Audit Practice and Assurance Module

Bachelor of Commerce
(Honours) in Accounting
Audit Practice and Assurance

Services
Module BACC 404

Author: Cuthbert Muza
Master of Commerce in Accounting Degree (MSU)
Bachelor of Business Administration in Accounting Degree
(Solusi University)
Certified Public Accountant (CPA(Z)) (ICPAZ)
Certified Professional Forensic Accountant (CPFAcct) (ICFA-
Canada)
Public Accountants and Auditors Board (PAAB) Registration
Certificate
Intermediate Certificate (ICSAZ)
Content Reviewer: Ephraim Hudson Mazvidza Matavire

Master of Business Administration (ZOU)
Fellow of the Institute of Administration and Commerce of
Southern Africa
Editor: Kenell Madzirerusa

M Sc Finance and Investment (NUST)
B Com Banking (Hon) (NUST)
IOBZ Diploma
Published by: The Zimbabwe Open University
P.O. Box MP1119
Mount Pleasant
Harare, ZIMBABWE
The Zimbabwe Open University is a distance teaching and open

learning institution.
Year: October 2013
Cover Design: T. Ndhlovu
Layout and Design: D. Satumba Nyandowe/S. Mushore
Printed by: ZOU Press
ISBN No: 978-1-77938-719-6
Typeset in Times New Roman, 12 point on auto leading
© Zimbabwe Open University. All rights reserved. No part of this

publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior permission of
the Zimbabwe Open University.
Foreword To the student
The demand for skills and knowledge
and the requirement to adjust and
academics, technologists
administrators of varied backgrounds,
and
change with changing technology, training, skills, experiences and personal

places on us a need to learn continually interests. The combination of all these
throughout life. As all people need an qualities inevitably facilitates the
education of one form or another, it has production of learning materials that
been found that conventional education teach successfully any student,
institutions cannot cope with the anywhere and far removed from the
demand for education of this tutor in space and time. We emphasize
magnitude. It has, however, been that our learning materials should enable
discovered that distance education and you to solve both work-related problems
open learning, now also exploiting e- and other life challenges.
learning technology, itself an offshoot
of e-commerce, has become the most To avoid stereotyping and professional
effective way of transmitting these narrowness, our teams of learning
appropriate skills and knowledge materials producers come from different
required for national and international universities in and outside Zimbabwe,
development. and from Commerce and Industry. This
openness enables ZOU to produce
Since attainment of independence in materials that have a long shelf life and
1980, the Zimbabwe Government has are sufficiently comprehensive to cater
spearheaded the development of for the needs of all of you, our learners
distance education and open learning in different walks of life. You, the
at tertiary level, resulting in the learner, have a large number of optional
establishment of the Zimbabwe Open courses to choose from so that the
University (ZOU) on 1 March, 1999. knowledge and skills developed suit the
career path that you choose. Thus, we
ZOU is the first, leading, and currently strive to tailor-make the learning
materials so that they can suit your
the only university in Zimbabwe
personal and professional needs. In
entirely dedicated to teaching by
developing the ZOU learning materials,
distance education and open learning.
we are guided by the desire to provide
We are determined to maintain our
you, the learner, with all the knowledge
leading position by both satisfying our
and skill that will make you a better
clients and maintaining high academic performer all round, be this at certificate,
standards. To achieve the leading diploma, undergraduate or postgraduate
position, we have adopted the course level. We aim for products that will
team approach to producing the varied settle comfortably in the global village
learning materials that will holistically and competing successfully with anyone.
shape you, the learner to be an all-round Our target is, therefore, to satisfy your
performer in the field of your own quest for knowledge and skills through
choice. Our course teams comprise distance education and open learning.
Any course or programme launched by ZOU is you may never meet in life. It is our intention
conceived from the cross-pollination of ideas to bring the computer, email, internet chat-
from consumers of the product, chief among rooms, whiteboards and other modern methods
whom are you, the students and your employers. of delivering learning to all the doorsteps of
We consult you and listen to your critical our learners, wherever they may be. For all these
analysis of the concepts and how they are developments and for the latest information on
presented. We also consult other academics what is taking place at ZOU, visit the ZOU
from universities the world over and other website at www.zou.ac.zw
international bodies whose reputation in
distance education and open learning is of a Having worked as best we can to prepare your
very high calibre. We carry out pilot studies of learning path, hopefully like John the Baptist
the course outlines, the content and the prepared for the coming of Jesus Christ, it is
programme component. We are only too glad my hope as your Vice Chancellor that all of you,
to subject our learning materials to academic will experience unimpeded success in your
and professional criticism with the hope of educational endeavours. We, on our part, shall
improving them all the time. We are determined continually strive to improve the learning
to continue improving by changing the learning materials through evaluation, transformation of
materials to suit the idiosyncratic needs of our delivery methodologies, adjustments and
learners, their employers, research, economic sometimes complete overhauls of both the
circumstances, technological development, materials and organisational structures and
changing times and geographic location, in order culture that are central to providing you with
to maintain our leading position. We aim at the high quality education that you deserve.
giving you an education that will work for you Note that your needs, the learner ‘s needs,
at any time anywhere and in varying occupy a central position within ZOU’s core
circumstances and that your performance activities.
should be second to none.
Best wishes and success in your studies.
As a progressive university that is forward
looking and determined to be a successful part
of the twenty-first century, ZOU has started to
introduce e-learning materials that will enable
you, our students, to access any source of _____________________
information, anywhere in the world through
internet and to communicate, converse, discuss
and collaborate synchronously and Prof. Primrose Kurasha
asynchronously, with peers and tutors whom Vice Chancellor
The Six Hour Tutorial Session At
The Zimbabwe Open University
A s you embark on your studies with the Zimbabwe
Open University (ZOU) by open and distance
learning, we need to advise you so that you can make
This is where the six hour tutorial comes in. For it
to work, you need to know that:
· There is insufficient time for the tutor to
the best use of the learning materials, your time and
the tutors who are based at your regional office. lecture you
· Any ideas that you discuss in the tutorial,
The most important point that you need to note is originate from your experience as you
that in distance education and open learning, there work on the materials. All the issues
are no lectures like those found in conventional raised above are a good source of topics
universities. Instead, you have learning packages that (as they pertain to your learning) for
may comprise written modules, tapes, CDs, DVDs discussion during the tutorial
and other referral materials for extra reading. All these
· The answers come from you while the
including radio, television, telephone, fax and email
can be used to deliver learning to you. As such, at tutor’s task is to confirm, spur further
the ZOU, we do not expect the tutor to lecture you discussion, clarify, explain, give
when you meet him/her. We believe that that task is additional information, guide the
accomplished by the learning package that you receive discussion and help you put together full
at registration. What then is the purpose of the six answers for each question that you bring
hour tutorial for each course on offer? · You must prepare for the tutorial by
bringing all the questions and answers
At the ZOU, as at any other distance and open that you have found out on the topics to
learning university, you the student are at the centre the discussion
of learning. After you receive the learning package, · For the tutor to help you effectively, give
you study the tutorial letter and other guiding him/her the topics beforehand so that in
documents before using the learning materials. During cases where information has to be
the study, it is obvious that you will come across gathered, there is sufficient time to do
concepts/ideas that may not be that easy to understand so. If the questions can get to the tutor
or that are not so clearly explained. You may also at least two weeks before the tutorial,
come across issues that you do not agree with, that that will create enough time for thorough
actually conflict with the practice that you are familiar preparation.
with. In your discussion groups, your friends can bring
ideas that are totally different from yours and In the tutorial, you are expected and required to
arguments may begin. You may also find that an idea take part all the time through contributing in every
is not clearly explained and you remain with more way possible. You can give your views, even if
questions than answers. You need someone to help they are wrong, (many students may hold the same
you in such matters. wrong views and the discussion will help correct
The Six Hour Tutorial Session At The Zimbabwe Open University
the errors), they still help you learn the correct thing as the tutor may dwell on matters irrelevant to the
as much as the correct ideas. You also need to be ZOU course.
open-minded, frank, inquisitive and should leave no
stone unturned as you analyze ideas and seek
clarification on any issues. It has been found that Distance education, by its nature, keeps the tutor
those who take part in tutorials actively, do better in and student separate. By introducing the six hour
assignments and examinations because their ideas are tutorial, ZOU hopes to help you come in touch with
streamlined. Taking part properly means that you the physical being, who marks your assignments,
prepare for the tutorial beforehand by putting together assesses them, guides you on preparing for writing
relevant questions and their possible answers and examinations and assignments and who runs your
those areas that cause you confusion. general academic affairs. This helps you to settle
down in your course having been advised on how
Only in cases where the information being discussed to go about your learning. Personal human contact
is not found in the learning package can the tutor is, therefore, upheld by the ZOU.
provide extra learning materials, but this should not
be the dominant feature of the six hour tutorial. As
stated, it should be rare because the information
needed for the course is found in the learning package
together with the sources to which you are referred.
Fully-fledged lectures can, therefore, be misleading
The six hour tutorials should be so structured that the

tasks for each session are very clear. Work for each
session, as much as possible, follows the structure given
below.
Session I (Two Hours)

Session I should be held at the beginning of the semester. The main aim
of this session is to guide you, the student, on how you are going to
approach the course. During the session, you will be given the overview
of the course, how to tackle the assignments, how to organize the logistics
of the course and formation of study groups that you will belong to. It is
also during this session that you will be advised on how to use your
learning materials effectively.
The Six Hour Tutorial Session At The Zimbabwe Open University
Session II (Two Hours)

This session comes in the middle of the semester to respond to the
challenges, queries, experiences, uncertainties, and ideas that you are
facing as you go through the course. In this session, difficult areas in the
module are explained through the combined effort of the students and
the tutor. It should also give direction and feedback where you have not
done well in the first assignment as well as reinforce those areas where
performance in the first assignment is good.
Session III (Two Hours)

The final session, Session III, comes towards the end of the semester.
In this session, you polish up any areas that you still need clarification on.
Your tutor gives you feedback on the assignments so that you can use
the experience for preparation for the end of semester examination.
Note that in all the three sessions, you identify the areas
that your tutor should give help. You also take a very
important part in finding answers to the problems posed.
You are the most important part of the solutions to your
learning challenges.
Conclusion for this course, but also to prepare yourself to

contribute in the best way possible so that you
In conclusion, we should be very clear that six can maximally benefit from it. We also urge you
hours is too little for lectures and it is not to avoid forcing the tutor to lecture you.
necessary, in view of the provision of fully self-
contained learning materials in the package, to BEST WISHES IN YOUR STUDIES.
turn the little time into lectures. We, therefore,
urge you not only to attend the six hour tutorials ZOU
Contents
Module Overview _____________________________________________ 1
Unit One: Introduction to Audit Practice and Assurance Services

1.0 _______ Introduction ____________________________________________________ 3
1.1 _______ Objectives ______________________________________________________ 4
1.2 _______ Authority Attaching to International Standards Issued by the __________
__________ International Auditing and Assurance Standards Board (IAASB) _____ 4
1.3 _______ Audit of Financial Statements _____________________________________ 4
1.4 _______ Audit-Related Services ___________________________________________ 5
__________ 1.4.1 Review _____________________________________________________ 5
__________ 1.4.2 Agreed-upon procedures ____________________________________ 6
__________ 1.4.3 Compilation engagement _____________________________________ 6
__________ Activity 1.1 ______________________________________________________ 6
1.5 _______ Assurance ______________________________________________________ 6
1.6 _______ Non-audit Assurance Engagements ________________________________ 7
__________ Activity 1.2 ______________________________________________________ 7
1.7 _______ Summary _______________________________________________________ 7
__________ References ______________________________________________________ 8
Unit Two: Legal and Regulatory Environment

2.0 _______ Introduction ____________________________________________________ 9
2.1 _______ Objectives _____________________________________________________ 10
2.2 _______ Companies Act Overview (Companies Act 24:03 Sec 150(1), (2)) _____ 10
2.3 _______ Company Law Legislation Affecting Auditors ______________________ 10
__________ 2.3.1 Appointing auditors ________________________________________ 10
__________ 2.3.2 Vacation of office __________________________________________ 11
__________ 2.3.3 Statement of circumstances _________________________________ 12
__________ Activity 2.1 _____________________________________________________ 12
2.4 _______ Auditor's Responsibility _________________________________________ 12
2.5 _______ Standards and Technical Pronouncements ________________________ 13
__________ 2.5.1 International Standards on Auditing (ISA) ___________________ 13
__________ 2.5.2 The need for regulation of audit and assurance services _______ 14
2.6 _______ Legal Liabilities Affecting Auditors and Accountants in Providing _____
__________ Assurance Services _____________________________________________ 14
__________ 2.6.1 The circumstances in which auditors may have legal liability ____ 14
__________ 2.6.2 Liability to the client and liability to third parties ______________ 15
__________ 2.6.3 Restricting auditors' liability _________________________________ 16
__________ Activity 2.2 _____________________________________________________ 16
2.7 _______ Summary ______________________________________________________ 16
__________ References _____________________________________________________ 17
Unit Three: Ethics
3.0 _______ Introduction ___________________________________________________ 19
3.1 _______ Objectives _____________________________________________________ 20
3.2 _______ Fundamental Principles of Professional ethics _____________________ 20
__________ 3.2.1 Rules of conduct for professional accountants ________________ 20
__________ 3.2.2 The fundamental principles in the IFAC Code ________________ 21
3.3 _______ Threats and Safeguards _________________________________________ 21
__________ 3.3.1 Independence _____________________________________________ 21
__________ 3.3.2 Threats to independence ___________________________________ 22
__________ Activity 3.1 _____________________________________________________ 25
__________ 3.3.3 Safeguarding independence _________________________________ 25
3.4 _______ Responsibilities to Clients and Colleagues _________________________ 26
__________ Activity 3.2 _____________________________________________________ 27
3.5 _______ Conflict of Interest _____________________________________________ 27
__________ 3.5.1 Conflict between members' and clients' interests ______________ 27
__________ 3.5.2 Conflicts between the interests of different clients ____________ 28
__________ 3.5.3 Safeguards ________________________________________________ 28
3.6 _______ Code of Confidentiality _________________________________________ 28
__________ Activity 3.3 _____________________________________________________ 29
3.7 _______ Professional Liability and Indemnity _____________________________ 29
__________ 3.7.1 Criminal liability ___________________________________________ 29
__________ 3.7.2 Civil liability _______________________________________________ 30
__________ 3.7.3 Indemnity _________________________________________________ 31
__________ Activity 3.4 _____________________________________________________ 31
__________ 3.7.4 Limiting liability ___________________________________________ 31
3.8 _______ Misconduct and Negligence ______________________________________ 31
__________ Activity 3.5 _____________________________________________________ 33
3.9 _______ Summary ______________________________________________________ 33
__________ References _____________________________________________________ 34
Unit Four: Audit Related Services

4.0 _______ Introduction ___________________________________________________ 35
4.1 _______ Objectives _____________________________________________________ 36
4.2 _______ Definition of Audit Related Services ______________________________ 36
__________ 4.2.1 IFAC standards for audit related services ____________________ 37
4.3 _______ Review Engagements ____________________________________________ 37
__________ 4.3.1 Differences between audit assignment and non-audit assignment 37
__________ 4.3.2 The work required for a review engagement __________________ 38
__________ 4.3.3 Review engagement procedures ______________________________ 39
__________ 4.3.4 The review report _________________________________________ 39
4.4 _______ Review of Interim Financial Information __________________________ 42
__________ 4.4.1 Procedure for the review of IFI _____________________________ 42
__________ 4.4.2 Reporting on the Review of IFI ______________________________ 42
__________ Activity 4.1 _____________________________________________________ 44
4.5 _______ Agreed-upon Procedures ISA920 _________________________________ 44
__________ 4.5.1 Defining the terms of engagement ___________________________ 44
__________ 4.5.2 Engagement letters _________________________________________ 45
__________ 4.5.3 Processes undertaken by the auditor to perform agreed-upon ____
__________ procedures ____________________________________________________ 45
__________ 4.5.4 The report of factual findings elements ______________________ 45
__________ Activity 4.2 _____________________________________________________ 48
4.6 _______ Compilation Engagements _______________________________________ 48
__________ 4.6.1 ISRS 4410 engagements to compile financial information _______ 48
__________ Activity 4.3 _____________________________________________________ 49
4.7 _______ Summary ______________________________________________________ 49
__________ References _____________________________________________________ 50
Unit Five: Assurance Engagements

5.0 _______ Introduction ___________________________________________________ 51
5.1 _______ Objectives _____________________________________________________ 52
5.2 _______ Definition of Assurance Engagement _____________________________ 52
5.3 _______ Objective of Assurance Engagements _____________________________ 52
5.4 _______ Five Elements of an Assurance Engagements ______________________ 52
__________ 5.4.1 A three party relationship __________________________________ 53
__________ 5.4.2 Subject matter _____________________________________________ 53
__________ 5.4.3 Criteria ___________________________________________________ 54
__________ 5.4.4 Engagement process ________________________________________ 54
__________ 5.4.5 Conclusion ________________________________________________ 54
__________ Activity 5.1 _____________________________________________________ 56
5.5 _______ Reporting on an Assurance Engagement ___________________________ 56
5.6 _______ Main Types of Assurance Engagements ___________________________ 56
__________ 5.6.1 Engagements relating to risk assessment ______________________ 56
__________ 5.6.2 Engagements relating to performance measurement ___________ 58
__________ Activity 5.2 _____________________________________________________ 58
__________ 5.6.3 Engagements relating to systems reliability ____________________ 58
__________ 5.6.4 Engagements relating to e-commerce maters __________________ 59
__________ 5.6.5 Other types of assurance engagements _______________________ 62
__________ Activity 5.3 _____________________________________________________ 62
5.7 _______ Types of Audits ________________________________________________ 62
5.8 _______ Summary ______________________________________________________ 63
__________ References _____________________________________________________ 64
Unit Six: Prospective Financial Information

6.0 _______ Introduction ___________________________________________________ 65
6.1 _______ Objectives _____________________________________________________ 66
6.2 _______ Definition of PFI _______________________________________________ 66
6.3 _______ Steps for Preparing PFI _________________________________________ 67
__________ Activity 6.1 _____________________________________________________ 67
6.4 _______ Matters to Consider in Accepting a PFI Assurance Engagement ______ 67
6.5 _______ Issues to Consider When Deciding the Nature, Timing and Extent of the
__________ Procedures Required to Complete a PFI Assurance Engagement ____ 68
6.6 _______ Approach to PFI _______________________________________________ 68
__________ Activity 6.2 _____________________________________________________ 70
6.7 _______ Reporting on PFI _______________________________________________ 70
__________ Activity 6.3 _____________________________________________________ 71
6.8 _______ Summary ______________________________________________________ 71
__________ References _____________________________________________________ 72
Unit Seven: Forensic Audits
7.0 _______ Introduction ___________________________________________________ 73
7.1 _______ Objectives _____________________________________________________ 74
7.2 _______ Forensic Accounting, Forensic Investigation and Forensic Auditing __ 74
__________ 7.2.1 Forensic accounting ________________________________________ 74
__________ 7.2.2 Forensic investigations _____________________________________ 75
__________ 7.2.3 Forensic audit _____________________________________________ 75
__________ Activity 7.1 _____________________________________________________ 75
7.3 _______ Major Applications of Forensic Auditing __________________________ 75
7.4 _______ Role of Forensic Accountant _____________________________________ 76
__________ Activity 7.2 _____________________________________________________ 77
7.5 _______ Fundamental Ethical Principles to Forensic Investigations __________ 77
__________ 7.5.1 Integrity __________________________________________________ 77
__________ 7.5.2 Objectivity ________________________________________________ 77
__________ 7.5.3 Professional competence and due care _______________________ 78
__________ 7.5.4 Confidentiality ____________________________________________ 78
__________ 7.5.5 Professional behaviour _____________________________________ 78
7.6 _______ Considerations When Carrying out Forensic Work ________________ 78
7.7 _______ Procedures in Forensic Investigations ____________________________ 79
7.8 _______ Reporting ______________________________________________________ 79
__________ Activity 7.3 _____________________________________________________ 80
7.9 _______ Summary ______________________________________________________ 80
__________ References _____________________________________________________ 81
Unit Eight: Engagements and Planning Activities

8.0 _______ Introduction ___________________________________________________ 83
8.1 _______ Objectives _____________________________________________________ 84
8.2 _______ Engagement Activities ___________________________________________ 84
__________ 8.2.1 Acceptance and continuance of client relationships ____________ 85
__________ 8.2.2 Obtaining of engagement acceptance information _____________ 85
__________ 8.2.3 Engagement activity procedures (Framework) _________________ 86
__________ Activity 8.1 _____________________________________________________ 87
__________ 8.2.4 Engagement letters _________________________________________ 87
__________ Activity 8.2 _____________________________________________________ 88
8.3 _______ Planning the Audit ______________________________________________ 88
__________ 8.3.1 The benefits of planning ___________________________________ 89
__________ 8.3.2 Person responsible for planning the audit ____________________ 89
__________ 8.3.3 Procedures to perform and aspects to consider in audit planning 90
planning90
__________ Activity 8.3 _____________________________________________________ 96
8.4 _______ Summary ______________________________________________________ 96
__________ References _____________________________________________________ 97
Unit Nine: Special Audits and Other Assurance Engagements

9.0 _______ Introduction ___________________________________________________ 99
9.1 _______ Objectives ____________________________________________________ 100
9.2 _______ Special Audits _________________________________________________ 100
9.3 _______ Principles that have to be Met in Special Audit Investigations ______ 100
__________ 9.3.1 Nature of the investigation and report provided ______________ 101
__________ 9.3.2 Assurance engagements other than audits or reviews of historic __
__________ financial information (ISAE 3000) _______________________________ 101
__________ Activity 9.1 ____________________________________________________ 101
9.4 _______ Due Diligence Investigations ____________________________________ 102
__________ 9.4.1 Circumstances when due diligence is required _______________ 102
__________ 9.4.2 Procedures to follow when conducting due diligence ____________
__________ investigations __________________________________________________ 102
__________ 9.4.3 Areas to cover and procedures to perform during due diligence __
__________ investigations __________________________________________________ 102
9.5 _______ The Consideration of Environmental Matters in the Audit of Financial _
__________ Statements ____________________________________________________ 103
__________ 9.5.1 Management’s responsibility in environmental matters ________ 104
__________ 9.5.2 The auditor’s responsibility in environmental matters ________ 104
__________ Activity 9.2 ____________________________________________________ 104
9.6 _______ Performance Auditing __________________________________________ 104
__________ 9.6.1 Audit process ____________________________________________ 105
__________ Activity 9.3 ____________________________________________________ 105
9.7 _______ Management Consulting Services ________________________________ 105
__________ 9.7.1 Principles for the provision of management consulting services 105
__________ 9.7.2 Underlying principles that should apply during the provision of __
__________ services _______________________________________________________ 105
9.8 _______ General Matters Relating to Other Reporting Engagements _________ 106
__________ 9.8.1 Change in engagement _____________________________________ 106
__________ 9.8.2 Reports on prescribed forms _______________________________ 107
9.9 _______ Prospectuses __________________________________________________ 107
__________ Activity 9.3 ____________________________________________________ 107
__________ 9.9.1 The auditor’s report to the prospectus ______________________ 108
9.10 ______ Audit of Historic Financial Information __________________________ 109
9.11 ______ Group Audits _________________________________________________ 110
__________ 9.11.1 Terminology in group audits ______________________________ 110
__________ 9.11.2 Possible problems with group audits _______________________ 111
__________ 9.11.3 Using the work of another auditor (ISA 600) _______________ 111
__________ Activity 9.4 ____________________________________________________ 112
__________ 9.11.4 Issues arising when a subsidiary is located overseas _________ 112
__________ 9.11.5 Matters to consider before accepting appointments as group ____
__________ auditor _______________________________________________________ 113
__________ 9.11.6 Group consolidation - audit procedures ____________________ 113
__________ 9.11.7 Letters of support _______________________________________ 113
__________ 9.11.8 Implication for the auditors’ report where a subsidiary has been
__________ qualified ______________________________________________________ 114
__________ Activity 9.5 ____________________________________________________ 114
__________ 9.11.9 Joint audits ______________________________________________ 115
9.12 ______ Summary _____________________________________________________ 115
__________ References ____________________________________________________ 116
Unit Ten: Completion of the Audit

