Week 3&4 Assurance

• The objective of the auditor is to plan the audit so that the engagement will be performed in an effective manner
• Planning an audit

  Establishing the overall audit strategy for the engagement and developing an audit plan
• Benefits of planning


  • Devote sufficient time to high-risk areas
  • Identify & resolve potential problems effectively
  • Audit performed in an efficient and effective way
  • Select audit team members with relevant skills and expertise to respond to anticipated risks
  • Directs audit team members work and review
  • Coordinate with work of other audit teams e.g. PLC Group audit
• Parties involved in planning

  • Engagement partner
  • Audit manager
  • Audit senior
  • All team members
• ISA 300 requires auditors to document the audit strategy and audit plan
• Audit strategy


  In general terms how the audit is to be conducted, the scope, timing and direction of audit
• Characteristics of engagement

  • Understanding the entity
  • Financial reporting framework i.e. IFRS, UK GAAP, US GAAP
  • Industry specific reporting
  • Audit locations
  • If other audit teams are involved
  • Timing of the audit (interim or final)
  • Reliance on internal audit
  • Availability of staff
  • Centralised services teams i.e. treasury, accounts receivable
• Reporting objectives, timing & communication

  • Timetable for reporting
  • Timing of meeting with audit team members before an audit
  • Communication with the client i.e. timings of 'kick off' meeting, final audit meeting, attendance at client site to perform work, type of reports produced
  • Communications with other audit teams – timings of their reports etc
  • Communication with third parties e.g. obtain bank references, accounts receivable confirmations etc
• Significant factors, preliminary engagement activities and knowledge gained from other engagements

  • Materiality levels determined
  • Identification of high-risk areas
  • Assessed risk of material misstatement
  • Reliance that can be placed on internal controls
  • Any changes in the financial reporting framework e.g. accounting for leases
  • Changes in any laws or regulations e.g. sugar tax
  • Changes in IT system
  • Changes in key personnel
  • New contracts entered into during the year
• Nature, timing and extent of resources

  • Selection of audit team members
  • Assignment of team members to specific audit tasks (according to expertise)
  • Budgeting – set the budget (staff hours x charge out rates)
  • Budgeting – will this need to change due to changes to workload as a result of risk assessment procedures
• Interim audit


  Completed part way through year, especially useful for tight reporting deadlines, conduct most of audit work during client's 'quiet' period, focus is on documenting and testing internal controls, test specific and complete transactions e.g. purchase of new company
• Final audit


  Completed after year end, focuses on remaining areas (if interim audit performed), smaller workload testing last few months of the year, focus on year end journal entries and SFP balances
• Internal control limitations


  • Human error
  • Fraudulent collusion
  • Management override
  • Exceptional or unforeseen circumstances
  • Limited resources
  • Difficulties recruiting suitable calibre staff and directors
• Ethics


  A social, religious, or civil code of behaviour considered correct, especially that of a particular group, professionalism, or individual
• Assurance engagements


  A practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users
• Accounting bodies have largely adopted the IESBA (international ethics standard board for accountants) Code of Ethics for Professional Accountants
• IESBA Code of Ethics fundamental principles

  • Integrity – straightforward and honest
  • Objectivity – not affected by bias or undue influences i.e. independent
  • Professional competence and due care – duty to maintain knowledge and skills. Act diligently
  • Confidentiality – client information (conflict of interest)
  • Professional behaviour – avoid actions that discredit profession
• Threats to objectivity

  • Self-review
  • Self interest
  • Familiarity
  • Advocacy
  • Intimidation
• Safeguards

  Actions or other measures that may eliminate threats or reduce them to an acceptable level
• Categories of safeguards

  • Safeguards created by the profession, legislation, or regulation
  • Safeguards in the work environment
• Self-review safeguards

  
  

  1. The firm provides non-audit services for the organisation as well – accounts preparation/tax advice/consultancy/valuations.

  - Safeguard - A different team and engagement partner for each type of service provided to ensure no team is reviewing work that they’ve completed.

  2. The client staff transfer over to the audit firm.

  - Safeguard – If the clients staff transfer over to the audit firm, they shouldn’t form part of the audit team for that specific client.
• Self-interest safeguards

  
  

  Owning shares in the client company

  - Safeguard – Any employee who owns shares in a client should not form part of the audit team.

  High value gifts from clients

  - Safeguards – ‘excessive’ gifts should be politely declined.

  Potential employment with client

  - Safeguard – Employees who are transferring over to the client should not form part of the audit team for that client, or if the work has already been done, the work should be reviewed again.
• Familiarity safeguards

  Known the client for years.

  - Safeguard (for non-listed audit clients) – The form should consider whether a change in engagement partner/senior staff is necessary is they have been working with the client for 10+ years although this is not mandatory.

  - A second partner review is another valid safeguard.

  - Safeguard (for listed clients) – No one can act as engagement partner for >5 years and senior teams should be reviewed after 7 years.
• There are no safeguards for advocacy - politely decline that type of work
• Intimidation safeguards - Recurring work

  
  

  Unpaid fees from the prior year – Safeguard – all fees must be paid before any other work commences.

  
  

  Threatened litigation/loss of client/other clients/potential clients – safeguard – Consider resigning from the audit firm.
• Accumulated depreciation


  Charge for year x term owned
• Carrying value


  Cost – accumulated depreciation
• Revaluation surplus


  Revalued amount – carrying value
• Intimidation safeguards

  Large proportion of a firm’s income.

   

  The rules:

  For non-listed audit clients – a client recurring fees should not exceed 15% of an audit firm’s revenue. For clients who >10% <15% this needs to be monitored.

   

  For listed audit clients – A clients recurring fees should not exceed 10% of an audit’s revenue. For clients who >5% <10% this needs to be monitored.

   

  Safeguards – Reduce fees to prevent exceeding limits, decline aspects of work or find new clients to increase revenue.
• What is performance materiality?


  A separate calculation which is typically adds an extra x% on to the original materiality figure i.e. making the materiality figure larger. This will help reduce the probability that the total (aggregate) individual misstatements do not add up to a material amount collectively.
• What is meant by inherent risk?

  
  

  The risk that the auditor’s procedures are not designed and performed correctly so that they fail to detect a material misstatement in the financial statements
• What is meant by the term 'inherent risk'?

  The risk that the auditor’s procedures are not designed and performed correctly so that they fail to detect a material misstatement in the financial statements
• What is meant by control risk?

  The risk that the internal controls will fail to prevent or detect a material misstatement or fraudulent transaction.
• What is meant by the term 'detection risk'?


  The risk that the auditors procedures are not designed and performed correctly so that they fail to detect a material misstatement in the financial statements.
• At the client reputation stage, an audit firm must consider

  1. if the client is known to behave unethically in their business practices
  2. if the audit firm’s reputation will be tarnished by being associated with auditing the financial statements of an unethical company
• At the management integrity stage, an audit firm must consider

  1. if there is a risk of fraud or intimidation by the client due to past questionable business practices or financial reporting
• How can an audit firm break contract law?

  Be negligent in their duties which ultimately results in a financial loss to their client.
• Examples of non-statistical sampling methods

  Haphazard selection

  Block selection