Paper

F8
Audit and Assurance
(INTERNATIONAL)

ACCA Qualification
Course NOTES
June 2011 Examinations

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F1 Accountant in Business
F2 Management Accounting
F3 Finanticial Accounting
F4 Corporate & Business Law
F5 Performance Management
F6 Taxation (UK)
F7 Financial Reporting
F8 Audit and Assurance
F9 Financial Management
P1 Governance, Risk & Ethics
P2 Corporate Reporting
P3 Business Analysis
P4 Advanced Financial Management
P5 Advanced Performance Management
P6 Advanced Taxation (UK)
P7 Advanced Audit & Assurance

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 Paper F8
 June 2011 examinations

Paper F8

Contents

Syllabus i
1 What is assurance? 1
2 Corporate governance 5
3 Auditors’ rights, appointment, removal and resignation 9
4 Professional ethics 11
5 The audit report 15
6 Types of audit report: modified/unmodified 21
7 The stages of an audit 27
8 The appointment process 31
9 Risk 33
10 The audit process and audit evidence 37
11 Internal control 43
12 Some accounting systems 49
13 Computer systems 51
14 Computer assisted audit techniques 53
15 The final audit – the assertions revisited 55
16 The audit of receivables 57
17 The audit of payables 59
18 The audit of accruals and prepayments 61
19 The audit of inventory 63
20 The audit of cash 67
21 The audit of non-current assets 69
22 Events occurring after the reporting period 71
23 Contingent assets and liabilities 73
24 Internal audit and other third parties 75
25 Written representations 77

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 Paper F8 i
 June 2011 Examinations

Paper F8
Syllabus

1 Aim
To develop knowledge and understanding of the process of carrying out the assurance engagement and its
application in the context of the professional regulatory framework.

2 Objectives
On successful completion of this paper, candidates should be able to:
• Explain the nature, purpose and scope of assurance engagements including the role of the external
audit and its regulatory and ethical framework
• Explain the nature of internal audit and describe its role as part of overall performance management
and its relationship with the external audit
• Demonstrate how the auditor obtains an understanding of the entity and its environment, assesses
the risk of material misstatement (whether arising from fraud or other irregularities) and plans an audit
of financial statements
• Describe and evaluate information systems and internal controls to identify and communicate control
risks and their potential consequences, making appropriate recommendations
• Identify and describe the work and evidence required to meet the objectives of audit engagements
and the application of the International Standards on Auditing
• Evaluate findings and modify the audit plan as necessary
• Explain how the conclusions from audit work are reflected in different types of audit report, explain the
elements of each type of report.

3 Approach to examining the syllabus

The syllabus is assessed by a three-hour paper- based examination, consisting of five compulsory questions.
The bulk of the questions will be discursive but some questions involving computational elements will be
set from time to time.

The questions will cover all areas of the syllabus.

Question 1 will be a scenario-based question worth 30 marks.

Question 2 will be a knowledge-based question worth 10 marks.

Questions 3, 4 and 5 will be worth 20 marks each.

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 Paper F8 1
 June 2011 Examinations

Chapter 1
What is assurance?

1 Audit and assurance

It is often not possible to check things for yourself, whether quality, accuracy, performance or existence.
You might not have the skills or the time or you might be in the wrong location. Therefore you must rely on
someone else to give you assurance. This means you have to decide:
• What standards should be applied?
• What represents ‘good’, ‘acceptable’ or ‘unacceptable?
• How much checking should be done? All checking and assurance has an associated cost
Audit is one form of assurance

An audit is defined as: the independent examination of and expression of opinion on the financial statements
of an entity by jury appointed auditor in pursuit of that appointment.

The important words here are ‘independent’ and ‘opinion’.

Independence is essential and underlies the value of auditing.

Opinion really means that one auditor could look at his set of financial statements and disagree with the
opinion of another auditor.

Judgment is essential to all auditing, there are no certainties and there are no certifications of correctness
or accuracy.

