ACCA
Advanced Audit
and Assurance (AAA)
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Advanced Audit and Assurance (AAA)
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ISBN 978-1-83996-176-2
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P.2
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Advanced Audit and Assurance (AAA)
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Advanced Audit and Assurance (AAA)
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KAPLAN PUBLISHING
Advanced Audit and Assurance (AAA)
Contents
Chapter 1:
Regulatory environment..................................................................................................1
Chapter 2:
Money laundering........................................................................................................... 9
Chapter 3:
Code of ethics and conduct.......................................................................................... 13
Chapter 4:
Professional responsibilities and liabilities.................................................................... 21
Chapter 5:
Quality management..................................................................................................... 29
Chapter 6:
Practice management................................................................................................... 35
Chapter 7:
Planning, materiality and assessing the risk of misstatement...................................... 43
Chapter 8:
Group and transnational audits.................................................................................... 53
Chapter 9:
Evidence.......................................................................................................................61
Chapter 10: Completion....................................................................................................................75
Chapter 11: Reporting......................................................................................................................83
Chapter 12: Audit-related services................................................................................................... 91
Chapter 13: Review of interim financial information......................................................................... 95
Chapter 14: Prospective financial information.................................................................................. 99
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Advanced audit and assurance
Chapter 15: Due diligence.............................................................................................................. 103
Chapter 16: Forensic audits........................................................................................................... 107
Chapter 17: Audit of social, environmental, sustainability and integrated reporting...................... 111
Chapter 18: INT syllabus: Audit of performance information in the public sector.......................... 117
Chapter 19: UK syllabus: Auditing aspects of insolvency.............................................................. 121
References .................................................................................................................................... R.1
Index
......................................................................................................................................I.1
.
This document references IFRS® Standards and IAS® Standards, which are authored by the International
Accounting Standards Board (the Board), and published in the 2021 IFRS Standards Red Book.
P.6
KAPLAN PUBLISHING
Advanced Audit and Assurance (AAA)
The content and style of the exam
Number of marks
Section A – one question
Planning, risk assessment, gathering evidence, ethical and professional
considerations
40
Professional skills and behaviours
10
Total for Section A
50
Section B – two questions
Completion review and reporting
20
Professional skills and behaviours
5
Any syllabus area other than completion review and reporting
20
Professional skills and behaviours
5
Total for Section B
50
Total marks
100
All questions are compulsory
Current issues can be examined in any part of the exam
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P.7
Advanced Audit and Assurance (AAA)
Professional skills
Professional scepticism and judgement
The inclusion of this syllabus area reflects
ACCA’s continued focus on ensuring that
the professional accountants of the future
have the right blend of technical and
professional skills, coupled with an ethical
mindset.
Probe, question and challenge information
and views presented to you.
The AAA exam will expect candidates to
demonstrate the following Professional Skills:
Communication:
Express yourself clearly and convincingly
through the appropriate medium while
being sensitive to the needs of the intended
audience.
Analysis and evaluation
Investigate and research information from a
variety of sources.
Carefully consider information, evidence,
ethical and professional issues and how they
will impact the audit engagement, the audit
firm or the client.
P.8
Commercial acumen
Show awareness of the wider external
factors affecting auditors, using commercially
sound judgement and insight to reach
suitable conclusions and implement relevant
recommendations.
Each of the four professional skills has
a number of leadership capabilities
associated and these will be used to allocate
marks in each exam question as appropriate.
Professional skills marks are earned as
you work through the technical marks
by providing a comprehensive and relevant
response to the technical requirements.
Therefore, time should be allocated based
on the technical marks available.
KAPLAN PUBLISHING
Advanced Audit and Assurance (AAA)
Section A
All four Professional Skills will be examined
and will be worth 10 marks.
Section B
Each question will contain a minimum of
two professional skills from Analysis and
evaluation, Professional scepticism and
judgement, and Commercial acumen.
Communication will not be examined in
Section B. Professional skills will be worth 5
marks per question.
Employability and technology
skills
By studying ACCA exams, candidates will
be equipped with not only technical syllabus
knowledge and professional skills, but
also practical, applied software skills. The
employability and technology skills syllabus
area is included within the syllabus to
acknowledge this acquired skillset.
KAPLAN PUBLISHING
The CBE software will replicate the work
that is performed by accountants in a
typical workplace. It will be used across
the syllabus to support a candidate’s answer
by providing suitable response options for
different types of answers. These response
options will be most suitable in the following
instances:
•
For discursive answers: it is best to use
the word processing option
•
For calculations: it is best to use the
spreadsheet option.
ACCA candidates can access the ACCA’s
Exam Practice Platform to practice
attempting questions using the CBE
software. It is imperative that candidates are
familiar with the software before attempting
the exam.
P.9
Advanced Audit and Assurance (AAA)
Aim of the exam
The keys to success
To ensure that candidates can exercise
judgement and apply techniques in the
analysis of matters relating to the provision
of audit and assurance services and can
evaluate and comment on current practices
and developments.
•
Answer all requirements to each
question attempted.
•
There is very little scope for rote-learned
knowledge: you MUST apply your
knowledge to the specific circumstances
of the scenario.
•
Take your time to read and understand
the full question requirement before
reading the scenario.
Time allocation
P.10
•
Allow 15 minutes for reading time and 3
hours for writing.
•
There are 80 technical marks and 20
professional skills marks. Professional
skills marks should be achieved as you
work through the technical marks.
•
Your time allocation should be 2.25
minutes per mark (180/80).
•
Be strict with your time and move
onto the next requirement when your
allocated time is up.
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Advanced Audit and Assurance (AAA)
Quality and accuracy are of the utmost
importance to us so if you spot an error in
any of our products, please send an email
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form in MyKaplan.
Our Quality Co-ordinator will work with our
technical team to verify the error and take
action to ensure it is corrected in future
editions.
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Advanced Audit and Assurance (AAA)
P.12
KAPLAN PUBLISHING
chapter
1
Regulatory environment
In this chapter
•
Main sources of regulation.
•
Public oversight and corporate governance.
•
Audit committees.
•
Current issues and developments.
1
Regulatory environment
The main sources of regulation
International Standards on Auditing
(ISAs) are issued by the International
Federation of Accountants (IFAC) – these
provide the basic principles and essential
procedures in most audit areas.
ACCA’s Code of
Ethics and Conduct
IESBA’s
International Code of
Ethics for Professional
Accountants
IFAC issues auditing standards
through its standards committee, the
International Auditing and Assurance
Standards Board (IAASB), whose mission
is to establish high quality, assurance,
quality control and related services
standards to develop the harmonisation
process worldwide.
2
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Chapter 1
Public oversight and corporate governance
Corporate governance is about ensuring that public companies are:
•
managed effectively
•
for the benefit of the company and its shareholders.
Fair appraisal
of performance
Fair remuneration
and benefits
Support/oversight of management by non-executive
directors (NEDs) with sufficient experience and authority
Good corporate governance requires
Fair financial
reporting
Constructive
relationship with
shareholders
Effective
management
Sound
systems of
internal control
Good corporate governance can be enforced:
•
by law – e.g The Sarbanes-Oxley Act, USA
•
by agreement through codes of best practice – e.g. UK Corporate Governance Code, or
•
through a combination of the two.
KAPLAN PUBLISHING
3
Regulatory environment
Corporate governance in action
Board leadership and
company purpose
Division of responsibilities
Composition, succession
and evaluation
4
•
Effective board leadership
•
Promote long-term sustainable success
•
Directors should lead by example
•
Independent chair leads the board
•
CEO and chair should be 2 individuals
•
Board should be balanced
•
Half the board should be independent
•
Board appointments made by Nomination
committee (majority INEDs)
•
Appointments based on merit – best person for
the job
•
Combination of skills and experience
•
Annual re-election of all directors
•
Chair must be replaced after 9 years
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Chapter 1
Audit, risk and
internal control
Remuneration
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•
Audit committee should ensure independence of IA and
EA functions
•
Board should manage risks and oversee internal controls
•
Audit committee must be established (min 3 INEDs)
•
Chair should not be a member of audit committee
•
At least one member with recent and relevant experience
•
Remuneration set by Remuneration committee (min 3 INEDs)
•
Remuneration should promote long-term sustainable success
•
Policy for setting remuneration should be formal and transparent
•
No director should be involved in setting their own pay
•
Board chair can only be a member of RC if independent on
appointment
•
Workforce pay should be considered when setting exec pay
•
NEDs paid according to time commitments and responsibilities
5
Regulatory environment
Audit committees
Advantages:
•Improve quality of
accounting.
•Improved
communication
between directors,
external auditors
and management.
• Avoids conflicts
between auditors
and management.
6
Objectives
• Increase public confidence in credibility and
objectivity of published financial info.
•Assist directors in meeting their responsibilities
in respect of financial reporting.
•Strengthen the independence of the external auditor.
Main functions include:
•Review of company internal control procedures.
•Review of internal audit function.
•Review of external auditors results to ensure
audit has been carried out efficiently, effectively
and independently.
•Recommending remuneration and nomination
of auditors.
• Reviewing requirements satisfied under
UK Corporate Governance Code.
Disadvantages:
•Fear purpose
to “catch out”
management .
•Overburdening
of non-executive
directors.
•May lead to “twotier” board.
• Costly.
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Chapter 1
Current issues and
developments
Current issues and developments by
their nature are constantly evolving and
therefore, you should be prepared to do
your own research and keep up to date with
developments affecting the profession.
Useful websites to visit for news and updates
are:
•
ACCA website – study support resources
•
PQmagazine.com
•
Accountancyage.com
•
FT.com.
Exam focus
Exam kit questions in this area:
•
Sunshine Hotel Group
•
Awdry
•
Basking
•
Boston
•
Tony Group
•
Spaniel
Topics of current issues and developments
include:
•
Climate-related risks
•
Audit reforms
•
Professional scepticism
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Regulatory environment
8
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chapter
2
Money laundering
In this chapter
•
Money laundering.
9
Money laundering
Money laundering
Definition
Money laundering: process by which criminals attempt to conceal the true origin and ownership of
the proceeds generated by illegal means.
