3 TYPES OF MISSTATEMENTS:

1. Factual - no debating with mgmt on the error made

2. Judgemental - auditor believes there is a more appropriate calculation or prepsenta
has to give sufficient evidence to support his stance in order to con
3. Projected - where a misstmt from a sample is extrapolated to the entire population

TENDERING

S PECALISMS match specialist skills with client's needs

A PPROACH Risk vs Procedure-based
T IMING Interim vs Final audit, site visits, scheduling
U S brief outline of firm, services client can ben
R ESOURCES staff, time , skills
N EEDS OF CLIENT

F EES appropriate level to compensate for servic

C TRLS AS PER QUALITY PROCEDURES Hot Review vs Cold Review,
C OMMUNICATION WITH MGMT Form it will take over the course of the eng

ACCEPTANCE PROCEDURES

Client Screening ◦ MGMT INTEGRITY ◦ PESTEL

◦ Any previous modified audit reports ◦ potential for mgm

Preconditions of Audit 1) Financials based on an acceptable Financial Reporting Fra

2) Mgmt Accept their responsibility for:
Professional Clearance 1) Permission to contact out-going auditor and reasons to d

Ethical Clearance Independence Issues, Conflict of Interest, Confidentiality, P

Competence

Resources

CONTENTS OF AUDIT PLAN

Understanding Entity ◦ PESTEL,

◦ Preliminary Analytical Review
◦ Previous Year Accounts
◦ Previous Year Audit Reports

Materiality Tolerable misstatements, Performance Materiality,

Risk Assessment & Response Biz Risk, RoMM, Detection Risk, Sampling Risk, Non

Audit Approach Ctrls vs Substantive Testing

Resources Budget, staff, timetable with deadlines

ANALYTICAL PROCEDURES IN RISK ASSESSMENT

Profitability Liquidity & Working Capital

◦ ROCE ◦ Current Ratio
◦ Operating Margin ◦ Quick Ratio
◦ Net Profit Margin ◦ Recble/Payables/Inventory Days
◦ Recble Days = (Recble / Sales) x 365
◦ Payable Days = (Payable / Purchases) x 365
◦ Inventory Days = (Inventory / Cost of Sales) x 365

Note: Earnings Mgmt Techniques used to boost profits - linked to Risk of Mgmt Bias
ulation or prepsentation,
ance in order to convince mgmt to change
e entire population

with client's needs

ite visits, scheduling conflicts etc

rvices client can benefit from

mpensate for services required and skill levels used

he course of the engagement

◦ PESTEL
◦ potential for mgmt BIAS (particularly for listed entities)

nancial Reporting Framework

- Fraud Prevention, Detection & Correction
- Int Ctrl Design and Implementation
- Finstat Preparation
 - Info Access

tor and reasons to deny engagement, 2) Out-going auditor properly resigned

st, Confidentiality, Professional Liability

SCOPE =

Sampling Risk, Non-Sampling Risk TIMING =

DIRECTION =

Gearing Other
◦ Debt/Equity Finance Cost ÷ Long Term Debt
Effective Tax % = Tax Exp ÷ Profit before tax onl
 Interest Cover

ales) x 365

isk of Mgmt Bias

fit before tax only
CORPORATE GOVERNANCE AND AUDITING

PRINCIPLES OF CORPORATE GOVERNANCE:

LEADERSHIP ◦ headed by BOD with proper direction & ctrl over companys operations
◦ division of responsibilities at the top - NO unfettered powers
◦ balance between executives and NEDs

EFFECTIVENESS ◦ of BOD and its committees (Nomination, Remuneration, Audit)

◦ knowledge, skills, experience and independence : balanced, updated at regular intervals
◦ director appointment & induction thru rigorous and transparent procedure
◦ Re-election at regular intervals

ACCOUNTABILITY ◦ maintain aspects of Internal Ctrl Systems => Risk Mgmt, sound Corporate Reporting,
◦ relations with Company Auditor

