirty’ money as legitimate revenue
...
Layering: This is passing the money through a large number of transactions or
‘layers’ so that it becomes very difficult to trace to its original source
...
g
...

3
...
The criminal now has ‘clean’ money which can be spent or invested
...

For example, there are a number of regulations relevant to professionals such as accountants
which accountants must therefore complete with relating to appointing money laundering
officers and making reports of suspicions of money laundering
...
It is also a
criminal offence to prejudice a money laundering investigation by letting the person being
investigated know something is happening, this offence is called Tipping off
...
Although there is some legal protection given, some of these
requirements appear to be at odds with the accountant’s duty of confidentiality to a client
...
This includes guidance on:
•Internal controls and policies relating to staff training
•Client identifications procedures
•Record keeping (minimum 5 years)
•Recognition of what constitutes suspicion
•Reporting of suspicious transactions and
•Not tipping off potential suspects
Money laundering Procedures within Firm
Before accepting a client, the firm should carry out the following Procedures:
•
•
•
•
•

Establish the Identity of the entity and its business activity e
...
by obtaining a certificate
of incorporation
If the client is an individual, obtain official documentation including a name and address,
e
...
by looking at photographic identification such as passports and driving license
Consider whether the commercial activity makes business sense (i
...
it
...
g
...


After acceptance, the firm should obtain 'know your client' information such as:
•
•
•
•

The expected patterns of the company's business, are there peak seasons for selling
products, are there any major clients or suppliers?
The business model of the company
...


7 | Page

P7

Advance Audit and Assurance

Internal controls, risk assessment, management and monitoring
The firm should establish systems and controls to effectively manage the risk that the firm is
exposed to in terms of money laundering activities
...


Change in Audit Firm:
This includes the factors due to which audit client consider changing the Audit Firm
1
...

•
•

Perceived to be too high-lf directors of a company believe that audit is a necessary evil,
they will seek to obtain it for as little money as they can
...
lt is possible that a company could be paying their
audit firm a fee that they consider reasonable for an audit, but they just believe that
another firm could give them a better audit for a similar fee
...

➢ He might receive a competitive tender which offers him far more than he receives
from his current auditor and he changes his auditor
...


8 | Page

P7

Advance Audit and Assurance

2
...
Size of the Company
a) Client experiences rapid growth
The auditor may not able to provide the audit for several reasons:
➢ Insufficient resources
➢ Staff
➢ Time
➢ Fee level issue
b) Client restructures in such a way that it no longer required statutory audit
➢ The client has chosen no ' longer to take advantage of the audit

9 | Page

P7

Advance Audit and Assurance

4
...


10 | P a g e

P7

Advance Audit and Assurance

Chapter 2

Professional and Ethical
Consideration
...
Ethics
•

Types and Conceptual Framework of Ethics

2
...
Fraud
•
•
•

Its Procedures
Responses
Reporting

4
...
Expectation Gap
•
•

How it can be reduced
Its criticism

11 | P a g e

P7

Advance Audit and Assurance

ETHICS
There are two types of Ethics
1-IFAC code of Ethics
2-ACCA code of ethics and Conduct
Both have developed a ‘principles based approach’ rather than rules based
approach

Advantages of Principles based approach:
•
•
•
•

It places onus on the auditor to actively consider every given situation, rather than just
agreeing a checklist of forbidden items
...

It allows for the variations that are found in every individual situation
It can accommodate a rapidly changing environment

Conceptual Framework
There are two things to consider in this section
1
...
Threats to independence and there Safeguards

1
...

➢ 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
...

12 | P a g e

P7

Advance Audit and Assurance

➢ 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 or specific authority or unless there is a legal
or professional right or duty to disclose
...

➢ Professional behavior: Members should comply with relevant laws and regulations and
should avoid any action that discredits the profession
...
Threats to independence and there Safeguards
Self Interest: This threat arises when Firm/Member interested in the client financially or
personally
...


•

Financial interest (direct or
indirect)
i
...
holding shares in the
client or being a trustee of
the trust the hold shares in
the client

To keep the client
happy to ensure
further work
...


Safeguards
The fee must be based on
pre-determined basis of
work required
...

• Comply with all
applicable Standards
and guidelines
...

13 | P a g e

P7

Close business
relationships

•
•

•

Employment with the audit
client

Being joint venture
partner
Marketing of
combined
products/services
Being distributor
marketer of the
client

Reasons could be

Advance Audit and Assurance

Rule:
Unless the interest is clearly
insignificant, an assurance
provider should not
participate in such a
venture
...


•

An audit staff
member might be
motivated by a
desire to impress a
future possible
employer

•

Safeguards:
A former audit
if no significant connection:
partner turned
• Modifying the audit plan
Finance Director
• Assigning individual to
has too much
the audit team who,
knowledge of the
have sufficient
audit firm's systems
experience in relation to
and procedures
the individual who has
when a key audit
joined the client or
partner joins the
• Having an independent
audit client a public
professional accountant
interest entity
former member of the
audit team
...

• A senior or managing
partner joining an audit
client unless, twelve
months have passed
since the individual was
the Senior or Managing
Partner (Chief Executive
or equivalent) of the
firm
...
Except to
perform the role of
company secretary for an
assurance client, if the role
is essentially administrative
...


There is a self-interest
threat when a member of
the audit team is evaluated
on selling non-assurance
services to the client
...
If the rule is violated
inadvertently then:
• Notify the firm
immediately
• Remove the member
from the team
• Exclude the member
from any significant
decision making
• Undertake a quality
control review
...

Safeguards:
• Removing the member
from the audit team; or
• Having the team
member's work
reviewed by a
professional accountant
...

16 | P a g e

P7

Loans, guarantees and
overdue fees

Contingent fees

The auditor will have fear of
not getting paid so will keep
the client happy to ensure
payment

Advance Audit and Assurance

Rule:
No loans or guarantees
allowed to or from client
that is not a bank or
Similar institution
...
Examples include:
• Making disclosures to
the audit committee
about the fees
•

•

Reviewing or
determination of the fee
by an unrelated third
party
Quality control policies
and procedures

17 | P a g e

P7

Advance Audit and Assurance

Dependence on client
The auditor will have a fear of losing a lot of income therefore will appease the client
Possible safeguards include:
• Reducing the dependency on the client;
• External quality control reviews; or
• Consulting a third party, such as a professional regulatory body or a professional
accountant, on key audit judgments
...

• Arrange for a review to be conducted, either by an external professional
accountant or by a regulatory body
...