Money Laundering
Legislation
10
Offences
Duties
• Criminal Justice Act 1993
• Money laundering
• Client due diligence
• Terrorism Act 2000
• Tipping off
• Appointing an MLRO
• Proceeds of Crime Act 2002
• Not setting up procedures
• Staff training
• Money Laundering
Regulations 2017
• Not complying with procedures
• Reporting
–
Internally to MLRO
–
o an External Regulatory
T
Authority
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Chapter 2
Client identification
•
Client identification and verification is a key component of client due diligence:
Typical Client
Identification Procedures
For an individual
For a company
For a trust
stablish the client’s full
E
name and address.
btain copies of the following
O
from the registrar:
Examine trust deed.
Examine:
•
certificate of incorporation
•
utility bills
•
register of directors
•
identities of trustees and
beneficiaries
•
driving licence
•
the purpose of the trust
passport.
r egister of members/
shareholders
•
•
•
sources of funding.
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•
registered address.
Ascertain:
11
Money laundering
Exam focus
Exam kit questions in this area:
12
•
Thomasson & Co
•
Vizsla
•
Lark & Co
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chapter
3
Code of ethics and conduct
In this chapter
•
Fundamental principles.
•
Threats & safeguards.
•
Confidentiality.
•
Conflicts of interest.
13
Code of ethics and conduct
Fundamental principles
•
Confidentiality: Members should
respect the confidentiality of information
acquired as a result of professional
and business relationships and should
not disclose any such information to
third parties without proper and specific
authority or unless there is a legal or
professional right or duty to disclose.
•
rofessional behaviour: Members
P
should comply with relevant laws and
regulations and should avoid any action
that discredits the profession.
The code identifies five fundamental
principles in professional conduct.
14
•
Integrity: Members should be
straightforward and honest in all
professional and business relationships.
•
Objectivity: Members should not
allow bias, conflicts of interest or
undue influence of others to override
professional or business judgements.
•
Professional competence and
due care: A professional accountant
must attain and maintain professional
knowledge and skill at the level required
to ensure that a client or employer
receives a competent and professional
service.
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Chapter 3
Threats & safeguards
Members are required to apply the conceptual framework to identify threats to compliance with
the fundamental principles, to evaluate their significance and, if such threats are other than clearly
insignificant, to apply safeguards to eliminate them or reduce them to an acceptable level such that
compliance with the fundamental principles is not compromised.
Either
Identify threats
Assess threats
Eliminate
the threat
e.g. decline
engagement
Apply safeguards
if necessary
Or
Reduce the
threat to an
acceptable level
To evaluate the significance, consider materiality of the matter, the seniority of the people involved,
etc.
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15
Code of ethics and conduct
Threats
The ACCA Code sets out the broad range of categories that the threats fall into:
Advocacy
e.g. promoting share
issue in audit client
Self-interest
e.g. undue dependence on
fees from a client
Self-review
e.g. report on financial
statements prepared on
behalf of the client
Threats to compliance with
fundamental principles
Familiarity
e.g. acting as auditor of
companies with family
involvement
16
Management
e.g. making decisions,
giving advice
Intimidation
e.g. threat of
auditor removal
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Chapter 3
Confidentiality
Before disclosing, consider:
•
Whether harm could be caused by the disclosure
•
Whether all relevant information is known and substantiated
•
Whether the information is to be communicated to appropriate recipients
Required by law
•
Production of documents or
other provision of evidence
in the course of legal
proceedings
•
To the appropriate public
authorities of infringements
of the law identified
•
E.g. tax evasion, money
laundering
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Disclosure
permitted
by law
and
authorised
by the
client or
employer
Professional duty or right to
disclose, when not prohibited by law
•
To comply with the quality review of ACCA or
another professional body
•
To respond to an inquiry or investigation by
ACCA or a regulatory body
•
To protect the professional interests of a
professional accountant in legal proceedings
•
To comply with technical standards and
ethics requirements
17
Code of ethics and conduct
Conflicts of interest
Arise where an auditor acts for both a client
company and for a competitor company of
the client. This situation is acceptable where
appropriate safeguards are implemented.
Regular review of
safeguards by an
independent senior
partner/ compliance
officer
Use of different
partners and teams
of staff for different
engagements
The firm must notify all affected clients of the
conflict and obtain their consent to act.
Additional safeguards must be implemented.
Where the acceptance/continuance of an
engagement would, despite safeguards,
materially prejudice the interests of any
clients, the appointment should not
be accepted/continued, or one of the
appointments should be discontinued.
Safeguards against conflicts of interest
Information barriers
– to prevent leakage
of confidential
information between
different years and
sections within
the firm
18
Advising at least
one or all clients to
seek additional advice
(last resort)
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Chapter 3
Exam focus
•
•
•
•
A common question type is of the form
“identify and comment on the ethical and
professional issues”, where a scenario,
or scenarios are given.
You should consider and explain all
potential threats within a scenario,
identify actions that should be taken
in coming to conclusions about the
seriousness of the threats, propose
potential safeguards and ultimately what
actions should be taken.
You must expand on all of these areas
– simply identifying that there is a threat
to independence will not get you any
marks!
Always look at how many marks are
available for each part of a scenario –
use it as a guide to how many points you
need to cover within your answer.
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Exam focus
Exam kit questions in this area:
•
Gruber
•
Pale
•
Ryder Group
•
Eagle Group
•
Bassett Group
•
Adams Group
•
Dali
•
CS Group
•
Macau & Co
•
Moritz & Co
•
Cheetah
•
Jacob
•
Retriever
•
Moosewood Hospital
•
Weston & Co
•
Thomasson & Co
19
Code of ethics and conduct
20
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chapter
4
Professional responsibilities
and liabilities
In this chapter
•
Laws and regulations in an audit of financial
statements.
•
Fraud and error.
•
Auditor liability.
•
Expectation gap.
21
Professional responsibilities and liabilities
Laws and regulations in an audit of financial statements
ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements covers illegal
acts by the client company.
Director’s responsibilities
Auditor’s responsibilities
•To ensure the entity complies with relevant
laws and regulations.
•
To obtain reasonable assurance that the
financial statements, are free from material
misstatement.
•
To obtain sufficient, appropriate evidence
regarding compliance with those laws and
regulations generally recognised to have
a direct effect on the determination of
material amounts and disclosures in the
financial statements.
•
To perform specified audit procedures to
help identify instances of non-compliance
that may have a material impact on the
financial statements.
•
To respond appropriately if non-compliance
is identified (or suspected).
•To establish effective arrangements for
preventing and detecting non-compliance.
22
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Chapter 4
Procedures required by ISA 250:
•Obtain a general understanding of the legal and regulatory framework and of how the entity is
compliant
•
Inspecting correspondence with relevant licensing or regulatory authorities
•Enquiring of the management as to whether the entity is in compliance with such laws and
regulations
•
Consider the results of other audit procedures
•Obtaining written confirmation from directors that they have disclosed all events which involve
possible non-compliance.
Reporting
non-compliance
To shareholders
To management and those
charged with governance
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Consider implication on
audit opinion.
To third parties
Need to bear in mind duty
of confidentiality but also
duty to public interest.
23
Professional responsibilities and liabilities
Fraud and error
ISA 240 The Auditor’s Responsibility Relating
to Fraud in an Audit of Financial Statements
Fraud = intentional acts of
deception
(May involve falsification of documents
and records, misappropriation of assets,
or misapplication of accounting policies)
Error = unintentional misapplication
Of accounting policies, oversights or
misinterpretations
Management primarily responsible for the prevention and
detection of fraud and error through the implementation
and operation of adequate accounting and
internal control systems
24
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Chapter 4
Auditor responsibilities
Audit procedures
•
•
Review year-end journals and
adjustments.
•
Review accounting estimates and areas
of management judgment.
Obtain reasonable assurance that the
financial statements, taken as a whole,
are free from material misstatement,
whether caused by fraud or error.
•
Maintain an attitude of professional
scepticism.
•
•
Identify and assess the risks of material
misstatement due to fraud.
Review transactions outside the normal
course of business.
•
Obtain written representation from
management.
Fraud risk assessment procedures
•
Engagement teams should discuss the
risk of fraud.
•
Consider the results of controls tests and
analytical procedures.
•
Enquire of client how they assess, and
respond to, fraud risk.
•
Enquire if client is aware of actual or
suspected fraud.
•
Consider incentives to commit fraud e.g.
performance related bonuses.
KAPLAN PUBLISHING
25
Professional responsibilities and liabilities
Reporting fraud and error
Management
Communicate
the fraud
on a
timely basis
26
Those charged
with
governance
If the suspected
fraud involves
management
3rd parties
Shareholders
If there is a
duty to
report
By modifying
the
auditor’s
opinion
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Chapter 4
Auditor liability
Auditors are liable to the client if they fail to
comply with the terms of the engagement
letter e.g. to deliver a competent and
professional service.
For the auditor to be found liable to a third
party:
1. A duty of care must exist
–
he auditor must know, or should
T
have known, that the injured party
was likely to rely on the financial
statements
–
he injured party must have
T
sufficient ‘proximity’ i.e. must belong
to a class likely to rely on the
financial statements
–
he injured party must in fact have
T
so relied
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–
he injured party must show they
T
would have acted differently if the
financial statements had shown a
less attractive picture.
2. The duty of care must have been
breached.
3. Loss must have been suffered as a
result of the breach.
Solutions to the negligence problem
•
Restrict use of documents to intended
use
•
Engagement letter and auditor’s report to
include disclaimer clause to limit liability
•
Screening potential clients
•
Take specialist advice
•
Respective responsibilities to be
communicated and agreed
•
Insurance – professional indemnity
insurance
27
Professional responsibilities and liabilities
•
Carry out high quality work
•
Take on LLP status
•
Set liability cap with client
Expectation gap
The gap that exists between what the public,
especially users of financial statements,
believe auditors do (or ought to do) and what
the auditors actually do.
Potential ways of closing the gap
28
•
Users having a better understanding of
the meaning, purposes and limitations
of financial statements and the auditor’s
report.
