WEEK 1KNUST IDL ACF 468 RISK BASED APPROACH OF AUDITING Risk-Based Audit There is some level of risks

isks associated with audit assignments. Risk-based audit is the system of audit used by auditors in order to concentrate on high risk clients and on high risk areas of a clients business rather than performing detailed audit tests on all areas of a clients business.

Auditors Objective in a Risk-Based Audit The auditors objective in a risk-based audit is to obtain reasonable assurance that no material misstatements whether caused by fraud or errors exist in the financial statements. This involves three key steps: Assessing the risks of material misstatement in the financial statements; Designing and performing further audit procedures that respond to assessed risks and reduce the risks of material misstatements in the financial statements to an acceptably low level; and Issuing a suitably worded audit report based on the audit findings. Audit Risk Audit risk is the risk of expressing an inappropriate audit opinion on financial statements that are materially misstated. The objective of the audit is to reduce this audit risk to an acceptably low level.

 Audit Risk To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditors opinion. To reduce audit risk to an acceptably low level, the auditor has to: Assess the risks of material misstatement; and Limit detection risk. This may be achieved by performing procedures that respond to the assessed risks at the financial statement, class of transactions, account balance and assertion levels. It should be noted that: Misstatement is a difference between the amounts, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from fraud or error. Risk of Material Misstatements is the risk that the financial statements are materially misstated prior to audit. This consists of two components, at the assertion level: i) Inherent risk and ii) Control risk

Audit Risk Components Total audit risk has three components which are described in the exhibit below: Inherent risk (IR) Control risk (CR) Detection risk (DR)

 The three risks multiplied together give total audit risk. Thus, TAR = IR x CR x DR. It is worth noting that the auditor applies professional judgement to put weights on these risks; there are no hard and fast rules Audit Risk Components Inherent Risk In developing the overall audit plan, the auditor should assess inherent risk at the financial statement level. In developing the audit programme, the auditor should relate such assessments to material account balances and classes of transactions. To assess inherent risk, the auditor uses his experience of the client company from their previous audits together with professional judgement to evaluate numerous factors, example of which are: At the financial statement level The integrity of management Management experience and knowledge and changes in management during the period, for example the inexperience of management may affect the preparation of the financial statement of the entity. Unusual pressures on management. For example circumstances that might predispose management to misstate the financial statements, such as the industry experiencing a large number of business failures or an entity that lacks sufficient capital to continue operations. The nature of the entity's business, for example the potential for technological obsolescence of its products and services, the complexity of its capital structure, the significance of related parties and the number of locations and geographical spread of its production facilities. Factors affecting the industry in which the entity operates, for example economic and competitive conditions as indicated by financial trends and ratios, and changes in technology, consumer demand and accounting practices common to the industry.

 At the account balance and class of transactions level Financial statement likely to be susceptible to misstatement for example accounts which require adjustment in the previous period or which involve a high degree of estimation. The complexity of understanding transactions and other events which might require the use of the work of an expert. The degree of judgement involved in determining account balances. Susceptibility of assets to loss or misappropriation, for example assets which are highly desirable and movable such as cash. The completion of unusual and complex transactions, particularly at or near period end Transactions not subjected to ordinary processing. Control Risk "Control risk" is the risk that material misstatement could occur in account balance or class of transactions, either individually or when aggregated with misstatements in other balances or classes, and not be prevented, or detected on a timely basis, by the accounting and internal control systems. After obtaining an understanding of the accounting system and control environment, the auditors should make a preliminary assessment of control risk for material financial statement assertions. The preliminary assessment of control risk is the process of evaluating the likely effectiveness of an entity's accounting and internal control systems in preventing and correcting materials misstatements. There is always some control risk because of the inherent limitations of any internal control system. The more effective the entity's accounting and internal control systems are assessed to be, the lower the auditor's assessment of control risk. Where the auditors obtain satisfactory audit evidence from tests of control as to the effectiveness of the accounting and internal control systems, the extent of substantive procedures may be reduced.

 The auditors may conclude that the accounting and internal control systems are not effective. In these circumstances the auditors plan the audit approach as if they had made an adverse preliminary assessment of control risk, and sufficient appropriate audit evidence needs to be obtained entirely from substantive procedures. When control risk is assessed at less than high, the auditors need to document the basis for the conclusion. Different techniques may be used to document information relating to accounting and internal control systems and the assessment of control risk. Selection of a particular technique is a matter for the auditor's judgement. Common techniques, used alone or in combination, are narrative descriptions, questionnaires, check lists and flow charts (these techniques are discussed in detail in the next chapter). The form and extent of this documentation are influenced by the size and complexity of the entity and the nature of the entity's accounting and internal control systems. Generally, the more complex the entity's accounting and internal control systems and the more extensive the auditor's procedures, the more extensive the auditor's documentation needs to be. Relationship between the assessment of inherent and control risk Management often reacts to situations where inherent risk is high by designing accounting and internal control systems to prevent and detect misstatements and therefore, in many cases, inherent risk and control risk are highly interrelated. In such a situation, if the auditor attempts to assess inherent risk and control risks separately, there is a possibility of inappropriate risk assessment. As a result, the effects of inherent risk and the preliminary assessment of control risk are often performed simultaneously. Detection Risk "Detection Risk" is the risk that auditors substantive procedures (tests of details of transactions and balances or analytical procedures) do not detect a material misstatement that exists in an account balance or class of

transactions, either individually or when aggregated with misstatement in other balances or classes. Regardless of the assessed levels of inherent and control risks, the auditors should perform some substantive procedures for material account balances and transactions classes. The higher the assessment of inherent and control risks the more audit evidence the auditors should obtain from the performance of substantive procedures. When both inherent and control risks are assessed as high, the auditors need to consider whether substantive procedures can provide sufficient appropriate audit evidence to reduce detection risk, and therefore audit risk to an acceptably low level. When the auditors determine that detection risk regarding a material financial statement assertion cannot be reduced to an acceptable low level, the auditors need to consider the implication for their audit report and may consider whether to withdraw from the engagement. The auditors' assessment of the components of audit risk may change during the cause of an audit, for example information may come to the auditor's attention (when performing substantive procedures) that differs significantly from the information on which the auditors' originally assessed inherent and control risks. In such cases, the auditors need to modify the planned substantive procedures based on a revision of the assessed-levels of inherent and control risks for the relevant financial statement assertions Materiality & Audit Risk The auditor should consider materiality and its relationship with audit risk when conducting an audit. "Materiality" is defined in the Internal Accounting Standards Board's "Framework for the Preparation and Presentation of Financial Statements" in the following terms: "Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular

circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful." The Concept of Materiality The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. The assessment of what is material is a matter of professional judgment. In designing the audit plan, the auditor establishes an acceptance materiality level so as to detect quantitatively material misstatements. However, both the amount (quantity) and nature (quality) of misstatements need to be considered. Examples of qualitative misstatements would be the inadequate or improper description of an accounting policy when it is likely that a user of the financial statements would be misled by the description, and failure to disclose the breach of regulatory requirements when it is likely that the consequent imposition of regulatory restrictions will significantly impair operating capability The auditor needs to consider the possibility of misstatements of relatively small amounts that cumulatively, could have a material effect on the financial statements The auditor considers materiality at both the overall financial statement level and in relation to classes of transactions, account balances, and disclosures. Materiality may be influenced by considerations such as legal and regulatory requirements and considerations relating to classes of transaction, account balances, and disclosures and their relationships. This process may result in different materiality levels depending on the aspect of the financial statements being considered. Materiality should be considered by the auditor when: a) Determining the nature, timing and extent of audit procedures; and b) Evaluating the effect of misstatements.

The Relationship between Materiality and Audit Risk When planning the audit, the auditor considers what would make the financial statements materially misstated. The auditor's understanding of the entity and its environment establishes a frame of reference within which the auditor plans the audit and exercises professional judgment about assessing the risks of material misstatement of the financial statements and responding to those risks throughout the audit. It also assists the auditor to establish materiality and in evaluating whether the judgment about materiality remains appropriate as the audit progresses. The auditor's assessment of materiality, related to classes of transactions, account balances, and disclosures, helps the auditor decide such questions as what items to examine and whether to use sampling and substantive analytical procedures. This enables the auditor to select audit procedures that, in combination, can be expected to reduce audit risk on an acceptably low level. There is an inverse relationship between materiality and the level of audit risk, that is, the higher the materiality level, the lower the audit risk and vice versa. The auditor takes the inverse relationship between materiality and audit risk into account when determining the nature, timing and extent of audit procedures. For example, if after planning for specific audit procedures, the auditor determines that the acceptable materiality level is lower, audit risk is increased. The auditor would compensate for this by either: Reducing the assessed risk of material misstatement, where this is possible and supporting the reduced level by carrying out extended or additional tests of control, or Reducing detection risk by modifying the nature, timing and extent of planned substantive procedures. Materiality and Audit Risk in Evaluating Audit Evidence The Auditor's assessment of materiality and audit risk may be different at the time of initially planning the engagement from at the time of evaluating the results of audit procedures. This could be because of a change in circumstances or because of a change in the auditor's knowledge as a result of performing audit procedures. For example, if audit procedures are

performed prior to period end, the auditor will anticipate the results of operations and the financial position. If actual results of operations and financial position are substantially different, the assessment of materiality and audit risk may also change. Additionally, the auditor may, in planning the audit work, intentionally set the acceptable materiality level at a lower level than is intended to be used to evaluate the results of the audit. This may be done to reduce the likelihood of undiscovered misstatements and to provide the auditor with a margin of safety when evaluating the effect of misstatements discovered during the audit. Evaluating the Effect of Misstatements In evaluating whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework, the auditor should assess whether the aggregate of uncorrected misstatements that have been identified during the audit is material. The aggregate of uncorrected misstatements comprises: Specific misstatements identified by the auditor including the net effect of uncorrected misstatements identified during the audit of previous periods: and The auditor's best estimate of other misstatements which cannot be specifically identified (i.e. projected errors). The auditor needs to consider whether the aggregate of uncorrected misstatements is material. If the auditor concludes that the misstatements may be material, the auditor needs to consider reducing audit risk by extending audit procedures or requesting management to adjust the financial statements. In any event, management may want to adjust the financial statements for the misstatements identified. If management refuses to adjust the financial statements and the result of extended audit procedures do not enable the auditor to conclude that the aggregate of uncorrected misstatements is not material, the auditor should consider the appropriate modification to the auditor's report

Communication of Errors If the auditor has identified a material misstatement resulting from error, the auditor should communicate the misstatement to the appropriate level of management on a timely basis, and consider the need to report it to those charged with governance.

Public Sector Perspective In assessing materiality, the public sector auditor must, in addition to exercising professional judgment, consider any legislation or regulation which may impact that assessment. In the public sector, materiality is also based on the context and nature of an item and includes, for example sensitivity as well as value. Sensitivity covers a variety of matters such as compliance with authorities, legislative concern or public interest How to perform a risk based audit Risk Assessment An effective risk assessment phase would include the following: Up-Front Involvement of Senior Team Members An Emphasis on Professional Skepticism Planning Team Discussions and Ongoing Communication Focus on Risk Identification Ability to Evaluate Managements Response(s) to Risk Use of Professional Judgment 1. Upfront Involvement of Senior Team Members: - Partners and audit managers need to be involved in planning the audit. Experience is required 2. An emphasis on Professional Skepticism: - The auditor needs to be satisfied with less-than-persuasive audit evidence when obtaining

reasonable assurance regardless of past experience of managements honesty and integrity. Need to maintain professional skepticism. 3. Planning: Adequate time to be spent on developing the overall audit strategy and audit plan to ensure that the audit objectives are achieved and that the work of audit staff is always focused on gathering evidence on the most critical areas of potential misstatement. 4. Team Discussions and Ongoing communication: A team planning discussion/meeting with the engagement partner present provides an excellent forum for: Informing staff about the client in general and discussing potential risk areas; Discussing the effectiveness of the overall audit strategy and the audit plan and then making changes as necessary; Brainstorming how fraud could occur and then designing an appropriate response; and Allocating audit responsibilities and setting timeframes. Ongoing communication among the audit team throughout the engagement is also important, the better to discuss and address audit issues as they arise, any unusual activities noted, or possible indicators of fraud. This will enable timely communications to management and, where necessary, changes to the audit strategy and audit procedures. 5. Focus on Risk Identification: The most important step in a risk assessment process is to identify all the relevant risks. If business and fraud risk factors are not identified by the auditor, they will not be assessed or documented, and an appropriate audit response (if required) will not be designed. This is why well-designed risk assessment procedures are so important to the effectiveness of the audit. These risk assessment procedures also need to be performed by the appropriate level of staff

6. Ability to Evaluate Managements Response(s) to Risk: A key step in the risk assessment process is to evaluate the effectiveness of managements responses (that is, managements control design/implementation), if any, to mitigate the identified risks of material misstatement in the financial statements. In smaller entities, more reliance will likely be placed on the control environment and monitoring of controls, and less on the traditional control activities. 7. Use of Professional Judgement: The ISA audit requirements require the use and then documentation of significant judgments made by the auditor throughout the audit. Typical examples of tasks throughout the risk assessment process include: Deciding to accept or continue with the client; Developing the overall audit strategy; Establishing materiality; Assessing risks of material misstatement, including the identification of significant risks and other areas where special audit consideration may be necessary; and Developing expectations for use when performing analytical procedures. Risk Response Requirements Description In this phase, the auditor considers the reasons (inherent and control risks) for the risk assessments at the financial statement level and at the assertion level (for each class of transactions, account balance, and disclosure), and develops responsive audit procedures. The auditors response to the assessed risks of material misstatement is documented in an audit plan that: Contains an overall response to the risks identified at the financial statement level;

 Addresses the material financial statement areas; and Contains the nature, extent, and timing of specific audit procedures tailored to respond to the assessed risks of material misstatement at the assertion level. The overall responses address assessed risks of material misstatement at the financial statement level. Such responses would include the assignment and supervision of appropriate personnel, need for professional skepticism, the extent of corroboration required for managements explanations/representations, consideration of the audit procedures to be performed, and what documentation would be examined in support of material transactions. Further audit procedures generally consist of substantive procedures such as tests of details, analytical procedures, and tests of controls (where there is an expectation that such controls have been operating effectively during the period). Some of the matters the auditor should consider when planning the appropriate mix of audit procedures to respond to identified risks include the following: Use of test of controls Substantive analytical procedures Unpredictability Management override Significant risks Reporting The final phase of the audit is to assess the audit evidence obtained and determine whether it is sufficient and appropriate to reduce audit risk to an acceptably low level. It is important during this phase of the audit to determine: Any change in the assessed level of risk; Whether conclusions drawn from the work performed are appropriate;

 If any suspicious circumstances have been encountered; and That additional risks (not previously identified) have been appropriately assessed and further audit procedures performed as required. A team debriefing meeting (towards or at the end of the fieldwork) is not a specific requirement of the ISAs, but can be useful for staff to discuss the audit findings, identify any indications of fraud, and determine the need (if any) to perform any further audit procedures. When all procedures have been performed and conclusions reached: Audit findings should be reported to management and those charged with governance; and An audit opinion should be formed and a decision made on the appropriate wording for the auditors report. Documentation Sufficient audit documentation is required to enable an experienced auditor, having no previous connection with the audit, to understand: The nature, timing, and extent of the audit procedures performed; The results of performing those procedures and the audit evidence obtained; and Significant matters arising during the audit, the conclusions reached thereon; and significant professional judgments made in reaching those conclusions. Audit documentation for a smaller entity is generally less extensive than that for the audit of a larger entity. For example, various aspects of the audit could be recorded together in a single document, with cross references to supporting working papers, as appropriate. Benefits of the Risk-based Audit Some of the benefits of the risk-based approach are summarized below. Time Flexibility When Audit Work Needs to be Performed Audit Teams Effort Focused on Key Areas

 Audit Procedures Focused on Specific Risks Understanding of Internal Control Timely Communication of Matters of Interest to Management Assertions Definition of Assertions: Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. They relate to the recognition, measurement, presentation, and disclosure of the various elements (amounts and disclosures) in the financial statements. For example, the completeness assertion relates to all transactions and events that should have been recorded having been recorded. They are used by the auditor to consider the different types of potential misstatements that may occur.