10.0 ______ Introduction __________________________________________________ 117
10.1 ______ Objectives ____________________________________________________ 118
10.2 ______ Framework for the Completion of the Audit ______________________ 118
10.3 ______ Completion of the Audit Procedures ____________________________ 118
__________ Activity 10.1 ___________________________________________________ 120
10.4 ______ Going Concern Assumption ISA 570 _____________________________ 120
__________ 10.4.1 Responsibility of management and the auditor ______________ 120
__________ 10.4.2 Conditions that may cast doubt about going concern ____________
__________ assumptions ___________________________________________________ 121
__________ 10.4.3 Audit procedures to asses the going concern ________________ 122
__________ 10.4.4 Audit conclusions and reporting __________________________ 122
__________ Activity 10.2 ___________________________________________________ 124
10.5 ______ Subsequent Events ISA 560 _____________________________________ 124
__________ 10.5.1 Events occurring between the date of the financial statements and
__________ the date of the auditor’s report _________________________________ 125
__________ Activity 10.3 ___________________________________________________ 125
__________ 10.5.2 Facts which become known to the auditor after the date of the ___
__________ auditor’s report but before the date the financial statements are _______
__________ issued _______________________________________________________ 126
__________ 10.5.3 Facts which become known to the auditor after the financial ____
__________ statements have been issued ____________________________________ 126
__________ 10.5.4 Inquiry _________________________________________________ 127
__________ Activity 10.4 ___________________________________________________ 127
10.6 ______ Factual Insolvency _____________________________________________ 127
__________ 10.6.1 Actions of the auditor where liabilities exceed assets ________ 128
__________ 10.6.2 Steps taken by management to guard against irregularities and ___
__________ l o s s __________________________________________________________ 128
10.7 ______ Summary _____________________________________________________ 129
__________ References ____________________________________________________ 130
Unit Eleven: Auditing in the Public Sector

11.0 ______ Introduction __________________________________________________ 131
11.1 ______ Objectives ____________________________________________________ 132
11.2 ______ Auditing in the Public Sector ____________________________________ 132
__________ 11.2.1 The audit _______________________________________________ 132
__________ 11.2.2 The auditor’s report _____________________________________ 133
11.3 ______ Performance Auditing __________________________________________ 133
__________ 11.3.1 Performance auditing mandate ____________________________ 134
__________ Activity 11.1 ___________________________________________________ 135
__________ 11.3.2 Application of performance audit standards ________________ 135
__________ 11.3.3 Reporting _______________________________________________ 136
__________ Activity 11.2 ___________________________________________________ 136
11.4 ______ Summary _____________________________________________________ 136
__________ References ____________________________________________________ 137
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Module Overview
A
udit and assurance services play a vital role in maintaining confidence
and stability in global financial markets and, therefore, the world
economy. Corporate failures have meant that government has decided
that the assurance industry cannot be relied upon to regulate itself. As a result
mechanisms for regulation and for maintaining standards of corporate
governance have been introduced.
In this module we aim at introducing you to audit practice and assurance
services to equip you with relevant knowledge applicable to the current
economic environment. You should be able to analyse, evaluate and conclude
on the assurance engagements and other audit and assurance issues in the
context of best practices and current developments.
In the module we introduce you to the audit practice and assurance services
in Unit One and legal and regulatory environment in Unit Two. The legal and
regulatory environment shall touch aspects of companies' act, companies law
legislation that affect auditors, auditors' responsibility in as far as regulations
governing the profession says. Legal liabilities affecting auditors and accountants
in providing assurance services and standards and technical pronouncements
shall be covered.
Audit Practice and Assurance Services BACC 404
We cover fundamental principles of professional ethics in Unit Three, audit

related services and assurance engagements in Unit Four. In the remaining
units audit related services are defined, encompassing review engagements,
agreed-upon procedures and compilation engagements. Elements on the report
of factual finding are explained in detail as well as the process undertaken by
the auditor to perform agreed-upon procedures. Assurance engagement is
defined; elements and main types of assurance engagements are explained as
well.
Engagements and planning activities are important areas of effective audit

practice and assurance services. You will be introduced to engagement and
planning activities to achieve effective audit and assurance services. Special
audits and other assurance engagements will be dealt with in this module.
We also cover prospective financial information, forensic audits, completion

of the audit, and finally auditing in the public sector. These final aspects will
enhance your skills which need to be accompanied by practical application of
the concepts.
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2 Zimbabwe Open University
1
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Unit One
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Introduction to Audit Practice

and Assurance Services
1.0 Introduction
T
he study of audit practice and assurance services is an advanced text
from Auditing BACC307 Module. The module assumes that you
have already studied the basics, although some revision of basic topics
is included. The main aim of this module is to build on the knowledge gained
from your studies of auditing. In this unit, we will introduce you to the basic
concepts of audit practice and assurance services, building on professional
codes and fundamental principles.
1.1 Objectives
By the end of this unit, you should be able to:
z define assurance services
z discuss the authority attaching to International Standards on Auditing
z explain the meaning of audit and audit related services
1.2 Authority Attaching to International Standards

Issued by the International Auditing and
Assurance Standards Board (IAASB)
As the unit progresses reference will be given to international standards which
are applicable for this study and it is very important to know what these
standards stand for.
1. International Standards on Auditing (ISAs) are to be applied in the
audit of historical financial information.
2. International Standards on Review Engagements (ISREs) are to be
applied in the review of historical financial information.
3. International Standards on Assurance Engagements (ISAEs) are to be
applied in assurance engagements other than audits or review of historical
financial information.
4. International Standards on Related Services (ISRSs) are to be applied
to compilation engagements, engagements to apply agreed upon
procedures to information and other related services as specified by
the IAASB.
5. ISAs, ISREs, ISAEs and ISRSs are collectively referred to as the
IAASB's Engagement Standards.
1.3 Audit of Financial Statements

The purpose of an audit is to enhance the degree of confidence of intended
users in the financial statements. This is achieved by the expression of an
opinion by the auditor on whether the financial statements are prepared, in all
material aspects, in accordance with an applicable financial reporting
framework (ISA200).
The audit opinion is on whether the financial statements are presented fairly in
material respects, or give a true and fair view in accordance with the framework.
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Unit 1 Introduction to Audit Practice and Assurance Services
A framework in this case is a financial reporting framework designed to meet

the common financial information needs of a wide range of users. The financial
reporting framework may be a fair presentation framework or compliance
framework.
Audits are long-established, formalised processes, closely regulated by laws

and professional practice. Audits were developed because of the separation
between the ownership of companies and stewardship. An audit is designed
to provide a high level of assurance to the users of financial statements.
The financial statements subject to audit are those prepared by management

of the entity. Management should accept responsibility that is fundamental to
the conduct of the audit.
1.4 Audit-Related Services

Audit-related services are engagements undertaken by an accountant or firm
of accountants, to perform such assignments as reviews of data, agreed-upon
procedures and compilations.
1.4.1 Review
A review in relation to quality control is appraising the quality of the work
performed and conclusions reached by others. The objective of review
engagements is to enable an auditor to state whether, on the basis of procedures
which do not provide all the evidence that would be required in an audit,
anything has come to the auditor's attention that causes the auditor to believe
that the financial statements are not prepared, in all material respect, in
accordance with an applicable financial reporting framework.
Review procedures are the procedures deemed necessary to meet the objective
of a review engagement, primarily inquiries of entity personnel and analytical
procedures applied to financial data.
A review provides a moderate level of assurance that the information under

review is free from any material misstatements. The auditor's opinion is usually
expressed in the form of negative assurance, which is an opinion that there is
nothing wrong in the information. The higher level of assurance provided by
an auditor enhances the credibility provided by the assurance process. An
audit is more time consuming and more costly than a review.
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Zimbabwe Open University 5
1.4.2 Agreed-upon procedures

Agreed upon procedures are an engagement in which an auditor is engaged
to carry out those procedures of an audit nature to which the auditor and the
entity and any appropriate third parties have agreed and to report on factual
findings. The recipients of the report form their own conclusions from the
report by the auditor. The report is restricted to those parties that have agreed
to the procedure to be performed since others; unaware of the reasons of the
procedures may misinterpret the results. In agreed procedures the party hiring
the auditor specifies the procedures that should be followed by the auditor in
performing the engagement.
1.4.3 Compilation engagement

A compilation engagement is an engagement in which accounting expertise,
as opposed to auditing expertise, is used to collect, classify and summarise
financial information.
Activity 1.1
1. Explain the meaning of audit and audit related services
? 2. Explain the functions of authority attaching to International Standards
issued by the International Auditing and Assurance Standards Board
(IAASB).
1.5 Assurance
Assurance engagement is an engagement in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the intended
users other than the responsible party about the outcome of the evaluation or
measurement of a subject matter against criteria. In assurance engagement an
assurance firm is engaged by one party to give an opinion on a piece of
information that has been prepared by another party. The opinion is an
expression of assurance, or comfort, about the information that has been
reviewed.
There are two types of assurance engagements a practitioner is permitted to

perform as follows:
¾ Reasonable assurance engagement - The objective of a reasonable
assurance engagement is a reduction in assurance engagement risk to
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Unit 1 Introduction to Audit Practice and Assurance Services
an acceptably low level in the circumstances of the engagement as the

basis for a positive form of expression of the practitioner's conclusion.
¾ Limited assurance engagement - the objective of a limited assurance
engagement is a reduction in assurance engagement risk to a level that
is acceptable in the circumstances of the engagement, but where that
risk is greater than for a reasonable assurance engagement, as the basis
for a negative form of expression of the practitioner's conclusion.
Assurance engagement risk is the risk that the practitioner expresses an
inappropriate conclusion when the subject matter information is materially
misstated.
A statutory audit is one form of assurance engagement. It provides assurance
about the quality of the information. This makes the financial statements more
reliable for the users. A statutory audit provides a high level of assurance.
Other assurance engagements may provide a lower level of assurance or
comfort to the person receiving the opinion. The level of assurance given by
other assurance engagements will depend on various factors which will be
discussed.
1.6 Non-audit Assurance Engagements

Non-audit assurance engagements might include reports on such matters as
follows:
¾ Corporate social responsibility
¾ Environmental policy
¾ Employment policies
¾ Non-financial performance indicators
Activity 1.2
? Define assurance engagements and its elements.
1.7 Summary
In this unit, we explained IAASB's Engagement Standards and how they are
to be applied. We also explained the meaning of audit of financial statements
with reference to the framework. Audit related services which include reviews,
agreed - upon procedures and compilations were introduced. We closed the
unit by looking at assurance engagements and its components.
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References
ACCA (2009). P7 INT Advanced Audit and Assurance Essential Text.
Workingham Berkshire: Kaplan Publishing UK.
ACCA (2010). P7 INT Study Text: Advanced Audit and Assurance. (4th
Edition). Crowthorne Berkshire: Emily Wolf International Publishing.
Lewis, C .(1952). Mere Christianity. pp19-21. Quoted in: Dan, M., Wayne,
C., and Alan, J. (1999). Auditing. (5th Edition). Florida: Dryden
Press.p.65.
Marx, B.,Van Det Watt, A., Bourne, P. and Hamel, A. (2004). Dynamic
Auditing: A Student Edition. (7th Edition). Durban: LexisNexis
Butterworths.
Puttick, G. and Van Esch, S. (2003). The Principles and Practices of
Auditing. (8th Edition). Lansdowne: Juta and Co. Ltd.
SAICA (2011). 2011/12 Auditing SAICA Handbook. Volume 2. Durban:
LexisNexis.
Tom, L., and Lidia, V. (ed.) (2009). Performance Audit Handbook: Routes
to Effective Evaluation. Santa Monica: Rand Corporation.
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Unit Two
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Legal and Regulatory

Environment
2.0 Introduction
T
he auditor should be aware of the legal and regulatory environment in
which s/he execute auditing duties. The legal and regulatory
environment is the first route to take in Audit Practice and Assurance
services to ensure that we are working within the parameters of law and
regulating environment. In this unit we will cover Companies Act, Law
legislation, the auditor's responsibility and legal liabilities affecting auditors
and accountants in providing assurance services.
2.1 Objectives
z explain companies law legislation affecting auditors
z outline auditors responsibility
z discuss legal liability affecting auditors and accountants in providing
assurance services
z give standards and ethical pronouncements that affect auditors
2.2 Companies Act Overview (Companies Act 24:03

Sec 150(1), (2))
The Companies Act requires a holding company to prepare consolidated
annual financial statements which deal with the affairs of the company and its
subsidiaries and are presented to members at the annual general meeting of
the company. The responsibility for preparation of group financial statements
lies with the directors of the company. It is the duty of the holding company
auditors to examine the group annual financial statements and to report on
them. If the directors decide that group financial statements need not be
prepared or certain subsidiaries should not be dealt with in the group financial
statements, the auditors must report on such decisions. Approval of the registrar
of companies is needed and the auditor's report on the decision should
accompany the application (Puttick and Van Esch, 2004).
2.3 Company Law Legislation Affecting Auditors

We will look at certain rules which are common to the statutory framework of
auditing.
2.3.1 Appointing auditors

In general, auditors are usually appointed by the members of the company
(that is, the shareholders) at an annual general meeting, or at any other meeting
where annual accounts are presented.
If it is a simple case of re-appointing the existing auditors, an ordinary resolution

of the members is sufficient. However, an ordinary resolution with a longer
notice period may be required in the following cases:
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Unit 2 Legal and Regulatory Environment
¾ appointment of an auditor rather than the existing auditors

¾ re-appointment of an auditor originally appointed by the directors
Special (more relaxed) provisions may apply in the case of private companies
who can pass a so called elective resolution (special resolution that requires
the unanimous agreement of the shareholders of a firm). Such a resolution
must be unanimous and can be revoked any time by an ordinary resolution.
However, so long as the elective resolution remain in force no AGM is necessary
to re-appoint the existing auditor (his appointment remains in force
automatically)
Auditors may be appointed by the directors in some cases when the company's
first auditors are appointed and when filling a casual vacancy (a casual vacancy
may occur through death or retirement of the auditor). The shareholders must
re-appoint auditors chosen by the directors at the next AGM. A government
officer may appoint auditors if at the conclusion of the AGM no auditor is
appointed. The company must inform the relevant government authority of
the situation.
In principle, the auditor's remuneration is fixed by those who appoint him. In

practice, the task of deciding the auditor's remuneration is delegated to the
audit committee or the directors.
2.3.2 Vacation of office

There are typical statutory provisions relating to the removal or resignation of
an auditor.
To remove an auditor before his term of office expires, an ordinary resolution

of the members with special notice is required. The auditor usually has a right
to make a written representation which must be circulated to all members or
must be read out at the meeting at which an ordinary resolution is passed. The
notice should state that the auditor has made representation, if that is the case.
The auditor has a right to receive notice of, to attend, to be heard at the
meeting at which his term of office would have expired and at the meeting at
which it is proposed to appoint a new auditor.
An auditor may resign from his office by submitting a written notice to the
company, which then notifies the registrar of companies and all parties entitled
to receive copies of accounts. The auditor has the right to request an extra-
ordinary general meeting (EGM) to consider the reasons for his resignation.
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2.3.3 Statement of circumstances

Whenever an auditor ceases to hold office he must typically deposit at the
registered office of the company either a statement that there are no
circumstances connected with his ceasing to hold office which he considers
should be brought to the attention of the members or creditors, or a statement
of any such circumstances. A resignation should be deposited at the registered
office of the company if neither of these circumstances exists.
Activity 2.1
Give a detailed outline of company law legislation affecting auditors.
?
2.4 Auditor's Responsibility
The primary responsibility of an auditor is to report to a company's members
on every set of accounts (that is, Statement of Financial Position, Statement
of Comprehensive Income, Statement of Cashflow, Statement of Changes in
Equity, accompanying notes and group accounts) of which a copy is laid
before the members in respect of an accounting period.
The auditor must report to the members on annual accounts laid before the
company in general meeting (normally the AGM).
The report must state whether in the auditor's opinion, the financial statements
give a true ad fair view of the financial position of the company or group as at
the Statement of Financial Position date, and of the results of its operations
and its cash flows for the year then ended in accordance with International
Accounting standards and complying with relevant national statutes or laws
(ISA 700).
In preparing a report an auditor is required to carry out such investigations as

will enable him to form an opinion as to whether:
¾ proper accounting records have been kept by the company
¾ proper returns, adequate for audit purposes, have been received from
any branches not visited by the auditor
¾ the accounts are in agreement with the records and returns
If the auditor forms the opinion that any of these are not the case he must say
so in his report. He reports on this by exception only.
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If either of the following situations arises, he should state the fact in his report.
¾ If he has been unable to obtain all the information and explanations
necessary for his audit.
¾ If there is any inconsistency between the accounts and the directors'
report.
2.5 Standards and Technical Pronouncements

An in-depth knowledge of standards and other technical pronouncements
issued by the IASB, IAASB and the APB will be looked at.
2.5.1 International Standards on Auditing (ISA)

Individual countries may set their own national auditing standards to be followed
in audits carried out within their jurisdiction. Harmonisation of auditing standards
across the world is a worth while objective in the desire to drive up the quality
of all audits, in the public interest. Thus, the International Federation of
Accountants (IFAC) and the International Auditing Practice Committee (IAPC)
were born. The IAPC has issued a comprehensive suite of high quality
International Standards on Auditing (ISAs). In 2002 the IAPC restructured
itself and was renamed the International Auditing and Assurance Standards
Board (IAASB).
IFAC's mission is the world wide development and enhancement of an

accountancy profession with harmonised standards, able to provide services
of consistently high quality in the public interest.
The International Auditing and Assurance Standards Board (IAASB) works

to improve the quality and uniformity of auditing practices and related services
worldwide, by issuing pronouncements (for example, ISAs) and promoting
their acceptance.
The IAASB issues three categories of documents as follows:

¾ International Standards on Auditing (ISAs) are to be applied in any
audit of financial statements and should also be applied to the audit of
other information and to related services. ISAs do not override local
regulations where a country has its own national auditing standards.
¾ International Auditing Practice Statements (IAPSs) provide practical
assistance to auditors in implementing the ISAs and carrying out best
practice. IAPSs are not intended to have the same authority as ISAs.
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¾ Discussion Papers promote debate on auditing and assurance issues.

They carry less authority than either ISAs or IAPs.
2.5.2 The need for regulation of audit and assurance

services
The following are some of the reasons for the need of regulation of audit and
assurance services:
¾ The Public Interest - The key reason why audit and assurance services
should be regulated is for public interest. Assurance providers give an
impartial, professional view on issues that matter to users of financial
statements and other information. It is important that this view can be
trusted. Assurance providers need to operate within ethical boundaries
and to consistent standards.
¾ Ethical Regulations - Assurance providers are given ethical guidance
by professional bodies, Law and IFAC.
¾ Legal regulations - most countries have legal requirements associated
with some assurance providers, particularly audits.
¾ Professional regulations - auditors are required to carry out audits
according to professional standards.
2.6 Legal Liabilities Affecting Auditors and

Accountants in Providing Assurance Services
Legal liabilities affecting auditor and accountants in providing assurance services
will be discussed under two major sub-headings: the circumstances in which
auditors may have legal liability and liabilities to the client and liability to third
parties.
2.6.1 The circumstances in which auditors may have legal

liability
The auditor has a statutory duty to report to the members on whether:
¾ the financial statements are free from material misstatement;
¾ the financial statements have been properly prepared in accordance
with relevant national legal frameworks ( for example, in Zimbabwe the
Companies Act); and
¾ the Directors' report is consistent with the financial statements.
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Such duties impose liabilities if things go wrong. Auditors' liability can be

categorised under the following headings:
¾ Civil or criminal liability arising under legislation
¾ Liability under common law arising from negligence
2.6.2 Liability to the client and liability to third parties

To fully understand liability to third parties we will look at liability in contract
and liability in tort.
Liability in contract
¾ Liability to the client arises from contract law. The company has a
contract with the auditor and hence can sue the auditor for breach of
contract if the auditor simply fails to deliver, or delivers a negligently
prepared, audit report.
¾ The auditor must exercise care and skill when carrying out his duties.
The degree of care and skill to be shown in relation to the depth of his
investigation and the types of check to be made is shown by judicial
precedent.
¾ Auditors 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. Auditors should act diligently and
in accordance with applicable technical and professional standards when
providing professional services.
¾ If auditors can show that they have complied with generally accepted
auditing standards they would not have been negligent.
Liability in tort
A third (that is, a person who has no contractual relationship with the auditor)
may sue the auditor for 'damages', that is, financial award.
In the tort of negligent, the plaintiff (the third party) must prove that:
¾ the defendant (the auditor) owes a duty of care;
¾ the defendant has breached the appropriate standard of care as
discussed above (has been negligent) ; and
¾ the plaintiff has suffered loss as a direct result of the defendant's breach.
On the whole litigation is not concerned whether the auditor has in fact been
negligent but whether a duty of care is owed in the first place. If no duty is
owed it cannot be breached.
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2.6.3 Restricting auditors' liability

Audit firms may take the following steps to minimise their exposure to negligent
claims:
¾ screening potential audit clients to accept only clients where the risk
can be managed;
¾ using a letter of engagement as per ISA 210 in order to establish the
respective responsibilities and duties of directors and auditors;
¾ carrying out high quality audit work;
¾ using clauses to disclaim liability to third parties ;
¾ taking out professional indemnity insurance (P11);
¾ attempting to regulate the use of documents and restrict their use to
their specific, intended purpose; and
¾ obtaining specialist legal advice where appropriate.
Activity 2.2
Discuss the impact of limiting audit liability in an audit firm.
?
2.7 Summary
In this unit, we discussed the legal and regulatory environment. The Companies
Act requires auditors to prepare annual financial statements and present them
to stakeholders. The auditors have responsibilities in preparing and presenting
financial statements which are stipulated in the companies Act. Legal liability
affecting auditors is of paramount importance to avoid the auditors for being
sued over negligence. The auditor should be well versed with IASs and
Technical pronouncements for proper execution of duties.
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References
Press.p.65.
Marx, B.,Van Det Watt, A., Bourne, P. and Hamel, A. (2004). Dynamic
Butterworths.
LexisNexis.
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Unit Three
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Ethics
3.0 Introduction
B
roadly defined, ethics represents the moral principles or rules of
conduct recognised by an individual or group of individuals. Ethics
apply when an individual has to make a decision from various
alternatives regarding moral principles. All societies and individuals possess a
sense of ethics in that they can identify what is "good" or "bad". As Lewis
(1952, quoted in Dan, Wayne and Alan,1999, p.65) observed, "human beings
all over the earth have some sort of agreement as to what right and wrong
are." Ethical conduct is determined by each individual. Each person uses moral
reasoning to decide whether something is ethical or not. Ethics are a moral
code of conduct that requires an obligation by us to consider not ourselves
but others. In this unit, we will cover fundamental principles of professional
ethics, threats and safeguards of professional code of conduct, the auditor's
responsibility to act ethically to clients and colleagues, conflict of interests,
code of confidentiality, professional liability and indemnity, misconduct and
negligence and finally APB published ethical standards for auditors.
3.1 Objectives
z define the fundamental principles of professional ethics
z identify threats to compliance with the fundamental principles
z discuss the effectiveness of available safeguards
z describe the responsibilities of internal and external auditors to clients
and colleagues for the prevention and detection of fraud and error
z illustrate the application of, professional ethics in the context of
confidentiality and conflicts of interest
z discuss ethical standards for auditors
3.2 Fundamental Principles of Professional ethics