REMUNERATION ◦ attract, retain & motivate QUALITY directors

◦ link rewards to COPORATE & INDIVIDUAL performance

RELATIONS WITH SHAREHOLDERS ◦ dialogue with investors => AGM

◦ encourage their participation
ted at regular intervals

orporate Reporting,
MONEY LAUNDERING

● 3 STEPS: PLACEMENT LAYERING

put into legit biz conceal traceabi
distancing it from

● MAIN INDICATORS OF ML: ◦ CASH BASED TRANSACTIONS

◦ MANY FOREIGN TRANSFERS
◦ SECRECY WHEN QUESTIONED

● TIPPING OFF BY: 1) suspicion disclosed to suspect

● ANTI-ML PROGRAMME ◦ MLRO or DEPUTY when absent

◦ Mgmt Culture supports ML detection
◦ Staff Training
◦ Comprehensive Coverage-Proper procedure from b
◦ Timely and smooth progress of firm's ML procedure
◦ Review of ML program effectiveness, updated for n
◦ ML Report: 1) Suspect Name, 2) ML Amts, 3) Reas

● ACCOUNTANTS REPORTING REQUIREMENTS ◦

◦
◦
◦
◦
-
-

● AUDITORS ACTIONS POST ML SUSPICION ◦

◦
● ACCOUNTANTS CAN RESIGN IF PROTECTING THEIR:
 LAYERING INTEGRATION
conceal traceability by frequent transfering, blends in with legit proceeds, and
distancing it from source used to make legit biz purchases

2) FEAR of tipping off = tipping off

=> link between internal audit staff and external law enforcement bod
detection

Proper procedure from beginning (Customer Due Dilience) to end (Suspicion results in prep of exte
s of firm's ML procedure,
tiveness, updated for new mtds of ML
e, 2) ML Amts, 3) Reason for Suspicion, 4) Location of ML assets

INTERNAL REPORT TO MLRO

EXTERNAL REPORT THEN MADE TO POLICE
FAILURE TO REPORT IS OFFENCE...........unless accountant believed client acted in
ONLY person who suspects ML can report it internally, even if they not at the highest level
FORMAT:
firm name - ML transactions details
suspect and their potential role in ML - location of ML proceeds (if any)

increase professional skepticism, mainly in cash area where ML tends to occur

understand accounting entries made, ask about contra entries
1)COMMERCIAL REPUTATION
2)PROFESSIONAL AND ETHICAL RESPONSIBILITY
ONCE TIPPING OFF IS AVOIDED => SEEK LEGAL ADVICE from your firm's lawyers
git proceeds, and now
git biz purchases

w enforcement bodies

ults in prep of external report)

ed client acted in good faith

t the highest level of mgmt

roceeds (if any)

r firm's lawyers
CUSTOMER DUE DILIGENCE / KNOW YOUR CUSTOMER INFORMATION TO

PURPOSE: Part of Risk Assessment Procedures, should be done by ALL AUDIT firms during CLIENT SCREENING

INDENTIFICATION VERIFICATION
- Of Shareholders
- Of Beneficial Owners (hidden behind the client but effectively as ctrl over directors, e.g Voting rights)
- Of Companies Related to the one in question

◦ Passports as PHOTOGRAPHIC I.D.

....For Individual
◦ Utility Bills to confirm ADDRESS
◦ Certificate of Incorporation
....For Company
◦ Company House Search (confirms s/holders,directors,effective controllers)

LATEST FINANCIALS helps determine source of funds

- Of client
- Of Companies Related to the one in question

SOURCE OF FUNDS / PROVIDERS OF FINANCE

◦ Collateral Assets
◦ Personal guarantees made by s/holders, directors or others

PAST CONTROVERSIAL ISSUES

Eg Breaches of regulations, poor corp. Gov.
INFORMATION TO GATHER

ing CLIENT SCREENING for NEW CLIENTS

g Voting rights)

....For Company
FORENSIC INVESTIGATIONS

Categories => Fraud Insurance Claims

◦ Tax Evasion ◦ Medical Malpra
◦ Money Laundering ◦Property Loss
◦Insider Dealing

General Approach Trace funds & assets Detailed Policy R

Forensic Investigations Approach very similar to audit process

Differences: Specialist area & High pressures situations

Engagement Acceptance and Plan:

