SKANS audit and assurance notes for the year 2017/2018 PDF

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Table of Contents- F8 Knowledge Summary (March/June 2018)Reasons for an unsuccessful attempt in FVery bad scripts Very brief answers to most, if not all questions. In other words, some of the basic knowledge is known, but there is little or no application of that knowledge to the scenario Significan...

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SKANS School of Accountancy

Table of Contents- F8 Knowledge Summary (March/June 2018) Reasons for an unsuccessful attempt in F8 Very bad scripts 1. Very brief answers to most, if not all questions. In other words, some of the basic knowledge is known, but there is little or no application of that knowledge to the scenario 2. Significant lack of understanding of audit procedures and the audit process. For example, where a question asks for audit procedures to be listed and explained, a typical answer is ‘check the ledger’ providing no indication of which ledger will be ‘checked’ or what the ledger is being checked for 3. Lack of exam practice. In a significant minority of scripts, it appears that candidates have not attempted any mock exams prior to the ‘real’ exam. Poor exam technique is identified as:  answering questions in a random sequence (for example, Question 1 Part (a), followed by Question 3 Part (b), followed by Question 2 Part (c), and so on)  spending far too much time on one question, leaving little or no time for the other questions  not writing in the required style (eg providing the answer in one long paragraph rather than splitting the answer up into individual points)  focusing on theory only with no attempt to use the scenario. Marginal scripts 1. Answering questions correctly, but not including a sufficient number of relevant points to obtain a pass standard. 2. Having a good knowledge of auditing, but being unable to apply that knowledge to the scenarios provided in the question. 3. Not answering all the questions. Pass standard scripts 1. Are usually well presented, and make appropriate use of paragraphs, sentences and table formats where appropriate. 2.

Demonstrate that students are able to apply that knowledge to the question, clearly and succinctly. Audit procedures are listed as well as explained.

3. All questions are attempted, even though some sections may not be answered that well. A few marks could normally be obtained from a valid attempt; obviously, no marks are awarded if the question is not attempted at all.

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Assurance Engagements The practitioner examines the subject matter made available by the responsible party, matches it to the suitable criteria using evidence and reports to the intended users.

Elements of an assurance engagement 1. An assurance engagement will require a three-party relationship comprising of: a) The intended user who is the person who requires the assurance report. b) The responsible party, which is the organisation responsible for preparing the subject matter to be reviewed. c) The practitioner (i.e. an accountant) who is the professional who will review the subject matter and provide the assurance. 2. A second element which is required for an assurance engagement is suitable subject matter. The subject matter is the data which the responsible party has prepared and which requires verification. 3. Thirdly this subject matter is then evaluated or assessed against suitable criteria in order for it to be assessed and an opinion provided. 4. Fourth, the practitioner must ensure that they have gathered sufficient appropriate evidence in order to give the required level of assurance.

5. Last, an assurance report provides the opinion which is given by the practitioner to the intended user

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Types of assurance assignments Reasonable assurance

Limited assurance

An Assurance engagement in which the Practioner reduces engagement risk to an acceptably low level in the circumstances of the engagement as the basis for the practitioner’s conclusion. Example: External Audit

An assurance engagement in which the practitioner reduces engagement risk to a level that is acceptable in the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement Example: Review of financial statements

High level of assurance but NOT absolute or 100%

Moderate level of assurance

A high but not absolute level of assurance is provided, this is known as reasonable assurance.

The practitioner gathers sufficient evidence to be satisfied that the subject matter is plausible; in this case negative assurance is given whereby the practitioner confirms that nothing has come to their attention which indicates that the subject matter contains material misstatements.

More testing (Analytical tests, test of controls and substantive testing)

Lesser testing-focus on obvious errors only (Analytical testing and Enquiry)

Going concern review carried out

No going concern review

Positive conclusion- Wording: ‘in our opinion the financial statements give (or do not give) a true and fair view of the state of the company’s affairs’.

The procedures undertaken are not nearly as comprehensive as those in an audit, with procedures such as analytical review and enquiry used extensively. In addition, the practitioner does not need to comply with ISAs as these only relate to external audits. Negative conclusion-Wording: “nothing has come to light to suggest errors or problems exist’' The assurance is therefore given on the absence of any indication to the contrary. Review engagements are often undertaken as an alternative to an audit, and involve a practitioner reviewing financial data, such as six-monthly figures. This would involve the practitioner undertaking procedures to state whether anything has come to their attention which causes the practitioner to believe that the financial data is not in accordance with the financial reporting framework.