•
Improved communication between
auditors and users of accounts.
•
Clarification of the responsibility for
fraud.
•
Improved control and education of the
auditing profession.
Exam focus
Exam kit questions in this area:
•
Margot
•
Goodman Group
•
Redback Sports
•
Sunshine Hotel Group
•
Magnolia Group
•
Beyer
•
Spaniel
KAPLAN PUBLISHING
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chapter
5
Quality management
In this chapter
•
Elements of a quality management system.
•
Engagement performance.
29
Quality management
Elements of a quality management system
Leadership
responsibilities
Ethical
requirements
Acceptance
& continuance
Engagement
resources
Elements
of a quality
management
system
Engagement
performance
30
Monitoring
& remediation
Overall
responsibility
Documentation
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Chapter 5
Element
Key features
Leadership
responsibilities
•
Engagement partner responsible for managing and achieving quality
•
All team members responsible for quality
•
Open and robust communication
•
Professional scepticism
Ethical
requirements
•
Identify, evaluate, and address threats
•
Remain alert for ethical breaches throughout engagement
Acceptance &
continuance
•
Integrity and ethics of client
•
Sufficient and appropriate resources available
•
Competence and capabilities of team
•
Human – experience & expertise, professional scepticism & judgment
•
Technological – communication, automated tools & techniques
•
Intellectual – consistent application of professional standards
•
Direction
•
Supervision
•
Review
•
Engagement quality review – pre-issuance review of significant judgments
and conclusions
Engagement
resources
Engagement
performance
KAPLAN PUBLISHING
31
Quality management
Monitoring &
remediation
Overall
responsibility
Documentation
32
•
Monitor the firm’s quality system
•
Evaluate severity of deficiencies, investigate root cause
•
Remediate deficiencies responsive to root cause
•
Perform annual evaluation
•
Prior to dating auditor’s report, partner ensures their involvement has been
sufficient and appropriate
•
Timely review of work, evidence of partner’s direction and supervision
•
Conclusions reached in respect of fulfilment of quality responsibilities
•
Conclusions resulting from consultations
•
Confirmation that an EQR has been completed on or before the date of
the auditor’s report (if applicable)
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Chapter 5
Engagement performance
Direction
Supervision
Review
Informing team members of
their responsibility to:
•
Tracking the progress of
the audit to ensure the
timetable can be met
Checking the audit work to
ensure:
•
Contribute to quality
•
Exercise professional
scepticism
•
Considering the
competence of the team
•
Fulfil ethical requirements
•
•
Perform procedures
•
Don’t allow budget or
resource constraints to
reduce quality.
Addressing significant
matters arising and
modifying the planned
approach accordingly
•
Identifying matters for
consultation.
KAPLAN PUBLISHING
•
The work has been
performed in accordance
with professional
standards
•
Appropriate consultations
have taken place
•
The work performed
supports the conclusions
reached
•
The evidence obtained is
sufficient and appropriate
to support the auditor’s
report.
33
Quality management
Exam focus
A common requirement in the exam is to
critically evaluate the audit work already
performed on an engagement and identify if
the audit has been carried out to the required
standard of quality.
To assess the quality of the audit consider
the following:
34
•
Have ISAs been followed?
•
Has the work been allocated to the
appropriate level of staff?
•
Has the audit been time pressured?
•
Has the appropriate type of evidence
been obtained?
•
Has the audit been performed in
accordance with the audit plan?
•
Has the audit been properly supervised
and reviewed?
Exam kit questions in this area:
•
Eagle Group
•
Jansen & Co
•
Bradley
•
Retriever
•
Magnolia Group
•
Macau & Co
•
James & Co
•
Welford & Co (specimen exam)
KAPLAN PUBLISHING
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chapter
6
Practice management
In this chapter
•
Tendering.
•
Obtaining professional work.
•
Engagement letters.
35
Practice management
Tendering
•
The fee and how it has been calculated.
•
Tendering: the process of quoting a fee for
work before it is carried out. This has lead
to increased competition within the audit
marketplace.
Proposed audit partner and key
members of the audit team.
•
Capacity of the audit partner to commit
sufficient time to the audit.
•
Risks of tendering include: wasted time,
setting a low fee, making unrealistic claims/
promises in order to win the contract.
Relevant experience of the industry and
type of company.
•
Ability of the firm to bring insight, add
value, and show understanding of the
company’s values and strategies and
objectives.
•
Proposed approach to the audit e.g. use
of technology and innovation such as
data analytics.
•
The firm’s audit quality track record and
commitment to provide a quality service.
•
Ability to maintain independence and
challenge management.
•
Nature, purpose and legal requirements
of an audit.
Definition
Matters to consider before submitting a
tender.
•
•
•
•
•
•
•
36
What goes in a proposal
Resources
Competences
Independence
Risks
Specialist skills
Potential for profitability
Additional services
KAPLAN PUBLISHING
Chapter 6
•
Assessment of the client’s requirements
and how the audit firm will meet them.
•
Ability of the firm to offer other services.
KAPLAN PUBLISHING
Exam focus
Exam kit questions in this area:
•
Sanzio
•
Weston & Co
•
Dragon Group
37
Practice management
Obtaining professional work
Obtaining professional work
Advertising and publicity
Fees
ACCA Code of Ethics and Conduct
ACCA Code of Ethics and Conduct
This material must not:
• Bring disrepute to the ACCA.
• Discredit services offered by others.
• Be misleading.
• Fall short of any advertising codes.
•Basis of calculating fees should be pre-agreed
and mentioned in the Engagement Letter to
avoid disputes.
•Fees should be charged bearing in mind
factors such as staff seniority, expertise, time
spent, apportionable overheads, risk involved.
•Contingency fees should be avoided except
customary (e.g. insolvency work).
38
KAPLAN PUBLISHING
Chapter 6
Professional
clearance
Independence &
objectivity
Preconditions for an
audit
Management
integrity
Money laundering
(client due diligence)
Issues to consider
prior to accepting an
engagement
Reputation of the
client
Professional
competence
KAPLAN PUBLISHING
Resources
Fees
Risks
39
Practice management
Procedures necessary before accepting a new client (where the organisation previously had an
auditor. Same principles apply in respect of changes of appointment for all recurring professional
work).
Member asked to accept
nomination as auditor
Request prospective client’s permission
to communicate with existing auditor
If permission given, request in writing,
all information necessary to decide
whether or not to accept nomination
If permission refused,
decline nomination
If permission refused
On receipt, existing auditor requests
permission of client to communicate
with nominee proposed
Proposed nominee
declines nomination
If permission given,
existing auditor should
Discuss freely with proposed nominee
all matters relevant to the appointment
40
KAPLAN PUBLISHING
Chapter 6
Engagement letters
The terms of engagement are recorded in a
written audit engagement letter and should
include:
•
The objective and scope of the audit;
•
The responsibilities of the auditor
•
The responsibilities of management
•
Identification of the applicable financial
reporting framework
•
The expected form and content of
reports to be issued.
KAPLAN PUBLISHING
Exam focus
•
The acceptance of a new client or
engagement might be rolled into a wider
ranging question regarding ethics.
•
In such a question, always consider what
steps an auditor must take to ensure
that they are acting according to the
fundamental principles – it is usually not
just about whether previous auditors
reply to your request for information!
Exam kit questions in this area:
•
Crux Group
•
Redback Sports
•
Bassett Group
•
Newman & Co
•
Welford & Co
•
Dragon Group
41
Practice management
42
KAPLAN PUBLISHING
chapter
7
Planning, materiality and
assessing the risk of misstatement
In this chapter
•
Audit planning.
•
Risk assessment.
•
Risk assessment procedures.
•
Materiality.
43
Planning, materiality and assessing the risk of misstatement
Audit planning
Exam focus
Planning is a critical part of the audit
process. If it is not carried out with due skill
and care, there is a risk that the auditor will
be accused of negligence.
ISA 300 Planning an Audit of Financial
Statements
In accordance with ISA 300 the auditor
should establish an audit strategy and an
audit plan. This includes consideration of:
Strategy:
•
In all exams to date there has been one
compulsory question involving planning
and risk assessment in a range of different
scenarios.
44
Scope:
–
engagement characteristics
–
reporting objectives
–
significant engagement factors
–
preliminary activity results
–
the resources needed.
•
Timing of when to deploy resources.
•
Management, direction and supervision
of resources (including meetings,
debriefs, reviews etc).
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Chapter 7
Plan
•
Nature, timing and extent of the planned
direction and supervision of engagement
team members and the review of their
work.
•
Nature, timing and extent of risk
assessment procedures.
•
Nature, timing and extent of further audit
procedures, including:
•
–
what audit procedures
–
who should do them
–
how much should be done
–
when the work should be done.
Other necessary procedures.
Risk assessment
In order to comply with ISAs auditors are
required to design procedures to reduce
audit risk to an acceptable level.
Audit risk is the risk that the auditor
offers an inappropriate audit opinion. It is
influenced by two further risk categories:
•
isk of material misstatement, i.e.
R
the risk that the financial statements are
misstated
•
etection risk, i.e. the risk that audit
D
procedures fail to detect material
misstatement.
Risk of material misstatement is a
factor of:
•Inherent risk (i.e. the risk that fraud or
error occurs in the first instance)
•Control risk (i.e. the risk that client
controls fail to prevent and/or detect
fraud and error).
KAPLAN PUBLISHING
45
Planning, materiality and assessing the risk of misstatement
To understand the level of inherent and
control risk, auditors must obtain an
understanding of:
ISA 315 (Revised 2019) Identifying
and Assessing the Risks of Material
Misstatement)
•
The auditor will use this understanding to
assess the risks and design further audit
procedures in response to these risks.
Aspects of the entity and its environment:
–
46
The entity’s organisational structure,
ownership and governance, and its
business model including the extent
to which the business model
integrates the use of IT.
–
Industry, regulatory and other
external factors.
–
The measures used, internally and
externally, to assess the entity’s
financial performance.
•
The applicable financial reporting
framework, and whether the entity’s
accounting policies are appropriate and
consistent with the applicable financial
reporting framework.