Ethics is a branch of philosophy that deals with values relating to human conduct,
with respects to the rightness and wrongness of certain actions and to the
goodness and badness of the motives and ends of such action. Fundamental
principles of professional ethics are the founding or foundation body of moral
principles or values governing or distinctive of a particular profession in this
case auditing. The fundamental principles of professional ethics will cover
rules of conduct for professional accountants and the fundamental principles
in the IFAC code.
3.2.1 Rules of conduct for professional accountants

A profession is a vocation of the highest standing: it calls on its members to
serve (no doubt for reward) the public by offering to them highly technical,
always confidential advice and services which require a different standard of
conduct from the tradesman. Its members stand in a different relationship
altogether from the man doing ordinary business.
All professions have a primary responsibility to provide quality service to the

public. The professional bodies that regulate the auditing profession set high
standards of behaviour for their members. Their codes of practice apply to all
members. The detailed rules of conduct vary between the professional bodies,
but all the major bodies have codes which are broadly similar.
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Unit 3 Ethics
3.2.2 The fundamental principles in the IFAC Code

The fundamental principles set out the obligations placed on all members,
whether or not they are in practice. The five fundamental principles of the
IFAC Code are set out below:
a) Integrity - A professional accountant should be straight forward and
honest in all professional and business relationships.
b) Objectivity - A professional accountant should not allow bias, conflict
of interest or undue influence of others to override professional or
business judgement.
c) Professional competence and due care - A professional accountant has
a continuing duty to maintain professional knowledge and skill at the
level required to ensure that a client or employer receives competent
professional services based on current developments in practice,
legislation and techniques. A professional accountant should act diligently
and in accordance with applicable technical and professional standards
when providing professional services.
d) Confidentiality - A professional accountant should respect the
confidentiality of information acquired as a result of professional or
business related services and should not disclose such information to
third parties without proper authorization, unless there is a legal or
professional right or duty to disclose. Confidential information should
not be used for personal advantage of the professional accountant or
third parties.
e) Technical standards- A professional accountant should comply with
relevant laws and regulations and should avoid any actions which discredit
the profession.
3.3 Threats and Safeguards

We are going to consider threats to independence and safeguard that can be
put in place to guard against threats. To safeguard independence accountants
should have procedures in place to identify possible conflict of interest
situations, evaluate the possible problem, and where necessary, take action
to manage or avoid conflict.
3.3.1 Independence
For an audit report to be of value, the auditor must be independent and also
must be seen to be independent. The opinion of an auditor must be an
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independent opinion given by a professional person with appropriate skills in

audit work, and the opinion must not be influenced by anyone else, especially
the views of management of the company whose financial statements have
been audited.
In order that a member's audit report is of value auditors must have

'independence of mind' and to be 'independent in appearance'. These
principles of both being and being seen to be independent are at the centre
of the role played by independence in auditing.
Independence of the auditor is a matter of public confidence in the audit

process.
In safeguarding independence it is important for auditors to be aware of the

following points.
¾ Auditors need to be fully aware of situations that may damage their
independence and objectivity. Such situations are referred to as threats
to auditor independence.
¾ Any threats to independence may be reduced by safeguards that are
taken by an audit practice (audit firm).
3.3.2 Threats to independence

Threats to fundamental principles are matters that could result in the accountant
or audit firm acting without integrity, sufficient competence, ensuring
confidentiality or in a way that discredit the profession. Threats to the
fundamental principles are largely threats to the independence and objectivity
of the accountant or audit firm.
The Code recognises the following general sources of threats to fundamental

principles:
¾ Self-interest threat. This arises when an accountant/auditor or an
audit firm has financial interest or other interest in the matter. The
decisions may be influenced by self interest, and the accountant or audit
firm will not act with independence and objectivity.
¾ Self-review threat. This occurs when an accountant is required to
review or re-evaluate (for a different purpose) a previous judgment he
has made or action that he has taken. Self-review threats can also apply
to audit firms. For example, if an audit firm prepared the financial
statements for a client company and then acted as auditor, it would be
reviewing its own work and would be reluctant to criticise or question
it. This would be a threat to objectivity and independence.
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Unit 3 Ethics
¾ Advocacy threat. This occurs when the accountant is in a position

where he is expected to defend or justify the position of the client, and
act as an 'advocate' for the client's position or point of view. This would
be a threat to objectivity and independence.
¾ Intimidation threat. This occurs when the accountant is deterred from
acting with objectivity due to threats against him or his firm. The nature
of the threat may be a threat by the client that it will take work away
from the audit firm unless it agrees with the point of view of the client
management.
¾ Familiarity threat. This occurs when the client becomes too
sympathetic with the client's position due to close relationships.
Specific threats
¾ Financial interest. A financial interest in a client would constitute a
self interest threat, although the nature of the interest and the degree of
control the accountant has over it will affect the level of risk. A member
of the assurance team or an immediate family member of that team
should not hold a direct financial interest or an indirect material interest
in a client. The interest should either be disposed of or the team member
removed from the engagement.
Example 3.1
Drin Company is developing a new product which is expected to be very
profitable, but it needs additional finance to complete the product development
work and for the market launch. It has invited its audit firm, Pull and Push, to
make an investment in the product. The financing arrangements would take
the form of either convertible debentures in Drin Company or a separate joint
venture company. If a joint venture company is established, Drin Company
and Pull and Push would share control of the business. The joint venture
company would develop, manufacture and market the new product.
What are the ethical issues to consider in this situation?
Solution
If Pull and Push retain Drin Company as an audit client, the ethical situation is
as follows.
Convertible debentures
The audit firm must not provide a loan to a client. Buying debentures in the
company would be a form of loan. It would create a major self-interest threat
for which there could be no suitable safeguards.
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A further problem is that convertible debentures could eventually be converted

into equity shares in Drin Company, which would also create a major self
interest threat for Pull and Push.
Joint venture company
A joint venture arrangement would also be unacceptable on ethical grounds,

because of the significant mutual financial interests that Drin Company and
Pull and Push would share.
A financial interest by an audit firm in an audit client is permissible only if the

interest is not material, the relationship with the client is insignificant and the
audit firm does not exercise significant influence. These conditions do not
apply here.
If the audit firm resigns from the audit
If Pull and Push resign from the audit of Drin Company, a different situation
would arise. The audit firm would be allowed to invest in its former audit
client, since the ethical threat would no longer exist. However, its is questionable
whether an audit firm would want to diversify its business interests into the
manufacture and marketing of a new product- an area of business in which
the firm's partners would have no direct experience or expertise.
Loans and guarantees
A loan from a client which is a bank or similar institution, made on normal

commercial terms would not constitute a threat to independence. However,
loans or guarantees made to or by assurance clients in other circumstances
constitute a self-interest threat and should be avoided.
Close business relationships
Close business relationships with assurance clients, such as having a material

joint venture represent a self-interest and possibly an intimidation threat. They
should be avoided. Purchasing goods and services from an assurance client
would not generally cause a threat to independence providing that it was on
normal commercial terms and in the normal course of business.
Family and personal relationships
Family and personal relationships between assurance staff and clients might
cause self-interest, familiarity or intimidation threat.
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Unit 3 Ethics
Other issues to consider are as follows:

Employment with Assurance Company
Recent service with assurance clients
Serving as an officer or director on the board of assurance clients
Long association of senior personnel with assurance clients
Fees
Gifts and hospitality
Actual and threatened litigation
Provision of other services (non audit work)
Temporary staff assignments
Activity 3.1
1. Define the fundamental principles of professional ethics.
? 2. Identify threats to compliance with the fundamental principles
3.3.3 Safeguarding independence

The responsibility for safeguarding independence is shared between the
individual auditor (or audit practice) and the profession as a whole.
The responsibilities of individual auditors and audit practices
A culture of independence and belief in auditor independence should exist

between auditor and the partners. A good auditor is usually an independent
auditor. Engagement partners and senior staff should be rotated, which means
an individual should not audit a client for more than specified number of years.
An audit firm should have the following procedures in place:

¾ appropriate training
¾ quality control procedures
¾ consultation procedures
Dealing with threats to independence might include any of the following:
¾ remove threat to independence, for example, not accepting a offered
gift;
¾ reject a proposed appointment as auditor, for example, doing substantive
procedures for an audit work you previously did; and
¾ resign from the audit of a client.
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3.4 Responsibilities to Clients and Colleagues

Professional bodies expect members to comply with their codes of conduct.
If an auditor does not comply with set codes of conducts regarding
independence the appropriate disciplinary action may be taken as follows:
¾ fine
¾ reprimand
¾ exclusion from membership
Auditor's independence may be improved by:
¾ regularly rotating auditors to avoid too close a relationship developing
between the auditor and client over along period; and
¾ the use of audit committees.
The responsibility for safeguarding independence is seen as shared between
the individual auditor and profession as a whole.
The auditor's responsibilities include the following:

¾ report an opinion;
¾ conduct the audit with due professional care and competence;
¾ maintain an independent mental attitude;
¾ report on material irregularities;
¾ detect and report fraud and error; and
¾ detect contraventions of laws and regulations
Example 3.2
An audit firm has completed the annual audit for a client company and the
audit team has identified a number of internal control weaknesses. As a result
the client has asked the firm to carry out a review of its financial IT systems.
What are the ethical issues to consider in this situation and how might the
problems be dealt with?
Solution
The engagement would involve non-audit work. The audit firm can accept the
engagement subject to certain conditions:
¾ The management of the client company must recognize that they have
the responsibility for internal controls in the company. The responsibility
cannot be passed to the auditor.
¾ The engagement team will not act in management capacity in any way
for example, implementation of internal control they recommend.
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Unit 3 Ethics
¾ There must be sufficient controls for self-review threat. For example

the individuals assigned to the engagement team to do the work should
not include anyone who will also be a member of the audit team.
Guidelines on providing non-audit services
¾ The auditor should evaluate the significance of threats created by
provision of non-audit work.
¾ In some cases threats may be eliminated or reduced by applying
safeguards. IFAC considers that safeguards are not possible for the
following activities:
¾ Authorising or executing a transaction, or otherwise exercising authority
on behalf of the assurance client, or having the authority to do so.
¾ Determining which recommendation of the firm should be implemented.
¾ Reporting in a management role to those charged with governance.
Some areas of non- audit work are as follows:
1. Taxation services
2. Internal audit services
3. IT systems services
These services may be permissible provided that management decisions are
not taken and that appropriate safeguards are in place.
Activity 3.2
? Discuss the ethical issues to consider in review of Financial IT systems.
3.5 Conflict of Interest

A conflict of interest concerning objectivity or confidentiality can arise where
an auditor acts for both a client company and also for a competitor company
of the client. Conflict of interest can be between the interests of a firm and a
client and or conflicts between the interests of different clients.
3.5.1 Conflict between members' and clients' interests

Audit firms must always place their clients' interests before their own. They
should not accept or continue engagements where there are significant conflicts
of interests between the firm and its clients. Any form of financial gain which
accrues, or is likely to accrue, to firms as a result of engagements, other than
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in the form of fees or other reward from clients, or concession properly earned,
will amount to a significant conflict of interest.
3.5.2 Conflicts between the interests of different clients

There is nothing improper in firms having two or more clients whose interests
may conflict, provided the work that the firm undertakes is not, in itself, likely
to be the subject of dispute between those clients. The firm's work should be
managed so as to avoid the interests of one client adversely affecting those of
another. Where the acceptance or continuance of an engagement would, even
with safeguards, materially prejudice the interests of any client, the appointment
should not be accepted or continued.
3.5.3 Safeguards
The rules of professional conduct suggest safeguards that can be instigated to
manage conflicts which may arise. These are:
¾ use different staff for each assignment;
¾ carry out a regular review of the situation;
¾ have instructions on maintaining confidentiality; and
¾ advice one or both clients to seek additional independent advice.
When a material conflict of interest between clients or potential clients is
identified, sufficient disclosure should be made to the clients concerned so
that they can make an informed decision as to whether to engage another firm
or continue with the existing firm.
3.6 Code of Confidentiality

Information acquired in the course of professional work should not be disclosed
to third parties without first obtaining permission from the client, unless there
is legal right or duty to disclose, or it is in the public interest to do so. It is
important in the auditor-client relationship that the client trusts the auditor to
observe confidentiality to ensure that all information necessary for the audit is
communicated or made available to the auditor.
Disclosure of confidential information may be allowed if:

¾ the client's permission has been given;
¾ the client is suspected of treason, terrorism, drug trafficking, or money
laundering;
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Unit 3 Ethics
¾ such disclosure is required to protect the member's interests;

¾ required by law; and
¾ it is in the public interests.
These disclosures can broadly be categorized under obligatory and voluntary
disclosures.
Activity 3.3
1. Define "Obligatory and Voluntary disclosures"?
? 2. Give examples of Obligatory and Voluntary disclosures.
3.7 Professional Liability and Indemnity

There are many areas of a registered accountant's and auditor's work that
expose the professional accountant to the risk of a claim for damages as a
consequence of allegations of negligence in performing the work. Claims
sometimes arise not out of any inherent defect in the professional work
performed, but, rather due to misunderstanding regarding the scope of or
responsibilities for that work (Puttick and Van Esch, 2004).
Legal claims may be made against an auditor on a number of grounds.

¾ The auditor may be prosecuted by the authorities for a criminal act,
and be criminally liable if found guilty.
¾ The auditor may be liable under civil law.
An audit firm owes a duty of care to their client, the entity.
3.7.1 Criminal liability

An auditor may be criminally liable in the following circumstances:
a. accepting appointment as an auditor under statutory provision where
you are not qualified to act;
b. where an auditor is involved in fraud for example, falsifying accounting
documents or records;
c. where he is guilty of insider dealing; and
d. criminal liability may arise for certain offences relating to the winding of
a company, tax law, financial services legislation and money laundering.
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3.7.2 Civil liability

The major threat faced by the auditing profession is the possibility of legal
claims against auditors as a result of negligent auditing.
Liability in contract
Liability to the client arises from contract law. The company has a contract
with the auditor and hence can sue the auditor for breach of contract if the
auditor fails to deliver or delivers a negligently prepared report. The auditor
must exercise due care and skill when carrying out his duties. Members have
a continuing duty to maintain professional knowledge and skill to ensure the
client receives competent professional services. Auditors should show
compliance with Generally Accepted Auditing Standards.
Liability in tort
Under the law of contract only the company that is in contract with the auditor
can sue the auditor. Others who feel they may have suffered because of
negligent audit have to rely on a different branch of law - The law of tort.
A tort can be defined as a 'civil' wrong other than that arising under contract
law, giving rise to a claim for damages.
Examples of persons who may suffer loss because of an auditors negligence

and relying on financial statements that do not give a true and fair view are:
¾ a bank that lends money to the company;
¾ a credit supplier;
¾ another company for purposes of takeover; and
¾ an investor
In the tort of negligence, the plaintiff (that is, the third part) must prove that:
¾ the defendant (that is, the auditor) owes a duty of care;
¾ the defendant has breached the appropriate standard of care (has been
negligent);
¾ the plaintiff has suffered a loss as a result of the defendant's breach; and
¾ third party has relied on the auditor's work.
The litigation process is concerned with the fact that a duty of care is owed in
the first place not negligence. If no duty owed, it can not be breached.
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Unit 3 Ethics
3.7.3 Indemnity
The professional accountancy bodies take the view that the image of the
profession would be seriously damaged if claims awarded against auditors
and accountants are not met because of lack of financial resources. Professional
bodies require members to carry professional indemnity insurance (PII). PII
is an insurance policy that provides cover against all civil liabilities that are
incurred as a result of the conduct of the firm's business. The insurance firm
pays out money on these policies if the firm itself cannot pay.
Activity 3.4
Discuss the disadvantages of the requirements of Compulsory PII.
?
3.7.4 Limiting liability
The following suggestions have been put forward as possible methods of
reducing liability:
a) Incorporation - would protect the partners from personal bankruptcy.
However, the firm itself may be forced into liquidation. Further, there
could be adverse tax implication and the firm would need to publish
financial statements and subject to an audit.
b) Limited liability partnerships (LLP) - would permit the partners to avoid
personal liability for the debts of the firm.
c) Capping liability - auditors should be able to limit the amount of their
liability for an individual audit.
3.8 Misconduct and Negligence

Misconduct
Misconduct refers to acts which are likely to bring discredit upon a member
of a profession or a profession itself. Convictions relating to the personal life
of members, such as, obtaining money or goods by false pretences, forgery,
theft and other offences involving dishonesty amount to misconduct.
Negligence
The critical matter in most negligence scenarios is whether a duty of care is

owed in the first place. A duty of care exists when there is a special relationship
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between the parties that is, where the auditor knew or ought to have known
that the audited accounts would be made available to, and would be relied
upon by, a particular person (or class of person).
Example 3.5
It is recommended that audit partners be rotated every five years. In order to

strengthen the ethical code of conduct, professional accountancy bodies are
currently debating whether to reduce the mandatory period for rotating audit
engagement partners to as little as two years.
Required:
a) Discuss why audit partner rotation is important in an ethical code of
conduct.
b) Explain two problems a small or medium sized firm of chartered certified
accountants might face if the threshold is lowered and identify possible
solutions to these problems.
Solution
Importance of Rotation
Rotation of key audit staff is important because it reduces the risk of familiarity
threat developing with audit clients. This raises a number of concerns with
regard to the professional completion of audit assignments.
Firstly, familiarity with clients increases the risk of collusion to commit fraud
(for example: Enron). Rotation of key staff would reduce the likelihood of this
occurring because it is more likely to be discovered by the new partner.
Familiarity could also encourage the development of personal or business

relationships. This would then create a self interest threat to objectivity. Once
again rotating the partner reduces the likelihood of this occurring but also
removes the partner in question away from engagements where relationships
have already developed. Finally, rotation reduces potential threats to
professional competence/due care. This is due to the fact that an overreliance
on historical knowledge of a business and trust of directors could cause senior
audit staff to overlook key issues. Rotation provides fresh perspectives and
ideas, which ensures a consistently high quality of service and professional
due care.
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Unit 3 Ethics
Problems faced by a small/medium sized firm
In many firms partners specialise in certain industries, meaning there would

only be a small pool of partners to rotate between. This could be overcome
by allowing partners to return to a previous client after a "cooling off" period.
It could also be overcome by firms pooling their audit teams to reduce specialist
departments, replacing them with staff able to adapt to a broad range of
industries. Each time a new partner takes over a client there will be a necessary
"transition of knowledge." It could potentially take a significant amount of
time for a partner to get to grips with the key issues and risks relating to a
client than the previous partner would have been aware of. To overcome this
successor partners could be identified well in advance. They could then review
the audit file each year prior to taking over the client to build an awareness of
the key issues. Another solution might be the creation of a "knowledge bank"
by the incumbent partner that they could give to their successor. In small and
medium sized firms many clients are won over by the local reputation of a
certain partner. They may feel let down by the rotation policy and this could
lead to problems accepting the new engagement partner. To manage, these
firms could work with their clients to ensure they are fully informed about the
changes. They could include the client when deciding upon the replacement
partner, perhaps even conducting interviews of the possible replacement.
Activity 3.5
Discuss the importance of audit partner rotation in line with ethical
? code of conduct.
3.9 Summary
In this unit we discussed that auditors are expected to display high standards
of professional ethics in executing their duties. Five fundamental principles of
professional ethics are integrity, objectivity, professional competency and due
care, confidentiality and technical standards. Auditors need to be fully aware
of situations that may damage their independence and objectivity. Such
situations are referred to as threats to auditor independence. Any threats to
independence may be reduced by safeguards that are taken by an audit
practice (audit firm). The responsibility for safeguarding independence is shared
between the individual auditor and profession as a whole. Information acquired
in the course of professional work should not be disclosed to third parties
without first obtaining permission from the client, unless there is legal right or
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duty to disclose, or it is in the public interest to do so. Auditor's liability may

be categorised under civil or criminal liability arising under legislation and liability
under common law arising from negligence. A third part may sue the auditor
for damages under the law of tort.
References
Press.p.65.
Marx, B.,Van Det Watt, A., Bourne,P. and Hamel, A. (2004). Dynamic
Butterworths.
LexisNexis.
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Unit Four
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Audit Related Services
4.0 Introduction
A
udit firms are often asked to provide services to clients, which do
not involve the expression of an opinion on the truth and fairness of
financial statements. For example, the firm might be asked to give
assurance that interim financial statements are correctly prepared in a business
or they might be asked to prepare the financial statements for a private entity
audit client. In this unit, we will look at review engagements, agreed upon
procedures and compilation engagements.
4.1 Objectives
z describe the nature of audit-related services and the levels of assurance
provided by audit firms
z explain the difference between audit-related services and audits of
historical financial statements
z discuss the importance of analytical procedures in review engagements
z examine the general principles relating to compilation and agreed upon
procedures engagements
4.2 Definition of Audit Related Services

Audit related services are services that the professional accountant or audit
firm might offer but which are not audits, although they are related ideas and
use similar skills.
Audit related services may also be referred to as Non Audit Services.
There are three types of audit related services or non audit services as follows:
a) review engagements;
b) agreed-upon procedures; and
c) compilation engagements.
Table 4.1 Circumstances in which Audit-Related Services are Required
Review Engagements Agreed Upon Procedure Compilation Engagements

• Engagements to review • Forensic accounting – • Preparing accounts.
the Financial Statements investigations into fraud • Preparing tax computations
of companies that do not or malpractice and acting as an agent for
have to be audited (for • Verifying insurance tax matters.
example. Small claims • Special tax enquiries.
companies) • Reporting on non-
• Interim Financial financial data such as
Information magazine circulation
• ‘Due Diligence’ figures.
assignments
(Source: ACCA, 2010)
These three types of audit related services form the major aspects of audit
related services.
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Unit 4 Audit Related Services
4.2.1 IFAC standards for audit related services

IFAC issued International Standards on Review Engagements (ISREs) and
International Standards on Related Services (ISRSs) in relation to each of the
types of audit - related services.
¾ ISRE 2400 Engagements to Review Financial Statements
¾ ISRE 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity.
¾ ISRS 4400 Engagements to Perform Agreed-Upon Procedures
Regarding Financial Information.
¾ ISRS 4410 Engagements to Compile Financial Information.
4.3 Review Engagements

Reviews of data are checks carried out on information prepared by another
person. They provide a moderate level of assurance that the information under
review is free of material misstatements.
ISRE 2400 Engagements to Review Financial Statements states that:
The objective of a review of financial statements is to enable an auditor to

state whether, on the basis of procedures that do not provide all the evidence
that would be required in an audit, anything has come to the auditor's attention
that causes the auditor to believe that the financial statements are not prepared,
in all material respect, in accordance with an identified financial reporting
framework.
4.3.1 Differences between audit assignment and non-audit

assignment
The major differences between audit assignments and non-audit assignments
are as follows:
¾ an audit is a statutory requirement for the majority of entities whereas
non audit engagements are usually voluntary.
¾ during an audit, the auditor has an obligation to form an opinion on the
truth and fairness of financial statements and their compliance with local
legislation and International Financial Reporting Standards (IFRS). The
auditor will have to perform the following activities:
an assessment of risks to the business;
an assessment of adequacy of internal controls;
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obtaining audit evidence;

designing audit procedures; and
considering whether the business is a going concern
A non-audit assignment will not involve these activities. The scope of
work is not laid out in statute, it will be agreed between the entity and
the audit firm. It is important to agree a detailed engagement letter with
the client prior to the commencement of any work.
Table 4.2 Differences between Audit Assignments and Non-audit
Assignments
An Audit Audit Related Service
Level of assurance Reasonable assurance Either Limited or no
assurance
Scope of work Set by auditor Set by review (For review
engagements) or
client/company (for agreed
upon procedures or
compilation engagements)
Types of assurance Positive Negative (for review
engagements), none for
(agreed upon procedures or
compilation engagements)
Required by Law in many countries Usually not required by law
(Source: ACCA, 2010)
4.3.2 The work required for a review engagement