The ISA requires that The auditor shall identify and assess the risks of material misstatement at: the financial statement level which refers to risks of material misstatement that relate pervasively to the financial statements as a whole and potentially affect many assertions; and the assertion level for classes of transactions, account balances, and disclosures. This means that for each account balance, class of transactions and disclosure, an assessment of risk (such as high, moderate, or low) should be made for each individual assertion (E, C, R, A, V and U) being addressed to provide a basis for designing and performing further audit procedures. A representation by management, such as that the financial statements as a whole are presented fairly in accordance with the applicable financial reporting framework, contains a number of embedded assertions. These

relate to the recognition, measurement, presentation, and disclosure of the various elements (amounts and disclosures) in the financial statements. Examples of managements assertions include: All the assets exist; All sales transactions have been recorded; Inventories are properly valued; Payables are proper obligations of the entity; All recorded transactions occurred in the period under review; and All amounts are properly presented and disclosed in the financial statements. These assertions are often summarized by a single word such as completeness, existence, occurrence, accuracy, valuation, etc. and described in this lecture as:

E = Existence, which includes occurrence; C = Completeness; R = Rights and Obligations; A = Accuracy, which includes cut-off, classification and; and V = Valuation. U = Understandability and Classification;

For example, when considering the sales balance, management is asserting that sales revenue is complete (completeness assertion), the transactions occurred (occurrence assertion), and transactions have been appropriately recorded in the accounting records (accuracy assertion). Description of Assertions

 The auditor may use the assertions as described above or may express them differently provided all aspects described above have been covered. For example, the auditor may choose to combine the assertions about transactions and events with the assertions about account balances. When making assertions about the financial statements of public sector entities, in addition to those assertions set out in paragraph A111, management may often assert that transactions and events have been carried out in accordance with law, regulation or other authority. Such assertions may fall within the scope of the financial statement audit. Combined Assertions To make the use of assertions a little easier to apply, this Lecture has combined a number of the assertions. The six combined assertions and the assertions they address are illustrated in the exhibit below. When the auditor uses combined assertions, it is important to remember that the accuracy assertion also includes cut- off assertion An individual procedure will often provide evidence only in respect of one assertion. When designing procedures the auditor needs to ensure that he has an appropriate focus covering the various assertions in respect of a particular item that reflects the risk he has identified. For example, where he has identified that there is a risk of omitted items (completeness) he would not want to construct a programme where the majority of procedures provide evidence in respect of existence/ occurrence. Risk of misstatement in the financial statements should be considered by reference to the above assertions. All assertions should be considered for each category of assets, liabilities or equity, class of transactions or other disclosure in the financial statements. Risks will not affect all assertions equally- for example the auditor may conclude that a particular set of circumstances indicates a risk that certain assets may have been omitted from a particular balance sheet heading (completeness) whilst at the same time he is satisfied that there is little risk of misstatement in the valuation of those assets that have been recorded. All procedures on the audit programme should be related to one or more assertions. In this way the auditor can ensure that his approach is properly

focused, addresses all assertions in respect of a particular category of assets or liabilities or class of transactions or disclosures, and does not result in over auditing of one or more assertions. Using Assertions in Auditing The auditor should therefore use assertions in sufficient detail to form a basis for: Considering the different types of potential misstatements that may occur; Assessing the risks of material misstatement; and Designing audit procedures that are responsive to the assessed risks. Considering Types of Potential Misstatements The auditor should ask questions about financial statement amounts and disclosures to identify the relevant assertions that, if not controlled, could result in a material misstatement in the financial statements. Assessing Risk of Material Misstatement Once the auditor has identified the types of potential misstatement, the next step is to identify what controls have been implemented to address the relevant assertions. For example, how does management ensure transactions are recorded (completeness) or that significant estimates are based on reasonable assumptions and properly recorded in the financial statements (accuracy)? It is then possible to assess the risks of material misstatement at both the financial statement and assertion levels. Designing Audit Procedures In designing audit procedures to be responsive to assessed risks, the auditor should place emphasis on addressing the relevant assertions where misstatements could occur. For example, if the risk is high that receivables are being overstated, the audit procedures should be designed to specifically address the valuation assertion. Similarly, when the auditor designs tests of controls, emphasis should be placed on testing controls over the relevant assertions rather than just significant controls. Substantive Testing-Key Audit Areas

Key Audit Areas Appropriate Working Paper Control Sheets should be used to record in detail the audit work to be carried out and to record the overall conclusion relating to that audit section drawn from the evidence obtained. For convenience the auditor plans, carries out and records his work in sections each related to one aspect of the business or financial statements. However it is important to remember that the objective of an audit is to enable the auditor to express an opinion on the financial statements as a whole and not just a series of opinions on individual items. Using Assertions in Audit of Key Audit Areas The Key Audit Areas that may be relevant in an audit includes: Revenue Purchases and Operating Expenses Payroll Corporate Taxation Value Added Tax Cash and Bank Balances Trade and Other Receivables Trade and Other Payables Inventories Property, Plant and Equipments Intangible Assets Goodwill Research and Development Expenses Preliminary Expenses Others

 Commitments and Contingencies Provisions Equity and Reserves Investment Property Contract Balances Finance Lease and Hire Purchase Investments Opening Balances and Comparatives Cash Flow Statements KNUST IDL ACF 468 WEEK 1 (CONTD) RISK BASED APPROACH OF AUDITING SUBSTANTIVE TESTING Substantive Testing-Key Audit Areas 2.1 Key Audit Areas

Appropriate Working Paper Control Sheets should be used to record in detail the audit work to be carried out and to record the overall conclusion relating to that audit section drawn from the evidence obtained. For convenience the auditor plans, carries out and records his work in sections each related to one aspect of the business or financial statements. However it is important to remember that the objective of an audit is to enable the auditor to express an opinion on the financial statements as a whole and not just a series of opinions on individual items. The Key Audit Areas that may be relevant in an audit includes:

 Revenue Purchases and Operating Expenses Pay Roll Corporate Taxation Value Added Tax Cash and Bank Balances Trade and Other Receivables Trade and Other Payables Inventories Property, Plant and Equipment Intangible Assets Goodwill Research and Development Expenses Preliminary Expenses Others Commitments and Contingencies Provisions Equity and Reserves Investment Property Contract Balances Finance Lease and Hire Purchase Investments Opening Balances and Comparatives Cash Flow Statement

 2.2 Audit Programmes and risk 2.2.1 Audit Programme An audit programme is a list of the work an auditor does on the occasion of his audit including reports to be made and procedures to be followed on important phases of examination, including tests of transactions and special procedures. 2.2.2 Purpose The purpose of an audit programme is therefore to act as a guide covering the major areas of work to be carried out and a means of control by which the progress of the audit may be guided and responsibilities allocated for different sections of the work. Audit programmes should be constructed to respond to assessed risks. These risks may have been specifically identified as part of the risk assessment or they may be more general risks associated with the preparation of any financial statements. It should be clear from the working paper control sheet what procedures have been designed in order to address risks identified in the risk assessment. The auditors aim is to carry out appropriate procedures in order to reduce the risk of material misstatement to an acceptable low level. 2.2.3 Using audit programmes to respond to assessed risks, The nature, timing and extent of further audit procedures should: Respond to the assessed risks (identified during the risk assessment process); Reduce audit risk to an acceptable level; and Respond to assessed risks of material misstatements for each material class of transactions, account balance, and disclosure.

The second phase of the audit is thus to design and perform further audit procedures that respond to the assessed risks of material misstatement and will provide the evidence necessary to support the audit opinion.

 Some of the matters the auditor should consider when planning the audit procedures include: Assertions that cannot be addressed by substantive procedures alone. This can occur where there is highly automated processing of transactions with little or no manual intervention. Existence of internal control that, if tested, could reduce the need/scope for other substantive procedures. The potential for substantive analytical procedures that would reduce the need/scope for other types of procedures. The need to incorporate an element of unpredictability in procedures performed. The need to perform further audit procedures to address the potential for management override of controls or other fraud scenarios. The need to perform specific procedures to address significant risks that have been identified. Audit procedures designed to address the assessed risks could include a mixture of: Tests of the operational effectiveness of internal control; and Substantive procedures such as tests of details and analytical procedures. In other words, in designing further audit procedures the auditor should consider the following factors: The significance of the risk (generally the higher the assessment of risk the more reliable and relevant his audit evidence must be) (Nature of assessed risks) The likelihood of material misstatement (Nature of assessed risks)

 The characteristics of the item involved (Need for Unpredictability and Other Basic or Required Audit Procedures) The nature of specific controls used by the entity and in particular whether they are automated or manual (Use of tests of controls) Whether he expects to obtain audit evidence by testing controls to determine whether the controls are effective in preventing or detecting and correcting material misstatements. (Use of tests of controls) Substantive procedures should be performed for each significant risk and each material class of transactions, account balance and disclosure, regardless of whether any risk factors have been identified. This may be necessary to comply with ISAs and local requirements. Examples might include attending the inventory count, external confirmations, and subsequent events. Substantive procedures include tests of detail and substantive analytical procedures. (Other Basic or Required Audit Procedures) 2.2.4 Using Assertions in Auditing Designing Audit Procedures In designing audit procedures to be responsive to assessed risks, the auditor should place emphasis on addressing the relevant assertions where misstatements could occur. For example, if the risk is high that receivables are being overstated, the audit procedures should be designed to specifically address the valuation assertion. Similarly, when the auditor designs tests of controls, emphasis should be placed on testing controls over the relevant assertions rather than just significant controls. An individual procedure will often provide evidence only in respect of one assertion. When designing procedures the auditor needs to ensure that he has an appropriate focus covering the various assertions in respect of a particular item that reflects the risk he has identified. For example, where he has identified that there is a risk of omitted items (completeness) he would not want to construct a programme where the majority of procedures provide evidence in respect of existence/ occurrence.

 All assertions should be considered for each category of assets, liabilities or equity, class of transactions or other disclosure in the financial statements. Risks will not affect all assertions equally- for example the auditor may conclude that a particular set of circumstances indicates a risk that certain assets may have been omitted from a particular statement of financial position heading (completeness) whilst at the same time he is satisfied that there is little risk of misstatement in the valuation of those assets that have been recorded. All procedures on the audit programme should be related to one or more assertions. In this way the auditor can ensure that his approach is properly focused, addresses all assertions in respect of a particular category of assets or liabilities or class of transactions or disclosures, and does not result in over auditing of one or more assertions. 2.2.5 Impact of controls Where risk exists and the client has implemented control procedures in order to eliminate or mitigate the risk the auditor may wish/ be required to place reliance on the satisfactory operation of these controls in order to eliminate or reduce the procedure he would otherwise need to carry out. If he intends to adopt this approach he must first carry out an evaluation of the control to ensure that (a) it is actually operating as intended and (b) it will in fact mitigate or eliminate the risk. If his evaluation is satisfactory then he can go on to test controls and then he will be concerned only with the residual (or uncontrolled) risk and will design additional procedures only in respect of this risk. The auditor must test controls if the risk assessment includes an expectation that controls are operating or if the risk is one where substantive procedures alone are deemed insufficient. He may choose to test controls in relation to significant risk but it is not compulsory. However if he takes a wholly substantive approach his tests must be directly responsive to the risks identified and must consist of more than analytical procedures alone.

2.2.6 Work relating to more than one audit area The auditor may be able to conclude that certain risks of misstatement in relation to particular account balances, classes or transactions or disclosures have been partially or completely addressed by procedures carried out in other audit areas. In this case he should record those procedures on the Section Control Sheets and cross reference those procedures to the section where the audit work is recorded. 2.2.7 Matters arising during the audit work The results or the auditors procedures may indicate matters arising which need to be followed up later or dealt with by other members of the team. These should be duly recorded and may be: Significant issues: Issues which need to be brought to the attention of the manager or partner and which need to be cleared prior to signing the audit opinion. Client Reporting Points: Matters which need to be reported to the clients management or those charged with governance such as inadequacies in internal control. Unadjusted misstatements: All actual and suspected non trivial errors and misstatements should be recorded for the necessary journals to be passed accordingly. These errors may be recorded in the Notes and Queries Sheets of each control section and summarized on the form Summary of Unadjusted Errors. This form should include extrapolated errors from procedures involving samples and variances outside tolerances in analytical procedures duly cross-referenced to supporting evidence. Revised approach: Changes in conditions, or unexpected results of the auditors work, may require changes to his planned procedures. Changes to the work programmed must be documented on the Section Control Sheet so that he has an accurate record of what was actually done (rather than what was originally intended to be done). Advantages of Audit Programme

 It facilitates the resumption of work by those taking up the audit after its commencement, in order words; absence doesnt disrupt the carrying out of the work It gives the opportunity of employing clerks on various sections of the work having regard to their individual capacity. There is less danger of any aspect of the work being overlooked since the programme offers a written and predetermined plan. Since the audit programme offers a clear perspective of the work to be done, it saves the audit clerks from repeating unnecessarily, much of the enquiries made at previous audit much to the advantage of both client and staff. It acts as a checklist to ensure that no important tests are omitted. As definite instructions are laid down junior clerks may need less supervision. The clerks initialling for the work done by them accept responsibility for them and in the event of any subsequent enquiry the actual staff engaged on the work would assist in providing the required information. Should the auditor at anytime be charged with negligence in the performance of his duties, a detailed audit programme duly completed may be of a considerable value in establishing that he has brought to bear on his work that reasonable skill and care to be expected of a professional auditor. Disadvantages of Audit Programme Work may tend to be mechanical, following the same pattern from year to year. The working system of the business may change but the same programme may still be used. Work may be hurried in order to complete that required schedule. The programme may tend to become rigid and inflexible following the set pattern with no room for one to use his discretion.

 The fixed audit programme may restrict or prevent the efficient clerk with initiative who should be able to decide on his own. If work is performed to a predetermined plan, client staff may become aware of that fact and fraud may be facilitated Suggestions to minimize the perceived disadvantages of Audit Programme A conscious effort should be made to encourage initiative among all level of staff. There should be a constant and periodic review in the Audit programme. Discussions with the client staff of the audit programme and the extent with its application be vigorously discouraged. There should be surprise check outside the audit programme and additional recommendation scheme should be done. There should be surprise investigations and enquiries to reveal serious discrepancies in the accounts. Audit staff flexibility in risk assessment and appropriate responses would negate the rigidity of the programme Format of audit sections Each of the sections which follow will take the following format Main risks associated with the area In all cases risks other than those outlined below may existdepending on the client and its particular circumstances. Typical procedures in response to those risks In all cases audit procedures other than those outlined below may be appropriate- depending on our assessment of risk. Typical purpose of controls that may be present where relevant.

 It is the responsibility of each auditor to satisfy himself / herself regarding the completeness of identified risks and the appropriateness and adequacy of audit testing of each assertion. Examples of Using Assertions in Risk-based Approach in auditing 2.3 REVENUE 2.3.1 Main risks usually associated with revenue Completeness the client has failed to record all transactions giving rise to revenue. This may be due to weaknesses in systems or deliberate omission. Occurrence the client has incorrectly recorded transactions as giving rise to revenue when no transaction has occurred or no revenue should be recognized. Accuracy and classification errors may arise through application of an inappropriate accounting policy (see note below). Accuracy and classification errors may also arise through incorrect application of an appropriate accounting policy (see note below). Occurrence/ Cut-Off revenue is recognized in the wrong period. Occurrence errors may be accidental or deliberate. Occurrence errors assume a greater significance when the result is a mismatch between recognition of revenue and the related cost of sales for example where a sale is recorded but the related inventory has not been recorded as dispatched/shipped, or advance billing in respect of services yet to be performed is recorded as a sale. Note: fraud risk Revenue recognition is one area where there is often considerable scope for deliberate misstatement (fraud) in order to give a misleading impression about the level of business carried out by the client, profit generated or growth trends. For this reason there is a general presumption that there are risks of fraud in this area. Such risks are considered significant risks.

2.3.2 Procedures in response to risks Some or all of the following procedures may be appropriate where they relate to risk of material misstatement in the financial statements. Consider the appropriateness of accounting policies for revenue recognition bearing in mind incentives/pressures on management for fraudulent reporting/aggressive earnings management Make enquiries and examine board minutes for indication of changes in levels of activity Analytical procedures including examination of margins, review of seasonal/cyclical performance, comparison of reported amounts for revenue in relation to known levels of activity, knowledge of client and sector performance Trace recorded revenue to source documentation to support recorded revenue Examine documentation relation to dispatch/shipping of goods/performance of services to ensure they give rise to revenue billed Examine contracts with major customers to identify completeness/accuracy/existence of special terms for example volume discounts; early settlement discounts etc. Examine recorded transactions around the period end to check that revenue relating to the period is recorded and revenue relating to the subsequent period are not recorded The auditor may obtain evidence relating to the completeness of revenue and occurrence from his work on trade receivables and inventory.