1) Accept Engagement? ◦ Adequate Resources? - Skills (Interrogation tra
- Maintain safe custody o
◦ Independence Issues? - do NOT accept if org. is
◦ Fee levels? - high enough to compen

2) Objectives ◦ Uncover details: a)Type of fraud , b)How it occurr

◦ Discover perpetrators
◦ Prosecute perpetrators
◦ Quantify financial loss - NB. LEGALLY no crime co

3) Steps ◦ Uncover details: a)Type of fraud , b)How it occurr

 ◦ Collect evidence - sufficient, appropriate
Eg: CAAT's, Analytical Pro
- interview suspect (last
◦ Evaluate Evidence

◦ Report - court exhibit

- report covers 3 objectiv
- may include suggested

◦ Court proceedings auditor is expert witness

2 Types of Reports From: Forensic Investigation

 Insurance Claims Professional Negligence Disputes
◦ Medical Malpratice ◦ Loss through Professional advice ◦ eg. in Partnerships
◦Property Loss ◦ eg. in Divorce

Detailed Policy Review Merits of Case Detailed Analysis

essures situations due to: court proceeds, interview of suspects, contentious parties as they hav

(Interrogation training, present court exihibits, handle pressure)

tain safe custody of assets
OT accept if org. is an audit client
enough to compensate for specialist work done (part of tendering)

d , b)How it occurred(ctrl weakness), c)For how long

GALLY no crime committed unless loss occurs

d , b)How it occurred(ctrl weakness), c)For how long

 ent, appropriate to PROVE fraud
AT's, Analytical Procedures
view suspect (last stage after enough evidence gathered to get confession)

t covers 3 objectives listed above

nclude suggested improvments to internal ctrls, advice to avoid reoccurrence of fraud

r is expert witness

VS. Forensic Expert used in part of the forensic audit

◦ Stmt of Material Facts (basis of opinion)
Partnerships

d Analysis

ous parties as they have alot to lose

ence of fraud

orensic audit
REGARDLESS OF MATERIALITY CRUMB

PROHIBITED NON-ASSURANCE SERVICES

NO C OUNSEL - general
NO R ECRUITMENT SERVICES
NO U NDERWRITING / DEALING OF SHARES
NO M ANAGING
NO B OOK-KEEPING SERVICES (can be provided if routine, and to immaterial divisions)

Exam Mark => Management Threat -- NO possible safeguard

Safeguards to Mgmt Threat => MGMT makes all final judgements and decisions as follows:

1)Client Staff experienced & skilled enough to oversee services provided

2)Client accepts responsibility for all decisions made based on service results

Hence the safeguard is AVOIDING the mgmt responsibilities on the whole and shifting it back to the

ALL THESE PROHIBITIONS APPLY TO PIE'S (PUBLIC INTEREST ENTITIE

SUMMARY OF ETHICAL FRAMEWORK:

Ethical Issues - Non-Listed Company => Permissable + Safeguards

(or small or owner-managed)

Ethical Issues - Listed Company / Public Interest Entity (PIE) => 1) Prohibited By DEFAULT
2) Prohibited By MATERIAL
3) Permissable + Safeguard
 BASED ON MATERIALITY

NON-ASSURANCE SERVICES

MAYBE D ESIGN & IMPLEMENT of FinRep IT SYSTEMS

MAYBE I NTERNAL AUDIT of INT CTRL OVER FinRep & R
MAYBE V ALUATIONS
MAYBE A DVOCATE FOR COURT MATTERS (TAX or DISPU
mmaterial divisions)
MAYBE T AX CALCULATIONS(current & deferred)
MAYBE E STIMATION OF DAMAGES
MAYBE A DVICE ON CORPORATE FINANCE re Accounting
[corp. Fin. Inlcudes Investment Apprai

ecisions as follows:

ole and shifting it back to the client

C INTEREST ENTITIES)

Generic Safeguards:

Key audit engagement members - Cool Off Periods / R

3rd Party Quality Ctrl Review
Independent 3rd Party Review - eg by specialist in the
Chinese Walls within audit firm - different teams do di
1) Prohibited By DEFAULT
2) Prohibited By MATERIALITY
3) Permissable + Safeguards
RIALITY DIVA TEA