If total fees significantly exceed 15%, then a post-issuance review may not be sufficient,
and a pre-issuance review will be required
...

Temporary Staff
The audit client must be
• Conducting an
additional review of the
assignments Staff may be
responsible for directing
work performed by the
loaned to an audit client,
and supervising the
loaned staff
but only for a short period
activities of the loaned
• Not giving the loaned
of time
...

staff audit responsibility
assume management
for any function or
responsibilities
...

Receipt/Payment of
Creates self interest
Evaluated the significance
referral fees
threat to objectivity
of threat and apply
and professional
safeguards when
competency and due care
necessary, like:

18 | P a g e

P7

Advance Audit and Assurance

•

Custody of client monies or
other assets

Self interest threat to
professional behaviour and
objectivity

Disclosing to the audit
committee
• Obtaining agreement
from the client for
commission
arrangements
Rule:
Don’t assume custody of
client monies or other
assets unless permitted to
do by law
...

Threat
Former employee of client

General other services

Preparing accounting
records and financial
statements

Safeguard
The individual having joining assurance firm significant
influence in the period under review or the previous two
years
...
If an individual is
involved with the client prior the time period mentioned
above safeguards:
• Obtaining a quality control review of the individual’s
work on the assignment
• Discussing the issue with the audit committee
Accountants are not allowed to:
Authorize or execute a transaction Decision making on behalf
of management Reporting in a management capacity to the
board
In other cases safeguards include:
• Ensuring non-assurance team staff are used for these
roles
• Involving an independent professional accountant to
advise
• Quality control policies on what staff are and are not
allowed to do for clients
• Making appropriated disclosures to those charged with
governance
• Resigning from the assurance engagement
Rule:
Public interest clients: Not allowed unless an emergency
arises
...

The Code divides taxation services into four categories:
• Tax return preparation does not generally threaten
independence, as long as management takes
responsibility for the returns
...
For non-public
interest entities, it is acceptable to do so provided that
safeguards are applied
...
g
...
However, if the
effectiveness of the tax advice depends on a particular
accounting treatment or presentation in the financial
statements, the audit team has reasonable doubt about
21 | P a g e

P7

•

Advance Audit and Assurance

the accounting treatment, and the consequences of the
tax advice would be material, then the service should not
be provided
...
However if the firm is acting as
an advocate of the client and the effect of the matter is
material to the financial statements to be audited the
firm is not permitted to act
...


Familiarity threat: Occurs when, because of a close relationship, members become too
sympathetic to the interests of others
...

Possible safeguards include:
• Rotating the senior personnel off the audit team
• Having a professional accountant who was not a member of the audit team review the
work of the senior personnel Regular independent Internal or external quality reviews of
the engagement
...
If an individual is a key audit partner for
seven years, they must be rotated off the audit for two years
...
If key partner continuity is particularly beneficial to
audit quality, and there is some unforeseen circumstance (such as the intended engagement
partner becoming seriously ill), then the key audit partner can remain on the audit for an
additional year, making eight years in total
...
However if the individual has served the audit client as a key audit partner for six or
more years when the client becomes a public interest entity, the partner may continue to serve
in that capacity for a maximum of two additional years before rotating off the engagement
...
g
...

Advocacy Threat
Arise in those situations where the
assurance firm promotes a position or
opinion to the point that subsequent
objectivity is compromised
...

• Corporate finance work, e
...
, if the
audit firm was involved in 'advice on
debt reconstruction and negotiated
with the bank on the client's behalf
...
In addition the Code does not
allow the appointment of a partner or an
employee of the firm as General Counsel’ for
legal affairs of an audit client
...

Intimidation means a threat arising when the auditor’s conduct is influenced by fear or threats
...

Examples:
• Dismissal from a client engagement
...

• Litigation
• Second opinion
• A firm being pressured to reduce inappropriately the extent of work performed in order
to reduce fees
...

23 | P a g e

P7

Advance Audit and Assurance

•

A professional accountant being informed by a partner of the firm that a planned
promotion will not occur unless the accountant agrees with an audit client's
inappropriate accounting treatment
...


Confidentiality
The circumstances where accountants are or may be required to disclose confidential
information or when such disclosure may be appropriate:
IFAC
a) Disclosure is permitted by law and is authorized by the client or the employer
b) Disclosure is required by law, for example:
• Provision of evidence in the course of legal proceedings; or
• Disclosure to the appropriate public authorities of infringements of the law that come to
light; and
c) There is a professional duty or right to disclose, when not prohibited by law:
• To comply with the quality review of a member body or professional body;
• To respond to an inquiry or investigation by a member body or regulatory body
• To protect the professional interests of a professional accountant in legal proceedings;
or
• To comply with technical standards and ethics requirements
...

What type of communication is expected and to whom it should be addressed
Legal liability as a result of disclosure
Appropriateness of the recipient

24 | P a g e

P7

•
•
•
•
•
•
•

Advance Audit and Assurance

As per ACCA-Factors to be considered while disclosing in the public interest
The size of the amounts involved and the extent of likely financial damage
...

The possibility or likelihood of repetition
The reasons for the client’s unwillingness to make disclosures to the authority
...

2) takeover situation, must not:
• Be principle advisors to either party
• Issue reports other than their audit report
The different parties allowed having clients in competition with each other
Rule: Where acceptance or continuance of any engagement would materially prejudice the
interests of any client, the appointment should not be accepted or continued
...

At the planning stage of any audit
...

Whenever additional, non audit services are provided to an audit client
...


Professional Liability
The auditor's liability
Liability may be:
• Criminal:
• accepts appointment without being qualified to act;
• involved in fraud;
• guilty of "insider dealing"; or
• other offences
• Civil
• Contract or
• Tort of negligence
Negligence
Is a common law concept, It seeks to provide compensation to a person who has suffered loss
due to another person’s wrongful neglect
...

• This duty of care was breached
...
In the case of negligence in relation to
financial advisers/auditors, this loss must be pecuniary (i
...
financial) loss
...

Duty of care exists?
Automatic
Breached?
Must be proved
Loss arising?
Must be proved

26 | P a g e

P7

Advance Audit and Assurance

Third parties
The key difference between third parties and the company is that third parties have no contract
with the audit firm
...

Duty of care exists?
Must be proved
Breached?
Must be proved
Loss arising?
Must be proved
A very important case is Caparo Industries plc Vs Dickman and Others 1990, the Conclusion was
that the auditors of a public company's accounts owed no duty of care to members of the
public at large who relied upon the accounts in deciding to buy share in the company
...