•
The components of the entity’s system of
internal control and control deficiencies.
Business Risk
Business risk includes all those factors
that threaten a client’s ability to meet their
strategic objectives, namely profit targets.
These are an important part of inherent
risk assessment because they also have a
potential impact on the financial statements.
In the exam make sure business risks focus
on the impact to the profit or cash flow of the
company.
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Chapter 7
Audit risk / Risk of material
misstatement
Business risk
Major customer in financial
difficulty unable to pay their
debts.
Receivables may be
overstated if bad debts have
not been written off.
A bad debt will arise which will
reduce profit if written off.
Company purchases goods
from overseas.
Purchases may be misstated
if the transactions are
not translated using an
appropriate exchange rate.
Payables may be misstated
if not revalued using the year
end exchange rate.
Purchases may become more
expensive if the exchange rate
moves in an adverse direction
which will reduce profit.
Change in laws and
regulations affecting the
company
Risk of unrecorded liabilities if
the company is not compliant
with the new regulations.
The company may have
to incur significant cost to
become compliant. Fines or
penalties may be imposed
for non-compliance. This will
reduce profit.
Sales have decreased
significantly and the company
is closing a number of sites.
Asset values may be
overstated due to impairment.
Falling sales and reduced
capacity will impact profit and
cash flow.
KAPLAN PUBLISHING
47
Planning, materiality and assessing the risk of misstatement
Risk assessment procedures
Auditors should
Obtain an understanding of the accounting
and internal control systems sufficient
to plan the audit and develop an
effective audit approach.
Use professional judgement to assess the
components of audit risk and to design audit
procedures to ensure it is reduced to an
acceptably low level.
Risk assessment procedures
• Enquiries of management and others within the entity
• Analytical procedures
• Observation and inspection.
48
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Chapter 7
Materiality
ISA 320 Materiality – ‘Information is material if its omission
or misstatement could influence the economic decisions of
users taken on the basis of the FS’
Materiality should be
considered in relation to:
• Financial statements as a
whole
Ultimately an area of
judgement but indicative
guidelines for preliminary
assessment are:
• The unique circumstances
of the business
Profit before tax 5%
• The informational
requirements of the users.
KAPLAN PUBLISHING
Revenue 0.5%
Total assets 1%
Auditor establishes
performance materiality:
• at an amount lower than
overall materiality
• to assist with testing
samples
• to reduce the risk that
misstatement in aggregate
is material.
49
Planning, materiality and assessing the risk of misstatement
50
Response to risk assessment
Professional scepticism
The purpose of performing risk assessment is
to allow the auditor to modify their detection
risk. This is achieved by manipulating the
approach to the audit. Examples of this
include:
Professional scepticism is defined as: ‘An
attitude that includes a questioning mind,
being alert to conditions which may indicate
possible misstatement due to error or fraud,
and a critical assessment of audit evidence.’
•
Allocating complex/risky areas to suitably
experienced and competent staff
•
Placing more or less reliance on systems
and controls
Professional scepticism requires the auditor
to be alert to:
•
•
Altering the volume of substantive
procedures performed
Audit evidence that contradicts other
audit evidence.
•
•
Changing sample sizes
Information that brings into question the
reliability of audit evidence.
•
Performing more or less substantive
analytical procedures
•
Conditions that indicate fraud.
•
•
Consulting external experts on technically
complex matters
Circumstances that suggest the need for
additional audit procedures.
•
Changing the timing, frequency and
nature of review procedures.
KAPLAN PUBLISHING
Chapter 7
Exam focus
Exam kit questions in this area:
•
Redback Sports
Gruber
•
Eagle
Pale Group
•
Bassett
Group
Rick
Group
•
AdamsGroup
Group
Ryder
•
Sunshine Hotel Group
Margot
•
Laurel Group
Redback
Sports
•
ZCG Group
Eagle
•
Vancouver
Group
Bassett
Group
•
Dali
Sunshine
Hotel Group
•
Ted Group
Laurel
•
Connolly
ZCG
•
Stow Group
Dali
•
Grohl
Connolly
•
CS Group
Adams
Group
•
CS Group
•
Crux Group (specimen exam)
KAPLAN PUBLISHING
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Planning, materiality and assessing the risk of misstatement
52
KAPLAN PUBLISHING
K
chapter
8
Group and
transnational audits
In this chapter
•
Treatment of groups.
•
Group accounts.
•
Regulatory requirements of accounting for groups.
•
Joint audits.
•
Special considerations.
53
Group and transnational audits
Treatment of groups
Acceptance as group auditor
Group is treated as
A single entity
In accounting
terms
54
In addition to the normal acceptance
considerations firms should consider whether
to accept the role of group auditor. To assist
the decision they must consider:
•
Whether sufficient appropriate audit
evidence can reasonably be expected
to be obtained in relation to the
consolidation process and the financial
information of the components of the
group.
•
Where component auditors are involved
the engagement partner shall evaluate
whether the group engagement team will
be able to be involved in the work of the
component auditors.
•
Whether reliance can be placed on the
component auditor’s work.
•
The materiality of the portion of the group
not audited by them.
Collection of
separate legal
entities
In law
KAPLAN PUBLISHING
Chapter 8
•
Understanding of the group, the
components and their environments.
•
Any other risks identified which affect the
group and its financial statements.
Acceptance as component auditor
The component auditor will consider the
following before accepting appointment:
•
Whether they are independent of the
parent and component companies and
can comply with ethical requirements
applying to the group audit.
•
Whether they possess any special
skills necessary to perform the audit of
the component and are competent to
perform the work.
•
Whether they have an understanding of
the auditing standards relevant to group
audits and can comply with them.
•
Whether they have an understanding of
the relevant financial reporting framework
applicable to the group.
KAPLAN PUBLISHING
•
Whether they can comply with the group
audit team instructions including the
deadlines.
•
Whether they are willing to have the
group auditor be involved in their work
and evaluate it before relying on it for
group audit purposes.
55
Group and transnational audits
Group accounts
•G
roup accounts involve consolidation
adjustments.
• Relevant accounting standards must be
complied with.
• Subsidiaries may be audited by firms
other than parent company auditor.
Problems of auditing foreign subsidiary:
•G
eographical location.
• Different accounting policies may be used.
• L anguage problems.
• Translation of foreign currency amounts
required.
56
I t is the group auditor’s responsibility to review the work
of component auditors. This is because no part of the audit
opinion can be delegated by the group auditor.
roup auditors normally send a consolidation questionnaire
G
to each of the subsidiaries auditors requesting information
on:
• accounting policies
• accounting details needed for consolidation.
roup auditors review of component auditors work includes:
G
•R
eview of accounting policies for uniformity.
•C
onsideration of materiality of amounts involved.
•C
onsidering whether all material areas are covered and
whether the work of the component auditors can be
relied upon, as well as the competence of the component
auditors.
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Chapter 8
Regulatory requirements of accounting for groups
Auditor should ensure investments are properly classified in accordance with their nature and in
line with accounting and legal guidelines – as subsidiaries, associates, JVs or other investments.
Main areas of consideration are:
Accounting
policies if not
uniform then
consolidation
adjustments
required
Inter-company
transaction and
items in transit
will require
consolidation
adjustments
Intercompany guaranteed
loans should be disclosed
KAPLAN PUBLISHING
Accounting
periods should
be co-terminus
(or within three
months of each
other). Otherwise
consolidation
adjustments
required
Consider
changes in
group structure
Subsequent events need to
consider whether there have
been any additions or disposals
Consider
loss making
subsidiaries and
the need for
impairments to
investments and
goodwill
Where there are restrictions
on distributions of profit, these
should be indicated in the FS
57
Group and transnational audits
Joint audits
Joint audits are audits where two or more audit firms are
appointed to perform an audit and issue the audit opinion
Advantages:
Disadvantages:
• Improved
service through
firms different
expertise
• Each joint auditor
takes responsibility
for the other’s
shortcomings
• Improved
geographical
coverage
• May be more
expensive
• Use of two
independent
firms can provide
added assurance
to client
58
• Different firm’s
audit methods
may not be
reconciled
Requirements for effective joint audits:
• Preliminary planning meeting between the
two firms to decide on timing, work allocation
etc.
• Final meeting to discuss audit issues,
conclusions, management letter and joint
audit opinion.
• Proper work allocation to avoid dominance.
• Both firms should have adequate
professional indemnity insurance.
• Close control of
division of work is
required
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Chapter 8
Special considerations
Subsidiaries in developing countries may not
have a fully developed system of accounting
and auditing standards. Hence, group auditor
can:
•
request group directors to adjust financial
statements to comply with IFRS Standards
•
require the local auditor to conform
to ISAs or to perform further audit
procedures.
If one or more subsidiary has a modified
auditor’s opinion (regardless of who the
auditor was), group auditor should:
•
ignore the matter if immaterial at a group
level
•
modify the group audit opinion if material
at a group level.
KAPLAN PUBLISHING
In accounting terms, a group is a single
entity. In legal terms, however, it is a
collection of legal entities – which may mean
that a component entity may not be a going
concern without the support of the group.
The custom is for the directors to give the
auditor a comfort/support letter assuring that
the group will support the subsidiary – this
will be taken by the auditor as valid audit
evidence of the going concern basis of the
subsidiary’s FS.
Exam focus
•
At this level, scenarios will likely include
a complex element which may involve
groups. As such, it is important to be
aware of the main accounting and
auditing issues involved.
59
Group and transnational audits
Transnational audits
An audit of financial statements which may be
relied upon outside the audited entity’s home
jurisdiction.
Reliance on these audits might be for
purposes of significant lending, investment or
regulatory decisions.
The differences between a ‘normal’ audit,
conducted within the boundaries of one
set of legal and regulatory requirements,
and a transnational audit are largely due to
variations in:
60
•
Auditing standards
•
Regulation and oversight of auditors
•
Financial reporting standards
•
Corporate governance requirements.
