The summary of ACCA F8 Audit and Assurance

Quick look at ACCA F8 Audit and Assurance.

Assurance

Audit is the process, assurance is the product.

Agency theory: secondary agent (auditor) delivers the aussurance to principal (shareholders) that the report (FSs) provided by primary agent (director) shows T&F view.

Objective of EA is assurance, purpose of EA is delivery confidence of FSs to shareholders.
Reasonable assurance is a high degree of confidence, but NO guarantees!

5 elements of assurance engagement:

(1) 3 parties relationships:

• practitioner (auditor)
• responsible party (director)
• intended users (shareholders)

(2) subject matter
(3) criteria (standards)
(4) audit procedures to form opinion
(5) audit report

Positive assurance - high level, but not absolute, a lot of testings to form opinion, FSs show T&F view
Negative assurance - medium level, a smaller amount of testings to form opinion, we have no evidences that CF forecast does not provide T&F view.

Statutory audit is an audit of annual FSs.

Auditor & AC - matters to discuss:

• scope & timing of audit
• significant findings during audit
• independence issues
• modification of audit report (opinion)
• man-t representation requested
• fraud cases

Corporate governance (CG) - systems by wich the company directed and controlled.
Rules of CG:

• global - OCDE Code
• national - The US - SOX, The UK - The UK CG Code
• other - Stock Echange Rules

Underlying concepts of CG:
HAIR DRIFT

• Honesty / probity
• Accountability
• Independence
• Responsibility
• 
  
• Decision taking / judgement
• Reputation
• Integrity
• Fairness
• Transparency / openness

NEDs - role (Higgs report)
StRiP Performance

• Strategy - contribute strategy success
• Risk - adequate ICs and risk man-t sistem in place
• People - appointment and remuneration of EDs, contractual and disciplinary issues
• Performance - hold EDs to account for decisions taken and results obtained, represent shareholders interests

Audit committee - 100% NEDs, 1 - financial experience
role - CLARISSA

• Create a climate of discipline and control
• Lend credibility in FS
• Assist CFO to provide forum
• Review FS to improve quality
• Independent judgement
• Strenthen position of internal auditor
• Strenthen position of external auditor
• Assist in resolution between EA and board

Audit process

• Appointment (Ethics)
• Planning (Audit strategy)
• Planning (Detailed audit plan)
• ICs assessmant & testing
• Reduced/detailed substantive testing
• Review (Finalisation)
• Reporting (Audit report)

Audit ethics

Ethics - fundamental principles
OPPIC

Objectivity
Professional behaviour
Professional competence
Integrity
Confidentiality

Ethics - threats
ASSIF

Advocacy
Self-interest
Self-review
Intimidation
Familiarity

Ethics - indicators of threats
FULL STOP

Friends and family
Undue fee dependence
Loans to/from
Litigation

Shares in client
Taking gifts and hospitality
Overdue fees
Provision to the other services

Preconditions for audit

• FR framework is acceptable?
• Man-t understands its responsibilities on:
• the preparation of FSs
• ICs
• ready to provide access to all relevant info for audit

Other pre-acceptance considerations

• resources (time & staff) available
• fees (!)
• client deadlines
• integrity of client and its directors
• level of audit risk
• money laundering procedures
• firm competence to do the work
• client credit rating
• professional clearance (contact with outgoing auditor's procedures)

Auditor rights

• access to all books and records
• access to all information & explanation
• be given notice of general meeting (GM)
• attend GM
• speak at GM
• resign without finishing the audit
• send the info to shareholders

Auditor duties

• issues the audit report, give an opinion on T&F view
• issues the statement of circumstancies with reasons of leaving
• respond any requests from new auditor after leaving the client

Fraud
EA gives an opinion on T&F view, free from MM cased by errors & fraud.
Audit procedures may detect fraud.
Prevention of fraud is NOT  the resposibility of EA, but prof. obligation to advise the client of how best to prevent it.

Man-t and TCWG are responsible for prevention and detection of fraud by having a good IC systems.

Engagement letter
Purpose - reduces misunderstandings and creates the legal basis for payment
Content
- objective of an audit
- responsibilities of man-t
to prepare FSs
to provide all info & explanation
audit standards, law & reguation applied
audit report & other communication
basis of fees
explanation of audit process and level of assurance provided

Internal audit

AC's roles is to be the liaison between BoD and IA & EA.