Recent developments In the US appear to try to redress the balance of liability by highlighting
the responsibilities of management with regard to published financial statements
...


How to avoid negligence litigation
• Client acceptance procedures are very important; particularly the screening of new
clients and the use of engagement letters
...
Firms should make sure that all audits are carried out in
accordance with professional standards and best practice
...
This includes not just controls over individual audits but also stricter
'whole-firm procedures
• Issue of appropriate disclaimers
...
This is an attempt to restrict the duty of care of audit
firm to the shareholders of the company, thereby attempting to restrict legal liability to that
class of shareholders
...


27 | P a g e

P7

Advance Audit and Assurance

Liability limitation agreement:
Is a contractual limitation of the auditor's liability to a company? There are several possible
implications for the profession which are discussed below
1) Audit quality
Audit quality could suffer as a result
...

2) Value of the audit opinion
As a consequence of the point above, many argue that users of the financial statements will
place less reliance on the audit opinion, resulting in less credible financial statements
...
This is
a response to the fact that if the audit firm has reduced its risk exposure, then the fee for
providing the audit service should be reduced
...
Bigger audit firms
may have the ability to set a high cap, which creates a disadvantage to smaller audit firms
...

How to restrict the liability
1) Professional Indemnity insurance
Professional indemnity insurance is insurance against civil claims made by clients and third
parties arising from work undertaken by the firm
...

ACCA requires that firms holding practicing certificates and auditing certificates have
professional indemnity insurance with a reputable insurance company
...
The insurance must
cover 'all civil liability incurred in connection with the conduct of the firm's business by the
partners, directors or employees
...


28 | P a g e

P7

Advance Audit and Assurance

Advantage to the auditor
Is that it provides some protection against bankruptcy in the event of successful litigation
against the firm
...

Disadvantages:
- This might encourage auditors to take less care than:
• Would otherwise be the case
• Their professional duty requires
- There are limits of cover (linked with the cost of buying the insurance) and any
compensation arising from a claim could be higher than those limits
...

- The regular cost of the insurance to the partnership
...
It does this by defining a liability limitation agreement, which is a contractual
limitation of the auditor's liability to a company, requiring shareholder agreement by resolution
and only effective if it is fair and reasonable
...
For the agreement to be
valid it cannot cover more than one financial year
...

It Is currently open to negotiation between auditors and their client companies as to what form
the agreement will take, for example, a liability cap (fixed or variable), or proportionate liability
but the Act leaves it open for the government to issue regulations in future as to the nature of
these agreements
...
This is
where member firms are part of a larger structure, often sharing a name (or using a similar
name) and professional resources
...


30 | P a g e

P7

Advance Audit and Assurance

FRAUD
An intentional act by one or more individuals
Risk of non-detection of material misstatement is higher in case of fraud because of:
• Schemes to conceal it case study
...

Our Concern
Fraud that causes a material misstatement in the financial statements:
1) Fraudulent financial reporting
Intentional misstatements including omissions
...
g
...
The auditor is responsible for maintaining professional
skepticism throughout the audit
...

Risk of material misstatement due to fraud-Risk assessment procedures
Discussion among team members
The discussion itself usually includes:
• An exchange of ideas between the engagement team about how fraud could be
perpetrated
• A consideration of circumstances that might be indicative of aggressive earnings
management
• A consideration of known factors that might give incentive to management to commit
fraud
• A consideration of management's oversight of employees with access to cash/other
assets
• A consideration of any unusual/unexplained changes in lifestyle of management
...

The auditor shall make inquiries of management, and others within the entity as appropriate,
to determine whether they have knowledge of any actual, suspected or alleged fraud affecting
the entity
...

Unless all of those charged with governance are involved in managing the Entity:
• The auditor shall obtain an understanding of how those charged with governance
exercise oversight of management's/processes for identifying and responding to the
risks of fraud in the entity and the internal control that management has established to
mitigate these risks
• The auditor shall make inquiries of those charged with governance to determine
whether they have knowledge of any actual, suspected or alleged fraud affecting the
entity
...

• Any unusual relationship during analytical procedures
• Evaluating whether any fraud risk factors are present

32 | P a g e

P7

Advance Audit and Assurance

ISA 330 Overall responses-Assessed risks of fraud
• Assign and supervise appropriate staff
• Evaluate the accounting policies
• Unpredictability in the selection of audit procedures
• The auditor shall design and perform audit procedures to:
1
...

2
...
For significant transactions outside the normal course of business, evaluate whether
they have been entered into to engage in fraudulent financial reporting or to conceal
misappropriation of assets
...
Management Assessment of the risk of fraud
2
...


33 | P a g e

P7

Advance Audit and Assurance

Responsibility for Compliance
➢ It is the responsibility of management (with oversight from those charged with
governance) to ensure a client's operations are conducted in accordance with laws and
regulation
➢ The auditor is not, and cannot be held responsible for preventing non-compliance
...
It is the responsibility of management (with oversight from those charged with
governance) to ensure a client's operations are conducted in accordance with laws and
regulation:
The following policies and procedures, among others, may assist / management in the
prevention and detection of non-compliance with laws and regulations
...

2
...

Certain factors will increase the risk of material misstatements due to non- compliance
with laws and regulations not being detected by the auditor

...

• Non-compliance may involve conduct designed to conceal it, such as collusion,
forgery, deliberate failure to record transactions, management override of controls
or intentional misrepresentations being made to the auditor
...


34 | P a g e

P7

Advance Audit and Assurance

Expectation Gap
x

This term is used to describe the difference between the expectations of those who rely upon
audit reports concerning audit work performed and actual work performed
...

Specific issues may include:
• Perception that it is the auditor's duty to prevent and detect fraud
• Perception that the auditor is liable for any errors in the financial statements
...

Narrowing the Expectation Gap
The expectation gap could, theoretically, be narrowed in two ways
...
Educating users- the auditor's report as outlined in ISA 700 includes an
explanation of the auditor's responsibilities
...
One suggestion is that auditors could highlight
circumstanced where they have had to rely on directors' representations
...

2
...

Suggestions for expanding the auditor’s role have included:
• Requiring auditors to report to boards and audit committees on the adequacy of
controls to prevent and detect fraud
•

Encouraging the use of targeted forensic fraud reviews

•

Increasing the requirement to report suspected frauds

35 | P a g e

P7

Advance Audit and Assurance

Narrowing the Expectation Gap- Criticism
Research indicates that extra work by auditors with the inevitable extra costs is likely to
make little difference to the detection of fraud because:
➢ Most material frauds involve management
...

