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ACCA ADVANCE AUDIT AND ASSURANCE TECHINICAL ARTICLES PAGE 3

EXAM TECHNI QUEFORADVANCEDAUDI TANDASSURANCE 

 IAASB exposure draft – Proposed International Standard on Auditing 540 (Revised) Auditing Accounting Estimates and Related Disclosures 34   Responding to non-compliance with laws and regulations (NOCLAR) 42 AUDITOR REPORTING

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 Corporate governance and its impact on audit practice 52  THE AUDITOR'S REPORT 57  AUDITING DISCLOSURES IN FINANCIAL STATEMENTS 64 PERFORMANCE INFORMATION IN THE PUBLIC SECTOR

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LAWS AND REGULATIONS

71

AUDIT QUALITY – A PERPETUAL CURRENT ISSUE

75

PROFESSIONAL SCEPTICISM

78

 USING THE WORK OF INTERNAL AUDITORS 82 ACCOUNTING ISSUES

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 FORENSIC ACCOUNTING 94 AUDITOR LIABILITY

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THE CONTROL ENVIRONMENT OF A COMPANY

103

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CONTINUE TO BE REST ASSURED

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SA 315 (REVISED), IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT 113 PLANNING AN AUDIT OF FINANCIAL STATEMENTS COMPLETING THE AUDIT  AUDIT AND INSOLVENCY GROUP AUDITING

117 200 124 127

ACCEPTANCE DECISIONS FOR AUDIT AND ASSURANCE ENGAGEMENTS 132 AUDITING IN A COMPUTER-BASED ENVIRONMENT

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 AUDIT OF ESTIMATES AND FAIR VALUES 140 ANALYTICAL PROCEDURES

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 GOING CONCERN 149 AUDIT RISK AUDITING IN A COMPUTER-BASED ENVIRONMENT (2)

153 157

 MASSAGING THE FIGURES 163 ISA 240 (REDRAFTED) - AUDITORS AND FRAUD THE IMPORTANCE OF FINANCIAL REPORTING STANDARDS TO AUDITORS

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 FORENSIC AUDITING 173 AUDITORS' REPORTS TO THOSE CHARGED WITH GOVERNANCE GROUP AUDIT ISSUES

176 178

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EXAMINING EVIDENCE

182

AUDIT WORKING PAPERS

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ADVANCED AUDIT AND ASSURANCE – EXAMINER’S APPROACH

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 HOW TO TACKLE AUDIT AND ASSURANCE CASE STUDY QUESTIONS 193 AUDIT AND ASSURANCE CASE STUDY QUESTIONS 198 EXAM TECHNI QUEFORADVANCEDAUDI TANDASSURANCE Par t1–Et hi cs Et hi calst andar dsandt hei rappl i cat i onf or m amaj orpar toft heAdvancedAudi t andAssur ancesy l l abusandar eexami nedr egul ar l y .Of t ent hemar ksf ort hi sar ea wi l lbespr eadov ermor et hanonequest i onandmaybecombi nedwi t hpl anni ng, pr of es si onal i ssuesorasas t andal one. Thebasi cet hi calst andar dsatt hi sl ev elar et hes ameast hos eexami ned pr evi ousl yi nAudi tandAss ur ance;whats et sapar tt hel ev eloft hequest i onsi s y ourabi l i t yt oappl yt hos es t andar dst omor ecompl exsi t uat i onsands howt hat y ouunder st andbot ht hr eat sandsaf eguar ds .Thi si sanar eaoft heex am wher e candi dat escanusegoodex am t echni quet oi ncr eas et hemar ksat t ai nedwi t hout havi ngt or ot el ear nmuc haddi t i onal i nf or mat i onabov et hatl ear ntf orpr evi ous exams. Thi sar t i cl ewi l l demons t r at ehowt omaxi mi semar ksont hesear easusi nggood t ec hni que.I ti s ,howev er ,speci fict ot hecont extofaudi t i ngandassur anceand wi l lt her ef or ehav eadi ffer entf oc usandappl i cat i ont ot hewayet hi csi sex ami ned i not herar easoft heACCAQual i ficat i on. WHATYOUNEEDTO KNOW Thest ar t i ngpoi ntf orpr epar i ngf oranyex am i st oknowt heunder l yi ngknowl edge t hati sr equi r edf ort hi spar toft hes yl l abus.Att hi sl ev elt hecont entoft he gui dancei swhaty ous houl df oc uson.Mar ksar enotawar dedf ormemor i si ngor quot i ngs t andar dnumber s,i ti st heappl i cat i onoft hecont entoft hosest andar ds t hati si mpor t ant .Fort heAdv ancedAudi tandAssur anceex am t hef ol l owi ng st andar dsar eexami nabl e:  ACCA’ sCodeofEt hi csandConduct( 2016)  I ESBA’ sCodeofEt hi csf orPr of es si onalAcc ount ant s( Revi sedMay 2015)  I ESBA–Changest ot heCodeAddr essi ngCer t ai nNonAss ur ance Ser v i cesPr ovi si onsf orAudi tandAssur anceCl i ent s  Et hi calConsi der at i onsRel at i ngt oAudi tFeeSet t i ngi nt heCont ext ofDownwar dFeePr essur e( Januar y2016) I naddi t i on,f ort heUKex am candi dat eswi l lbeex ami nedont heFi nanci al

