These EEC notes are intended to help students kick start their P7 and to get an overall idea of the subject; without wasting much time on bulky text books.
P7
–
Advance Audit and Assurance
Created by : Excellence Education Centre, Doha www.eec-doha.com
Ex = Exam Tips Ex – Know all the Standards, IAS Ex – Always explain “why” Ex – Real time exams. So take care of dates-timelines dates-timelines Ex – past papers = work experience
Assurance = Opinion External audit is only one of the assurance services. Internal audit Social + Environmental Environmental audit Due diligence (especially mergers & acquisitions) Business risk (not much figures in here)
Big Topics Risks Audit evidence, procedures etc.
Next Biggest
Other Assurance services Audit Reports Ethics Group Audits – very heavily examined
Other Areas
Practice Management ( running your own company)
Money laundering
Laws
Regulations that relate to all client Telling the BOD or outside body Provisions & contingencies needed
Regulations
ACCA Professional Oversight Board(nonaccountants) IAASB- International Auditing (Austrailia,Us,Uk) Subsidiary
Money laundering
Hiding the true source of proceeds of crime International Regulations You can move money around to avoid investigation
Responsibilities of Accountants (Auditors) 1. Have a money laundering reporting officer (MLRO) 2. KYC procedures-(Know your clients) Identify Source of funds 3. Train staff in how to spot clues. 4. Situation where ML more likely to happen Politically
Exposed Persons Clues to Money Laundering
Overly complicated transactions Businesses / groups more complicated then should be.
Moving money through “suspicious”
countries Fraud (RARE)
Preventing & detecting fraudulent auditors’ responsibility but fraud affects the true and fair view of F/S so linked. Directors may be involves. So report to audit committee (NED S).Some situations report outside the company.
Auditor liability(current issues) To whom are we liable Shareholders
How much far ?(check solutions next page)
Anyone else if
Auditors know of their plans when signing audit report Audit work was neglected (poor quality) This person lost money as a result of poor quality work but can issue a disclaimer to these “extra”
people
Why people like to sue audit firms rather then directors for fraud?
Audit firms traditionally o Partnerships o Seem as rich Directors may be seen as guilty but have no money Audit firms have insurance May settle out of court to avoid court cares.
Solutions
LLC
Director’s insurance
Liability cap figure for claims Current issue for a long time.
when it comes to
ethical issues ,consider:-
identify issues seniority of staff involved dates
Action
Deal with the people involved Deal with the audit process Make sure t never happens again.
3 Ways Auditors can leave a company:1. Resignation 2. Removal 3. Not seeking re-appointment.
Ethics [integrity,honesty] Due care + competence Objectivity-free from
bias Confidentiality –professional behavior Forced to introduce client confidentiality Suspicion
of money laundering
Terrorism Treason – acting
against the government An ACCA investigation Objectivity
Having a clear mind when doing something
Shouldn’t be thinking about irrelevant stuff
You must be objective and be seen to be objective Key to objectivity is independence !!!! Threats
Self-interest –you think about yourself Intimidation – forced to do stuff Self-review –ACCA allows you to mark yourself Familiarity Advocacy – hardest
Advocate:-representative (Tax) – One side of the argument
Management
What people think; is important for YOU Safeguards
nd
2 Part “HOT” Review of audit files. Rotate staff an audit team every few years Take care when providing “ethic services”
Conflicts of interest Use 2 separate teams Each team headed by different partner Use staff from 2 different offices rd 3 partners to ensure 2 teams kept apart Tell both clients Resign from one/both Confidentially for client files Ethics is all about question practice
Practice Management (comes up often) 1. Quality control 2. Tendering 3. Advertising 4. Fees
Have been tested
QC f
Each piece of work
Firm as a whole
Recruitment + training
Attitude of partners( Quality)
Partners in charge of quality Documented policies + procedures Specialists/consultatio n Cold file review process
Planning Planning meeting for whole team Documenting all work Direction, supervision, review of all work done Work delegated board on skills + experiences
Pre-appointed checks
Small Firms Can Take Can take care of quality control by haring resources with other smaller firms e.g. (training)
Tendering What do companies consider when choosing auditors?
