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December 2014–June 2015 Edition
STUDY SYSTEM
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ACCA
Paper F8 | AUDIT AND ASSURANCE
(INTERNATIONAL)
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ACCA
AUDIT AND ASSURANCE F8
(INTERNATIONAL)
STUDY SYSTEM
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December 2014–June 2015 Edition
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Paper
F8
Contents
Page
introduction ...............................................................................................v
About this Study System ............................................................................v
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Syllabus.....................................................................................................vi
ACCA Study Guide ......................................................................................ix
examination Approach ............................................................................. xiv
examinable documents ........................................................................... xiv
examination technique .......................................................................... xvii
Sessions
Audit and Other Assurance engagements ............................. 1-1
2
external Audit ...................................................................... 2-1
3
Corporate Governance .......................................................... 3-1
4
Professional Codes of ethics and Conduct ............................. 4-1
5
Auditor Appointment ............................................................ 5-1
6
documentation ..................................................................... 6-1
7
Audit Planning ...................................................................... 7-1
8
understanding the entity ...................................................... 8-1
9
internal Control .................................................................... 9-1
10
Audit materiality ..................................................................10-1
11
Fraud, law and Regulations.................................................11-1
12
tests of Control ...................................................................12-1
13
Communication on internal Control .....................................13-1
14
Service Organisations ..........................................................14-1
15
Audit evidence .....................................................................15-1
16
Analytical Procedures ..........................................................16-1
17
Accounting estimates ..........................................................17-1
18
using the Work of an expert ................................................18-1
19
Audit Sampling ....................................................................19-1
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© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
iii
Contents
Sessions
Page
Written Representations ......................................................20-1
21
Computer-Assisted Audit techniques...................................21-1
22
Non-current Assets ..............................................................22-1
23
inventory ............................................................................23-1
24
External Confirmations, Receivables and Sales ....................24-1
25
Share Capital, Reserves and directors' Remuneration .........25-1
26
loans, Bank and Cash ..........................................................26-1
27
liabilities, Provisions and Contingencies .............................27-1
28
Small Business and Not-for-Profit Organisations .................28-1
29
Audit Finalisation ................................................................29-1
30
the Auditor's Report on Financial Statements .....................30-1
31
Going Concern .....................................................................31-1
32
internal Audit ......................................................................32-1
33
using the Work of internal Audit .........................................33-1
34
index ..................................................................................34-1
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20
iv
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
Introduction
ABOut thiS Study SyStem
This Study System has been specifically written for the Association of Chartered Certified
Accountants Professional Paper F8 Examination, Audit and Assurance (International).
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It provides comprehensive coverage of the core syllabus areas and is designed to be used
both as a reference text and as an integral part of your studies to provide you with the
knowledge, skill and confidence to succeed in your ACCA examination.
About the author: Keith Rye is ATC International's lead tutor in this subject area of auditing
and assurance and has more than 10 years' experience in delivering ACCA exam-based
training.
How to Use This Study System
You should start by reading through the syllabus, study guide and approach to examining
the syllabus provided in this introduction to familiarise yourself with the content of this
paper.
The sessions which follow include the following features:
These are the learning outcomes relevant to the session,
as published in the ACCA Study Guide.
Session Guidance
Tutor advice and strategies for approaching each session.
Visual Overview
A diagram of the concepts and the relationships addressed
in each session.
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Focus
Termsaredefinedastheyareintroducedandlargergroupingsoftermswill
be set forth in a Terminology section.
illustrations
These are to be read as part of the text. Any solutions to numerical
Illustrations are provided.
exhibits
These extracts of external content are presented to reinforce concepts and
should be read as part of the text.
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definitions
examples
These should be attempted using the pro forma solution provided (where
applicable).
Key Points
Attention is drawn to fundamental rules, underlying concepts and
principles.
exam Advice
These tutor comments relate the content to relevance in the examination.
Commentaries
These provide additional information to reinforce content.
Session Summary
A summary of the main points of each session.
Session Quiz
These quick questions are designed to test your knowledge of the technical
content. A reference to the answer is provided.
Study Question
Bank
A link to recommended practice questions contained in the Study Question
Bank. As a minimum you should work through the priority questions
after studying each session. For additional practice you can attempt the
remaining questions (where provided).
example Solutions
Answers to the Examples are presented at the end of each session.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
v
Syllabus
F8 Audit and Assurance (iNt)
SyllABuS
Aim
To develop knowledge and understanding of the process of carrying out the assurance
engagement and its application in the context of the professional regulatory framework.
Main Capabilities
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The examiner has made it clear that her aim is that Paper F8 can be passed by a candidate who
understands the underlying theory of auditing and can apply that theory to relatively basic audit
situations—knowledge itself is not sufficient to pass.
On successful completion of this paper, candidates should be able to:
A. Explain the concept of audit and assurance and the functions of audit, corporate
governance, including ethics and professional conduct, describing the scope and
distinguishing between the functions of internal and external audit.
B. Demonstrate how the auditor obtains and accepts audit engagements, obtains
an understanding of the entity and its environment, assesses the risk of material
misstatement (whether arising from fraud or other irregularities) and plans an audit of
financialstatements.
C.
Describe and evaluate internal controls, techniques and audit tests, including IT
systems to identify and communicate control risks and their potential consequences,
making appropriate recommendations.
e.
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d. Identify and describe the work and evidence required to meet the objectives of audit
engagements and the application of the International Standards on Auditing.
Explain how consideration of subsequent events and the going concern principle can
informtheconclusionsfromauditworkandarereflectedindifferenttypesofaudit
report,writtenrepresentationsandthefinalreviewandreport.
Rationale
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The Audit and Assurance syllabus is essentially divided into five areas.
The syllabus starts with the nature, purpose and scope of assurance engagements both
internal and external, including the statutory audit, its regulatory environment, and
introduces professional ethics relating to audit and assurance.
It then leads into planning and risk assessment audit.
The syllabus then covers a range of areas relating to an audit of financial statements
including the scope of internal control. These include, evaluating internal controls, audit
evidence and a review of the financial statements.
The final section then deals with reporting, including statutory audit reports, management
reports and internal audit reports.
vi
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (iNt)
Syllabus
Relational Diagram of Main Capabilities
Audit framework and regulation (A)
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Planning and Risk assessment (B)
Internal control (C)
Audit evidence (d)
Review and reporting (e)
Position Within the Syllabus
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This diagram shows the indirect links between this paper and other papers following it.
CL (F4)
PA (P1)
AAA (P7)
FA (F3)
AA (F8)
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
vii
Session 1
FOCUS
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Audit and Other Assurance
Engagements
This session covers the following content from the ACCA Study Guide.
A. Audit Framework and Regulation
1. The concept of audit and other assurance engagements
a) Identify and describe the objective and general principles of external
audit engagements.
b) Explain the nature and development of audit and other assurance
engagements.
c) Discuss the concepts of accountability, stewardship and agency.
d) Define and provide the objectives of an assurance engagement.
e) Explain the five elements of an assurance engagement.
f) Describe the types of assurance engagement
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g) Explain the level of assurance provided by an external audit and other
review engagements and the concept of true and fair presentation.
Session 1 Guidance
Review the development of external audit, internal audit and assurance services (s.1). Understand
that an external audit is a specific form of assurance service (s.1.3, s.2.1).
Understand the concepts of accountability, stewardship and agency (s.2.2). Learn the audit
objective and appreciate the basic elements contained in an auditor's report, including management's
responsibilities and the auditor's responsibilities (s.2.3).
Understand the terms reasonable assurance, materiality, professional judgment, professional
scepticism and a "true and fair view" (s.2.3).
(continued on next page)
F8 Audit and Assurance (INT)
Becker Professional Education | ACCA Study System
VISUAL OVERVIEW
Objective: To introduce the concepts of audit and assurance engagements.
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DEVELOPMENT
• External Audit
• Internal Audit
• Assurance Services
EXTERNAL AUDIT
•
•
•
•
•
•
IFAE
Five Elements
Types of Engagement
Evidence Gathering
Review Engagements
Other Engagements
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• As an Assurance
Service
• Stewardship, Agency
and Accountability
• Auditor's Report
• The Audit Process
ASSURANCE
ENGAGEMENTS
INTERNAL AUDIT
(SESSION 32)
Session 1 Guidance
Review the audit process, including its application to internal audit (s.2.4).
Learn the definition of an assurance engagement and its five elements (s.3.1-s.3.2).
Understand the difference between reasonable assurance engagements and limited assurance
engagements (s.3.3).
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-1
Session 1 • Audit and Other Assurance Engagements
1
Development
1.1
External Audit
F8 Audit and Assurance (INT)
The development of joint-stock corporations during the middle of
the 19th century brought about a need for directors to report to
the shareholders whose capital they managed.
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As ownership and management became significantly separated,
shareholders (and in today's corporate environment, other
stakeholders) required independent verification that what the
directors (management) reported was in fact true.
< Following a series of scandals, statutory audits (i.e. carried
<
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<
out in accordance with statutory provisions) became
mandatory for companies in the UK in 1900. The auditor was
required to be independent of the company, hence the use of
an external auditor.
Up to this time, the purpose of an audit was to detect fraud,
technical errors and errors of principle. However, as the size
and complexity of companies grew, case law developed the
principle that it was unreasonable to expect auditors to detect
all aspects of fraud, even though they were expected
to exercise reasonable skill and care.
As companies grew in size, with many becoming international
organisations, it became impracticable for auditors to verify
the 100% accuracy of financial records and so the audit of
financial statements became an attestation (substantiation,
testimony) of their credibility (i.e. believability).*
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*In line with the increasing complexity of company activities and
procedures, the auditors' application of reasonable skill and care has
moved away from the passive approach of a watchdog to the highly
sceptical approach of Sherlock Holmes. As discussed in greater
detail later in this study system, auditors must now, for example,
apply fraud risk assessment procedures throughout their audit and,
at the first sniff of any fraud possibility, thoroughly investigate and
follow through.
< The objective of an external audit, which must be performed
by an independent auditor following accepted standards
(e.g. International Standards on Auditing), is to express
an opinion (in terms of truth and fairness) on whether the
financial statements are prepared, in all material respects, in
accordance with an identified reporting framework (e.g. IFRS)
and relevant law.
1-2
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
1.2
Session 1 • Audit and Other Assurance Engagements
Internal Audit
The modern form of internal audit was initially developed as the
growth and increasing complexity of entities in the early 1900s
stretched the capabilities of managers to effectively manage.
< Senior management appointed specialist employees to
<
1.3
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<
*The Institute of
Internal Auditors (IIA)
was founded in 1941.