REVIEW ENGAGEMENTS
Plan Procedures
Professional skepticism Enquiries
Analytical procedures
Read the Financial statements
Follow up
Figure 4.3: The Work Required for a Review Engagement (Source:

Puttick and Van Esch, 2003)
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4.3.3 Review engagement procedures

The accountant or auditor must carry out sufficient work to enable him to
express negative assurance on the financial statements. In deciding on the
scope of the review (that is, the procedures deemed necessary in the
circumstances), the accountant will consider:
¾ any knowledge acquired previously about the client;
¾ the nature of the accounting systems;
¾ the extent to which items are affected by management judgment; and
¾ the materiality of transactions and balances.
Review work will concentrate on:
¾ enquiries of company management; and
¾ analytical procedures.
Analytical procedures should be designed to identify relationships and individual
items that appear unusual. Such procedures might include:
¾ current financial statements vs. prior periods;
¾ current financial statements versus forecasts; and
¾ review for any relationships within the financial statements that would
be expected to conform to a predictable pattern based on previous
patterns for the entity or industry norms.
4.3.4 The review report

The outcome of a review engagement will be a report from the accountant or
auditor. The review report must contain a clear written expression of negative
assurance.
The review report should contain:

¾ title;
¾ addressee;
¾ Opening or introductory paragraph including:
- identification of the financial statements on which the review has been
performed; and
- a statement of the responsibility of the entity's management and the
responsibility of the auditor.
¾ scope paragraph, describing the nature of the review, including:
- a reference to the International Standards on Auditing applicable to
review engagements, or to relevant national standards or practices;
- a statement that a review is limited primarily to enquiries and analytical
procedures; and
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- a statement that an audit has not been performed, that the procedures
undertaken provide less assurance than an audit and that an audit opinion
is not expressed.
¾ statement of negative assurance
¾ date of the report
¾ auditor's address; and
¾ auditor's signature
Two main forms of review report
¾ No matters have come to the attention of the auditor, which
indicate that a true and fair view is not presented
¾ Some matter has come to the attention of the auditor, indicating
that a true and fair view might not be presented.
No matters have come to the attention of the auditor
The auditor will issue a report giving a clear expression of negative assurance.
An example of such report based on ISRE2400 is given below:
Unqualified/Negative review report
We have reviewed the accompanying Statement of Financial Position of XYZ

Company 31 December 2011, and the related statement of Income and cash
flows for the year then ended. These financial statements are the responsibility
of the company's management. Our responsibility is to issue a report on these
financial statements based on our review.
We conducted our review in accordance with the International Standard on

Review Engagements 2400. This standard requires that we plan and perform
the review to obtain moderate assurance as to whether the financial statements
are free of material misstatement. A review is limited primarily to enquiries of
company personnel and analytical procedures applied to financial data and
thus provide less assurance than an audit. We have not performed an audit
and, accordingly, we do not express an opinion.
Based on our review, nothing has come to our attention that causes us to
believe that the accompanying financial statements do not give a true and fair
view in accordance with International Financial Reporting Standards.
AUDITOR
Date
Address
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NB: The negative assurance that is given in the report - nothing has come to
the attention of the accountant to indicate that a material misstatement exists.
Where such matters have come to the auditor's attention
When matters have come to the auditor's attention, suggesting that a material
misstatement exists, the reporting requirements are similar to those in ISA700
for qualified external audit reports. The auditor will need to:
¾ describe the matters involved;
¾ assess the impact of the matter, as either material or pervasive/
fundamental; and
¾ distinguish between 'disagreement' and 'limitation on scope' when
presenting the opinion in the report.
Review report example dealing with material disagreements based on
ISRE2400.
REVIEW REPORT
(First two paragraphs as for the previous unqualified report)
Management has informed us that inventory has been stated at its cost which
is in excess of its net realisable value. Management's computation, which we
have reviewed, shows that inventory, if valued at lower of cost and net realisable
value as required by International Financial Reporting Standards would have
been decreased by $.....,and net income and shareholders' equity would have
been decreased by $.....
Based on our review, except for the effects of the overstatement of inventory
described in the previous paragraphs, nothing has come to our attention that
causes us to believe that the accompanying financial statements do not give a
true and fair view in accordance with International Financial Reporting
Standards.
AUDITOR
Date
Address
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4.4 Review of Interim Financial Information

ISRE 2410 Review of interim financial information performed by the
independent auditor of the entity gives guidance to the accountant in carrying
out a review of Interim Financial Information (IFI).
Interim Financial statements are subject to a review not a full audit.
4.4.1 Procedure for the review of IFI

¾ Obtain understanding of the entity and its environment
¾ Make enquiries and perform analytical procedures sufficient to reach a
conclusion for the review
¾ If any such matters come to the auditor's attention, make additional
enquiries or perform more procedures to obtain information
¾ Check whether the IFI agree or reconcile to the accounting records
¾ Check whether management has taken subsequent events into account
and made an assessment of an entity's going concern
¾ Evaluate any uncorrected misstatements in the IFI, both individually
and in aggregate.
¾ Obtain written representation from management that:
o they acknowledge their responsibility for internal controls;
o that IFI has been prepared and presented in accordance with applicable
International Financial Reporting Framework;
o any uncorrected misstatement are immaterial; and
o Full disclosure of significant facts has been observed.
4.4.2 Reporting on the review of IFI

IFI report should consist of the following elements
¾ Title
¾ Addresses
¾ Identification of the IFI that has been reviewed
¾ A statement of management's responsibility
¾ The auditor's conclusion
¾ The auditor's responsibility
¾ A statement that the review was conducted in accordance with ISRE
2410
¾ A statement that the review is less in scope.
¾ Date of report
¾ Location in the country or jurisdiction where the audit firm practises
¾ Signature of auditor/accountant.
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Example
Report on Review of Interim Financial Information
(Appropriate addresses)
Introduction
We have reviewed the accompanying statement of financial position of XYZ

entity as of 30 June 2011and the related statement of income, changes in
equity and cash flows for the six months period then ended, and a summary of
significant accounting policies and other explanatory notes. Management is
responsible for the preparation and fair presentation of this interim financial
information in accordance with IFRS. Our responsibility is to express a
conclusion on this interim financial information based on our review.
Scope of review
We conducted our review in accordance with International Standards on

Review Engagements 2410. A review of interim financial information consists
of making enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly we do not express an audit
opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the accompanying Interim Financial Information does not give a
true and fair view of the financial position of the entity as at June 30, 2011,
and of its financial performance and its cash flows for the six-month period
then ended in accordance with IFRS.
Auditor
Date Address
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Activity 4.1
1. Using the above example, Report on Review of Interim Financial
? Information, give a detailed list of IFI report elements.
2. Discuss conditions in which a qualified or adverse opinion can be given.
3. Explain what an auditor should do if a limitation of scope is imposed.
4. Briefly describe going concern in line with ISA570 Going Concern.
4.5 Agreed-upon Procedures ISA920

The objective of an agreed-upon procedures engagement is for the auditor to
carry out procedures of an audit nature to which the auditor and the entity and
any appropriate third parties have agreed and to report on factual findings.
As the auditor simply provides a report on the factual findings of agreed-upon

procedures, no assurance is expressed. Instead, users of the report assess
for themselves the procedures and findings reported by the auditor and draw
their own conclusions from the auditor's work.
The report is restricted to those parties that have agreed to the procedure to
be performed since others, unaware of the reasons for the procedures, may
misinterpret the results.
4.5.1 Defining the terms of engagement

The conduct of agreed-upon procedures is regulated by ISRS 4400
Engagements to perform agreed-upon procedures regarding financial
information.
The auditor should ensure with representatives of the entity and, ordinarily,
other specified parties who will receive copies of the report of factual findings,
that there is a clear understanding regarding the agreed-upon procedures and
the conditions of the engagement. Matters to be agreed include the:
¾ nature of the engagement;
¾ stated purpose for the engagement;
¾ identification of financial information to which agreed-upon procedures
will be applied;
¾ nature, timing and extent of the specific procedures to be applied;
¾ anticipated form of the report of factual findings; and
¾ limitations on distribution of the report of factual findings.
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s
4.5.2 Engagement letters

An engagement letter should be sent by the auditor documenting the key
terms of the appointment. An engagement letter confirms the auditor's
acceptance of the appointment and helps avoid misunderstandings regarding
such matters as the objective and scope of the engagement, the extent of the
auditor's responsibilities and the form of the report to be issued.
Engagement letter should include:

¾ a listing of the procedures to be performed as agreed between the
parties; and
¾ a statement that the distribution of the report of factual findings would
be restricted to the specified parties who have agreed to the procedures
to be performed.
4.5.3 Processes undertaken by the auditor to perform

agreed-upon procedures
a) Planning
b) Documentation
c) Procedures and evidence
Procedures may include -
i. enquiry and analysis;
ii. re-computation, comparison and other clerical accuracy checks;
iii. observation;
iv. Inspection; and
v. Obtaining confirmations.
d) Reporting
4.5.4 The report of factual findings elements

The following elements should be found in a report of the factual finding by
the auditor.
¾ Title
¾ Addressee (Client)
¾ Identification of specific financial or non financial information to which
the agreed-upon procedures have been applied
¾ A statement that the procedures performed were those agreed with the
recipient
¾ A statement that the engagement was performed in accordance with
the International Standards on Auditing applicable
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¾ When relevant, a statement that the auditor is not independent of the

entity
¾ Purpose of agreed-upon procedures
¾ A listing of specific procedures performed
¾ A description of the auditor's factual finings
¾ A Statement that the procedure performed does not constitute either
an audit or review and as such no assurance is expected.
¾ A statement that, had the auditor performed additional procedures, an
audit or review, other matters might have come to light that would have
been reported.
¾ A statement of report restriction
¾ A statement that the report relates only to the elements, financial
statements, items or financial and non-financial information specified
and it does not extend to the entity financial statements taken as a whole
(when applicable)
¾ Date of the report
¾ Reporting accountant's address
¾ Reporting accountant's signature
Example 4.1: Report of Factual Findings
REPORT OF FACTUAL FINDINGS
To: Those who engaged the reporting auditor
We have performed the procedures agreed with you and enumerated below
with respect to the accounts payable of Vida Ltd as at 31 March 2012, set
forth in the accompanying schedule. Our engagement was undertaken in
accordance with the International Standards on Auditing applicable to agreed-
upon procedures engagements. The procedures were performed solely to
assist you in evaluating the validity of the accounts payable and are summarised
as follows:
1. We obtained and checked the addition of the trial balance of accounts
payable as at 31March 2012 prepared by Vida Ltd, and we compared
the total to the balance in the related general ledge account.
2. We compared the attached list of major suppliers and the amounts
owing as at 31 March 2012 to the related names and amounts in the
trial balance.
3. We obtained suppliers' statements or requested suppliers to confirm
balances owing as at 31 March 212.
4. We compared such statements or confirmations to the amounts referred
to in 2 above. For amounts which do not agree, we obtained
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reconciliations from Vida Ltd. For reconciliations obtained, we identified

and listed outstanding invoices, credit notes an outstanding payments in
transit , each of which was greater than $xxx. We located and examined
such invoices and credit notes subsequently received and remittances
subsequently paid and we ascertained that they should in fact have
been listed as outstanding on the reconciliations.
We reported our findings below:
a) With respect to item 1 we found the additions to be correct and the
total amount to be in agreement.
b) With respect to item 2 we found the amounts compared to be in
agreement.
c) With respect to item 3 we found there were suppliers' statements for all
such suppliers.
d) With respect to item 4 we found the amounts agreed, or with respect to
amounts which did not agree, we found Vida Ltd had prepared
reconciliations and that the invoices, credit notes and outstanding
payments over $xxx were appropriately listed as reconciling items with
the following exceptions :
(Detail the exceptions)
Because the above procedures do not constitute either an audit or a review

made in accordance with International Standards on Auditing, we do not
express any assurance on the accounts payable as of 31 March, 2012.
Had we performed additional procedures or had we performed an audit or

review of the financial statements in accordance with International Standards
on Auditing, other matters might have come to our attention that would have
been reported to you.
Our report is solely for the purpose set forth in the first paragraph of this
report and for your information and is not to be used for any other purpose or
to be distributed to any other parties. This report relates only to the accounts
and items specified above and do not extend to any financial statements of
Vida Ltd taken as a whole.
Date Reporting Auditor
Address
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Activity 4.2
1. Discuss the importance and significance of agreed-upon procedures.
? 2. Explain what you understand by "factual findings report"
4.6 Compilation Engagements

In compilation engagement, the accountant is engaged to prepare financial
statements or other information and not to audit or review the financial
statements or other information that has been prepared by someone else.
4.6.1 ISRS 4410 engagements to compile financial

information
ISRS 4410 engagements to compile financial information, regulates the conduct
of compilation engagement.
¾ No assurance is given by the accountant
¾ The benefit is derived from the accountant's professional competence
and due care
¾ The accountant must comply with professional codes of conduct
¾ An engagement letter is required, confirming;
- that the work to be carried out is not an audit and is not a review
- the engagement cannot be relied upon to disclose error, fraud or other
irregularities
- the information on which the assignment will be based is the responsibility
of management
- the intended use and distribution of the report
¾ Planning and documentation will be required for the engagement
¾ The accountant should have adequate knowledge of the client's business
¾ If the accountant is aware that the information provided is unsatisfactory,
he should ask management to correct the information. The accountant
should withdraw from the engagement if management refuses to improve
or correct the information.
Example 4.2: Compilation Report
To: The Board of Management of the Mkoba Swimming Club
On the basis of the information provided by you we have compiled, in

accordance with the International Standards on Related Services applicable
to compilation services, the statement of financial position of the Mkoba
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Swimming Club as at 31 December 2011, and the income statement and

statement of cash flows for the year ended 31st December 2011.
Management is responsible for these financial statements. We have not audited

or reviewed these financial statements and accordingly express no assurance
on them.
ACCOUNTANT
Date
Address
Activity 4.3
Outline the objectives of compilation engagements.
?
4.7 Summary
In this unit, we discussed audit related services or non audit services which
are services that the professional accountant or audit firm might offer but
which are not audits, although they are related ideas and use similar skills.
There are three types of audit related services namely Review Engagements,
Agreed-upon procedures, and Compilation engagements. Audit and Audit
related services have major differences in terms of level of assurance, scope
of work, types of assurance and legal requirements.
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References
Press.p.65.
Butterworths.
LexisNexis.
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5
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Unit Five
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Assurance Engagements
5.0 Introduction
A
uditors are often engaged to audit and report an opinion on other
subject matters other than issuing an opinion on the fair presentation
of annual financial statements. As covered in unit four auditors may
be engaged to review financial and non financial subject matters and report a
conclusion based on their review. Engagements to perform an audit or a review
are termed assurance engagements (Puttick and Van Esch, 2003). Auditors
may be engaged to perform agreed upon procedures and report on factual
findings or compile financial statements based on information supplied by the
client. In this unit, we will identify different categories of engagements and
assurance engagements. Agreed upon procedures and compilation
engagements have been discussed in unit four. Audit and review engagements
are classified as assurance engagements whilst agreed-upon procedures and
compilation engagements are classified as related services. The objectives
and elements of assurance engagements intended to provide a high level of
assurance are discussed in this unit. In unit four we discussed the standards
and guidance for the performance of engagements to provide a moderate
level of assurance, or no assurance.
5.1 Objectives
z explain the objectives of assurance engagements
z explain the elements of assurance engagements
z describe the various levels of assurance the auditor can give
z outline the main types of assurance engagements
z discuss the major types of audits
5.2 Definition of Assurance Engagement

An assurance engagement is an engagement in which a practitioner expresses
a conclusion designed to enhance the degree of confidence of the intended
measurement of a subject matter against criteria.
5.3 Objective of Assurance Engagements

Assurance engagements performed by professional accountants and auditors
(referred to as a 'practitioner' when carrying out assurance engagements)
enhance the credibility of information prepared by one party and so can be
accepted with confidence by another party, the intended user of the information
(Puttik and Van Esch, 2003).
The International Framework for Assurance Engagements states that the

objective of assurance engagement is for a practitioner to evaluate or measure
a subject matter that is the responsibility of another party against identified
suitable criteria, and to express a conclusion that provides the user with a
level of assurance about a subject matter.
5.4 Five Elements of an Assurance Engagements

Whether a particular engagement is an assurance engagement will depend
upon whether it exhibits all the following elements:
1. a three party relationship involving:
- a professional accountant;
- a responsible party; and
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Unit 5 Assurance Engagements
- an intended user.
2. a subject matter;
3. suitable criteria;
4. an engagement process; and
5. a conclusion.
5.4.1 A three party relationship

The responsible party and the intended user of the subject matter and assurance
report are often from separate organisations or with the same organisation.
The responsible party is the person who prepares the subject matter. For
external reporting the responsible party usually engages the professional
accountant. For internal reporting the professional accountant is usually engaged
by a party other than the responsible party, for example, the directors. External
intended users of assurance reports may request or impose a requirement for
an assurance engagement.
The intended user is the party for whom the assurance report is prepared. In
audit of financial statements intended users are dictated by statute being
shareholders of a company and in terms of common law these are financial
institutions, regulatory authorities, creditors and potential shareholders. The
user of the report may be restricted if the engagement is for a specific purpose.
5.4.2 Subject matter

In reference to financial information the subject matter may be financial
statements and in the case of non-financial information, it may be the
implementation and operation of internal control.
The subject matter may also include:

¾ information such as historic or prospective financial information, statistical
information or performance indicators;
¾ systems and controls; and
¾ behaviour such as corporate governance, compliance with regulation
or human resource practices.
The subject matter of an assurance engagement is to be identifiable, capable
of consistent evaluation or measurement against suitable criteria and in a form
that can be subjected to procedures for gathering evidence to support that
evaluation or measurement (SAAS 100, paragraph.21).
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5.4.3 Criteria
These are the standards or benchmarks used to evaluate or measure the subject
matter. Without acceptable criteria, a reporting accountant cannot add
credibility to the subject matter on which the assurance report is based. Criteria
for assessment need to be suitable and known to intended users. A criterion
which enables reasonable consistent evaluation or measurement of a subject
is considered suitable.
Examples of suitable criteria:

¾ When reporting on the way in which an entity is organised or managed,
or the extent to which its objectives have been achieved, generally
accepted criteria for a particular industry may be used.
¾ When reporting on internal control, the criteria may be an established
internal control framework or stated internal control criteria.
¾ When reporting on compliance, the criteria may be the applicable law,
regulation or contract.
¾ Criteria may also be developed for specific users, for example, a party
to a contract who wants assurance that other parties to the same contract
are complying with the contract terms.
5.4.4 Engagement process

The engagement process involves obtaining sufficient appropriate evidence
to express an appropriate conclusion using professional judgment. The greater
the assurance required the more extensive the engagement process will be
and vice versa. The terms of the assurance engagement thus dictate the extent
of the process and these terms need to be agreed upon by the party engaging
the reporting accountant and the reporting accountant, as well as possibly
other parties such as the intended user or users and the party preparing the
subject matter. The accountant uses professional judgment considering
engagement risks and materiality when planning and conducting the
engagement.
5.4.5 Conclusion
Having gathered sufficient evidence to draw a conclusion that the subject
matter conforms in all material respect with suitable known criteria, the
professional accountant can express such a conclusion. Where the subject
matter contains assertions by the responsible party, the engagement is termed
an attest engagement. The professional accountant's conclusion relates to the
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assertion. Assertions are representations or conclusions about the subject

matter based on identifiable suitable criteria.
Level of assurance provided by the professional accountant's conclusion:

¾ In an attest engagement, the conclusion relates to an assertion by the
responsible party. The assertion is the responsible party's conclusion
about the subject matter based on identifiable suitable criteria. The
professional accountant can either express a conclusion about the
assertions made by the responsible party, or provide a conclusion about
the subject matter in a form similar to the assertions made by the
responsible party.
¾ In a direct reporting engagement, the professional accountant expresses
a conclusion on the subject matter based on suitable criteria, regardless
of whether the responsible party has made a written assertion on the
subject matter.
¾ Professional accountants ordinarily undertake engagements to provide
either a high or moderate level of assurance. Engagements are affected
by various elements, for example the degree of precision associated
with the subject matter, the nature, timing and extent of procedures,
and the sufficiency and appropriateness of the evidence available to
support a conclusion.
¾ 'High level assurance' means that the professional accountant has
obtained sufficient appropriate evidence to conclude that the subject
matter conforms in all material respects with identified suitable criteria.
In rare circumstances, the professional accountant may be able to
provide absolute assurance as a result of such factors as:
- the use of selective testing;
- the inherent limitations of control systems;
- the fact that much of the evidence available to the professional
accountant is persuasive rather than conclusive; and
- the use of judgment in gathering evidence and drawing conclusions
based on that evidence, for example, where the evidence available is
conclusive and reliable because the subject matter is determinate, the
criteria definitive and the process applied comprehensive. The high level
of assurance is less than absolute because of the limitations of the
engagement process. The professional accountant designs the
engagement to reduce to a low level the risk of an inappropriate
conclusion that the subject matter conforms in all material respects with
identified suitable criteria.
¾ 'Moderate level assurance' means that the professional accountant has
obtained sufficient appropriate evidence to be satisfied that the subject
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matter is plausible in the circumstances. The professional accountant

designs the engagement to reduce to a moderate level the risk of an
inappropriate conclusion. The professional accountant designs the report
to convey a moderate level of assurance regarding the conformity of
the subject matter with identified suitable criteria.
Activity 5.1
1. Describe the objectives of an assurance engagement.
? 2. Explain the five elements of an assurance engagement.
5.5 Reporting on an Assurance Engagement

The report prepared by the accountant at the end of an assurance engagement
will include the following elements:
¾ a title;
¾ an addressee;
¾ subject matter of the report;
¾ suitable criteria;
¾ use of report restriction statement (where appropriate);
¾ a statement that the engagement was carried out in accordance with
ISAEs;
¾ a summary of the work performed;
¾ the practitioner's conclusion; and
¾ the date, name and address of the practitioner.
5.6 Main Types of Assurance Engagements

There are four main types of assurance engagements as follows:
¾ Risk assessments
¾ Business performance measurement
¾ Systems reliability, and
¾ E-commerce matters
5.6.1 Engagements relating to risk assessment

Businesses have systems in place to identify and monitor business risks. The
management of business risk is critical as directors must safeguard the assets
of the entity.
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Many models are used to identify risks including:

¾ Porter's Five Forces
¾ PEST analysis
¾ SWOT analysis
Management will distinguish between strategic, operating and information risk.
They will analyse risks, considering potential impact on the business and
probability of the risk occurring.
Risks are often prioritised as follows:
High Impact High Impact

High Likelihood Low Likelihood
A B
Low Impact Low Impact

High Likelihood Low Likelihood
C D
When risks have been identified and analysed, management has to come up
with strategies to manage risks. There are various strategies in line with the
table above.
¾ A - High impact high likelihood risks must be dealt with, perhaps by
taking out insurance against the eventuality (transferring risk) or by putting
in place internal controls to prevent the risk arising (managing risk). In
other words immediate action is needed.
¾ If a risk is a high impact, high probability it might have to be avoided,
for instance, by not taking up the new business opportunity.
¾ B - High Impact Low Likelihood risk, consider action and develop a
contingency plan.
¾ C - Low impact High likelihood risk consider action.
¾ D - If risks are low impact, low probability/likelihood, then they may
well be accepted and kept under review.
Assurance on risk assessment
Monitoring risk assessment processes is often a task carried out by internal

audit but which could equally be carried out by external parties (such as the
audit firm) as an assurance engagement.
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5.6.2 Engagements relating to performance measurement