2.3.3 Purposes of main controls that may be present to ensure invoices rendered for all goods dispatched/shipped to ensure all invoices rendered are accurately recorded to ensure invoices are rendered at proper amounts

 to ensure credit notes are properly supported to ensure transactions are recorded in the correct account and in the correct accounting period 2.4 Inventories 2.4.1 Main risks usually associated with inventory Existence- recorded inventories do not exist. Completeness- inventories held by the client, or owned by the client but held by third parties, are not recorded. Rights/obligations- inventories held by the client do not belong to it. Occurrence/cut off- inventory movements around the year end are recorded as transactions in the wrong period. Valuation inventories are not initially recognized at cost using an acceptable accounting policy or basis of approximation (e.g. FIFO) Valuation- inventories are recorded at amounts greater than their net realizable value- i.e. inadequate provision is made for write- downs in respect of damaged or obsolete inventory. Valuation- cost of inventory does not include an appropriate proportion of directly attributable costs. This is likely to be a more significant risk in respect of manufactured or processed inventory where directly attributable costs will include an appropriate allocation of overheads on an acceptable basis. 2.4.2 Procedures in response to risks Some or all of the following procedures may be appropriate where they relate to risk of material misstatement in the financial statements: consider appropriateness of accounting policies attendance at inventory count combined with observation and evaluation of inventory count procedures and test counts may provide evidence relating to existence of inventory.

 Observation of physical condition of inventory may provide evidence in respect of valuation Search by enquiry, examination of correspondence with third parties or examination of post year end transactions for evidence of inventory owned by third parties. Where inventories are held by third parties- obtain direct confirmation of items and quantities held. Obtain information relating to inventory movement around the year end and test for correct cut-off treatment Obtain evidence of inventory prices used for valuation purposes by reference to original documentation (eg invoices) Where inventory values include a proportion of overheads test calculations check reliability of source information for numbers used in calculations consider compliance with accounting standards in respect of which overheads are included. where inventory values are derived from continuous inventory records perform tests to establish accuracy and reliability of records in respect of inventory quantities, prices. where inventories are subject to valuation by external valuers apply reliance on others procedures where inventories are subject to valuation by internal valuers consider the basis on which it was done, the adequacy of the evidence obtained to support the valuation and the overall reasonableness of the result look for evidence of reliability of inventory values post year end examine inventory movement records for slow moving or obsolete inventory items

 perform tests on accuracy of inventory movement records (to support conclusions drawn from above examination) examine post year end records of inventory returns relating to pre-yearend sales When inventory is material the auditor should always obtain assurance regarding existence and completeness by attending an inventory count. If he is unable to attend the inventory count due to unforeseen circumstances then he should take or observe some physical counts on an alternative date and where necessary perform tests of intervening transactions. If attendance is impracticable (e.g. due to the nature and location of the inventory) he should consider whether alternative procedures will provide sufficient evidence so that he does not need to refer to a limitation of scope in the audit opinion. 2.4.3 Purpose of main controls that may be present to ensure that purchased materials are recorded as additions to inventory quantities to ensure that consumption (into production) of raw material quantities are properly recorded to ensure that work in progress records are updated for raw materials consumption and other costs (labour and overheads) to ensure that work in progress records are updated when finished goods are produced to ensure that finished goods are updated for transfer from work in progress to ensure that materials removed from inventories, other than for sales and production are recorded to ensure that inventory quantities are updated when goods are shipped to ensure that physical counts of inventory are made and reconciled to inventory records.

2.5 Purchases and Operating Expenses a) Cost of Sales 2.5.1 Main risks usually associated with cost of sales Completeness the client has failed to record all costs associated with recorded revenue. This may be due to weaknesses in systems or deliberate omission. Occurrence the client has incorrectly recorded costs when no transaction has occurred or no cost of sales should be recognized. Accuracy and classification errors may also arise through incorrect application of an appropriate accounting policy (see note below). Occurrence - cost of sales recognized in the wrong period. Cut off errors may be accidental or deliberate. Cut off errors assume a greater significance when they result in a mismatch between recognition of revenue and the related cost of sales for example where a sale is recorded but the related inventory has not been recorded as dispatched/shipped, or advance billing in respect of services yet to be performed is recorded as a sale. 2.5.2 Procedures in response to risks Some or all of the following procedures may be appropriate where they relate to risk of material misstatement in the financial statements. consider the appropriateness of accounting policy for recognizing revenue and related cost of sales analytical procedures including examination of margins; review of management accounts; comparison with prior periods and sector performance make enquiries and examine board minutes for indication of changes in levels of activity trace recorded cost of sales to source documentation to support recorded costs

 Examine contracts with major suppliers to identify completeness/ accuracy / existence of special terms, example volume discounts; early settlement discounts etc. The auditor may obtain evidence relating to completeness and occurrence from his work on trade payables, inventory and contract balances. b) Other expenses 2.5.3 Main risks usually associated with other expenses Accuracy expenses are not computed accurately Classification expenses have been inappropriately classified Completeness expenses have been omitted from the financial statements Occurrence expenses are recorded in the wrong accounting period 2.5.4 Procedures in response to risks perform analytical procedures where items are recurring or otherwise predictable check or test calculations of expenditure agree items of expenditure to source documentation make enquiries and review board minutes looking for: evidence to support recorded items of expenditure; and evidence of unrecorded items or expenditure examine invoices booked after the period end to ensure they do not relate to the period under audit The auditor may obtain some evidence relating to the completeness and valuation of other expenses from his work on prepayments. 2.5.5 Purpose of main controls that may be present to ensure that reported purchases and other expenses are properly supported and are for the client

 to ensure that liabilities are recorded only upon proof of receipt of goods or services to ensure that charges are posted to the correct accounts 2.6 Receivables 2.6.1 Main risks usually associated with trade receivables Completeness the system has failed to record all trade receivables i.e. goods or services have been delivered or rendered but no corresponding right to receive payment has been recorded. This may result from weaknesses in systems or fraud. Entities should have robust systems and controls to prevent such misstatements. Occurrence goods or services dispatched/shipped or rendered around the year end and /or the corresponding trade debtor are recorded in the wrong accounting period, or alternatively payments received from trade receivables are recorded in the wrong period. Occurrence errors may be particularly serious when one side of the transaction is recorded but the other is not (see completeness above). For example when goods dispatched/shipped are excluded in inventory but the receivable is not included in trade receivables. These misstatements can occur at either end of the accounting period and will have a direct impact on reported profit both in the current period and in the previous or subsequent period. Existence/Rights trade receivables include amounts that are not receivables of the company this might arise for example from a breakdown in the clients system for recording receipts from receivable or fraud by employees or customers (or both acting in collusion) involving the creation of fictitious receivable balances Accuracy where sales are subject to retrospective volume discounts or other rebates or price adjustments there is a risk that these amounts may be incorrectly calculated Valuation insufficient allowance may have been made for amounts that may be valid receivables but may prove to be uncollectible by the client. 2.6.2 Procedures in response to risks

 Some or all of the following procedures may be appropriate where they relate to risk of material misstatement in the financial statements. examination, testing or re-performance of period end reconciliation of sales ledger balances to control consideration of the value of receivables in relation to known levels of activity and previous periods examination of movements in the control account around the period end, obtaining explanations for unusual items examination of the make-up of individual sales ledger balances, test checking to original documentation generally schedule balances should be made up of identifiable individual amounts relation to specific invoices or other transactions examination of receivables listing to identify items (such as significant credit balances) that should not be classified as receivables examination of post year-end cash receipts as evidence of recoverability of recorded receivables and as an indication of potential bad debts direct confirmation of debt balances with third parties confirmations often provide evidence of existence but not of recoverability examination of credit notes issued post year end to identify sales recorded pre year end that should not have been recorded as such follow up tests on inventory movements around year end ensuring that inventory movements, revenue and receivables are all recorded in the same period examination of contracts with significant customers looking for evidence of volume discount/rebate arrangements examination of aged receivable listing to identify potential irrecoverable balances supplemented by enquiry into reasons for provision/non-provision examination of board minutes, correspondence and legal correspondence relating to disputed or defaulted debts where there are significant amounts recoverable in more than one year:

 consider the appropriateness of accounting policy in respect of discounts obtained as evidence to support use of an appropriate discount rate (where applicable) The auditor may obtain some evidence relating to the completeness and valuation of receivables from our work on revenue. b) Other receivables and other current assets 2.6.3 Main risks usually associated with other receivables Other receivables and other current assets will typically include prepayments, accrued income, miscellaneous (non-trade) receivables, loans receivable, amounts due from directors and other related parties, nontrading balances with group companies. The risks associated with each type of other current receivable/asset will differ. Items under this heading could arise from a large variety of different transactions or events and will not necessarily be expected to be consistent from one period to the next. Often the transactions or events giving rise to the liabilities will fall outside the clients normal operating cycles and may not be subject to the same systems and controls as are applied to other transactions. In particular these transactions may be more susceptible than others to management override of controls Completeness the system has failed to record all other receivables/assets, recoverables or payments in advance. This may result from weaknesses in systems or fraud. Entities should have robust systems and controls to prevent such misstatements. Occurrence Expenditure and /or income recorded in the wrong accounting period as prepayments or expenses or accrued income are not correctly identified. These misstatements will have a direct impact on reported profit both in the current period and in the previous or subsequent period. Existence/ Rights current assets include amounts that are not recoverable by the company - this might arise for example from a breakdown in the clients system for recording receipts from investments or fraud by employees or suppliers (or both acting in collusion) involving the creation of fictitious balances

 Accuracy there is a risk that prepayments/accrued income may be incorrectly calculated Valuation insufficient allowance may have been made for amounts that may be valid receivables but may prove to be uncollectible by the client. 2.6.4 Procedures in response to risks Some or all of the following procedures may be appropriate where they relate to risk of material misstatement in the financial statements. Analytical procedures applied to items of income and expenditure to identify errors in calculation or omission in identifying prepayments/accrued income Comparisons with prior years Where accrued income or deferred (prepaid) expenditure arises from the application of a revenue recognition accounting policy consider the appropriateness of the policy and perform procedures to check its consistent application Perform checks on calculations of individual items Obtain direct confirmation of balances due from third parties and group companies - confirmations often provide evidence of existence but not of recoverability (Note confirmations obtained from group companies and other related parties are likely to provide less satisfactory evidence that would be the case with confirmations obtained from independent unrelated parties) Obtain evidence of recoverability of balances e.g. cash after balance sheet date Consider recoverability of unsettled balances e.g. balances from group companies, related parties and others obtain evidence that such parties have the financial ability to settle the debt in due course Review of post year-end cash receipts to identify any omissions/overstatements in current assets

 Review of post year end management accounts to identify any omissions/overstatements in current assets 2.6.5 Purpose of main controls that may be present to ensure that sales are not recorded until goods are dispatched or shipped or services rendered to ensure that collections made are deposited intact and properly credited to ensure that accounts receivable are reconciled to control accounts on a regular basis to ensure that sales are only made to authorized (credit worthy) customers to ensure that write offs of accounts receivables are properly authorized to ensure that management reviews and follows up accounts receivable on a regular basis 2.7 Property, plant and equipment 2.7.1 Main risks usually associated with property plant and equipment Existence- recorded property, plant and equipment do not exist Existence/Rights- capitalized expenditure includes amounts that do not meet the definition of assets and that should properly have been regarded as expenses. Existence/Rights- property, plant and equipment include assets that should have been derecognized following sale, other transfer of rights or abandonment. Completeness/ Accuracy- expenditure that should have been recognized as property, plant and equipment has not been- including capitalized finance costs where the client has a policy of capitalizing such costs. Completeness- failure to account for assets held under finance leases or hire purchase agreements

 Accuracy and classification- property, plant and equipment are inappropriately classified, for example split between land and building or between long and short leaseholds. Classification may have a significant impact on the application of accounting policies. Valuation- where a cost model is followed- depreciation has been incorrectly calculated due to: mechanical error incorrect application of accounting policy inappropriate assessment of remaining useful life inappropriate assessment of residual value incorrect classification of the asset

Valuation- where a valuation model is followed- carrying amount does not reflect current market value (or fair value) due to: failure to update valuations for current circumstances failure to brief valuers correctly, use of invalid assumptions or data etc valuations not performed by competent personnel Existence/valuation- tangible assets acquired in a business combination are not initially recognized at their fair value at that date. Valuation- failure to recognize impairment or reversal of impairment Other risks may exist- depending on the client and its particular circumstances. 2.7.2 Procedures in response to risks related to property, plant and equipment Some or all of the following procedures may be appropriate where they relate to risk of material misstatement in the financial statements:

 consider the appropriateness of accounting policies- including policies for determining which costs are capitalized, whether a cost or valuation model is followed and depreciation (including assessment of residual values). Obtain evidence of transactions involving property, plant and equipment (purchases/ other additions/ sales etc) by examination of original documentation. Where assets are self constructed and include a proportion of capitalized interest, administrative costs or other overheads perform tests to ensure that only permissible amounts are included in asset cost. Examine the asset(s) concerned to establish existence. Make enquiries and examine lease contracts to provide evidence that assets acquired under finance leases or hire purchase agreements are properly capitalized Examine board minutes and other correspondence looking for indications of significant asset acquisitions, disposals or retirements In respect of property- examine title deeds, contracts, land registry documents etc as evidence of ownership Perform procedures to obtain corroborating evidence that the client actually possesses the rights associated with assets- e.g. that the cash flows or economic benefits associated with it are actually accruing to the client. Obtain evidence of continuing use of the asset- where there has been a change of use consider whether this gives rise to a need to change classification of the asset (e.g. to inventory), assets held for sale, investment property etc) Check accuracy/reasonableness of depreciation calculations. Consider whether there are any circumstances that indicate a possible impairment of property, plant and equipment. 2.7.3 Purpose of main controls that may be present to ensure that additions to asset accounts are valid

 to ensure that disposals or retirement of assets are authorized by management and properly recorded to ensure that assets owned are periodically compared to the accounting records. 2.8 Intangible assets (excluding goodwill) 2.8.1 Main risks usually associated with intangible assets Existence/Rights capitalized expenditure includes amounts that do not meet the definition of assets and that should properly have been regarded as expenses. Existence/Rights intangible assets include assets that should have been derecognized following sale, other transfer of rights or abandonment. Completeness/Accuracy expenditure that should have been recognized as intangible assets has not been including capitalized finance costs where the client has a policy of capitalizing such costs. Valuation where a cost model is followed amortization has been incorrectly calculated due to: mechanical error incorrect application of accounting policy inappropriate assessment of remaining useful life inappropriate assessment of residual value Valuation where a valuation model is followed carrying amount does not reflect current market value (or fair value) due to: failure to update valuations for current circumstances failure to brief valuers correctly, use of invalid assumptions or data etc. valuations not performed by competent personnel Existence/valuation where intangible assets are acquired in a business combination (a) not all separate intangible assets are recognized on

acquisition and/or (b) they are not recognized at their fair value at that date. Valuation failure to recognize impairment or reversal of impairment. 2.8.2 Procedures in response to risks Some or all of the following procedures may be appropriate where they relate to risk of material misstatement in the financial statements: consider the appropriateness of accounting policies including policies for determining which costs are capitalized, whether a cost or valuation model is followed and amortization. obtain evidence of transactions involving intangibles (purchases/other addition/sales etc) by examination of original documentation. examine documenting conferring rights associated with the intangible e.g. contracts, licenses to obtain evidence of existence perform procedures to obtain corroborating evidence that the client actually possesses the rights associated with intangibles e.g. that the cash flows or economic benefits associated with it are actually accruing to the client. where a valuation is performed internally consider the basis on which it was done, the adequacy of the evidence obtained to support the valuation and the overall reasonableness of the result. check accuracy/reasonableness of amortization calculations. Consider whether there are any circumstances that indicate a possible impairment of intangible assets. 2.8.3 Purpose of main controls that may be present to ensure that additions to intangible asset accounts are valid to ensure that disposals or write offs of intangible assets are authorized by management and properly recorded to ensure any impairment is appropriately calculated and recognized

2.9 Goodwill 2.9.1 The main risks usually associated with goodwill Existence/Rights goodwill recognized in the statement of financial position does not exist or has been impaired. Completeness/Accuracy expenditure that should have been recognized as intangible assets has been inappropriately included in goodwill. Valuation failure to recognize impairment or reversal of impairment Other risks may exist depending on the client and its particular circumstances. 2.9.2 Procedures in response to risks Some or all of the following procedures may be appropriate where they relate to risk of material misstatement in the financial statements. consider the appropriateness of accounting policies for goodwill obtain evidence of transactions involving goodwill by examination of original documentation consider whether there are any circumstances, both internal and external, that indicate impairment of goodwill 2.9.3 Purpose of main controls that may be present to ensure that all additions are valid to ensure that all assets and only appropriate assets are recognized as goodwill to ensure impairment testing is performed and that any impairment is appropriately calculated and recognized

THANKS FOR YOUR ATTENTION, CONTRIBUTIONS & QUESTIONS

 KNUST IDL ACF 468 WEEK 2 AUDIT EVIDENCE MANAGEMENT REPRESENTATION & RELIANCE ON THIRD PARTIES Introduction

Audit evidence must be reviewed initially with respect to its validity and pertinence as evidence before it is permitted to influence the mind of the auditor with respect to the financial statements assertions at issue The purpose of this lecture is to provide guidance on evidence from management representations in an audit of financial statements and the role of specialists in audit evidence Management Representation Objective and Form of Management Representations In forming his audit opinion, the auditor may derive some of his evidence from management (or officers/directors) representations. Before the auditor issues his audit report, he must obtain written confirmation of representations from management on matters material to the financial statements. The possibility of misunderstandings between the auditors and management is reduced when oral representations are confirmed in writing. Written confirmation of representations may take the form of: A representation letter from management a letter from the auditors outlining their "understanding of management representations duly acknowledged and confirmed by management or minutes of meetings of the board of directors, or similar body, at which representations are approved.