➢ Management fraud is unlikely to be found in a financial statement audit
...

Example of Offences
• Handling the proceeds of criminal activities
• Arranging the acquisition or use of criminal property
...

• Tipping off- when the Money Laundering Reporting Officer (MLRO) or any individual
discloses something that might prejudice any investigation

36 | P a g e

P7

Advance Audit and Assurance

Chapter 3

Practice Management

What’s in this chapter?

1) Audit Engagement
•
•
•

Procedures accepting Audit engagement
Agreeing the terms of audit engagement
Contents of Audit proposal

2) Quality Control ISA 220
•
•

At firm level
At individual assignment

37 | P a g e

P7

Advance Audit and Assurance

Audit Engagement
The client request for a tender
or audit proposal

The client asked for nomination
in the AGM

Certain factors are considered
before submission of audit
proposal

Procedures before accepting nomination
Obtain the following information (through 'meeting or otherwise)
...


Ensure professionally qualified to act:
Consider whether disqualified on legal or ethical grounds
Ensure Existing resources adequate:
• Consider available time, staff and technical expertise
• Does the proposed timetable for the work fit with the current work plan?
• Does the firm have suitable personnel available?
• Where will the work be performed and is it accessible/cost-effective?
• Are (non accounting) specialist skills necessary?
• Will staff need further training to do the work?
• If so, what is the cost of that further training?
38 | P a g e

P7

Advance Audit and Assurance

ISQC 1(Competence of the firm)
• Do firm personnel have knowledge of relevant industries/subject matters?
• Do firm personnel have experience with relevant regulatory or reporting requirements,
or the ability to gain the necessary skills and knowledge effectively?
• Does the firm have sufficient personnel with the necessary capabilities and
competence?
• Are experts available, if needed?
• Are individuals meeting the criteria and eligibility requirements to perform t
engagement quality control review available where applicable?
• Is the firm able to complete the engagement within the reporting deadline?
Ensure professionally qualified to act:
Consider whether disqualified on legal or ethical grounds
Ensure Existing resources adequate:
Consider available time, staff and technical expertise

ISQC 1
The identity and business reputation of the client's principal owners, key management, related
parties and those charged with governance
...

➢ Information concerning the attitude of the client's principal owners, key management,
those charged with governance towards matters such as aggressive interpretation of
accounting standards/internal control environment
...

➢ Indications of an inappropriate limitation in the scope of work
...

➢ The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm
...
If client allowed then
communicate with the present auditors to know whether here are any professional ethical
reasons why we should not accept nomination
...
Determine whether the financial reporting framework is acceptable
...
statements, the nature of
the financial statements, and
...

2
...

➢ Internal control that is necessary to enable the preparation of financial
statements which are free from material misstatement
...

• Agreement that management acknowledges and understands its responsibilities for the
following, is not obtained:
➢ Preparing of FSs
➢ Internal control
➢ Providing access to all information

Contents of an Audit Proposal
An assessment of the needs of the prospective client
The tender document should outline the requirements of the client, for example, each
subsidiary is required to have an individual audit on its financial statements, and that the
consolidated financial statements also need to be audited; The firm may choose to include here
a brief clarification of the purpose and legal requirement of an audit
...
e
...
In
addition, invoicing and payment terms should be described, e
...
if the audit fee is payable in
installments, the stages when each installment will fall due
...
Here the firm will describe
how the audit would be conducted, ensuring that the needs of the client % have been met
...
For
example:
▪ How the firm would intend to gain business understanding at group and subsidiary level
...

▪ Procedures used to assess the control environment and accounting systems
...
g
...

▪ How the firm would structure the audit of the consolidation of the group financial
statements and how they would liaise with subsidiary audit teams
...


41 | P a g e

P7

Advance Audit and Assurance

A brief outline of the firm
This should include a short history of the firm, a description of its organizational structure, the
different services offered by the firm (such as audit, tax, corporate; finance etc), and
...
The document should; also state whether it is a member
of any international audit firm networks the firm should describe the areas in which the firm
has particular experience of relevance to the client
...
In addition, the firm should clarify the approximate number of
staff to be used in the audit team and the relevant experience of the key members of the audit
team
...

Communication with management
The firm should outline the various reports and other communication that will be made to
management as part of the audit process
...

Timing
The firm should outline the timeframe that would be used
...

Quality control
The firm should emphasize the importance of quality control and therefore should explain the
procedures that are used within the firm to monitor the quality of the audit services provided
...


42 | P a g e

P7

Advance Audit and Assurance

Acceptance procedures
Procedures after accepting nomination
▪ Ensure Current auditor has resigned
▪ Ensure new auditor's appointment is valid
▪ Prepare and submit engagement letter
The audit engagement letter
The letter shall include the following:
▪ The objective and scope of the audit
▪ The auditor's responsibilities
▪ Management's responsibilities
▪ Indication of the applicable financial reporting framework
▪ Form and content of any reports to be issued
Additional matters that may be included
▪ Elaboration of scope of audit Form of any other communication
▪ The fact that there is an unavoidable risk that some material misstatements may not be
detected
▪ Arrangements regarding planning and performance
▪ Management will provide written representations
▪ Agreement of the management to provide all information in a timely manner
▪ Fees and billing arrangements and the basis of fees
▪ Request for acknowledging the receipt of the letter Involvement of other auditors and
experts Involvement of internal auditors and other staff Arrangements to be made with
predecessor auditor
▪ Any restriction of auditor's liability
▪ Complaints procedures and jurisdiction
▪ Any obligation to provide audit working papers to other parties
Recurring audits
The auditor will assess whether the terms of the engagement need to be revised and whether
there is need to remind the entity of the existing terms
...

A change in the terms of audit engagement prior to completion may result from:
1) A change in circumstances affecting the need for the service
2) A misunderstanding as to the nature of an audit, or of the related service originally
requested
3) A restriction on the scope of the audit engagement, whether imposed by management or
caused by circumstances
The auditor shall determine whether there is reasonable justification for doing so
...

A change may not be considered reasonable, however if it seems to relate to information that
is incorrect, incomplete or otherwise unsatisfactory
...
g
...

• Have documented processes for staff to follow
...

• Have strict recruitment policies
...

• Ensure overall Environment is one where quality is rewarded, and poor quality is
punished
...

• Cold Review process where selections of completed assignments are checked to help
future work be done better
...

