Audit & Assurance

Assurance Engagement

Is one 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 against criteria

5 elements of Assurance Engagement

• 3 party involved: practitioner (providing the assurance), intended user (relying on the info), responsible party (for the subject matter)

• Subject Matter: Info being eval

• Suitable Criteria: standards against subject matter

• Sufficient and appropriate evidence: To form an opinion

• Written Assurance Report: Expression a conclusion or opinion

External Audit Goal

Reasonable assurance FS as a whole give a True and Fair view

Express opinion FS prepared accordance financial reporting framework

Report on findings

Benef Audit: HIRED

• Helps improve quality info

• Independent scrutiny

• Reduce risks management biais, fraud & errors

• Enhance credibility FS

• Deficiencies in internal control highlighted

Limits Audit: FIRED

• FS include subjective estimates & jugement

• Inherent limitstion of internal control

• Representation from manager not reliable

• Evidence persuasive not conclusive

• Do not test all transactions, only samples

Agency

Principal employs the agent to perform a task on their behalf

Stewardship

The responsibility to take good care of resources (directors)

Corporate Governance

Is the mean by which a company is operated and controlled.

Aims to ensure decision best interest of the company.

Reduces risk of directors abusing power, stronger internal control, increased communication between Audit committees and external audit (higher quality audit)

Advantages Good Corporate Governance: GGORR

Greater transparency (clear visible company op and decision making process)

Greater accountability (directors and management accountable to share and stakeholders)

Operational efficiency (streamlined processes due to effective governance structure)

Risk management (enhance ability respond quickly to risk and effectively)

Reduce mismanagement (lower like hood errors or unethical practices within organisation)

5 fundamental ethical principles

Members must:

• Integrity: straightforward and honest in all prof and business relationships

• Objectivity: excersie prof judgment without being compromised by biais, conflict interest or undue influence/ reliance on others

• Professional competence and due care: attain and maintain required prof knowledge and skills level to provide competent prof services

• Confidentiality: info on client must not be disclose without appropriate authority or used for perso advantages

• Professional behaviour: compliance with laws and regulations mandatory

5 Threats to Independence

• Self-Interest threats

• Familiarity threats

• Self-Review threats

• Advocacy threats (auditor promoting position of a client or representing them - impairing impartiality)

• Intimidation Threats

Safeguard

Is an action or measure that eliminates a threat or reduces it to an acceptable level.

Engagement Letter

Confirm acceptance of the engagement and set out the T&C

Include: nature of the contract & T&C or engagement, objectives and scope of audit, responsibilities and financial reporting framework, form and content of the report, fees…

Audit Risk

Risk that the auditor expresses an inappropriate opinion on the FS

Audit Risk = Risk of material misstatement x Detection risk

Risk of material misstatement = inherent Risk x Control risk

Risk of Material Misstatement

= Inherent risk x Control Risk

The risk that the FS are materially misstated prior to the audit commencing.

Because of numbers misstated (over/under/misstated, control not working effectively), missing disclosures or inadequate, basis of preparation is inappropriate

Inherent Risk

The susceptibility of an assertion about transactions, balances, disclosure to misstatement that could be material before consideration of any related controls.

Eg: Volatile industry, rapidly changing industry, complex accounting treatment

Complex accounting treatment:

• Inventory values at the lower of cost and NRV

• Events after reporting period (overstated receivable if cust bankruptcy and no provision)

• PPE if expenditure on repairs treated as capex or incorrect useful life.

• Provision, Contingent liabilities/Asset: provision overstated if criteria not met (no obligation exists at YE)

• Intangible Asset: research cost to be treated as devpm expenditure or misstated if not amortised useful life

• Revenue from contract: overstated if recognised before performance obligation fulfilled

• Presentation: going concern

Control Risk

The risk that a misstatement is not presented, detected or corrected by the entity's control

Eg: old or ineffective accounting software, lack of segregation duties, lack authorisation procedures

Detection Risk

The risk that the auditor fails to detect material misstatement.