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<
review and report on various financial and other processes
and to ensure that appropriate controls were being
effectively applied.
The role of the early internal auditors ranged from checking
routine financial and operational functions with a heavy
emphasis on compliance, security and detection of fraud, to
(in some cases) the analysis and appraisal of financial and
operational activities.*
The role of internal audit, whether required by legislation
(e.g. in public sectors), listing regulations, corporate
governance codes (e.g. the UK Corporate Governance Code)
or as voluntary activity, has expanded rapidly since the 1970s,
reflecting the economic and international growth
of organisations.
With the introduction of corporate governance codes and the
extended use of risk management in corporate management,
the objective of internal audit has significantly evolved over
the last few decades:
 to provide to management an independent, objective
assurance and consulting activity designed to add value
and improve an organisation's operations; and
 to help an organisation accomplish its objectives by
bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management, control
and governance processes.
Assurance Services
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Over the past 30 years or so, the auditing profession has sought
to broaden its role (and income streams) with external auditors
developing a wide range of assurance services (of which the
financial statement audit is just one part).
Assurance services—independent professional services that improve
the quality of information, or its context, for decision-makers.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-3
Session 1 • Audit and Other Assurance Engagements
F8 Audit and Assurance (INT)
Factors contributing to the increasing demand for assurance
services include:
< The rapid expansion of available information (e.g. systems
<
<
<
<
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capabilities of capturing, processing and delivering relevant
and reliable information).
The changing information needs of businesses and consumers
(e.g. minimising information overload).
The increase in demand for relevant information for decisionmakers (e.g. budgets, cash flows, raw material consumption
and reserves, production capacity, business systems, business
purchase, due diligence).
Use of new technology (e.g. Internet transaction and data
security) and new business processes (e.g. business-wide
integrated supply chain management, outsourcing).
Changing expectations and demands of customers, suppliers
and other stakeholders (e.g. quality control, market trends).
Globalisation of businesses creating worldwide needs
(e.g. compliance with central ethical supply-chain codes
and key performance indicators by developing world suppliers
and business partners).
< Increasing corporate accountability demanding more
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relevant and reliable information (e.g. corporate governance,
compliance with laws and regulations, environmental
performance, corporate social reporting, global reporting
initiative).
Typical assurance services include:*
*Only audits and reviews are within the syllabus. The other
assurance services are illustrative only.
Audits of financial statements and reviews of historical
financial information.
Prospective financial information (e.g. cash flows) reviews.
Business ethics audits, social responsibility reporting,
environmental reporting.
Risk assessments (including e-commerce).
Value for money audits.
Performance measurement.
Systems and control reliability.
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<
<
<
<
<
<
<
1-4
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
2
Session 1 • Audit and Other Assurance Engagements
External Audit
An external audit provides confidence in the integrity of corporate
reporting for the benefit of stakeholders and society as a whole,
by providing an external and objective view on the statutory
financial statements. Specifically, the audit enhances the degree
of confidence of the shareholders in the financial statements.
2.1 As an Assurance Service
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As an assurance service, an external audit must include the
five elements of an assurance engagement, which are further
discussed in section 3.
1.The subject matter of an external audit engagement is the
financial statements prepared under IFRS.
2.The three-party relationship in an external audit includes:
< the
directors, who are responsible for the financial
statements;
< the practitioner (i.e. the external auditor); and
< the shareholders (and other intended users of the financial
statements).
3.The criteria used by the external auditor to evaluate the
financial statements (e.g. International Financial Reporting
Standards—IFRS).
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4.The external auditor plans and performs the audit engagement
to obtain sufficient appropriate evidence in order to support the
expression of an opinion on the financial statements.
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5.The external auditor issues an appropriate audit report at the
end of the audit engagement.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-5
Session 1 • Audit and Other Assurance Engagements
F8 Audit and Assurance (INT)
Directors
RESPONSIBLE
PARTY
IFRS used to
prepare financial
statements
Financial
Statements
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Criteria
SUBJECT MATTER
IFRS used to
evaluate TS
Criteria
Evidence
Shareholders
2.2
Assurance
Report
PRACTITIONER
Audit
Opinion
External auditor
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INTENDED
USER
Sufficient
appropriate
evidence
to support
opinion
Stewardship, Agency and Accountability
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Generally companies are owned by their shareholders, but
managed by the directors. The directors are appointed by the
shareholders. The shareholders then appoint the auditors to
report to them (provide assurance) on the information provided
to them by the directors (the annual financial statements as
required by law). In most jurisdictions, the relationships among
the directors, shareholders and auditors are described in terms of
stewardship, agency and accountability.*
Stewardship, agency and accountability are specifically mentioned by
the examiner in the syllabus. They have been examined in the past
and are likely to be examined in the future.
1-6
*A strength of the
external audit is
its structure and
approach through the
use of a regulatory
environment and
application of
principles based on
ISAs. This may also
be considered a
weakness as many
users of financial
statements expect
auditors to be able to
detect all errors and
fraud (regardless of
size) and to provide
100% assurance
that management is
running the business
efficiently and
effectively. As this
is not the role of the
auditor an "expectation
gap" exists between
what auditors
actually do and what
stakeholders expect
them to do.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
2.2.1
Session 1 • Audit and Other Assurance Engagements
Stewardship
Stewardship is the practice of managing another person's
property. Directors and other managers of an enterprise have the
responsibility of stewardship for the property of that enterprise,
which is owned by the shareholders.
Example 1 Stewardship
Solution
1.
2.
3.
4.
5.
2.2.2
Agency
PL
E
Suggest FIVE responsibilities of company directors.
M
An agent is an individual (or another entity) employed or used to
provide a particular service. The individual utilising the agent is
referred to as the principal.
Example 2 Agency
Describe the possible agency relationships among shareholders, directors and
auditors.
SA
Solution
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-7
Session 1 • Audit and Other Assurance Engagements
2.2.3
F8 Audit and Assurance (INT)
Accountability
Accountability is where one party is held responsible (answerable)
to another party for its actions; it will be required to justify its
actions and decisions to that party.
Example 3 Accountability
Explain the accountability of directors to shareholders.
Auditor's Report
M
2.3
PL
E
Solution
The objective of an audit of financial statements is:
SA
 to enable an independent auditor to obtain reasonable assurance
about whether the financial statements are free from material
misstatement, whether due to fraud or error; and (thereby)
 to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an identified
financial reporting framework.
The auditor's report is the key means of communicating to
the shareholders (and indirectly to other stakeholders) of
the business.
< Understanding the end result of the auditor's work provides an
<
1-8
overview of the whole process. The basic concepts underlying
the report need to be understood.
An example of an auditor's report, which expresses the
auditor's opinion, follows.
Although the audit
report will be
considered in greater
detail in a later
session, you will be
examined on many
of the key concepts
discussed in this
section.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
Session 1 • Audit and Other Assurance Engagements
Independent Auditor's Report To……………………
Detailed
responsibilities
reflecting
engagement
letter
We have audited the accompanying financial statements of
ABC Company, which comprise the statement of financial
position as at December 31, 20XX, and the statement of
comprehensive income, statement of changes in equity
and statement of cash flows for the year then ended, and
a summary of significant accounting policies and other
explanatory notes.
Management's Responsibility for the Financial
Statements
PL
E
Reference can
be by page
numbers
On whose
behalf audit is
carried out
Management is responsible for the preparation of financial
statements that give a true and fair view in accordance with
International Financial Reporting Standards and for such
internal control as management determines is necessary to
enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
Standards
complied with
Auditor's Responsibility
Reasonable,
but not
absolute,
assurance
Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in
accordance with International Standards on Auditing.
Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain
reasonable assurance whether the financial statements
are free from material misstatement.
SA
M
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on
the auditor's judgement, including the assessment of the
risks of material misstatement of the financial statements,
whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant
to the entity's preparation and fair presentation of the
financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness
of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation
of the financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
Unmodified
implies that,
for example,
changes in
accounting
principles,
etc have
been properly
determined
and disclosed
In our opinion, the financial statements give a true and
fair view of the financial position of ABC Company as of
December 31, 20XX, of its financial performance and its
cash flows for the year then ended in accordance with
International Financial Reporting Standards… (and comply
with…).
And/or applicable GAAP
Nature
of audit
examination
(scope)
Or "present
fairly, in
all material
respects,"
Relevant
statutes/law
Signature
Date
Must include
Address
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-9
Session 1 • Audit and Other Assurance Engagements
2.3.1
F8 Audit and Assurance (INT)
Management and Auditor's Responsibility
Management is responsible for preparing and fairly presenting
the financial statements (e.g. in accordance with the applicable
financial reporting framework).*
< Management's responsibility is stated in:
the auditor's report;
the engagement letter between the auditors and directors
(see Session 5); and
 the letter of representation from the directors to the
auditors (see Session 20).
Oversight of management's responsibilities (including those
for the financial statements) is provided by those charged with
governance. The structures of governance will vary depending
on the jurisdiction that management operates within and the
applicable corporate governance code (see Session 3).
An audit of financial statements does not relieve management
or those charged with governance of their responsibilities.
The auditor is responsible for expressing an opinion on the
financial statements based on the audit. The scope of audit
work is described in the report. The auditor is not responsible
for the financial statement's form and content.

<
<
<
PL
E

*Although it is not
specifically stated,
management's
responsibility
includes designing,
implementing and
maintaining the
necessary internal
control, selecting and
applying appropriate
accounting policies and
making accounting
estimates that are
reasonable in the
circumstances.
< Although the auditor's opinion enhances the credibility of the
financial statements, users cannot assume that the opinion
is an assurance as to the future viability of the entity or
the efficiency or effectiveness with which management has
conducted the affairs of the entity.
International Standards on Auditing (ISA)
M
2.3.2
< Each ISA provides:
an introduction (usually scope and effective date),
objectives and definitions;
 requirements (i.e. what must be done); and
 application and other explanatory material (which is crossreferenced from the introduction, objectives, definitions and
requirements).*
An audit conducted in accordance with ISAs must consider the
requirements of:
 ISAs (i.e. to plan, evaluate controls, obtain evidence, form
conclusions and report);
 relevant professional bodies (e.g. ACCA);
 legislation and regulations (e.g. Companies Acts);
 the terms of the audit engagement and reporting
requirements.
SA

<
2.3.3
*The scope and
authority of ISAs is
discussed in Session 2.
Ethical Requirements
The auditor should comply with the International Federation of
Accountants (IFAC) Code of Ethics for Professional Accountants
as authored by the International Ethics Standards Board for
Accountants (IESBA) (see Session 4).
