ACCA AAA D19 Notes - It is adva nced level paper PDF

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Advanced Audit and Assurance (AAA) (INT/UK)

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Advanced Audit and Assurance (AAA) (INT/UK) INTRODUCTION TO ADVANCED AUDIT AND ASSURANCE (AAA) (INT/UK) REGULATION, LEGAL MATTERS AND QUALITY CONTROL

1. 2. 3. 4. 5. 6. 7. 8. 9.

What is Assurance? Corporate Governance and Auditor Regulation Appointment as an Auditor Professional Ethics Money Laundering Responding to Non-Compliance with Laws and Regulations (NOCLAR) Auditors’ Liability Fraud, Error, the Evaluation of Misstatements and Reporting Control Weaknesses Quality Control

7 11 17 23 29 33 37 41 45

AUDIT PLANNING AND RISK ASSESSMENT

10. 11. 12.

Audit planning Risk Question Practice on Risk

49 55 61

AUDIT EVIDENCE

13. 14. 15. 16. 17. 18. 19. 20.

Audit Evidence Relevant Accounting Standards Computer Assisted Audit Techniques Experts Internal Audit Outsourced Accounting Functions Written Representations Related Parties

69 73 75 79 81 83 87 89

THE AUDIT OF GROUP FINANCIAL STATEMENTS

21.

Group Audits

93

THE FINAL STAGES OF AN AUDIT

22. 23. 24. 25.

Subsequent Events The Auditor’s Report 1: Overall Structure The Auditor’s Report 2: Going concern The Auditor’s Report 3: Types of Audit Opinion

101 103 111 115

OTHER ASSIGNMENTS

26. 27. 28. 29. 30. 31. 32.

Types of Assignment Prospective Financial Information Forensic Audits Due Diligence Social, Environmental and Integrated Reporting The Audit of Performance Information in the Public Sector (International Syllabus only) Auditing aspects of insolvency (UK Syllabus only)

119 121 127 131 133 137 145

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INTRODUCTION TO ADVANCED AUDIT AND ASSURANCE (AAA) (INT/UK) 1. Warning! Do not even think of studying this paper if you haven’t already studied paper Strategic Business Reporting (SBR)/Corporate Reporting (P2). In every AAA paper, there is at least one question dealing with audit risk and/or audit evidence. Audit risk is the risk that there might be a material misstatement in the financial statements. Whenever there is such a risk, the auditor must decide how to respond and that usually means carrying out more audit work to gather more audit evidence. What you need to realise is that material misstatements can be caused by two types of error: ๏

The amount is wrong.

๏

The item has not been treated in line with the relevant accounting standards or financial reporting standards.

For example, if the company incurs research and development expenditure, not only does the auditor have to obtain evidence about the amount of expenditure, but must also collect evidence that the expenditure has been written off or capitalised in line with IAS 38 Intangible Assets. Therefore, if the expenditure has been capitalised, the auditor must collect evidence that the project is technically viable, that the company can fund its completion….and so on. If you do not know the standard, you cannot plan to collect the right evidence. Every accounting standard studied in SBR/P2 sets out rules that govern how amounts in financial statement are to be displayed and therefore each standard has implications for auditors.

2. The ‘maturity’ of answers required Consider this: During attendance at a physical inventory count at a client who makes jars of preserved food, a pack of 12 jars falls from its shelf in the warehouse and the jars shatter. The contents smell awful and it is obvious that pack contained food that had gone bad. What audit issues does this incident cause and how should the auditors respond? At the AA level you might simply have said that the pack had to be written off. At AAA, the incident raises many more issues. See if you can think what they might be. This is discussed in the lecture for Chapter 12.

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3. Topics in AAA, not in AA The main additions are: ๏

Money laundering and professional liability

๏

Business risk (audit risk, but not business risk, was in AA)

๏

The audit of groups

๏

Specific assignments (due diligence, prospective financial information and forensic audits)

๏

Social, environmental and integrated reporting

๏

The audit of performance information in the public sector (INT Syllabus only)

๏

Auditing aspects of insolvency (UK Syllabus only)

๏

Current issues

Most AA topics appear again in AAA but to a more detailed level. Professional ethics remain very important. You will not be asked to evaluate an accounting system to identify weaknesses in internal control.