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Repor t i ngCounci l ’ sRev i sedEt hi cal St andar d2016,f ort heI RLexam candi dat es wi l lbet es t edont heI AASA’ sEt hi calSt andar df orAudi t or s( I r el and)2016,and SGPc andi dat esshoul dal s or ef ert ot heI SCACodeofPr of es si onal Conductand Et hi cs( Revi sedNov ember2015) . Youwi l lbef ami l i arwi t hACCA’ sCodeofEt hi csf r om t heAudi tandAssur ance exam.Thi smi r r or st heI ESBA’ sCodeofEt hi cssoy ouwi l lbef ami l i arwi t ht hefiv e bas i cpr i nci pl esofI nt egr i t y ,Obj ect i vi t y ,Pr of essi onalCompet enceandDueCar e, Confident i al i t y ,andPr of es si onal Behav i our .Youwi l lal sobef ami l i arwi t ht he gener al ar easoft hr eatt ot hef undament al pr i nc i pl esofSel fRevi ew,Sel fI nt er est , Adv oc ac y ,Fami l i ar i t y ,andI nt i mi dat i on. Thesi t uat i onsy ouwi l lbeappr ai si ngatt hi sl ev elwi l l us ual l yi nv ol v ean assess mentoft hos es amepr i nc i pl eswi t hi ns cenar i osgi v eni nt hequest i on.I n addi t i on,y oumaybeexpect edt oi dent i f ysi t uat i onswher et heaudi t ori satr i skof assumi ngamanagementr espons i bi l i t ywi t hr espectt opr ovi di ngaddi t i onal ser vi cest oaudi tcl i ent sorappr eci at et hedi ffer encesbet weenl i s t ed( orot her publ i ci nt er es tent i t i es)andnonl i st edc l i ent swheni tcomest oappl yi ngt hese pr i nc i pl es. Wi t hr egar dst oobj ect i vi t yandi ndependenc e,t hegener alconcept ualappr oac h i nt hecodesi sasf ol l ows: ( a)I dent i f yt hr eat st oi ndependence ( b)Eval uat et hesi gni ficanceoft het hr eat si dent i fied,and ( c)Appl ysaf eguar ds,whennecessar y,t oel i mi nat et het hr eat sorr educe t hem t oanaccept abl el evel . Whent hepr of essi onalaccount antdet er mi nest hatappr opr i at esaf eguar ds ar enotavai l abl eorcannotbeappl i edt oel i mi nat et het hr eat sorr educe t hem t oanaccept abl el evel ,t hepr of essi onalaccount antshal lel i mi nat et he ci r cumst anceorr el at i onshi pcr eat i ngt het hr eat sordecl i neort er mi nat e t heaudi tengagement . HOW TO APPL YTHEKNOWLEDGE Whenaddr essi nget hi cal si t uat i onsi nt heex am,y ouwi l l us ual l yhav et o demonst r at et heseski l l s:  t haty oucani dent i f yanet hi calt hr eat  t haty ouunder st andhowi tar i sesandt hei mpl i cat i onoft het hr eat , and  t haty oucanr el at et hegui dancet ot hespec i fics cenar i ot o det er mi net hesaf eguar dsorcour seofact i onr equi r ed. Eac hoft heseski l l scanbei l l us t r at edt hr ought heex ampl esbel ow( not et hatt he ans wer spr ovi dedher ear ef oc usi ngont heet hi cali ssuesar i si nganddonot cov ert hepr of essi onalorot heri ssuesy oumi ghtal soneedt odi scussar i si ngf r om t hesc enar i os) .Theseanswer sar enotf ul l ycompr ehensi v eandgi v eanexampl e oft hecont entwhi chcoul dbepr oducedi nanex am.Ther ear ef ur t herpoi nt si n eachcas et hatcoul dbedevel opedandaddi t i onal out comesav ai l abl ewi t hi nt he et hi cal codes;howev er ,t heydor epr es entawel l devel opedansweracandi dat e 4