Exam focus
Exam kit questions in this area:
•
Rick Group
•
Ryder Group
•
Margot
•
Redback Sports
•
Eagle Group
•
Bassett Group
•
Sunshine Hotel Group
•
Laurel Group
•
ZCG
•
Adams Group
•
CS Group
•
Magnolia Group
•
Adder Group
•
Francis Group
•
James & Co
•
Dragon Group
•
Crux Group (specimen exam)
KAPLAN PUBLISHING
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chapter
9
Evidence
In this chapter
•
Obtaining audit evidence.
•
Related party transactions (ISA 550).
•
Using the work of an auditor’s expert (ISA 620).
•
Using the work of an internal audit (ISA 610).
•
Using the work of a service organisation (ISA 402).
•
Accounting estimates (ISA 540).
•
Opening balances (ISA 510) & Comparatives (ISA 710).
•
Automated tools and techniques.
61
Evidence
Obtaining audit evidence
ISA 500 Audit Evidence, states that ‘ auditors should obtain
SUFFICIENT APPROPRIATE audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion’
Sufficient – the necessary quantity
must be obtained.
SUFFICIENCY – as determined by a number
of factors e.g. Materiality of item being
examined, auditor’s knowledge and
judgement.
62
Appropriate – the audit evidence must be
of appropriate quality – both
relevant and reliable.
Relevant – Evidence
is required that will
enable auditor to
draw conclusions
on the financial
statement assertions.
Reliable – auditor
should consider
source and its
reliability – e.g.
written, external
and original.
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Chapter 9
Enquiry
Recalculation
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Inspection
Observation
Audit testing techniques
Confirmation
Re-performance
Analytical procedures
63
Evidence
Related party transactions
(ISA 550)
Parties are related if one has the ability to
control or exercise significant influence over
the other.
Audit risks with RPTs
•
Directors may be reluctant to disclose
related party transactions e.g.
transactions with family members.
•
Transactions may not be easy to identify
from the accounting systems.
•
Transactions may be concealed in whole,
or in part, from auditors for fraudulent
purposes.
IAS 24 Related Party Disclosures:
•
Where control exists, this relationship
should be disclosed irrespective whether
any transactions have taken place.
•
Where transactions have taken place,
make disclosure of:
(1) nature of relationship
(2) types of transactions
(3)elements of the transactions necessary
for an understanding of the FS.
64
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Chapter 9
Audit procedures to identify
related parties include:
Review of accounting records
for large/unusual balances
Review bank confirmations
and loans receivable/payable
Review of board minutes
KAPLAN PUBLISHING
Review of invoices and
lawyers correspondence
Enquiry of management
65
Evidence
Using the work of an auditor’s expert (ISA 620)
Auditor’s expert
Person/firm providing specialist skill, knowledge and experience
Auditor must obtain sufficient and appropriate evidence that the
work performed by the expert is adequate for audit purposes
66
1.
Agree which expert to use – consider competence,
capability and objectivity
2.
Agree the nature and scope of the work with the expert
3.
Assess the expert’s work – consistency of findings with
other work, reasonableness of assumptions, source data
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Chapter 9
Using the work of internal audit (ISA 610)
Before relying on the work of internal audit, the external auditor must assess whether the
work produced by the internal auditor is adequate for the purpose of the audit.
1.
Evaluate the IA function
2.
Evaluate the IA work
IA Function
IA Work
•
Objectivity of IA
•
Properly planned and performed
•
Competence of IA
•
QC procedures in place
•
Systematic and disciplined approach
•
Sufficient appropriate evidence obtained
•
Valid conclusions reached
KAPLAN PUBLISHING
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Evidence
Using internal audit to provide direct
assistance
68
•
Internal audit function can provide direct
assistance to the external auditor under
their supervision and review.
•
Cannot be provided where laws and
regulations prohibit such assistance.
•
The competence and objectivity of the
internal auditor must be considered.
•
Must not do work which involves
significant judgement, a high risk of
material misstatement or with which the
internal auditor has been involved.
•
Planned work must be communicated
with those charged with governance.
•
Cannot make excessive use of internal
auditor.
•
Management must not intervene in that
work.
•
Internal auditors must keep the external
auditor’s information confidential.
•
External auditor will provide direction,
supervision and review of the internal
auditor’s work.
•
External auditor should remain alert to
the risk that the internal auditor is not
objective or competent.
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Chapter 9
Using the work of a service
organisation (ISA 402)
•
If controls are expected to operate
effectively:
Outsourcing: using an external company
(service organisation) to provide a
business function or service instead of the
organisation doing it in-house.
Implications for external auditors
ISA 402 Audit Considerations Relating to an
Entity Using a Service Organisation.
•
Obtain an understanding of the service
organisation (nature of services provided
and relationship with client, materiality
of transactions). Obtain understanding
through:
–
Inquiries with client
–
onfirmations from the service
C
organisation and their auditors
–
Visits to the service organisation
–
ype 1 or type 2 report from service
T
organisation auditors.
KAPLAN PUBLISHING
Design and perform audit procedures
responsive to risks.
•
–
Obtain a type 2 report if available
–
erform tests of controls at the
P
service organisation
–
se another auditor to perform tests
U
of controls.
Reporting.
Consider whether sufficient appropriate
audit evidence has been obtained, if not,
modify the audit opinion.
The auditor is fully responsible for their
opinion, therefore the use of the service
organisation or their auditor is not
mentioned in the auditor’s report.
69
Evidence
70
Accounting estimates
(ISA 540)
Procedures
•
Review subsequent events.
The auditor must separately assess inherent
risk and control risk when assessing the
risk of material misstatement relating to
accounting estimates.
•
Test how management made their
estimates.
•
Develop a point estimate to compare
with management’s estimate.
When assessing inherent risk the auditor
should consider:
•
Obtain written representation.
•
The degree to which the estimate is
subject to estimation uncertainty.
•
The degree of complexity and subjectivity
involved in the method, assumptions and
data used to make the estimate.
•
The degree of complexity and subjectivity
used in the selection of management’s
point estimate.
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Chapter 9
Opening balances (ISA 510)
& Comparatives (ISA 710)
The auditor must ensure that:
•
Opening balances do not contain
material misstatements.
•
Accounting policies have been
consistently applied, or changes
adequately disclosed.
•
Comparatives agree to the prior year
financial statements.
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Evidence
Automated tools and
techniques
Test data
72
Audit software
Data analytics
Data analytics is the science of examining
large data sets (big data) with the purpose of
drawing conclusions about that information.
Data analytics are a more sophisticated form
of computer assisted audit technique.
Test data is data
generated by the
auditor which is then
processed using the
client’s computer
systems.
Software
specifically
designed for audit
purposes.
Put dummy
data through the
system and make
sure the controls
within operate as
they should.
Valid data should be
accepted
Invalid data should
be rejected.
It is used for:
Selecting samples.
Checking
computations and
calculations by
reperformance.
Comparing two or
more different files.
Performing detailed
analytical review.
Benefits
•
Allows the auditor to manipulate 100% of
the data in a population quickly.
•
Can be used throughout the audit to help
identify risks, test the controls and as
part of substantive procedures.
•
Audit quality should increase as
sampling risk is reduced.
•
As audit quality increases the auditor’s
liability risk is reduced.
•
Audit procedures can be performed more
quickly and to a higher standard.
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Chapter 9
•
Audit procedures can be carried out on
a continuous basis rather than being
focused at the year-end.
•
Reporting to the client and users will be
more timely.
Exam focus
•
•
•
The syllabus area on audit evidence is
critical to the exam. A common exam
question in the past has been scenario
based with the requirement to “state the
audit evidence you would expect to find”.
You will be expected to be aware of
the relative merits of different types of
evidence and how far they are reliable.
You will also be expected to consider
alternative sources.
The key points covered by the ISAs in
this section will provide you with the tools
to approach such a question – you will,
however, need to apply your knowledge
as far as possible to the scenario given!
KAPLAN PUBLISHING
Exam focus
Exam kit questions in this area:
•
Gruber
•
Adder Group
•
Pale
•
Francis Group
•
Rick Group
•
Snipe
•
Ryder Group
•
•
Margot
Crux Group
(specimen exam)
•
Redback Sports
•
Eagle Group
•
Sunshine Hotel
Group
•
Laurel Group
•
ZCG
•
Adams Group
•
CS Group
•
Awdry
•
Lifeson
•
Osier
73
Evidence
74
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chapter
10
Completion
In this chapter
•
Subsequent events (ISA 560).
•
Going concern (ISA 570).
•
Overall review.
•
Evaluation of misstatements (ISA 450).
•
Written representations (ISA 580).
75
Completion
Subsequent events (ISA 560)
76
Up to the date of
the auditor’s report
After the date of the auditor’s
report but before the
FS are issued
After the FS
are issued
Auditors should peform
procedures designed to obtain
sufficient appropriate audit
evidence that all events up to
the date of the auditor’s report
that may require adjustment or
disclosure have been identified.
Auditor has no responsibility to
perform procedures or make enquiry
regarding FS after auditor’s report
date. If auditor becomes aware
of amendment should discuss
with management and consider
implications for auditor’s report.
Auditor has no obligation to
make any inquiry regarding FS.
If new information relating to prior
to the date of auditor’s report
comes to light, auditor should
consider revision of FS and
discuss with management.
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Chapter 10
Going concern (ISA 570)
Directors’ responsibilities
Directors should prepare the financial
statements using the going concern basis of
accounting unless the company has ceased
trading, intends to cease trading within the
next 12 months or has no alternative but to
cease trading because of financial difficulties.
Directors must make disclosures in the
financial statements if:
•
There is a material uncertainty over the
future of the company.
•
They have been unable to assess going
concern in the usual way (e.g. for a
period of less than 12 months from the
year end).
•
Auditor responsibilities
•
Evaluate the appropriateness of
management’s use of the going concern
assumption.
•
Conclude whether a material uncertainty
exists and if so, assess the adequacy of
the client’s disclosure.
•
Report in accordance with ISA 570 Going
Concern.
Indicators of going concern problems
•
Net current liabilities
•
Necessary borrowing facilities not agreed
•
Significant cash flow problems
•
Loss of key management
•
Loss of key suppliers or customers
The financial statements are prepared
on a basis other than the going concern
basis.