An audit firm may be asked to provide performance measures operating within
a business. Performance measurement aims to establish how well something
or somebody is performing in relation to previous or expected activity or in
comparison with another item or body.
Different measures are appropriate for different businesses. Traditional financial

performance measures are:
¾ Profit
¾ Revenue-costs
¾ Share price
¾ Cash flow
¾ Return on investment.
Financial measures do not give a full picture of a business' performance. Entities
are turning to non-financial performance measures for example:
In manufacturing business, non-financial performance measures are as follows:

¾ Customer rejects or sales returns
¾ Customer satisfaction
¾ Wastage
¾ Staff morale
¾ Machine down time
¾ Documents processed per employee
In order to provide assurance about the way in which performance
measurements are calculated and presented the practitioner might need to:
¾ understand the performance measurement system in use;
¾ assess and evaluate it; and
¾ test the effectiveness of its operation.
Activity 5.2
Suggest five non-financial performance measures that a manufacturing
? business could use internally.
5.6.3 Engagements relating to systems reliability

Businesses are exposed to risk if their computerised systems are unreliable as
follows:
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¾ Assets are misappropriated or tempered with

¾ Systems are damaged and shut down
¾ Data is tempered with and unauthorised amendments made
¾ Confidential data is stolen
Management and other stakeholders may engage a practitioner to give
assurance on the effective and secure operation (reliability) of their computer
systems.
The practitioner's work in these engagements will focus more on identifying,

evaluating and testing controls within the company's information system.
¾ Computer -assisted audit techniques (CAATs), such as, audit software
and test data are likely to be used by the accountant to carry out the
work.
5.6.4 Engagements relating to e-commerce maters

Entities may use information technology to conduct business transactions, using:
¾ E-commerce or
¾ Electronic data interchange (EDI). EDI is the process of transferring
documents between the computer systems of different entities.
¾ SET or secure electronic transactions is an extension of EDI; is used to
process money transfers electronically for credit cards and debit cards.
E-commerce refers to trading electronically rather than face to face. Most e-
commerce activities take place over the internet, customers buying goods or
services through the websites of sellers.
Users of an e-commerce system need to have trust in the integrity of the

system.
Risks associated with the use of e-commerce systems:
Inherent risks
¾ A loss of transaction integrity.
¾ Increased security risks with 'remote' trading than face-to-face or paper-
based trading transactions.
¾ The use of inappropriate accounting policies (for example, in respect
of the capitalisation of website development costs).
¾ Legal and regulatory risks: e-commerce activities may be breaking the
law in some countries.
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Potential risks
¾ Customer validity; how do they know that a customer is who they say
they are?
¾ Server reliability; the site may be subject to denial of service attacks
preventing the receipt of legitimate orders.
¾ Data theft; firewalls can prevent this as they will deny external users the
opportunity to access parts of the system.
Business risks
¾ Cash flow difficulties due to investment in the systems
¾ Loss of competitive advantage in a fast-moving market place if systems
or processes fail or are suspended
¾ Failure of systems development
¾ Lack of profitability
¾ Customer dissatisfaction due to poor service
Management responsibility for e-commerce risks
Management should evaluate the risks to which the entity is exposed and take
appropriate action to manage those risks. The general approach that should
be taken is summarised below:
¾ Management should carry out risk assessment exercises on a regular
basis
¾ Management should create an appropriate control environment,
including an information systems security policy
¾ The entity should make appropriate use of an internal audit function, to
obtain assurance that the e-commerce system is functioning properly
¾ There should be adequate audit trails for e-commerce transactions
¾ The entity should keep up-to-date back-up copies of data files
¾ Use encryption for data, encryption involves the electronic conversion
of data into a secure coded language for transmission, so that it will be
incomprehensible to anyone who intercepts it in transmission.
¾ The system user should comply with generally-recognised standards
and register with the Web Trust or a similar organisation.
Webtrust
Webtrust is designed to create confidence in consumers and entities who

conduct business transactions over the internet. Having the Webtrust seal on
a business web site provides some assurance that the site owner has systems
in place to preserve the confidentiality and security of a credit card holder.
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The owner of a web site can engage a specially licensed accountant to provide
the Webtrust assurance service. This accountant must conduct an updated
assurance examination of the procedures in place at the site at least once
every three months.
Internal controls assessment
The audit firm must consider the following in order to assess the system
properly:
¾ How many servers does the entity have?
¾ What processing methods are used?
¾ How is the network configured?
¾ How are customers and suppliers authenticated?
¾ What security methods are used?
¾ How good are the general internal controls?
Electronic commerce-effect on the audit of financial statements
Performing an assurance engagement on electronic processing system provides

additional challenges for auditors as follows:
¾ the need for technical expertise in the audit firm;
¾ increased audit risk;
¾ the going concern problem needs more attention than usual;
¾ internal audit is especially important in these areas;
¾ problems may arise when some aspects of the e-commerce system
(Such as the electronic payments system) are outsourced by the client
to another entity;
¾ the focus of controls may be different. Most systems concentrate on
recording and storage of transactions. In e-commerce the focus may
be on the actual execution of the transactions; and
¾ Possible problems of independence and conflict of interest, if the audit
firm was involved in designing or setting up the e-commerce system
that is subject to 'audit'.
Audit approach to e-commerce
¾ The audit firm should decide whether the engagement should be accepted
¾ Plan the engagement; appropriate staff with e-commerce expertise
¾ Obtain a detailed knowledge of the client's business
¾ Consider liaison with the internal auditors of the client, if there have
been internal audit investigations into the client's e-commerce transactions
or system
¾ Identify and evaluate the risk in the system
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¾ Ascertain and evaluate the control environment and the specific internal
controls that are in operation
¾ Perform a going concern review, particularly in the case of entities that
rely mainly on e-commerce activities for their income
5.6.5 Other types of assurance engagements

Other types of assurance engagements include:
¾ Social and environmental issues
¾ Reviews of internal control as part of corporate governance framework
¾ Value for money assessment
¾ Ethical supply chain management
¾ Continuous auditing
Activity 5.3
1. Discuss the risk of a business exposure to unreliable systems.
? 2. Explain risks associated with the use of e-commerce systems.
5.7 Types of Audits

Auditing constitutes a major part of the activities of a registered accountant
and auditor. Auditing has been defined as the independent examination of
financial information of any entity, whether profit-orientated or not, and
irrespective of its size or legal form, when such an examination is conducted
with a view to express an opinion thereon (Internal Auditing guide No.3)
Auditing covers the following major branches:

¾ Independent auditing
¾ Internal auditing
¾ Operational auditing
¾ Management auditing
¾ Comprehensive auditing
¾ Forensic auditing; and
¾ Public sector auditing
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5.8 Summary
An assurance engagement is an engagement in which a practitioner expresses
a conclusion designed to enhance the degree of confidence of the intended
measurement of a subject matter against criteria. In this unit we looked at the
nature and objectives of assurance engagements which is to give credibility to
the users of financial and non-financial information. There are five major
elements of assurance engagements which consist of a three part relationship,
a subject matter, suitable criteria, engagement process and conclusion. At the
end of the engagement an auditor has to come up with a report which shows
the level of assurance being expressed by the practitioner. In this unit we also
discussed the types of assurance engagements as being risk assessments,
business performance measurement, systems reliability, and e-commerce
matters. We concluded the unit by giving the major types of audits.
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References
Press.p.65.
Butterworths.
LexisNexis.
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6
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Unit Six
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Prospective Financial
Information
6.0 Introduction
P
rospective financial information falls under Assurance Services category
covered in the previous unit. In this unit we discuss that traditionally,
the role of the auditor has focused on providing assurance on 'historical'
events. When an auditor examines historical data, there is usually factual
evidence to support the reported figures. The evidence will come from events
that have taken place since the financial statements were produced. For
example receivables may subsequently have been paid, inventories may have
subsequently have been sold, providing evidence that trade receivables were
correctly valued in the statement of financial position, and that inventory was
also correctly valued. This evidence is critical to the audit process. Assurance
services on information relating to the future is known as prospective financial
information (PFI).
6.1 Objectives
z define prospective financial information (PFI)
z distinguish between a forecast, a projection, a hypothetical illustration
and a target
z describe the matters to be considered before accepting a specified
engagement to report on PFI
z discuss the level of assurance that the auditor may provide
z compare the content of a report on examination of PFI and report
made in providing non audit services
6.2 Definition of PFI

Prospective financial information (PFI) means financial information based on
assumptions about events that may occur in the future and possible actions by
an entity. Financial information may be in the form of a forecast, or a projection,
or a combination of both.
¾ Forecast: A forecast is PFI prepared on the basis of assumptions about
future events that management expects to take place and the actions
that management expect to take as of the date the information is prepared
(best -estimates assumptions). A forecast is generally for a period not
exceeding one year.
¾ A projection is PFI prepared on the basis of hypothetical assumptions
about future events and management actions that are not necessarily
expected to take place or a mixture of best-estimate and hypothetical
assumptions. Projections are typically for more than one year (two to
five years).
¾ A forecast is therefore a best estimate of what is expected to happen,
and a projection is an estimate of what is likely to happen if certain
conditions or events were to happen. A target is what management
want to happen or a desired future outcome aimed for by an
organisation.
¾ A hypothetical illustration is a depiction of anticipated outcomes based
on the assumptions made about future activities.
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Unit 6 Prospective Financial Information
6.3 Steps for Preparing PFI

i. Make best estimate assumptions about future
¾ Sales will rise by 4%
¾ Interest rates will remain stable
¾ Exchange rates will fluctuate
ii. Determine accounting policies that must be used to prepare PFI from
already existing policies
¾ Sales recognition
¾ Revenue recognition
¾ Depreciation rates
iii. Prepare PFI on basis of assumptions and accounting policies
iv. Issue PFI with material assumptions clearly disclosed.
Activity 6.1
1. Distinguish between a forecast, a projection, a hypothetical illustration
? and a target.
2. Explain the major objectives of PFI.
6.4 Matters to Consider in Accepting a PFI

Assurance Engagement
The following are the matters to consider in accepting a PFI assurance
engagement:
¾ The availability of resources and staff with the necessary expertise
¾ The timescale for the completion of the engagement
¾ Agreeing a fee for the work with the client
¾ The intended use of the information (internal or external) - information
for external use will be relied upon by third parties, potentially for making
investment decisions. The consequences of inappropriate reports will
be more risk and severe
¾ Whether the information is for general or limited distribution: Information
for general distribution is more risky as the larger audience will rely on
it
¾ The nature of the assumptions (for example, best-estimates or
hypothetical)
- Forecast and projections cannot be verified with any certainty because
the outcome is unknown
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- Information best-estimates should be reasonable approximations to

likely actual
- Where assumptions are hypothetical, they will be much more difficult
for the auditor to validate - as there is likely to be little to support them;
and therefore the assignment holds higher risk
¾ The elements to be included in the information
- Inclusion of complex and subjective elements that the auditor has little
knowledge increases the risk to the accountant of accepting the
engagement
¾ The period covered by the information. Short term periods are easy to
verify than long periods
In a review of PFI only a negative assurance or limited assurance can be
provided. An engagement letter should be agreed and signed by both parties
before the work is started.
6.5 Issues to Consider When Deciding the Nature,

Timing and Extent of the Procedures Required
to Complete a PFI Assurance Engagement
The following are some of the issues to consider when deciding the nature,
timing and extent of the procedures required to complete a PFI assurance
engagement:
¾ The likelihood of material misstatements in the forecast or projection
¾ The knowledge that the auditor has obtained during any previous similar
engagements
¾ The competence of the client's management with regard to the
preparation of PFI
¾ The extent to which PFI is affected by management's judgment
¾ The adequacy and reliability of the underlying data and assumptions
that have been used as the basis for preparing the prospective financial
information
6.6 Approach to PFI

The general approach to the PFI assurance work should be similar to the
approach for audit work or other assurance work, but with some modifications
to allow for the specific nature of the work.
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The procedures will include the following:

¾ where the audit firm has no previous knowledge of the entity, it should
obtain sufficient knowledge of the entity and its environment;
¾ if best estimates have been used in preparing the PFI (a forecast), the
auditor should seek evidence to support these estimates;
¾ if hypothetical assumptions have been used (to prepare a projection),
the auditor should assess whether they are realistic and sensible, and
whether the full implications of the hypothetical assumptions have been
properly reflected in the PFI;
¾ assess whether the PFI contains all the relevant material items;
¾ if part of the 'future period' in the forecast or projection has already
passed, the auditor should review the actual results for that part of the
period, and compare actual results with the forecast or projection. This
will help in assessing reliability of the forecast or accuracy of the
projection;
¾ check arithmetic accuracy and consistency of PFI prepared; and
¾ obtain representation from management;
- Management's acceptance of responsibility
- Intended use of information
- The completeness of assumptions made to prepare PFI.
Example 6.1
List possible procedures relating to a profit forecast that the entity will use in
support of a bank loan application.
Solution
¾ Understand the basis of the forecast
¾ Consider whether the assumptions are consistent with each other.
¾ Consider if the forecast is reasonable in light of known facts
¾ Discuss key variables and sensitivities with management
¾ Review internal consistency of forecast
¾ Compare assumptions and bases for forecasting with internal
information.
¾ Compare figures with other forecasts for consistency
¾ Compare figures with any available evidence
¾ Consider all items of costs
¾ Consider whether the forecast of the amount of finance required allows
for working capital
¾ Check that the forecast of profit and cash flows includes the cost of
borrowed finance
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¾ Forecasts of cost and revenue should allow inflation estimates

¾ Carry out sensitivity analysis of revenue, cost and profit forecast to
establish the extent to which estimates in the forecast would differ before
forecast profit turns into loss.
Activity 6.2
Discuss the general approach to PFI relating to a profit forecast that
? the entity will use in support of a bank loan application.
6.7 Reporting on PFI

A PFI report should contain the following elements:
¾ Title
¾ Addressee
¾ Identification of the PFI
¾ A reference to the ISAE
¾ A statement that management is responsible for the PFI
¾ Purpose of the PFI and restrictions of the PFI
¾ A statement of negative assurance
¾ An opinion as to whether the PFI is properly prepared on the basis of
these assumptions, and whether the PFI is presented in accordance
with the relevant financial reporting framework
¾ Warnings that the PFI is a forecast or projection, and the results indicated
by PFI might not be achieved.
¾ Date, address and signature of the auditor.
If the auditor is not in a position to issue an unqualified report, the auditor may
issue, a qualified report, an adverse report or withdraw from the engagement.
Example 6.2
Based on the PFI reporting element, draft a report on a financial forecast.

Solution
REPORT ON A FINANCIAL FORECAST
To the Board of Directors of the Grains Company
We have examined the profit forecast for the year to 31st December
2012 set out on pages…to… Our examination was made in accordance
with International Standard on Assurance Engagements 3400.
Management is not responsible for the forecast, including the
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assumptions set out in Note XX on which the forecast is based.

Based on our examination of the evidence supporting the assumptions,
nothing has come to our attention that causes us to believe that these
assumptions do not provide a reasonable basis for the forecast. Further,
in our opinion, the forecast is properly prepared on the basis of the
assumptions.
Actual results are likely to be different from the forecast, since anticipated
events frequently do not occur as expected and the variation may be
material.
Auditor
Address
Date
Activity 6.3
1. Discuss PFI reporting element.
? 2. Draft a PFI report based on PFI reporting elements of a company of
your choice. The report should be of a financial nature.
6.8 Summary
Prospective financial information is financial information based on assumptions
about future events based on forecast, projections or hypothetical illustration,
to enable management to come up with desired future outcomes or targets.
PFI may be used for internal or external use. In PFI preparation you make
assumption, define accounting policies, then prepare PFI and issue a PFI
report. Before accepting a PFI engagement the auditor should assess the
level of risk involved. The Level of assurance is based on the possibility to
verify future events and only limited assurance can be offered for PFI
engagements. The auditor can only comment on the reasonableness of
assumptions made. The general approach to the assurance work should be
similar to the approach for audit work or other assurance work, but with
some modifications to allow for the specific nature of work. The report
following an examination of PFI will be significantly different from traditional
audit reports.
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References
Press.p.65.
Butterworths.
LexisNexis.
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7
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Unit Seven
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Forensic Audits
7.0 Introduction
I n unit five, we introduced the major types of audits which were also covered
in detail in Auditing (BACC307) module which is a pre-requisite of Audit
Practice and Assurance Services (BACC404). Among the major types of
audits, we mentioned forensic auditing, which will be covered in detail in this
unit. Forensic auditing is a topical issue, in the auditing profession. In general,
“forensic’means used in connection with courts of law. In accounting ‘forensic’
refers to the use of accounting information for legal purposes, in the resolution
of legal disputes that are resolved by a court of law (Puttik and Van Esch,
2003).A forensic auditor is an investigative accountant or fraud auditor, utilising
a combination of accounting, auditing and investigative skills to search for
evidence of criminal conduct and the monetary consequences thereof. A
forensic auditor may also be required to assist in the determination, or rebuttal
of claimed damages. The forensic auditor is required to analyse, interpret,
summarise and present complex financial and business-related issues in a
manner that will be suitable for and understood by users of the forensic auditor’s
report. This information is used as a basis for discussion, debate and, ultimately,
the resolution of the matter.
Audit Practice and Assurance Services Module BACC 404
7.1 Objectives
z define forensic accounting, forensic investigation and

forensic audit
z describe the major applications of forensic auditing
z explain the role of forensic auditor as an expert witness
z explain the fundamental ethical principles for professional
accountants engaged in forensic audit assignments
z apply the fundamental ethical principles for professional
accountants engaged in forensic audit assignments
z discuss the terms under which experts make reports
7.2 Forensic Accounting, Forensic Investigation

and Forensic Auditing
In this section we define and discuss forensic accounting, forensic investigation
and forensic auditing.
7.2.1 Forensic accounting

Forensic accounting is the preparation of financial information to be used as
evidence by a court of law. Forensic accounting uses accounting, auditing,
and investigative skills to conduct an examination into a company’s financial
statements. Forensic accounting is often used to provide an accounting analysis
to enable lawyers, insurance companies and other clients to resolve disputes.
Information provided by forensic accountant for example relates to:

¾ Loss of earnings
¾ Settlement of a legal dispute involving the valuation of a business
¾ Losses relating to an insurance claim
¾ A divorce settlement.
Forensic accountants are trained to look beyond the numbers and deal with
business reality. They require the ability to analyse, interpret, summarise, and
present complex financial and business-related issues and communicate
financial information obtained clearly and concisely. Forensic accountants
should be familiar with legal concepts and procedures.
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Unit 7 Forensic Audits
There are two aspects of forensic accounting:

¾ Forensic investigations
¾ Forensic audits
7.2.2 Forensic investigations

Forensic investigation is a forensic audit carried out in response to a suspicion
of wrong doing to prove or disapprove certain assumptions. This involves
using specialised investigative skills to carry out enquiries conducted in such a
manner that the outcome will have application to a court of law. The objective
of a forensic investigation is to obtain evidence to resolve a dispute or prove
innocence or guilt in a criminal case. Forensic investigations are usually reactive
in nature, they seek to prove or disprove suspicions of wrong doing and
provide evidence for legal proceedings. Investigations can be proactive or
preventive. Risks of wrong doing can be identified through specialised
techniques of forensic auditing and steps can be taken to improve the situation.
7.2.3 Forensic audit

These are methods and procedures used to obtain audit evidence in forensic
investigations. Forensic auditing may be defined as the process of gathering,
analysing and reporting on data, much of it financial in nature, in the pre-
defined context of legal dispute or investigation into suspected irregularities
and in some cases, giving preventative advice.
Activity 7.1
? 1. Distinguish between forensic accounting, forensic
investigation and forensic audit.
2. Explain the objectives of forensic audits.
7.3 Major Applications of Forensic Auditing

Major applications of forensic auditing are shown below:
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Table 7.1: Major Applications of Forensic Auditing

Application Examples Type of Work Performed
Fraud Employee Funds tracing, asset identification
Investigations embezzlement of and recovery, forensic
company, tax evasion, intelligence gathering, due
insider dealing diligence reviews, interviews,
detailed review of documentary
evidence
Insurance claims Business interruptions, Detailed review of the policy
property losses, motor from either an insured or insurer’s
vehicle accidents, perspective to investigate
personal liability claims, coverage issues, identification of
cases of medical appropriate method of calculating
malpractice, wrongful the loss, quantification of losses.
dismissal
Professional Loss suffered as a result Advising on merits of a case in
negligence of placing reliance on regards to liability, quantifying
professional adviser losses
Shareholder, Determination of funds Detailed analysis of numerous
partnership and to be included in years accounting records to
matrimonial settlements, as benefits quantify the issues in dispute,
disputes or distributions tracing, locating and evaluation of
assets
(Source: Emily Wolf, 2010)
7.4 Role of Forensic Accountant

The forensic accountant has many responsibilities to include the following:
¾ Communicate their findings in the form of reports, exhibits and collections
of documents
¾ Assist in legal proceedings, including testifying in court as an expert
witness and preparing visual aids to support trial evidence
¾ Provide evidence on the financial implications of a situation, or on
whether there is evidence to substantiate claims of fraud or negligence.
¾ In cases of fraud investigations:
¾ investigates whether fraud has actually occurred, and obtains evidence
to support the assertion
¾ identify the individual or individuals who have committed the fraud,
obtain evidence to link them to fraud and how they had the opportunity
to commit fraud that is, control weaknesses
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¾ estimate financial loss due to fraud

¾ To act as expert witness where:
¾ it is relevant to a matter that is in dispute between parties
¾ it is reasonably required to resolve the proceedings
¾ they have the expertise relevant to the issues on which an opinion is
sought
¾ they have experience, expertise, and training appropriate to the value,
complexity, and importance of the case
Activity 7.2
1. Explain the major applications of forensic auditing giving
? examples and type of work to be performed.
2. Describe the role of forensic accountant in fraud
investigations.
7.5 Fundamental Ethical Principles to Forensic

Investigations
The fundamental ethical principles to forensic investigations are:
7.5.1 Integrity
Forensic professionals are likely to deal frequently with people who lack
integrity, or may have been involved in criminal behaviour. The investigator
must not be involved in anything that will damage their reputation, such as
accepting bribes or giving in to other forms of coercion/intimidation. The
forensic accountant must act with integrity and honesty at all times.
7.5.2 Objectivity
The professional accountant must always be-and be perceived to be-entirely
neutral. This is very important especially if the forensic report will be submitted
to the court of law. Any threat to objectivity will undermine the integrity of
evidence provided. The forensic accountant should remain independent and
should seek to obtain evidence to reach an opinion and not to be compromised
by the pressure to satisfy the conclusion perceived by the paying client. The
accountant must safeguard against self-review and advocacy threats. Advocacy
threats arise because the firm may feel pressured into promoting the interests
and point of view of their paying client, which breaches the concept of
objectivity in court proceedings.
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Self-review threat arises when an auditor becomes involved in some form of

forensic work because the investigation is likely to involve some form of fraud
or potential misstatements to the accounts.
7.5.3 Professional competence and due care

Individuals should be sufficiently competent to do the work since forensic
investigations involve specialist skills such as:
¾ knowledge of the relevant legal framework;
¾ knowledge of how to gather specialist evidence;
¾ skills in the safe custody of evidence, maintaining a ‘chain’ of evidence;
and
¾ strong interpersonal skills: communication, interview techniques,
presentation of material at court.
7.5.4 Confidentiality
Accountants should maintain client confidentiality and information should not
be disclosed without their consent unless required by law. Legal requirements
for disclosure override the rules of client confidentiality. During legal proceedings
the investigator may be requested to disclose all information deemed necessary
by the court.
7.5.5 Professional behaviour

Fraud investigators may become a matter of public interest and media attention
is often focused on their work. A highly professional attitude must be displayed
at all times, in order to avoid damage to the reputation of the firm, and of the
profession. Lapse in professional behaviour could undermine credibility of
the investigator acting in the capacity of expert witness.
7.6 Considerations When Carrying out Forensic Work

