Audit and Assurance (AA) - Unit 1-10 Notes
Unit 1: Audit Framework & Regulation
An assurance engagement enhances confidence in a subject matter by evaluating it against criteria and issuing a written report. It involves three parties: a practitioner, intended users, and a responsible party.
Types of assurance engagements include reasonable assurance (e.g., external audits) and limited assurance, which provide different levels of confidence.
External audits aim to enhance the reliability of financial statements by expressing an opinion on their truth and fairness, in accordance with the applicable financial reporting framework (e.g., IFRS).
Auditors must be independent, unbiased and follow a strict ethical code of conduct.
An expectation gap exists when users incorrectly believe that an audit provides absolute assurance.
Limitations of an audit include reliance on subjective estimates, internal controls, management representations, and sampling.
National and international regulations, auditing standards (e.g., ISAs), and codes of ethics govern audit practices.
Auditor appointment, resignation, and removal are subject to legal requirements outlined in national laws (e.g. UK Companies Act 2006).
Professional bodies like ACCA promote quality through qualifications, support, technical expertise and disciplinary actions.
Corporate governance strengthens control environments, improves financial reporting, and enhances audit quality.
Fundamental ethical principles for professional accountants include objectivity, professional behavior, competence, integrity and confidentiality.
Threats to these principles include self-interest, self-review, advocacy, familiarity, and intimidation, requiring safeguards or withdrawal from engagements.
Unit 2: Audit Planning and Risk Assessment
Acceptance/continuance requires client screening: professional clearance, assessing independence, management integrity, resources, risks, fees.
Preconditions for an audit: management acknowledges responsibility for financial statement preparation, internal control, and providing auditor access.
Audit risk is the risk of expressing an inappropriate opinion on materially misstated financial statements. It comprises the risk of material misstatement and detection risk:
Risk of material misstatement includes inherent risk (susceptibility to misstatement) and control risk (internal controls failing to prevent or detect misstatements).
Detection risk is the risk that auditor procedures will not detect a misstatement. It includes sampling and non-sampling risk.
Auditors exercise professional skepticism: a questioning mind and critical assessment of audit evidence.
Risk assessment procedures: inquiries, analytical procedures, observation, and inspection.
Auditors understand the entity, its environment, financial reporting framework, and internal control system.
Analytical procedures evaluate financial information for inconsistencies and potential misstatements.
Misstatements arise from fraud (intentional) or error (unintentional).
Auditors identify non-compliance with laws and regulations that may materially impact financial statements.
NOCLAR ethical standard provides guidance for accountants on responding to non-compliance with laws and regulations.
An audit plan details the nature, timing, and extent of audit procedures.
Interim audits are performed before year-end; final audits after year-end.
Audit documentation provides evidence for the auditor's report and compliance with standards.
Unit 3: Internal Control & Internal Audit
Components of internal control include the control environment, risk assessment, monitoring, information system, and control activities.
The control environment sets the organization's tone regarding internal controls.
Risk assessment identifies and addresses financial reporting risks.
Monitoring evaluates control effectiveness over time.
The information system communicates financial reporting information.
Control activities (authorization, reconciliations, verifications, segregation of duties) ensure management's objectives are met.
IT controls encompass general IT controls and information processing controls.
Recording of the internal control system includes the purchases, sales and inventory systems.
Computer system controls and types include general IT controls and information processing controls.
Auditors perform tests of controls to assess their design and effectiveness.
Deficiencies in internal control are communicated to management and those charged with governance via a management letter.
Differences between internal and external auditors: Internal is to improve company's operation and effectiveness and external is to provide an opinion of the FS truth and fairness.
The internal audit function assesses corporate governance, risk management, and internal controls. It may be outsourced.
Common Internal audit assignments includes value for money assessments, operational audits, audits of IT systems, and financial audits.
Value for money is concerned with obtaining the best possible combination of services for lower resources. 3Es (Economy, Efficiency and Effectiveness).
Unit 4: Audit Evidence and Audit Procedure
Audit evidence must be sufficient (quantity) and appropriate (quality: relevance and reliability).
Reliable evidence comes from independent sources, direct auditor observation, and written documentation.
Relevant evidence relates to financial statement assertions being tested.
