Professional scepticism PDF

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Professional scepticism (Definition and Why) 1. 2. 3. 4. 5. 6.

Attitude includes having a questioning mind Alert to conditions which may indicate possible misstatement due to error or fraud Subjecting audit evidence to a critical assessment rather than taking it at face value It can reduce the risk of overlooking unusual transactions It can reduce the risk of over-generalising when drawing conclusions It can reduce the risk of using inappropriate assumptions in determining the nature, timing and extent of audit procedures and evaluating the results of them 7. It is necessary to the critical assessment of audit evidence 8. Includes questioning contradictory audit evidence and the reliability of documents and responses from management and those charged with governance

Professional judgement (Definition and what area) 1. It is the application of relevant training, knowledge and experience in making informed decisions about the appropriate courses of action in the circumstances of the audit engagement. 2. Auditor must exercise professional judgement when planning an audit of financial statement. 3. Area 1: Determination of materiality for the financial statement will require professional judgement. 4. Area 2: Deciding on the nature, timing and extent of audit procedures.

Threats to the fundamental principles 1. Self-interest threat A financial interest in a client’s affairs where an audit firm owns shares in the client 2. Self-review threat A firm prepares accounting records and financial statements and then audits them 3. Advocacy threat Acting as an advocate on behalf of an assurance client in litigation 4. Familiarity threat Senior members of staff at an audit firm with a long association with a client 5. Intimidation threat Client threatens to sue the audit firm for previous work

Reduced the threats to an acceptable level 1. Self-interest threat Any interest should be declined politely, for example if the clients offer a low interest rate loan, luxury accommodation, or any benefits 2. Self-review threat The individual must not be involved in client’s company and another partner should be appointed as a review partner The audit partner should choose two separate teams, one which prepares the financial statements and another performs the audit 3. Advocacy threat The request should be politely declined 4. Familiarity threat The audit firm should rotates partners so professional scepticism is maintained 5. Intimidation threat The audit partner should explain to the finance director that the firm is required to perform the audit in accordance with auditing and quality control standards. If the finance director is unwilling to accept and continue to put under pressure on auditor, the audit partner should consider resigning from the engagement.

Threats arising from financial matters (Definition and safeguards) 1. Financial interests Definition: Holding shares in a client by the firm, a member of the assurance team and an immediate family member of a team member Safeguards: Disposal of shares, remove individual from team, inform audit committee, independent partner review. 2. Loans and guarantees Definition: Loans or guarantees to the firm, no threat if immaterial and on normal terms, if material, apply safeguards. Loans to members of the assurance team, not a threat to independence if on normal commercial terms Safeguards: Review by professional accountant from outside the firm 3. Gifts and hospitality Definition: Acceptance of gifts may also be perceived as a bribe Safeguards: should not be accepted 4. Fees and pricing Definition: Self-interest threat arises when total fees from a client represent a large portion of the firm’s total fees. The firm may issue favourable opinion rather than risk losing such Safeguards: Discuss with audit committee, consider resignation if overdue fees not paid

Matters to be included within an audit engagement letter (First 5 are key points) 1. The objective and scope of the audit 2. The auditor’s responsibilities 3. Management’s responsibilities 4. Identification of the applicable financial reporting framework 5. Expected form and content of any reports 6. Elaboration of scope of audit 7. Any other communication 8. Unavoidable risk that some material misstatements may not be detected 9. Arrangements regarding planning and performance 10. Written representations 11. Agreements regarding planning and performance 12. Expectation that management will provide written representations 13. Fees and billing agreements 14. Any restriction of auditor’s liability 15. Any further agreements between auditor and entity 16. Any obligations to provide audit working papers to other parties 17. Involvement of other auditors and experts 18. Involvement of internal auditor’s liability 19. Request for management to acknowledge receipt of the letter and agree to the terms outlined in it.

The fundamental principles (Code) 1. Integrity Straightforward, honest, fair dealing and truthfulness 2. Objectivity Not allow bias, conflicts of interest, undue influence of others 3. Professional competence and due care Professional knowledge and skill ensure client receive competent professional service 4. Confidentiality Should not disclose any information to third party without authority, confidential information should not be used for the personal advantage of the professional accountant or third parties 5. Professional behaviour Ensure comply with relevant laws and regulations and avoid any action that discredits the profession

External auditors’ responsibilities (Prevent & Detect. Fraud & errors) 1. ISA240 the auditor’s responsibilities relating to fraud in an audit of financial statement. 2. The auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. 3. The auditor is responsible for maintaining professional scepticism throughout the audit 4. Audit procedures effective for detecting errors may not be effective for detecting fraud. 5. Auditor is required to identify and assess the risks of material misstatement due to fraud at the financial statement level and at the assertion level. 6. Auditor should address the risks, design and perform further audit procedures whose nature, timing and extent are responsive to them. 7. Discussion should take place amongst the audit team, emphasis on how and where the financial statements may be susceptible to fraud.

Nature and purpose of internal audit assignment 1. 2. 3. 4. 5. 6. 7.

Value for money audits Information technology (IT) audits Financial audits Audits to verify regulatory compliance Fraud investigations Customer Experience audits Operational audits

The UK Corporate Governance Code 1. Leadership Chairman of the board of directors need to lead the board, make sure directors fulfilling their role effectively 2. Effectiveness Board evaluation. Training throughout the year, directors annual re-election 3. Accountability The boards is responsible for risk management 4. Remuneration Performance-related elements should be transparent. Directors cannot decide their own remuneration. 5. Relations with shareholders There should be a dialogue with shareholders based on the mutual understanding of objectives.

