Definitions / help points

Contents of letter of engagement

Objective of the audit of the financial statements.

Scope of the audit of the financial statements.

Responsibilities of the auditor.

Responsibilities of management.

Applicable financial reporting framework.

Form and content of reports.

Statement that form and content of report may differ from expectations.

assurance engagements

An 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 matter against criteria.

audit threshold

no more than £15m turnover, £7.5 mil total assets and 50 or fewer avg. employees

director responsibilities

safeguard assets

maintain books and records

prepare FS

file statement at CH

produce a stragetic report

comment on impact of operations on the environement

physical risks

Risks which arise from the physical effects of climate change that can be driven by events or by long-term shifts in climatic patterns. These can be broken into two types: acute or chronic

transition risks

Risks which relate to social and economic shifts to a low-carbon economy, such as changes to policy, regulation, technology and markets and failure to adapt to such.

stranded assets

assets that are economically stranded, having suffered from ‘unanticipated or premature write-downs, devaluations or conversion to liabilities

auditor rights under CA06

The right of access at all times to the company's books and accounts

The right to obtain any information for the audit (from any employee)

The right to attend any general meeting of the company.

journals riskier

Relate to seldom used accounts or suspense accounts

 Are processed by individuals that do not usually do journals

 Are unusual in timing/out of office hours

 Contain no description or vague references  Lack commercial rationale

 Involve related parties

money laundering

It is the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin, so that they can be retained permanently or recycled into further criminal enterprises

Future of audit

 Greater oversight of audit committees and the role they play to ensure audit quality

 Split of Big Four’s audit/non-audit businesses to ensure focus on quality

 A five-year review of the state of the industry

 Mandatory joint audits* to help smaller firms to compete with the Big-Four

risks of technology

Extent of use in accounting functions, Do they understand this technology? Is there risk of automation bias?

Fundamental principles

Professional behaviour, Professional competence and due care (acting diligently), Confidentiality, Integrity and Objectivity

Safe guards for ethical threats

 Consultation with Ethics partner and Disclosure to those charges with governance

 Removal of audit staff who give rise to a threat (such as family or long association)

 Using separate audit personnel to minimise self-review or advocacy

 Ensure the audit file has an Engagement Quality Review (EQR) (Independent scrutiny of judgements made on the audit)

 Consideration/reduction of the type and amount of work provided to a client

 Considering whether it probable that a reasonable and informed third party would conclude that objectivity either is impaired or whether in fact, it could be impaired.

 Resignation (a safeguard where no alternatives exists or an action is prohibited)

 Ensure there is informed management where the auditor may take on a management role (an ability that management have the capiablilty to make independent judgements)

FRC standards

part A = Overarching Principles and Supporting Ethical Provisions

part b =

Section 1 deals with policies, procedures and roles to be put in place by the firm to help facilitate compliance with the other sections,

Section 2 Financial, Business, Employment and Personal Relationships,

Section 3 Long Association with the Audit Engagement, PIE - 5 yrs on 5 off and mandatory rotation 20yrs with tender 10yrs, non- PIE after ten years the firm must consider if ‘a reasonable and informed 3rd party would question the partners objectivity’

Section 4 Fees, Remuneration and Evaluation Policies, Litigation, Gifts and Hospitality. NAS limit to 70% of 3yr audit fee, if PIE 10-15%, PIE 5-10% then obtain EQR - if exceeded reduce dependancy

Section 5 Non-Audit Services/Additional Services. Prohibited : valuation services , IT systems, tax advice or advocate, PIE can not have payroll done ,

Section 6 Provisions Available for Small Entities

Professional clearance

Step 1: Obtain written permission from prospective client to contact existing auditor

Step 2: Write to the outgoing auditor of obtain relevant information e.g unpaid fees, unlawful acts

Step 3: Consider information received/lack of information received

Step 4: Take decision/inform client

appointment of auditors / removal

appointment must be made by the end of the 28 days after

auditor must write a statement of circumstances and deposit it at the company’s registered office explaining the circumstances of their removal.

right to have written representations circulated to all the members

if auditor resigns:

auditor must submit written notice to the company’s registered office and write and submit a statement of circumstances

audit strategy

The formulation of the general strategy for the audit, which considers materiality, risk, audit approach, experts, timing, team, budgets and the deadlines of the audit and guides the development of the audit plan.

audit plan

more detailed than the strategy and sets out the specific nature, timing and extent of the audit procedures to be performed by the engagement team members in order to obtain sufficient and appropriate evidence.

Materiality thresholds

0.5% Revenue

5% PBT

1% Total assets

double materiality

a concept which considers not only the sustainability issues that might create financial risks for the company (financial/quantitative materiality), but also those sustainability issues where a company’s activities materially impact on people and the environment (impact materiality/‘by nature’/qualitative).

analytical procedures strengths and weaknesses

S:

 May highlight errors not identified by detailed testing

 Allows auditor to identify risk areas/material areas requiring further work

 Uses information outside of the accounting records which the preparer may have less scope over (i.e. budgets)

W:

 A good knowledge of the business is required to understand results

 There may be a tendency to carry out procedures mechanically, without appropriate professional scepticism

 Requires an experienced member of staff to be done properly

 Reliable data may not be available

key ratios

ROCE - measures a company’s profitability and efficiency in using its total capital to generate operating profit.

Profit before interest & tax / Total Assets Less Current Liabilities

current ratio: assets / liabilities

quick ratio current assets - inventory / current liabilities

Gearing - indicates how much a company relies on borrowed funds compared to shareholders’ equity to finance its activities NET DEBT / EQUITY x 100 (going concern, existence of covenants)

Interest cover - PB interest / interest cost (linked to debt covenants)

Business risk

‘risk resulting from significant conditions, events, circumstances that could adversely affect an entity’s ability to achieve its objectives and execute its strategies’

Operational risks are the risks arising with regard to operations, for example, the risk that a major supplier will be lost and the company will be unable to operate

Compliance risk is the risk that arises from non-compliance with laws and regulations that surround the business, for example a restaurant failing to comply with food hygiene regulations might face fines, enforced closure, legal action from customers and so on.

Financial risks are the risks arising from the financial activities or financial consequences of an operation, for example, cash flow issues or overtrading

Audit risks

Inherent - A factor that increases the susceptibility, consider complexity of acc standards / policies, motives , estimations and subjectivity

Control - risk that a misstatement will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. Information system / communication, monitor internal controls

detection - the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists. Sampling risk & resource / approach risks