Financial statement assertions include occurrence, completeness, accuracy, cut-off, classification, and presentation for transactions and events; and existence, rights and obligations, completeness, accuracy, valuation classification, and presentation for account balances.
Audit procedures include inspection, observation, external confirmation, recalculation, reperformance, analytical procedures, and inquiry.
Tests of controls assess the operating effectiveness of internal controls. Substantive procedures detect material misstatements.
Sampling involves testing less than 100% of a population. An appropriate sample should be representative.
Statistical and non-statistical sampling methods are used; stratification reduces variability within a population.
Deviations during tests of control and misstatements during substantive procedures are evaluated.
Audit testing of specific items: receivables, prepayments, payables, accruals, bank balances, non-current assets, and related transaction.
Automated tools and techniques include audit software.
Auditors must evaluate the competence, capabilities, and objectivity if using either Management or Auditor's Expert.
For reliance on Internal Audit, assess objectivity, competence, and systematic approach; evaluate internal audit work.
Service organizations impact the audit so audit evidence will need to be obtained from them, instead of, or in addition to, the client.
Audits of Not-For-Profit (NFP) Organizations: Assess the specific Audit risks and do testing related. NFP differs because profit maximization is not their main objective.
Unit 5: Review & Reporting
Subsequent events are events occurring between the financial statement date and the auditor's report date or facts becoming known after the auditor's report date. Actions taken depend on when the event becomes known.
Going concern is the assumption that the entity will continue in business for the foreseeable future. Auditors obtain sufficient evidence about management's use of the going concern basis.
If there is material uncertainty, it should be disclosed in the financial statements. If the financial statements are no longer a going concern they should be prepared in a basis other than the going concern basis.
The going concern concept consists or Net current liabilities, Missing tax payments, Borrowing fact not agreed, etc.
Indicators of problems for going concern are negative cash flows, inability to pay debts, and loss of key personnel.
Written representations provide management's confirmation of certain matters and are used to support other audit evidence.
Written representations comes in the form of a letter addressed to the auditor and signed by client management.
An overall review of the financial statements ensures compliance with standards and reflects the auditor's understanding.
This also includes performing analytical procedures and reviewing misstatements.
The independent auditor's report expresses an opinion on the financial statements' truth and fairness.
Modified opinions (qualified, adverse, disclaimer) are issued when financial statements are materially misstated or sufficient evidence is unobtainable.
Key Audit Matters are the matters of most significance in the audit. This assists users in understanding the entity and provides a basis for the users to engage with management.
Emphasis of Matter paragraphs highlight matters of fundamental importance. Matters could be; An uncertainty relating to the future outcome of exceptional litigation.
Materiality guides audit planning and considers size, nature, and user needs. Performance materiality is set lower to reduce the risk of aggregate misstatements of accounts and data.
Unit 6: The UK Tax System and its Administration
The purpose of taxation in a modern economy is to promote economic stability, social justice, and influence behavior.
Progressive, regressive, and proportional taxation structures impact wealth redistribution.
HMRC administers UK tax law. Taxpayers self-assess and are responsible for reporting taxable income and paying taxes.
Sources of tax law include statute law (Finance Acts), case law, and HMRC guidance (Statements of Practice, Extra-Statutory Concessions).
Tax evasion is illegal; tax avoidance is legal but may involve targeted anti-avoidance measures.
Tax agents must adhere to ethical principles (objectivity, competence, behavior, integrity, confidentiality) outlined in the ACCA Code of Ethics and Conduct.
Members need to be aware of the Money Laundering Regulations.
Self-assessment requires taxpayers to submit returns by specified time limits (31 October, paper return and 31 January, online return) and keep necessary records for 5 Years.
Penalties apply for late filing and payment. Non-compliance generates penalties to be paid on time and interest to start accruing.
Tax agents face penalties for dishonest conduct.
Employees have income tax and NIC deducted through PAYE; the self-employed use self-assessment.
Unit 7: Income tax, NIC and capital gains tax computation for individuals
Income tax is assessed on taxable income, after exemptions and reliefs, within a tax year (6 April to 5 April).
The Personal Allowance is reduced as income rises above income thresholds. Individuals can, however, transfer amounts between Civil partners and Spouses.
Assessable earnings for income tax includes salary, bonuses, benefits, however there are Exempt Benefits.