2 Elements of an assurance engagement

The following are the five elements of an assurance engagement:

(a) A three party relationship involving a practitioner, a responsible party, and intended users

(b) An appropriate subject matter

(c) Suitable criteria

(d) Sufficient appropriate evidence

(e) A written assurance report in the form appropriate to a reasonable assurance engagement or a limited
assurance engagement.

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2 Chapter 1 Paper F8
What is assurance? June 2011 Examinations

2.1 Three party relationship

A three party relationship involving a practitioner, a responsible party, and intended users:
• Practitioner: for example an auditor. The practitioner is responsible for determining the nature, timing
and extent of procedures and is required to pursue anything that leads the practitioner to question
whether a material modification should be made to the subject matter information.
• A responsible party: the person responsible for the information and assertions
• The intended users are the person(s) for whom the practitioner prepares the assurance report. The
responsible party can be one of the intended users.

2.2 Appropriate subject matter

The subject matter can take many forms, such as:
• Financial performance
• Non-financial performance, for example the key indicators of efficiency and effectiveness.
• Physical characteristics, for example, capacity of a facility.
• Systems and processes, for example, an entity’s internal control or IT system
• Behaviour, for example, corporate governance, compliance with regulation.

2.3 An appropriate subject matter is:

• Identifiable, and capable of consistent evaluation or measurement against the identified criteria; and
• Such that the information about it can be subjected to procedures for gathering sufficient appropriate
evidence.

2.4 Criteria
Criteria are the benchmarks used to evaluate or measure the subject matter.

For example:
• When reporting on financial statements, The International Financial Reporting Standards.
• When reporting on internal control, the criteria may be an established internal control framework.
• When reporting on compliance, the criteria may be the applicable law, regulation or contract.
Without the frame of reference provided by suitable criteria, any conclusion is open to individual interpretation
and misunderstanding.

Suitable criteria exhibit the following characteristics:

• Relevance: relevant criteria contribute to conclusions that assist decision-making by
the intended users.
• Completeness: criteria are sufficiently complete when they include all relevant factors
that could affect the conclusions.
• Reliability: reliable criteria allow reasonably consistent evaluation of the subject
matter.
• Neutrality: neutral criteria so that conclusions that are free from bias.
• Understandability: conclusions that are clear, comprehensive, and not subject to significantly
different interpretations.
The evaluation or measurement of a subject matter on the basis of the practitioner’s own expectations,
judgments and individual experience would not constitute suitable criteria.

Criteria need to be available to the intended users to allow them to understand how the subject matter has
been evaluated or measured
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Chapter 1 Paper F8 3
What is assurance? June 2011 Examinations

2.5 Evidence
The practitioner plans and performs an assurance engagement with an attitude of professional scepticism
to obtain sufficient appropriate evidence about whether the subject matter information is free of material
misstatement. An attitude of professional scepticism means the practitioner questions the validity of
evidence and is alert to evidence that brings into question the reliability of documents or representations.

Sufficiency is the measure of the quantity of evidence. Appropriateness is the measure of the quality of
evidence - its relevance and its reliability.

The reliability of evidence is influenced by its source and by its nature, and is dependent on the individual
circumstances under which it is obtained, eg documentary better then oral, directly obtained better then
inquiry.

2.6 Assurance Report

The practitioner provides a written report containing a conclusion.

In a reasonable assurance engagement the practitioner’s conclusion is worded in the positive form, for
example: “In our opinion internal control is effective, in all material respects, based on XYZ criteria.” In a
limited assurance engagement the conclusion is worded in the negative form, for example, “Based on our
work described in this report, nothing has come to our attention that causes us to believe that internal
control is not effective, in all material respects, based on XYZ criteria.”

A practitioner does not express an unqualified conclusion for either type of assurance engagement when:

(a) There is a limitation on the scope of the practitioner’s work.

(b) The assertion is not fairly stated, and the subject matter information is materially misstated.

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