P.

7 - Advanced Audit and Assurance Services (International)

SUMMARY

Objective
To analyse, evaluate and conclude on the assurance engagement and other audit and assurance issues in the context of best practice and current issues. It builds on F8 Audit and Assurance, P2 Corporate Reporting and other financial reporting papers.

Syllabus
The syllabus is divided into SEVEN main sections Regulatory Environment recognise the legal and regulatory environment and its impact on audit and assurance practices. Professional and ethical considerations demonstrate the ability to work effectively on an assurance or other service engagement within a professional and ethical framework. Practice management assess and recommend appropriate quality control policies and procedures in practice management and recognise the auditors position in relation to the ace

Syllabus
Audit of Historical Financial Information Identify and formulate the work required to meet the objectives of the audit assignment and apply the International Standards on Auditing. Other assignments identify and formulate the work required to meet the objectives of non audit assignments. Reporting evaluate findings and the results of work performed and draft suitable reports on assignments. Current Issues and developments understand the current issues and developments relating to the provision of audit related and assurance services.

Format of Exam
Section A: Two compulsory questions Section B: Choice of two from three questions 50-70 marks 3050 marks.

Time allowed: 3 hours. (Time is what makes or breaks you in paper, take it very seriously.)

Regulatory Environment

Objective
To understand the International Regulatory environment for audit and assurance services. Money laundering to explain the responsibility of professional accountants in this area and to outline the procedures that audit firms should implement. Laws and regulations auditors responsibility in respect of laws and regulations that apply to an audit client. (Topic can be built into a practical case study question.)

International Standards of Auditing (ISA)

International Standards of Auditing (ISA) are produced by the International Audit and Assurance Standards Board (IAASB), a technical standards committee of the International Federation of Accountants (IFAC). See List of current on page 6 of BPP Text. Exam Tip understand how to apply ISAs in practice and refer to them when answering questions.

Audit committees
Audit committees are made up of non executive directors and are perceived to increase confidence in financial reports.
Duties and responsibility of the audit committee.

To monitor integrity of financial statements To review the companys internal financial control system To monitor and review the effectiveness of the companys internal audit function. To recommend appointment, remuneration and liaise with the external auditors. Review management accounts and recommend improvements.

Internal Controls (IC)

Internal controls serve the following purpose.
Safeguard the companys assets Help to prevent and detect fraud Safeguard the shareholders investments.

Directors responsibility ultimate responsibility of ICs lies in the hands of the Board of directors. assess the risk, monitors, reviews, reports and corrects. Auditors responsibility shall gain an understanding of the controls due to the work on the accounts; The review required by auditing standards is narrower in scope than the review performed by directors. Auditors therefore dont assess whether the directors review covers all risks and controls and whether the risks are satisfactorily addressed by the internal controls.

Money Laundering
Money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activity, allowing them to maintain control over the proceeds and, ultimately providing a legitimate cover for their source of income. ACCA Code of Ethics and Conduct

Code of Ethics and Conduct

ACCA Code of Ethics and Conduct

Fundamental Principles
Integrity straight forward and honest Objectivity should not allow bias, conflict of interest and undue influence of others. Professional Competence and due care professional knowledge/skill and act diligently. Confidentiality should not disclose unless there is a legal or professional right to do so. Professional behaviour comply with relevant laws and regulations and avoid actions that discredit the profession.

Threats to compliance with Fundamental Principles

There are five sources of threats Self-interest threat (e.g. financial interest in client) Self-review threat (e.g. auditing F.S. prepared by the firm.) Familiarity threat ( e.g. audit team member having family at the client.) Intimidation threat (e.g. threat of replacement due to disagreement.) Advocacy threat (e.g. promoting shares in a listed entity when the entity is a F.S. audit client.)

Available Safeguards
Three(3) categories of safeguards: Created by the profession, legislation or regulation. In the work environment. Created by the individual.