People Price Location Services available Reputation (recommendation) Experience
Advertising and fees Fees
Lowballing-setting a low price to attract client , then making money from other services, or by putting prices up in the future. Contingency fees:
Fees dependent on something else.
Advertising
Clear Any claims must be backed up Must not criticize other accountants Overall manner + location should be professional
Audit strategy (most important area of the syllabus & very vast )
Plan Good
Bad
They work
Don’t
work
Full substantive tests
Reduced substantive tests
Completion
Report A lot of “small” transactions-> test controls
Few “big transactions” -> substantive testing Substantive tests Analytical procedures Enquiry + Confirmation [management, 3rd parties] Inspection Observation Analytical procedures
e.g. subsequent events
Work well if Not a new client Company is stable – similar things to previous years, not much growth Company has several divisions doing the same thing Similar company exists in the industry During audits the main focus is mainly on the B/S assets and liabilities
Accounting Equation Opening net assets + profits – drawings dividends = closing net assets Audited (corrected)
ignore
Audit this!
If the opening and closing net assets are always correct , the profit will be correct as well Most auditors focus on B/S, assets and liabilities Most of the areas that come up in exams tend to focus on the B/S.eg
“Intangible assets”, “Provisions & Contingencies”
4 Things the auditors focuses on DEBITS Too High
CREDITS too Low
DEBITS too low
CREDITS too low
So does the auditor check all of these..? For a DEBIT to be overstated…
Another DEBIT must be overstated OR A CREDIT must also be overstated Only one thing left ;CREDITS too low So check DEBITS in one direction and CREDITS in the other ,called Directional testing So Test DEBITS for overstatement Test CREDITS for understatement
In P7, say 1 thing, get 1 mark In P7, always breakdown the question. Never read the whole thing Materiality By size or nature
Revenue – 0.5 -1% (use the whole range ) PBT - 5-10 % Assets – 1-2% Always go for “Overlap”
E.g. overlap: $0.7 - $1.0 If a new client, materiality towards the lower end of 0.7m-1.0m We might use last years audited figures If one of the three gives odd results , ignore
Audit Risk Risk of wrong audit opinions Audit risk = F/S risk* detection risk (Inherent risk, control risk) Answer Plan For Audit Risk Questions
IR
CR Audit evidence
DR
Going concern Manipulation Key balances
Documents Assets Directors Accounting system 3rd parties
Business risk – other assurance engagements Identify Assets + Priorities
impact of the risk likelihood how soon
Manage
Transfer (e.g. insurance) Avoid Reduce ( internal factors, diversification) Accept Dop top down approach etc.
Audit risk questions:-IR, CR, DR Mostly IR- key balances in F.S that might be wrong F.S. RISK – same as audit risk, but ignore D.R Business risk – arises to the company’s future performance AUDIT (Evidence & procedures) Ex Sure To Come Up In Exams Ex Accounting knowledge really important here Normally the Questions Ask For The following:Matters to consider
Identify The Relevant Accounting Rules If Possible, Is The Company Doing It Right? How Material Is The Error They Are Making (Or Might Be Making)
If There Is A Definite Mistake, And It Is Material, “except for” disagreement in audit report
Audit Evidence/Procedures Documents
Analytical
Assets
Enquiry + confirmation
Directors
Inspection
Accounting system
observation
3rd Parties
Recalculation
Audit Report- Contents Title – “Report Of Independent Auditors” Addressee – “To The Shareholders Of The ABC” Intro – what has been audited (F.S rather than audit report)
That “Other Information Has Been Read But Not Audited”
Audit responsibilities – how audit was done – which audit standards followed Basic opinion – whether FS are true & fair – whether FS properly prepared – other opinion as required by the country Possible extra paragraph – name of auditor – city – date report was signed
6 Ouleames
Unmodified report
5 modifications
Unqualified + emphasis of matter Disagreement
Limitation of scope
“Except for”
qualification
Adverse (FS don’t
give a T+T view)
“Except for might”
qualification
Disclaimer of opinion; can’t form an opinion
Emphasis of matter
Standard audit report but ….