1-10
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
2.3.4
Session 1 • Audit and Other Assurance Engagements
Reasonable Assurance
In an audit engagement, the auditor provides a high, but not
absolute, level of assurance (expressed positively in the audit
report as reasonable assurance) that the information subject
to audit (i.e. the financial statements) is free of material
misstatement.
< To provide reasonable assurance, the auditor carries out
<
2.3.5
Materiality
*The detailed routines
and tests enable the
auditor to express a
positive conclusion
on the assertions
being made by the
directors (that the
financial statements
show a true and fair
view and have been
prepared in accordance
with specific laws and
regulations). Basically,
the auditor believes
that the evidence
obtained is sufficient
and appropriate to
provide a basis for his
opinion.
PL
E
<
specific detailed routines, conducts relevant testing and
assesses the accumulated evidence collected in respect of the
financial statements as a whole (as detailed in the report's
scope paragraph).*
An auditor cannot obtain absolute (e.g. 100%) assurance
because of the inherent limitations in an audit (see Session 2).
Thus an audit can never be a guarantee that the financial
statements are free of material misstatement, but it does
give reasonable assurance that they are.
Omissions or misstatements of items are material if they could,
individually or collectively, influence the decisions of users taken on
the basis of the financial statements.
M
Materiality is an expression of relative significance or importance
of a matter, whether quantitative or qualitative (e.g. values and
discursive disclosures), in the context of the financial statements
as a whole (see Session 10).
< In planning their audit, the auditors must consider those areas
SA
<
that are material to the financial statements and the possibility
that material errors could be contained in the (unaudited)
financial statements (financial statement risk).
Audit procedures must minimise the risk that such errors
remain undetected by the audit. The auditors are not
responsible for the detection of misstatements that are not
material to the financial statements taken as a whole.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-11
Session 1 • Audit and Other Assurance Engagements
2.3.6
F8 Audit and Assurance (INT)
Professional Judgement
Professional judgement is applied by the auditor in all stages of the
audit process.
There are four primary areas in which professional judgement is
particularly important:
PL
E
1. In interpreting relevant ethical requirements and the
application of ISAs.
2. In understanding the entity and its environment
(with particular emphasis on materiality and audit risk).
3. In determining the audit scope and audit plan (e.g. in deciding
the nature, timing and extent of audit procedures) to meet the
requirements of ISAs and gather audit evidence.
4. In drawing conclusions based on evidence obtained (e.g. in
assessing the persuasiveness of conflicting evidence from
different sources, evaluating management's judgements in
applying the applicable financial reporting framework and
assessing the reasonableness of the estimates made by
management in preparing the financial statements).*
Professional Scepticism
M
2.3.7
The auditor should plan and perform (i.e. conduct) the audit with
an attitude of professional scepticism recognising that circumstances
may exist that will cause a material misstatement in the financial
statements
*In a principle-based
approach (e.g. using
ISAs) professional
judgement is critical.
Poor professional
judgement can result
in auditors issuing
inappropriate audit
opinions and being
sued. In a rules-based
approach, professional
judgement would be of
minimum use as only
the rules would need
to be followed.
SA
Professional scepticism is an attitude that includes a questioning
mind and a critical assessment of evidence.
< It is required throughout the audit process:
for the auditor to reduce the possibility of marginalising
a critical element of risk to the business during the risk
assessment;
 to identify conditions that may indicate possible fraud;
 to avoid inappropriate assumptions when determining the
nature, timing and extent of the audit procedures and
evaluating results;
 for the auditor to be alert for audit evidence that contradicts
or brings into question the reliability of documents or
management representations; and
 to assess management's judgements that involve estimation
or subjective matters.
In planning, conducting and reviewing the audit, an auditor
should therefore assume neither dishonesty nor unquestioned
honesty of management.

<
1-12
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
2.3.8
Session 1 • Audit and Other Assurance Engagements
"True and Fair View"
The term "true and fair view" is not defined in International
Standards on Auditing (ISAs) and definitions should therefore
be regarded with caution.
< True or truth relates to factual accuracy (bearing in mind
<
PL
E
<
materiality). The information provided conforms to required
standards, regulations and law.
Fairness relates to the presentation of information and
the view conveyed to the reader. Such information is free
from bias. The financial statements reflect the commercial
substance and reality of the underlying balances and
transactions.
View indicates that a professional judgement has been
reached.*
*A degree of imprecision is inevitable because of inherent
limitations. For example, the auditor does not inspect 100% of all of
the entity's transactions.
2.4
2.4.1
M
A true and fair view means that the appropriate financial
framework (e.g. IFRS) has been complied with. IFRS does
allow different accounting policies to be applied (e.g. the cost
or revaluation method under IAS 16). Using either alternative
provides a true and fair view if it has been applied in accordance
with IFRS.
The Audit Process
Stages
Agree to terms
of engagement
SA
Form opinion
(Auditor's
report)
Documentation
Obtain written
representations
Plan
Asses risk and
internal control
Review
Substantiate
assets, liabilities,
transactions &
disclosures
Understand the
entity and its
environment
Reliance on
effectiveness of
control
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-13
Session 1 • Audit and Other Assurance Engagements
F8 Audit and Assurance (INT)
Step
Description
Engagement
letter
Auditor must send all clients an engagement letter
setting out the auditor's duties and responsibilities,
as well as those of management.
Planning
Session 7
Assess risk
Sessions 8 and 9
Understand
internal
controls
Session 9
Planning and controlling audit work is essential to
performing work to the required high standard of
skill and care. Planning includes understanding the
entity, its environment, internal control and the risk
of material misstatements.
As part of the process to determine audit
strategy and the nature, timing and extent of
audit procedures (the audit plan), auditors must
understand the risks faced by an entity and
relate such risks to the possibility of material
misstatements arising in the financial statements.
The auditor must also understand the entity's
risk assessment procedures and how the entity's
management deal with identified risks.
PL
E
Session 5
Regardless of the audit approach used, auditors
must understand the design of internal controls and
if such controls have been implemented, as part of
their overall risk assessment. This helps them to
assess the risk of material errors in the financial
statements.
Where the auditor decides to gain audit assurance
from controls in an entity, the effectiveness of such
controls must be tested.
Substantive
work
Balances and transactions in the financial
statements, together with disclosures, must be
verified based on key substantive assertions
(e.g. completeness, existence, occurrence).
M
Control
effectiveness
Session 12
Session 15
Auditors should ensure that the audit has been
carried out in accordance with ISAs and that audit
working papers fully support the audit opinion.
Procedures would normally also include analytical
review of the financial statements, subsequent
events and going concern reviews.
SA
Review and
finalisation
procedures
Session 29
Obtain
management
representations
Session 20
Sign auditor's
report
Session 30
1-14
The auditor asks management to formally confirm
in writing that they are responsible for the fair
presentation of the financial statements, the design
and implementation of internal control to prevent
and detect fraud; that they have recognised
and carried out their legal and governance
responsibilities and that they approve the financial
statements. Representations may also be required
from management to support audit evidence
(e.g. that all liabilities have been fully disclosed;
that the entity has title to all assets).
After the directors have approved the financial
statements, the auditor signs the audit report.
This may be unmodified (most common) but under
certain circumstances, it may also be modified and
the opinion qualified.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
2.4.2
Session 1 • Audit and Other Assurance Engagements
Application to Internal Audit
Many of the methods and procedures used in external audit also
apply to internal audit.
< Internal auditors need terms of engagement (i.e. they must
PL
E
know the scope, requirements and objectives of the work they
are being asked to perform).
< They need to plan their work to be efficient and effective and
to obtain realistic results.
However, many methods and procedures are expanded for
internal audit because internal auditors focus on the efficiency and
effectiveness of operations in addition to the financial statements.
< Internal auditors should understand the entity, its environment
<
and its exposure to risks faced in much greater depth than the
external auditor (as they deal with the entity on a day-to-day
basis).
They must have a thorough understanding of all business
systems and controls and their effectiveness, not just the
systems and controls related to the financial statements.
< Control effectiveness, assets, liabilities, and transactions may
<
*For example, that
monthly management
reports are sent to the
bank.
SA
M
<
be part of their work, although they also cover all aspects of
management effectiveness and efficiency in an entity.
While external auditors concentrate on the financial
statements, internal auditors consider, for example, the
quality and timeliness of information received, processed and
reported to management and other third parties.*
Internal audit reports do not express an opinion on a true
and fair view, but will be specifically related to the stated
requirement of their task.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-15
Session 1 • Audit and Other Assurance Engagements
F8 Audit and Assurance (INT)
3
Assurance Engagements
3.1
International Framework for Assurance
Engagements (IFAE)
PL
E
Assurance engagement—an engagement in which a practitioner
expresses a conclusion designed to enhance the degree of confidence
of the intended users, other than the responsible party, about the
outcome of the evaluation or measurement of a subject matter against
criteria (per IFAE).
The IFAE defines and describes the elements and objectives of an
assurance engagement. The framework covers audits, reviews of
historical financial information and other assurance engagements.
International Framework for
Assurance Engagements
Assurance Engagements
Other than Audits or
Reviews of Historical
Financial Information
M
Audit and
Reviews of
Historical
Financial
Information
ISRE 2000+
International
Standards
on Review
Engagements
SA
ISA 100+
International
Standards on
Auditing
1-16
ISAE 3000+
International
Standards on
Assurance
Engagements
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
3.2
Session 1 • Audit and Other Assurance Engagements
Five Elements of an Assurance Engagement
The five elements of an assurance engagement are:
a three-party relationship;
an appropriate subject matter;
 suitable criteria;
 sufficient, appropriate evidence; and
 a written assurance report.
Three-party relationship: an assurance engagement includes
three separate parties:



PL
E
a practitioner;
a party responsible for the subject matter or an assertion
about the subject matter; and
 the intended users of the assurance report.
Subject matter: data prepared by, or assertions made by, the
responsible party.

Criteria: benchmarks (relevant, complete, reliable, neutral,
understandable) against which the subject matter can be
assessed and an opinion provided.
Evidence: the practitioner plans and performs an assurance
engagement with an attitude of professional skepticism to obtain
sufficient appropriate evidence about whether the subject matter
is free of material misstatement.
3.3
M
Assurance Report: a written report given by the practitioner to
the intended users that provides either reasonable assurance or
limited assurance about the subject matter.
Types of Assurance Engagement
Practitioners are permitted to perform two types of assurance
engagements:
1. reasonable assurance engagements; and
2. limited assurance engagements.
SA
For assurance engagements involving historical financial
statements:
< reasonable assurance engagements are called "audits"; and
< limited assurance engagements are called "reviews".