The procedure the auditor should carry out to gain evidence 1. 2. 3. 4. 5.

The basis of valuation Independence/ objectivity Qualifications Experience Reputation of the valuer

The role of external and internal audit 1. External Audit Conducted in accordance with the international standards on auditing and local law legislation. Reports to director, Independent Objective: give an opinion on whether the FS are true and fair, are proper records kept? 2. Internal Audit To assist the board in achieving their corporate objectives. Reports to directors, probably employed, maybe outsourced Objectives: wide-ranging anything to add value, IT, controls, compliance, fraud and value for money “3es”

Audit procedures (reliance on continuous counts for y/e inventory) 1. 2. 3. 4.

Agree the total on the inventory listing to the continuous inventory records Attend one continuous counts, observe and review the inventory count instruction Review the schedule of counts undertaken/to be undertaker during the year Review corrections to the inventory records, determine and confirm the corrections have been authorised by a manager 5. Enquire management’s action, ensure that the valuation of inventory is accurate

Substantive procedures (confirm directors’ bonus payments for y/e) 1. 2. 3. 4. 5. 6.

Cast the addition of the schedule of director’s bonus payments Compare the bonuses with both the previous years’ and with expectations Agree bonus payments to payroll records, Bank statement agree with payroll records Review board meeting, for evidence of any bonuses not disclosed Review the cash book for any unusual transactions Review the disclosure of directors’ bonuses, accordance with accounting standards.

Audit Procedure (Completeness of provisions/contingent liabilities) 1. Discuss with management the reason for not providing / disclosing a potential payment to director for unfair dismissal, corroborate response with documentary evidence 2. Review correspondence with old financial director and company’s lawyers, try and assess whether a reliable estimate of any potential payment is possible

Audit risk and factors (AR=IR x CR x DR) 1. Inherent risk: Definition: The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatements, before consideration of any related controls Factors: A high degree of regulation over certain areas of the business Going concern issues and loss of significant customer Expanding into new territories Events or transaction that involve significant accounting estimates Developing new products or services, or moving into new lines of business The application of new accounting standards Accounting measurements that involve complex process 2. Control risk: Definition: A misstatement that could occur in an assertion about a class of transaction, account balance or disclosure, will not be prevented or detected and corrected on a timely basis by the entity’s internal control Factors: Changes in key personnel such as the departure of key management A lack of personnel with appropriate accounting skills Deficiencies in internal control Changes in the IT environment Installation of significant new IT systems related to financial reporting 3. Detection risk: Definition: The procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material Factors: Poor planning Inappropriate assignment of personnel to the engagement team Failing to apply professional scepticism Inadequate supervision and review of the audit work performed Incorrect sample sizes Incorrect sampling techniques performed

Purpose of review engagement (1) / Differ from external auditor (2) 1. Alternative to audit, involve practitioner reviewing financial data (6 month). Practitioner states whether financial data is accordance with the financial reporting framework 2. Procedures undertaken are not nearly as comprehensive as those in an audit, such as analytical review and enquiry. Practitioner does not need to comply with ISAs.

Level of assurance provided by external audits / review engagements 1. External audit- High, but not absolute level of assurance, as reasonable assurance, true and fair, and are free of material misstatements. 2. Review engagement- limited assurance is given, the subject matter contains material misstatements.

Substantive procedure – Payroll cost 1. Compare the total payroll expense to previous year, investigate significant variance 2. Review monthly payroll charger and compare to prior year monthly charge 3. Reconcile the total wages and salaries expense to the cost in financial statement 4. Agree amounts owed to tax authorities to the payroll records 5. Cast a sample of payroll records to confirm completeness 6. Recalculate the gross and net pay for a sample employees and agree to payroll 7. Recalculate statutory deductions to confirm correct deductions are included in payroll 8. Perform a proof in total of total factory workforce wages by taking last year’s expense 9. Agree the start/ leaving date to supporting documentation for a sample joiners/ leavers 10. Agree total net salaries paid on the payroll records to the bank transfer payments

Substantive procedure – Redundancy provision 1. 2. 3. 4. 5. 6. 7.

Obtain an analysis of the redundancy calculation Obtain written representation from management confirming the completeness Review documentation, If redundancies announced in pre-year end Review the board minutes to assess probability the redundancy payments will be paid Recalculate the redundancy provision to confirm completeness Confirm redundancy payments have been made post year end Review disclosure of redundancy provision, ensure it complies with IAS 37 Provisions.

Documenting the sales system (method/advantage/disadvantage) 1. Narrative notes Consist of a written description of system, details what occurs in the system at each stage and include controls operate at each stage Advantage: Simple to record. Facilitate understanding by all members of audit team Disadvantage: Too cumbersome. Difficult to identify missing internal controls 2. Questionnaire Internal control questionnaires contain a list of questions, used to assess whether controls exist whereas ICEQs assess the effectiveness of the controls in place Advantages: Quick to prepare. Ensure controls present in the system are considered Disadvantages: Easy for staff to overstate the level of control. A standard list of questions may miss out unusual or more bespoke controls by the company 3. Flowcharts Graphic illustration of the internal control system for sales system. Advantages: Easy to view the system. Can be effective in identifying missing controls Disadvantages: Difficult to amend. Still the need for narrative notes to accompany the flowchart (Time consuming)...