NT of FinRep IT SYSTEMS
f INT CTRL OVER FinRep & Related Systems

URT MATTERS (TAX or DISPUTE)

S(current & deferred)

RATE FINANCE re Accounting Issues with REASONABLE DOUBT

. Inlcudes Investment Appraisal, Financing, Treasury, Acq'ns & Mergers, Dividend policies & Risk Mgmt]

rs - Cool Off Periods / Rotation

- eg by specialist in the particualr area (eg. tax specialist)

- different teams do different audits
INDEPENDENCE ISSUES
Advocacy Threat perception of being representatives of client, supporting
Self-Review Threat provision of a service that has an impact on figures or di
Familiarity Threat close personal relationship eg long association
Intimidation Threat scared to act independently, pressure tactic from client
Self-Interest Threat financial or other interest

Conflict of Interest Eg audit firm provides engagement services for 2 compe

Safeguard = Disclose this to both parties

Professional Liability Duty of Care owed to client

Safeguard = Liability Disclaimer paragraph - stating laib
Safeguard = prove duty of care NOT owed ie

Confidentiality
client, supporting their cause, promoting their interests
t on figures or disclosures in the financials on which the auditors have to express an opinion, lea

actic from client mgmt

ices for 2 competitor firms

aph - stating laibility limited to those to whom report addressed

1) auditor did NOT have close proximity to client (didnt know client would rely on enga
2)NOT fair/just to impose duty
3) party did NOT suffer a financial loss
ss an opinion, leads to auditor over-reliance on figures

ould rely on engagement report)

Disposing Of MAGIC PASTA

Disposals Partial
Full

O ther Auditors ◦ Component Auditors - Evaluate their work using Component SFP

F oreign Subsidiaries

Note: Support Letters - Parent company's support of

k using Component SFP => Component's Qual, Exp, Competence (similar to Ethical Code
=> Strategy auditor's planning techniques regarding risk asse
=> Findings
=> Procedures
to Ethical Code
egarding risk assessm,evidence gathering
AUDIT EVIDENCE

[NOUN] to confirm [PURPOSE]

eg. Copy of sales agreement

eg. Extract of fixed asset register

D ocuments
A cct System
D irectors (board minutes, Written Representations)
A ssets
3 rd Party Confirmations
AUDIT PROCEDURES

COMMON ONES: (taken from past paper answers)

Agrees the amount of cash paid/received to the cash book and bank statement

Agrees the opening balance on a CF to

d bank statement
OTHER ENGAGEMENTS

REVIEW: Enquiries & Analytical Procedures => NOTE: Ctrl & Substantive Tes

AGREED UPON PROCEDURES

COMPILATION:
TE: Ctrl & Substantive Testing are not done
OPINION

BASIS OF OPINIO QUANTIFY and DESCRIBE the financial impact of any misstatement

MURGC

KEY AUDIT MATTER [KAM] Paragraph COMPULSORY FOR LISTED CO's

Includes Intro paragraph explaining what key audit matters are to users

Contents:
◦ Matters MOST SIGNIFICANT in the auditors judgement
◦ Areas that are: - High Risk - Subjective - Complex
◦ Details auditor aproach & Procedures
 WHEN CRITICALLY APPRAISING REPORTS IN T
al impact of any misstatement
Assess Paragraphs shown for accuracy of:
◦ TITLE
◦ POSITION IN BODY OF REPORT
◦ CONTENT
Y FOR LISTED CO's - NO accusatory language, no names called

are to users

AUDIT REPORT - QUESTION APPROACH:

- Major Event/Transaction Like RoMM Question

1) Materiality
2) Correct Treatment vvs Mgmt Misstmt
3) IF NOT ADJUSTED => impact on audit report
4) 2 Fin-Stat Impacts
NG REPORTS IN THE EXAM:

or accuracy of:

ge, no names called

APPROACH:

t on audit report
APPROACH TO AUDIT REPORT QUESTION:

1 Problem

2 Material / Pervasive?

3 Modification

4 Conclusion

IMPACT OF MIS-STMTS WHEN MAKING AUDIT OPINIONS:

