ACCA P7 Notes Acowtancy PDF

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Advance Audit & Assurance notes with practice questions and standard revision....

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P7 Course notes!

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Syllabus A: REGULATORY ENVIRONMENT

3

Syllabus A1: International regulatory frameworks !

3

Syllabus A2: Money laundering !

8

Syllabus A3: Laws and regulations !

20

Syllabus B: PROFESSIONAL AND ETHICAL CONSIDERATIONS 24 Syllabus B1: Code of Ethics for Professional Accountants !

24

Syllabus B2: Fraud and error !

39

Syllabus B3: Professional liability !

43

Syllabus C: PRACTICE MANAGEMENT

48

Syllabus C1: Quality control !

48

Syllabus C2: Advertising, publicity, obtaining professional work and fees !

59

Syllabus C3: Tendering !

63

Syllabus C4: Professional appointments !

64

Syllabus D: AUDIT OF HISTORICAL FINANCIAL INFORMATION 69 Syllabus D1: Planning, materiality and assessing the risk of misstatement !

69

Syllabus D2: Evidence !

86

Syllabus D3: Evaluation and review !

104

Syllabus D4: Group audits !

193

Syllabus E: OTHER ASSIGNMENTS

205

Syllabus E1: Audit-related and assurance services ! Syllabus E2: Prospective financial information !

216

Syllabus E3: Forensic audits !

222

Syllabus E4: Internal audit !

227

Syllabus E5: Outsourcing !

231

Syllabus E6: The audit of performance information (pre-determined objectives) in the public sector !

238

Syllabus F: REPORTING

243

Syllabus F1: Auditor’s reports !

243

Syllabus F2: Reports to those charged with governance and management !

256

Syllabus G: CURRENT ISSUES AND DEVELOPMENTS

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205

258

Syllabus G1: Professional and ethical developments !

258

Syllabus G2: Transnational audits !

259

Syllabus G3: The audit of social, environmental and integrated reporting !

262

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Syllabus A: REGULATORY ENVIRONMENT Syllabus A1: International regulatory frameworks Syllabus A1a) Explain the need for laws, regulations, standards and other guidance relating to audit, assurance and related services.

The Need for Standards and Regulations Regulation is needed to ensure that auditors are acting in the public interest These 'regulations' come in 4 ways:

1. Ethics 2. Standards 3. Regulations 4. Statutory

The international regulatory framework for audit and assurance services encompasses:

1. International Federation of Accountants (IFAC) pronouncements 2. Corporate Governance

Other Boards • IAASB (International Auditing & Assurance Standards Board)" These develop ISAs but they must be in the public interest so are overseen by.

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• PIOB (Public Interest Oversights Board)" Their role is to make sure everything is in the public interest and not just in the interest of the auditor

• IESB (International Ethics Standards Board)" Their role is to create an ethics code of conduct for all auditors to follow

Syllabus A1b) Outline and explain the need for the legal and professional framework including: i) public oversight to an audit and assurance practice ii) the impact of corporate governance principles on audit and assurance practice

Public Interest Oversights Board

A profession has a responsibility to the public Public Interest Oversight Boards:

1. Oversees IFAC's auditing and assurance

2. Believes standards should be high quality, clear and usable

3. Ensures auditors act independently of personal interests, and be responsive to emerging needs of standard users

4. Promote compliance with IFAC standards by the member bodies of IFAC around the world 4

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Syllabus A1b) Outline and explain the need for the legal and professional framework including: iii) the role of audit committees and impact on audit and assurance practice.

Audit Committees Structure of the Committee At least one member of the committee should have recent and relevant financial experience.

There should be at least 3 non executive directors.##In the case of smaller companies, this may be 2.

Role of the committee 1. To improve the quality of financial reporting

2. To increase the confidence of the public in the financial statements.

3. Assist directors in meeting their responsibilities in respect of financial reporting.

4. Provide a channel to external auditors to report concerns or issues.

5. Review the company’s system of internal controls.

6. Strengthen the position of internal audit by providing greater independence from management.

7. Appointment of external auditor. 5

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Advantages of a committee 1. Independent Reporting" Provides internal audit with an independent reporting mechanism.##Without this management may be tempted to hide unfavourable reports.

2. Frees up Executive time" Leaves top executives free to manage by providing expertise on financial reporting

3. Corporate Governance monitored" Ensures that corporate governance requirements are brought to attention of the board

4. Appropriate Internal Controls" Should ensure that an appropriate system of internal control is maintained.

5. Better Communication" Better communication between the directors, external audit and management is facilitated.

6. Strengthens external audit independence" Strengthens independence of external audit as their appointment is now not made by the board.

Disadvantages of Committee 1. Executive directors may perceive it as a threat to their authority.