Particular considerations the accountant has to bear in mind when carrying
out forensic work are as follows:
¾ To whom a duty of confidentiality is owed
¾ Duties to the court
¾ Legal privilege in the context of money laundering
¾ Most accountancy work, auditing or accounts preparation gives rise to
the duties to report suspicions of money laundering. If an accountant is
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working in a legal capacity and obtains information due to legal privileges,

it will be wrong to make a report of suspicion of money laundering.
7.7 Procedures in Forensic Investigations

Procedures depend on terms and objectives of the engagement. In general
these are elements in a normal audit investigation which apply. The following
are the procedures in Forensic investigations.
¾ Establish the objectives of the investigation
¾ Plan the investigation in line with objectives, for example, in a suspected
fraud investigation, plan how to establish whether fraud has occurred,
how it could have happened and for how long-who committed and
how much has been lost
¾ Audit work should be planned in a way that provides sufficient
appropriate evidence to achieve the audit objectives. The evidence
should be strong enough to ‘stand up’ in court if required. Audit evidence
should try to establish a motive for alleged fraudster, identify the
opportunity that the fraudster had to commit the fraud and evidence of
measures by the fraudster to conceal crime
¾ Audit evidence may be gathered in various ways, similar to ways in a
normal audit.
¾ The auditor should use evidence obtained to reach an opinion
¾ A report is prepared for the client at the end of the investigation
7.8 Reporting
On completion of forensic investigation, the forensic accountant will write and
submit a report on their findings.
Key issue in reporting will be as follows:

¾ Whom the report is intended for and restriction of liability to other
parties.
¾ The type of assurance required.
¾ The purpose of the report, for example, to substantiate an insurance
claim or to provide evidence to a court of law.
The report may include sections on:
¾ The nature of the assignment
¾ Scope of the investigation
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¾ Approach utilized
¾ Limitations of scope, and
¾ Findings and/or opinions.
Activity 7.3
? List audit procedure the accountant will have to do if asked by
a client to give evidence of whether inventory has been
misappropriated or not.
7.9 Summary
In this unit, we explained forensic accounting, forensic investigation and forensic
auditing. A clear distinction of the three areas of forensic audits was given.
The major applications of forensic audits were explained giving examples and
work to be performed in each major application. There are fundamental ethical
standards to be adhered to by the forensic accountant in executing his/her
duties. The forensic accountant has to conduct investigative procedures and
evaluate evidence before coming up with a final report on findings.
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References
Press.p.65.
Butterworths.
LexisNexis.
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8
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Unit Eight
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Engagements and Planning

Activities
8.0 Introduction
T he auditor and the client should agree on the terms of the engagement. In
case of statutory appointments, such as the audit of incorporated
companies, the objective and scope of an audit and the auditor’s obligations
are established by law. Thus the auditor may not accept engagement terms
which are in anyway restricted, but may accept terms of engagement which
go beyond the statutory audit requirements. Such terms might include tax,
accounting or management consulting services. Once agreed upon the terms
should be recorded in an engagement letter or contract. Engagement letter
helps prevent misunderstandings surrounding the engagement. The engagement
letter document confirms the auditor’s acceptance of the appointment, the
objective and scope of the audit, the extent of the auditor’s responsibility to
the client, and the form of any reports. Planning the audit is not a discrete
phase of the audit, but rather a continuous process that often begins after
accepting the audit engagement for new clients, or shortly after completing
the current audit engagement for existing clients. In this unit we will discuss in
detail engagements and planning activities. Since obtaining or updating

knowledge of the client’s business is a prerequisite to planning, and because
the auditor also considers materiality and audit risk during the planning stage,
these concepts have been dealt with in Auditing module prior to the detailed
discussion of planning in this unit.
8.1 Objectives
z obtain engagement acceptance information

z explain the engagement activity procedure or framework
z describe the purpose and contents of engagement letters
z identify the aspects that need to be considered in planning
an audit
z discuss the effects and benefits of appropriate planning
8.2 Engagement Activities

Before accepting a new audit engagement, firms should ensure that they are:
¾ competent to undertake the work;
¾ consider carefully whether there are threats to their independence and
objectivity and, if so, whether adequate safeguards can be established;
¾ assess the integrity of the owners, directors and management of the
entity; and
¾ comply with the ethical requirements of the professional accountancy
bodies in relation to changes in appointment.
The auditors and clients should agree on the terms of the engagement. These
should be recorded in writing. Once the terms of engagement have been agreed,
they will remain in force from one year to the next unless they are replaced.
Auditors should regularly review the terms of the engagement to ensure they
are appropriate. The engagement letter documents should confirm the auditors’
acceptance of the appointment, and should include a summary of the
responsibilities of the directors and the auditors, the scope of the engagement
and the form of any reports. These engagement activities will be dealt with in
the next sections.
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Unit 8 Engagements and Planning Activities
8.2.1 Acceptance and continuance of client relationships

The auditors need to perform engagement activities to evaluate the acceptability
of new clients or to consider the ability to continue as auditors for existing
clients. This is done to limit the auditor’s risk by not accepting unsatisfactory
clients where the firm’s professional reputation may be damaged due to
negative publicity.
The risks and exposures to the audit firm of unacceptable clients can be as
follows:
¾ Legal liability – resulting from lawsuits
¾ Reputational damage – negative publicity by being associated with a
specific client
The auditor should only take a new client if all ethical and professional
requirements have been met. Failure to comply might result in disciplinary
action, penalties and even suspension from audit practice.
It is of paramount importance for auditors or audit firm to take engagements

if they have the skills, competence, staff and experience to provide an effective
and efficient audit.
8.2.2 Obtaining of engagement acceptance information

New clients
The auditor obtains information of a general nature from a wide range of

sources to evaluate and screen a new prospective client which include:
¾ communication with predecessor auditors;
¾ enquiry of client personnel (Boards, Audit Committees, Management);
¾ enquiry from third parties, for example, bankers, lawyers;
¾ enquiry from other auditors with similar clients in the industry;
¾ press and media coverage of the client; and
¾ background search of relevant databases.
The information will be used to screen a new client and to consider whether
or not to accept an engagement.
Existing clients
When considering continuing as auditors for existing clients, the auditor should
be in a good position to have access to all the information required. The
information will be available in the current or previous year’s audit files and
experience gained in the previous audit engagements.
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The auditor should consider whether any changes occurred regarding the
client that might affect the ability to continue as their auditor, for example:
¾ take-overs and mergers, resulting in conflict of interest with other clients
¾ factors affecting the auditors independence, for example, family and
friendship relationships; and
¾ change in owners or shareholders, resulting in additional risks.
8.2.3 Engagement activity procedures (Framework)

1. Perform client investigation (Client Screening)
In client screening consider the following;
¾ Independence of the auditor. Threats to the auditor’s independence
should be noted and addressed.
¾ The integrity of the client (risk of the client and management) – the risk
should be at such a level that the auditor will be able to accept
appointment. Matters that the firm consider include, the identity and
business reputation of the client’s principal owners, key management,
related parties and those charged with its governance, nature of client’s
operations, whether the client is aggressively concerned with maintaining
the audit firm’s fees as low as possible; indications of an inappropriate
limitation in the scope of the auditor’s work, indications of money
laundering activities, and the reasons for the proposed appointment
and non-reappointment of the previous firm.
¾ Changes in the entity for existing clients
¾ Information obtained from communication with the predecessor auditor.
The auditor should inquire from the client whether the existing auditors
were informed of the intention to replace them; inquire whether the
existing auditors were given permission to discuss the clients’ affairs
with new auditor; obtain the client’s permission to contact the existing
auditors and enquire of professional reasons/circumstances not to accept
the engagement; and if the client refuses this, the engagement should
not be accepted, unless there are good reasons for the refusal.
¾ Financial responsibility of the client- ability to pay audit fees
¾ The legal procedures in respect of the engagement, a vacancy should
exist before accepting the engagement. The auditor should have resigned
or legally removed.
2. Determine the skills and competence requirements for the engagement
The firm should consider if it has the capabilities, competence, time and
resources to accept an engagement for a new client, or to continue as
auditor for existing client. The firm should consider whether:
¾ the firm’s personnel have knowledge of relevant industries or subject
matters;
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¾ the firm’s personnel have experience with relevant regulatory or reporting

requirements, or have the ability to gain the necessary skills and
knowledge;
¾ the firm has sufficient personnel with necessary skills and competencies;
and
¾ experts are available, if needed; and whether the audit deadline can be
met.
3. Establish the terms of the engagement
All new engagements and changes in existing engagements have to be
confirmed in writing through an engagement letter. This establishes a
contractual relationship and should remove any misunderstanding that
may exist.
Activity 8.1
? 1.
2.
Explain the engagement activity framework.
Identify items for consideration in client screening process.
3. Explain how an auditor or audit firm may go about
obtaining engagement acceptance information for an
institution of your choice.
8.2.4 Engagement letters

Engagement letters should be issued to avoid misunderstandings between the
client and the auditor with respect to the engagement. They document the
auditor’s acceptance of the engagement, his/her responsibility to the client,
the objective and scope of the audit, and the format of any reports.
An engagement letter should be issued for each audit or other engagements.

For recurring audits, the letter needs to be issued each year unless the auditor
finds:
¾ indications that the client does not understand the objective and scope
of the audit;
¾ special or significant changes occurred in the terms of the engagement;
¾ that changes in the management or board took place;
¾ that significant changes took place regarding the nature and scope of
the client’s business activities; and
¾ that changes in legislation occurred that may affect the audit.
Contents of engagement letters
¾ Letterhead, address, salutation, introductory paragraph
¾ Differentiate between audit, accounting and other services
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¾ Required information
¾ Objective of the audit
¾ Management’s responsibility for the financial statements
¾ The applicable financial reporting framework
¾ Scope of the audit
¾ Format and contents of the reports
¾ Management’s responsibility for internal controls
¾ Detection of misstatements (errors/fraud)
¾ Responsibility in terms of branches/divisions
¾ Additional Information
¾ Reporting to management
¾ Representations by management
¾ Arrangements in respect of documents to be issued with the financial
statements
¾ Fees
¾ Acknowledgement of receipt
¾ Additional information where applicable
¾ Arrangements in terms of the audit of subsidiaries ( other auditors)
¾ Arrangements in terms of internal auditors
¾ First audit engagement –arrangements in terms of the predecessor.
¾ Limiting the auditor’s liability where applicable
¾ Other agreements/services rendered
¾ Arrangements in terms of planning the audit
¾ Signed and dated
Activity 8.2
Identify a company of your choice and draft an engagement
? letter taking into consideration the above contents of
engagement letters.
8.3 Planning the Audit

Two fundamental requirements of an audit are effectiveness and efficiency.
An ineffective audit may bring accusations of professional negligence, and an
inefficient audit is likely to result in failure to recover fees and ultimately the
loss of clients. Thorough and timely planning provides an organised approach
to the audit and ensures the optimum utilisation of audit staff, prerequisites of
an effective and efficient audit.
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The planning of the audit involves developing an overall strategy for the scope,
emphasis, timing and conduct of the audit, and a detailed approach for the
nature, timing and extent of the audit procedures (test of controls and substantive
procedures) to be performed for each class of transaction and account
balance. The extent of planning will vary according to the size of the business,
the complexity of the audit and the auditor’s knowledge and experience of
the entity.
8.3.1 The benefits of planning

The auditor has to plan the audit effectively so that:
¾ appropriate attention is devoted to important areas;
¾ potential problems and risk areas are identified;
¾ the audit work is completed expeditiously;
¾ work is properly delegated to assistants; and
¾ work performed by other auditors and experts is properly coordinated.
8.3.2 Person responsible for planning the audit

The audit should be planned, and the audit strategy finalised by a person or
persons with relevant knowledge, skills and experience. This would normally
be somebody at a senior level. The engagement partner should approve the
audit plan.
The auditor should plan the audit with professional skepticism that
circumstances may arise:
¾ that may cause the financial statements to be materially misstated;
¾ during the audit that might result in the need to change the overall strategy
for the scope and conduct of the audit and the approach to the planned
procedures.
The auditor may discuss elements of the audit plan with the client. Aspects of
discussion may include:
¾ the general approach to and the overall scope of the audit;
¾ limitations of the audit;
¾ co-operation with and the use of the client’s staff; and
¾ administrative issues, for example, timing of visits.
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8.3.3 Procedures to perform and aspects to consider in audit

planning
a. Obtain an understanding (Knowledge) of the entity and its environment
b. Obtaining an understanding of the accounting information and internal
control system
c. Identifying and assessing audit risk
d. Setting of materiality
e. Formulating an audit approach
f. Organising and managing the audit (co-ordination and control)
a. Obtaining an understanding (Knowledge) of the entity and its
environment (ISA 315)
The auditor should obtain sufficient knowledge/understanding of the entity
and its environment, including its internal controls, to enable him/her to identify
and assess the risk of material misstatement of the financial statements whether
due to fraud or error, and to design and perform further audit procedures
accordingly.
The knowledge obtained will help to:

¾ plan the audit;
¾ exercise professional judgment when assessing the risk of material
misstatements; and
¾ respond to identified risks.
Procedures to obtain knowledge of the entity and its environment (risk
assessment procedures)
The auditor performs risk assessment procedures to obtain an understanding

of the entity and its environment, including its internal controls. This will consist
of:
i. inquiries of management and others within the entity
ii. analytical procedures
iii. observation and inspection- observation of the entity’s activities and
operations, inspection of documents, reading reports, tracing
transactions, visits to the entity’s premises.
b. Obtaining an understanding of the accounting information and internal
control system
Accounting systems are the functions by which business transactions are
processed in order to obtain and maintain the accounting records. Internal
control is the process designed and effected by those in charge with
governance, management and other personnel to provide reasonable assurance
about the achievement of the entity’s objectives with regards to reliability of
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financial reporting, effectiveness and efficiency of operations, and compliance

with laws and regulations.
The auditor will have to perform risk assessment procedures to obtain

information and an understanding of the accounting information systems and
controls.
Components of an internal control system

i. The control environment
This includes the governance and management functions and attitudes,
awareness and actions of those charged with governance and
management regarding the internal controls and the importance thereof
for the entity.
The elements of control environment comprises:
¾ communication and enforcement of ethical values;
¾ commitment to competence;
¾ participation(control consciousness) by those charged with governance;
¾ management’s philosophy and operating cycle;
¾ organisational structure;
¾ assignment of authority and responsibility; and
¾ human resources policies and practices.
ii. The entity’s risk assessment process
This is the process of identifying business risk relevant to financial
reporting objectives and deciding on actions to respond to those risks.
iii. The accounting information system
These are functions through which the entity’s information is assembled,
processed and recorded.
iv. Internal controls
These are control activities and the monitoring of the working of the
controls.
Control activities may include the following:

¾ reconciliations, reporting, reviewing and approving;
¾ checking of arithmetical accuracy of records;
¾ control accounts and trial balance;
¾ budgetary control; and
¾ comparing physical assets with recorded assets.
The auditor is concerned with policies and procedures within the accounting
and control system that are relevant to financial statements assertions. The
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understanding of these will assist the auditor to understand the control risk
and develop appropriate audit procedures.
For an auditor to obtain an understanding of the internal controls the following

should be done:
¾ a system walk-through test;
¾ inquiry of management and personnel;
¾ inspection of documents, for example, system flow chart;
¾ observations of controls and processes; and
¾ check prior year’s working papers.
Information Technology risks and internal controls
IT poses risk to internal controls such as:

¾ reliance on systems or programs that are inaccurately processing data,
processing inaccurate data, or both;
¾ unauthorised access to data that may result in the destruction of data or
improper changes to data;
¾ the possibility of IT personnel gaining access privileges beyond those
necessary to perform their assigned duties, thereby breaking down
segregation of duties; and
¾ potential loss of data or inability to access data as required.
c. Identifying and assessing audit risk
Audit risk is the risk of material misstatements (inherent and control
risk) and the risk that the auditor will not detect such misstatements
(detection risk).
Inherent risk, control risk and detection risk definitions were covered under
Auditing (BACC307) Module.
The following are examples of factors affecting inherent risk at assertion level:
¾ complex calculations are more likely to be misstated than simple
calculations;
¾ accounts based on estimates are more risky than accounts based on
routine, factual data;
¾ external factors, for example, technological developments might lead
to obsolete inventory and overstatements; and
¾ Lack of funding or working capital.
The auditor assesses the control risk by performing tests of controls to obtain
audit evidence about the operating effectiveness of controls in preventing, or
detecting and correcting material misstatements at the assertion level. Tests of
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controls consist of inspection, observation, re-calculation, inquiry and re-

performance.
The higher the risk of material misstatements (inherent and control risk) the
more audit evidence the auditor should obtain from the performance of audit
procedure to limit his/her audit risk.
d. Setting of materiality
The information is material if its omission or misstatements could influence
the economic decisions of users taken on the basis of the financial
statements. Materiality depends on the size of the omission or error in
the given circumstances, and thus provides a threshold or cut-off point
against which the usefulness of information is measured.
Relationship between materiality and audit risk
There is an inverse relationship between materiality and audit risk, namely:

¾ the higher the audit risk, the lower materiality will be set to compensate
for this; and
¾ the lower the audit risk, the higher materiality may be set because the
chance is small that a material misstatement could occur and go
undetected.
The relationship affects the nature, timing, and extent of the audit procedures.
Setting materiality
Materiality is set during the following stages of the audit:

¾ the planning phase (planning materiality) – to determine the nature, timing
and extent of the audit procedures, and
¾ the completion phase (final materiality) – to measure the effect of audit
differences and misstatements.
Planning materiality
This is provisional judgment of materiality or benchmark against which to

measure quantitative misstatements. It helps the auditor determine the nature,
timing and extent of the audit procedure.
When setting planning materiality the auditor should consider:

¾ the amount of misstatements (quantitative), namely individual amounts
or small amounts that may be material in aggregate
¾ the nature of misstatements (qualitative), for example, an accountant
that has stolen money.
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Materiality should be considered at two levels, namely:

¾ the overall level: for the overall financial statements; and
¾ the individual level: for individual account balances, classes of
transactions and disclosure.
Quantitative indicators of materiality
The following table is a guide on which to base materiality:
Table 8.1: A Guide on which to Base Materiality in an Audit
Turnover 0.5 - 1%
Gross profit 1 - 2%
Net Income 5- 10%
Total assets 1 - 2%
Equity 2 - 5%
(Source: Marx, Van Det Watt, Bourne and Hamel, 2004)
The auditor needs to base materiality upon the most appropriate criteria for
the entity that will provide a stable basis. It can be a single criteria or a
combination of both.
Qualitative aspects that need to be considered
Aspects that need to be considered when quantifying materiality include:

¾ the control environment;
¾ the integrity of management;
¾ effectiveness of internal controls;
¾ the appropriateness of the accounting policies and the disclosures
thereof;
¾ statutory requirements and regulations;
¾ problems and errors experienced the previous year;
¾ the results of the provisional analytical procedures; and
¾ the possibility of illegal transactions.
Final materiality
Final materiality is established at the end of the audit and is the standard
against which identified misstatements are measured, to determine the effect
on the financial statements.
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The auditor will need to re-assess the amount of planning materiality, given
the knowledge gained during the audit and audit evidence obtained. This will
enable the auditor to assess whether the amount of planning materiality is still
appropriate, or needs to be adjusted to measure audit differences and other
misstatements.
The auditor should consider whether the unadjusted audit differences affect
the fair presentation of the financial statements.
The auditor should consider the materiality of misstatements for both their
quantitative nature ( the amount of identified audit differences, together with
the net effect of unadjusted audit differences of previous years) and qualitative
nature (consider the nature of the audit differences, irrespective of the amount
thereof).
The auditor’s response in relation to identified misstatements will include:

¾ performing further procedures to limit the audit risk; and
¾ requesting management to adjust the financial statements, and if they
refuse, qualify the audit report
e. Formulating an audit approach
This is the strategy or method to obtain audit evidence against which to
measure the fair presentation of the financial statements. It contains the
nature, timing and extent of the audit procedures to be performed to
limit the risk of material misstatement, namely the tests of controls and
substantive procedures.
Meaning of the nature, timing and extent of the audit procedures to
be performed
i. Nature
This relates to how the procedures will be performed to limit the risk of
material misstatement, namely tests of controls and substantive
procedures.
ii. Timing
This relates to when the procedures are performed (the timing of
performing the tests of controls or substantive procedures)
iii. Extent
This relates to how many items should be tested, namely the size of the
sample. The more reliance to be placed on the test performed, the
bigger the sample should be.
f. Organising and managing the audit (co-ordination and control)
This involves the co-ordination and control of the audit and should
already be done during the planning phase of the audit.
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Coordination and control may include arrangements with regard to:

¾ client-specific issues and circumstances; This may include arrangements
in relation to number of locations/areas to visit, staff availability, travel
and housing arrangements;
¾ dates/timing of the audit;
¾ engagement team specifics;
¾ budgeting for the audit;
¾ areas requiring special attention,
¾ existence of related parties, using the work of experts, internal auditors,
computer experts, reliance on IT service organisation;
¾ communication with the entity;
¾ attending meeting, written reports, communication with third parties;
¾ going concern; and
¾ previous audit findings and recommendations.
Activity 8.3
? 1. Explain the major components of a good internal control
system.
2. Describe the procedures to perform and aspects to
consider in audit planning.
8.4 Summary
In this unit, we looked at engagement activities. The auditor needs to perform
engagement activities to evaluate the acceptability of new clients or to consider
the ability to continue as auditor for existing clients. Client screening should be
performed to limit the auditor’s risk through following engagement activity
procedures or framework. Engagement letters should be issued to avoid
misunderstanding between the client and the auditor with respect to the
engagement. The planning of the audit involves developing an overall strategy
for the scope, emphasis, timing and conduct of the audit, and a detailed
approach for the nature, timing and extent of the audit procedures to be
performed for each class of transactions and account balances. Proper audit
planning is of paramount importance to the organisation.
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References
Press.p.65.
Butterworths.
LexisNexis.
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9
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Unit Nine
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Special Audits and Other

Assurance Engagements
9.0 Introduction
I n this unit, we will focus on special audit investigations, management

consulting services, historic financial assurance engagements, group audits
and other types of assurance engagements that the auditor can provide to the
client.
9.1 Objectives
z define special audit investigations

z explain management consulting services
z outline the underlying principles that should apply during
the provision of management consulting services
z describe historic financial assurance engagements
z discuss group audits and joint audits
9.2 Special Audits

Special audits comprise investigations by auditors, for clients, of information
other than annual financial statements, for example:
¾ performance audits: to determine whether the client’s business is
operated in an economic, efficient and effective manner;
¾ fraud investigations: investigations to determine whether fraud has
occurred and where fraud has been confirmed, the amount thereof;
¾ investigations in respect of mergers/take-overs: reasonableness of
information contained in the statements;
¾ compliance with contracts: whether the provisions of contracts are being
met;
¾ investigations of the effectiveness of internal controls;
¾ compliance with corporate governance principles;
¾ environmental audits: to determine whether the client complies with laws
and regulations regarding policies in respect of environmental issues;
and
¾ due diligence investigations: determine the reasonableness of information
in financial statements, contracts.
9.3 Principles that have to be Met in Special Audit

Investigations
There are principles that have to be met in special audit investigations as
follows:
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Unit 9 Special Audits and Other Assurance Engagements
9.3.1 Nature of the investigation and report provided