• Suitable consultation with others, where matters are unclear
...

• Careful thought about which member of the team should perform and review each task,
and the best time for that task to be performed
...

• Careful procedures on acceptance / continuance of client relationships
...

Classification: transactions and events have
been recorded in the proper accounts
...


Account balances(statement of financial
position)

Rights and obligations: the entity holds or
controls the rights to assets, and liabilities are
the obligations of the entity
...

Completeness: all assets, liabilities and equity
interests that should have recorded have been
recorded
Valuation and allocation: assets, liabilities and
equity interest are included in the financial
statements at appropriate amounts and any
resulting valuation or allocation adjustments
are appropriately recorded
...

Completeness: all disclosures that should have
recorded have been recorded
Classification and understand ability: financial
information is appropriately presented and
described, and disclosures are clearly
expressed
...


Carrying out Audit
The Process of obtaining an understanding of the entity and its environment
1
...
Objectives and strategies and relating business risk
3
...
Financial performance
5
...
Industry regulatory and other external factors
ISA 315 sets out the methods that the auditor shall use to obtain the understanding
...

ISA 315 says that the auditor shall identify and assess the risks of material misstatement at the
financial statement level and at the assertion level for classes of transactions, account balances
and disclosures
...
Per IAS 2
Inventories, inventory should be valued at the lower of cost and net realizable value and could
be easily overvalued at the year-end if there is not close monitoring of sales trends, and
necessary mark downs to reflect any slow movement of product lines
...

Inventory could be the subject of fraudulent financial reporting, as it would be relatively easy
for management to inflate quantities of inventory to increase the amount recognized on the
statement of financial position
Over-capitalization of IT/website cost:
If on-line system has been upgraded at significant cost, There is a risk that costs have been
incorrectly capitalized SIC 32 Intangible Assets - Website Costs states that only costs relating to
the Development phase of the project should be capitalized, but costs of planning, and all costs
when the website is operational should be expensed
...
Hence there is a risk of overvalued assets and unrecognized
expenses
...
The risk is that the asset is overvalued, for two reasons
...
This may be optimistic, and there
is a risk that the brand is overvalued and operating expenses incomplete if there is no annual
write-off
...

49 | P a g e

P7

Advance Audit and Assurance

Going Concern
There are indications that the company may not continue in operational, existence
...

Contingency-fines or penalties
IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that a provision should be
recognized if the company has a probable obligation-at the yearend which can be measured
reliably
...

If the authorities commence legal proceedings against the Co before the year end, then
management should assess the probability of payment
...

Convertible debentures
According to IAS 32 Financial Instruments: Presentation, convertible debt instruments should
be presented in the statement of financial position split into two separate components
...
The financial statement risk is firstly that split accounting
has not been applied, so the whole of the credit has been recognized as either debt or equity,
and therefore incorrectly recognized in the statement of financial position
...
The financial statement
risk is that the derivatives have not been recognized at all, particularly because the contracts
were acquired at no cost, so there is no accounting entry when the contract is taken out
...
This could be complex to
calculate and if not performed by an experienced specialist could cause the over or
understatement of the financial statement recognized, and an associated incorrect entry
recognized in profit
...
The risk is that disclosures made in the notes to the financial statements are
incomplete
...

Internally generated brand names
IAS 38 Intangible Assets prohibits the recognition of internally generated brands
...

Overstatement of property, plant and equipment
Following IAS 36 Impairment of Assets, an impairment review must be carried out if there are
indicators of impairment to an asset
...

Inspection of fixed asset
Under IAS16 Property, Plant and Equipment, costs of a major inspection should be capitalized
and then depreciated over the period to the next inspection
...
This would result in
understated profit and understated non- current assets
...

Assets held for disposal
Under IFRS 5, the assets should be presented separately, measured at the lower of carrying
amount and longer be depreciated
...
In addition, the assets may be measured incorrectly, for example, if following
the measurement rules of IFRS 5 would result in impairment of the assets, and if depreciation
continues to be charged
...


51 | P a g e

P7

Advance Audit and Assurance

Discontinued Operations
According to IFRS 5, once the discontinued operation side definition is met as held for sale, its
results should be presented separately in the statement of comprehensive income
...

Comparative figures should also be re-stated
...
A further disclosure risk arises
from IFRS 5's requirement the net cash flows of the discontinued operation to be disclosed on
the face of, or in the notes to the statement of cash flows Current assets
If the receivables collection period has increased, and the inventory holding period increased
...
The nature of the products being manufactured
mean a high risk of obsolescence exists
...

Share-based payment
The expense should be calculated by considering whether performance conditions attached to
the share options will be met
...
The expense should be adjusted each year end to account for staff
turnover If the expense is overstated
...
In addition, the calculation of the total cost of the sharebased payment is e/complex
...
Unutilized tax losses can-be; carried forward for offset against
future taxable profits
...

If it is difficult to demonstrate that the tax losses are recoverable against future profits, then
there is financial statements risk that the deferred tax asset is overstated
...

Going Concern
There are indications that the company may not continue in operational existence
...


52 | P a g e

P7

Advance Audit and Assurance

Changes to accounting estimates
Changes to accounting estimates can represent a high risk of material misstatement
...
There is a risk that
management has confused changes to estimates with changes in policies, which require a
retrospective accounting treatment
...

Dismantling costs
According to IAS 16 Property, Plant and Equipment, the cost of an asset should include the
estimated costs of dismantling and removing the asset (also known as decommissioning costs)
if there is an obligation to incur the cost at the end of the life of the asset
...

Even if the costs have been recognized, there are specific rules regarding the measurement of
the amount recognized, which should be discounted to present value
...

Furthermore, a finance charge should be recognized each year to reflect the unwinding of the
discounted provision
...

Government Grant
IAS 20 Accounting for Government Grants and Disclosure of Government assistance requires
that grants should be recognized as income over the periods necessary to match them with the
related costs that they are intended to compensate
...

Under IAS 20, the grant should be presented on the statement of financial position either as
deferred income, or by deducting the grant in arriving the asset's carrying value
Secondly, there may be conditions attached to the grant
...
The risk is a potential understatement of provisions if the target
has not been met
...
Given the materiality
of the loan, it is likely that disclosure would be required
...
ISA 315 indicates that the
installation of significant new IT systems related to financial reporting is an event that may
indicate a risk of material misstatement
...