Extra paragraph under opinion Without qualifying opinions Refers to a note in FS, Or Part Of Annual Report
E.g. company has a major court cure hut has fully disclosed in the note to FS E.g. in this annual report there are misleading commands/inconsistencies suggesting F.S are working, but auditors believes F.S are F< F Disagreement
With figures or disclosures Opinion
Heading should make clear that is disagreed Explain the mistake (usually by mentioning an IFRS ) Explain the effect e.g on profits of correcting this mistake
“Except For”
OR
“don’t give a T&F view”(adverse)
Limitation of scope Audit responsibilities/basis of opinion – “however, our evidence was limited because
What missing Why?
Opinion – “except for might”
OR
“cannot give an opinion” (disclaimer)
Critising an audit report
Clarity Detail consistency Everything in right place The opinion
Also
Any Issues with prior year figures need to be reported this year.
Other information
Unaudited information, attached to the F.S + audit report (e.g. mark of Annual Report ) Auditor should read other information. if any of the content is wrong, ask the board to change it If they refuse Tell shareholders at the AGM OR
Use “emphasis of matter” in the audit report
Subsequent events If BOD’s re-issue the F.S
Need a new audit report, dated on/after the date the new FS were signed Need to audit the “GAP” between the original audit report date +
today If BOD’s refuses to correct the F.S
Speak at AGM WITH AUDIT OPINION Seek legal advice
Assurance Services External Audit
Detail work is done Allows auditors to provide a relatively high level of assurance (“positive assurance”)
Auditing standards tell us how to audit
No Assurance (no opinion given)
e.g. “compilation”
Accounting figures taken from a trial balance, put into F.S formats – but figures not checked at all As such, no opinion given as to whether the figures are correct Should report a short report making clear that no checking was done
Review Assignments
Less detailed checking than an audit Therefore a lower level of assurance is provided= “negative assurance”
“I have not seen anything to suggest the figures are net true & fair”
Audit Analytical – forecasts etc Enquiry + confirmation Inspection Observation Recalculation Examples Of “Review” Assignments
6 months financial statements (“interim accounts”- negative
assurance) e.g. rare in exam Prospective financial information (e.g. forecasts and projections) – “negative assurance”
Due diligence review Company X checks out company Y before finalizing the takeover
Other non-audit assignments(e.g. ferry question)
Business risk management
Identify business risks Suggest solutions. Website security – IT audit Social / Environmental audits Internal audits services
Forensic accounting + accounting [Examiner’s favorite ;)]
Issues To Consider Before Accepting Any Assignment
Fees Any conflicts of interest with existing clients Time / deadlines Staff other resources Competent? Any other services available Independence (familiarity etc.) Professional clearance Integrity of clients, managers
If Not An Audit
Who is the report for
Why this work has been requested
How much evidence will be available
How detailed do they want my work to do
How much assurance do they want (inked to the previous 2 points)
Any professional guidance on how to do this assignment
Learn this additional list
“Review Assignment”
PFI = Prospective financial information = Forecasts + projections
Review Of Forecasts
Analytical procedures “A”
Compare with current year (unaudited) + previous years (audited)
Compare last year’s forecasts wit actuals
Compare assumptions in the forecasts with industry (wider economy) expectations Do figures make internal common sense? E.g. if sales Cost of sales Sales – related expenses Receivables etc.
Enquiry “E”
How were these figures produced? What are the assumptions behind them?