• short list of EA for the shareholders vote at AGM
• consider if EA remains independent
• negotiate the fee for EA
• receive the EA's report, man-t letter and other letters
• decide the need of IA dept
• decide of using in-house IA or outsoursing
• recruit the CIA
• receive all IA's reports
• monitor FR and IC systems of the company

Comparison of External and Internal Auditing 

                                   External Audit                              Internal Audit

Appointed by                Shareholders                                Directors
Reporting to                 Shareholders                                Directors
What they Check          Annual FSs                                  Risk man-t & IC systems
Legally Requirement      Usually Yes                                 Typically No
Independence               They Must Be                              Ideally, but hard to achieve

Value for money audit

3 Es
Economy - the lowest costs with appropriate quality of goods and services used (costs effeciency)
Efficiency - the best outputs from the lowest inputs (resources using)
Effectiveness - the best way to achieve company objectives (meeting objectives)

Outsourcing IA
Advantages
No salary and other staff costs
Get experiences outsides
Improve independence of IA
Get expertise of outside specialists

Disadvantages
Expensive
Cost of monitoring people outside the company
Loss of control
Confidentiality breaches
Slower to respond

Planning

Benefits of planning

• appropriate attention to important areas
• identify & resolve potential problems on a timely basis
• perform audit in an effective & efficient manner
• identify audit risks
• proper staffing and assignments
• easy to direct, supervise and review audit work
• coordinate work with experts

Audit risk is a risk of giving the wrong opinion when FSs contain MM which the auditor fails to detect.

Audit risk model
Audit risk = Inherent risk * Control risk * Detection risk

Inherent risk - FSs contain MM due to nature of business and its transactions
Control risk - company's ICs fail to prevent and detect MM in FSs
Detection risk - audit procedures fail to detect MM in FSs

Materiality

Overall materiality (FSs level)

• 0,5% - 1% of Sales Revenue
• 1-2% of Total assets
• 5-10% of PBT

Performance materiality

It is lower than overall, set for particular areas ( do not miss the errors which in aggregate may be material)

Audit documentation

evidence of audit work done properly
facilitates the review by seniors the work done by junior staff
help audit team in the future years
encourage high-quality approach

Working papers (WP) will be retained at least 5 years.

WP content

• Name of a client
• Year end
• Name of a person prepared it
• Date of preparation of WP
• Name of reviewer
• Date of review
• Some explanation about the work done
• Conclusions of the work done

Internal control (IC)

5 elements of IC

• Control environment
• Control procedures
• Risk assessment
• Information systems
• Monitoring

Control procedures
CARCAP

Comparison
Authorisation
Reconciliations
Computer controls
Arithmetical
Physical

Inherent limitations of ICs

• Human error
• Collusion
• Cost > Benefits
• Non-routine transactions

Control procedures on sales system

ODIACO

Ordering
Test whether the customers are credit worthy and credit reports were used before approval

Delivery
Test whether the goods dispatched are the ones ordered by comparing GDNs & sales order notes and also observing checks when loading trucks
Invoicing
Test whethes the customers are charged for what they recieved by checking a sample GDNs have customers’ & have an invoice issued for those goods
Accounting
Test that all invoices have been posted correctly by checking that a sample of invoices have been recorded in the sales day book and correctly posted to sales legder

Cash
Test that the cheques recieved have been banked the following day by comparing the register for checks recieved with the Bank statement
Overall
Agree that correct supervision of all functions is done by going via supervisory log books which give details of spot checks carried out at all levels of processing.

Audit evidence

Financial statements assertions
ACCA COVER

Accuracy
Completeness
Cut off
Allocation

Classification and understandibility
Occurence
Valuation
Existance
Rights and obligations

PROVE

Presentation & disclosure

Records are accurate & complete

Ownership

Valuation

Existence

COVE + D

Compliteness

Ownership

Valuation

Existence

Disclosure

Sources of evidence
AEIOU

Analytical procedures
Enquiry and confirmation
Inspection
Observation
recalcUlation and reperformance

Evaluation of expert's work
CCO

Competent ?
Capable ?
Objective?

Indications of going concern problems

• Net liabilities
• Operating losses
• Major debt repayments due
• Loss of major customers or suppliers
• Loss of key staff
• Withdrawal of overdrafts
• CFs problems
• Major litigation

Reporting

Standard report content

• Title
• Addressee
• Introduction
• Responsibilities of man-t & auditors
• Basis of opinion
• Opinion
• Signature & date

Unmodified report - FSs show T&F view, free from MM cased by errors or fraud.

Modified report:

Emphasis of matter paragraph - to draw attention to some matters properly & cleraly disclosed in FSs.
EOM doesn't affect opinion.

Other matter - to refer to a matter not present or disclosed in FSs.
OM doesn't affect opinion.

Qualified opinion - FSs contain MM, but not pervasive or auditor is unable to obtain sufficient appropriate evidence and possible effect on FS material, but not pervasive.
Opinion EXCEPT FOR .... FSs show T&F view

Adverse opinion - FSs contain material & pervasive misstatement.
FSs do not show T&F view.

Disclamer of opinion - auditor is unable to obtain sufficient appropriate evidence and possible effect on FS material & pervasive.
We do not express an opinion on FSs.



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