 Educational training and experience; Continuing professional development requirements; Corporate governance regulations; Professional standards; Professional or regulatory monitoring and disciplinary procedures (ICPAU); External reviews by legally empowered third parties. (e.g.USE, BoU)

Safeguards created by the profession, legislation or regulation:

 Consulting an independent third party Appropriate disciplinary processes Timely communication of policies and procedures Using different partners and engagement teams for provision of non-assurance services. Discussion ethical issues with those charged with governance. Disclosing to those charged with governance the nature of service and extent of fees charged. Involving another firm to perform or re-perform engagement.

Safeguards in the work environment Second partner review

Safeguards created by the Individual

Complying with continuing professional development requirements. Keeping records of contentious issues and approach to decision making. Maintaining a broad perspective to how similar organisations work. Using an independent mentor. Maintaining contact with legal advisors and professional bodies.

Professional Liability

Negligence
Auditor may have a professional liability of negligence if injured party can prove;
A duty of care which is enforceable by law This duty of care was breached The breach caused the injured party loss

The parties likely to bring action include the company, shareholders, bank, other lenders and other interested third parties.

Fraud and Error

Fraud is an intentional act by one or more individuals among management, those charged with governance (management fraud), employees (employee fraud) or third party involving the use of deception to obtain an unjust or illegal advantage. Auditors concern is fraud that causes material misstatement to financial statements. Error is when material misstatement is caused by mistake.

Types of fraud
Fraudulent financial reporting manipulation, falsification and alteration of records, misrepresentation of events/transactions and intentional misapplication of accounting principles. Misappropriation of assets theft of assets, embezzlement, paying for foods not received, using assets for personal use. Note: Management/charged with governance are primarily responsible for preventing and detecting fraud.

Quality Control

QC at AUDIT FIRM LEVEL ISQC 1

Organisations forms include sole practitioners, partnership and LLP Policies to ensure that ALL audits are conducted in accordance with ISAs, National standards and applicable regulatory and legal requirements Factors to consider in determining the nature, timing and extent of policies Size and nature of practice Geographic dispersion Organization Appropriate cost/benefit considerations

Elements to consider in the policies and procedures

Firm and Leadership responsibility for quality internal culture of quality, Ethical requirements Human resources sufficient personnel who are capable, competent and ethical. Continuous professional development, work experience and coaching. Assigning of engagement teams Engagement performance Direction, Supervision, review, consultation, resolution of disputes Monitoring - Q.C. procedures must be relevant, adequate, operating effectively and complied with.

Q.C. on an Individual Audit ISA 220

ISA 220 requires firms to implement Q.C procedures over individual audit engagements. The engagement partner is responsible for the overall quality of each audit. Independence, Acceptance, assignment of engagement team, engagement performance, consultations and engagement reviews are responsibilities of the partner

Professional Appointments

Change of Auditors
Reasons for Change Audit Fees Size Personality Audit rotation Auditor doesnt seek re-election

Advertising
Promotional advertisement allowed (US and UK) May contain any factual statement the truth of which can be justified. Generally prohibited Discredit ACCA, members, firms or accountancy profession Claim superiority Mislead Fall short of standards regarding legality, decency, clarity, honesty and truthfulness.

Lowballing/Predator pricing
Lowballing or predator pricing is where a firm seeks to increase its market share by dropping its quote for an audit fee or undercutting its competitors. NOT disallowed as long as client is not misled.

New appointments
Client acceptance procedures put in place to avoid clients that have unprofessional attitudes towards acquiring professional work and risky clients They include; Client screening procedures Professional clearance procedures Independence checks

Planning, Materiality and Risk

ISA 300 Planning an audit of financial statements

ISA refers to two documents: Overall audit strategy (scope, timing and direction) Audit plan (specific procedures to be carried out) Audit Planning sets the tone and direction of the audit. It ensures that the right resources are allocated to high risk areas at the appropriate time.

Understanding the entity and its environment

Methods used Make inquiries of management Analytical procedures Observe (operations) and inspect (business plans) Read reports prepared by management and those charged with governance Other procedures (walk through, visit premises) Update prior year info Review interim FS

Materiality
ISA 320 materiality in planning and performing an audit. ISA 450 Evaluation of misstatements identified during the audit. Materiality Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements

Percentage guidelines for materiality

Planning materiality preliminary materiality 5 10% profit .5 1% net assets 1 - 2% total assets .5 1% revenue. Exam note: always compute materiality related to case area.(i.e. BS item - use total assets)

Business Risk
Risk that the entity will not be able to achieve its objectives and execute its strategies. As a result of how entity is managed(operating environment, customer bases, employee base, ownership, legal, regulatory) Risk assessment procedures recognize business risks. Risk can be in various groups. Applicable to all companies, arise from strategies adopted and industry specific.