If just material to the financials, ALWAYS explictly explain why mis-stmt is NOT PERVA
state " in isolation the matter has a limited impact on the financials as a whole hence

Try to write a shortened version of the Opinion paragraph ie

EXCEPT FOR In our opinion except for the effect on the financials of the ma
ADVERSE In our opinion the financials do not give a true and fair view /
DISCLAIMER We do not express an opinion on the financials
 FS Item / Disclosure

Over/Understated by ______%

State it

Matl Misstmt OR No Modification

Qualified Opinion

OPINIONS:
y explain why mis-stmt is NOT PERVASIVE =>
act on the financials as a whole hence it it not pervasive"

paragraph ie
r the effect on the financials of the matter referred to in the following paragraph, the financials
cials do not give a true and fair view / the financial statements are NOT presented fairly in all m
pinion on the financials
ragraph, the financials give a true and fair view
resented fairly in all material respects
GOING CONCERN

Procedures ◦ Request Mgmt's Own Assessment of going concern

◦ Evaluate their assessment - is it realistic?
◦ Other Evidence - cash flows
◦ Get Mgmt Representation - subjective evidence NOT sufficien

Indicators ◦ Loss of Loan Facility from finance providers

◦ Loss of Major Customers/Suppliers
◦ Financial Loss
◦ Negative Working Capital
◦ Cash flow problems
◦ Key/Senior Staff Leaving (loss of knowledge & experince from
◦ Late Pymt of Staff

Mgmt Responsibilities for Going Concern: ◦ Do a GC Assessment

◦ Disclose in financials -- if matl uncerta
◦ Disclose in financials -- if going concern bas
◦ Consider impact of business activities

Auditor Responsibilities for Going Concern: ◦ Obtain sufficient, appropriate evidenc

◦ Determine audit report implications b
◦ Be ALERT to changing assessment of G
 going concern

e evidence NOT sufficient, however act of asking for this reminds mgmt of their role in going co

wledge & experince from entity can adversely affect strategic goals)

nancials -- if matl uncertainty re. going concern

ncials -- if going concern basis NOT used to prepare fin-stats - state this, the reason why & alternativ basis us
act of business activities on GC

ent, appropriate evidence on mgmt's use of going concern assumption and appropriateness of
udit report implications based on what was found
changing assessment of GC
mt of their role in going concern

on why & alternativ basis used

and appropriateness of its use

PROCEDURES DONE AT REVIEW STAGE:
◦ Get Written Representations for _________
◦ Analytical Review
◦ Qual Ctrl Review
◦ Obtain understanding from mgmt as to why any uncorrected missmts are left as is,
◦ Also for Uncorrected Misstmts: mgmt must provide written representation that the
◦ Auditor makes a Schedule of Uncorrected Misstmts

Other ISAs that require subject matter specific written representations:

ISA 240 The Auditor's Responsibilities Relating to Fraud
ISA 250 Consideration of Laws and Regulations
ISA 450 Evaluation of Misstatements Identified During the Audit
ISA 501 Audit Evidence – Specific Considerations for Selected Items
ISA 540 Auditing Accounting Estimates
ISA 550 Related Parties
ISA 560 Subsequent Events
ISA 570 Going Concern
missmts are left as is, this understanding will be considered when forming opinion
presentation that these are immaterial
NOCLAR - NON-COMPLIANCE WITH LAWS & REGULATIONS

Step 1 Seek legal advice about breach of laws

Step 2 Report suspicion to those TCWG
Step 3 If TCWG suspected, report to Audit Committee
Step 4 Auditor must compel TCWG to disclose to regulatory body, if resistance DO S
Step 5 If TCWG does NOT disclose, seek legal advice first to avoid one of the 2 legal disputes: 1
body, if resistance DO SO THEMSELVES
e of the 2 legal disputes: 1) From client for confidentiality breach 2) From regulator for inaction
or for inaction
SCARY TOPICS

FINANCIAL INSTRUMENTS

GOING CONCERN -- COMPLETION AND AUDIT REVIEW STAGE

SEGMENTAL REPORTING

GROUP AUDITS

related party isa 550

analytical procedures isa 520

FORENSIC AUDITS

AGREED UPON PROCEDURES

CAAT's