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Assignments were no assurance is given 1. Agreed-upon procedures : A report on factual findings is given but no assurance expressed. Users must judge for themselves and drawn their own conclusions 2. Compilation engagement: Users of the compiled information gain benefit from the accountant’s involvement but no assurance is expressed. It is used to collect, classify and summarise financial information. It means to present data in a manageable and understandable form.

External audit It is a review and assessment of the financial records to form an overall conclusion as to whether: - The financial statements have been prepared using acceptable accounting policies, which have been consistently applied. - The financial statements comply with all the relevant regulations and statutory requirements. - Adequate disclosure of all material matters relevant to the proper presentation of financial information has been made.

Objective of external audit engagements: “Opinion”: The auditor’s report contains a clear written expression of opinion on the financial statements.

General principles of external audit engagements According to the International Standards on Auditing, the general principles of an audit are: 1. 2. 3. 4. 5.

Compliance with Code of Ethics (IFAC’s) Performance of an audit in accordance with ISAs Audit with professional skepticism Professional judgment Sufficient appropriate audit evidence

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Important Terms True and Fair presentation Financial statements are produced by management which give a true and fair view of the entity’s results. The auditor in reviewing these financial statements gives an opinion on the truth and fairness of them. Although there is no definition in the International Standards on Auditing of true and fair it is generally considered to have the following meaning: True – Information is factual and conforms with reality in that there are no factual errors. In addition it is assumed that to be true it must comply with accounting standards and any relevant legislation. Lastly true includes data being correctly transferred from accounting records to the financial statements. Fair – Information is clear, impartial and unbiased, and also reflects plainly the commercial substance of the transactions of the entity. Those charged with governance – The person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. Management – The person(s) with executive responsibility for the conduct of the entity’s operations. In some cases, all of those charged with governance are involved in managing the entity, for example, a small business where a single owner manages the entity and no one else has a governance role Engagement partner – The partner in the firm who is responsible for the audit engagement and its performance, and for the auditor’s report that is issued on behalf of the firm, and who has the appropriate authority from a professional, legal or regulatory body. Professional judgment – The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Professional skepticism – An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. Professional skepticism includes being alert to, for example: • Audit evidence that contradicts other audit evidence obtained. • Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. • Conditions that may indicate possible fraud. • Circumstances that suggest the need for audit procedures in addition to those required by the ISAs.

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Inherent Limitations of audit/ Reasons why absolute assurance cannot be given 1. Sampling – it is not practical for an auditor to test 100% of transactions and so they have to apply sampling methodologies in selecting balances/transactions to test. Therefore, there could be an error in an item not selected for testing by the auditor. 2. Subjectivity – financial statements include judgmental and subjective areas and therefore the auditor is required to use their judgment in assessing whether the financial statements are true and fair. 3. Inherent limitations of internal control systems – an internal control system is operated by people and hence is liable to human error. In addition, there is the possibility of controls override by management and of collusion and fraud. It is impossible to remove all of these inherent limitations and as the auditor relies on the internal control systems, this can reduce the usefulness of the audit. 4. Evidence is persuasive not conclusive – the opinion is based on audit evidence gathered; however, while this evidence can indicate possible issues affecting the audit opinion, evidence involves estimates and judgments and hence does not give a definite conclusion. 5. Even if everything reported on was examined and found to be satisfactory, there may be other items which should have been included– the completeness problem. 6. Auditors plan their work to detect material errors and frauds only – so small frauds (or large frauds split into many small amounts) may go unnoticed. An external audit has a number of other issues which reduce its usefulness 1. Audit report format – the format of the opinion is determined by International Standards on Auditing. However, the terminology used is not usually understood by non-accountants. This means that users may not actually understand the audit opinion given. 2. Historic information – the audit report is often issued some time after the year end, and so the financial information can be quite different to the current position. In the current marketplace where companies’ financial positions can change quite quickly, the audit opinion may no longer be relevant as it is out of date. 3. Auditors need to understand their clients in great depth if they are to understand how fraud could be carried out and hidden. However, auditors cannot become too close to their clients or their independence will be called into question. 4. Where auditors spot errors or fraud, their primary legal responsibility is to report this to management. Any external reporting is hampered by rules on confidentiality.

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The auditor’s duties Fundamental duties are to: form an opinion on whether the financial statements give a true and fair view and are prepared in accordance with applicable reporting framework issue an audit report.

Duty to check and ensure: Adequate accounting records, Compliance with legislation, Truth and fairness, Adequacy of financial statements disclosures

The auditor’s rights 1. 2. 3. 4. 5. 6.