2. Finding non executive directors with appropriate expertise may be difficult.

3. Additional costs will be involved.

4. Too much detail may be thrust upon non executive directors.

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Communication with the audit committee Why does the external auditor speak first to the Audit Committee?

1. To ensure independence between the board and the audit firm. " The audit committee consists of independent NEDs, who can therefore take an objective view of the audit report.

2. The audit committee has more time to review the audit report and other communications (e.g. management letters) than the board. " The auditor should therefore benefit from their reports being reviewed carefully

3. The audit committee can ensure that any recommendations from the auditor are implemented. " The NEDs can pressurise the board to taking action on auditor recommendations

4. The audit committee also has more time to review the effectiveness and efficiency of the work of the external auditor than the board. " The committee can therefore make recommendations on the re-appointment of the auditor, or recommend a##different firm if this is appropriate

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Syllabus A2: Money laundering Syllabus A2a: Define ‘money laundering’ and discuss international methods for combatting money laundering

Money Laundering Basics

Money laundering is creating the appearance that money obtained from crimes originated from a legitimate source. Money laundering is thus the process by which criminals attempt to conceal the true origin and ownership of the proceeds generated by illegal means, allowing them to maintain control over the proceeds and, ultimately, providing a legitimate cover for their sources of income.

The term is widely defined to include:

• Possessing • Dealing with in any way • Concealing " " .....the proceeds of any crime

Money laundering usually consists of three steps 1. placement, 2. layering and 3. integration.

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1. Placement

is the depositing of funds into the financial system

To disguise criminal activity, launderers route cash through a "front" operation; that is often, a cash based business " The entry of cash into the financial system, (placement’ stage) is where the launderer is most vulnerable to detection. " Because of the large amounts of cash involved it is extremely hard to place it into a bank account legitimately

2. Layering

involves the wire transfer of funds through a series of accounts in an attempt to hide the funds' true origins.

This often means transferring funds to countries which have strict bank-secrecy laws. " Once deposited in a foreign bank, the funds can be moved through accounts of "shell" corporations, which exist solely for laundering purposes. " The high daily volume of wire transfers makes it difficult to keep track of for those investigating it"

The keeping of comprehensive transaction records by financial organisations provides a useful audit trail and gives useful information on people and organisations involved in laundering schemes once discovered.

3. Integration involves the buying of legitimate goods, using the cash after the layering stage 9

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International Efforts on Money Laundering The Financial Action Task Force on Money Laundering (FATF) is an international body which sets standards, and develops policies to combat money laundering and terrorist financing

It currently has 35 member countries/territories and observers such as the World Bank and International Monetary Fund. Their recommendations are endorsed by more than 180 countries and are the international anti-money laundering standard against which national anti-money laundering systems are assessed

The recommendations cover • • •

Policies and coordination Money laundering and confiscation Terrorist financing and financing of proliferation

More specifically these deal with: 1. The scope of the criminal offence of money laundering

2. Measures to prevent money laundering including: " – #customer due diligence (CDD) and record-keeping; and " – #reporting of suspicious transactions and compliance to an external financial intelligence unit (FIU);

3. Measures needed in systems for combating money laundering, including transparency of legal persons and arrangements

4. International co-operation including mutual legal assistance and extradition

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Syllabus A2b: Explain the scope of criminal offences of money laundering and how professional accountants may be protected from criminal and civil liability.

Scope of Money Laundering

These are the common ones under UK legislation but generally apply worldwide and hence in the exam..

1. Not appointing a Money Laundering Reporting Officer (MLRO) 2. Not having risk management procedures and internal controls complying with anti-ML legislation 3. Not verifying identity of all new clients 4. No ongoing client due diligence 5. Failure to report a suspicion of ML 6. Tipping off 7. Tax evasion

Tipping-off This is when an individual who is suspicious, discloses that suspicion to the suspect In fact even non-disclosure/action may be considered tipping off (e.g. not carrying out a client's instructions that is effectively a money laundering operation).

If the client asks the accountant to commit a suspected ML offence, this must be reported to the appropriate authority

Also not being suspicious is not a defence if it is clear that a reasonable person should have been suspicious

The fear of tipping off should not prevent the professional accountant from discussing money laundering matters with clients on a non-specific basis. Not doing so, when requested, may amount to tipping off.  11

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How Accountants May Be Protected

All partners are potentially liable on a joint and several basis for breaches of the firm's obligations.

Defences to money laundering offences include:

• Reporting to the MLRO • Intending to report BUT there was a reasonable excuse for not doing so (fear of violence) • We thought the client's actions were in good faith (and it's a reasonable assumption)

Syllabus A2c: Explain the need for ethical guidance in this area.