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Completion
Audit procedures to assess going
concern
78
•
Review cash flow forecasts and perform
sensitivity analysis.
•
Review correspondence from major
customers for evidence of disputes or
difficulties paying invoices.
•
Review correspondence from the bank to
assess the likelihood of obtaining further
finance.
•
Review correspondence from lawyers
regarding the outcome of a legal case.
•
Review board minutes for management’s
plans to address going concern issues.
•
Obtain written representation from
management that they believe the
company is a going concern.
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Chapter 10
Do the FS
comply with local
legislation and
accounting standards?
Are the FS
consistent with
our knowledge of
the business?
Is the quality of
the audit work
up to standard?
Overall review
Have appropriate
accounting policies
been followed?
KAPLAN PUBLISHING
Do the financial
statements give
a true and fair
view?
Have the firm’s
procedures been
followed?
79
Completion
Overall review
The reviewer should ask:
80
•
Has the work has been performed in
accordance with professional standards
and regulatory and legal requirements?
•
What significant matters have been
raised for further consideration?
•
Have appropriate consultations taken
place and the resulting conclusions been
documented and implemented?
•
Is there a need to revise the nature,
timing and extent of the work performed?
•
Does the work performed support the
conclusions reached?
•
Is the work appropriately documented?
•
Is the evidence obtained sufficient and
appropriate to support the auditor’s
report?
•
Have the objectives of the engagement
procedures have been achieved?
Evaluation of misstatements
(ISA 450)
•
All identified errors should be recorded
on a working paper set up for the
purpose.
•
Individually immaterial errors may,
in aggregate, amount to a material
difference.
•
Management should be requested to
adjust all identified misstatements.
•
All uncorrected misstatements should
be communicated to those charged with
governance and a description of the
implications for the auditor’s report, if
appropriate.
•
If any material misstatements remain
unadjusted the auditor will modify the
audit opinion.
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Chapter 10
Written representations
(ISA 580)
refuses to co-operate in this area,
auditor should consider modifying the
audit opinion due to a lack of sufficiently
reliable evidence.
Key revision points
•
•
Where management make oral
representations to auditors during
the course of an audit – to avoid
misunderstandings and to provide
more reliable audit evidence, these
representations are documented in a
letter.
The management representations may
be the primary source of evidence but
they are NOT a substitute for other
corroborative evidence that may be
available.
Matters included in a written
representation letter:
General matters
•
Management has fulfilled its
responsibility for preparing the FS
•
Management have provided all relevant
information to the auditor
Matters required by other ISAs
•
All known and suspected frauds have
been communicated to the auditor (ISA
240)
•
If contradictory evidence is found, further
investigation is required.
•
•
Management should be informed of the
existence of the letter and be involved
in the drafting to avoid conflict and
misunderstandings – where management
All instances of non-compliance with
laws and regulations have been
communicated to the auditor (ISA 250)
•
Management believe the effects
of uncorrected misstatements are
immaterial (ISA 450)
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81
Completion
•
•
•
All related parties and related party
disclosures have been disclosed (ISA
550)
82
Exam kit questions in this area:
All subsequent events have been
communicated to the auditor (ISA 560)
•
Sol & Co
•
Francis Group
All going concern issues have been
communicated to the auditor (ISA 570)
•
Matty
•
Bradley
•
Goodman Group
•
Snipe
•
Lifeson
•
•
Kilmister
Myron
(specimen exam)
•
Daley
•
Coram & Co
•
Brearley & Co
•
Basking
•
Magnolia Group
•
Osier
•
Boston
•
Macau & Co
•
Darren
•
Thurman
•
Adder Group
Specific matters
•
Exam focus
Matters involving management
judgement or intentions of management
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chapter
11
Reporting
In this chapter
•
The auditors’ report.
•
Reporting to those charged with governance.
•
Communicating deficiencies in internal control.
83
Reporting
The auditors’ report
INT Syllabus
UK syllabus
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
84
Title
Addressee
Auditor’s opinion
Basis for opinion
Material uncertainty related to
going concern (if applicable)
Emphasis of matter (if applicable)
Key audit matters (Listed
companies)
Other information
Responsibilities of management
Auditor’s responsibilities
Report on other legal and
regulatory requirements
Other matter (if applicable)
Signature
Auditor’s address
Date
•
•
•
•
•
•
•
•
•
•
•
Title
Addressee
Auditor’s opinion
Basis for opinion
Conclusions relating to going concern / Material
uncertainty related to going concern (if applicable)
Emphasis of matter (if applicable)
Key audit matters, our application of materiality, an
overview of the scope of our audit (Listed companies)
Other information
Opinion on other matters prescribed by the
Companies Act 2006
Matters on which we are required to report by
exception
Responsibilities of directors
Auditor’s responsibilities
Other matter (if applicable)
Signature
Auditor’s address
Date
KAPLAN PUBLISHING
Chapter 11
Nature of issue
Misstatement
Inability to
obtain sufficient
appropriate audit
evidence
Not material
Material but Not
Pervasive
Material & Pervasive
Unmodified opinion
Qualified Opinion
Adverse Opinion
True and fair view
Except for ...
Basis for opinion
Basis for qualified
opinion
FS do not give a true
and fair view
Unmodified opinion
Qualified Opinion
Disclaimer of Opinion
True and fair view
Except for ...
Basis for opinion
Basis for qualified
opinion
Do not express an
opinion
Basis for adverse
opinion
Basis for disclaimer of
opinion
Material but not pervasive – misstatements do not represent a substantial proportion of the FS
Material and pervasive – misstatements represent a substantial proportion of the FS making them
unreliable as a whole
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Reporting
Other audit reporting implications
Situation
Refer to in:
Impact on
opinion
Going concern uncertainties adequately
disclosed
Material uncertainty related
to going concern
Unmodified
Inconsistencies between the other information
and the financial statements
Other information
Unmodified
Matters of fundamental importance disclosed
in the financial statements to be brought to
the attention of the users
Emphasis of matter
paragraph
Unmodified
Matters relating to the auditor’s
responsibilities, the audit or auditor’s report to
be explained further to the users
Other matter paragraph
Unmodified
Explanation of why a modified opinion is
being given
Basis for opinion
Modified
UK syllabus only: Conclusions relating to going concern
If there are no going concern issues to report, (i.e. the basis of preparation is appropriate and no
disclosures are required), the auditor must make a statement to this effect in the auditor’s report.
86
KAPLAN PUBLISHING
Chapter 11
Reporting to those charged with governance
A request that
ALL identified
misstatements be
amended.
Matters relevant
to auditor
independence.
The wording
of expected
modifications.
ISA 260 – matters
requiring
communication
Key audit matters
Auditor’s
responsibilities in
relation to the audit.
Planned scope and
timing of the audit.
Requests for
written
representations.
KAPLAN PUBLISHING
Significant
difficulties
encountered
during the audit.
Views regarding
significant
accounting practices
and policies.
87
Reporting
Communicating deficiencies
in internal control
The communication should include:
•
A description of the deficiency
Auditors are required to communicate
identified deficiencies in internal control on a
timely basis in accordance with ISA 265.
•
An explanation of their potential effects
•
Sufficient information to understand the
context of the communication in relation
to the audit process.
The auditor should communicate deficiencies
in internal control to management.
Significant deficiencies in internal control
must be communicated to those charged
with governance in writing.
88
Commonly, the additional reports required
by ISAs 260 and 265 are referred to as
“Management Letters” or “Findings from the
Audit Letters.”
KAPLAN PUBLISHING
Chapter 11
Exam focus
•
•
•
The form and content of the auditor’s
report is a highly examinable area – after
all, it is the final deliverable after the
planning and performance of the audit!
Be prepared to consider if an item is
material, how it affects the interpretation
of the reader and, therefore whether
modification to the auditor’s opinion is
required.
You may have to critically appraise a
draft report. This requires thought about
the order of the paragraphs, the style of
the wording used, as well as whether the
opinion suggested is appropriate.
KAPLAN PUBLISHING
Exam focus
Exam kit questions in this area:
•
Sol & Co
•
Bradley
•
Matty
•
Snipe
•
Goodman Group
•
•
Lifeson
Myron
(specimen exam)
•
Kilmister
•
Daley
•
Coram & Co
•
Brearley & Co
•
Basking
•
Magnolia Group
•
Osier
•
Boston
•
Darren
•
Thurman
•
Adder Group
•
Francis Group
89
Reporting
90
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chapter
12
Audit-related services
In this chapter
•
Audit related services.
91
Audit-related services
92
Assurance engagements
Agreed-upon procedures
•
•
Engagements to review the financial
statements of companies that do not have
to be audited (eg, small companies).
•
Interim financial information.
•
Due diligence assignments.
•
PFI engagements.
•
Environmental/social reporting.
•
Forensic audits
–
Fraud investigation.
–
Verifying insurance claims.
Due diligence.
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Chapter 12
Audit related services
Audits
Related services
Nature of service
Audit
Review
Agreed-upon
procedures
Limited assurance
No assurance
Negative assurance
on assertions
Factual findings of
procedures
ISRE 2400
ISRS 4400
Assurance provided
Reasonable, but not
100% assurance
Report provided
Positive assurance
on assertions
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Audit-related services
Levels of assurance
Reporting
The International Framework for Assurance
Engagements permits only two types of
assurance engagement to be performed:
•
Title
•
Addressee
•
Identification and description of the
subject matter
•
Identification of the criteria
•
Description of any significant, inherent
limitations
•
Restriction on the use of the report to
specific users
•
Statement of responsibilities of the
responsible party and practitioner
•
Statement that the engagement
was performed in accordance with
professional standards
•
Summary of the work performed
•
Practitioner’s conclusion
•
Date
•
Name of the firm or practitioner and
location
•
•
94
Reasonable assurance: the reporting
accountant concludes that the subject
matter conforms in all material respects
with identified suitable criteria. Reports
express positive assurance, i.e. giving an
opinion that the subject matter is (or is
not) free from material misstatement.
Limited assurance: the reporting
accountant concludes that the subject
matter is plausible in the circumstances.
Reports express negative assurance,
i.e. that procedures have not identified
any material misstatement regarding the
subject matter.
