Lack of controls that increase the

Intentional act involving the use of opportunity of fraud

deception to obtain an unjust or Motive
illegal advantage
Dishonesty

Opportunity
Reason for fraud

Prerequisites for fraud

Definition

Fraud detection
Fraud prevention
FRAUD

1. Anti-fraud Fighting fraud It is not the 1. Performing

Reduce opportunity
responsibility of external regular checks
and remove culture
2.Risk awareness auditors to look for fraud 2. Paying attention
temptation for fraud
3. Whistleblowing to warning signs

Fraud response

The fraud response plan sets out the 1. Internal disciplinary action
arrangements for dealing with suspected cases of 2.Civil litigation for the recovery of loss
fraud, theft or corruption. 3. Criminal prosecution through the police
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 Error of commission
Spot checks

Error of omission Error of principle

Types of errors Detection of errors

Transactions should be authorised at

an appropriate level ERRORS Evidence of transactions

Authorisation procedure Documentation

Prevention of errors

Segregation of duties Safeguarding of assets

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 An independent appraisal activity established within an 1. Reviewing accounting and internal control systems
organisation as a service to it. It is a control which 2. Examining financial and operating information
functions by examining and evaluating the adequacy and 3. Assisting with the identification of significant risks
effectiveness of other controls 4. Special investigations
5. Reviewing the economy, efficiency and effectiveness of operations
6. Reviewing compliance with laws and other external regulations

Definition

Role of internal audit department

Types of audit

The need for an internal audit department

INTERNAL
1. Financial audit
AUDIT
2. Operational audit
3. Project audit
4. Value for money audit 1. Scale and diversity of activities
5. Social and environmental audit 2. Complexity of operations
6. Management audit 3. Number of employees
4. Cost/benefit considerations
Qualities of an effective
Internal audit 5. The desire of senior management to have
internal audit function assurance and advice on risk and control
report

1. Terms of reference
1. Sufficiently resourced 2. Well organised 2. Executive summary
3. Independent and objective 4. No operational responsibilities 3. Body of the report
5. Work plan agreed by the audit committee 6. No limitation on the scope of their work 4. Appendix
7. Chief internal auditor appointed by the audit committee
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 To enhance the degree of confidence of the intended users in 1. Obtain reasonable assurance about whether the financial are free from
the financial statements. material misstatements
2. Express an opinion on whether the financial statements are prepared in
accordance with an applicable financial reporting framework.
3. Report on the financial statements, and communicate in accordance
with the auditor's findings.

Purpose

Objectives of an auditor

Elements of an external audit

engagement EXTERNAL
AUDIT

A three-party relationship, involving: the

practitioner, a responsible party and intended users Requirement for external audit

Appropriate subject matter

Suitable criteria Every company in UK needs to conduct an

Audit, unless they come with two of the
following exceptions:
Sufficient, appropriate evidence to support the conclusion • Turnover < £10.2m
• Total assets < £5.1m
• Number of employees < 50
A conclusion contained within a written report

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 Audit opinion is a guarantee the financial 1. Financial statements include subjective estimates and other judgmental matters.
statements are 'correct' and not an absolute 2. Internal controls may be relied on which have their own inherent limitations.
assurance. 3. Representations from management may have to be relied upon.
This misconceptions about the role of an auditor 4. Evidences often persuasive not conclusive.
are referred to as expectations gap. 5. Do not test all transactions and balances, only a sample is tested.

Limitations of an audit
Expectations gap

EXTERNAL
AUDIT

Audit testing
Rights of auditors

Controls testing - Assessing the

reliability of accounting systems,
procedures and controls. 1. Access to accounting records
2. Access to information and explanations as necessary
3. Receive notice of, attend and speak at general
Substantive testing - Detailed meetings of shareholders
testing designed to detect material 4. Rights relating to their removal, resignation and
misstatement retirement.

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 Control risk - This risk is caused by the
failure of existing controls or the absence of
Inherent risk - The susceptibility controls, leading to incorrect financial Detection risk - This risk is
of a transaction, account balance or statements. caused by the failure of the auditor
disclosure to material misstatement to discover a material
irrespective of the internal controls misstatement in the financial
in place. statements.

Audit risk

EXTERNAL
Sufficient evidence AUDIT Appropriate evidence

Quantity Audit evidence Quality

There needs to be 'enough' evidence to Reliable - Obtain evidence from the Relevance - Audit evidence has to
support the auditor's conclusion. most trustworthy and dependable source address the objective/purpose of a
possible procedure

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 Preliminary engagement activities: Audit strategy - Sets the scope,
1. Evaluating compliance with ethical timing and direction of the audit
requirements
2. Establishing the terms of the Audit planning
engagement activities
Audit planning Audit plan - Detailed plan on how
process the various matters identified in the
audit strategy will be applied
Planning activities:
1. Developing the audit strategy
2. Developing an audit plan

Audit engagement letter

Audit opinion

EXTERNAL
AUDIT Specifies the nature of Contents
Unmodified report with unmodified opinion – the contract between
Opinion that financial statements are presented, in the audit firm.
all material respects, in accordance with applicable
financial reporting framework.

Letter of
1. The objective and scope of the audit
Modified report with unmodified opinion – representation
2. The responsibilities of the auditor
The financial statements show a true and fair view but 3. The responsibilities of management
there is something that needs to be brought to the 4. The identification of an applicable financial
attention of the user by way of an additional paragraph. reporting framework
5. Reference to the expected form and content
of any reports to be issued
Modified report with modified opinion – A written statement by management
The financial statements don’t fully show a true and to the auditor to confirm certain
fair view or the auditor has not obtained sufficient matters or to support other audit
appropriate evidence to make that conclusion. evidence
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 Contents of an unmodified Management letter
audit report

1. Title and Addressee

2. Introductory Paragraph Covers reporting deficiencies in internal
3. Management's Responsibilities control that have been identified during the
4. Auditor’s Responsibilities course of the audit.
5. Opinion
EXTERNAL
6. Other Reporting Responsibilities AUDIT
7. Signature, Date and Address

Audit Firm Governance Code

Leadership Values Independent non- Operations Dialogue Reporting

executives

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