The nature of the investigation will determine the level of assurance expressed,
or not expressed, and/or the reporting on the findings of the procedures
performed.
¾ Reasonable or limited assurance
This will apply where there are suitable criteria against which to measure
the subject matter. Assurance expressed in the report positively or in
positive terms is called reasonable assurance and negative assurance
expressed in the report is called limited assurance.
¾ Report on the factual findings
This is when the auditor expresses no assurance but reports on the
results of the agreed upon procedures performed.
9.3.2 Assurance engagements other than audits or reviews

of historic financial information (ISAE 3000)
This relates to assurance engagements on information other than historic
financial information; for example, providing assurance on the effectiveness of
internal controls.
The following principles and requirements apply, depending on the nature of

the subject matter and the criteria, additional considerations may apply:
¾ Ethical requirements – The practitioner should comply with the ethical
requirements namely integrity, objectivity, independence, professional
competence and due care, confidentiality and professional behaviour.
¾ Quality control – Compliance with quality control principles should apply
at both firm level and individual engagement level.
¾ Engagement acceptance and continuance
¾ Planning the engagements
¾ Obtaining evidence
¾ Reporting – Evaluate the sufficient and appropriateness of the evidence
obtained, form a conclusion and prepare report.
Activity 9.1
? Explain assurance engagements other than audits of reviews of
historic financial information as outlined by ISAE3000.
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9.4 Due Diligence Investigations

Due diligence investigations comprise special investigations in order to provide
assurance to the parties involved in a transaction.
9.4.1 Circumstances when due diligence is required

Due diligence investigations can be performed in respect of:
¾ take-overs, mergers and acquisitions;
¾ compliance with contracts; and
¾ entering into agreements.
9.4.2 Procedures to follow when conducting due diligence

investigations
¾ Pre-engagement activities- consider acceptability of the engagement
and document the conditions of the engagement in an engagement letter
¾ Plan the work and the areas to cover; for example, assets and liabilities,
contingencies, income and expenses
¾ Perform the investigation- normal procedures of inspection, observation,
enquiry and confirmations. Document the procedures, evidence obtained
and findings
¾ Reporting-The procedures performed and the findings will be described
in the report, without assurance being expressed like in agreed-upon
procedures
9.4.3 Areas to cover and procedures to perform during due

diligence investigations
¾ General
¾ Statutory details: memorandum, articles, minutes
¾ Annual financial statements (current and previous): to determine trends
and tendencies
¾ Management accounts: trends, tendencies, areas which require further
investigation
¾ Budgets (assets, income and expenses, cash flow): to determine trends
and tendencies
¾ Strategic plans
¾ Standing, reputation and experience in the business community: quality
of products, service
¾ Management: integrity and reputation, contracts with management.
¾ Agreements with suppliers, clients, other parties: conditions
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¾ Existing contracts: conditions, obligations, profitability

¾ Intellectual assets: existence, conditions, tax treatment
¾ Staff: quality, years of service, experience
¾ Statement of financial position ( assets and liabilities )

¾ Accounts receivables-composition, large accounts receivables, collection
conditions and terms, provision for bad debts.
¾ Accounts payables-composition, large accounts payables, payment
conditions, unrecorded liabilities and obligations.
¾ Inventory – confirm existence and ownership through inventory counts,
inventory records, provision for obsolete, damaged inventory.
¾ Non Current Assets-confirmation and ownership, confirm the value of
assets.
¾ Bank and overdraft facilities
¾ Loans
¾ Statement of comprehensive income (income and expenses)

¾ Profitability and profit margins
¾ Contracts for income and expenses: conditions and renewal possibilities
¾ Nature of income, expenses and completeness of recording
¾ Conditions of the agreement

¾ The obligations of the seller and the buyer
¾ The basis for determination of prices.
9.5 The Consideration of Environmental Matters in

the Audit of Financial Statements
The auditor should consider the influence of environmental aspects on the
financial statements during the audit. This applies to both audit engagements
and review engagements.
The auditor should:

¾ obtain knowledge of specific environmental requirements and regulations
that apply to the business;
¾ obtain sufficient knowledge of the business in respect of environmental
aspects;
¾ consider the risk emanating from environmental aspects;
¾ consider the internal controls instituted to address the risk;
· design appropriate substantive procedure to address the risk;
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¾ consider if reliance can be placed on the work of others;

¾ obtain management representation letter in respect of environmental
aspects;
¾ consider the impact of the environmental aspects on the financial
statements and audit report; and
¾ consider compliance by the entity with environmental laws and
regulations.
9.5.1 Management’s responsibility in environmental matters

Management is responsible for identifying, accounting for and disclosing
environmental matters. Management should implement sufficient internal
controls to control environmental aspects-this may lead to specific
environmental systems being implemented.
9.5.2 The auditor’s responsibility in environmental matters

The auditor is not, and cannot be held responsible for the non-compliance
with environmental laws and regulations by entities. The auditor should plan
and perform the audit in such a manner that material misstatements or non
compliance with laws and regulations will be detected.
Activity 9.2
? Explain the impact of environmental issues on the auditor’s
procedures.
9.6 Performance Auditing

This is an independent auditing process carried out by a performance auditor
to evaluate the measures instituted by management, or their lack, to ensure
that resources have been acquired economically and are utilised efficiently
and effectively, and to report to management and, if appropriate, to the
legislative body concerned.
The objective of performance auditing is to confirm independently that the

measures and criteria exist and are effective, and to independently report
thereon to management.
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9.6.1 Audit process

The audit process for performance auditing comprises:
¾ pre-engagement activities;
¾ planning of the work – you obtain knowledge of business , identify
areas to concentrate on, identify audit objectives and criteria to measure
compliance against, come up with an audit programme; and
¾ perform audit procedures to come up with the audit objectives and
criteria- this includes obtaining of audit evidence, reliance on the work
of others , reporting and quality control for audit work.
Activity 9.3
? 1.
2.
Define performance Audit.
Describe the audit process in performance audits.
9.7 Management Consulting Services

Management consulting services comprise the provision of professional advice
and technical assistance to a client to enable him/her to achieve the objectives
of his/her business.
The person performing management consulting services should comply with

Statements on Practising Standards for Management Consulting Services.
9.7.1 Principles for the provision of management consulting

services
¾ the practitioner is only responsible to his/her client for any findings
presented
¾ the scope of work is limited to that agreed with the client
¾ the work is performed for the benefit of the client, without any obligation
to third parties.
9.7.2 Underlying principles that should apply during the

provision of services
¾ Integrity
¾ Objectivity
¾ Independence
¾ Professional competence
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Management consulting services covers the following areas:

¾ consultations;
¾ advisory services;
¾ implementation services;
¾ transaction services;
¾ staff and other support services; and
¾ product services.
9.8 General Matters Relating to Other Reporting

Engagements
The general matters relating to other reporting engagements includes change
in engagement and reports on prescribed forms.
9.8.1 Change in engagement

An auditor may accept an engagement to report on an element of financial
statements when a qualified opinion, or an opinion has been disclaimed, on
the financial statements as a whole. The auditor should consider carefully the
effect of the uncertainty or disagreement on the element being reported on.
An auditor should not agree to report on certain elements of financial

statements instead of reporting on the financial statements as a whole, in order
to avoid qualifying or disclaiming an opinion on such financial statements.
When engaged to issue a certain category of special report, the auditor should
not issue a different category of report to avoid a qualification of such report.
An auditor may be requested by the client to change from one category of

special reporting engagement to another before completing the engagement.
A change in circumstances affecting the client’s requirements or a
misunderstanding by the client of the nature of the engagement and form of
report are ordinarily reasonable justification to change the engagement. If the
change results in an imposition of a restriction on the auditor’s scope of
examination, or is done deliberately to avoid a qualification in the auditor’s
report, it would not be acceptable. In this circumstance the auditor should
withdraw from the engagement unless there is a responsibility remaining to
report to those to whom it was originally intended.
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9.8.2 Reports on prescribed forms

Auditors are sometimes required to submit a special report on a prescribed
form to government authorities and others. Prescribed forms may omit essential
wording or may require the auditor to give assurance which cannot be provided
(for example, where the auditor is required to certify the correctness of
information). In these circumstances, the auditor should make changes to the
form, or, rather attach an appropriately reworded report to it. It is appropriate
to dispatch a letter setting out the auditor’s reservations regarding the prescribed
form.
9.9 Prospectuses
Offering of shares for subscription or sale should be accompanied by a
prospectus. A prospectus shall contain a fair presentation of the state of the
affairs of the company, the shares of which are being offered. Reduced
disclosure is required if a renounceable rights issue of shares in an unlisted
company is being made.
Important disclosure requirements in a prospectus include the following:

¾ details of directors and management;
¾ history of the company;
¾ state of affairs and prospects of the company;
¾ profits or losses;
¾ dividends paid over the past five years;
¾ the purpose of the offer;
¾ details of share capital and loans; and
¾ property to be acquired out of the proceeds.
The fair presentation of the prospectus is the responsibility of the directors.
The reports required in the prospectus are the auditor’s responsibility.
Activity 9.3
? Define the prospectus and explain the important disclosure
requirements of the prospectus in reference to the requirements
of the Companies Act.
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9.9.1 The auditor’s report to the prospectus

A report by the auditor of the company should be in respect to:
¾ profits or losses of the company for the previous five years or for the
period of company if less than five years;
¾ the dividend rate(s) (or the fact that no dividends were declared), in
respect of the previous five years before the issue of the prospectus;
and
¾ the assets and liabilities of the company as at the date of the most
recent annual financial statements of the company.
If no financial statements have been prepared in respect of any part of the
period of five years ending on a date three months before the issue of the
prospectus, that fact should be stated.
In the case of a company with subsidiaries, it is required, in regard to profit

and losses that the auditor’s report should deal separately with the company’s
profit and loss and in addition, deal:
¾ as a whole with the company’s share of the combined profits or losses
of all subsidiaries; or
¾ individually with the company’s share of the profits and losses of each
subsidiary; or
¾ as a whole with the consolidated profits and losses of the company and
all its subsidiaries.
In regard to assets and liabilities, the auditor’s report should deal separately
with the company’s assets and liabilities and, in addition, deal either:
¾ as a whole with the combined assets and liabilities of all subsidiaries; or
¾ as a whole with the consolidated assets and liabilities of all subsidiaries.
The auditor must be satisfied that as stated in the report:
a) The debtors and creditors do not include any accounts other than trade
accounts;
b) The provision for doubtful debts are adequate;
c) Adequate provision has been made for obsolete, damaged or defective
goods and for supplies purchased at prices in excess of current market
prices;
d) Intercompany profits in the group have been eliminated;
e) There have been no material changes in the assets and liabilities of the
company and of any subsidiary since the date of the last annual financial
statements.
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The objective of the auditor’s reports on the profit history and assets and
liabilities of a company offering shares to the public is to provide a prospective
investor with useful information in order to make an investment decision. The
historic profitability acts as a guide to potential investors for future performance.
The statement of assets and liabilities reflect the financial strength of the
undertaking.
9.10 Audit of Historic Financial Information

A report on historic financial information should be included in a prospectus.
If adjustments are made to previously reported historic financial information
consider the following:
¾ A statement of adjustments should be disclosed, detailing the amounts
and reasons for the adjustments. This should be provided in the form of
reconciliation between the previously reported historic financial
information and adjusted historic financial information included in the
report of historic financial information.
¾ If no adjustments are made there should be disclosure of the fact.
Adjustments should only be made to give effect to:
¾ retrospective application of changes in accounting policies; and
¾ retrospective correction of fundamental errors
Adjustments are not made for:
¾ events which have not yet occurred;
¾ changes in estimates;
¾ correction of errors that are not fundamental; and
¾ non-arm’s length transactions.
The reporting accountant should provide the following opinion on the

components of the report of historic financial information:
¾ an audit opinion on financial information and adjustments relating to the
financial year preceding the issue of the prospectus;
¾ either an audit or a review opinion on financial information and
adjustments relating to the financial years prior to the financial year
preceding the issue of the prospectus; and
¾ a review opinion on interim financial information and adjustments thereto.
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Separate reports should be provided for the issuer and each business
undertaking acquired or to be acquired.
The objective of the engagement in auditing historic financial information is to

enable the reporting accountant to express an opinion that the historic financial
information, in all material respects, fairly presents the financial position of the
entity at specific dates, and the results of its operations and cash flows for the
periods ended on those dates, in accordance with statutory and regulatory
requirements.
The objective of reviewing historic financial information is to enable the reporting

accountant to state that, on the basis of procedures that do not provide all the
evidence that would be required for an audit, nothing has come to the reporting
accountant’s attention that causes the reporting accountant to believe that the
historic financial information is not prepared, in all material respects, in
accordance with statutory and regulatory requirements.
9.11 Group Audits

A group audit is the audit of group financial statements. In a group situation,
the parent entity will have to prepare its own audited financial statements
together with audited group financial statements incorporating the results of
all subsidiary entities. The group financial statements will be audited by the
parent entity auditors, who are known as group auditors.
The parent company and subsidiaries are referred to as the ‘components’ of

the group.
9.11.1 Terminology in group audits

Group auditor – Is the audit firm responsible for the audit of the group financial
statements (and will usually also be the auditor of the parent company). ISA
600 refers to the ‘group audit ’, the ‘group engagement partner’ and the
‘group engagement team’.
Component auditor – is an auditor who, at the request of the group auditor,

performs work on the financial information of a component.
Component- A component is an entity or business activity for which group

or component management prepares financial information that should be
included in the group financial statements.
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The group engagement team will:

¾ establish the overall group audit strategy;
¾ communicate with component auditors;
¾ perform the work on the consolidation process; and
¾ evaluate the conclusions drawn from the audit evidence obtained in
order to form an opinion on the group financial statements.
9.11.2 Possible problems with group audits

¾ Group audits may include a large number of companies. Some group
companies may be foreign subsidiaries that report in their own currency
and use their national accounting practice to prepare financial statements
rather than international standards.
¾ Some companies in the group may have a different year-end accounting
date from other companies.
¾ It might be difficult to make audit adjustments to financial statements of
individual group companies, for consolidation purposes.
¾ Some group companies may be audited by an audit firm that is not the
auditor of the parent company.
These possible problems might be dealt with through:

¾ enhancing the understanding of the group, its components and their
environments, obtained at the acceptance or continuation stage by the
group auditor;
¾ obtaining an understanding of the consolidation process, including the
instructions issued by management to its components; and
¾ assessment of the component auditor’s professional competence
In accordance with ISA 315, the group auditor must identify and assess the
risks of material misstatement through obtaining an understanding of the entity
and its environment.
9.11.3 Using the work of another auditor (ISA 600)

The group auditors have the sole responsibility for the opinion on the group
financial statements. The auditors of the subsidiary entities (component
auditors) are a source of evidence.
The group auditors must decide on how much reliance they will place on the
work performed by these component auditors by considering the qualifications,
experience and resources of the component auditors. Generally the group
auditors should have the right to ask the component auditors for all reasonable
information and explanations. In addition, ISA 600 states that the component
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auditors should inform the group auditors of any matter they discover during
their audits that might be relevant to the audit of the group financial statements.
Matters to discuss with the component auditors:

¾ The component auditors must be informed of the use that is to be made
of their work. They should be advised of the standard and scope of
work required, together with reporting deadlines;
¾ It is common practice to ask the component auditors to complete a
checklist to confirm that they have applied the required audit procedures.
¾ Compliance with ethical requirements;
¾ The component auditor’s professional competence;
¾ Whether the component auditor operates in a regulatory environment
that actively oversees auditors; and
¾ Whether the group engagement team will be able to be involved in the
work of the component auditor to the extent necessary to obtain sufficient
appropriate audit evidence.
Activity 9.4
? Define the following term according to ISA 600
· Group audit
· Group auditor
· Component auditor
· Group engagement partner
· Group engagement team
· Principal auditor
9.11.4 Issues arising when a subsidiary is located overseas

A number of potential difficulties may arise when a subsidiary is located overseas
as follows:
¾ Different accounting policies might be used in the overseas country.
The subsidiary financial statements must be brought into line with the
accounting policies used by the parent entity in order to consolidate
properly (IAS27);
¾ There may be cultural problems unique to the country in which the
subsidiary operates. The group auditor will need to be sensitive to these
during dealings with the other auditors;
¾ Language problems may arise; and
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¾ There may be issues in existence which are specific to the country in

which the subsidiary operates, for example in Zimbabwe, inflation at
one time was over 100%. Financial statements produced in these
circumstances will need to be adjusted prior to consolidation with the
parent entity. Factors such as these will need to be identified for each
subsidiary and resolved as appropriate during the audit.
9.11.5 Matters to consider before accepting appointments as

group auditor
The following are the matters to consider before accepting appointments as
group auditor:
¾ the materiality of the portion of the financial statements which they do
not audit;
¾ the degree of their knowledge regarding the business of the subsidiaries;
¾ the nature of their relationship with the component auditors;
¾ their ability where necessary to perform additional procedures to enable
them to act as group auditors; and
¾ the risk of material misstatements in the financial statements of the
subsidiaries audited by component auditors.
9.11.6 Group consolidation - audit procedures

After receiving and reviewing the financial statements from all subsidiaries
and associates, the group auditor must audit the group financial statements.
The main procedures would be as follows:
¾ check the transcription of the audited financial statements of each
invested entity to the consolidation schedule;
¾ check that the adjustments made on consolidation are appropriate and
consistent with prior years. The adjustments could be permanent or
current year adjustments;
¾ the consolidation schedule should be checked for arithmetic accuracy
¾ the group financial statements should be checked for compliance with
international financial reporting standards; and
¾ an opinion should be formed on the truth and fairness of the group
financial statements.
9.11.7 Letters of support

¾ A ‘ letter of support’ is an agreement made between a parent entity and
its subsidiary or fellow subsidiary under which one entity agrees to
provide support, in the form of funding, to the other entity in order that
it may meet its debts and liabilities.
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¾ A letter of support may be required from the parent entity where it

appears that a subsidiary is not a going concern and will be unable to
pay non-group creditors as they fall due.
¾ The auditor needs to determine whether the parent entity has the power
to provide a letter of support. The following information should be
obtained:
¾ Written confirmation from the parent entity’s solicitors to the effect that
the giving of the support is permitted under the constitution, is not beyond
the entity’s power, and that it is within the powers of the board of
director to give the support; or
¾ If the transaction is not permitted by the constitution, a certified copy
of the special resolution amending the constitution to authorise the parent
entity to give the letter of support.
9.11.8 Implication for the auditors’ report where a

subsidiary has been qualified
In a group situation, materiality and risk must be assessed in the context of the
group as a whole. It is possible therefore for a qualification in a subsidiary to
be wholly immaterial in the group financial statements. If this is the case, an
unqualified opinion could be given on these financial statements.
Where the group auditors conclude that adequate evidence about the work
of the component auditors cannot be obtained and they have been unable to
perform sufficient additional procedures with respect to that subsidiary, they
should consider the implications for the audit report.
Activity 9.5
? You are auditing the group financial statements of CBZ
Holdings for the year ended 31 December 2011. The
group has three group subsidiaries, CBZ Asset
Management, CBZ Bank and CBZ Building Society. You
are not the Auditor of CBZ Building Society.
Describe the audit work that you would carry out before
placing reliance upon the work carried out by the auditors
of CBZ Building Society.
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9.11.9 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.
Purpose of joint audits

¾ In a new acquisition the parent entity may insist that their auditors act
jointly with those of the new subsidiary.
¾ An entity operating from many distant locations may find it useful to
have joint auditors.
¾ Overseas subsidiaries may need to employ local audit firms to satisfy
the laws of the country in which they operate. These local auditors may
act jointly with the group auditors.
¾ Some entities may prefer to use local auditors while at the same time
enjoying the greater range of services offered by a large international
firm.
Before accepting appointment as a joint auditor it will be necessary to consider
the experience and standards of the other firm. 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. Both firms must sign the audit report
and both are responsible for the whole audit. They are jointly liable in the
event of litigation.
9.12Summary
In this unit, we looked at special audits and other engagements where in special
audits comprise investigations by practitioners for information other than
contained in the annual financial statements. Auditors conducting special audits
should understand the nature of investigations and the report to be provided.
Auditors are also involved in due diligence investigations where they check
compliance with set policies or objectives. We also discussed performance
auditing as an independent auditing process carried out by a performance
auditor to evaluate the measures instituted by management, or their lack, to
ensure that resources have been acquired economically and are utilised
efficiently and effectively, and to report to management and, if appropriate, to
the legislative body concerned. Provision of professional service and or advice
or technical assistance to client is of paramount importance when considering
other engagement activities. When offering shares to the public, the offer should
be accompanied by a prospectus which contains a fair presentation of the
state of the affairs of the company. The prospectus is subject to audit and
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should disclose specific items of the company as per the Companies Act. We
finally looked at group audit and joint audits. Group audit is the audit of a
group financial statements and joint audits. In group consolidation the auditor
should be able to follow the audit procedures for consolidation process. 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.
References
Press.p.65.
Butterworths.
LexisNexis.
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Unit Ten
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Completion of the Audit
10.0Introduction
I n this unit, we will look at the considerations and procedures that are
applicable to the last step in the audit process which is the completion of
the audit. The auditor can ensure the successful completion of the audit by
considering the factors and procedures which we will look into. The auditor
should have thorough knowledge of ISA 560 “subsequent events”, ISA 570
“Going concern”, IAS 10 “events after the reporting period”, IAS 37
“provisions, contingent liabilities and contingent assets” and Guideline on
“trading while factually insolvent” in order to be able to execute the full
requirements of completion of the audit and come out with a report.
The completion of the audit procedures should be performed at the end of the
audit after the audit work has been completed and the draft financial statements
received. This is the last step before the auditor issues an audit report.
Completion of the audit procedures ensures that enough audit evidence has
been obtained to form an opinion and be able to issue a report. The procedures
should be performed by competent staff with relevant experience and expertise.
10.1Objectives
z set out a framework for completion of the audit

z perform completion of the audit procedures
z explain going concern considerations
z discuss subsequent events
z describe factual insolvency
10.2 Framework for the Completion of the Audit

The framework sets out the different aspects and issues to consider, as well
as the procedures to perform, during the completion of the audit phase.
It considers the following:

¾ adequacy and applicability of audit evidence;
¾ evaluate audit differences;
¾ review of financial information;
¾ consider whether liabilities exceed the assets;
¾ consider subsequent events/post-balance sheet events;
¾ concluding and reporting; and
¾ post-audit review.
10.3Completion of the Audit Procedures

Outlined below are the procedures to perform in completion of the audit.
a) Adequacy of the audit evidence
The auditor should consider whether audit evidence obtained is
adequate, relevant, applicable and reliable. The audit evidence should
be documented in working papers and should be properly referenced.
b) Evaluate audit differences
The auditor should evaluate the audit differences to determine their
effect on the financial statements and the audit opinion. Audit differences
are the differences between the amount included in the financial
statements and the amounts as determined by the audit evidence (Marx,
2004). Audit differences arise as a result of differences identified (in
amounts, accounting treatment or disclosures) and uncertainties (inherent
uncertainties about amounts, scope limitations). The auditor should
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Unit 10 Completion of the Audit
consider the risk of undetected audit differences. In evaluation of audit

differences consider the following points:
¾ determine final materiality;
¾ consider the nature of audit differences;
¾ consider the state of provisions and contingent liabilities/contingencies;
¾ consider materiality of audit differences and the effect on the financial
statements and audit opinion; and
¾ search for information that could affect the fair presentation of the
financial statements, for example, unrecorded liabilities, related party
transactions.
c) Review financial information
The auditor should perform an overall financial information to determine
if it is fairly stated in the financial statements. The auditor should test
calculations and castings, cross-references the draft financial statements
with the trial balance. The auditor should perform final analytical
procedures on the draft financial statements to serve as a general
reasonableness test to determine whether the conclusion on the line
items is reasonable and to determine areas which require further
procedures. The auditor needs to consider the fair presentation of
financial statements to determine whether the financial statements
assertions are complied with and whether the information contained in
the statements complies with audit findings and the auditor’s knowledge
of the business.
Factors to consider in fair presentation of financial statements:
¾ Compliance with fundamental accounting principles
¾ The accounting policy applied
¾ Financial position and results of operation
¾ Fairness of presentation and disclosure
d) Consider whether or not liabilities exceeds the assets
The auditor should determine the fair value of assets and check if liabilities
do not exceed assets because this will affect the going concern and the
audit opinion, and this might as well indicate existence of a material
irregularity.
e) Consider subsequent events/post-balance sheet events ISA 560
Subsequent events ISA560 were previously referred to as post-balance
sheet events. These are events occurring between the date of the financial
statements and the date of the auditor’s report and facts that become
known to the auditor after the date of the auditor’s report.
Financial statements may be affected by certain events that occur after the
date of the financial statements. The auditor needs to consider these events
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that could affect the financial statements. Two types of events should be
considered as follows:
¾ those that provide evidence of conditions that existed at the date of the
financial statements; and
¾ those that provide evidence of conditions that arose after the date of
the financial statements.
f) Concluding and reporting
The auditor formulates an opinion and reports on the financial statements.
The auditor should consider performing a quality control review to
determine adherence to policies, comparing final financial statements
with draft audited statements and reporting to shareholders and
management.
g) Post-audit review
The auditor should:
¾ perform a staff evaluation;
¾ consider aspects of importance in respect of future audits and document
them in the next year’s papers;
¾ consider the viability of re-engagement and issue a letter of engagement
if necessary; and
¾ invoice the client.
Activity 10.1
? Outline the audit procedures in completion of the audit phase.
10.4Going Concern Assumption ISA 570

Under the going concern assumption, an entity is viewed as continuing in
business for the foreseeable future. Financial statements are prepared on a
going concern basis unless management either intends to liquidate the entity
or to cease operations or has no realistic alternative to do so. When the use of
the going concern assumption is appropriate, assets and liabilities are recorded
on the basis that the entity will be able to realise its assets and discharge its
liabilities in the normal course of business.
10.4.1 Responsibility of management and the auditor

Management’s responsibility is to make specific assessment of the entity’s
ability to continue as a going concern, and standards regarding matters to be
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considered and disclosures to be made in connection with going concern.