 The auditors objective in requesting a representation letter is to obtain written confirmation of representations made to him during the course of his work where these are significant to him in forming an opinion. He does not need to obtain confirmation of representations which are not significant to his opinion nor does he need to obtain confirmation of representations relating to matters in respect of which he has sufficient alternative evidence, except where these are required by Auditing Standards. Purpose of Management Representation The general purpose served by the letter of representation is to place on record the representations of management on significant matters directly affecting the accounts. It also serves to remind directors that it is their statutory responsibility to ensure that a true and fair view is given by the accounts which they have prepared The letter also represents audit evidence from the highest authority within the client company on a range of important questions, especially those that are matters of opinion. It plays a vital role in the normal verification procedures. Instances where management representations will be appropriate Representations made by others are one of many sources of evidence. They are, however, a relatively weak source of evidence and should only be relied on for assurance purposes where no adequate alternative source of evidence exits. Oral representations can often be verified by checking with independent evidence but there are circumstances in which sufficient appropriate independent evidence is not available; in such cases representations may be critical to obtaining sufficient appropriate assurance evidence. These usually fall into one of two categories: Where knowledge of the facts is confined to management Where the matter is one of judgement or opinion

 Where the auditor relies on management representations he should always seek corroborative evidence where possible and ensure that there is no conflicting evidence. Written confirmation of representations is unlikely, on its own, to constitute sufficient appropriate evidence in respect of a matter which is material to the financial statements. Management representations can never be a substitute for independent evidence, and it may well be appropriate for the auditor to qualify his opinion on the grounds of a limitation of scope, even when a letter of representation has been obtained covering the relevant points. Evidence of Directors responsibility for preparing the financial statements Before signing any audit report the auditor must obtain evidence that the directors acknowledge their collective responsibility for the preparation of the financial statements. Normally the auditor will obtain evidence of this by receiving a signed copy of the financial statements which incorporates a statement of directors responsibilities. However, this will not necessarily have been seen or approved by all the directors and the auditor may also wish to see minutes of a board meeting at which the financial statements were approved. The auditor should also generally seek to obtain acknowledgement of responsibility from the directors by inclusion of an appropriate paragraph in the representation letter. Matters on which the auditor may obtain representations The matters on which the auditor will obtain representations from officers/directors vary from client to client. As a guide, the letter of representation should usually contain, as a minimum, appropriate paragraphs relating to: Directors acknowledgement of responsibility for the financial statements Directors acknowledgement of responsibility for the design and implementation of internal control to prevent and detect fraud Directors confirmation that they have disclosed to the auditor the results of its assessment of the risk the financial statements may be materially

misstated as a result of fraud and they have disclosed to the auditor actual, suspected or alleged fraud Completeness of information supplied to the auditor Compliance with law and regulations Transactions with directors and other related parties Control of the client The directors assessment of the appropriateness of the going concern basis and disclosures thereto Directors reasons for non-adjustment of errors brought to their attention; and Subsequent events The auditor may draft the letter and give it to the client for typing and signature. The final letter should be addressed to the auditor, typed on the clients letterhead and signed by one or more director(s) on behalf of the board. Where the letter contains confirmation of representations made on behalf of the board as a whole (such as collective acknowledgement of responsibility for the financial statements and reasons for non-adjustment of errors) the auditor should request that the letter be approved at a Board meeting and minuted as such. Where, in large organizations, executive responsibilities are divided or where representations on a particular issue are sought from a specific individual rather than the Board as a whole it may be appropriate to obtain separate letters confirming different representations made. When representations to the auditors relate to matters which are material to the financial statements, the auditors need to: seek corroborative audit evidence from sources inside or outside the entity evaluate whether the representations made by management appear reasonable and are consistent with other audit evidence obtained, including other representations ; and

 consider whether the individuals making the representations can be expected to be well informed on the particular matters. Date of letter The letter should be dated at the time of the auditors audit report If there is a significant delay between the approval of the letter and the signing of the auditors audit report he should consider whether he needs to obtain further representations in respect of the intervening period, as well as the need for additional assurance procedures. Refusal to provide Letter of Representation If a client declines to sign a letter of representation or provide other written evidence of representations made to the auditor during the course of the audit, the auditor must ensure that the refusal is not based on reservations about the financial statements, the withholding of information or intentional misrepresentations. The partner should therefore contact the appropriate officials and determine the reasons for refusal to sign. Refusal to provide Letter of Representation (Contd) If officers/directors refuse to provide written confirmation of representations that the auditor considers to be necessary, due either to unwillingness to co-operate or genuine uncertainty over the matters raised, the auditor will need to consider the implications of this scope limitation for his audit report. He may conclude, for example, that he has not received all the information and explanations that he requires, and will therefore need to qualify his audit report. He may also need to reconsider his reliance on other representations made by officers/directors during the assignment and this could have further consequences for the audit report. Contradictions of Management Representation with Other Evidence If a representation made by the officers/directors appears to conflict with or be contradicted by other audit evidence the auditor should investigate the circumstances to resolve the matter and consider whether it casts doubt on the reliability of other representations. The investigation of apparently contradictory audit evidence regarding a representation received ordinarily begins with further enquiries of

management, to ascertain whether the representation has been misunderstood or whether the other audit evidence has been misinterpreted, followed by corroboration of management responses. If management is unable to provide an explanation, or if the explanation is not considered adequate, the auditors need to determine the audit procedures to be undertaken to resolve the matter. Specimen Letter of Representation Date The Partner in Charge KNUST IDL 2013 BBA 4 Associates Chartered Accountants IDL, KNUST Kumasi

Dear Sir, LETTER OF REPRESENTATION IN RESPECT OF FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 ST DECEMBER, 2012 This representation letter is provided in connection with your audit of the financial statements of ISAAC AND MABLE COMPANY LIMITED for the year ended 31ST DECEMBER 2012 for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of the financial position of the company as of 31st December, 2012 and of the results of its operations and its cash flow for the year ended in accordance with International Financial Reporting Standards. We acknowledge our responsibility for the fair presentation of the financial statements in accordance with the Companies Code 1963 (Act 179) and International Financial Reporting Standards.

 We confirm to the best of our knowledge and belief, the following representations: There have been no irregularities involving management or employees who have a significant role in the accounting and internal control systems or that could have a material effect on the financial statements. We have made available to you all books of accounts and supporting documentation. We confirm the completeness of the information provided regarding the identification of related parties. The financial statements are free of material misstatements, including omissions. In our opinion the effect of those uncorrected financial statement misstatements aggregated during the audit are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. The company has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of noncompliance. There has been no noncompliance with requirements of regulatory authorities that could have a material effect on the financial statements in the event of noncompliance. We acknowledge our responsibility for the design and implementation of internal control to prevent and detect fraud. We are not aware of any instance of actual, suspected or alleged fraud affecting the entity. We have no plans or intentions that may materially alter the carrying value or classification of assets and liabilities reflected in the financial statements. We have no plans to abandon lines of product/service or other plans or intentions that will result in any excess or obsolete inventory, and no inventory is stated at an amount in excess realisable value.

 The company has satisfactory title to all assets and there are no liens or encumbrances on the companys assets. We have recorded or disclosed, as appropriate, all liabilities, both actual and contingent. There have been no events subsequent to the period end which require adjustments of or disclosure in the financial statements. There are no claims in connection with any litigation. . Chief Executive Officer .. Chief Finance Officer 2013

Reliance on Expert Introduction The auditor may on occasion need to place some reliance on the work of an expert who may have been engaged by the client to provide advice on a particular matter affecting the financial statements or by him in order to obtain assurance regarding particular financial statement assertions. Managements expert An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements. Situations requiring the need to use the work of an expert The most commonly encountered situation is where the financial statements incorporate a valuation of property, plant and equipment (tangible, intangible or investments) which have been carried out by an expert Other situations include:

 Determination of quantities or physical condition of assets / plant, property & equipment, for example mineral reserves Actuarial valuations and pensions accounting Measurement of work completed and to be completed on contracts in progress Legal opinions regarding the interpretation of agreements, statutes and regulations, or on the outcome of litigation or disputes. When using the work performed by an expert the auditor should obtain sufficient appropriate audit evidence that the work is adequate for the purpose of his audit. The first stage in this process is to consider whether the expert is likely to be competent to carry out the required work to an appropriate standard and whether he is in a position to do this with an appropriate degree of objectivity. When planning to use the work of an expert the auditor should therefore assess the objectivity and professional qualifications, experience and resources of the expert. a) He should evaluate the competence, capabilities and objectivity of that expert as well as the adequacy of the scope and objectives of the experts work. (Whether objectivity may be threatened by the experts relationship with the client). The auditor should consider factors such as: Membership of professional bodies Licensing by regulatory authorities Size and reputation b) Obtain the understanding of the work of that expert; and c) Evaluate the appropriateness of that experts work as audit evidence for the relevant assertion If the auditor has concerns regarding the competence or objectivity of the expert, he should discuss them with officers/directors. He may need to

undertake additional audit procedures or seek a second opinion from another expert. KNUST IDL WEEK 2 AUDIT CONCLUSION AND REPORTING Brief Recap of Audit Conclusion and Reporting 1 Overview of Audit Completion Process Audit Review Techniques Review Issues (Points arising from reviews, Points Outstanding, Significant Issues, Points Forward, Unadjusted misstatements Timing of Reviews Client Reporting Fraud Financial Statements Review of Subsequent Events Completion Checklist 3.1 Overview of Completion Process The completion process involves: Ensuring that all work that should have been done has been done and the appropriate conclusions drawn Ensuring appropriate review processes have been carried out Ensuring that review points are cleared and that there are no significant issues outstanding Obtaining written confirmation of management representations as required

 Carrying out a subsequent events review and ensuring that the results are reflected in the financial statements as appropriate Signing the audit report and issuing the final financial statements to the client Ensuring that matters which have been identified as matters to report to the client have been reported Ensuring that any other reports required have been issued

3.2 Audit Review Techniques Review Issues (Points arising from reviews, Points Outstanding, Significant Issues, Points Forward, Unadjusted misstatements Timing of Reviews Client Reporting Fraud 3.3 Financial statements Certain checks should be performed on the financial statements prior to finalization such as the completion of a disclosure checklist. Such procedures are summarized on the form, Financial Statements Programme and are detailed below: i) Check casts and cross casts of financial statements ii) Check cross references within the financial statements (including cash flow statement) and between financial statements and other information such as directors report or chairmans report. iii) Reference financial statement amounts to lead sheets in the audit file or,

in the case of consolidated financial statements to the final consolidation schedule. iv) Reference financial statement disclosures to indicate where in the audit file supporting evidence for any particular disclosure can be found. Ensure that the audit file contains audit evidence to support all material disclosures in the financial statements. v) Complete financial statements disclosure checklist to ensure compliance with relevant standards. vi) Read the financial statements carefully and check whether the layout and wording fairly present the information disclosed using appropriate and consistent accounting policies and they are in accordance with the auditors knowledge of the client. vii) Read and consider all the other information to be issued with the financial statements including directors report, chairmans statements, summarized financial information, operating and financial review etc. Ensure that there are no apparent misstatements or material inconsistencies therein. viii) Consider whether any other disclosure and reporting regulations apply to the client (e.g. listing rules) and complete programs as appropriate to achieve compliance with such regulations. ix) Perform overall analytical review to ensure the financial statements are consistent with the auditors knowledge of the business. Consider and document whether there is an indication of previously unrecognized risk of fraud Detail additional procedures as deemed necessary or state none: Procedures to be performed by the partner x) Read the financial statements carefully to ensure that the layout and wording fairly present the information disclosed using appropriate and consistent accounting policies and they are in accordance with the auditors knowledge of the client.

xi) Read and consider all the other information to be issued with the financial statements including directors report, chairmans statements, summarized financial information, operating and financial review etc. Ensure that there are no apparent misstatements or material inconsistencies therein. 3.3 Review of subsequent event 3.3.1 Introduction As a general principle the auditors responsibility to the client extends to the date on which the audit report is signed and may, in some circumstances extend beyond that. The auditor therefore needs to perform procedures designed to obtain sufficient appropriate evidence that all material subsequent events up to the date of his report which require adjustment of, or disclosure in the financial statements have been identified and properly reflected therein. He should also consider the effect of any subsequent events on his report. The objectives of the subsequent events review are to obtain reasonable assurance that:

Significant events occurring since the balance sheet date that could have an impact on the financial statements have been identified, and Where appropriate, they are disclosed or recognized in the financial statements. 3.3.2 Overview ISA 560 provides guidance on the auditors responsibility regarding subsequent events. Subsequent events occur after the date of the financial statements (the period-end date). Other key dates in the preparation, audit, and release of financial statements are outlined below: Date of F/S Date of Mgmt Approval of F/S Date of Auditors Report on F/S Date F/S is Issued

Between Date of F/S and Date of Auditors Report on F/S Obtain evidence of Subsequent Events

 Between Date of Auditors Report on F/S and Date F/S are issued, Respond to new facts that become known Subsequent events refers to: Events occurring between the date of the financial statements and the date of the auditors report; and Facts that become known to the auditor after the date of the auditors report. 3.3.3 The objectives of the auditor are: (a) To obtain sufficient appropriate audit evidence about whether events occurring between the date of the financial statements and the date of the auditors report that require adjustment of, or disclosure in, the financial statements are appropriately reflected in those financial statements in accordance with the applicable financial reporting framework; and (b) To respond appropriately to facts that become known to the auditor after the date of the auditors report, that, had they been known to the auditor at that date, may have caused the auditor to amend the auditors report 3.3.4 Meanings of Terms For purposes of the ISAs, the following terms have the meanings attributed below: (a) Date of the financial statementsThe date of the end of the latest period covered by the financial statements. (b) Date of approval of the financial statementsThe date on which all the statements that comprise the financial statements, including the related notes, have been prepared and those with the recognized authority have asserted that they have taken responsibility for those financial statements. (c) Date of the auditors reportThe date the auditor dates the report on the financial statements in accordance with ISA 700. (d) Date the financial statements are issuedThe date that the auditors report and audited financial statements are made available to third parties. (

 (e) Subsequent eventsEvents occurring between the date of the financial statements and the date of the auditors report, and facts that become known to the auditor after the date of the auditors report. 3.3.5 Date of Financial Statement Approval

a) Date of the Report The earlier date on which those with the recognized authority: Determine that all the statements that comprise the financial statements, including the related notes, have been prepared; and Have asserted that they have taken responsibility for those financial statements.

The Recognized Authority Individuals prescribed by law or regulation who follow the necessary financial statement approval procedures; and Individuals specified by the entity itself who follow their own financial statement approval procedures.

b) Need for Shareholder Approval Final approval by shareholders is not necessary for the auditor to conclude that sufficient appropriate audit evidence on which to base the auditors opinion on the financial statements has been obtained.

3.3.6 Determination of Subsequent Events and Assessment of their Impact In determining the existence of subsequent events and assessing their impact, the auditor would carry out the steps set out below.

a) Identify Any Subsequent Events Perform audit procedures to identify any subsequent events that would require adjustment of, or disclosure in, the financial statements. This would include: Understanding management procedures (if any) to identify subsequent events; Making inquiries of management (and those charged with governance) about: New commitments, borrowings, or guarantees, Sales or acquisitions of assets that have occurred or are planned, Increases in capital or issuance of debt instruments, Agreements to merge or liquidate, Assets that have been appropriated by government or destroyed (e.g., by fire or flood), Litigation, claims, and contingencies, Any unusual accounting adjustments made or contemplated, Any events that have occurred or are likely to occur that will bring into question the appropriateness of the going-concern assumption or other accounting policies, Any events relevant to the measurement of estimates or provisions in the financial statements, and Any events relevant to the recoverability of assets; Reading minutes, if any, of the meetings (management and those charged with governance) held after the date of the financial statements, and inquiring about matters discussed at meetings for which minutes are not yet available; and Reading financial reports (interim financial statements, budgets, cash flow statements, etc. produced after the period end, if any.

 Inquiring, or extending previous oral or written inquiries of the entitys legal counsel concerning litigation and claims. b) Obtain Written Representations

Consider whether written representations covering particular subsequent events may be necessary to support other audit evidence, and thereby obtain sufficient appropriate audit evidence.

When a component, such as a division, branch or subsidiary, is audited by another auditor, the auditor would consider the other auditors procedures regarding events after period end and the need to inform the other auditor of the planned date of the auditors report.