coul duset oat t ai nt hef ul lmar ksav ai l abl e.

Exampl e1 Theaudi tcommi t t eeof ,MumbaiCo,hasask edt hepar t nert ocons i derwhet heri t woul dbepos si bl ef ort heaudi tt eam t oper f or m ar evi ewoft hecompany’ si nt er nal cont r ol s y st em.Anumberofr ecenti nc i dent shav er ai s edconcer nsamongstt he managementt eam t hatcont r ol shav edet er i or at edandt hatt hi shasi ncr eas edt he r i skoff r aud,aswel lasi neffici entcommer ci alpr act i ces .Theaudi t or ’ sr epor tf ort he audi toft hefinanc i alst at ement sofMumbai Cof ort hey earended31Mar ch2016 wassi gnedaf ewweeksago.MumbaiCoi sal i st edcompany . Requi r ed: Commentont heet hi cali ss uesr ai sedandt heac t i onsy ourfir m shoul d t ak ei nr es ponset ot hecl i ent ’ sr eques t . ( 6mar k s)

I nt hi sexampl e,wear eask edt opr ovi deanaddi t i onal ser vi cet oanaudi tcl i ent– ar evi ewofsy s t emsandcont r ol s.Thi si sgoi ngt ogi v er i set oasel f r evi ewt hr eat andmayposs i bl yl eadt oassumi ngamanagementr esponsi bi l i t y .Thi s i dent i ficat i oni st hefir stst ept oans wer i ngt hequest i on,butt hesepoi nt sal onewi l l notscor ecr edi ti nt heex am unt i ly ouhav edev el opedt hem.I nor dert odot hi s y oucanuset hest epsdescr i bedt obui l dupmar ksasf ol l ows .Thei mpor t ant phr asesar ei nbol d. Demonst r at i ngy ouunder st andt het hr eat s ,howt heyar i seandt hei mpl i cat i on

Pr ov i di ngar evi ewoft hecompany’ ss ys t em andcont r ol sgi v esr i set oasel f r evi ew t hr eatast hesecont r ol swi l lt henber evi ewedbyt hefir m whendet er mi ni ngour audi tst r at egy.Thefir m mayber el uct antt ohi ghl i ghter r or soradopta subst ant i v eappr oachdur i ngt heaudi tast hi smayhi ghl i ghtdefici enc i esi nt hefir m’ s wor kont headdi t i onalser vi ce.( 1mar k) Thedesi gnofsyst emsandcont r ol si samanagementr esponsi bi l i t ysoa r ev i ewofsuchmaygi v er i set oasi t uat i onwher et heaudi t ori sass umi nga managementr esponsi bi l i t ybyt aki ngont her ol eofmanagement .( 1mar k)

