AAT Level 4 Diploma in Professional Accounting: Audit and Assurance Study Notes
AAT Level 4 Diploma in Professional Accounting: Audit and Assurance Course Notes
Introduction to the Course
Syllabus Overview
Growing significance of audit and assurance in the global marketplace.
Audit important for business confidence and accountability.
Increased scrutiny following corporate failures.
Aim: Develop understanding of auditing principles and processes including ethical requirements and regulatory frameworks.
Emphasis on practical application: audit processes from planning to reporting.
Key focus on professional scepticism throughout the audit process.
Assessment Structure
Duration: 2 hours 30 minutes
Competency required: 70%.
Assessment Components:
Computer-based assessment
Combination of multiple choice, true/false, and written response tasks.
Learning Outcomes and Objectives
Understand audit and assurance framework (10% weighting)
Importance of professional ethics (15% weighting)
Evaluate planning processes for audit and assurance (25% weighting)
Procedures for obtaining sufficient audit evidence (35% weighting)
5. Reporting findings effectively (15% weighting)
Principles of Auditing and Professional Ethics
1.1 Principles and Concepts of Audit
Definition of Audit.
Process of objectively obtaining and evaluating evidence relating to assertions about economic actions and events to ensure they are in accordance with established criteria.
Assurance Definition.
Assurance provides confidence to stakeholders regarding the reliability of financial statements.
Audit Expectation Gap.
Difference between what users believe auditors should provide and the actual audit services delivered.
Types of Assurance.
Reasonable Assurance: Includes a comprehensive examination.
Limited Assurance: Less comprehensive, more restricted review.
Professional Scepticism.
The attitude that includes a questioning mind and alertness to conditions that may indicate possible misstatement due to fraud or error.
1.2 Regulatory Environment
Overview of UK regulations and auditing standards including those set by the International Auditing and Assurance Standards Board (IAASB) and the Financial Reporting Council (FRC).
Responsibilities established by the Companies Act regarding statutory audit requirements.
Ethical Principles
Integrity: Be straightforward and honest in all professional relationships.
Objectivity: Do not allow bias or conflict of interest to override professional judgments.
Professional Competence: Maintain knowledge and skill to ensure a client receives competent professional service.
Confidentiality: Respect the confidentiality of information, disclosing only with proper authority or legal duty.
Professional Behaviour: Comply with relevant laws and avoid actions that may discredit the profession.
Threats to Independence
Self-interest Threat: Financial interests that may impact judgment.
Self-review Threat: Mindset about prior decisions that are reviewed again.
Advocacy Threat: Promoting a client or position.
Familiarity Threat: Close relationships leading to sympathy towards interests of others.
- Intimidation Threat: Pressure to conform to the wishes of influential individuals.
Evaluation of Audit Procedures
3.1 Audit Planning Process
Understanding the Entity: Understand client operations, industry regulations, and internal control systems for risk identification.
Develop a risk assessment matrix.
Consider external impacts (regulatory changes, market conditions).
Audit Risk Model Components:
Inherent Risk: The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
Influencing factors include: nature of business, industry characteristics, complex transactions, management integrity, and judgmental estimates.
Control Risk: Risk that a material misstatement won't be prevented or detected by internal controls.
Detection Risk: Risk that audit procedures do not detect such misstatements.
3.2 Concept of Materiality
Materiality Levels:
Performance Materiality: Set below overall materiality to reduce risk that the sum of uncorrected and detected misstatements exceeds materiality.
Thresholds: 5-10% of profit before tax, 1-2% of revenue, 2-5% of total assets.
2. Revising Materiality: Audit materiality must be re-evaluated if significant unexpected information comes to light during the audit.
Obtaining Audit Evidence
4.1 Methods Used to Obtain Audit Evidence
Verification Techniques (AEEIOUR):
Analytical Procedures
Enquiry/External Confirmation
Inspection
Observation
Recalculation
Re-performance
Testing Controls vs. Substantive Procedures:
Tests of Control evaluate effectiveness of internal controls.
Substantive Procedures aim to detect material misstatements.
Importance of Assertions:
Ensure all elements of financial statements have necessary characteristics for inclusion.
4.2 Cash & Bank
Key Tests: Review bank reconciliations for completeness and existence. Cross-check with bank letters for validation of amounts and balances.
4.3 Trading Receivables
Circularisation of outstanding amounts to verify with customers. Follow-up any discrepancies identified.
4.4 Audit Sampling
Definition: Applying audit procedures to less than of items within a population to evaluate some characteristic of the population.
Types of Sampling:
Statistical Sampling: Uses random selection and probability theory to evaluate sample results, including measurement of sampling risk.
Non-Statistical Sampling: Auditor uses judgment to select sample items; no formal statistical methods are applied.
Sampling Risk: The risk that the auditor's conclusion based on a sample may differ from the conclusion if the entire population were subjected to the same audit procedure.
Tolerable Misstatement: The maximum monetary misstatement in financial statements that the auditor is willing to accept without concluding that the financial statements are materially misstated.
Documentation:
Auditors must maintain thorough working papers to support all findings, conclusions, and opinions issued in the auditor's report.
The types of documentation may include:
Evidence of management discussions
Procedures carried out in internal audit
- Results of substantive testing and tests of controls.
Reporting Findings
Audit Opinion
Format of Auditor's Report:
Opinion on financial statements, detailing basis for opinion.
Emphasis on material uncertainties or significant findings to be disclosed transparently.
Types of Audit Opinions:
Unqualified (clean) Opinion: Issued when the financial statements present a true and fair view in accordance with the applicable financial reporting framework, without any material misstatements.
Qualified Opinion: Issued when misstatements are material but not pervasive to the financial statements, or when the auditor is unable to obtain sufficient appropriate audit evidence (scope limitation) that is material but not pervasive. The opinion states that the financial statements are true and fair "except for" the matters described.
Adverse Opinion: Issued when misstatements are both material and pervasive to the financial statements, indicating that the financial statements as a whole do not present a true and fair view.
Disclaimer (inability to express opinion): Issued when the auditor is unable to obtain sufficient appropriate audit evidence (scope limitation) that is both material and pervasive, making it impossible to form an opinion on the financial statements. No opinion is expressed.
Communication with Governance
Notify any deficiencies in internal controls to those charged with governance in writing, providing context and potential impacts.
Conclusion
- Comprehensive understanding of auditing exists to support financial transparency and assurance in reporting, critical for stakeholder trust.
Glossary of Key Terms
Audit: Independent review of financial statements.
Assurance: Confidence in the reliability of financial statements.
Materiality: Importance of an item concerning decisions by users of financial statements.
Professional Scepticism: Attitude of questioning and critical assessment.
Control Risk: Risk that a material misstatement would not be prevented or detected by internal controls.
- Detection Risk: Risk that an auditor fails to detect a material misstatement.
Bibliography
Companies Act 2006.
Financial Reporting Council guidelines.