When the auditor becomes aware of events which materially affect the financial statements, the auditor should consider whether such events are properly accounted for and adequately disclosed in the financial statements. 3.3.7 Procedures prior to completion of field work An appropriate form, say, Subsequent Events Form provides suggested procedures to consider events occurring up to the end of the field work. This includes following up on points which have been noted during the course of the audit and a review of primary records for the post year end period. The extent and nature of the work performed will vary according to the clients circumstances but should take into account the auditors knowledge of the business and the risks it faces. For example:

If there was a material outstanding debt at the year end, has it been collected? If the client was in negotiations with the bank, what was the outcome?

 Does post year end experience support the assumptions made when considering the applicability of the going concern basis? Does post year end experience support the assumptions made when carrying out impairment reviews?

3.3.6 Procedures after completion of fieldwork but prior to report Where there is a delay between the completion of field work and the date the audit report is signed, it will be necessary to update the subsequent events review to ensure that it adequately considers events up to the date of the report. The extent of this work will vary according to the nature of the client and its operation, the length of time covered, how long after the year end the fieldwork occurs, the degree of subjectivity in the financial statements, and so on. In general, however, it will proceed from a basis of enquiry of the directors, looking at whatever documentary evidence is judged necessary. Where the delay between the significant fieldwork and the date the report is signed is a significant period of time it will normally be considered necessary to examine the clients accounting records and other relevant documentary evidence to support discussions with officers/ directors. If this is not done the reasons why it is not considered necessary should be recorded. The auditor should sign his report as soon as possible after the directors have approved the financial statements (where appropriate). He should receive a letter of representation at the same time and He should not sign his audit report before the financial statements are approved and the letter of representation received.

3.3.7 Facts Become Known to the Auditor (After Date of Auditors Report but before Financial Statements Are Issued)

 The auditor has no responsibility to search for evidence of subsequent events after the audit report is signed. However, the directors still have a duty to ensure that the financial statements they issue give a true and fair view.

If, after the auditor has signed his report but before the financial statements are issued, he becomes aware of material subsequent events he should establish whether the financial statements need amendment and discuss the matter with the directors. Generally, in these circumstances, the auditor would hope to persuade the directors to amend the financial statements prior to issue. This will mean that they have to re-approve the financial statements and the auditor will have to provide a new report after taking whatever action is necessary to extend his procedures to the date of his new report. If the directors do not amend the financial statements and the auditor has not presented them with a copy of his signed report he should amend his report and express a qualified or adverse opinion. If however the report has already been issued to the directors he should discuss the matter with those charged with governance. If the audit report is subsequently released he should take action to prevent reliance on his report and legal advice should be sought in particular he should consider contacting any regulators immediately. Summary Discuss the matter with management (and those charged with governance); Determine whether the financial statements need amendment and, if so: Inquire how management intends to address the matter in the financial statements, Perform any further audit procedures required, and Issue a new auditors report on the amended financial statements. This could also include dual dating of the report, restricted to the amendment or inclusion of an emphasis of matter paragraph; and

 Where management does not amend the financial statements, the auditor would issue a modified auditors opinion. If the auditors report has already been released, notify management (and those charged with governance) not to issue the financial statements to third parties before the necessary amendments have been made. If the financial statements are released despite the notification, take appropriate action (after consulting with legal counsel) to prevent reliance on the auditors report. 3.3.8 Facts Become Known to the Auditor (After the Financial Statements Are Issued) If after the financial statements and the audit report have been issued the auditor becomes aware of a fact which existed at the date of his report and which if known at that point would have caused him to modify his report he should consider whether the financial statements need revision. The auditor should discuss the matter with officers/ directors and take appropriate action which may involve a revision of the financial statements and a revision to the audit report. The new audit report should contain an emphasis of matter paragraph referring to a note in the financial statements that more extensively discusses the reason for the revision and to the earlier report issued by him.

Summary Discuss the matter with management (and those charged with governance); Determine whether the financial statements need amendment and, if so, inquire how management intends to address the matter in the financial statements; If management amends the financial statements: Extend the subsequent event audit procedures to the date of the new auditors report unless the auditors report is amended to include an additional date restricted to a particular amendment, Perform any further audit procedures required,

 Review managements actions to ensure anyone in receipt of the previously issued financial statements and auditors report thereon is informed of the situation, and Provide a new auditors report on the amended financial statements; Issue a new or amended auditors report that includes an Emphasis of Matter paragraph. If management does not take steps to ensure anyone in receipt of the previously issued financial statements is informed of the situation: Notify management (and those charged with governance) that the auditor will take appropriate action to seek to prevent reliance on the auditors report; and If, despite such notification, management (or those charged with governance) does not take the necessary steps, take appropriate action (such as consulting with legal counsel) to prevent reliance on the auditors report. 3.3.9 Offering of Securities to the public Where securities are offered to the public the auditor may have additional legal and professional requirements applicable in the jurisdiction of issue. For example he may be required to carry out additional procedures up to the date of the final offering document. 3.3.10 Adjusting Subsequent Events Adjusting events provide additional evidence relating to conditions existing at the balance sheet date and hence should lead to adjustment of the financial statements. Examples include: Property, plant and equipment the subsequent determination of the purchase price or of the proceeds of sale of assets purchased or sold before the year end Property- a valuation which provides evidence of an impairment in value Investments- the receipt of a copy of the financial statements or other information in respect of an

unlisted company that provides evidence of an impairment in the value of a long-term investment Inventory and work in progress the receipt of proceeds from sales after the balance sheet date or other evidence concerning the net realizable value of inventories. the receipt of evidence that the previous estimate of accrued profit on a long-term contract was materially inaccurate Receivables- the renegotiation of amounts owing by receivables, or the insolvency of a receivable Dividends receivable- the declaration of dividends by subsidiaries and associated companies relating to periods prior to the balance sheet date of the holding company. Taxation- the receipt of information regarding rates of taxation Claims- amounts received or receivable in respect of insurance claims which were in the course of negotiation at the balance sheet date Discoveries- the discovery of errors or frauds which show that the financial statements were incorrect. 3.3.11 Non-Adjusting Events Non-adjusting events are those which concern conditions which did not exist at the balance sheet date and therefore do not require changes in amounts included in financial statements. They may, however, be of such materiality that their disclosure is required to ensure that financial statements are not misleading. The following are examples of post balance sheet events which normally should be classified as non-adjusting events. - Mergers and acquisitions - Reconstructions and proposed reconstructions - Issues of shares and debentures - Purchases and sales of non current assets and investments - Losses of non current assets or inventories as a result of a catastrophe

such as fire or flood - Opening new trading activities or extending existing trading activities. - Closing a significant part of the trading activities if this was not anticipated at the year end. - Decline in the value of property and investments held as non current assets, if it can be demonstrated that the decline occurred after the year end

- Changes in rates of foreign exchange - Government action, such as nationalization - Strikes and other labour disputes - Augmentation of pension benefits

3.3.12 Review for Subsequent Events Form An appropriate form, say, Review for Subsequent Events Form should be used to record post balance sheet event consideration. Procedures 1 and 2 should be carried out at the end of the audit fieldwork (whilst still on site). The remaining procedures should be carried out prior to signing the audit report and a final check should be made immediately prior to signing the audit report. At end of audit fieldwork i) Points noted for follow up at the subsequent events stage during the course of the audit/ whilst out on site: Document resolution of above issues in comments column

ii) Ensure that the following records have been reviewed from the balance sheet date to the date of the end of substantial completion of fieldwork and investigate any large or unusual entries: - cash receipts and disbursements - purchases, sales and sales returns - general ledger and general journal - journal entries If the records referred to above are not up-to-date, review source data such as deposit slips, cheque stubs, purchase and sales invoices, credit notes, receiving reports etc. Before signing the audit report iii) Read the latest available client management accounts: a. compare them with the financial statements being reported upon; and make any other comparisons considered appropriate in the circumstances; investigate and document important variations. b. inquire of management with responsibility for financial and accounting matters as to whether the statements have been prepared on the same basis as that used for the statements under audit iv) Inquire of and discuss with management with responsibility for financial and accounting matters as to significant matters pertaining to the period between the balance sheet being reported on, to the date of inquiry, for example some of the following may be significant: sales and profit trends

 changes in the company's operations and market conditions increases or decreases in prices of the company's products significant changes in the cost of materials and their effect on inventory valuation significant changes in general, income and sales tax legislation affecting the company's operations income and sales tax notices of assessment received substantial contingent liabilities or commitments significant change in stated capital, reserves, long-term debt, or working capital changes in accounting or financial policies special dividends significant changes in foreign currency exchange rates purchase or sale of major plant/equipment; fires, explosions, closure of plant etc impact of wage negotiations in process significant changes in market values of investments significant changes in estimates with respect to amounts included or disclosed in the financial statements being reported on unusual adjustments other matters v) Read the available minutes of meetings of shareholders, directors, and appropriate committees after those reviewed at fieldwork stage; as for meetings, for which minutes are not available, inquire about matters dealt with at such meetings. vi) Review, if appropriate, the directors' report for any matters which may provide information in respect of any significant events.

vii) Assemble pertinent findings resulting from response of client's legal advisers and other auditing procedures concerning litigation, claims, and assessments. If a significant period has expired since date of response, inquire of legal advisers to update response. viii) Obtain a letter of representation, appropriately dated from client officials, generally the chief executive officer and chief financial officer/finance director or accountant. ix) Make such additional inquiries or perform such procedures deemed necessary and appropriate to dispose of questions that arise in carrying out the foregoing procedures, inquiries, and discussions. x) Where consolidated financial statements are prepared, ensure that audit procedures discussed above are updated for subsidiaries and the parent company to the time of completion of the consolidated financial statements.

3.4 Completion checklist Finally certain confirmations should be sought from the senior who performed the audit, the reviewer and the partner prior to signing the audit report. Some of these confirmations are set below: a) File Completion i) Review of a letter of representation ensuring that it covers all important areas and includes a schedule of the unadjusted misstatements and that the client staffs agree that they are valid misstatements. ii) Review and updating of all related files (tax, permanent, correspondence) and follow up on all matters with financial statement significance. iii) Ensuring that all working papers, confirmations and audit programmes have been reviewed, signed-off, and indexed and cross indexed iv) Discussing with and giving to the client a copy of any adjusting entries v) Ensuring that conclusions on the following matters have been documented - The resolution of all significant issues

- The resolution of all review points - The resolution of points outstanding vi) Performing the procedures as set out in the Financial Statements Programme including overall analytical review b) Overall Completion vii) Recording all relevant matters on the Points Forward Form viii) Completing a sufficiently detailed review ix) Satisfying that the audit work done is sufficient and appropriate and that the file contains sufficient, appropriate evidence to support the auditors opinions x) Satisfying that all audit services outlined in the letter of engagement have been completed xi) A "Management Letter or Report to Those Charged with Governance" has been compiled and findings have been communicated to the client by way of a meeting or a written report Give details where applicable:

xii) Reconsidering: - Whether the auditor is still competent to undertake the work - The auditors continuing independence and objectivity - The integrity of the owners, directors and management of the entity

Satisfying that the auditor may accept reappointment as auditors c) Financial Statements and Auditors Report xiii) Completing/reviewing the review for subsequent events xiv) Satisfying that: - the auditors' report is appropriate

- the financial statements are prepared in accordance with the applicable accounting framework, consistently applied - all disclosures required for fair presentation have been made 3.5 Going Concern 3.5.1 Overview and Managements Responsibility The going-concern assumption is fundamental to the preparation of financial statements. ISA 570 provides guidance on the auditors responsibility in the audit of financial statements with respect to the going-concern assumption and managements assessment of the entitys ability to continue as a going concern. Under the going-concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading, or seeking protection from creditors pursuant to laws or regulations. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. Some financial reporting frameworks contain an explicit requirement for management to make a specific assessment of the entity's ability to continue as a going concern, and standards regarding matters to be considered and disclosures to be made in connection with going concern. For example, International Accounting Standard 1 "Presentation of Financial Statements requires management to make an assessment of an enterprise's ability to continue as a going concern. In other financial reporting frameworks, there may be no explicit requirement for management to make a specific assessment of the entitys ability to continue as a going concern. Nevertheless, since the going concern assumption is a fundamental principle in the preparation of the financial statements, management has a responsibility to assess the entity's ability to continue as a going concern even if the financial reporting framework does not include an explicit responsibility to do so.

 When there is a history of profitable operations and a ready access to financial resources, management may make its assessment without detailed analysis.

Management's assessment of the going concern assumption involves making a judgement at a particular point in time, about the future outcome of events or conditions which are inherently uncertain. The following factors are relevant: In general terms, the degree of uncertainty associated, with the outcome of an event or condition increases significantly the outcome of an event or condition. For that reason, most financial reporting frameworks that require an explicit management assessment specify the period for which management is required to take into account all available information. Any judgement about the future is based on the information available at the time at which the judgement is made. Subsequent events can contradict a judgement which was reasonable at the time it was made The size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors all affect the judgement regarding the outcome of events or conditions 3.5.2 The objectives of the auditor are: (a) To obtain sufficient appropriate audit evidence regarding the appropriateness of managements use of the going concern assumption in the preparation of the financial statements; (b) To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entitys ability to continue as a going concern; and (c) To determine the implications for the auditors report. 3.5.3 Risk Assessment Procedures When performing risk assessment procedures as required by ISA 315, the auditor shall consider whether there are events or conditions that may cast significant doubt on the entitys ability to continue as a going concern. In so

doing, the auditor shall determine whether management has already performed a preliminary assessment of the entitys ability to continue as a going concern, and: (a) If such an assessment has been performed, the auditor shall discuss the assessment with management and determine whether management has identified events or conditions that, individually or collectively, may cast significant doubt on the entitys ability to continue as a going concern and, if so, managements plans to address them; or (b) If such an assessment has not yet been performed, the auditor shall discuss with management the basis for the intended use of the going concern assumption, and inquire of management whether events or conditions exist that, individually or collectively, may cast significant doubt on the entitys ability to continue as a going concern. The auditor shall remain alert throughout the audit for audit evidence of events or conditions that may cast significant doubt on the entitys ability to continue as a going concern. 3.5.4 Examples of Some Events or Conditions that may cast Significant doubt about the Going Concern Assumption Examples of some events or conditions that, individually or collectively, may cast significant doubt about the going-concern assumption are set out below. The Indicators are grouped under: Financial Operating Others

a) Financial Indicators Net liability or net current liability position. Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment, or excessive reliance on short-term borrowings to finance long-term assets. Indications of withdrawal of financial support by creditors.

 Negative operating cash flows indicated by historical or prospective financial statements. Adverse key financial ratios. essential investments Financial Indicators Contd Substantial operating losses, or significant deterioration in the value of assets used to generate cash flows Arrears or discontinuance of dividends. Inability to pay creditors on due dates. Inability to comply with the terms of loan agreements. Change from credit to cash-on-delivery transactions with suppliers. Inability to obtain financing for essential new-product development or other b) Operating Indicators Managements intentions to liquidate the entity or to cease operations. Loss of key management without replacement. Loss of a major market, key customer(s), franchise, license, or principal supplier(s). Labor difficulties. Shortages of important supplies. Emergence of a highly successful competitor. c) Other Indicators Non-compliance with capital or other statutory requirements. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy.

 Changes in law or regulation or government policy expected to adversely affect the entity. Uninsured or underinsured catastrophes. The significance of the above events or conditions often can be mitigated by other factors. For example, the effect of an entity being unable to make its normal debt repayments may be counterbalanced by managements plans to maintain adequate cash flows by alternative means, such as by disposing of assets, rescheduling loan repayments, or obtaining additional capital. Similarly, the loss of a principal supplier may be mitigated by the availability of a suitable alternative source of supply. 3.5.5 Evaluating Managements Assessment The auditor shall evaluate managements assessment of the entitys ability to continue as a going concern. In evaluating managements assessment of the entitys ability to continue as a going concern, the auditor shall : - cover the same period as that used by management to make its assessment as required by the applicable financial reporting framework, or by law or regulation if it specifies a longer period. If managements assessment of the entitys ability to continue as a going concern covers less than twelve months from the date of the financial statements as defined in ISA 560, the auditor shall request management to extend its assessment period to at least twelve months from that date. - consider whether managements assessment includes all relevant information of which the auditor is aware as a result of the audit. - inquire of management as to its knowledge of events or conditions beyond the period of managements assessment that may cast significant doubt on the entitys ability to continue as a going concern. 3.5.6 Evaluating Managements Plans in Smaller Entities Management of smaller entities may not have prepared a detailed assessment of the entitys ability to continue as a going concern. They may rely instead on their in-depth knowledge of the business and anticipated future prospects.

a) The auditors typical evaluation procedures would include: Discussing medium- and long-term financing with management; Corroborating managements intentions with the understanding of the entity obtained and documentary evidence; Satisfying the requirement for management to extend its assessment period to at least 12 months. This could be achieved through discussion, inquiry, and inspection of supporting documentation, and the results evaluated by the auditor as to their feasibility. For example, a prediction of future sales revenues could be supported by potential sales orders or sales contracts; and Inquiring if management has knowledge of events/conditions beyond the period of managements assessment that would cast significant doubt on the entitys ability to continue as a going concern.

b) Particular factors that could cast significant doubt on the entitys ability to continue as a going concern include: The entitys ability to withstand adverse conditions. Small entities may be able to respond quickly to exploit opportunities, but may lack reserves to sustain operations.