Appl yt hegui dancet ot hesc enar i o–ev al uat et hesi gni ficanceandsuggest s af eguar ds

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Thecodest at est hatt het hr eatt oi ndependenceofunder t aki ngmanagement r espons i bi l i t i esf oranaudi tcl i enti ssosi gni ficantt hatt her ear enosaf eguar ds whi chcoul dr educet het hr eatt oanac cept abl el ev el .( 1mar k)

Howev er ,t hi sans wercoul dscor et hr eemar ks ,i ti sl i k el yt hatmor emar ksar e av ai l abl e.Fr om anex am t ec hni quepoi ntofvi ew,y ous houl dbel ooki ngf or addi t i onalpoi nt st omak e.Att hi ss t age,don’ tst ar tspec ul at i ngaboutr el at i v ef ee si z e;t r yt of oc usont hei nf or mat i ont heex ami nerhasgi v eny ou.Her e,t he companyi sflaggedasl i st ed,sot her emustbef ur t herdev el opmentav ai l abl eon t hi sar ea.Thi nkabouthowy ou’ v eseenmanagementr es ponsi bi l i t yi ss ues ov er comedur i ngy ourst udi esandpas tques t i onpr act i ce.I ti st hes epoi nt st hat y oucanuset oat t r actf ur t hermar ks .

Managementr esponsi bi l i t ycanbeav oi dedi ft hecl i entt akesr esponsi bi l i t yf or moni t or i ngt her epor t smadeandt aki ngt hedeci si onsonr ecommendat i ons . ( 1mar k) Howev er ,ast hi scl i enti sl i st ed,wear epr ohi bi t edf r om under t aki ngi nt er nalaudi t ser vi ceswhi chr el at et oasi gni ficantpar toft hecont r ol sov erfinanc i alr epor t i ng.( 1 mar k)

Concl ude

Assuc hwemustdecl i net headdi t i onalwor k.( 1mar k)

I not herci r cumst ances,t hesaf eguar dofusi ngsepar at et eamst oov er comesel f r ev i ewt hr eat sorcons i der i ngt hecompet enceoft hefir mt opr ovi det hi sser vi ce woul dat t ai ncr edi t ;howev er ,i nt hi scase,t hecl i enti sl i st edsot hesepoi nt sar e i r r el ev anther e. Not et hat ,i nt heex am,nomar ksar eawar dedf orsi mpl yl i s t i ngsel f r evi ewor managementr esponsi bi l i t yast heywi l lneedt obedes cr i bedbef or emar ksar e awar ded.Assuch,ensur et haty out ak et het i met oexpl ai nt het hr eat sr at hert han 6

si mpl ywr i t i ngt er ms .

Exampl e2 Yourfir m’ sadv i sor ydepar t menthasbeencar r yi ngoutaduedi l i genceas si gnment onapot ent i al ac qui si t i ont ar getofanaudi tcl i ent ,Bl ueCo.Themanagementt eam ofBl ueCohasal soappr oachedWhi t e&Cot oaskwhet herr epr esent at i v esoft he fir m woul dbeav ai l abl et oat t endameet i ngwi t ht hecompany ’ sbank er s,whot hey ar ehopi ngwi l lfinancet heac qui si t i onofRedCo,t osuppor tt hemanagementt eam i nconv ey i ngt hesui t abi l i t yoft heacqui si t i onofRedCo.Fort hemeet i ngt hebank r equi r est hemostupt odat ei nt er i m account sofRedCowi t ht heaccompanyi ng audi t or ’ si ndependenti nt er i mr evi ewr epor t .Yourfir mi sduet ocompl et et hei nt er i m r ev i ewshor t l yandt hemanagementt eam ofRedCohasr eques t edt hatt hei nt er i m r ev i ewi scompl et edqui ckl ysot hati tdoesnothol dupnegot i at i onswi t ht hebank, st at i ngt hati fi tdoes,i tmayaffectt heout comeoft henex taudi tt ender ,whi chi s duet ot ak epl aceaf t ert hecompl et i onoft hi sy ear ’ saudi t . Requi r ed: Commentont heet hi cali ss uesr ai sedandr ecommendanyact i onsy our fir m shoul dt ak ei nr espons et ot hecl i ent ’ sr equest s. ( 8mar k s)