Ethical Framework or Rules

Current Issue - Is an ethical framework better than rules? Here's some reasons why a framework is good…

• Needs auditor to consider his situation actively - not just a checklist • Ensures there are no loopholes by interpreting rules too narrowly • Every situation is different • A framework works better in changing environments

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Syllabus A2d: Describe how accountants meet their obligations to help prevent and detect money laundering including record keeping and reporting of suspicion to the appropriate regulatory body.

How Accountants Prevent Money Laundering Accountants have money laundering obligations.. The following will prevent their organisations being used for money laundering purposes:

• Establish a top-down anti-money laundering culture • Have risk management procedures & internal controls • Appoint a money laundering reporting officer (MLRO) • Have record keeping systems for all transactions • Keep systems for initial verification and continued monitoring of clients' identities • Have internal suspicion reporting procedures • Educate and train all staff in the main requirements of " the legislation

Money Laundering Reporting Officer

Basically should have a suitable level of seniority and experience

If the MLRO is away then a deputy must be appointed (as reports must be made as soon as practicable)

Sole practitioners do not need to appoint an MLRO

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MLRO Responsibilities Include

• Internal reports of money laundering • Deciding if sufficient grounds for suspicion • Preparing the external report to present to the appropriate authority • Key liaison individual with the authorities • Advising the engagement individual/team on how to continue their work and interact with the client • Training on ML matters • Designing anti-ML systems

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Syllabus A2e: Explain the importance of customer due diligence (CDD) and recommend the information that should be gathered as part of CDD.

Importance of Customer Due Diligence

This is vital so as you know who you are dealing with - this is more than just getting their passports or certificates of incorporation (if they’re a company)

To know what is a suspicious transaction you must understand what their business patterns and models are

Also know where their income should come from, so any money laundering income would look suspicious

Client Acceptance Procedures

Identification procedures 1. Know your Client information" including... passports, driving licences, utility bills.

2. Also company registration documents"

3. Their expected patterns of business

4. Their business model

5. Where their funds come from !

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Syllabus A2f: Recognise potentially suspicious transactions and assess their impact on reporting duties.

Reporting Duties Professional accountants must report money laundering to the appropriate authority (e.g. MLRO, Police). Some Points about Reporting

• It is a criminal offence not to report • Regardless of the amount or seriousness • There is no obligation to quantify the certainty of suspicion • There is no automatic need to cease working for a particular client where a report has been filed • Doing so may even be tipping off! An external report should be made to the authorities

It should include the following: 1. Name of the reporting business 2. Identification information of each person (DOB, address etc) 3. Role of each person (e.g. Suspect) 4. Any references seen (e.g.Bank account) 5. Details of suspicious transaction 6. Location of any laundered property

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Resignation

You should consider resigning where.. • It is in your commercial interests to do so • It is professionally and ethically responsible to do so Just be careful to avoid tipping off. Again, legal advice should be sought if in doubt

What are suspicious transactions? • Large cash deposits • Unexplained foreign transactions • Transactions with no business explanation

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Syllabus A2g: Describe, with reasons, the basic elements of an anti-money laundering program.

Anti-Money Laundering Programme

The MLRO is responsible for setting up the anti-money laundering programme The following is required:

• Dedicated Resources An MLRO in place The MLRO has appropriate knowledge, experience and responsibility

• Written Policies and Procedures! " The procedures should use available technology and identify risk factors - items to look for when detecting money laundering"

These risk factors could include: • Secrecy with a transaction • Transactions through several jurisdictions or financial institutions without any apparent purpose • Using central bank or government-owned banks as the source of funds • A rapid increase/decrease in a balance, not explained by fluctuations in the underlying market value of investments held • Frequent or excessive use of funds/wire transfers in or out of an account • Repeated deposits or withdrawals just below the monitoring and reporting threshold on or around the same day • A pattern that after a deposit or wire transfer the same (or similar) amount is wired to another financial institution (especially one that is offshore).  18

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• A frequent clearing out of an account for purposes other than maximising the value of the funds held in the account

• Comprehensive Coverage All aspects of a company's business, particularly those that" have contact with customers should be covered

A comparison of the account holder's identity to the government lists of known or suspected terrorists

• Timely Escalation and Resolution • Timely reports • Appropriate reviews of the report • Identify the outcome / resolution of matters • Explicit Management Support • Senior management should set the tone • Their support clearly visible to all employees • Sufficient Training and Education • Integral to the whole programme • Courses on how to recognise suspicious activity and what to do next • Regular Review of the Program • To make sure it is working as designed • Accompanied by a formal assessment / report

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Syllabus A3: Laws and regulations

Syllabus A3a: Compare and contrast the respective responsibilities of management and auditors concerning compliance with laws and regulations in an audit of financial statements.

Responsibilities of management and auditors

Management is responsible for ensuring that the company complies with laws and regulations Auditors are responsible for: • concluding FS free from misstatements caused by non-compliance with laws and regulations • havin...