Process of Audit

key elements

• 3 party relationship: practitioner, intended users, responsible party

• subject matter

• suitable criteria

• sufficient appropriate evidence

• written report

reasonable assurance

• high level

• positive conclusion: the statement is reasonable

limtied assurance

• lower but still meaningful level

• negative conclusion: nothing to suggest it isn’t reasonable

benefits of assurance

• provides reasonable assurance that figures are accurate

• provides reasonable assurance that material fraud isn’t happening

• the auditor independently examines processes and controls in a business

• draws attention to deficiencies in information

• can prevent fraud or errors due to the deterrent effect

• reduce the chance of managerial biases

• helps ensure high high-quality and reliable information exists

• can give additional confidence to other parties and enhance the reputation of a business

limitations of assurance

• don’t oversee the preparation of the financial statements

• accounting systems relied on have inherent limitations

• most evidence is persuasive not conclusive

• sampling is used, auditors cannot test every item

• client staff members may collude in fraud

• it can be subjective and professional judgments need to be made

• some items are estimates so uncertain and cannot be verified

• the report cannot include every judgement and conclusion made

• auditors rely on the client to provide correct information and this can be impossible to verify

expectations gap

• users aren’t aware of and don’t understand the limitations of audit

• believe they are offering a guarantee of correctness

• closing the gap - engagement letters detailing the work to be done and regularly review the form and content of reports

statutory audit exemption

meets 2 of the criteria:

• turnover less than 10.2m

• total assets less than 5.1m

• 50 or less employees on average

true

information is factual, conforms with reality, standards and the law and has been correctly extracted from books and records

fair

free from discrimination and bias, complies with standards, reflects the underlying commercial substance of transactions

professional sceptism

questioning mind, alert to conditions indicating misstatement, critically evaluating evidence

professional judgment

applying training, knowledge and experience to make informed decisions

ESG

• environmental, social and governance

• looking at sustainability from a corporate perspective and how it impacts business value

sustainability impacts

how the business affects ESG issues, eg emissions, resource use

sustainability dependencies

how ESG issues affect the business’s ablity to create and maintain value, eg climate risks, resource availability, consumer expectations

bulding block model

1. investor focused

2. multi-stakeholder focused

physical risks

due to the physical effects of climate change, eg extreme weather

transition risks

due to social and economic shifts to a low carbon economy, eg changes to policy, regulations, technology

task force on climate related finanical disclosure

• governance, strategy, risk management, metrics and targets

• sustainability and environmental issues need to be included in the strategic and director’s report

• director’s report needs to disclose CO2 emissions

appointment considerations

• ethical issues

• independence issues

• must be qualified to act

• need sufficient resources

• need to obtain references

• need to communicate with previous auditors

communicating with previous auditor

• need to obtain client consent

• no reply can be taken as no adverse comment to be made

• decline the engagement if the client refuses to give consent

client risk

• specific risks need to be identified and documented

• low risk - well financed, strong controls, conservative policies, few unsual transcations

• high risk - poor performance, weak controls, lack of experienced finance staff, significant unexplained transactions

information sources

• bankers and solicitors

• reviewing documents

• communicating with the previous auditor

• reviewing industry rules and standards

post acceptance procedures

• ensure the previous auditor has been properly removed

• ensure the new appointment is valid

• submit an engagement letter to the directors

client due diligence

• need to check the identity of clients

• individuals - photographic ID and supporting documents with full name and address

• companies - certificate of incorporation, registered address, list of shareholders and directors

• need to keep client documents for 5 years

engagement letters

• must be sent to all new clients before the audit starts

• scope, limitations, responsibilities, report format

• clearly defining management and auditor responsibilities reduces the risk of misunderstandings

engagement letters key contents

• objective

• scope, with reference to legislation, regulations and professional bodies

• reporting framework

• auditor responsibilities

• management responsibilities to prepare the FS and provide unrestricted access to any records/documents

audit strategy

the general strategy setting the scope, timing direction and guides the development of the audit plan

audit plan

how the strategy will be carried out, more detailed, sets the nature, timing and extent of procedures

reasons for planning

• ensures attention is devoted to important areas

• identify and resolve problems

• ensure the audit is properly organised and managed

• assigns work to team members

• facilitates direction and supervision of team members

• facilitates review

analytical procedures

• evaluating the relationships and trends between financial and non-financial data