I nt hi sexampl ewehav eaddi t i onal ser vi cesandpr es sur er el at i ngt oexi st i ng ser vi cest oanaudi tcl i ent .Thei ss ueswef acear eadv ocacy ,sel f r evi ew, managementr esponsi bi l i t yandi nt i mi dat i on. Demonst r at i ngy ouunder st andt het hr eat s ,howt heyar i seandt hei mpl i cat i on

At t endi ngameet i ngwi t ht hebankwoul dgi v er i set oanadv ocac yt hr eataswe woul dbeper cei v edaspr omot i ngt hei nt er est sofourcl i entandconfir mi ngt he cl i ent ’ sasser t i onsi nnegot i at i ons.( 1mar k) I naddi t i on,t hi smaygi v er i set ol egalpr oxi mi t yexposi ngt hefir mt opot ent i al l i t i gat i on.( 1mar k) At t endi ngt hemeet i ngmayr es ul ti nt hefir m bei ngper cei vedt osuppor tt he acqui si t i onofRedCo.Ast hesear edeci si onswhi chshoul dbet akenby managementwecoul dbeper cei vedast aki ngonamanagementr ol e. ( 1mar k) Sel f r evi ewt hr eat smayal soar i s ewhenwel at eraudi tt hefinanceandacqui si t i on i nt hefinanci alst at ement soft hegr oupaswemayber el uct antt ohi ghl i ght

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er r or sorar el essscept i calaboutt hev al uesi nt hesubs i di ar yaswehav e pr ovi dedt heduedi l i gencewor k.( 1mar k) Fur t her ,ani nt i mi dat i ont hr eatex i st sast hecl i enthast hr eat enedt hati ft hei nt er i m r epor ti sdel ay edi twoul daffectt heout comeoft het enderf oraudi ti nt hef ut ur eand t her ei sar i skt hatqual i t yi sr educedi nor dert omeett hecl i ent ’ sdemands.( 1 mar k)

Appl yt hegui dancet ot hesc enar i o–ev al uat et hesi gni ficanceandsuggest s af eguar dsandconcl udeHer e,t her ear edi ffer entdi r ect i onst hatt heanswer coul dt ak e–f orexampl e,di scuss i ngi ndept ht heex actnat ur eoft heas si gnment andmeet i ngat t endance;howev er ,i ti spos si bl et oat t r actmar kswi t houtsuch det ai li ny ourans werasf ol l ows :

Ass umi ngamanagementr es ponsi bi l i t ycanbeav oi dedi ft hedi r ect or sconfir mi n wr i t i ngt hatt heyar er esponsi bl ef oranydeci si onr egar di ngt heac qui si t i on.( 1 mar k) Thefir m shoul ddecl i net oat t endt hemeet i ngwi t ht hebank.( 1mar k) Thesel f r evi ewt hr eatcanber educedbyhav i ngani ndependentpar t nerr evi ew t heaudi twor kpr i ort osi gni ngt heaudi t or ’ sr epor t .( 1mar k) Thei nt i mi dat i ont hr eatshoul dber epor t edt ot hosechar gedwi t hgover nance.( 1 mar k)