*The practitioner must consider the detail of the engagement and
the requirements of those requesting the engagement, to decide
which assurance level he is able to provide before accepting the
engagement. Having accepted, for example, a reasonable assurance
engagement, the practitioner cannot then decide to issue a report
based on limited assurance because, for example, expected evidence
could not be obtained. He must qualify his opinion on the reasonable
assurance report.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-17
Session 1 • Audit and Other Assurance Engagements
3.3.1
F8 Audit and Assurance (INT)
Reasonable Assurance Engagement
A reasonable assurance engagement provides a high level of
assurance through the expression of a conclusion in the positive
form. For example, "In our opinion the financial statements give
a true and fair view".
< The practitioner should obtain sufficient appropriate evidence
<
<
3.3.2
PL
E
<
in order to express a conclusion in this positive form.
The assurance engagement risk (i.e. the risk that an
inappropriate opinion will be given) should be reduced to
an acceptably low level given the circumstances of the
engagement.
The easier it is to objectively measure the subject matter
(e.g. information that is qualitative, quantitative, historical),
the more formal the measurement criteria (e.g. IFRS,
corporate governance codes), the more independent, reliable
and persuasive the evidence that can be obtained, and the
greater the assurance that can be given on the subject matter.
In audit engagements the auditor provides reasonable
assurance through obtaining sufficient appropriate audit
evidence to be able to draw conclusions on which to base
an opinion (see Session 15).
Limited Assurance Engagement
M
A limited assurance engagement provides a low level of assurance
through the expression of a conclusion in the negative form. For
example, "Based on our review, nothing has come to our attention
that causes us to believe that the accompanying financial
statements do not give a true and fair view".
< The level of work carried out is limited and can only allow
<
SA
<
the practitioner to provide a negative form of expression.
The assurance engagement risk is greater (but still
acceptable) than that for a reasonable assurance engagement
(i.e. if the same level of work were carried out to provide
reasonable assurance, there would be an unacceptably high
risk of giving an inappropriate opinion).
Where the subject matter, criteria and measurement are
subjective and informal, the evidence obtained may not be
sufficiently independent, reliable and/or persuasive, and the
practitioner may conclude that reasonable assurance cannot
be given and that only limited assurance is appropriate.
In a review engagement, the evidence obtained is through
enquiry and analytical review. This is sufficient to enable only
limited assurance to be given.*
<
*Specific limited assurance services have been developed to meet
the needs of users (e.g. reviews of historic financial information).
For example, in Canada audit exemption applies for appropriate
companies. A limited assurance review report is given instead of the
audit report.
1-18
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
Session 1 • Audit and Other Assurance Engagements
Example 4 Assurance
State (and explain) the form of assurance that could be given on a company's code
of business ethics.
3.4
M
PL
E
Solution
Evidence Gathering Procedures and Reports
SA
The procedures used to gather evidence and the reports issued
will vary depending on whether a reasonable assurance or limited
assurance engagement is being performed.
3.4.1
Reasonable Assurance Engagement
Evidence gathering for this type of engagement requires the
practitioner to do the following:
< Obtain an understanding of the engagement circumstances
(Session 7).
< Assess risks and respond to those risks (Sessions 8 and 9).
< Perform further procedures using a combination of inspection,
observation, confirmation, recalculation, performance
recalculation, analytical procedures and inquiry.
< Further procedures may involve tests of the operating
effectiveness of controls, substantive procedures and obtaining
corroborating information (Sessions 12 and 15).
< Evaluate the evidence obtained (Session 29).
When reporting, the practitioner expresses the conclusion in the
positive form, such as:
"In our opinion, internal control is effective, in all material
respects, based on XYZ criteria."
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-19
Session 1 • Audit and Other Assurance Engagements
3.4.2
F8 Audit and Assurance (INT)
Limited Assurance Engagement
As with reasonable assurance engagements, the practitioner
obtains an understanding, assesses risks and responds to those
risks (but in the context of limited assurance).
The evidence gathering procedures are deliberately set to be
more limited (e.g. analytical review and inquiry). Confirmations,
recalculations, performance recalculation and test of controls,
for example, are not considered as part of the work programme
necessary to achieve the user's requirements.
PL
E
When reporting, the practitioner expresses the conclusion in the
negative form, such as:
"Based on our work described in this report, nothing has come to
our attention that causes us to believe that internal control is not
effective, in all material respects, based on XYZ criteria."
3.5
Review Engagements
< A review of historical financial information is a limited
assurance engagement.
The standards for review engagements are found in International
Standards for Review Engagements (ISRE) 2400 and 2410. Although
these ISREs are not examinable documents, you should understand
the concept of reviews within the general assurance framework.
M
< The objective of a review engagement is to enable a
SA
practitioner to state whether, on the basis of procedures which
do not provide all the evidence that would be required in an
audit, anything has come to his attention that causes him to
believe that the financial statements are not prepared, in all
material respects, in accordance with an identified financial
reporting framework.
This is a negative form of report that provides limited assurance.
< In a review engagement, the practitioner obtains sufficient
<
appropriate evidence primarily through inquiry and
analytical procedures.
An example of a review report follows.
1-20
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
Session 1 • Audit and Other Assurance Engagements
Illustration 1 Standard Review
Report
Review Report To . . .
We have reviewed the accompanying statement of financial position
of ABC Company at 31 December 20X1, and the related statements of
comprehensive income and cash flows for the year then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to issue a report on these financial
statements based on our review.
PL
E
We conducted our review in accordance with the International
Standard on Review Engagements 2400 Engagements to Review
Financial Statements. This standard requires that we plan and
perform the review to obtain moderate assurance as to whether the
financial statements are free of material misstatement. A review is
limited primarily to inquiries of company personnel and analytical
procedures applied to financial data, and thus provides less assurance
than an audit. We have not performed an audit and, accordingly, we
do not express an audit opinion.
Based on our review, nothing has come to our attention that causes
us to believe that the accompanying financial statements do not
give a true and fair view (or are not presented fairly, in all material
respects) in accordance with International Financial Reporting
Standards.
Signature
Date
SA
M
Address
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-21
Session 1 • Audit and Other Assurance Engagements
3.6
F8 Audit and Assurance (INT)
Other Assurance Engagements
Assurance engagements other than audits, which follow ISAs, and
reviews of historical financial information, which follow ISREs, are
covered by the International Standard on Assurance Engagements,
ISAE 3000.
< The general principles and approach of ISAE 3000 are basically
<
<
<
<
<
<
<
<
SA
<
<
PL
E
<
<
M
<
<
<
<
the same as those for an audit (which is, of course, a specific
form of assurance service). For example:
Comply with the ISAE and any other relevant ISAEs.
Use ISAs and ISRE as necessary to provide guidance.
Comply with the Code of Ethics.
Implement quality control procedures applicable to each
engagement.
Agree on, or update, terms of engagement with the client.
Ensure assurance team has appropriate professional
competence.
Plan the engagement to ensure effective performance.
Exercise professional scepticism.
Assess the appropriateness of the subject matter.
Assess the suitability of the criteria to measure or evaluate the
subject matter.
Consider engagement risk (to reduce it to an acceptable level)
and materiality.
If the work of an expert is to be used, apply the same ethical
and assignment approach to the expert as if he were a
member of assignment team.
Obtain sufficient appropriate evidence on which to base a
conclusion.
Obtain representations from the responsible party as
appropriate.
Consider subsequent events (events after the reporting date).
Prepare an assurance report taking into consideration
the objectives of the engagement (reasonable or limited
assurance) and whether sufficient appropriate evidence has
been obtained.
Consider the need to report to other parties, including
reporting governance matters to those charged with
governance.
<
1-22
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
Session 1
Summary
<
Assurance services are independent professional services that improve the quality of
information for decision-makers. Audits and reviews are assurance services.
<
The objective of an audit is to obtain reasonable assurance that the financial statements
are free from material misstatement and to express an opinion on whether the financial
statements are properly prepared in accordance with a financial reporting framework.
<
Management is responsible for:
preparing and fairly presenting the financial statements;
PL
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•
•
•
•
designing, implementing and maintaining internal control;
selecting and applying appropriate accounting policies; and
making reasonable accounting estimates.
<
<
The auditor is responsible for expressing an opinion on the financial statements.
<
Key concepts in auditing are reasonable assurance, materiality, professional judgement,
professional scepticism and "true and fair."
<
The audit process includes:
An auditor should conduct an audit in accordance with ISAs and comply with IFAC's Code
of Ethics for Professional Accountants.
•
•
•
•
•
agreeing to the terms of the engagement;
planning and risk assessment;
understanding and testing the effectiveness of internal controls (when appropriate);
substantive procedures; and
final review procedures before signing the auditor's report.
The five elements of an assurance engagement are a three-party relationship, an
appropriate subject matter, suitable criteria, sufficient appropriate evidence, and a written
assurance report.
<
Assurance engagements provide either reasonable (positive/high) assurance or limited
(negative/low) assurance. Audit engagements provide reasonable assurance and review
engagements provide limited assurance.
SA
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<
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-23
Session 1 Quiz
Estimated time: 30 minutes
State the objective of an audit of financial statements. (1.1)
2.
Briefly describe what internal auditing is. (1.2)
3.
Define stewardship. (2.2.1)
4.
State whom is responsible for the preparation and fair presentation of
financial statements. (2.3.1)
5.
Explain reasonable assurance in an audit engagement. (2.3.4)
6.
Define materiality. (2.3.5)
7.
Describe THREE primary areas in which professional judgement is important. (2.3.6)
8.
Define professional scepticism. (2.3.7)
9.
Outline the stages of an audit. (2.4.1)
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1.
10. Define an assurance engagement, including its FIVE elements. (3.1, 3.2)
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11. List and briefly discuss the TWO types of assurance engagements. (3.3, 3.4)
1-24
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
EXAMPLE SOLUTIONS
Solution 1—Stewardship
Responsibilities (e.g. duties embodied in statute and corporate
governance requirements) may include:
1. Keeping books of accounts and proper accounting records.
2. Safeguarding the entity's assets.
3. Implementing appropriate business, financial and risk management
controls.
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4. Producing financial statements (statement of financial position,
statement of comprehensive income, statement of cash flows,
statement of changes in equity, disclosure notes) that show a true
and fair view and the results of their stewardship.
5. Producing a directors' report and other information (e.g. as required
by listing rules) which is consistent with the financial statements and
contains certain specified information.
Solution 2—Agency
● A director can be described as an agent having a fiduciary relationship
(one of trust) with a principal (i.e. the company that employs her).
● A director is similarly an agent of the shareholders.
● Auditors, as they are appointed by the shareholders in most
jurisdictions, are also agents of the shareholders.