Availability of financing This could include banks and other lenders ceasing to support the entity. It could also include a withdrawal or major alteration in the terms of a loan or loan guarantees from the owner-manager (or other related parties such as family members).

Other major changes

This could include the possible loss of a principal supplier, major customer, key employee, or the right to operate under a license, franchise, or other legal agreement. c) The auditors procedures in these situations. i. Documentary Evidence Available Document: - Terms of any loans and financing provided to the entity; - Details of subordinated loans to a third party such as the bank; - Details of financing by third parties based on guarantees or personal assets pledged as collateral; and - Details of other changes that could cast significant doubt on the entitys ability to continue as a going concern. ii. Additional Support Available Evaluate the ability of the owner-manager or other related parties to: Provide the necessary additional support such as loans or guarantees; and Meet the obligations under the support arrangements. iii. Other Major Changes Address the impact on operations of a major change such as loss of key customer, supplier, key employee, or loss of sales revenue due to technical obsolescence, new competition, etc. iv. Request Written Confirmations Request written confirmation of the: Terms and conditions of the financial support being provided; and Owner-managers intentions or understanding with respect to the support being provided.

3.5.7 Risk Response When Events are identified If events or conditions have been identified that may cast significant doubt on the entitys ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists through performing additional audit procedures, including consideration of mitigating factors. These procedures shall include: (a) Where management has not yet performed an assessment of the entitys ability to continue as a going concern, requesting management to make its assessment. (b) Evaluating managements plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether managements plans are feasible in the circumstances. (c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of managements plans for future action: (i) Evaluating the reliability of the underlying data generated to prepare the forecast; and (ii) Determining whether there is adequate support for the assumptions underlying the forecast. (d) Considering whether any additional facts or information have become available since the date on which management made its assessment. (e) Requesting written representations from management and,

where appropriate, those charged with governance, regarding their plans for future action and the feasibility of these plans. Where the auditor identifies going-concern events/conditions, the next step is to perform additional procedures (including consideration of mitigating factors) to determine whether or not a material uncertainty exists. i) Material Uncertainty Events or conditions may be identified that cast doubt on the entitys ability to continue as a going concern. A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditors judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for the fair presentation of the financial statements, or, in the case of a compliance framework, for the financial statements not to be misleading. Managements action plans to address going-concern issues typically include one or more of the following strategies: - Liquidating assets; - Borrowing money or restructuring debt; - Reducing or delaying expenditures; - Restructuring operations, including products and services; - Seeking a merger or acquisition; or - Increasing capital. ii) The steps that the auditor would take to address going-concern issues. a) Obtaining Managements Assessment and Plan If not already provided, request management to make an assessment of the entitys ability to continue as a going concern.

b) Evaluating Managements Plans of Action Evaluate managements future actions to address the going-concern assessment. Address: Will outcome of plans improve the situation? Are the plans feasible under the circumstances? How reliable are the profit/cash-flow forecasts, and what support is there for the assumptions used? Identifying, discussing, and obtaining evidence for other factors that may affect the entitys ability to continue as going concern, such as: Poor recent operating results, Breaches in terms of debentures and loan agreements, References in meeting minutes to financing difficulties, Existence of litigation/claims and estimates of financial implications, Existence, legality, and enforceability of arrangements to provide or maintain financial support with related and third parties, Financial ability of related and third parties to provide additional funds or loan guarantees, Other subsequent events, and Indicators of fraud such as management override, fictitious transactions, or concealment of material facts. Continued existence, terms, and adequacy of borrowing facilities. Reports on regulatory actions. Adequacy of support for any planned disposals of assets.

 Also consider the impact of any additional facts or information since the date management made its assessment and plans. c) Obtaining Written Confirmations Request written representations from management (and those charged with governance) regarding their plans for future action and feasibility 3.5.8 Risk Reporting Based on the audit evidence obtained, the auditor shall conclude whether, in the auditors judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entitys ability to continue as a going concern. A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditors judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for: (a) In the case of a fair presentation financial reporting framework, the fair presentation of the financial statements, or (b) In the case of a compliance framework, the financial statements not to be misleading. a) Going Concern Assumption Appropriate but Material Uncertainty exists If the auditor concludes that the use of the going concern assumption is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements: (a) Adequately describe the principal events or conditions that may cast significant doubt on the entitys ability to continue as a going concern and managements plans to deal with these events or conditions; and

(b) Disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entitys ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business. If adequate disclosure is made in the financial statements, the auditor shall express an unmodified opinion and include an Emphasis of Matter paragraph in the auditors report to: (a) Highlight the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entitys ability to continue as a going concern; and (b) Draw attention to the note in the financial statements that discloses the appropriate matters If adequate disclosure is not made in the financial statements, the auditor shall express a qualified opinion or adverse opinion, as appropriate, in accordance with ISA 705. The auditor shall state in the auditors report that there is a material uncertainty that may cast significant doubt about the entitys ability to continue as a going concern. b) Going Concern Assumption Inappropriate

If the financial statements have been prepared on a going concern basis but, in the auditors judgment, managements use of the going concern assumption in the financial statements is inappropriate, the auditor shall express an adverse opinion.

If, on the basis of the additional audit procedures carried out and the information obtained, including the effect of management's plans, the auditor's judgment is that the entity will not be able to continue as a going concern, the auditor concludes, regardless of whether or not disclosure has

been made, that the going concern assumption used in the preparation of the financial statements is inappropriate and expresses an adverse opinion. c) Management unwilling to make or extend its assessment If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor shall consider the implications for the auditors report.

In certain circumstances, the auditor may believe that it is necessary to ask management to make or extend its assessment. If management is unwilling to do so, it is not the auditors responsibility to rectify the lack of analysis by management, and a modified report may be appropriate because it may not be possible for the auditor to obtain sufficient appropriate evidence regarding the use of the going concern assumption in the preparation of the financial statements. The auditor should consider the need to modify the auditor's report as a result of the limitation on the scope of the auditor's work. d) Communication with those charged with governance Unless all those charged with governance are involved in managing the entity, the auditor shall communicate with those charged with governance events or conditions identified that may cast significant doubt on the entitys ability to continue as a going concern. Such communication with those charged with governance shall include the following: (a) Whether the events or conditions constitute a material uncertainty; (b) Whether the use of the going concern assumption is appropriate in the preparation and presentation of the financial statements; and (c) The adequacy of related disclosures in the financial statements.

3.5.9 Significant delay in the signature or approval of the Financial Statements If there is significant delay in the approval of the financial statements by management or those charged with governance after the date of the financial statements, the auditor shall inquire as to the reasons for the delay. If the auditor believes that the delay could be related to events or conditions relating to the going concern assessment, the auditor shall perform those additional audit procedures necessary, as well as consider the effect on the auditors conclusion regarding the existence of a material uncertainty, 3.5.10 The Final Step The final step is to determine the impact of identified events/conditions on the audit report and communicate the decision to management and those charged with governance, where applicable. 3.5.11 Public Sector Perspective The appropriateness of the use of the going concern assumption in the preparation of the financial statements is generally not in question when auditing either a central government or those public sector entities having funding arrangements backed by a central government. However, where such arrangements do not exist, or where central government funding of the entity may be withdrawn and the existence of the entity may be at risk, the going concern difficulties may be imputed. As governments corporatize and privatize government entities, going concern issues will become increasingly-relevant to the public sector. 3.5.12 The following exhibit summarizes the requirements. Use of Going-Concern Uncertainty Exists Assumption Appropriate but a Material

Do financial statements fully describe events/ conditions and disclose existence of material uncertainty? Yes Unmodified opinion plus Emphasis of Matter paragraph

 No Express a qualified or adverse opinion, and state material uncertainty exists

Use of Going-Concern Assumption Inappropriate Express an adverse opinion THANK YOU FOR YOUR PATIENCE AND CONTRIBUTIONS KNUST IDL WEEK 3 FORMING AN OPINION ON FINANCIAL STATEMENTS (ISAS 700 & 705) 3.6 .1 Introduction Relevant ISA 700 3.6.2 Objectives of the Auditor The objectives of the auditor are: (a) To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and (b) To express clearly that opinion through a written report that also describes the basis for that opinion. 3.6.3 Meanings For purposes of the ISAs, the following terms have the meanings attributed below:

(a) General purpose financial statementsFinancial statements prepared in accordance with a general purpose framework. (b) General purpose frameworkA financial reporting framework designed to meet the common financial information needs of a wide range of users. The financial reporting framework may be a fair presentation framework or a compliance framework. The term fair presentation framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and: (i) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or (ii) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances. The term compliance framework is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (i) or (ii) above. (c) Unmodified opinionThe opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Reference to financial statements in this ISA means a complete set of general purpose financial statements, including the related notes. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The requirements of the

applicable financial reporting framework determine the form and content of the financial statements, and what constitutes a complete set of financial statements. Reference to International Financial Reporting Standards in this ISA means the International Financial Reporting Standards issued by the International Accounting Standards Board, and reference to International Public Sector Accounting Standards means the International Public Sector Accounting Standards issued by the International Public Sector Accounting Standards Board. 3.6.4 Overview The final step in the audit process is to evaluate the audit evidence obtained, consider the impact of any misstatements identified, form an audit opinion, and prepare an appropriately worded audit report. An opinion is formed on a complete set of general purpose financial statements which is based on an evaluation of the conclusions drawn from the audit evidence obtained; and expressing clearly that opinion through a written report that also describes the basis for that opinion. The Auditors report may be modified or unmodified For audits conducted in accordance with ISAs, the wording of the unmodified auditors report will contain a minimum number of elements. The wording will be standard, except where additional paragraphs are added for an emphasis of a matter or other reporting matters. Consistency in the auditors report helps: - Promote credibility in the global marketplace by making more readily identifiable those audits that have been conducted in accordance with globally recognized standards; and - Promote the users understanding and helps to identify unusual circumstances (such as modifications to the auditors

report) when they occur. In some jurisdictions, the laws or regulations governing the audit of financial statements may prescribe different wording for the auditors opinion. However, the auditors responsibilities for forming the opinion remain the same. Where the wording differs significantly from the standard international wording, the auditor would consider the risk that users might misunderstand the assurance obtained. If such a risk exists, further explanation could be added to the auditors report. 3.6.5 Financial Reporting Frameworks The auditors opinion on the financial statements will be made in the context of an applicable general purpose framework. This is a financial reporting framework designed to meet the common financial information needs of a wide range of users. Acceptable frameworks include: - International Financial Reporting Standard for Small and Medium-sized Entities; - International Financial Reporting Standards; and - International Public Sector Accounting Standards.

There are two types of general purpose frameworks: the fair presentation framework and the compliance framework. - Fair Presentation Framework - Compliance Framework In some cases, the auditor may be required to conduct an audit in accordance with both frameworks. In these situations, the auditors opinion would refer to both the fair presentation framework and the applicable legal or regulatory requirements.

National Standards

 A reference in the auditors report to both International Standards on Auditing and the national auditing standards is appropriate when no conflict exists between the requirements of both sets of standards. If a conflict exists, the auditors report would only refer to the auditing standards (either International Standards on Auditing or the national auditing standards) in accordance with which one the auditors report has been prepared.

For example, ISA 570 requires the auditor to add an Emphasis of Matter paragraph to highlight a going concern problem, whereas some national auditing standards prohibit such a paragraph. When forming an opinion, the auditor needs to ensure that the statements are prepared in accordance with the applicable financial reporting framework, as shown below. Materiality Conclude whether: Materiality remains appropriate in the context of the entitys actual financial results. Uncorrected misstatements (including uncorrected misstatements related to prior periods), either individually or in aggregate, could result in a material misstatement.

Audit Evidence Has sufficient appropriate audit evidence been obtained? Are the accounting estimates made by management reasonable? Did the analytical procedures performed at or near the end of the audit corroborate conclusions formed during the audit?

Accounting Policies Do the financial statements adequately disclose the significant accounting policies selected and applied? Are the accounting policies consistent with the financial reporting framework, and appropriate in the circumstances? Financial Statement Disclosures Do the financial statements refer to or describe the applicable reporting framework? Have all financial statement disclosures been made as required by the applicable financial reporting framework? Is the terminology used in the financial statements, including the title of each financial statement, appropriate? Are there adequate disclosures to enable intended users to understand the effect of material transactions and events on the information conveyed in the financial statements? Is the information presented relevant, reliable, comparable, understandable, and sufficient? Do the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements?

Fair Presentation Frameworks Do the overall presentation, structure, and content (including the note disclosures) faithfully represent the underlying transactions and events in

accordance with the applicable financial reporting framework? If not, is there a need to provide disclosures beyond those specifically required by the framework to ensure fair presentation? Are the financial statements, after any adjustments made by management as a result of the audit process, consistent with the understanding obtained about the entity and its environment?

Compliance Frameworks Are the financial statements misleading? This is likely only in extremely rare circumstances. Based on the results of the evaluations outlined above, the auditor would determine what form of audit report (unmodified or modified) is appropriate in the circumstances, as shown below. Unmodified Opinion The financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework, and an unmodified opinion would be appropriate. Modified Opinion (Qualified, Adverse, or Disclaimer) Sufficient appropriate audit evidence could not be obtained to conclude that the financial statements as a whole are free from material misstatement. 3.6.6 Form and Wording of the Auditors Report The auditors report communicates the following information to the reader: - Responsibilities of management; - Responsibilities of the auditor and a description of the audit; - The audit was conducted in accordance with International Standards on Auditing;

- The financial reporting framework used; and - The auditors opinion on the financial statements.

The form of the auditors report will be affected by the financial reporting framework used, any additional requirements required by law or regulation, and the inclusion of any supplementary information. The auditors report is entitled the Independent Auditors Report and headings are required for each paragraph as follows: - Report on the Financial Statements; - Managements Responsibility for the Financial Statements; - Auditors Responsibility; and - Opinion. Other headings for paragraphs that may be used where applicable are: - Emphasis of Matter; and - Report on Other Legal and Regulatory Requirements.

The main components of the auditors report (which have to be in writing) are outlined as follows: 3.6.7 Unmodified Audit OpinionFair Presentation Framework The standard wording for an auditors report (from ISA 700) on general purpose financial statements, prepared in accordance with a fair presentation framework and expressing an unmodified opinion, is illustrated below. INDEPENDENT AUDITORS REPORT [Appropriate Addressee]

 We have audited the accompanying financial statements of ABC Company, which comprise the statement of financial position as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the period then ended, and a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. Auditors Responsibility (Contd) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects (or give a true and fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the period then ended, in accordance with International Financial Reporting Standards.

*Auditors signature+

*Date of the auditors report+

*Auditors address+ Unmodified Audit OpinionCompliance Framework The standard wording for an auditors report on general purpose financial statements, prepared in accordance with a compliance framework and expressing an unmodified opinion, is illustrated below INDEPENDENT AUDITORS REPORT [Appropriate Addressee] We have audited the accompanying financial statements of CDE Company, which comprise the statement of financial position as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the period then ended, and a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Financial Statements Management is responsible for the preparation of these financial statements in accordance with XYZ Law of Jurisdiction X, and for such internal control as management determines is necessary to enable the

preparation of financial statements that are free from material misstatement, whether due to fraud or error Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements of CDE Company for the period ended December 31, 20X1 are prepared, in all material respects, in accordance with XYZ Law of Jurisdiction X.

*Auditors signature+

 [Date of the auditors report+

*Auditors address+ 3.6.8 Other Reporting Requirements In some jurisdictions, the auditor may be required to report on matters in addition to the auditors responsibility under the ISAs, as discussed in the following exhibit. 3.6.9 Supplementary Information Presented with the Financial Statements Supplementary information is information presented with the audited financial statements, but not required by the applicable financial reporting framework. Supplementary information may be required by law, regulation, or standards, or may be presented voluntarily. Supplementary information (not required by the applicable financial reporting framework) needs to be clearly differentiated from the audited financial statements unless it is an integral part of the audited financial statements. If such supplementary information is not clearly differentiated, the auditor shall ask management to change how the unaudited supplementary information is presented. If management refuses to do so, the auditor shall explain in the auditors report that such supplementary information has not been audited. Presenting Supplementary Information with the Financial Statements 3.6.10 Audits Conducted in Accordance with ISAs and National Auditing Standards Where the auditor is required to report on compliance with national auditing standards and the ISAs, reference would be made to both sets of standards in the auditors report. A reference to both International Standards on Auditing and the national auditing standards is appropriate when the following conditions are met.