Include sampling and non-sampling risks

Only risk that can be influenced by the auditors

To reduce:

• assigning more experienced individuals to the audit team

• -performing a wider range of audit procedures

• testing larger sample sizes

Eg: using inappropriate procedure, misinterpreting results

Sampling Risk

Risk of making a conclusion based on a sample that differs from the conclusion based on a full population

Non-Sampling Risk

Risk of incorrect conclusions for reasons other than sampling issues.

Eg: first year auditing the client and lack cumul knowledge, time pressure resulting on rushed audit. Auditor can't visit all sites for client.

Materiality

Information is material if its omissions or misstatement could either individually or in aggregate influenced the economic decisions of the users taken on the basis of the FS.

FS with material misstatement will not give a true and fair view so auditors must test all material balances.

Material by size or nature

Materiality by size

½ - 1% Revenue

5 - 10% profit before income tax

1 - 2% total assets

Materiality by nature

Include compliance with laws and regulations and debt convenants, turn a profit to a loss, transactions with directors

Performance Materiality

Amount set at less than materiality for the FS as a whole to reduce the risk that the aggregate of smaller misstatement in individual account balances or classes of transactions could exceed materiality for the FS as a whole

Analytical Procedures

Eval of financial info through analysis of plausible relationship among both financial and non financial data and investigation of identified fluctuation, inconsistent relationship or amounts that differ from expected value.

Helps identify risks of material misstatement due to fraud, unusual transactions, events, amounts, ratios, trends thay might indicate matter audit implications.

Eg: comparing FS with prior results, budget, industry data

Audit Plan

Details of the audit procedures, their timing (interim or final audit), who will perform them, how much work should be done (sample size).

Fraud

Is an intentional act by one or more individuals among management. Those charged with gov, employees or third party, involving thr use of deception to obtain an unjust or illegal advantage.

Non-Compliance

Means acts of omissions or commission by the entity, either intentional or unintentionally, which are contrary to the prevailing laws or regulations.

Specifically relates to the business acty

Potential withdrawal of engagement initiated by auditors

Audit Documentation

Must be sufficient to allow auditor with no previous connection with audit to understand

Audit work performed

Evidence obtained

Significan matters arising

Conclusion reached

Risk of fraud high

• Reduce reliance on management representation

• Reduce reliance on internally generated evidence

• Reduce materiality

• Increase focus on externally generated evidence

• Increase level of testing

Assertions

Are implicit claims or representations made by management regarding the FS in order for them to show a true and fair view

Assertions relating P&L

Occurence: transactions recorded have occurred and relates to the entity

Completeness: all necessary transactions and disclosure recorded

Accuracy: amounts and disclosure recorded appropriately (amount)

Cut-off: transactions recorded correct accounting period

Classification: transactions recorded proper accounts

Presentation: transactions clearly understandable and appropriately classified

Assertions Statement of Financial Position

Existence: Asset, liability. Equity interests exist

Rights & obligations: entity owns assets and liabilities are obligations to entity

Completeness: all assets, liabilities, equity interests and their disclosure recorded

Accuracy, Valuation, and Allocation: values appropriate and disclosure accurate (amount)

Classification: assets and liabilities recorded proper accounts

Presentation l: proper aggregation and clarity in disclosures

Substantive Procedures

Designed to detect misstatement at assertion level

Test of detail (individual transactions and balances)

Substantive analytical procedures

Types of audit procedures AEIOU

• Analytical procedures for data examination

• Equity and confirmation

• Inspection of assets/ documents

• Observation of processes

• RecalcUlation of figures and reperformance of processes

Audit testing

100% testing: For small relevant populations

Specific item selection: targeting high value items or items of interest

Sampling: application of audit procedures to less than 100% of items within pop of audit relevance sucj thay all sampling units have a chance of selection in order to provide the auditor with reasonable basis on which to draw conclusions about entire pop

Stratification: breaking pop into subpopulatioks eith similar traits for testing

Sampling Methods example

Statistical

• Random selection (though random number generator or table)

• Systematic selection (constant sampling interval used)

• Monetary unit selection (higher value items)

Non statistical

• Haphazard selection (not a structured technique but avoid biais or predictability)

• block selection (block of next to each other items from populations, to reduce risks, multiples to be selected)

Deviation

Any issues identified during a test of control.