Financial statement risk

Risk that that financial statements are misstated. Many misstatements could involve;
Errors in the amounts recorded in the FS. Errors in or omissions from the disclosure notes.

Many, if not all Business risks produce Financial statement Risks

Audit Risk
The risk that the auditor gives an inappropriate audit opinion when the FS are materially misstated. Audit is designed to provide reasonable assurance that FS as a whole are free of material misstatement. Reasonable implies risk exists. Risk reduced to an acceptable level. Audit risk is considered at two levels
FS materially misstated prior to audit. Auditor will not detect such misstatement.

Audit risk model

Material misstatement must be considered at:
Overall financial statement level Transaction, balance and disclosure

Audit risk = inherent risk * controls risk * detection risk(residual risk)

Analytical Procedures
Meaning analysis of significant ratios and trends including the resulting investigations of fluctuations and relationships that are inconsistent with other information or which deviate from predictable amounts. Purpose
To assist in understanding business To identify areas of potential risk To plan nature, timing and extent of other audit procedures

Ratio Analysis Expectation and performance measures

Audit Evidence

FS Assertions
Accuracy(during period, presentation/disclosure) Completeness(during period, period end, presentation) Cut off(during period) Allocation(period end) Classification(during period, presentation/disclosure) Occurrence(during period, presentation/disclosure) Valuation(period end, presentation/disclosure) Existence(period end) Rights and obligations(period end, presentation/disclosure)

Audit procedures
Inspection of assets Confirms existence, gives evidence of valuation but does NOT confirm rights and obligations. Confirmation that assets seen are recorded in accounting records gives evidence of completeness. Confirm completeness, cut-off(checking transactions after year end), valuation, rights and obligation(contracts) and presentation/disclosure. Involves watching a procedure. (Limited use since it can only confirm procedure took place when auditor was watching.) Seek information from client staff or external sources. Depends on integrity and knowledge of source.

Inspection of Documents

Observation

Enquiries

Audit procedures
Confirmation Recalculation Seeking confirmation from another source. (Bank confirmation) Checking arithmetic of clients records, for example, adding up ledger accounts.

Re-performance
Analytical procedures

Auditors independent execution of procedures or controls.(manual or CAATs)

Evaluation of financial information by comparing financial and non-financial information

Audit evidence should be sufficient and appropriate. Sufficiency is the measure of the quantity of audit evidence. Appropriateness is the measure of the quality or reliability of the audit evidence.

Competence and Objectivity of the auditors expert

Auditor should assess the experts competence, capability and objectivity for audit purposes. Competence
professional certification, licensing, membership, experience and reputation

Objectivity
Employed by entity Related to entity in any manner(financially dependant.)

Assessing the work of the auditors expert

ISA 620 The auditor shall evaluate the adequacy of the auditors experts work for the auditors purposes including.the relevance and reasonableness of the experts findings or conclusions. Other considerations include
Source of data used Assumptions and methods used When the expert carried out the work The reason for any changes in assumptions and methods The results of the experts work in the light of the auditors overall knowledge of the business.

ISA 610 Using work of Internal Audit

Scope and organization of Internal audit function must be considered. The following factors must be considered. Proficiency and training Level of supervision, review and documentation Sufficiency and appropriateness of evidence Appropriateness of conclusions drawn Consistency of the report prepared to work performed Whether the work necessitates amendment to the external audit program

Evaluation and Review

Opening Balances Comparatives Subsequent Events Going Concern

Evaluation and Review

Inventory and construction contracts Standard costing systems Non current assets Fair value Impairment Intangible assets Financial Instruments Investment properties Assets held for sale and discontinued operations The effect of foreign exchange rates.