 A reference to both International Standards on Auditing and the national auditing standards is not appropriate where a conflict exists between the requirements in ISAs and those in the national auditing standards that would result in: The auditor forming a different opinion on the national standards than that appropriate for the ISA standards; and Omission of additional information, such as an Emphasis of Matter paragraph, that is required by the ISAs but not permitted under national standards. MODIFICATIONS TO THE AUDITORS OPINION 3.7 Modifications to the Auditors Opinion 3.7.1 Introduction Relevant ISA 705 For purposes of the ISAs, the following terms have the meanings attributed below: (a) PervasiveA term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditors judgment: (i) Are not confined to specific elements, accounts or items of the financial statements; (ii) If so confined, represent or could represent a substantial proportion of the financial statements; or (iii) In relation to disclosures, are fundamental to users understanding of the financial statements. (b) Modified opinionA qualified opinion, an adverse opinion or a disclaimer of opinion.

 3.7.2 Overview The auditor is required to clearly express an appropriately modified opinion on financial statements in situations such as those set out below:

Situations Modified Report Necessary (Qualified, Adverse, or Disclaimer of Opinion) - Financial Statements Are Materially Misstated - Inability To Obtain Sufficient Appropriate Audit Evidence

a) Financial Statements Are Materially Misstated Based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement. This would include uncorrected misstatements that are material, the appropriateness or application of accounting principles, and the failure to disclose information that results in a material misstatement. b) Inability To Obtain Sufficient Appropriate Audit Evidence Unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. This could include: Circumstances beyond the control of the entity, such as a fire that damaged accounting records; Circumstances relating to the nature or timing of the auditors work, such as an inability to attend an inventory count; or Limitations imposed by management, such as management

not allowing the auditor to obtain an external confirmation of certain receivables. 3.7.3 Modifications to the Audit Opinion A modified audit opinion is required where the auditor concludes that: - Based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or - It is not possible to obtain sufficient appropriate audit evidence that the financial statements as a whole are free from material misstatement.

There are three types of modified opinions. These are qualified, adverse, and a disclaimer of opinion. The exhibit below (reproduced from ISA 705.A1) illustrates how the type of opinion to be expressed is affected by the auditors judgment about: - The nature of the matter giving rise to the modification; and - The pervasiveness of its effects or possible effects on the financial statements.

The appropriate use of the three types of modifications is described below. Qualified Opinion When the effect is not material and pervasive enough to require an adverse or disclaimer of opinion. This applies where: Sufficient appropriate audit evidence was obtained, but the auditor concludes that misstatements exist, individually or in the aggregate, that are material but not pervasive to the

financial statements; or The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion. The auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

Worded as: Except for the effects (or the possible effects) of the matter described in the Basis for Qualified Opinion paragraph Adverse Opinion When the effects of misstatements are both material and pervasive. This applies where sufficient appropriate audit evidence was obtained, but the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. Worded as In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph...the financial statements do not present fairly Disclaimer of Opinion When the possible effect of undetected misstatements, if any, could be both material and pervasive. This applies where the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and concludes that the possible effects of undetected misstatements, if any, could be both material and pervasive. This also applies to extremely rare circumstances where it is not possible to form an opinion due to the potential interaction of multiple uncertainties and their possible cumulative effect on the financial statements. This

applies even where the auditor has obtained sufficient audit evidence regarding each of the individual uncertainties. Worded as Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements. The only alternative to issuing an adverse or disclaimer of opinion would be withdrawing from the audit altogether (where permissible) and not issuing an opinion. When a modification is required, the details would be provided in a basis for modification as paragraph described below. Basis for modification Purpose Sets out details of the modification in a separate paragraph (uniformly worded to the extent possible) preceding the opinion or disclaimer of opinion on the financial statements. The paragraph would be headed Basis for Qualified Opinion, Basis for Adverse Opinion, or Basis for Disclaimer of Opinion. Wording The paragraph would include: - The substantive reasons for qualification; - Unless impracticable, quantification of the possible effect(s) on the financial statements of modifications involving specific amounts in the financial statements (including quantitative disclosures). This would include quantification of the effects on the account balances, classes of transactions and disclosures affected, plus the effect on income before taxes, net income, and equity;

- When applicable, a statement that it is not practical to quantify the financial effects; - Where the material misstatement relates to narrative disclosures, an explanation of how the disclosures are misstated; - Nature of omitted information unless disclosures are not readily available, not prepared by management, or would be unduly voluminous in the report; and - A description of all identified matters that would have required a modification of the auditors opinion. An adverse or disclaimer of opinion relating to one specific matter does not justify the omission of other matters that would have required a modified auditors report. Notes to the Financial Statements The auditors report may make reference to a more extensive discussion in a note to the financial statements. 3.7.4 Financial Statements Are Materially Misstated This applies where sufficient appropriate audit evidence has been obtained, but the auditor concludes that misstatements, individually or in the aggregate, are material (requiring a qualified opinion) or material and pervasive (requiring an adverse opinion) to the financial statements. This could result from: - The auditors evaluation of uncorrected misstatements; - The appropriateness of the selected accounting policies; - The application of the selected accounting policies; or - The appropriateness or adequacy of disclosures in the financial statements.

Examples Inappropriate Selection of Accounting Policies Inadequate Disclosure of a Financial Instrument Inadequate Disclosure of Material Uncertainty 3.7.5 Inability To Obtain Sufficient Appropriate Audit Evidence This applies when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material (qualified opinion) or material and pervasive (disclaimer of opinion).

The auditors inability to obtain sufficient appropriate audit evidence (also referred to as a limitation on the scope of the audit) may arise from: - Circumstances beyond the control of the entity, such as when the entitys accounting records have been destroyed (such as through fire, water, theft, or computer-data loss) or seized by a government authority; - Circumstances relating to the nature or timing of the auditors work. This could occur where the auditors appointment is such that the auditor is unable to observe the counting of the physical inventories, the accounting records are not complete at the time of the audit, or where the auditor determines that performing substantive procedures alone is not sufficient but the entitys controls are not effective; or - Limitations imposed by management, such as not allowing external confirmation of certain receivables or restricting access to key personnel, accounting records, or operating locations. Where this occurs, there may

be other audit implications, such as the assessment of fraud risks and whether to continue with the engagement. If the limitation is known before the engagement is accepted, the auditor would ordinarily not accept such a limited engagement.

Before concluding that a modified opinion is required, the auditor would: - Attempt to obtain sufficient appropriate audit evidence by performing alternative procedures; and - Discuss the matter with management and those charged with governance to determine if the issue can be resolved. If the matter cannot be resolved, the auditor would then communicate the intention to modify the audit opinion and the proposed wording.

Limitation on Scope, Unable to Observe the Counting of Inventories Evaluation = Material but not pervasive Response = Qualified opinion Framework = International Financial Reporting Standards

Limitation on Scope, Management Placed Limitations on Scope of Audit Work Evaluation = Material and pervasive Response = Disclaimer of opinion Framework = International Financial Reporting Standards 3.7.6 Emphasis of Matter & Other Matter Paragraph

 In certain situations, the auditor may want to draw the users attention to certain matters in the auditors report that are fundamental to the users understanding of the financial statements, or of the audit itself and the auditors responsibilities. This can be achieved by adding an extra paragraph to the auditors report. The two types of paragraph that can be added are outlined below. Emphasis of Matter (Paragraph) Attention is drawn to important matters relating to the financial statements already disclosed in the financial statements. Matter(s) presented/disclosed in the financial statements that are of such importance that they are fundamental to users understanding of the financial statements. Examples Uncertainty relating to exceptional litigation or regulatory action, subsequent events, a major catastrophe, other significant uncertainties and inconsistencies, and early application (where permitted) of a new accounting standard. Other Matters (Paragraph) Matters relevant to users understanding of the audit function but not disclosed in the financial statements Any matter(s) (other than those presented or disclosed in the financial statements) that are relevant to the users understanding of the audit, the auditors responsibilities, and/or the auditors report. Examples Inability of the auditor to withdraw from the engagement, additional responsibilities of the auditor, and any restrictions on the distribution of the auditors report. An Emphasis of Matter paragraph is not a substitute for: - Modifying the audit opinion when required; or

- Management making required disclosures in the financial statements.

When the auditor expects to include an Emphasis of Matter or an Other Matter paragraph, the auditor would communicate with management and those charged with governance on: - The need for the paragraph; and - The proposed wording. 3.7.7 Emphasis of Matter Paragraph An Emphasis of Matter paragraph is intended to highlight important matters (already disclosed in the financial statements) that will enhance the users understanding of the financial statements. The key requirements for using an Emphasis of Matter paragraph are set out below. (Conditions and Comments) a) Matter is Already Fully Disclosed in the Financial Statements The Emphasis of Matter paragraph refers to matters already presented or disclosed in the financial statements and is not a substitute for such disclosure. The paragraph would not include more detail than is already presented in the financial statements. b) No Material Misstatement Exists The auditor has to obtain sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements. c) Placed Immediately after the Audit Opinion The paragraph follows the auditors opinion paragraph, but comes before the section on any other reporting responsibilities. The paragraph is headed Emphasis of Matter or other appropriate heading.

d) Is Not a Modification to Opinion The paragraph indicates that the auditors opinion is not modified in respect of the matter emphasized. 3.7.8 Other Matter Paragraph An Other Matter paragraph may be necessary to highlight matters not already disclosed in the financial statements that would be relevant to the users understanding of the audit, the auditors responsibilities, and/ or the auditors report.

Other Matter paragraphs can be used to highlight matters such as: - Restriction on distribution of the auditors reportSince financial statements (using a general purpose framework) are sometimes prepared for a specific purpose, an Other Matter paragraph could state that the auditors report is intended solely for the intended users and should not be distributed to or used by other parties; - Highlight additional responsibilitiesSpecific law, regulation, or generally accepted practice in a jurisdiction may require or permit the auditor to elaborate on the auditors responsibilities; and - Inability to withdraw from the engagementIf the auditor is unable to withdraw or resign, an Other Matter paragraph could explain why it is not possible. The following conditions apply when using an Other Matter paragraph. (Conditions and Comments) a) Matter is Not Already Disclosed in the Financial Statements Refers to a matter other than those already presented or disclosed in the

financial statements. In addition, an Other Matter paragraph would not include information required to be provided by management. b) Disclosure is Not Prohibited The disclosure would not be prohibited by law, regulation, or other professional standards such as standards relating to confidentiality of information. c) Disclosure Relevant to Users The disclosure is relevant to the financial statement users understanding of the audit, the auditors responsibilities, or the auditors report. d) No Contradictions The information presented would not contradict the opinion or items disclosed or presented in the financial statements. The Other Matter paragraph does not affect the auditors opinion. e) Placed Immediately After the Audit Opinion The paragraph would immediately follow after the Opinion paragraph and any Emphasis of Matter paragraph, or elsewhere in the auditors report if the content of the Other Matter paragraph is relevant to the Other Reporting Responsibilities section. f) State that Such Disclosure Not Required The content of an Other Matter paragraph would indicate that the matter is not required to be presented and disclosed in the financial statements. The following ISAs refer to situations where an Other Matter paragraph may be included. ISA Title Paragraph

560 Subsequent Events 710 Comparative Information Corresponding Figures and Comparative Financial Statements

2(b), 16 13-14; 16-17, 19

THANK YOU FOR YOUR ATTENTION AND CONTRIBUTIONS KNUST IDL ACF 468 WEEK 2 (D) AUDIT ASSURANCE AND ASSURANCE SERVICES 3.8.1 AUDIT ASSURANCE Audit assurance is about the implementation of a system to regulate the auditing practice as an added measure to ensure quality audit. Quality Assurance or Practice Assurance is a fall out of the scrutiny of corporate governance in the post Enron world. Audit assurance has always been a prickly subject.

No one liked the prospective of having their business interfered with by a board of inspectors, no doubt with intent on finding fault. It would be timeconsuming and costly, and potentially embarrassing.

 Auditing practitioners believe that there is the need to maintain the right standard of practice and that is all that audit assurance is about. The standard of practice are principles based, not prescriptive, and have been designed with the aim of providing useful examples of best' and 'acceptable' practice. Reviewers will assess whether a firm's procedures and standards of practice are effective and appropriate to its size and the nature of the work it does. Practice assurance is part of an overall quality assurance programme, designed to demonstrate to the business community and wider public the accountancy profession's commitment to upholding and developing professional standards that command public confidence. It involves the monitoring of all accountancy member firms and encompasses all practising certificate holders. Practice assurance involves the following: - Laws, regulations and professional standards - Client acceptance and disengagement - Competence

- Quality Control

Practice assurance scheme works as follows: An annual return is sent by the board of inspectors to firms, covering all areas of work they undertake, including work in the regulated areas. This is used to gain information about firms and assist in making selections for visit to the firms. This return will include the annual statement of compliance and statements relating to client money and money laundering regulations. 3.8.2 An Auditors System of Quality Control Policies and Procedures a) Objective The objective of the auditor is to establish and maintain a system of quality control to provide him with reasonable assurance that: The Auditor and his staff comply with professional standards and applicable legal and regulatory requirements; and

 Reports issued by the Auditors firm or engagement partners are appropriate in the circumstances. The objective provides the context in which the requirements of ISQC 1 are set, and is intended to assist the auditor in: Understanding what needs to be accomplished; and Deciding whether more needs to be done to achieve the objective. b) Elements of a System of Quality Control The auditors system of quality control that includes policies and procedures addresses each of the following elements: Leadership responsibilities for quality within the auditors firm. Relevant ethical requirements. Acceptance and continuance of client relationships and specific engagements. Human resources. Engagement performance. Monitoring. The following are the audit firms policies and procedures which the staff members are to comply with. i. Leadership Responsibilities for Quality within the Firm The ultimate responsibility of the firms system of quality control rests with the Senior Partner. He should ensure that the firms system of quality control is complied with in the performance of engagements The Senior Partner should ensure that the audit managers who are assigned operational responsibility for the firms system of quality control by him has sufficient and appropriate experience and ability, and the necessary authority, to assume that responsibility. ii. Relevant Ethical Requirements

 A crucial decision at this stage is confirmation that we will be able and willing to accept (or continue with) the engagement having regard inter alia, to: Ethical and independence requirements The capacity and resources to execute the audit The particular risks associated with the engagement

Independence The purpose of an audit is the expression of an independent opinion on the financial statements. It is therefore necessary to establish independence before commencing any detailed work. Independence requires: Independence of mind The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism Independence in appearance The evidence of facts and circumstances that are so significant that a reasonable and informed third party, having all knowledge of relevant information, including safeguards applied, would reasonably conclude a firms or other member of the audit teams integrity, objectivity or professional skepticism had been compromised The process is to consider first the threats to the auditors independence that may exist and then to consider what safeguards can or should be put in place to mitigate these threats. Where no safeguards are available to reduce the threat to an acceptable level, the auditor should eliminate the activities or interest giving rise to the threat or notify the client and cease to act immediately. His consideration of threats to independence should be properly documented in the file.

 For each audit the auditor should consider and document any actual or perceived threats to his independence or objectivity through: Self-interest threat occurs when a firm or member of the assurance team could benefit from a financial interest in, or other self-interest conflict with an audit client. Examples of circumstances which may create this threat include, but are not limited to: a direct financial interest or material indirect financial interest in an audit client a loan or guarantee to or from an audit client or any of its directors or officers undue dependence on total fees from an audit client concern about the possibility of losing the engagement having a close business relationship with the audit team potential employment with an audit client contingent fees relating to audit engagements Self-review threat occurs when (1) any product or judgment of a previous audit engagement or other engagement needs to be re-evaluated in reaching conclusions on the audit engagement or (2) when a member of the audit team was previously a director or officer of the audit client, or was an employee in a position to exert direct and significant influence over the subject of the audit engagement. Examples of circumstances that may create this threat include, but are not limited to: a member of the audit team being, or having recently been, a director or officer of the audit client a member of the audit team being, or having been, an employee of the audit client in a position to exert direct and significant influence over the subject matter of the audit engagement. performing services for an audit client that directly affect the subject matter of the assurance engagement

 preparation of original data used to generate financial statements or preparation of other records that are the subject matter of the audit engagement, Advocacy threat occurs when a firm or member of the audit team promotes, or may be perceived to promote, an audit clients position or opinion to the point that objectivity may, or may be compromised. Such may be the case if a firm or a member of the audit team were to subordinate their judgment to that of the client, Examples of circumstances that may create this threat include, but are not limited to: dealing in, or being a promoter of shares other securities in an audit client acting as an advocate on behalf of an audit client in litigation or in resolving disputes with third parties, Familiarity threat occurs when, by virtue of a close relationship with an assurance client, its directors, officers or employees, a firm or a member of the audit team becomes too sympathetic to the clients interests. Examples of circumstances that may create this threat include, but are not limited to: a member of the audit team having an immediate relationship with an assurance client, its directors, officers or employees, a firm or a member of the audit team becomes too sympathetic to the clients interests. a member of the audit team having an immediate family member or close family member who, as an employee of the audit client, is in a position to exert direct and significant influence over the subject matter of the audit engagement a former partner of the firm being a director, officer of the audit client or an employee in a position to exert direct and significant influence over the subject matter of the audit engagement long association of a senior member of the audit team with the audit client

 acceptance of gifts or hospitality, unless the value is clearly insignificant, from the audit client, its directors, officers or employees Intimidation occurs when a member of the audit team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived, from the directors, officers or employees of an audit client. Examples of circumstances that may create this threat include, but are not limited to: threat of replacement over a disagreement with the application of an accounting principle and pressure to reduce inappropriately the extent of work performed in order to reduce fees.