4. Syllabus 4.1. Aim To analyse, evaluate and conclude on the assurance engagement and other audit and assurance issues in the context of best practice and current developments.

4.2. Objectives On successful completion of this paper, candidates should be able to: A.

Recognise the legal and regulatory environment and its impact on audit and assurance practice.

B.

Demonstrate the ability to work effectively on an assurance or other service engagement within a professional and ethical framework

C.

Assess and recommend appropriate quality control policies and procedures in practice management and recognise the auditor’s position in relation to the acceptance and retention of professional appointments.

D.

Identify and formulate the work required to meet the objectives of audit assignments and apply the International Standards on Auditing.

E.

Evaluate findings and the results of work performed and draft suitable reports on assignments.

F.

Identify and formulate the work required to meet the objectives of non-audit assignments.

G.

Understand the current issues and developments relating to the provision of audit-related and assurance services.

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5. Approach to examining the syllabus The syllabus is assessed by a 3 hour 15 minute paper-based examination. The examination is constructed in two sections. Questions in both sections will be largely discursive. However, calculations will be expected, for example to be able to assess materiality and calculate relevant ratios where appropriate. Part A Case study (50%) Set at the planning stage of the audit. Candidates will be provided with detailed information and be required to address a range of requirements from syllabus sections A, B, C and D. Four professional marks are available in Section A Part B Two compulsory 25 mark questions, predominately based around a short scenario. One question will always predominantly come from syllabus section E (completion, review and reporting). The other question can be drawn from any other syllabus area including section F. Syllabus section G, Current Issues, may be examined in Section A or Section B, but is unlikely to to form the basis of any question on its own. Full details are shown on syllabus available from the ACCA’s site: Advanced Audit & Assurance (INT) – syllabus & study guide September 2019 to June 2020 Advanced Audit & Assurance (UK) – syllabus & study guide September 2019 to June 2020

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REGULATION, LEGAL MATTERS AND QUALITY CONTROL

Chapter 1 WHAT IS ASSURANCE? 1. Audit and assurance We start with a little bit of revision of AA, and indeed you will be making use of AA skills throughout AAA (such as suggesting audit evidence to look for). The paper is called ‘Advanced Audit and Assurance’ and we start by explaining what is meant by the terms ‘audit’ and ‘assurance’. It is often not possible to check things for yourself, whether quality, accuracy, performance or existence: you might not have the skills or the time, or you might be in the wrong location. Therefore you must rely on someone else to give you assurance. This means you have to decide: ๏

What standards should be applied?

๏

What represents ‘good’, ‘acceptable’ or ‘unacceptable?

๏

How much checking should be done? All checking and assurance has an associated cost.

Audit is one form of assurance. We will see that in AAA other forms of assurance might have to be described and discussed too, such as providing assurance to a bank that a company’s cash flow budget is not a work of fantastic fiction or that a take-over target is not hiding horrific liabilities. An audit is defined as: the independent examination of and expression of opinion on the financial statements of an entity by a duly appointed auditor in pursuit of that appointment. The important words here are ‘independent’ and ‘opinion’. Independence is essential and underlies the value of auditing - and of all other forms of assurance Opinion really means that one auditor or accountant could look at a set of financial statements (or a cash budget) and disagree with the opinion of another. Judgment is essential to all assurance: there are no certainties and there are no certifications of correctness or accuracy.

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Auditing is the most regulated form of assurance you will meet in AAA. Legislation, International Auditing Standards and financial reporting standards all lay down rules about how auditing should be carried out and how financial statements should be prepared. Other forms of assurance are much less uniform and this can cause a problem unless the work to be performed is precisely agreed between auditor and client at the very start. For example, if you are asked to give assurance about a cash flow forecast you need to find out if it is a one, three or five year budget as the work and difficulties are very different in each case.

2. Elements of an assurance engagement 2.1. The elements of an assurance engagement The following are the five elements of an assurance engagement: (1)

A three party relationship involving a practitioner, a responsible party, and intended users.