Evaluation and Review

Statement of cash flows Changes in accounting policies Taxation(including deferred tax) Segmental reporting Leases Revenue recognition Employee benefits Government grants Related parties Earning per share Provision, contingent liabilities and contingent assets Share-based payments transactions Business combinations

Reporting

Emphasis of Matter and Other matters paragraph.

ISA 706 Emphasis of matter and other matter paragraphs in the independent Auditors report (new ISA) Emphasis of matter paragraph a paragraph included in the auditors report that refers to a matter appropriately presented or disclosed in the FS that, in the auditors judgment, is of such importance that it is fundamental to users understanding of the FS. Other matters paragraph a paragraph included in the auditors report that refers to a matter other than those presented or disclosed in the FS that, in the auditors judgment, is relevant to users understanding of the audit, the auditors responsibilities or the auditors reports.

Emphasis of matter
Must be used if
Financial report framework prescribed by law/regulation would be unacceptable but for the fact that it is prescribed by law.(ISA 210 Agreeing the terms of audit engagements). Existence of a material uncertainty relating to events or condition that may cast doubt on entitys going concern.

It may be used uncertain outcome to litigation, early application of an accounting standard that has pervasive effect on the FS in advance of effective date, a major catastrophe that has had and continues to have devastating effect on FS) Emphasis of matter follows opinion we draw your attention to Note X in the FS .

Other matter
Paragraph must be used:
Where prior period FS were audited by a predecessor auditor.(ISA 710) Where prior period FS were not audited (ISA 710) Where reporting on prior period FS in connection with the current periods audit, if auditors opinion on such prior period FS differs from the opinion the auditor previously expressed.(ISA 710) If revision of the other information is necessary and management refuses to make the revision.(ISA 720)

Modified opinion
ISA 705 Modifications to the opinion in the independent auditors report. The objective of the auditor is to express clearly an appropriate modified opinion on the FS that is necessary when: The auditor concludes, based on the audit evidence obtained, that the FS as a whole are not free from material misstatement. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the FS as a whole are free from material misstatement.

Modified opinions
TYPE OF OPINION Old ISA 700(pre-clarity project) New Isa 705(postclarity Project)

Modified (except for)

Modified (except for)

Qualified due to a disagreement

Qualified due to a limitation on scope

Qualified due to a material misstatement

Qualified due to an inability to obtain sufficient appropriate audit evidence. Adverse opinion due to material and pervasive misstatements. disclaimed opinion due to material and pervasive inability to obtain sufficient appropriate audit evidence.

Adverse

Adverse opinion due to material and pervasive disagreements. disclaimed opinion due to material and pervasive limitation on scope.

Disclaimer of opinion

Group Audits and Transnational Audits

Group accounting
A group is a parent and all its subsidiaries. A parent is an entity that has one or more subsidiaries. A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity. Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.

Audits of groups
ISA 600 Special considerations audits of group financial statements (including work of component auditors) says the objective of the group auditor is:
Determine whether to act as the auditor of the group financial statements. Communicate clearly with component auditors about scope and timing of their work. Obtain sufficient appropriate audit evidence about the Financial information of the components.

Group auditor has to ensure that the other auditors are professionally qualified, meet quality control and ethical requirements.

Definitions
Component and entity or business activity for which the group or component mgt prepare financial information that should be included in the group financial statements. Component auditor an auditor who, at the request of the group engagement team, performs work on financial info related to the component. Component materiality materiality level for a component determined by the group engagement team, Significant component a component identified by the group engagement team: (a) that is of individual significance to the group, or (b) that due to specific nature or circumstances, is likely to include significant risks of material misstatement of the group FS.

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. Reasons for joint audits
Takeover (parent company auditors act jointly with those of new subsidiary) Political problems (Need to employ local auditors to satisfy the laws of the country) Locational problems (Companies operate from widely dispersed locations) Companies may prefer to use local accountants while enjoying the wide range of services provided by a large national firm.