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chapter
13
Review of interim financial
information
In this chapter
•
Interim financial information.
95
Review of interim financial information
Interim financial information
A complete or condensed set of financial
statements for a period shorter than a
financial year.
Objective of a review of interim financial
information
•
Implement appropriate quality
management procedures.
•
Consider whether the engagement
should be accepted.
•
Agree the terms of engagement.
•
Plan the engagement so that it will be
performed effectively including:
To enable the auditor to express a
conclusion whether, on the basis of the
review, anything has come to the auditor’s
attention that causes the auditor to believe
that the interim financial information is
not prepared, in all material respects, in
accordance with an applicable financial
reporting framework.
Principles of the review
96
•
Comply with the ethical requirements
•
Comply with ISRE 2410 Review of
Interim Financial Information Performed
by the Independent Auditor of the Entity.
–
Applying professional scepticism.
–
btaining an understanding of the
O
subject matter.
–
ssessing the suitability of the
A
criteria to evaluate the subject
matter.
–
onsideration of materiality and
C
engagement risk.
•
Obtain sufficient appropriate evidence on
which to base the conclusion.
•
Consider subsequent events.
•
Document matters significant in providing
evidence that supports the engagement
report.
KAPLAN PUBLISHING
Chapter 13
•
Provide a clear written expression of
the conclusion about the subject matter
information.
Procedures
•
Enquiries of relevant parties (usually
management).
•
Analytical procedures.
•
Other review procedures as necessary to
obtain sufficient appropriate evidence.
•
Written representations from
management.
KAPLAN PUBLISHING
Exam focus
Exam kit questions in this area:
•
Gannet & Co
97
Review of interim financial information
98
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chapter
14
Prospective financial
information
In this chapter
•
Prospective financial information.
•
Procedures.
•
Reporting.
99
Prospective financial information
Prospective financial information
A reporting accountant may be asked to provide an opinion on
prospective (future) financial information in the form of a forecast and/
or projection (ISAE 3400 is the authoritative standard in this area).
PFI = Financial information
based on assumptions about
events that may occur in the
future and possible actions
by the entity.
100
FORECAST= PFI based on
management expectations
(best-estimate assumptions).
PROJECTION= PFI based
on hypothetical assumptions
about future events that may
or may not take place or
based on a combination
of best-estimate and
hypothetical assumptions.
Prior to ACCEPTANCE of a PFI
engagement, the auditor must consider:
•
The nature of assumptions: best
estimate or hypothetical?
•
The intended users.
•
•
Whether the information will be for
general or limited distribution.
Elements to be included and period
covered.
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Chapter 14
Procedures
•
Cast the forecast to verify arithmetical
accuracy.
•
Compare previous forecasts with actual
results to assess the ability of the
preparer.
•
Compare accounting policies used in the
financial statements to those used in the
forecast to ensure consistency.
•
Agree opening cash figure to cash book
(if already within the forecast period).
•
Calculate key ratios and trends to assess
reasonableness of the forecast figures.
•
Enquire of management where there are
unusual movements expected.
•
Enquire of management of their plans for
the forecast period and ensure these are
reflected in the figures.
KAPLAN PUBLISHING
•
Compare forecast with management
accounts for prior year to assess
reasonableness of figures and identify
any missing items.
•
Compare forecast to management
accounts for period to date to see if the
figures are in line.
•
Review forecast for any items which are
to be discontinued and ensure they are
not included.
•
Review forecast for any new costs/
incomes that should be included that
weren’t present previously.
•
Compare trends with industry
expectations to assess reasonableness.
•
Obtain written representation from
management that they believe the
assumptions are reasonable.
•
Inspect the forecast for any new loans
and interest to ensure they have been
included.
101
Prospective financial information
Make sure your procedures are relevant to
the type of forecast being examined. Cash
flow forecasts should focus on forecast
receipts and payments on a cash basis.
Profit forecasts should focus on forecast
incomes and expenditures on an accruals
basis.
Reporting
The report will contain:
102
•
a conclusion providing negative
assurance over the reasonableness of
the assumptions used to prepare the
forecast, and
•
an opinion on whether the forecast has
been properly prepared on the basis
of the assumptions and presented in
accordance with the relevant financial
reporting framework.
Exam focus
Exam kit questions in this area:
•
Flynn & Co
•
Moritz & Co
•
Jansen & Co
•
Vizsla
•
Waters
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15
Due diligence
In this chapter
•
Due diligence.
103
Due diligence
Due diligence
Due diligence involves gathering information
for a client on a potential acquisition. The
aim is to reduce the risk of making a bad
investment.
Consider what information will impact
the client’s decision to go ahead with the
acquisition or what price to pay. Obtain
information to suggest whether this is a good
or bad investment.
Information required:
104
•
Financial statements
•
Forecasts and budgets
•
Details of contracts and agreements
•
Industry comparisons
•
Details of outstanding litigation
•
Details of tax investigations
•
Details of management contracts
•
Factors affecting asset values
•
Completeness of liabilities
•
Retention of staff
•
Quality issues
•
Reputational issues
•
Likely synergies
Benefits of due diligence
•
Decrease management time assessing
acquisition
•
Identification of operational issues and
risks
•
Liabilities evaluated and identified
•
Identify assets not capitalised
•
Gather information
•
Enhance credibility of the investment
decision
•
PlaNning the acquisition
•
Claims made by vendor substantiated
•
Evaluation of post-acquisition synergies
KAPLAN PUBLISHING
Chapter 15
Exam focus
Exam kit questions in this area:
•
Cheetah
•
Sanzio
•
Baltimore
•
Jacob
KAPLAN PUBLISHING
105
Due diligence
106
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chapter
16
Forensic audits
In this chapter
•
Forensic accounting.
•
Applications of forensic accounting.
107
Forensic audits
Forensic accounting
•
Inspection of documents.
•
Enquiries of management and staff.
Forensic accounting is a specialist branch
of the profession carried out by forensic
accountants and encompassing forensic
auditing and investigation.
•
Analytical procedures.
•
Automated tools and techniques.
•
Tests of controls.
Planning
Report
Definition
108
Procedures
•
Clarify the objectives and deadline for
the engagement.
•
Summary of the procedures performed.
•
Summary of results of procedures.
•
Enquire whether the insurance company
has been contacted.
•
Conclusion regarding losses.
•
Recommendations to prevent future
problems.
•
Scrutinise the insurance policy to ensure
cover is in place.
•
Consider the resources and skills
required.
•
Confirm with the client that full access to
information will be allowed.
•
Confirm the output of the investigation.
•
Confirm whether you will be required as
an expert witness.
KAPLAN PUBLISHING
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Chapter 16
Applications of forensic accounting
Application
Examples
Type of work performed
Fraud
investigations
Employee embezzlement of
company funds, tax evasion, insider
dealing.
Funds tracing, asset identification
and recovery, forensic intelligence
gathering, due diligence reviews,
interviews, detailed review of
documentary evidence.
Insurance
claims
Business interruptions, property
losses, motor vehicle incidents,
personal liability claims, cases
of medical malpractice, wrongful
dismissal.
Detailed review of the policy from
either an insured or insurer’s
perspective to investigate coverage
issues, identification of appropriate
method of calculating the loss,
quantification of losses.
Professional
negligence
Loss suffered as a result of placing
reliance on professional adviser.
Advising on merits of a case in
regards to liability, quantifying losses.
Shareholder,
Determination of funds to be included
partnership and in settlements, as benefits or
matrimonial
distributions.
disputes
KAPLAN PUBLISHING
Detailed analysis of numerous years
accounting records to quantify the
issues in dispute, tracing, locating
and evaluation of assets.
109
Forensic audits
Exam focus
•
•
110
A question on forensic auditing would
allow many areas of knowledge to be
tested outside of the ‘standard’ audit
scenario.
Approach any question on forensic
auditing with an open mind, consider
what the question is asking for and
address the requirements – do not
automatically assume it is related to
finding or investigating a fraud!
Exam focus
Exam kit questions in this area:
•
Beyer
•
Lark & Co
•
Retriever
KAPLAN PUBLISHING
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chapter
17
Audit of social, environmental,
sustainability and integrated
reporting
In this chapter
•
Impact on reporting.
•
Assurance.
•
Impact of SES matters on the audit.
•
Providing assurance on a sustainability report.
111
Audit of social, environmental, sustainability and integrated reporting
Impact on reporting
•
Reduction in CO2 emissions
•
•
Number of serious accidents in the
workplace
•
Number of staff volunteer days
•
$ donated to charity
Organisations need to be accountable
for their impact on social, environmental
and sustainability (SES) matters such as
climate change.
•
SES matters may directly impact
financial statement amounts and
disclosures.
•
SES policies of an organisation may
affect decisions of shareholders,
customers, suppliers and employees.
Key performance indicators (KPIs)/
performance measures
Assurance
•
Auditing amounts and disclosures in
the financial statements relating to SES
matters e.g. provisions, impairment of
assets.
•
Reading the other information that
refers to SES matters published with the
financial statements for consistency in
accordance with ISA 720.
•
Providing assurance over KPIs included
in the annual report.
In the exam you may be asked to suggest
social, environmental and sustainability KPIs.
Examples:
112
•
Tonnes of waste sent to landfill
•
Reduction in water usage
•
Reduction in electricity usage
•
% electricity from renewable/sustainable
sources
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Chapter 17
Impact of SES matters on the audit
The following auditing standards are particularly relevant:
PLANNING
DURING
COMPLETION
REPORTING
ISA 250
ISA 315
ISA 320
ISA 330
ISA 500
ISA 540
ISA 620
ISA 450
ISA 570
ISA 260
ISA 700
ISA 701
ISA 720
Audit testing will need to focus on:
•
Review management’s risk assessment in respect of SES matters.
•
Assessing the adequacy of management’s asset impairment reviews.
•
Assessing the reasonableness of estimates including provisions.
•
Obtaining evidence from experts such as environmental experts and lawyers.
•
Reviewing compliance with laws and regulations.
•
Evaluating management’s use of the going concern basis of accounting and adequacy of
disclosures.