M
Solution 3—Accountability
● Directors are accountable to the shareholders. Many jurisdictions
place legal requirements on directors with regard to how they are
accountable and the way they communicate with stakeholders, for
example through directors' reports and financial statements prepared
under an appropriate framework (e.g. IFRS).
SA
● Directors of listed companies will also be subject to listing rules and
corporate governance codes (e.g. publication of interim financial
statements, regular meetings with financial institutions, profit and
going concern warnings, analysis and management of risk, audit
committees, annual general meetings).*
● The auditors of a company's financial statements are accountable
to shareholders. They act in the interest of the shareholders (the
primary stakeholders) while also having regard to the wider public
interest in that other stakeholders will read their report (but note that
they are not the agents of any other stakeholder and their report is
not addressed to such stakeholders, only to the shareholders).
*The role of the
annual general
meeting (AGM) in
managing companies
is assumed knowledge
from F4 Corporate and
Business Law.
Solution 4—Assurance
This would be a limited assurance engagement. Although there is a
Code of Business Ethics, the subjectivity of applying any specific ethical
criteria and the subjectivity of measuring the application of such criteria
(e.g. what is not ethical to one business may be considered ethical by
another) would not enable the practitioner to reduce assurance risk to a
sufficiently low level to allow reasonable assurance to be given.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
1-25
Session 2
FOCUS
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External Audit
This session covers the following content from the ACCA Study Guide.
A. Audit Framework and Regulation
2. External audits
a) Describe the regulatory environment within which external audits
take place.
b) Discuss the reasons and mechanisms for the regulation of auditors.
c) Explain the statutory regulations governing the appointment, rights,
removal and resignation of auditors.
d) Explain the regulations governing the rights and duties of auditors.
e) Describe the limitations of external audits.
f) Explain the development and status of International Standards on
Auditing (ISAs).
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g) Explain the relationship between International Standards on Auditing and
national standards.
Session 2 Guidance
Review the background to this topic (s.1, s.2).
Know the scope and authority of International Standards on Auditing (ISAs) (s.3.2).
Understand how external audits are affected by statutory regulation and when an entity
might be exempt from audit (s.4.1, s.4.2).
(continued on next page)
F8 Audit and Assurance (INT)
Becker Professional Education | ACCA Study System
VISUAL OVERVIEW
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Objective: To describe the regulatory framework in which external (statutory)
audits take place.
REGULATION
• Historical Background
IFAC
(WWW.IFAC.ORG)
M
• Mission, Vision
and Values
• Structure
STANDARDS
ISSUED BY IAASB
SA
• Structure
• Scope and Authority
of ISAs
• Development
EXTERNAL AUDIT
• Statutory Regulation
• Audit Exemption
• Eligibility to Become
an Auditor
• Recognised
Supervisory Bodies
• Rights and Duties
of Auditors
• Appointment
of Auditors
• Removal of Auditors
• Limitations of External
Audits
ETHICAL CODE
(SESSION 4)
Session 2 Guidance
Learn who is eligible to be an auditor (s.4.3).
Learn the auditor's rights and duties (s.4.5) and how auditors are appointed (s.4.6)
and removed (s.4.7).
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
2-1
Session 2 • External Audit
F8 Audit and Assurance (INT)
1
Regulation
1.1
Historical Background
< After several scandals caused by company collapses, many
<
*The adoption of
ISAs by national
jurisdictions is proving
to be a lot easier and
less contentious than
IFRS (e.g. convergence
with US GAAP) as
there is greater
compatibility between
national standards and
ISAs.
M
<
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<
professional bodies began to issue formal auditing standards
in the mid-1970s (e.g. 1976 in the UK) to ensure a uniform
approach to all audits carried out by their members. Before
the issue of these national standards, "best practice" had been
established by the leading audit firms.
The Council of the International Federation of Accountants
(IFAC) was established in 1977. Under the IFAC, the
International Auditing Practices Committee (IAPC) was formed
in 1979.
Between 1980 and 1991 the IAPC issued International
Auditing Guidelines (IAG) and addendums to these. The first
International Standard on Auditing (ISA) was issued in 1991.
Many national jurisdictions and professional bodies are now
adopting ISAs as their national auditing standards, mirroring
the approach taken by many countries with respect to the
IFRS.*
As further company financial reporting scandals have
occurred (the most notorious being Enron Corp 2000/2001
and WorldCom 2001/2002), statutory and other regulations
on auditors have been revised, expanded and tightened
(e.g. issue of corporate governance codes, Sarbanes-Oxley in
the US, removal of self-regulation from member bodies).*
SA
*The banking crisis of 2008 resulted in a lot of re-evaluation with
regard to the role of the auditor. The overall conclusion from the
various investigations conducted appears to show that auditors did
what they were required to do under the laws and regulations at
the time. The approach being taken is to tighten up such laws and
regulations to ensure that banking auditors play a far greater role in
the regulation of the banking industry.
2-2
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
2
Session 2 • External Audit
International Federation of Accountants (IFAC)
2.1 Mission, Vision and Values
IFAC is a non-profit, non-governmental, non-political international
organisation of 167 member accountancy organisations
(with at least 2.5 million professional accountants) from
127 countries.
2.1.1Mission
= contributing
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< The mission of IFAC is to serve the public interest by:
to the development, adoption and
implementation of high-quality international standards and
guidance;
= contributing to the development of strong professional
accountancy organisations and accounting firms, and to
high-quality practices by professional accountants;
= promoting the value of professional accountants worldwide;
and
= speaking out on public-interest issues where the
profession's expertise is most relevant.
2.1.2Vision
< IFAC's vision is that the global accountancy profession
be recognised as a valued leader in the development of
strong and sustainable organisations, financial markets and
economies.
M
2.1.3Values
< The values of integrity, expertise, and transparency are
SA
the guiding principles that IFAC seeks to exemplify as
an organisation through its council, board, boards and
committees, volunteers and staff.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
2-3
Session 2 • External Audit
2.2
F8 Audit and Assurance (INT)
Structure
IFAC Council
IFAC Board
Transnational
Auditors
Committee
Forum of
Firms
International
Ethics Standards
Board for
Accountants
International
International
IFAC Council Public Sector
Accounting
Education
Accounting
Standards Board
Standards Board
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International
Auditing and
Assurance
Standards Board
Compliance
Advisory
Panel
Small and
Medium
Practices
Committee
Professional
Accountancy
Organisation
Development
Committee
Professional
Accountants
in Business
Committee
Public Interest
Oversight Board
(PIOB)
M
2.2.1 International Auditing and Assurance Standards
Board Objective
< The objective of the International Auditing and Assurance
Standards Board (IAASB) is to improve the uniformity of
auditing practices and related services throughout the world
by issuing pronouncements (e.g. ISAs) on audit and assurance
functions and promoting their acceptance worldwide.
SA
2.2.2 International Ethics Standards Board
for Accountants Objective
< The International Ethics Standards Board for Accountants has
two objectives, which are:
To develop guidance on professional ethics and promote its
understanding and acceptance by member bodies.
= To continually monitor and stimulate debate on a wide range
of ethical issues to ensure that IFAC's ethical guidance
(issued by the IESBA) is responsive to the expectations and
challenges of individuals, businesses, financial institutions
and others relying on accountants' work.
=
2.2.3 International Accounting Education Standards
Board Objective
< The objective of the International Accounting Education
Standards Board is to develop guidance, conduct research
and facilitate the exchange of information to ensure
that accountants are adequately trained to meet their
responsibilities.
2-4
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
2.2.4
Session 2 • External Audit
Forum of Firms
< The Forum of Firms brings together international professional
firms to involve them more closely in IFAC's activities, thus
enhancing its effectiveness and ability to achieve IFAC's
mission.
2.2.5
Public Interest Oversight Board
< The Public Interest Oversight Board (PIOB) was formally
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<
established in February 2005 to oversee IFAC's auditing and
assurance, ethics, and education standard–setting activities,
as well as its compliance programme (designed to encourage
member bodies to adopt international standards and to
implement quality assurance, investigation and discipline
programs).
The objective of the PIOB is to increase the confidence
of investors and others that IFAC's activities are properly
responsive to the public interest. This is achieved by ensuring
that auditing and assurance, ethics and educational standards
for the accounting profession are set in a transparent manner
that reflects the public interest.
< The PIOB also maintains active liaisons with independent audit
regulators, monitors and similar oversight boards around the
world, many of which were also established in response to
Enron and other scandals.*
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*Before Enron, the regulation of auditors was primarily undertaken
by a member body (e.g. ACCA). Post-Enron, many jurisdictions
required that the monitoring of (at least) listed and public-interest
company auditors be carried out by an independent body. For
example, the UK's independent monitoring body is the Financial
Reporting Council (www.frc.org.uk).
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
2-5
Session 2 • External Audit
F8 Audit and Assurance (INT)
3
Standards Issued by IAASB
3.1
Structure
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The Code of Ethics, most ISAs and ISAE 3000 (Assurance
Engagements Other Than Audits or Reviews of Historical Financial
Information) are examinable documents (see Session 00). All
standards, including those examinable in Paper F8, are examinable
in Paper P7 Advanced Audit and Assurance. For the F8 examination,
only the standards listed as examinable (Session 00) and included
in this Study System are relevant.
IFAC Code of Ethics for Professional Accountants
Services Covered by IAASB Pronouncements
International Standards on Quality Control (ISQCs)
International Framework for Assurance Engagements
Assurance Engagements Other
Than Audits or Reviews of
Historical Financial Information
M
Audit and Reviews of Historical
Financial Information
ISREs 2000+
International
Standards
on Review
Engagements
ISAEs 3000+
International
Standards on
Assurance
Engagements
ISRSs 4000+
International
Standards on
Related Services*
SA
ISAs 100+
International
Standards on
Auditing*
Related Services
*ISAs are further classified as follows:
100
200
300
400
500
600
700
800
2-6
series
series
series
series
series
series
series
series
Introductory Matters
General Principles and Responsibilities
Risk Assessment and Response to Assessed Risks
(continuation of 300 series)
Audit Evidence
Using the Work of Others
Audit Conclusions and Reporting
Specialised Areas
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
Session 2 • External Audit
*Related services include:
 agreed-upon procedures where, for example, the practitioner
reports on the factual findings of his procedures as agreed with
the client, but no conclusion is given; and
 compilation of financial statements where, for example, the
practitioner prepares a set of financial statements from the books
and records of the entity for the directors, but does not audit or
provide any form of assurance on them.
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Related services do not provide any form of assurance and no
opinion (positive or negative) is given. Any report or comments
made by the practitioner are limited to the facts as found by the
practitioner.