(2)

Appropriate subject matter (eg the financial statements, a budget, a take-over target).

(3)

Suitable criteria (eg financial reporting standards)

(4)

Sufficient appropriate evidence.

(5)

A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance engagement.

Item 4 on the list is sufficient appropriate evidence and if assurance had to be summed up in one word ‘EVIDENCE’ would be it. Assurance is not based on the auditor guessing or hoping that something is the case. All assurance is based on gathering sufficient appropriate evidence and if the required evidence is not available then assurance cannot be given. It will be said again, but when it comes to the audit of financial statements evidence is required about two elements: ๏

Is the amount materially correct?

๏

Do the presentation and disclosures conform to the financial reporting standards?

There is no point in tracing research and development expenditure back to invoices supporting the accuracy of the amounts if you do not also give assurance that the amounts have been written off or capitalised in line with the IAS 38. Evidence is needed to support the treatment of the amounts.

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2.2. Professional scepticism A practitioner should plan and performs an assurance engagement with an attitude of professional scepticism to obtain sufficient appropriate evidence about whether the subject matter information is free of material misstatement. An attitude of professional scepticism means the practitioner questions the validity of evidence and is alert to evidence that brings into question the reliability of documents or representations. Scepticism means that you don’t know. It does not mean that the practitioner assumes everyone is dishonest or that figures have been deliberately misrepresented. Nor does it mean that you believe all figures and statements are correct. It means you are aware that we can all be subject to optimism (perhaps too much), human error, giving quick answers because we are short of time, and misunderstanding. It also recognises that sometimes people are deliberately misleading or dishonest. Scepticism means that evidence is required to test statements or assumptions. You could almost summarise the process of assurance in the phrase ‘collect evidence that supports everything that is being claimed’. Sufficiency is the measure of the quantity of evidence. Appropriateness is the measure of the quality of evidence - its relevance and its reliability. The reliability of evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained, eg documentary evidence is better then oral, directly obtained evidence better then evidence provided by a client.

2.3. Assurance Report The practitioner provides a written report containing a conclusion. There are two types of assurance reports: In a reasonable assurance engagement the practitioner’s conclusion is worded in the positive form, for example: “In our opinion internal control is effective, in all material respects, based on XYZ criteria.” It is called ‘reasonable’ because the practitioner will never give guarantees. Only reasonable assurance is ever given. In a limited assurance engagement the conclusion is worded in the negative form, for example, “Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria.”

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2.4. Examples: Positive ๏

The financial statements show a true and fair view

๏

The value of amount of inventory lost is $x

Negative ๏

We have discovered nothing wrong with the financial statements

๏

The basis of the forecast is not unreasonable

๏

There is no evidence of discrimination in the appointment.

All statutory audits attempt to provide positive assurance that the financial statements show a true and fair view (or present fairly, in all material respects). There are some types of assurance assignment where giving positive assurance is not possible. For example, it would be impossible to give assurances that a budget is correct because it depends on so many assumptions and factors that cannot be verified with certainty, such as the state of the economy next year, competitors’ plan and sales forecasts. A practitioner would not express an unqualified conclusion for either type of assurance engagement when: ๏

There is a limitation on the scope of the practitioner’s work (ie sufficient appropriate evidence cannot be obtained); or

๏

The assertion is not fairly stated (in all material respects) or the subject matter information is materially misstated (ie the assertion is incorrect).

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Chapter 2 CORPORATE GOVERNANCE AND AUDITOR REGULATION 1. Why corporate governance is needed Corporate governance is the system by which companies are directed and controlled. Auditing financial statements adds to their credibility and this enables shareholders to better understand how the directors and company have performed.

2. Principles of corporate governance The Organisation of Economic Cooperation Development (OECD) promotes six Principles of a corporate governance framework: ๏

It should promote transparent and fair markets and the efficient allocation of resources and support effective supervision and enforcement.

๏

It should protect shareholders’ rights, ensuring fair treatment of all shareholders, including minority and foreign shareholders. For example all shareholders should have access to the same information.

๏

It should provide for stock markets to func...