Transnational Audits
Transnational audits are audits of FS which may be relied upon outside an entitys home jurisdiction for the purpose of significant lending, investment or regulatory decisions(Including audit of FS of companies with listed equity, debt and other public interest entities which attract particular public attention because of their size, products or services). (TAC) Forum of Firms (FoF) was formed by networks that carry out transnational audits (e.g. KPMG, Deloitte, E&Y, PwC) and they have agreed to promote high quality audit practices worldwide (use of ISA) and maintain quality control standards in accordance with International standards on Quality Control issued by IAASB.

Audit-related services and other assurance services

Reviews
Two types of assurance engagement which can be applied to review. Attestation engagement accountant declares that a given premise is either correct or not.(e.g. accounting policies used are consistent with those in the prior year, no material modifications to the interim financial information.) Direct reporting engagement accountant reports on issues that have come to his attention during the course of his review.(e.g. due diligence)

Due diligence
A due diligence engagement an advisor is engaged by one company planning to take over another to perform an assessment of the material risks associated with the transaction, to ensure that the acquirer has all the necessary facts and that the perceived business opportunities are in fact real. Helps determine the purchase price. Due diligence may be requested by seller. Auditor uses enquiry and analytical review. Get a lower level of assurance.

Enquiries of Due diligence

Structure(ownership and organization) Financial health Credibility of owners, directors and senior managers. Future potential, reflected in the strength of its products or services and the probability of earnings growth over the medium to long term. Assessment of the risk to the acquiring business, in terms of market, strategy and likely future events. Business plan (Is it realistic)

Agreed-upon procedures
Agreed-upon procedures assignment an auditor is engaged to carry our procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and reports on factual findings. The recipients of the report must form their own conclusions from the report by the auditor. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results.

Forensic audits

Definitions
Forensic auditing The process of gathering, analyzing and reporting on data, in a pre-defined context, for the purpose of finding facts and/or evidence in the context of financial/legal disputes and/or irregularities and giving preventive advice in this area. Forensic investigation carried out for civil or criminal cases. These can involve fraud or money laundering. Forensic accounting undertaking a financial investigation in response to a particular event, where the findings of the investigation may be used as evidence in court or to otherwise help resolve disputes.

 Fraud quantifying losses from theft of cash or goods, identifying payments or receipts of bribes, identifying intentional misstatements in financial information and investigating intentional misrepresentations made to auditors. Negligence investigating the work done to provide evidence as to whether auditor met the standards in case client has sued the auditor. Insurance claims validate the amounts of losses being claimed in order to resolve a dispute between the company and the claimant. Other disputes shareholder disputes, partnership disputes, contract disputes, business sales and purchase disputes and matrimonial disputes.

Application of forensic auditing

Prospective Financial Information

Types of PFI
Forecasts PFI based on assumptions as to future events which management expects to take place and the actions management expects to take (best-estimate assumptions). Projection PFI based on hypothetical assumptions about future events and management action, or a mixture of best estimate and hypothetical assumptions. Hypothetical illustration PFI based on assumptions about uncertain future events and management actions which have not yet been decided on. Target PFI based on assumptions about the future performance of the entity.

Internal Audit and Outsourcing

Outsourcing
Outsourcing is the process of purchasing key functions from an outside supplier.(e.g. Internal audit, information technology) Insourcing is when an organization decides to retain a centralized department for the key functions, but brings experts in from an external market on a short-term basis to account for peak and trough periods. It is a business decision that is often made to maintain control of certain critical production and competences.

Reasons for outsourcing

Financial efficiency improved cost control, may reduce the number of employees or reshape the entitys financial statements(selling some of the assets.) Change management smooth running of mergers of two firms with different accounting systems, restructuring. Strategy refocus on core competences, improve technical services or entre a market in the most low risk way.

Current Issues

Summary of current issues

Professional, ethical, regulatory and corporate governance topics. Information technology Going concern Audit documention Social and environmental auditing

How to tackle exam: a markers perspective

Practice your handwriting, in three-hour sessions. Read widely, keep up to date, be aware of global trends and issues. Read question before the scenario Allocate your time properly Pay attention to the number of marks Read the question very carefully what is the requirement?

How to tackle exam: a markers perspective

Make sure the answers are easy to read and mark Not explaining points in sufficient detail Desire for success.
by Sean Purcell part of P3 marking team

SUCCESS IN YOUR PAPER