< Practice Statements are also issued. They provide
interpretive guidance and practical assistance in implementing
specific matters. Their role is similar to that of the IFRS
Interpretations issued by the International Financial Reporting
Standards Interpretation Committee (IFRS IC).
3.2
Scope and Authority of ISAs
< ISAs and Practice Notes (PN), taken together, provide the
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<
M
<
necessary standards for the auditor's work to enable them to
express an independent opinion on the financial statements
being audited. All standards and PNs that are relevant to the
audit process for a particular assignment must be followed.*
If the auditor is unable to obtain reasonable assurance as
to whether the financial statements are free from material
misstatement, ISAs require that the opinion be modified or
that the auditor withdraw from the engagement.
As discussed in Session 1, each standard contains
an introduction (including objectives and definitions)
requirements and application detail (see Exhibit 1 below). The
entire text of a standard must be understood in order to apply
its requirements.*
By their very nature, ISAs require auditors to use their
professional judgement when applying them.
In exceptional circumstances, a professional accountant may
judge it necessary to depart from a basic principle or essential
procedure of a standard (and Practice Statement) to achieve
more effectively the objective of the standard. When such a
situation arises, the auditor must justify the departure in the
working papers.
The requirements of the standards do not override local
regulations governing audit and assurance in a particular
country. If local regulations have been followed and ISAs
that are applicable to the engagement have not been applied
in their entirety, the auditor cannot state in his audit report
that "we conducted our audit in accordance with International
Standards on Auditing".
<
<
<
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
*In practice, auditors
are expected to read
through, study and
apply (in their audit
procedures) all of the
ISAs. Therefore, there
is no substitute for
reading through each
of the standards. All
standards can be found
on the IFAC website
www.IFAC.org.
*Each of the objectives
within all appropriate
standards must be
achieved to enable
the auditor to reach
a conclusion on the
financial statements.
If any objective
cannot be achieved,
the auditor must use
his judgement to reevaluate his ability to
achieve the overall
audit objective and
therefore the effect
on the auditor's report.
2-7
Session 2 • External Audit
Exhibit 1
F8 Audit and Assurance (INT)
ISA
The following is the contents page for ISA 200.
INTERNATIONAL STANDARD ON AUDITING 200
OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND
THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH
INTERNATIONAL STANDARDS ON AUDITING
(Effective for audits of financial statements for periods beginning
on or after December 15, 2009)
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CONTENTS
Paragraph
Introduction
Scope of this ISA ..................................................................................... 1−2
An Audit of Financial Statements ................................................................ 3−9
Effective Date ............................................................................................ 10
Overall Objectives of the Auditor ........................................................ 11−12
Definitions .............................................................................................. 13
Requirements
Ethical Requirements Relating to an Audit of Financial Statements .................... 14
Professional Scepticism ............................................................................... 15
Professional Judgement .............................................................................. 16
Sufficient Appropriate Audit Evidence and Audit Risk ....................................... 17
Conduct of an Audit in Accordance with ISAs ............................................. 18−24
Application and Other Explanatory Material
An Audit of Financial Statements ........................................................... A1−A13
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Ethical Requirements Relating to an Audit of Financial Statements ........... A14−A17
Professional Scepticism ...................................................................... A18−A22
Professional Judgement ..................................................................... A23−A27
Sufficient Appropriate Audit Evidence and Audit Risk .............................. A28−A52
SA
Conduct of an Audit in Accordance with ISAs ......................................... A53−A76
2-8
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F8 Audit and Assurance (INT)
3.3
Session 2 • External Audit
Development
< Projects are identified by IAASB members, advisory groups
(e.g. business communities), the Forum of Firms, national
auditing standard-setting bodies and IFAC members.
= The task force carries out the basic research and
development of an exposure draft (ED). This may
be done as a joint project with a national auditing
standard-setting body.
= The typical development process is shown here:
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Project proposed and input sought
If approved, project assigned to a task force
Research carried out and exposure draft prepared
ED placed on IFAC website and widely distributed for comment
to member bodies, interested parties and general public
M
Comments received and considered; ED revised and re-issued if
substantive changes made
SA
Revised ED approved and issued as a standard
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
2-9
Session 2 • External Audit
4
F8 Audit and Assurance (INT)
External Audit
4.1 Statutory Regulation
< Because of the importance of the company external auditor
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and his relationships with directors and shareholders, the role
of audit and duties of the auditor are often specifically laid
down in statute. The external auditor is often referred to as
a statutory auditor.
< Statutory regulations cover, for example:
= Requirement for audited accounts and audit exemption.
= Eligibility and requirements to become and remain
statutory auditors.
= Appointment, removal or resignation of auditors.
= Auditors' reports, duties and rights.
= Monitoring of auditors.
= Rights of shareholders to raise audit concerns at the
company's annual general meeting of shareholders (AGM).
= Liability of auditors.
= Specific reports required (e.g. standard annual audit;
report on interim financial statements for listed companies;
reports on private companies becoming listed; reports
on accounts of small companies; redemption and buy-back
of share capital).
< In many jurisdictions the requirements for entities (listed,
private, public, NGOs) to be audited are set out in statute.
M
4.2 Audit Exemption
< It is a standard requirement in nearly all jurisdictions that
SA
companies be audited. However, in some jurisdictions it is
recognised that for a certain level of company ("small") the
benefit of having an audit is relatively limited and/or may
not justify the costs involved.
< Specific requirements vary from jurisdiction to jurisdiction, but
a general understanding of a "small" company revolves around:
= Concentration of ownership and management in a small
number of individuals (e.g. owner-managers).
= Few sources of income.
= Uncomplicated management structures and accounting
functions.
= Usually limited control functions. Greater involvement by
management in overseeing/applying controls (thus greater
potential for management override).
< In the UK size limits are applied as follows (both conditions
must be met):
= Turnover less than £6.5 million.
= Statement of financial position total (non-current assets +
current assets) less than £3.26 million.
< In addition:
= If the company is listed, involved in financial services or a
parent company, it cannot be exempt from audit.
= If members holding more than 10% of an eligible company's
issued share capital require an audit, an audit must be
carried out.
2-10
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
Session 2 • External Audit
Example 1 Audit Exemption
Suggest FOUR reasons why a small company may require an audit and provide counterarguments to those reasons.
Solution
Argument for audit
Counter-argument
1.
3.
4.
4.3
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2.
Eligibility to Become an Auditor
< Most jurisdictions require a statutory auditor (i.e. one able
SA
<
M
<
to carry out statutory audits of companies, etc) to be
appropriately qualified. For example:
= a member of a recognised professional body (e.g. in the
UK a member of ACCA); or
= holding an approved international qualification.
Being "appropriately qualified" not only means having passed
examinations of a recognised body, but also:
= obtaining a minimum number of years of practical and postqualified relevant audit experience (to obtain a practising
certificate and statutory auditor status);
= continuous application of ethical criteria;
= continuous relevant practical experience; and
= continuous professional education.*
Many countries now have "mutual recognition" arrangements
by which, for example, after passing country specific
examinations (e.g. law and taxation in the language of that
country) a statutory auditor of one country may become a
statutory auditor of another.
In most jurisdictions, officers (i.e. directors) and employees
of an entity (or any associated undertaking) are usually
ineligible to be statutory auditors. Although statute is often
not prescriptive in barring others (e.g. family and friends)
from being a company's auditor, this is addressed by the IFAC
ethical codes (see Session 4).
<
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
*For example, in
the UK (and the EU)
it is essential that
ACCA members have
studied and passed the
Advanced Auditing and
Assurance paper (P7).
Without this paper
they would not be able
to act as statutory
auditors (i.e. as
"registered auditors" in
the UK) and sign off on
audit reports.
2-11
Session 2 • External Audit
4.4
F8 Audit and Assurance (INT)
Recognised Supervisory Bodies (RSBs)
The following detail on RSBs should be read in a general context;
specific detail (e.g. quality control) is beyond the F8 syllabus.
4.4.1
Basic Concept
< As an example of the application of the statutory environment,
<
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<
4.4.2
That is, although
statute lays down
the "day-to-day
management"
requirements, the RSB
implements them.
M
<
in the UK the regulation of auditors is a statutory matter
(e.g. as detailed in the Companies Act 2006) but it is managed
through the use of recognised supervisory bodies (RSBs).
An RSB is a professional body (e.g. ACCA) whose rules,
regulations and procedures have been reviewed (and approved
by government) and whose members are recognised by
statute as being eligible (after having met appropriate criteria)
to sign audit reports on companies and public interest entities.
ACCA is also a recognised qualifying body (RQB) in that
it is allowed to examine and award relevant professional
qualifications.
RSBs must have rules to ensure, for example, that:
= A person is not eligible unless "appropriately qualified".
= Only "fit and proper" persons are appointed as company
auditors.
= Company audit work is conducted "properly and with
integrity".
= Technical standards are applied to company audit work.
= Competence of company auditors is maintained.
Monitoring of RSBs and Auditors
< Continuing with the UK example, monitoring and oversight of
SA
<
RSBs is carried out by the Financial Reporting Council (FRC),
a unified, independent regulator.
Part of the FRC's role is to monitor all listed and public interest
audits. This function is carried out by the Audit Quality
Review team (AQR; see www.frc.org.uk) through visiting and
reviewing the audit procedures of all firms that carry out such
audits.
Monitoring of other audits (i.e. those that are not listed
or public interest) is carried out by the member bodies
(e.g. ACCA) who report directly to the FRC on their findings.
The basic functions of monitoring (AQR and ACCA) are:
= to ensure that the RSB and firms are in compliance with
the statutory (and IFAC) audit requirements; and
= to assist in the raising of standards within the profession.
<
<
2-12
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
4.5
Session 2 • External Audit
Rights and Duties of Auditors
4.5.1
Duties
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In addition to the statutory audit, many jurisdictions place
statutory duties upon auditors in other areas related to companies
(e.g. reporting on internal controls, reporting on directors'
remuneration statements, reporting on the ability to distribute
reserves, reporting on the ability to buy back shares). Apart from the
statutory audit, all other statutory duties of the auditor are beyond
the scope of the F8 syllabus.
< In most instances, the primary duty of a statutory auditor is
4.5.2
*The examples of
rights and duties given
in this section reflect
UK legislation (i.e.
Companies Act 2006).
M
<
to report to the company's members on financial statements
(statement of financial position, statement of comprehensive
income, statement of cash flows, accompanying notes, etc)
prepared to an accounting reference period (usually for a year).