Audit Risk
Risk that auditors may give an inappropriate opinion
These are of two types:
1
...
Detection Risk
1
...
Business risks represent problems which are faced by the management of a
business, and these problems should be identified and assessed for their possible impact on the
business
...
It
represents problems which are faced by the management of a Business and these have impact
on the business e
...

• Cash flow issues
• Overtrading
• Going concern
• Breakdown of accounting systems
• Credit risk
• Loss of key supplier/customer
• Loss of key employees
• Physical disasters
• Poor brand management
• Breaches of law/regulation: fines
• Tax problems: fines
• Environmental law: fines/compensation

55 | P a g e

P7

Advance Audit and Assurance

BUSINESS RISK has three categories
Financial Risk: Arising from the financial activities of an operation, e
...
cash flow, issues or
overtrading
Operational Risk: Arising with regard to operations e
...
major supplier will be lost and the co
...
Rapid and new technological developments in the industry will render certain existing
products and services obsolete
...
Co
...
g
...

Competition
Increasing competition from other existing and new competitors offering new Technologies
could:
1
...
reduce Co's share of new and existing customers
3
...

Product life cycle
Demand is declining for the main revenue generating product
...
The continued loss of a main revenue stream will have
significant detrimental profit and cash flow implications
...

Decisions made locally may not be comparable with the overall operating strategy of the
company
...
This could lead to production
inefficiencies, e
...
if an agent secures a contract to supply a particular product, it may take time
for this to be communicated to the manufacturing facility, and delays in fulfilling the order will
then be inevitable, leading to loss of customer goodwill
...

E-commerce- volume of sales
One of the tasks associated with the on-line sales is the scale of the increase in the volume of
transactions
...
This would harm the
reputation of the company and Brand
...
Any breach of security could result in credit card details being stolen, and the
Co may be liable for losses suffered by customers if their credit card details were used
fraudulently
...
Additionally, the system must be
secure from virus infiltration, which could cause system failure, interrupted sales, and loss of
customer goodwill
...
Overseas sales expose Co
to potential sales tax complications such as extra tax to be paid on the export of goods to
abroad, and additional documentation on
...
Another important regulatory issue is that of data protection
...
faces the risk
of non-compliance with any data protection regulation relevant to customers providing
personal details to the on-line sales system
...
Frauds are more likely to
occur in the absence of controls and the quality of financial information used by the directors
for planning and reviewing business performance could be inadequate

Tax investigations
Recent tax investigations could indicate that the company is not complying with relevant tax
regulations, which in turn leads to the risk of fines and -penalties, which could be severe if this
is a recurring breach of regulations which has not been resolved
...


57 | P a g e

P7

Advance Audit and Assurance

Cash based business
This can lead to a high risk of fraud, as cash can easily Jae misappropriated by staff when
dealing with cash sales
...
If the segment
contributes the highest proportion of revenue to the company, damage to this brand name will
be significant for the company
...

Relationship
✓ There is usually a direct relationship between business risk and FSs risk
...
For example, declining demand for the
company's products is a business risk
...

✓ Sometimes business risks have a more general effect on the financial statements
...
Inadequacies in
systems and controls could lead to errors or misstatements in any area of the financial
statements so auditors would perceive this as a general audit risk factor
...
In terms of financial statement risk, going concern
is a very specific issue, and the risk is normally the inadequate disclosure of going
concern problems
...


58 | P a g e

P7

More examples:
Economic pressures causing reduced unit sales
and eroding margins
Economic pressures resulting in demands for
extended credits
Product quality issues related to inadequate
control over supply chain and transportation
damage
Customer dissatisfaction related to inability to
meet order requirements
Customer dissatisfaction related to invoicing
errors and transportation damage
Unacceptable service response call rate
related to poor product quality
Out of date IT systems affecting
management's ability to make informed
decision

Advance Audit and Assurance

Inventory values (IAS 2) Going concern
Receivables recoverability
Inventory values-net realizable value and
inventory returns
Going concern
Receivables valuation
Going concern
Litigation-provisions and contingencies
Inventory-net realizable value
Anywhere

The business risk approach
✓ looks at the business as a whole and the risks to which it is exposed
✓ focuses on those business risks which impact on the FSs; and
✓ Plans the audit around those key business risks
...

59 | P a g e

P7

Advance Audit and Assurance

AUDIT EVIDENCE-ISA 500
•

•
•
•

The information used by the auditor in "arriving at the conclusions on which the
auditor's opinion is based
Information from a firm's quality control procedures for client acceptance and
continuance
...

Audit evidence may have been prepared using the work of a management's expert
...


•

Management's expert - An individual or organization possessing expertise in a field other
than accounting or auditing, whose work in that field is used by the entity to assist the
entity in preparing the financial statements, e
...
actuarial calculations, valuations or
engineering data
...
Inspection of tangible assets
•
•

Inspection of assets that are recorded in the accounting records confirms existence,
gives evidence of valuation, but does not confirm
...

Confirmation that assets seen are recorded in the accounting records gives evidence of
completeness
...
Inspection of documentation or records
•
•
•

•

Confirmation to documentation of items recorded in accounting, records
documentation confirms that an asset exists or a transaction occurred
...

Cut-off can be verified by inspecting reverse population, that checking transactions
recorded after the end of the reporting period to supporting documentation to confirm
that they occurred after the end of the reporting period
...
It can also be used to compare
documents (and hence test consistency of audit evidence) and confirm authorization
...
Observation
Observation involves watching a procedure being performed (for example, post opening)
...

4
...
Strength of evidence depends on
knowledge and integrity of source of information
...
Confirmation
The reliability of audit evidence is affected by its source
...

Both ISA 330 The auditor’s responses to assessed risks and ISA 505 External confirmations
address the need for external confirmations in gathering sufficient and appropriate audit
evidence
...
19
The auditor shall consider whether external confirmation procedures are to be performed as
substantive audit procedures:
ISA330 identifies the following situations where external confirmations are appropriate:
• Bank-balances and other information from bankers
• Accounts receivable balances
• Inventories held by third parties
• Property deeds held by lawyers
• Investments held for safekeeping by third parties or purchased from stockbrokers but not
delivered it the end of the reporting period
• Loans from lenders
• Accounts payable balances
...
7 states that "the auditor shall maintain control over external confirmation requests"
...

61 | P a g e

P7

Advance Audit and Assurance

If management refuses to allow the auditor to send an external confirmation request, the auditor
must consider whether this is reasonable and whether audit evidence can be obtained in another
way
...

In November 2009 the IAASB issued a Practice Alert in this area, Emerging Practice Issues
Regarding the use of External Confirmations in an Audit of Financial Statements
...