This involves making a judgment at a particular point in time, about inherently
uncertain future outcomes of events or conditions.
The auditor’s responsibility is to obtain sufficient appropriate evidence about

the appropriateness of management’s use of the going concern assumption in
the preparation of the financial statements and to conclude whether there is a
material uncertainty about the entity’s ability to continue as a going concern.
The auditor cannot predict future events or conditions. The absence of any
reference to going concern uncertainty in an auditor’s report cannot be viewed
as a guarantee to the entity’s ability to continue as a going concern.
10.4.2 Conditions that may cast doubt about going

concern assumptions
The following are examples of conditions that may cast significant doubt about
the going concern assumptions.
Financial
¾ Net liability or net current liability position
¾ Fixed-term borrowings approaching maturity without realistic prospects
of renewal or repayment
¾ Excessive reliance on short-term borrowings to finance long-term assets
¾ Indications of withdrawal of financial support by creditors
¾ Negative operating cash flows
¾ Adverse key financial ratios
¾ Substantial operating losses or significant deterioration in the value of
assets used to generate cash flows.
¾ Inability to pay creditors on due dates
Operating
¾ Management intentions to liquidate the entity or to cease operations
¾ Loss of key management without replacement
¾ Loss of a major market, key customer(s), franchise
¾ Labour difficulties
¾ Shortages of important suppliers
¾ Non-compliance with capital or other statutory requirements
¾ Pending legal or regulatory proceedings against the entity
The significance of such events or condition can be mitigated by other factors.
For example, the effect of an entity being unable to make its normal debt
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repayments may be counter-balanced by management’s plans to maintain

adequate cash flows by alternative means such as by disposing assets,
rescheduling loan repayments, or obtaining additional capital.
10.4.3 Audit procedures to asses the going concern

Audit procedures may include the following:
¾ analysing and discussing cash flow, profit and other relevant forecast
with management;
¾ analysing and discussing the entity’s latest available interim financial
statements;
¾ obtain management’s representation letter in respect of the going
concern;
¾ reading the terms of debentures and loan agreements and determining
whether any have been breached;
¾ reading minutes of the meetings of shareholders, management and
directors, those charged with governance and relevant committees for
reference to financial difficulties;
¾ inquiry of the entity’s legal advisors regarding litigation and claims;
¾ confirming the existence, legality and enforceability of arrangements to
provide or maintain financial support with related and third parties and
assessing the financial ability of such parties to provide additional funds.
¾ evaluating the entity’s plans to deal with unfilled customer orders;
¾ performing audit procedures regarding subsequent events to identify
those that either mitigate or affect the entity’s ability to continue as a
going concern;
¾ confirm the existence, terms and adequacy of borrowing facilities;
¾ obtaining and reviewing reports of regulatory authorities; and
¾ determine the adequacy of support for any planned disposals of assets.
10.4.4 Audit conclusions and reporting

Material uncertainty may exist which relates to events or conditions which
may cast significant doubt on the entity’s ability to continue as a going concern
that should be disclosed in the financial statements.
Adequacy of disclosure of material uncertainty should reveal explicitly the

possibility that an entity may be unable to continue realising its assets and
discharging its liabilities in the normal course of business.
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Example 10.1
An example of an emphasis of matter paragraph when the auditor is satisfied

as to the adequacy of the note disclosure:
Emphasis of matter
Without qualifying our opinion, we draw attention to Note X in the financial

statements which indicate that the company incurred a net loss of ZZZ during
the year ended December 31, 2012 and, as of that date, the company’s
current liabilities exceeded its total assets by YYY. These conditions along
with other matters as set forth in Note X, indicate the existence of a material
uncertainty that may cast significant doubt about the company’s ability to
continue as a going concern.
If there are multiple material uncertainties it would be appropriate to express

a disclaimer of opinion.
A qualified opinion is expressed when disclosure of material uncertainty is

inadequate.
Example 10.2: Basis for qualified opinion
The company’s financing arrangements expire and amounts outstanding are

payable on March 19, 2012. The company has been unable to re-negotiate
or obtain replacement financing. This situation indicates the existence of a
material uncertainty that may cast significant doubt on the company’s ability
to continue as a going concern and therefore the company may be unable to
realize its assets and discharge its liabilities in the normal course of business.
The financial statements and notes do not fully disclose this fact.
Qualified opinion
In our opinion, except for the incomplete disclosure of the information referred
to in the Basis for Qualified Opinion paragraph, the financial statements present
fairly, in all material respect (or give a true fair view of) the financial position of
the company as at December 31, 2012, and of its financial performance and
its cash flows for the year then ended in accordance with….
Example 10.3: When an adverse opinion is to be expressed:
Basis of adverse opinion
The company’s financial arrangements expired and the amount outstanding

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was payable on December 31, 2012. The company has been unable to re-
negotiate or obtain replacement financing and is considering filing for
bankruptcy. These events indicate a material uncertainty that may cast significant
doubt on the company’s ability to continue as a going concern and therefore
the company may be unable to realize its assets and discharge its liabilities in
the normal course of business. The financial statements (and notes thereto)
do not disclose this fact.
Adverse opinion
In our opinion, because of the omission of the information mentioned in the

Basis for Adverse Opinion paragraph, the financial statements do not present
fairly (or give a true fair view of ) the financial position of the company as at
December 31, 2012, and of its financial performance and its cash flows for
the year then ended in accordance with….
Activity 10.2
? 1.
2.
Define going concern assumptions according to ISA 570.
Outline the procedures you may perform to assess the
applicability of the going concern assumption in a
manufacturing industry.
10.5Subsequent Events ISA 560

Subsequent events refer to events occurring between the date of the financial
statements and the date of the auditor’s report, and facts that become known
to the auditor after the date of the auditor’s report.
Financial statements may be affected by certain events that occur after the
date of the financial statements. There are two types of such events as follows:
¾ Those that provide evidence of conditions that existed at the date of
the financial statements; and
¾ Those that provide evidence of conditions that arose after the date of
the financial statements.
Objectives of the auditor
¾ To obtain sufficient appropriate audit evidence about whether events
occurring between the date of the financial statements and the date of
the auditor’s report that require adjustments of, or disclosure in, the
financial statements are appropriately reflected.
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¾ To respond appropriately to facts that become known to the auditor

after the date of the auditor’s report, that, had they be known to the
auditor may have caused the auditor to amend the auditor’s report.
10.5.1 Events occurring between the date of the

financial statements and the date of the auditor’s report
The auditor shall perform audit procedures to obtain sufficient appropriate
audit evidence that all events occurring between the date of the financial
statements and the date of the auditor’s report that require adjustments of, or
disclosure in the financial statements have been identified. The auditor is not
expected to perform additional audit procedures on matters to which previously
applied audit procedures provided satisfactory conclusions.
Procedures to identify events are indicated below:

¾ review procedures performed by management to identify events
¾ reading minutes of the meetings of the entity’s owners, management
and those charged with governance about matters discussed
¾ review of the latest interim financial statements ,budgets
¾ enquire from legal advisors on pending litigations/claims
¾ consider relevant information from sources outside the entity which came
to the attention of the auditors
¾ inquiring of management as to whether any subsequent events have
occurred which might affect financial statements
¾ in respect of group situation, if a component is audited by another auditor,
the principal auditor should:
¾ consider the procedures performed by the other auditor to identify
subsequent events
¾ inform the other auditor of the planned date of the auditors report.
Activity 10.3
? Inquiring of management as to whether any subsequent events
have occurred which might affect financial statements is one of
the procedures to identify events. Give 10 examples of items
an auditor may inquire from management.
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10.5.2 Facts which become known to the auditor after

the date of the auditor’s report but before the date the
financial statements are issued
The auditor has no obligation to perform audit procedures after the date of
the auditor’s report. If a fact becomes known to the auditor after the auditor’s
report but before the date of the financial statements issue which may materially
affect the financial statements the auditor shall:
¾ discuss the matter with management
¾ determine whether financial statements need amendment
¾ inquire how management intends to address the matter in the financial
statements
¾ if management changes the financial statements
¾ Perform audit procedures on the revised financial statements
¾ Issue a new auditor’s report, with a date not earlier that the revised
financial statements.
¾ if management refuses to change the financial statements and the auditor
deems it necessary.
¾ If the auditor’s report has not yet been issued qualify the report.
¾ If the report has already been issued to the entity, inform management
not to make the auditors report available to third parties. If it is released
the auditor should take steps to limit reliance on his/her report.
10.5.3 Facts which become known to the auditor after

the financial statements have been issued
The auditor has no obligation to perform any audit procedures after financial
statements have been issued. If a fact becomes known after the financial
statements have been issued the audit should perform the following procedures:
¾ discuss the matter with management
¾ determine whether financial statements need amendment
¾ inquire how management intends to address the matter in the financial
statements.
¾ if management amends the financial statements , the auditor shall:
¾ perform audit procedures on the amended financial statements
¾ review steps taken by management to ensure that reliance is not placed
on the issued financial statements.
¾ provide a new report
¾ if management refuses to amend the financial statements, the auditor
shall
¾ inform management that s/he is going to act
¾ take steps to limit reliance by third parties on the issued report.
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10.5.4 Inquiry
Inquire from management as to whether any subsequent events have occurred
that might affect the financial statements, the auditor may inquire as to the
current status of items that were accounted for on the basis of preliminary or
inconclusive data and may make specific inquiries about the following matters:
¾ whether new commitments, borrowings or guarantees have been entered
into;
¾ whether sales or acquisitions of assets have occurred or are planned;
¾ increase in capital or issuance of debt instruments for example, issue of
new shares, debentures;
¾ whether any assets have been appropriated by government or destroyed,
for example, by fire or flood;
¾ developments regarding contingencies;
¾ unusual accounting adjustments;
¾ occurrence of events which might bring into question the appropriateness
of accounting policies used;
¾ whether any events have occurred that are relevant to the measurement
of estimates or provisions made in the financial statements; and
¾ whether any events have occurred that are relevant to the recoverability
of assets.
Activity 10.4
? Define the following terms:
– date of the financial statements
– date of approval of the financial statements
– date of the auditor’s report
– date the financial statements are issued
– subsequent events
10.6Factual Insolvency
Factual insolvency is a situation where an entity is trading while liabilities exceed
assets.
There is a major risk of irregularities if an entity’s liabilities exceed assets,

which consist of:
¾ Common law fraud
¾ The intention to defraud, and
¾ Recklessness
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10.6.1 Actions of the auditor where liabilities exceed assets

a) Consider the financial position, the fair value of the assets and liabilities
b) If the liabilities still exceed the assets consider the following:
¾ Consider the existence of a material irregularity
¾ Consider management level: persons responsible for management
¾ Financial loss for members or creditors: harmful or potentially harmful
practices resulting in monetary losses
¾ Professional judgment
¾ Report the irregularity to the client’s management
¾ State full particulars of the irregularity
¾ Consider management’s reply carefully
¾ If management’s reply does not satisfy report to the board.
¾ Document all considerations in working papers
¾ Obtain legal advice to support the opinion
10.6.2 Steps taken by management to guard against

irregularities and loss
Steps management may take to satisfy the auditor that no irregularity is taking
place, or that steps have been taken to prevent the loss are:
¾ Proof of making profits in the foreseeable future
¾ Conversion of loan to share capital, issue of new share capital
¾ Providing guarantees for debts
¾ Entering into subordination or back ranking agreements
¾ Providing letters of support from the holding company
¾ Applying for a liquidation order
¾ Applying for judicial management
The auditor must ensure that the proposed steps are viable and attainable by:
¾ inspection of minutes, decisions
¾ inspection of documentation ( contracts, agreements)
¾ enquiries of third parties
¾ investigation/consideration of management plans and proposed actions.
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10.7 Summary
In this unit we concentrated on completion of the audit. A framework for
completion of the audit was established together with completion of the audit
procedures. Under the going concern assumption, an entity is viewed as
continuing in business for the foreseeable future. The financial statements are
prepared in line with the going concern assumption and the audit has to establish
if the going concern assumption is correctly presented by management. We
explained subsequent events (events occurring between the date of the financial
statements and the date of the auditor’s report, and facts that become known
to the auditor after the date of the auditor’s report) and factual insolvency as
a situation where an entity is trading while liabilities exceed assets.
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References
Press.p.65.
Butterworths.
LexisNexis.
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Unit Eleven
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Auditing in the Public Sector
11.0 Introduction
I n this unit we discuss that public sector auditing is performed by the office
of the Auditor-General or by a person registered as an accountant and
Auditor with the Public Accountants and Auditors Board (PAAB). A public
entity may appoint a private sector auditor if its audit is not performed by the
Auditor-General. The auditor reports to public entity management which in
turn reports to parliament or the respective legislation body concerned.
There are two public sector auditing guidelines which provide guidance on
public sector audits as follows:
¾ Auditing in the Public Sector
¾ Performance Auditing
11.1 Objectives
z describe public sector auditing

z discuss the difference between public sector audit and
audit of financial statements of limited companies
z explain performance auditing
z outline the conduct of performance audit and the report
11.2 Auditing in the Public Sector

The audit of a public sector entity is performed in a similar manner to a private
sector audit with the exception of the requirements of a performance audit.
The public sector audits performed on behalf of the Auditor-General should
be performed in accordance with the applicable framework/guidelines
formulated or adopted by the Auditor-General.
The governing body of public sector entities is interested in information which

relates to:
¾ compliance with legislative and related authorities
¾ accounting for the safeguarding of assets
¾ adequacy of management control systems
¾ integrity of information
¾ the economical and efficient management of resources
¾ the effective performance of the entity’s functions
The public sector auditor is expected to report to the governing body in respect
of the above matters. Auditors provide their own assessment of the matters
rather than waiting for management to make their presentations then comment
on the credibility of presentations. The report by the auditor is made public.
11.2.1 The audit

The entity may appoint a private sector auditor as its auditor in a situation
where the auditor general is not auditing the public entity. The terms of
engagements must be agreed upon and set in such a situation. In a situation
where the Auditor-General is the auditor of a public entity, the auditor general
may appoint a private sector entity to perform audit work on its behalf. The
audited entity in this case is not in a client relationship with the auditor.
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Unit 11 Auditing in the Public Sector
The auditor has to discharge the statutory mandate freely and impartially in
forming audit opinions, conclusions and recommendations with no responsibility
to management of the audited entity for the scope and nature of the audit. The
mandate establishes the audit objectives, and this will help in establishing
appropriate auditing standards.
Audits of public sector entities are known as comprehensive audits and fall
into two categories;
¾ Regularity auditing and
¾ Performance auditing
Regularity auditing
Relates to the keeping of proper accounting records, due collection of revenue,

authorised expenditure backed by evidence, effective checks and balances
within systems of control and compliance with regulations.
Performance auditing
Encompasses an independent and objective review of financial and operational

performance to determine whether or not the control measures which have
been introduced ensure that available resources are utilised economically,
efficiently and effectively. The audit of a private sector entity typically includes
aspects of regularity auditing, but does not necessarily include a performance
audit.
11.2.2 The auditor’s report

The reporting procedures of the office of the Auditor-General are laid down
in legislation. The reporting procedures are more comprehensive than in private
sector audits.
¾ Within thirty days after finalization of the audit, a report must be directed
to the Office of the Auditor General who in turn reports to Parliament
or the respective legislative body concerned and the entity.
11.3 Performance Auditing

Performance auditing refers to an independent evaluation of the arrangements
to promote and achieve economy, efficiency and effectiveness. Performance
audit involves drawing together evidence to support judgments about the worth
and value of activities made possible by the use of public resources (money,
authority, staff (Rand Corporation, 2009).
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Performance audits should be carried out in all public entities. The public
Sector Auditor should be satisfied that reasonable management measures have
been taken to ensure that resources are acquired and utilised economically,
efficiently and effectively.
¾ Economy refers to the appropriate acquisition of the appropriate quality
and quantity of financial, human and physical resources at the appropriate
time and place, at the lowest possible cost.
¾ Efficiency refers to the use of financial, human and physical resources
so that output is maximised for any given set of resource inputs, or
input is minimised for any given quantity and quality of output provided.
¾ Effectiveness refers to the extent of achievement of the objectives or
other intended effects of programmes, operations, activities or
processes.
Performance audit may be carried out with respect to an entity or only a
portion of an entity, for example, programme, management control system or
organisational unit.
11.3.1 Performance auditing mandate

The mandate specifies the audit and reporting requirements. The reporting
requirements of performance auditing mandate vary. Many performance audits
mandates may require the private sector auditor to report deficiencies observed
while other require the auditor to express an opinion.
In carrying out performance audit work in the public sector, the private sector
auditor may not question policy objectives unless requested to do so. The
auditor will examine the accuracy and completeness of the information on
which, or arrangements by which, policy decisions are reached, and will
consider the effects of policy and the way in which objectives are achieved.
The mandate should include reference to:

¾ the objectives of the performance audit;
¾ the scope of the performance audit;
¾ the legislation or regulations to which the entity should adhere;
¾ the fees to be charged and the basis on which such fees are to be
computed, rendered and paid; and
¾ the manner, nature, expected form and timing of eventual reports, and
to whom they should be addressed.
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Activity 11.1
? 1.
2.
Explain public sector auditing.
Define performance auditing.
3. Outline the major objectives of performance audit
mandate.
11.3.2 Application of performance audit standards

The standards requirements are as follows:
¾ Adequate training and proficiency is needed to fulfil the particular
requirements of the audit to the people carrying out the examination.
¾ Knowledge of and proficiency in many fields is required to carry out
specific performance audit engagements.
¾ The private sector auditor is not expected to possess the expertise of
specialists on the audit team but must be able to understand audit
objectives and terms of references.
¾ Adequately plan the assignment
¾ Supervise staff
¾ Gather sufficient evidence in support of the audit report
¾ Criteria should be established for the evaluation of matters which are
being subject to audit. Such criteria should be reasonable and attainable
standards of performance and control against which the adequacy of
systems and procedures and the extent of economy, efficiency and
effectiveness of operations can be assessed.
¾ Criteria may be developed from various sources as follows:
¾ Legislation or policy statements
¾ Standards of best practice developed by professions or associations
¾ Statistics or practices developed within the entity
¾ Criteria identified in similar performance audits
¾ Criteria developed may be used if in the auditor’s opinion are suitable.
The auditor may not perform the audit and report on the basis of criteria that
is believed to be unsuitable.
¾ The private sector auditor may find it necessary to rely on evidence
that is persuasive rather than conclusive in formulating an opinion. The
private sector auditor normally seeks corroborating evidence from
different sources or of a different nature in making assessments and
forming conclusions.
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11.3.3 Reporting
The report should contain the following basic features:
¾ the mandate and objectives of the performance audit;
¾ the scope;
¾ any limitations to the work carried out arising out of restricted access
to client staff or information;
¾ management’s responsibility to institute proper arrangements for
securing value for money from the use of resources;
¾ a statement that the performance audit was performed in accordance
with the standards recommended;
¾ identify the criteria;
¾ describe the findings that form the basis of the conclusion;
¾ auditor’s recommendations; and
¾ management’s responses with respect to matters reported.
Activity 11.2
? 1. Explain the standards requirements in application of
performance audit standards.
2. Explain the elements of performance audit report.
11.4 Summary
In this unit we discussed that the audit of a public sector entity is performed in
a similar manner to a private sector audit with the exception of the requirements
of a performance audit. The public sector audits are done on behalf of the
Auditor-General who in turn has a mandate to report to parliament or the
governing body of the reporting entity. Audits of public sector entities are
known as comprehensive audits which encompass regularity auditing and
performance auditing.
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References
Press.p.65.
Butterworths.
LexisNexis.
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Bachelor of Commerce

Audit Practice and Assurance

Module BACC 404

Content Reviewer: Ephraim Hudson Mazvidza Matavire

Editor: Kenell Madzirerusa

P.O. Box MP1119

The Zimbabwe Open University is a distance teaching and open

Year: October 2013

Cover Design: T. Ndhlovu

Layout and Design: D. Satumba Nyandowe/S. Mushore

Printed by: ZOU Press

ISBN No: 978-1-77938-719-6

Typeset in Times New Roman, 12 point on auto leading

© Zimbabwe Open University. All rights reserved. No part of this

change with changing technology, training, skills, experiences and personal

The six hour tutorials should be so structured that the

Session I (Two Hours)

Session II (Two Hours)

Session III (Two Hours)

Conclusion for this course, but also to prepare yourself to

Module Overview _____________________________________________ 1

Unit One: Introduction to Audit Practice and Assurance Services

Unit Two: Legal and Regulatory Environment

Unit Four: Audit Related Services

Unit Five: Assurance Engagements

Unit Six: Prospective Financial Information

Unit Eight: Engagements and Planning Activities

Unit Nine: Special Audits and Other Assurance Engagements

Unit Ten: Completion of the Audit

Unit Eleven: Auditing in the Public Sector

We cover fundamental principles of professional ethics in Unit Three, audit

Engagements and planning activities are important areas of effective audit

We also cover prospective financial information, forensic audits, completion

Introduction to Audit Practice

1.2 Authority Attaching to International Standards

1.3 Audit of Financial Statements

A framework in this case is a financial reporting framework designed to meet

Audits are long-established, formalised processes, closely regulated by laws

The financial statements subject to audit are those prepared by management

1.4 Audit-Related Services

A review provides a moderate level of assurance that the information under

1.4.2 Agreed-upon procedures

1.4.3 Compilation engagement

There are two types of assurance engagements a practitioner is permitted to

an acceptably low level in the circumstances of the engagement as the

1.6 Non-audit Assurance Engagements

Legal and Regulatory

2.2 Companies Act Overview (Companies Act 24:03

2.3 Company Law Legislation Affecting Auditors

2.3.1 Appointing auditors

If it is a simple case of re-appointing the existing auditors, an ordinary resolution

¾ appointment of an auditor rather than the existing auditors

In principle, the auditor's remuneration is fixed by those who appoint him. In

2.3.2 Vacation of office

To remove an auditor before his term of office expires, an ordinary resolution

2.3.3 Statement of circumstances

In preparing a report an auditor is required to carry out such investigations as

2.5 Standards and Technical Pronouncements

2.5.1 International Standards on Auditing (ISA)

IFAC's mission is the world wide development and enhancement of an