Auditor to determine level of deviation willing to accept

Misstatement

Any issues identified during a substantive test

Limitations of Internal Control

Human error (errors, misjudgement, carelessness in processing transaction or operating controls)

Ineffective controls (outdated system)

Staff collusion circumventing controls (2 or more working together, making fraud detection more chalenging)

Management override of controls

Non-routine transactions (higher proba no control applied)

Cost-benefit analysis (cost of implementing should not overweight its expected benefs)

Components of Internal Control CRIME

• Control activities (actual internal control in place - policies and procedures to achieve control of management)

• Entity's risk assessment process (how management identifies the risks rhay requires controls)

• Information system and communication (auditor to understand how they work to see if well controlled as they process transaction)

• Monitoring of controls (management check operating and effective)

• Control environment (how serious management takes internal control)

Control activities

Policies (statement of what should or not be done) & procedures (action to implement policies) to achieve the control objectives of management and those charged with governance.

Eg

Authorisation, Reconciliation, Verification, Physical or logical controls to prevent theft asset and data, Segregation of duties

Control Procedures

Controls in place by the client within any system to try and prevent or detect errors arising

Control Objectives

What’s a control would be hoping to achieve (something good or prevent something bad)

Control Risks

Possibility that a control procedure will fail to prevent or detect inaccuracies leading to financial misstatement or operational inefficiencies

The auditor and Control: Ascertain the system, documenting and evaluate system

Ascertain methods: Examine previous audit work, clients own documentation of the system, interview staff, trace a transaction through system (walk-through test), observe procedure

Documenting system: narrative notes, organisation chart, flowcharts, complete ICQ or ICE

ICE Internal Control Eval: list of risks and client tell us which control in place to mitigate them (quick to prep & less likely to be overstated, might miss some unusual risks or have some not relevant)

Internal control questionnaire ICQ: list of control objectives and check cust have them (quick to prep, ensure all control, but control might be overstated and unusual unlikely to be included)

Direct controls

Are control procedures which are properly designed, in place and working effectively to address the risk of material misstatement at the assertion level

Value for money

VFM Value for money (best combination of services for the least ressources)

• Economy (best qual min cost)

• Efficiency (max output min ressources)

• Effectiveness (achieving set goals and target)

Audit procedures

Action applied to a source achieving an objectif

Subsequent Events

Events occuring and facts discovered between the period end and the date the FS are authorised for issue

Adjusting Events

Provide additional evidence about conditions existing at the statement of financial position date

Require adjustment

Eg Trade receivable become irrecoverable debts, inventory sold less than costs after YE, estimate provision revised

Non-Adjusting Events

Provide evidence about conditions arising after the statement of financial position date

Requires disclosure if material

Eg, fire destroys inventory after YE, legal action due to injury, takeover

Active Duty Auditor

Between YE date and Auditors report signed

Performed procedures to ensure subsequent events have been accounted for appropriately

Passive duty auditor

Between auditors report signed and FS issued

No obligation to perform procedures but must take action if they become aware of events which would cause a modified opinion

Going concern

Is the assumption that the entity will continue in business for the foreseeable future (min 12months from FS date)

If not breakup or liquidation basis (intend to liquidate or no other choice)

Written representation

Written statement by manager provided to the auditor to confirm certain matters or to support other audit evidence

Goal to obtain evidence those charges with governance have fulfilled their responsibilities

Pervasive issues

Issue which make the financial statement unreliable as a whole

Audit Opinion

Misstatement:

• Not material: unmodified opinion, True and fair view, basis for opinion

• Material, not pervasive: qualified opinion, Except for…, basis for qualified opinion heading

• Material, pervasive: adverse opinion, do not give T&F view, Basis for adverse opinion

Inability to obtain sufficient appropriate audit evidence

• Not material: unmodifiedopinion, T&F view, Basis for opinion

• material, not pervasive: qualified opinion, except for, basis for qualified opinion

• Material, pervasive: Disclaimer of opinion, do not express an opinion. Basis for disclaimer of opinion