• investigating fluctuations and inconsistencies

• compulsory at the planning and overall review stage

• best for large volumes of predictable transactions

analytical procedures information sources

• interim financial information

• budgets

• management accounts

• non-financial information

• bank and cash records

• board minutes

• discussions with client at year end

materiality

the level of misstatement that affects the decision of users

performance materiality

• level of materiality for individual transactions and balances at a lower level than the FS to reduce the risk of aggregate undetected and uncorrected misstatements exceeding overall materiality

• provides a margin of safety

tolerable misstatement

the maximum misstatement that will be accepted in a class of transcations or balances

double materiality

how sustainability issues create risk for the company and how the company impacts people and the environment

audit risk

• detection risk

• risk of material misstatement

• inherent risk

• control risk

inherent risk

• risk that items will be misstated due to their characteristics

• estimates, complex accounting treatments, entire FS when the company is seeking to raise finance or there are motivations for directors to misstate the figures

• impacted by the nature and industry of the entity

control risk

risk that a material misstatement isn’t prevented, detected or corrected by the company’s accounting system or system of internal control

detection risk

• risk that the auditor won’t detect a material misstatement

• if high, more work is needed

• if too high, may want to decline the engagement

significant risks

• high risk items

• need special consideration

• eg complex or unusual transactions

• complexity, subjectivity, change, uncertainity, management bias

related party transactions

• may be for reasons other than usual business

• need to disclose the identity of related parties, related party transcations and appropriately account for them

going concern risks

need to consider the risk that the client isn’t a going cocern

climate change risks

• can impact business models, industry factors such as suppliers, regulations, asset values, and going concern ability

• physical risks

• transition risks

fraud

intentional act involving deception to obtain an unjust or illegal advantage

error

unintentional misstatement, eg omission

fraudulent financial reporting

intentional misstatements to deceive users

misappropriation of assets

theft of assests, usually by employees in small and immaterial amounts

management fraud responsibilities

• for detecting and preventing fraud and error

• system of internal control

• culture of honesty and ethical behaviour

auditor fraud responsbilities

• obtaining reasonable assurance that the statements are free from material misstatements due to fraud or error

• hard to detect due to sophisticated schemes, collusion, management ability to override controls and manipulate records

• may need to report fraud to the MLRO

audit evidence

• information within the accounting records and other information gathered by auditors

• need to be sufficient and appropriate

tests of controls

procedures to evaluate the effectiveness of the company’s controls in preventing, detecting and correcting material misstatements

obtaining evidence

• tests of control

• inquiry

• reperformance

• observation

• substantive procedures

substantive procedures

• procedures to detect material misstatements at the assertion level

• testing if specific items are stated correctly

• tests of detail

• analytical procedures

• some must always be done due to limitations of internal controls

compulsory substantive procedures

• agreeing FS to underlying accounting records

• examining material journal entries

• examining adjustments

higher quality evidence

• 3rd party

• obtained directly by the auditor

• when the company’s controls operate effectively

• written rather than oral

• original documents

transactions assertions

• occurence

• completeness

• accuracy

• cut-off

• classification

• presentation

assertions about account balances

• existence

• rights and obligations

• completeness

• accuracy, valuation and allocation

• classification

• presentation

data analytics

examining data to identify patterns, trends, correlations

auditor opinion - the financial statements:

• give a true and fair view of the company’s affairs

• have been prepared in accordance with IAS

• have been prepared in accordance with the Companies Act

report key elements

• title

• addressee

• auditor opinion and basis for it

• key audit matters

• going concern

• other info

• responsibilities of management and of the auditor

• extent to which they could detect irregularities

• opinions on other matters, eg directors report

• matters that need to be reported on by excecption

• name and signature of engagement partner

• address

• date

items reported on by exception

only when they haven’t been met, no mention implies no issues

• adequate accounting records have been kept

• adequate returns were received from branches not visited

• FS agree with the accounting records and returns

• all the needed information and explanations were received

• they had access to all books and accounts

• director emoluments and other benefits were correctly disclosed

• loans and transactions in favour of directors have been correctly disclosed

audit committee roles

• supervises overall controls

• monitors the independence of the external auditor

• monitors the policy of the provision of non-audit services

• makes recommendations about the external auditor to the board

• plays a role in monitoring IT security

• reviews and monitors internal audit

internal audit functions

• ensures the risk management system operates effectively

• monitors internal controls to ensure they operate effectively

• assists management in achieving corporate objectives

• act as auditors for board reports not audited by the external auditors

• experts in accounting and auditing, helping to implement new standards

• liasing with the external auditor to reduce their work and so fees

• checking the external auditors report back everything required by the standards

• special investigations, eg into fraud