If a threat is identified, unless it is clearly insignificant safeguards must be applied to eliminate the threat or reduce it to an acceptable level and documented. The auditors conclusion with respect to independence considerations should be documented. iii Acceptance and Continuance of Client Relationships and Specific Engagements The audit firm shall only undertake or continue relationships and engagements where the firm: Is competent to perform the engagement and has the capabilities, including time and resources, to do so; Can comply with relevant ethical requirements; and Has considered the integrity of the client, and does not have information that would lead it to conclude that the client lacks integrity. iv. Human Resources

 The Senior Partner shall ensure that the firm has sufficient personnel with the competence, capabilities, and commitment to ethical principles necessary to: Perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and Enable the firm or engagement partners to issue reports that are appropriate in the circumstances.

Assignment of Engagement Teams The Senior Partner shall be responsible for each engagement and shall establish policies and procedures requiring that the identity and role of the senior partner is communicated to key members of client management and those charged with governance; The Senior Partner shall assign appropriate personnel with the necessary competence, and capabilities to: Perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and Enable the firm or the Principal and Managing Partner to issue reports that are appropriate in the circumstances. v. Engagement Performance It will be ensured that engagements are performed in accordance with professional standards and applicable legal and regulatory requirements, and that the firm or the principal and managing partner issue reports that are appropriate in the circumstances. The Senior Partner shall give guidance that includes: Matters relevant to promoting consistency in the quality of engagement performance; Supervision responsibilities; and Review responsibilities.

 The firms review responsibility policies and procedures shall be determined on the basis that work of less experienced team members is reviewed by more experienced engagement team members. Consultation The Senior Partner shall ensure that: Appropriate consultation takes place on difficult or contentious matters; Sufficient resources are available to enable appropriate consultation to take place; The nature and scope of, and conclusions resulting from, such consultations are documented and are agreed by both the individual seeking consultation and the individual consulted; and Conclusions resulting from consultations are implemented. Engagement Quality Control Review The Senior Partner shall: Require an engagement quality control review for all audits of financial statements of listed entities; Set out criteria against which all other audits and reviews of historical financial information and other assurance and related services engagements shall be evaluated to determine whether an engagement quality control review should be performed; and Require an engagement quality control review for all engagements, if any, meeting set criteria established. The Senior Partner shall ensure engagement quality control review to include: Discussion of significant matters with the engagement partner; Review of the financial statements or other subject matter information and the proposed report;

 Review of selected engagement documentation relating to significant judgments the engagement team made and the conclusions it reached; and Evaluation of the conclusions reached in formulating the report and consideration of whether the proposed report is appropriate. For audits of financial statements of listed entities, the firm shall establish policies and procedures to require the engagement quality control review to also include consideration of the following: The engagement teams evaluation of the firms independence in relation to the specific engagement; Whether appropriate consultation has taken place on matters involving differences of opinion or other difficult or contentious matters, and the conclusions arising from those consultations; and Whether documentation selected for review reflects the work performed in relation to the significant judgments and supports the conclusions reached. Documentation of the Engagement Quality Control Review It shall be ensured that documentation of the engagement quality control review includes: The procedures required by the firms policies on engagement quality control review have been performed; The engagement quality control review has been completed on or before the date of the report; and The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the significant judgments the engagement team made and the conclusions it reached were not appropriate. Differences of Opinion Shall be resolved by the Senior Partner Engagement Documentation

Completion of the assembly of final engagement files Completion Checklist shall be completed by staff concerned. Confidentiality, safe custody, integrity, accessibility and retrievability of engagement documentation The Resident and Audit Mangers shall be responsible under the supervision and direction of the Senior Partner Retention of engagement documentation The retention of engagement documentation shall be for a period of at least 10 years before being moved to archives. vi. Monitoring Monitoring the firms quality control policies and procedures The Senior Partner shall ensure that a monitoring process is designed to provide the firm with reasonable assurance that the policies and procedures relating to the system of quality control are relevant, adequate, and operating effectively. This process shall: Include an ongoing consideration and evaluation of the firms system of quality control including, on a cyclical basis, inspection of at least one completed engagement for each engagement partner; Require responsibility for the monitoring process to be assigned to a partner or partners or other persons with sufficient and appropriate experience and authority in the firm to assume that responsibility; and Require that those performing the engagement or the engagement quality control review are not involved in inspecting the engagements.

Evaluating, Communicating and Remedying Identified Deficiencies

 The Audit Managers / Other Partners shall evaluate the effect of deficiencies noted as a result of the monitoring process and determine whether they are either: Instances that do not necessarily indicate that the firms system of quality control is insufficient to provide it with reasonable assurance that it complies with professional standards and applicable legal and regulatory requirements, and that the reports issued by the firm or engagement partners are appropriate in the circumstances; or Systemic, repetitive or other significant deficiencies that require prompt corrective action. The Audit Mangers / Other Partners shall communicate to the Senior Partner deficiencies noted as a result of the monitoring process and recommendations for appropriate remedial action. Recommendations for appropriate remedial actions for deficiencies noted shall include one or more of the following: Taking appropriate remedial action in relation to an individual engagement or member of personnel; The communication of the findings to those responsible for training and professional development; Changes to the quality control policies and procedures; and Disciplinary action against those who fail to comply with the policies and procedures of the firm, especially those who do so repeatedly. Complaints and Allegations The Senior Partner shall ensure the design of a mechanism to provide the firm with reasonable assurance that it deals appropriately with: Complaints and allegations that the work performed by the firm fails to comply with professional standards and applicable legal and regulatory requirements; and Allegations of non-compliance with the firms system of quality control.

Documentation of the System of Quality Control The Audit Mangers / Other Partners shall ensure that appropriate documentation to provide evidence of the operation of each element of its system of quality control is made. The retention shall be reviewed periodically to ensure that laws and regulations are complied with The Audit Managers / Other Partners shall ensure the documentation of complaints and allegations and the responses to them. 3.8.3 Assurance Services Assurance services are independent professional services that improve the quality of information for decision makers. It is "value-added" service. Individuals who are responsible for making business decisions seek assurance services to help improve the reliability and relevance of the information used as the basis for their decisions. Assurance services are highly valued because the assurance provider is independent and perceived as being unbiased with respect to the information examined.

Assurance services can be performed by chartered accountants or by a variety of other professionals. Technological changes have encouraged accounting professionals to transform "number crunchers and certifies of information" to "decision support specialists and enhancers of information". Many professionals who keep abreast of the major changes in the profession and technology have adapted their practices market orientation to these new "valued-added" assurance services. The need for assurance is not new. Chartered accountants have provided many assurance services for years, particularly assurances about historical financial statement information Auditing firms have also performed assurance services related to systems reliability. More recently, chartered accountants have been expanding the types of assurance services they perform to include engagements that provide assurance about other types of information, such as assurance about company financial forecasts and assurance about web-site controls.

The demand for assurance services is expected to grow as the demand for forward-looking information increases and as more real time information becomes available through the internet. One category of assurance services provided by chartered accountants is attestation services. An attestation service is a type of assurance service in which the audit firm issues a report about the reliability of an assertion made and which is the responsibility of another party. The term 'attest' means to provide assurance as to the reliability of information. An attest engagement is one in which a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. There are three categories of attestation services: Audit of historical financial statements Review of historical financial statements and Other attestation services that may be applied to a broad range of subject matter. Chartered accountants provide numerous other attestation services. Many of these services are a natural extension of the audit of historical financial statements, as users seek independent assurances about other types of information. For example, banks often require loans and advances customers to engage chartered accountants to provide assurance about the customer's compliance with certain financial covenant provisions stated in the loan agreement. Chartered accountants also provide assurance about the effectiveness of a client's internal controls over financial reporting. The information about internal controls is closely related to the financial statements, but it is also forward looking because effective internal controls reduce the likelihood of future misstatements in the financial statements. More recently, professional accountants render opinions on other representations, such as reporting on management's report as to the effectiveness of the entity's internal controls, as now required by SarbanesOxley Act of 2002 for companies in USA or overseas companies with USA shareholding interest. Chartered accountants can also attest to the information in a client's forecasted financial statements, which are often used to obtain financing.

Most of the other assurance services that chartered accountants provide do not meet the formal definition of attestation services. They are similar to attestation services in that the chartered accountant must be independent and must provide assurance about information used by decision makers. They differ in that the assurance does not have to be about the reliability of another party's written assertion about compliance with specified criteria. Rather, in these other assurance services engagements, the assurance is about the reliability and relevance of information, which may or may not have been asserted by another party. 3.8.4 Consulting Services Attestation and audit services are considered special types of assurance services. Consulting services do not fall under the umbrella of assurance services. Historically, consulting services offered to clients (two-party contracts) by professional accountants were referred to as management consulting services or management advisory services. These services have generally evolved from accounting-related matters in connection with audits or tax engagements. In a consulting engagement, the accountant develops findings and conclusions, which are followed with recommendations for the benefit of the client. This is in contrast to an attest engagement (a three-party contract) whereby the accountant reports on the reliability of a written assertion that is the responsibility of a third party. Examples of consulting engagements include litigation support services, computer installation engagements, and various market studies for clients. The typical consulting engagement is quite similar to the investigations process which will be discussed in later sessions. The consulting engagement would normally include: Determination of the client's objectives Formulation of a proposed action Fact-finding Communication of the results

 Definition of the problem Implementation and follow up Evaluation of the alternatives. The common feature of all assurance services, including audits and attestation services is the focus on improving the quality of information used by decision makers. The demand for assurance on other types of information is expected to grow substantially with new types of risks faced by businesses and increases in the amount of available information sources. The following areas among others discussed in this section need to be considered by the practitioner and students alike in the area of assurance services: Business risk measurement and analysis Financial performance measurement Operational performance measures Performance of information systems Systems reliability Value for money audits E-commerce Managing e-commerce Web Trust assurance services Sys Trust assurance services Financial reporting and websites security Social matters (corporate social responsibilities) Environmental policies and achievements Corporate governance

 3.8.5 Benchmarking A typical extension of the audit is providing the assurance service of "benchmarking," whereby the practitioner provides quality information as to management's strategies and performance in relation to other similar companies. Benchmarking is a performance measurement tool used in conjunction with improvement initiatives to measure comparative operating performance and to identify best practices. Benchmarking experts have studied such areas as accounting and financial systems, acquisitions, business facilities management, corporate downsizing and foreign currency, as well as host of other topics. Benchmarking has benefited clients for many years, and for many accounting firms this assurance service has also improved the audit function. As corporations have been reengineering their processes, accounting firms are involved in a continuous process of reengineering their audit methodologies in order to become more efficient. This reengineering audit methodology includes more emphasis on the following three basic components: strategies and business process analysis, risk assessment, and business measurement. The first component, (strategies and business process analysis), includes a thorough understanding of the client - the client's strategies, objectives, and management processes to maintain its competitive advantage; the client's business risks associated with these elements; and how the client is responding to these risks. The output from this first component of the audit methodology is to compare the client's elements to industry standards or best practices in order to assess the client's effectiveness in these areas. Such an in-depth analysis has a significant impact on the scope of the audit. PricewaterhouseCoopers' Internet applet, called Edgarscan, is an excellent tool for performance measurement or benchmarking activities. The second component of the reengineered audit methodology is risk assessment. Based on the auditor's understanding of the client's strategies, objectives, processes, and related business risks, the auditor must determine whether the client has the appropriate controls, to mitigate the risks. This detailed assessment of the client's risk profile has a major impact on the audit plan for the client. Risk assessment consists of the process of identifying and analyzing both internal and external risks and threats to

achieving an entity's goals and objectives. The auditor can perform risk assessment either on the level of the whole enterprise or on just a specific application or transaction. Processes for both enterprise-level and application-level risk assessment form the basis for determining how to manage risk. The auditor will then assign more effort to the high risk areas within the client's operations. The third major component of the reengineered audit methodology is business measurement. Here, the auditor, not only focuses on the financial statement numbers, but also the client's accounting recognition practices, the quality of earning, and financial and nonfinancial performance measures. Benchmarking also aids in business measurement. The result of this audit methodology is not only a report on the fairness of the entity's financial statements, but also constructive advice for improvement in the client's operations and performance. This assurance service of benchmarking along with related tools, such as Edgarscan, is having a significant impact on improving client operations and the business audit methodology of accounting firms. Another excellent tool for benchmarking activities is Thomson ONE (Thomson Analytics). Thomson Analytics provides a professional research tool to access a full range of fundamental information, earnings estimates, various market data, and other source documents on a variety of companies. 3.8.6 Accounting Services In response to the needs of non-public clients, regulatory agencies, and the investing public, the public accounting profession offers compilation or review services to clients, rather than conducting a more expensive audit examination in accordance with generally accepted auditing standards (GAAS). Compilation and review of financial statements are defined as follows: Compilation - a service presenting, in the form of financial statements, information that is the representation of management without undertaking to express any assurance on the statements. Review - a service performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited

assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with generally accepted accounting principles or, if applicable, with another comprehensive basis of accounting. Therefore, the basic distinction between these two services is that a review service provides limited assurance about the reliability of unaudited financial data presented by management, whereas a compilation provides no assurance as to the reliability of the data. In a compilation, the accountant prepares financial statements only from information supplied by management. The accountant in a compilation need not verify this information furnished by the client and therefore provides no assurance regarding the validity of this information. 3.8.7 Tax Research Tax practitioners must understand the difference between tax evasion, tax avoidance, and abusive tax avoidance. Tax evasion consists of illegal acts, such as making false statements of fact, to lower one's taxes. Tax advisors must not condone any tax evasion by a client. Tax avoidance seeks to minimize taxes legally, such as avoiding the creation of fact that would result in higher taxes. Tax avoidance is often the objective of tax research. However, Internal Revenue Service (IRS) frowns on "abusive tax avoidance" by promoters of tax shelters and taxpayers investing in transactions which the IRS believes are intentionally misapplying the tax laws. Tax practitioners should also understand how the term tax research is used in different contexts. Applied tax research addresses existing tax laws, with the objective of determining its impact on a given situation. In this section, the term tax research is used solely in the application sense to relate to the tax problems of specific taxpayers, rather than to the problems of the society at large. However, theoretical tax research is often a policy-oriented research having the objective of providing new information that will help policy makers decide what the tax law ought to be. Tax research is best defined as an examination of all relevant tax laws given the facts of a client's situation, in order to determine the appropriate tax consequences.

 Identifying the relevant facts is the first essential part of tax research. Many tax disputes involve questions of fact, rather than questions of law. The term fact as used in the definition of tax research includes conclusions, as well as individual events from which those conclusions are drawn. 3.8.8 The Assurance Report The reporting format is not all that different from the report on audit investigations. The following features of the report should be noted: Title of the report to identify the nature of the assurance engagement being provided. An address that identifies the party or partners to whom the report is directed. A description of the engagement and identification of the subject matter. A statement to identify the responsible party and describe the practitioner's responsibilities. When the report is for a restricted purpose, identification of the partners to whom the report is restricted and for what purpose it was prepared. Identification of the standards under which the engagement was conducted. Identification of the criteria against which the subject matter was evaluated or measured so that readers can understand the basis for the practitioners' conclusions. The practitioner's conclusion, including any reservation or denial of a conclusion. The report data to confirm the consideration of the effect on the subject matter of material events of which practitioner became aware up to that date. The name of the firm or the practitioner and the place of issue of the report.

 3.8.9 International Standards on Assurance Engagements (ISAEs) ISAEs establish the basic principles and essential procedures for professional accountants in public practice for the performance of engagements intended to provide assurance services. ISAEs 3000 - 3399 have been issued to serve as guidance to professional accountants. It is worth mentioning that the International Standard on Auditing on Assurance Engagement continues to undergo revision through development of further guidance; accordingly, practitioners and students are advised to continue to search for materials on the subject. THANK YOU FOR YOUR ATTENTION
AND CONTRIBUTIONS