•

All confirmation responses carry some risk of interception, alteration or fraud
...
Accordingly, the auditor should maintain control over the
confirmation process
...


•

The ISAs do not preclude the use of electronic confirmations, as they can, if properly
managed, provide appropriate evidence
...


6
...

Recalculation may be performed manually or electronically
...
Re-performance
Re-performance is the auditor’s independent execution of procedures or controls originally
performed as part of the entity's internal control, either manually or using CAATs
...

CAATs may be used in performing various auditing procedures, including the following
...

➢ The materiality of the item
...

➢ The nature of the accounting and internal control systems
...

➢ The findings of audit procedures
...
g
...

➢ The source and reliability of the information
...
g
...
g
...


• Measure of the quality
The quality is affected by:
➢ Relevance
➢ Reliability

63 | P a g e

P7

Advance Audit and Assurance

Relevance:
The relevance of audit evidence should be considered in relation to the overall audit objective
of forming an opinion and reporting on the financial statements
...


Reliability
•
•

•

•

•

The reliability of audit evidence is increased when it is obtained from independent
sources outside the entity
...

Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or by
inference (for example, inquiry about the application of a control)
...

Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitized or
otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance
...
Written representations in this context do not include financial
merits, the assertions therein, or supporting books and records
...

ISA 580 requires the auditor to determine appropriate individuals from whom to seek written
representation
...
However the ISA goes on to point out that in circumstances where others are
responsible for the financial statements e
...
those charged with governance then they should
be requested to provide the representation,
The ISA emphasizes the need for management to make informed representation
...

ONCE REPRESENTATION RECEIVED THE PROCEDURES ARE:
On Receipt of a written representation the auditors will need to ensure that there is no other
evidence that rave discovered during the course of their audit which conflicts with it
...

•
•
•

Seek corroborative audit evidence from sources inside or outside the entity
...

Consider whether the individuals making the representations can be expected to be well
informed lie particular matters
...

• The entity’s reasons for choosing a particular course of action
...

• The existence or lack of any other information that might have been obtained during the
course of the audit that may be inconsistent with management’s judgment or intent
...
For example, if
the intent of management is important to the valuation basis for investments, it may not be
possible to obtain sufficient appropriate evidence without a written representation from
management about its intentions
...


66 | P a g e

P7

Advance Audit and Assurance

Chapter 5

Group Audit

What’s in this chapter?

1) Joint Audit
2) Transnational Audit
3) Audit of Groups
•
•
•
•

Definitions
Responsibility of group auditor
Matters to consider
Audit opinion

67 | P a g e

P7

Advance Audit and Assurance

Joint Audits
A joint Audit is one where two or more auditors are responsible for an audit engagement and
jointly produce an audit report to the client
...
This local auditor may act jointly with the principal
auditors
...

Accepting a joint audit
Practical points that must be borne in mind before accepting a joint audit
...

• Where there are joint auditors, the audit engagement should he explained in similar
terms by each set of auditors
...

• Once a joint position has been accepted the program to be adopted and the split of the
detailed work will have to be discussed
...

• The allocation of work between the firms needs to be agreed and the auditors should
agree whether joint or separate engagement letters will be sent
...
They
are jointly liable in the event of litigation
...

•
A joint audit will allow sufficient resources to be allocated to the audit, assuring the
quality of the opinion provided
...


68 | P a g e

P7

Advance Audit and Assurance

•

The audit should also benefit from an improvement in quality
...
In particular, the newly appointed audit team will have a
'fresh pair of eyes' and be able to offer new insight to matters identified
...

Disadvantages
• High cost
• If no proper working relation then time increases
• Different methodology e
...
Materiality

Transnational Audits
Transnational audit means an audit of financial statements which are or may be relied upon
outside the audited entity's home jurisdiction for purposes of significant lending, investment or
regulatory decisions; this will include audits of all financial statements of companies with listed
equity or debt and other public interest entities which attract particular public attention
because of their size, products or services provided
...

Significant component: A component identified by the group engagement team:
a) That is of individual significance to the group, or
b) That due to its specific nature or circumstances is likely to include significant risks of
material misstatement of the group financial statements
...
If
component assets, liabilities, cash flows, profit or turnover (whichever is the most appropriate
benchmark) exceed 15% of the related group figure, then the auditor may judge that the
component is a significant component
...

69 | P a g e

P7

Advance Audit and Assurance

Matters to consider before accepting appointment as principal auditor to a group
Can sufficient appropriate audit evidence be obtained on consolidation process and component
information?
If it will not be possible to obtain sufficient appropriate evidence the group engagement
partner must refuse to accept or resign from the engagement
In order to achieve the group audit objectives the auditor needs to obtain evidence in relation
to the:
(1)
Individual components of the group
(2)
Consolidation process
The Component Auditors
Group engagement team must obtain an understanding of:
• Whether the component auditor understands the relevant ethical requirements and is
independent
• The component auditor’s professional competence
• Whether the group engagement team will have sufficient involvement in the work of
the component auditor
• Whether the component auditor operates in a regulator/ environment that actively
oversees auditors
ISA 600 states that a significant component can be identified by using a benchmark
...

Understanding the Component Auditor
Procedures to perform
✓ Obtaining and reviewing the ethical code adhered to by the component auditor, and
comparing it to those followed by the group auditor
...

✓ Establishing through discussion or questionnaire whether Component auditor is a
member of an auditing regulatory body, and the professional qualifications issued by
that body
...

✓ Determining through discussion whether component auditor is a member of a network
of audit firms
...
g
...

✓ Ascertaining the quality control policies and procedures used by component auditor
both firm-wide and those applied to individual audit engagements,
✓ Requesting any results of monitoring or inspection visits conducted by the regulatory
authority under which component auditor operates
...

Planning matters to consider
1) Risk
The group structure will need to be ascertained to ensure that all the relevant entities are
consolidated
...

2) Materiality
3) Accounting Treatments
• Goodwill
• Intercompany balances
• Accounting policies
4) Practical issues
a) Independence and competence of the other auditors will need to be assessed
...

b) Instructions should be issued to all the component auditors in order to co-ordinate the
audit work; these will include details such as:
• Areas requiring special attention
• Procedures for the identification of intercompany transactions
• Procedures for notifying the group auditors of unusual circumstances
• The timetable for the completion of the audit
• The independence requirements
• Relevant accounting auditing and reporting requirements

71 | P a g e

P7

Advance Audit and Assurance

Component Auditor will Communicate
✓ Identification of information reported on
✓ Risks of material misstatements in group financial statements
✓ Lists of uncorrected misstatements
✓ Indicators of management bias
✓ Material weakness in internal control over financial reporting
✓ Other significant matters including fraud/suspected fraud
...