Right of access at all times to the company’s books, accounts and vouchers. Right to require from an officer of the company such information or explanations as they think necessary for the performance of their duties as auditors. Right to receive all communications relating to written resolutions. Right to receive all notices of, and other communications relating to, any general meeting which a member of the company is entitled to receive. Right to attend any general meeting of the company. Right to be heard at any general meeting which an auditor attends on any part of the business of the meeting which concerns them as auditor.

Appointment of auditors Only a member of a recognised supervisory body is eligible to be appointed as an auditor. The person to be appointed as the auditor is required to hold a professional accountancy qualification. 1. Appointed by shareholders 2. Appointment runs from the end of the Annual General Meeting (AGM) until the end of the next AGM. 3. On appointment , need to get ‘clearance’ from outgoing auditor For entities in which a share is owned by the state, the auditor is appointed by the Secretary of State or Ministry of Finance (or a person authorised by the Ministry of Finance)

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Removal of auditors 1. RESIGNATION: Sometimes it is necessary for the auditors to resign. If an auditor resigns, they should do so in writing and they may wish to speak to the shareholders to explain their reasons 2. FORCED REMOVAL: Sometimes, the Board of Directors or some shareholders may wish to remove the auditors. A General Meeting must be called so that the shareholders can vote on the proposal (via an ordinary resolution). 3. AUDITORS DO NOT WISHTO SEEK REAPPOINTMENT: Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years. As such,when the board asks them to accept nomination for the following year, the auditors should politely decline and issue a Statement of Circumstances.

Key points  Directors cannot remove the auditors themselves.  Auditors Can be removed by a simple majority at a general meeting.  The auditors should be given notice of such a meeting  They are allowed to speak at the general meeting 

Deposit at the company’s registered office a statement of the circumstances connected with the removal/resignation or a statement that there are no such circumstances. They can request an Extraordinary General Meeting (EGM) of the company to explain the circumstances of the resignation.

Audit exemption for small companies The main reasons for exempting small companies are: - for owner-managed companies, those receiving the audit report are those running the company (and hence preparing the accounts!) - the advice/value which accountants can add to a small company is more likely to concern other services, such as accounting and tax, rather than audit and which may also give rise to a conflict of interest under the ethics rules - the impact of misstatements in the accounts of small companies is unlikely to be material to the wider economy - it may also not be cost beneficial for the small entities.

Attempt questions to check your understanding: June 2015-Q5c

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Fundamental principles of ethics 1. Integrity: Members should be straightforward and honest in all professional and business relationships. Auditors should not knowingly be associated with reports, returns, communications or other information where they believe that the information contains a materially false or misleading statement. 2. Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.

3. Professional competence and due care: to maintain professional knowledge and skill at the level required to ensure that a client receives competent professional services, and to act diligently and in accordance with applicable technical and professional standards. 4. Confidentiality : Members should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority There are, however, circumstances where auditors may disclose information to third parties without first obtaining permission. These can be categorised as obligatory and voluntary disclosures. Obligatory: Auditors are obliged to make disclosure where, for example, there is a statutory right or duty to disclose, such as if the auditor suspects the client is involved in money laundering, terrorism or drug trafficking in which case they must immediately notify the relevant authorities. In addition, auditors must make disclosure if compelled by the process of law, for example under a court order or summons, under which they are obliged to disclose information. Voluntary In certain circumstances auditors are free, as opposed to obliged, to disclose information without obtaining the client’s permission first. These circumstances can be categorised into the four areas below: Public interest – An auditor may disclose information which would otherwise be confidential if disclosure can be justified in the ‘public interest’. This would be perhaps if those charged with governance are involved in fraudulent activities; Protect a member’s interest – Members/auditors may disclose information to defend themselves against a negligence action, disciplinary proceedings or if suing for unpaid fees; Authorised by statute/laws – There are cases of express statutory provision where disclosure of information to a proper authority overrides the duty of confidentiality; Non-governmental bodies – Auditors may be approached by non-governmental bodies seeking information concerning suspected acts of misconduct not amounting to a crime or civil wrong. Disclosure should only be made to those bodies with statutory powers to compel disclosure.

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Professional behaviour: Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Threats Once you have identified a threat from the scenario, you will need to name the threat, explain WHY it is a threat and tell the safeguard. QCR: Quality Control Review ( independent partner review)- Having a professional accountant who was not involved with the non-assurance service review the non-assurance work performed Chinese walls:...