Other duties relating to the statutory audit will vary among
jurisdictions, but may, for example, include the requirement to
report that:*
= the directors' report is consistent with the information
contained in financial statements;
= proper accounting records have been kept;
= the accounts are in agreement with the records and returns;
= all necessary information and explanations have been
received by the auditors;
= proper returns, adequate for audit purposes, have been
received from any branches not visited by the auditor; and/
or
= information, as required by law to be disclosed, on directors'
remuneration and other transactions has been disclosed.
Rights
SA
< An auditor cannot fulfil statutory duties without commensurate
<
rights (which must also be legislated). For example:
= To have access at all times to the entity's books, accounts
and vouchers.
= To require from officers of the company any information
and explanations considered necessary for the purposes
of the audit.
= To receive notice of, attend and be heard at the general
meeting of the company on business which concerns them
as auditor (e.g. a resolution to remove them from office).
Also, the auditor may have rights associated with his vacation
of office (e.g. by resignation or removal) to bring matters
to the attention of members (shareholders) and creditors
(e.g. if the auditor is removed because he gives a qualified
audit opinion or if he resigns because he is not given access
to necessary information).
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
2-13
Session 2 • External Audit
4.6
F8 Audit and Assurance (INT)
Appointment of Auditors
< In many jurisdictions auditors are appointed by the members
(shareholders) to whom they report. This procedure may
be delegated to directors, or under corporate governance
to a supervisory or audit committee, and then approved by
members.*
PL
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*For example, under the UK Companies Act directors have powers
to make appointments in limited circumstances (e.g. upon the death
of a sole-practitioner auditor or upon the resignation of the auditor
before the start of an audit). Such appointments will need to be
approved by the shareholders at the first opportunity (e.g. at the
next AGM).
< In the UK for example, the appointment is for a period
4.7
4.7.1
Removal of Auditors
M
<
of one year. The auditors will then offer themselves for
re-appointment (e.g. at the AGM) to be voted on by the
members. Re-appointment is not automatic.
The auditor's remuneration is generally fixed by those
who appoint her. In practice, members usually delegate
the negotiation of this to the directors, or under corporate
governance procedures to be recommended by the audit
committee (see Session 3).*
Removal by Directors
*See Session 5 for
greater detail on
the specific auditor
appointment process.
< It is generally more difficult to remove auditors than it is to
SA
<
appoint them. This is for the simple reason that auditors
should not be removed just on the whim of directors (e.g.
because the auditor wants to qualify his opinion and the
directors disagree).
As the members of an entity usually appoint the auditor, it will
only be the members who are able to remove the auditor.
The exact requirements for removing auditors may differ
among jurisdictions. In the UK, the following procedures are
required:
= The directors must inform the auditor in writing of their
intention to remove him as auditor of the entity.
= A special meeting of members must be held to discuss/
vote on the directors' resolution to remove the auditor. It is
not uncommon for the timing of the removal of auditors to
coincide with the AGM.
= The auditor should be informed of the meeting and be able
to make representations at the meeting as to why he should
stay in office (if he so wishes). He may also require the
directors to include such representations in the notice to
members of the meeting.
<
2-14
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
=
If the auditor is removed, the directors must inform
the statutory regulatory authorities and statutory audit
authorities (e.g. the RSB and POBA). The auditor must
produce a "statement of circumstances" concerning the
removal, which must be given to the entity and also to the
authorities.
If there are no matters the auditors wish to bring to the
attention of the members, a statement to this effect should
be given to members and the authorities.*
PL
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=
Session 2 • External Audit
*Note that in all circumstances of auditors no longer acting for
an entity, a "statement of circumstances" or of "no circumstances"
must be made by the auditors and the entity must seek
replacement auditors.
4.7.2
At Point of Re-election
< If, for whatever reason, an auditor no longer wishes to act for
<
M
<
a client after the end of a current appointment, he simply does
not stand for re-election after completing the annual audit.
In the UK the auditor will be required to provide a statement
to members (and appropriate regulatory and audit authorities)
that there are no circumstances that need to be brought to the
attention of members.
As a matter of professional courtesy, the auditor will usually
have discussed with management the decision not to seek
re-appointment in good time to allow a replacement to be
proposed for appointment at the AGM.
SA
In the examination, if a scenario indicates the possibility of auditor
resignation, avoid leaping to the immediate conclusion that the
auditor should resign. Work through all options first, and then
consider the need for the auditor to seek appropriate ethical and
legal advice (e.g. from ACCA) and only then suggest that the auditor
consider the need to resign.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
2-15
Session 2 • External Audit
4.7.3
F8 Audit and Assurance (INT)
Resignation During Engagement
< Although it is relatively rare, there are reasons why an auditor
would resign from an engagement. These include:
significant limitations placed on the work of the auditor
by management;
= loss of trust/working relationship with management
(e.g. significant doubt over management's integrity); and
= regulatory requirements (e.g. discovery of significant fraud).
In the UK the following procedures apply:
= Upon resignation, the auditors must give written notice
to the client. This would then be sent to the appropriate
regulatory and audit authorities.
= A statement of circumstances (or no circumstances)
must also be sent to the authorities and the members/
shareholders of the entity (and others who are entitled to
receive a copy of the financial statements).
= The auditors may have the right to require the directors
to call a special meeting of members to discuss the
circumstances of their resignation.
In all resignation circumstances the auditor must consider his
professional duty to complete the engagement (e.g. he should
not resign to avoid giving a qualified audit opinion) and the
legal ramifications of resignation.*
=
<
4.7.4
*In some situations
(e.g. fraud, suspicion
of money laundering)
resignation may
result in the auditor
being charged with a
criminal offence (see
Session 11). In such
circumstances the
auditor should seek
ethical and legal advice
before taking any
action (e.g. from the
ACCA and solicitors).
PL
E
<
Role of the Audit Committee
< Where an entity has an audit committee, there is often a
4.8
M
requirement under various codes of corporate governance
for such committees to have specific responsibilities with
the external auditors (e.g. recommending appointment,
remuneration, reviewing circumstances of resignation).*
Limitations of External Audits
*Session 3 deals with
the audit committee in
greater detail.
The auditor is not able to provide absolute assurance in an audit
because of the inherent limitations of external audits. These
inherent limitations arise from:
SA
< the nature of financial reporting;
< the nature of audit procedures; and
< the need for the audit to be conducted within a reasonable
period of time and at a reasonable cost.
4.8.1
The Nature of Financial Reporting
Some financial statement items are subject to an inherent level
of variability because they involve judgement by management
or because they involve subjective decisions or assessments or a
degree of uncertainty (e.g. accounting estimates).
2-16
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
F8 Audit and Assurance (INT)
4.8.2
Session 2 • External Audit
The Nature of Audit Procedures
There are practical and legal limitations on the auditor's ability to
obtain audit evidence, including the following:
< There is a possibility that management or others may not
<
<
<
PL
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<
provide, intentionally or unintentionally, all information that
is needed for the preparation or presentation of the financial
statements or that is requested by the auditor.
An audit is not an investigation into alleged wrongdoing, so
the auditor does not have any specific legal powers that would
be necessary for such an investigation.
Any accounting and internal control system has inherent
limitations (see Session 9).
Fraud may be concealed in such a way that it is difficult to
detect with audit procedures (see Session 11).
Most audit evidence is persuasive, rather than conclusive (see
Session 15). For example, an asset purchased by an entity,
though physically possessed, may no longer be owned if title
has been transferred to another party.
< Testing is on a sample basis (see Session 19).
< Specific limitations my affect the persuasiveness of available
audit evidence (e.g. transactions between related parties in
which one has the ability to control or exercise significant
influence over the other may not be identified as such).
4.8.3
Timeliness and Cost v Benefit
M
There is an expectation by users of financial statements that the
auditor will form an opinion on the financial statements within
a reasonable period of time and will achieve a balance between
benefit and cost.*
Therefore, it is necessary for the auditor to:
< Plan the audit so that it is performed effectively.
< Direct audit efforts to the areas where the risk of material
misstatement is most expected.
Use testing and other means of examining populations for
misstatement.
SA
<
*It is impracticable for
the auditor to address
all information that
may exist.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
2-17
Summary
IFAC includes the International Auditing and Assurances Standards Board (IAASB) and
the International Ethics Standards Board for Accountants (IESBA).
<
The objective of the IAASB is to improve the uniformity of auditing practices and related
services throughout the world by issuing International Standards on Auditing (ISAs).
<
The objective of the IESBA is to develop guidance on professional ethics in the form of the
IFAC Code of Ethics for Professional Accountants.
<
The Public Interest Oversight Board (PIOB) oversees IFAC's standard-setting activities in
order to increase public confidence in the activities of IFAC.
<
ISAs set out the standards necessary for an auditor to express an independent opinion on
financial statements.
<
A Recognised Supervisory Body (RSB) is a professional body whose members are
recognised, by UK company law, as eligible to sign audit reports.
<
The main duty of a statutory auditor is to express an opinion of the annual financial
statements. The auditor must have a legal right of access to information and explanations
to fulfil this duty.
<
Generally, auditors are appointed, re-appointed and removed by the shareholders in general
meeting. Auditors may choose not to be re-appointed; they rarely resign.
<
Limitations of external audit arise from the nature of financial reporting, the nature of audit
procedures and the need for timely reporting at a reasonable cost.
PL
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<
Session 2 Quiz
M
Estimated time: 20 minutes
1. State what "IFAC" stands for. (2)
2. State the mission of IFAC. (2.1.1)
3. State the objective of the International Auditing and Assurance Standards Board
(IAASB). (2.2.1)
SA
4. True or false. The ISAs alone provide the necessary standards for the auditor's work to enable
them to express an independent opinion on the financial statements being audited. (3.1)
5. State the auditor's options under the ISAs if the auditor is unable to obtain reasonable
assurance as to whether the financial statements are free from material misstatement. (3.2)
6. Describe the type of company likely to be exempt from an audit. (4.2)
7. State what is meant by a recognised supervisory body (RSB). (4.4)
8. State the primary duty of a statutory auditor. (4.5)
9. State how an auditor may be removed from office. (4.7)
Study Question Bank
Estimated time: 30 minutes
Priority
Q1
2-18
Estimated Time
International auditing
Completed
30 minutes
© 2014 DeVry/Becker Educational Development Corp. All rights reserved.
Session 2
EXAMPLE SOLUTION
Solution 1—Audit Exemption
Argument for audit
Counter-argument
Shareholders not involved in management
need the assurance provided by an audit.
The 10% rule (or similar in non-UK
jurisdictions) provides reasonable protection
for minority shareholders.
2.
Audited financial statements are essential
for valuing shares in an unlisted company.