• As a result the auditor's report on the group financial statements shall not refer to a
component auditor
...
g
...

• If the opinion on a component is qualified, the group audit opinion is only affected if the
matter is material to the group
...

There may be issues in existence which are specific to the country in which the
subsidiary operates
...
Factors such as these will need to be identified for each
subsidiary and tackled as appropriate during the audit
...

The principal auditor will need to be sensitive to these during dealings with the other
auditors
...
This problem can be easily- overcome by using staff
who can speak the relevant language or by using a translator
...

A letter of support may be required from the parent where it appears that a subsidiary is not a
going concern and will be unable to pay non-group payables as they fall due
...
The following should be obtained
...


73 | P a g e

P7

Advance Audit and Assurance

Chapter 6

Reporting

What’s in this chapter?

1) Unmodified opinion
2) Contents of Audit Report
3) Reasons for recent changes to report
4) Change of order
5) Modified Report and Opinion

74 | P a g e

P7

Advance Audit and Assurance

Reporting
The meaning of:
✓ “give a true and fair view”; or
✓ “presented fairly in all material respects”
Has not been formally defined:
✓ Relies heavily on judgment
✓ Should be taken as a phrase; and
✓ Will usually imply;
❖ Compliance with legislation and accounting standards;
❖ Use of accurate figures or best possible estimates;
❖ Meaningful presentation/disclosure; and
❖ Avoidance of bias or concealment

An unmodified opinion
-

-

Is given where auditor concludes that:
✓ The FS give a true and fair view; and
✓ Comply with the identified financial reporting framework
Provides a high level of assurance that no material misstatement have been identified;
and
Format is regulated by revised ISA700

Contents of the Audit Report
➢ Title and Addressee
➢ OPINION (which could be modified as Qualified “except for”, or Adverse, or Disclaimer)
➢ BASIS FOR OPINION
• Explains any modification in the Opinion
• Statement confirming Firm’s independence
➢ STATEMENT OF RESPONSIBILITIES
• Of Auditors (including duty to read, but not audit, “Other Information”)
• Of Directors
➢ Signature, date, location of audit firm

75 | P a g e

P7

Advance Audit and Assurance

Possible extra Contents and there Locations:
1
...

ii
...


Why and how a risk to the FS
Audit response/work
Conclusions

2
...
EMPHASIS OF MATTER paragraph
➢ To highlight any other disclosure note, other than a MURGC as above, that is considered
by the auditors to be vital to shareholders’ FS understanding
➢ Can go anywhere in audit report as long as it is below the Basis for Opinion, and below a
MURGC (if there is one)
➢ Opinion on FS is NOT modified
➢ States number of relevant FS disclosure note

76 | P a g e

P7

Advance Audit and Assurance

4
...
A qualification due to a material misstatement (disagreement) in the financial Statements
...
A qualification due to a lack of sufficient appropriate evidence (limitation of scope) during
the audit
...
An adverse opinion – where the auditors disagree with the truth and fairness of the Financial
Statements overall
...
A disclaimer of opinion, where a lack of evidence is so large that the auditors are unable to
give an opinion at all
...
An Emphasis of Matter, where there is nothing wrong with the Financial Statements and no
lack of evidence but there is something important disclosed in the FS that the auditors wish to
draw to the shareholders’ attention
...
An Other Matter, where there is nothing wrong with the Financial Statements and no lack of
evidence but there is a mistake in the unaudited “Other Information”
...
Qualification due to material misstatement
When there is a single material mistake in the Financial Statements (or a small number of
individual mistakes), the overall Financial Statements remain true and fair
...

There are many examples that would lead to this opinion, for example:

78 | P a g e

P7

•
•
•

Advance Audit and Assurance

Failure to provide for a material doubtful debt
Material error in the calculation of depreciation
The treatment of a material expense as an asset
...
Qualification due to a lack of sufficient evidence
With this “limitation of scope”, the auditor was unable to fully carry out his work due to a lack
of the usual evidence
...

The auditor reports that, Except for any adjustments that might have been necessary, had the
auditor seen the evidence, the Financial Statements give a true and fair view
...
g
...

• There are lots of cash transactions (where there is not a lot of documentary evidence)
...
Adverse opinion
This is a form of misstatement that is so strong, it affects the opinion of the Financial
Statements as a whole (pervasive)
...
As such, the auditor is disagreeing with the entire basis of preparation of the Financial
Statements, which is likely to result in disagreement with many of the figures in the Financial
Statements
...

4
...

Imagine turning up to an audit client to be told that all of the accounting records were lost the
previous day in a fire, and that there are no back-ups
...

The auditor reports that “we do not provide an opinion”, or similar wording
...
Emphasis of matter / other matter
Sometimes the auditor is happy that the Financial Statements are true and fair, and that all
evidence has been received
...
In this case, an Emphasis of Matter
paragraph is required in the audit report, directly under the Opinion section
...
In this case, the required paragraph is called an “Other
Matter”, but also appears under the Opinion section
...
In such an
engagement, the auditor is being asked to attest assertions made
...
A typical due diligence
engagement is where an adviser (often an audit firm) is engaged by one company planning to
take over another to perform an assessment of the material risks associated with the
transaction (including validating the assumptions underlying the purchase), to ensure that the
acquirer has all the necessary facts
...

Similarly due diligence can also be requested by sellers
...

• Financial due diligence (a review of the financial position and obligation of a target to
identify such matters as covenants and contingent obligations)
• Operational and IT due diligence (extent of operational and IT risks, including quality of
systems, associated with a target business)
• People due diligence (key staff positions under the new structure, contract termination
costs and costs of integration)
• Regulatory due diligence (review of the target's level of compliance with relevant
regulation)
• Environmental due diligence (environmental, health and safety and social issues in a
target)
Due diligence work is primarily limited to enquiry and analytical procedures
...
It is normally a report of factual findings
...

- The accountant provides a report on factual findings; and
- No assurance is given
ISRS4400 Engagements to perform agreed upon procedures regarding financial information
regulates:
- An engagement letter should refer to:
• The nature and purpose of the engagement;
• The procedures/ information to be used; and
• The form of the report
- Process may be similar to an audit but volume of work will be less

---