Not et hat ,i nt hi si nst ance,asepar at et eam f ort heduedi l i genceandaudi t assi gnment swasnotsuggest edast hescenar i oal r eadyt ol dust hatadi ffer ent depar t menthadbeencar r yi ngoutt heduedi l i gencewor k. CONCLUSI ON Theabov et woex ampl esai mt ocov erar angeofi ss uesandi l l ust r at ehow candi dat escanat t r acts t r ongmar kswhenans wer i nget hi csques t i ons .Aswi t h mostar easoft heAdv ancedAudi tandAssur anceex am,i ti st heappl i cat i onof knowl edget oascenar i or at hert hant heknowl edgei t sel ft hatwi l l at t r actmar ks . Thi smeanst hatwhenpr epar i ngf ort hi sex am,agoodgr aspoft heknowl edge under pi nni ngt hes yl l abusi si mpor t antbutpr act i si ngques t i onsanddev el opi ng t hes ki l l sofappl yi ngt hatknowl edgei sk eyt opassi ng. Wr i t t enbyamemberoft heP7exami ni ngt eam Las tupdat ed:2Feb2018

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 Part 2 – Risk / Element: Page Intro Block: Text Risk is examined in several ways within the Advanced Audit and Assurance syllabus and understanding the difference between these can be key to scoring good marks in the exam. Quite often, risk forms part of a planning question but it is also examined with respect to financial reporting issues elsewhere in the exam. The key to attaining good marks for risk comes from understanding the types of risk you are looking for and explaining them in the correct context. As with many areas of the exam, good exam technique can be used to increase the marks attained without having to rote learn much additional information. It is application and understanding that is important at the Professional level. This article will demonstrate how to maximise marks on these areas using effective exam technique. It is, however, specific to the context of auditing and assurance and will therefore have a different focus and application to the way risks are examined in other areas of the ACCA Qualification. What you need to know The three main types of risk you might be asked to evaluate in the exam are business risk, risk of material misstatement and audit risk. These are defined as follows: Business risk A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies (ISA 315) Risk of material misstatement (RoMM) ‘The risk that a material misstatement exists in figures or disclosures within the financial statements prior to audit’ (IAASB – glossary of terms) Audit risk ‘The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of material misstatement and detection risk’ (IAASB – glossary of terms) How they interact You should know from your study of Audit and Assurance that the audit risk model is comprised of: Audit risk = RoMM x detection risk For a risk of misstatement to occur there must be an inherent risk of an item being misstated and a risk that the client’s controls did not identify and correct this misstatement. When you are asked to evaluate RoMM in an exam, the examiner is looking for those inherent and control risks and, in many cases, these arise from underlying business risks. For something to be an audit risk, there must be either a RoMM or a detection risk, the risk that the auditor’s procedures do not identify a material misstatement in the financial statements. How to apply the knowledge Knowing these definitions will help you to remember which type of risk is which or to categorise risks into these sub types but it is not something you will be

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awarded direct credit for in an Advanced Audit and Assurance exam. Remember that you are often being asked to prepare an answer for the attention of the audit engagement partner, who will certainly not need these terms explained. Therefore, these definitions are so that you know what type of risk you are looking for in a question but the marks will be awarded for your evaluation of these risks. Let’s consider an example of information that may be provided in the exam and how your answer would differ for each of the risk types you might be asked to evaluate. The following is an extract from the published September/December 2015 sample questions:

Dali Co was established 20 years ago and has become known as a leading supplier of machinery used in the quarrying industry, with its customers operating quarries which extract stone used mainly for construction. The machines and equipment made by Dali Co are mostly made to order in the company’s three manufacturing sites. Customers approach Dali Co to design and develop a machine or piece of equipment specific to their needs. Where management considers that the design work will be significant, the customer is required to pay a 30% payment in advance, which is used to fund the design work. The remaining 70% is paid on delivery of the machine to the customer. Typically, a machine takes three months to build, and a smaller piece of equipment takes on average six weeks. The design and manufacture of bespoke mach...