Employees can deduct expenses incurred wholly, exclusively, and necessarily in the performance of duties and are eligible to relief for Approved Mileage Allowance Payments (AMAP).
Employers are required to provided P45 Employee leaving form ,P60 Year End summary and P11D Benefits summary, form for each payment.
Private use of a company car is taxed at specific rates for different engine types and CO2 emissions.
Unincorporated trader's profit is self-employment trading income & determined using “Badges of Trade” (FAST SOFIRM).
Tax adjusted profit = Accounts net profit + disallowed-expenses -non-taxable profits =Taxable profit for traders.
Allowable trading expenses may include loan or mortgage interest, or even gifts ,if the price is below gift limit.
Any business with revenue of under £150,000 may use cash-basis accounting opposed to accural basis accounting.
Profits or loss are assessed on assessment by CYB, and there is Opening, Closing and On-Going profits reliefs and losses.
There's rules where relief is given for certain business trade investment such as Capital Allowance (CA).
Capital and trade gains/losses from different types of share schemes, are subject to income tax or capital gains tax charge to account records.
The capital gains tax is applicable to shares of different financial investment for the self-employed individual involved.
Unit 8: Inheritance tax
Inheritance Tax (IHT) is levied on transfers of value by chargeable persons on chargeable property.
Exempt transfers include small gifts, marriage gifts, normal expenditure out of income and gifts to family.
A Potentially Exempt Transfer (PET) is a lifetime gift from an individual to another. If the donor dies within 7 years, it becomes chargeable. These have 0 annual liability.
A Chargeable Lifetime Transfer (CLT) is a gift into a trust, which is chargeable at 20% or 25% depending on conditions.
Lifetime Transfers - PETs do not use up annual exemption until made chargeable. CLTs do use up annual exemptions, however, taper relief can apply depending on when date-of-death is.
Individuals are entitled to a Nil Rate Band and Residue Nullity in estate value (RNRB) on transfers on death to direct descendants.
RNRB is lost where estate is over a certain threshold. Married couples transfer any unused nil rate band to spouse.
Taper Relief gives a % discount on the IHT, the earlier on in gifting done before death.
Unit 9: Corporation tax liabilities and group implications
Corporation tax is assessed on a company's taxable total profits arising in an accounting period (<=12 months) at a rate fixed by financial year.
Companies that are residents in the UK, are chargeable to corporation tax.
Accounting period is a period that is longer than a year but shorter than 12 months.
Accounting periods are always 12 months max and you follow rules on carry-back to previous tax returns upon bankruptcy.
Taxable Profits = Trading Profit + Property/Investment Profit + Capital Gains - QCOs
Trade related profits that are assessed for corporation tax have certain disallowances which must be added back.
Corporation - There is no PRR and income or capital gains are based on % of business purpose use within transactions.
Losses - Interest income can be offset against certain interests as well as all non trade related activities. Carry-back provisions do not relate.
Capital Allowances are in Special pool and Main pool and claim can be made on each, as well as Enhanced capital allowance.
75% corporate group member transfers allows for loss or shares transfers as if it's a sole enterprise. But the Parent must have 50%+ interest.
Unit 10: Value added tax (VAT)." and tax
VAT is on taxable supplies (not exempt supplies) made by a taxable person in the course of a business.
Taxable supplies are at standard (20%), reduced, or zero rates. Exempt supplies include insurance, finance, education, property, charitable activities, and health.
If a business is generating more than the Minimum threshold (£85,000 Currently), then it's VAT registerable.
For this compulsorily registration, there is Future and Past revenue based to register within 1M, or there would be surcharges.
There is, however, provision for you to Voluntary Register if it's viable for an exporter.
For VAT relief and transfers, the transferor and transferee must be up-to-date in order to claim VAT relief within one group.
VAT registered owners must file invoices; There is simplified VAT invoices below VAT threshold.
If there is no compliance from VAT users side as a liability to report on time and in-payments a Default surcharge will be implemented on a sliding scale.
However, businesses would be responsible for errors on VAT returns and are liable to for dishonest VAT practice.
Cash-based revenue are subject to VAT schemes that have certain conditions as well with pros and cons.
If a business has a service operating OUTSIDE of the UK, there isn't VAT on Exports and cross border business activities.
This is all subject to Time of delivery for invoice reasons.