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Audit of social, environmental, sustainability and integrated reporting
114
Providing assurance on a
sustainability report
Measurement difficulties
•
Deciding which KPIs on which to report
Planning the engagement
•
KPIs may not be specific enough to
measure accurately.
•
Understand and agree scope of
engagement.
•
•
Obtain an understanding of the entity,
including the users and their needs.
The concepts involved may lack precise
definition.
•
•
Consider the appropriateness of the
information in light of the users’ needs.
Systems and controls may not be in
place to capture the information reliably.
•
Consider the feasibility of conducting the
engagement:
Reporting difficulties
•
Accountants may lack the specific skills
and experience needed.
−
Level of uncertainty, subjectivity,
complexity
•
−
Potential for manipulation
Significant subjectivity of the subject
matter.
−
Access to quality evidence
•
−
Access to client staff
Evidence may not be sufficient or
appropriate for the purposes of providing
assurance.
−
Whether KPIs are specific enough to
measure
•
Potential for manipulation to achieve the
desired result.
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Chapter 17
Assurance report
The assurance report will include the
following:
•
Description of the scope of the
engagement and type of assurance
provided.
•
Identification of the intended user.
•
Respective responsibilities of the client
and assurance provider.
•
Details of the work performed.
•
The opinion or conclusion.
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Exam focus
Exam kit questions in this area:
•
Eagle Group (ethical considerations)
•
Moosewood Hospital
•
Newman & Co
•
Crux Group (specimen exam)
115
Audit of social, environmental, sustainability and integrated reporting
116
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chapter
18
INT SYLLABUS ONLY:
Audit of performance information
in the public sector
In this chapter
•
Performance audits and performance information.
•
Reporting.
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Audit of performance information in the public sector
Performance audits and
performance information
Audit procedures
•
Inspection of supporting documentation.
Performance audits provide assurance
regarding the effective functioning of the
organisation’s operations.
•
Enquiries of management and staff.
•
Perform analytical procedures.
•
Recalculate the figures to verify
arithmetical accuracy.
•
Obtain written representations from
management regarding accuracy and
completeness.
Performance information is published by an
organisation to highlight achievement of their
objectives. Performance information is in the
form of KPIs.
Planning an audit of performance
information
118
•
Obtain an understanding of the
information to be audited.
•
Enquire of management of how the
information is collected and recorded.
•
Determine an appropriate materiality
level.
•
Examine the systems and controls for
recording the information.
Potential problems
As with any KPI, problems may be
encountered with:
•
Measuring the information in the first
instance.
•
Subjectivity of definition.
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Chapter 18
Reporting
An assurance report for performance
information may provide reasonable
assurance or limited assurance depending
on the requirements of the client.
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Exam focus
Exam kit questions in this area:
•
Moosewood Hospital
•
Kandinsky
119
Audit of performance information in the public sector
120
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chapter
19
UK SYLLABUS ONLY:
Auditing aspects of insolvency
In this chapter
•
Voluntary liquidation.
•
Compulsory liquidation.
•
Administration.
•
Alternative to winding up.
•
Fraudulent and wrongful trading.
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Auditing aspects of insolvency
A company is insolvent if:
Procedures
•
its liabilities exceed its assets
•
it is failing to discharge its debts as they
fall due.
Members’ VL:
•
Members pass resolution
•
Directors make declaration of solvency
Voluntary liquidation
•
Appointment of insolvency practitioner
Liquidation is the process of terminating a
company. The assets of the company are
physically liquidated to pay off company
creditors and equity holders.
•
Liquidator sells the company’s assets and
distributes the proceeds
•
Final report issued
•
Company is dissolved
There are two forms of voluntary liquidation
Creditors’ VL:
•
•
Members pass resolution
•
Directors send creditors a statement of
affairs
•
Appointment of insolvency practitioner
•
Liquidator sells the company’s assets and
distributes the proceeds
•
Final report issued
•
Company is dissolved
•
122
a members’ voluntary liquidation (used
when a company is solvent)
a creditors’ voluntary liquidation (used
when a company is insolvent).
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Chapter 19
Compulsory liquidation
Companies may be obliged to liquidate if
a winding up order is presented to a court,
usually by a creditor or member. A petition
may be made because:
•
•
the company is unable to pay its debts
or
it is just and equitable to do so.
•
Final report issued
•
Company is dissolved
Liquidators in a compulsory liquidation must
pay debts in the following order:
•
Fixed charge holders
•
Liquidation expenses
•
Preferential creditors, including
employee’s wages and accrued holiday
pay
Procedures
•
Winding up order presented to court by
creditor or member
•
Secondary preferential creditors – HMRC
in respect of VAT, PAYE, NICs
•
Court appoints Official Receiver
•
•
Receiver investigates the company’s
affairs and cause of failure
Prescribed part set aside for unsecured
creditors
•
Floating charge holders
Receiver appoints licensed insolvency
practitioner
•
Unsecured creditors (ranked equally)
•
Preference shareholders
•
Liquidator sells the company’s assets
and distributes the proceeds
•
Members.
•
Court passes an order dissolving the
company
•
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Auditing aspects of insolvency
Administration
This is when an insolvency practitioner
is appointed to manage the affairs of a
business under the Enterprise Act 2002. It
is often used as an alternative to liquidation
with a view to:
124
•
presenting or defending a petition to
liquidate the company.
In administration certain protections are
afforded to a company:
•
the rights of creditors to enforce
security over the company’s assets are
suspended
•
rescuing a company
•
achieving the best result for creditors
•
petitions for liquidation are dismissed
•
realising property to pay off secured
creditors.
•
no resolutions to wind up the company
may be passed
Consequences
•
Administrators take over control of the
management of the company. Their powers
include:
the directors continue in office, although
their powers are suspended.
Advantage of administration
•
Provides time to develop survival plan.
•
removal/appointment of directors
•
•
calling meetings of creditors/members
Shareholders are less likely to lose their
investment.
•
making payments to secured or
preferential creditors
•
Creditors are more likey to be paid.
•
making payments to unsecured creditors
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Chapter 19
Alternative to winding up
Individual Voluntary Arrangements (IVAs)
•
available to individuals, sole traders and
partnerships
•
helps reach a compromise with creditors
with the aim of avoiding closure
•
usually facilitates lower payments of debt
over an extended period, usually five
years
•
once a proposal is submitted to the
courts creditors may no longer take
action against the individual (referred to
as a moratorium on actions)
•
a creditors meeting must be held within
fourteen days of the order
•
the creditors may accept the proposals
with a 75% majority (by value of creditors
present) vote.
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Reconstructions
Companies in difficulty could survive
through growth and diversification but, in the
circumstances, would find it difficult to attract
investment.
Various mechanisms of the Companies Act
2006 enable companies to reconstruct their
balance sheet to make them more attractive
to investment. Permitted reconstructions
include:
•
writing off unpaid share capital
•
writing off share capital not represented
by available assets
•
writing off paid up share capital in excess
of requirements
•
writing off debenture interest arrears
•
replacing existing debentures with a lower
interest debenture
•
writing off preference dividend arrears
•
writing off amounts owing to trade creditors.
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Auditing aspects of insolvency
Fraudulent and wrongful
trading
Fraudulent trading (a criminal offence) is
where a company carries on a business with
the intention of defrauding creditors.
Wrongful trading (a civil offence) is when
the director(s) of a company knew or
ought to have concluded that there was no
reasonable prospect of avoiding insolvent
liquidation.
126
Exam focus
Exam kit questions in this area:
•
Alucard
•
Krupt
•
Kandinsky
•
Hunt & Co
•
Butler
KAPLAN PUBLISHING
References
R.1
References
The Board (2021) IAS 24 Related Party
Disclosures. London: IFRS Foundation.
R.2
KAPLAN PUBLISHING
Index
I.1
Index
A
C
Accepting an engagement 39
Administration 124
Advertising and publicity 38
Assurance engagements 92
Audit of performance information in the
public sector 117
Audit planning 44
Audit risk 45
Audit software 72
Audit strategy 44
Automated tools and techniques 72
Client identification 11
Code of ethics and conduct 13
Completion 75
Component auditor 55
Compulsory liquidation 123
Confidentiality 14, 17
Conflicts of interest 18
Corporate governance 3
B
Business risk 46
D
Deficiencies in internal control 88
Detection risk 45
Due diligence 104
E
Engagement letters 41
Evaluation of misstatements 80
Evidence 61
Expectation gap 28
I.2
KAPLAN PUBLISHING
K
G
Index
F
Fees 38
Forensic accounting 108
Forensic audits 107
Fraud and error 24
Fraudulent and wrongful trading 126
Fundamental principles 14
G
Group Accounts 56
Group and
transnational audits 53
I
IAASB 2
Individual voluntary arrangements 125
Insolvency 121
Integrity 14
ISA 250 22
ISA 260 87
ISA 265 88
ISA 300 44
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ISA 315 48
ISA 320 49
ISA 450 80
ISA 550 64
ISA 580 81
ISA 620
ISAE 3400 100
J
Joint audits 58
L
Laws and regulations 22
Limited assurance 93, 94
M
Materiality 49
Money laundering 9
N
Negligence 27
I.3
Index
O
R
Objectivity 14
Other assignments 95
Outsourcing and the auditor 69
Reasonable assurance 94
Reconstructions 125
Regulatory requirements of accounting for
groups 57
Related party transactions 64
Reporting fraud and error 26
Reporting non-compliance 23
Risk of material misstatement 45
P
Performance audits 118
Performance information 118
Performance materiality 49
Planning, materiality and
assessing the risk of misstatement 43
Principal auditor 54
Procedures 63
Professional behaviour 14
Professional competence and due care 14
Professional responsibilities and liabilities 21
Prospective financial information 99
Q
Quality control 29, 30
S
Sources of regulation 2
T
Tendering 36
Test data 72
Threats 16
Threats & safeguards 15
U
UK Corporate Governance Code 3
Using the work of an auditor’s expert
I.4
KAPLAN PUBLISHING
Index
V
Voluntary liquidation 122
W
Written representations 81
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I.5
Index
I.6
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