A separate valuation exercise can be carried
out at any time. There are also other critical
factors to valuing shares (e.g. a controlling
holding) outside of the scope of an audit.
3.
Banks rely on audited financial statements
when making loans and reviewing the value
of security.
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1.
< The bank can require an audit to be carried
out as a condition of the loan.
< Valuation of a loan's security (i.e. land and
buildings) is relatively easy to obtain.
< Reviews can be carried out of management
accounts, budgets and cash flows and
separate assurance can be obtained on
these.
4.
Trade creditors need audited financial
statements to assess the entity's ability
to pay.
< Depending on when the credit is taken,
the financial statements may be 6 to 18
months out of date.
< Trade and credit references will be taken
before any substantial credit is granted.
< Management guarantees can also be
given/taken.
Management needs an audit as an
independent check.
< An audit can still be carried out if
management decides to have one.
< Other assurance services and reviews can
be provided to management to cover the
specific benefits management believes are
obtained from an audit.
SA
M
5.
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2-19
Index
A
B
Accountability ............................. 1-8, 3-7
Accountancy work ............................ 28-4
Accounting estimates ........................ 17-2
Accounting system .............................9-6
Accounts receivable, See Receivables
Accrued expense .............................. 27-3
Accuracy ......................................... 15-6
Acid test.......................................... 16-6
Actual or threatened litigation ............ 4-27
Additional professional work............... 4-18
Additions to non-current assets .......... 22-4
Adjusting events ............................ 29-11
Agency .............................................1-7
Allocation ........................................ 15-6
Allowances .................................... 23-16
Analytical procedures ........................ 16-2
audit finalisation ............................ 29-4
not-for-profit organisations ............. 28-9
Anomalous error............................... 19-3
Application controls .......................... 12-3
Appointment of auditors .................... 2-14
Appropriate audit evidence ................ 15-5
Assertion risks
intangible non-current assets .......... 22-7
inventory ...................................... 27-5
loans, bank and cash...................... 26-2
receivables ................................... 24-7
share capital ................................. 25-3
tangible non-current assets ............. 22-2
Association with senior personal ......... 4-24
Assurance
report .......................................... 14-6
Attribute sampling .......................... 19-10
Audit ................................................1-2
committees ................................... 3-10
completion .................................... 29-2
evidence....................................... 15-2
exemption .................................... 2-10
objective ........................................1-8
planning ................................. 7-2, 14-4
process ........................................ 1-13
risk .....................................8-11, 10-10
sampling ...................................... 19-3
software ....................................... 21-9
strategy .........................................7-6
Auditor............................................ 2-11
Auditor's
expert .......................................... 18-6
report ..................... 1-8, 3-18, 14-8, 30-2
responsibility................................. 1-10
Authorisation .....................................9-7
Bank and cash ........................ 12-29, 26-4
Bank reports for audit purposes.......... 26-5
BBA, See British Bankers' Association
Bespoke audit software ................... 21-10
Best value audits ............................ 32-14
Block sampling ................................. 19-7
British Bankers' Association (BBA) ...... 26-6
C
SA
M
PL
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CAATs, See Computer-assisted audit
techniques
Capability ........................................ 18-3
Cash ............................................... 26-4
audit programme ......................... 28-10
flows ............................................ 31-7
petty ............................................ 26-5
receipts ...................................... 12-18
Charities ......................................... 28-6
Classification.................................... 15-6
Close business relationships ............... 4-26
Closed confirmations ......................... 24-4
Code of Ethics for Professional
Accountants ............................... 1-10
Communication ............... 3-15, 7-16, 11-10
Competence .............................. 4-3, 18-3
Completeness .................................. 15-6
Completion checklists ........................ 29-3
Compliance testing, See Tests of controls
Computer-assisted audit techniques
(CAATs) ............................ 21-3, 24-14
Conceptual framework ........................4-4
Confidence level ............................... 19-3
Confidentiality ............................ 4-3, 6-12
Confirmation
bank letter .................................... 26-6
external ....................................... 24-2
Conflicts of interest ..................... 4-3, 4-33
Consistency .............................. 15-8, 32-8
Contingency fees .............................. 5-13
Contingent asset .............................. 27-2
Contingent liability ............................ 27-2
Continuous stocktaking ..................... 23-6
Control
accounts.............................. 27-6, 24-12
activities.........................................9-7
design .......................................... 9-15
effectiveness ................................. 1-14
environment ...................................9-4
implementation ............................. 9-20
inherent limitations ..........................9-9
objectives ............................. 9-7, 12-12
risk .............................................. 8-15
weaknesses .........................9-22, 13-10
F8 Audit and Assurance (INT)
Becker Professional Education | ACCA Study System
F8 Audit and Assurance (INT)
Session 34 • Index
Corporate governance ................. 3-2, 9-11
Critical points ................................... 10-5
Current ratio .................................... 16-6
Cut-off ............................................ 15-7
cash............................................. 26-3
equity ......................................... 25-2
inventory .................................... 23-10
payables ....................................... 27-8
receivables ................................. 24-13
D
E
Family relationships .......................... 4-15
Fees ......................................... 4-11, 5-5
Financial interests............................. 4-13
Financial processes audit ................. 32-15
Financial ratios ................................. 16-5
Financial statements ......................... 29-2
auditor's report ............................. 30-2
management representation letter ... 20-6
self-review threat .......................... 4-20
Forum of Firms............................ 2-4, 2-5
Fraud .............................................. 11-2
Fraudulent financial reporting ............. 11-3
Fundamental Principles........................4-2
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Data
test.............................................. 21-5
Deficiencies in internal control ............ 13-2
Depreciation .................................... 22-5
Derivatives ...................................... 26-7
Detection risk .................................. 8-17
Deviations ....................................... 19-3
Direct
confirmation ................................. 24-2
Directional testing ............................ 15-9
Directors' emoluments ...................... 25-8
Disclaimer of opinion....................... 30-13
Disposal of non-current assets .. 15-10, 22-5
Dividends ........................................ 25-6
Documentation........................... 6-2, 7-15
F
SA
M
ED, See Exposure draft
Efficiency ratios ................................ 16-5
Eligibility of auditors ......................... 2-11
Embedded audit software ................ 21-10
Employment with assurance client ...... 4-25
Engagement
letter ................................... 5-12, 28-3
preliminary activities ........................7-5
terms .............................................5-8
withdrawal .................................. 11-11
Equity ............................................. 25-5
Error............................................... 11-2
projection ..................................... 19-8
trapping ....................................... 21-8
Estimation uncertainty ...................... 17-6
Ethics
ACCA Code of Ethics and Conduct
.......................................... 1-10, 4-2
Standards Board ..............................2-4
Evaluation
expert's work ................................ 18-5
Evidence, See Audit evidence
Evidence gathering ......................... 15-13
Examinable documents........................xiv
Existence ....................... 12-12, 15-6, 22-5
Experts ........................................... 18-2
Exposure draft (ED) ............................2-9
External audit ............................ 1-5, 3-10
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G
Gearing ........................................... 16-6
General controls ............................... 12-2
Gifts ............................................... 4-13
Gross profit percentage ..................... 16-5
H
Haphazard selection .......................... 19-7
High-risk items ................................ 23-6
Hybrid tests ................................... 15-19
I
IAASB, See International Auditing and
Assurance Standards Board
IAS 2 Inventories ............................. 23-3
IAS 16 Property, Plant and
Equipment ................................. 22-6
ICQs, See Internal Control Questionnaires
IESBA, See International Ethics Standards
Board for Accountants
IFAC, See International Federation of
Accountants
IFAE, See International Framework for
Assurance Engagements
IFRS, See International Financial Reporting
Standards
IIA, See Institute of Internal Auditors
Information processing........................9-7
Information systems ...........................9-6
Inherent risk .................................... 8-15
Institute of Internal Auditors (IIA) ........1-3
Intangible non-current assets............. 22-7
Integrity.................................... 4-2, 4-10
Interest cover .................................. 16-7
Interim audit ................................... 12-8
Interim stocktaking........................... 23-6
Internal audit ..................... 1-3, 3-10, 32-2
34-1
Session 34 • Index
F8 Audit and Assurance (INT)
ISA
ISA
ISA
ISA
ISA
ISA
505 External Confirmations........... 24-2
540 Auditing Accounting Estimates.17-2
560 Subsequent Events.............. 29-10
570 Going Concern...................... 31-3
580 Written Representation.......... 20-2
610 Using the Work of
Internal Audit.............................. 33-2
ISA 620 Using the Work of an
Auditor's Expert........................... 18-2
ISA 700 Forming an Opinion and Reporting
on Financial Statements................ 30-2
ISA 705 Modifications to the Opinion in the
Independent Auditor's Report........ 30-6
ISA 706 Emphasis of Matter Paragraphs
and Other Matter Paragraphs in the
Independent Auditor's Report........ 30-6
ISA 720 The Auditor's Responsibility
Relating to Other Information........ 29-9
ISAE 3000 Assurance Engagements Other
Than Audits or Reviews of Historical
Financial Information.............. 1-22, 2-6
IT audit.......................................... 32-14
IT controls..........................................9-9
PL
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Internal control
cash cycle.................................... 12-29
definition.........................................9-2
inventory cycle............................. 12-27
limitations.......................................9-9
non-current assets cycle................ 12-31
purchases cycle............................ 12-21
Questionnaires (ICQs)..................... 9-16
revenue cycle............................... 12-17
Turnbull Guidance........................... 9-11
payroll cycle................................. 12-24
International Auditing and Assurance
Standards Board (IAASB)................2-4
International Ethics Standards Board for
Accountants (IESBA)......................4-2
International Federation of Accountants
(IFAC)................................... 2-3, 4-2
International Financial Reporting Standards
(IFRS)................................. 10-2, 17-4
International Framework for Assurance
Engagements (IFAE)..................... 1-16
International Standards on Assurance
Engagements (ISAE)......................2-6
International Standards on Auditing
(ISA).................................... 1-10, 2-6
Inventory................................ 12-27, 23-2
ISA, See International Standards on
Auditing
ISA 200 Overall Objectives of the
Independent Auditor................ 2-8, 7-2
ISA 210 Agreeing the Terms of Audit
Engagements................................5-8
ISA 230 Audit Documentation............. 6-13
ISA 240 The Auditor's Responsibilities
Relating to Fraud......................... 11-2
ISA 250 Consideration of Laws and
Regulations................ 11-12, 20-7, 28-8
ISA 260 Communication With Those
Charged With Governance............. 3-15
ISA 265 Communicating Deficiencies in
Internal Control........................... 13-2
ISA 300 Planning an Audit of Financial
Statements...................................7-2
ISA 315 Identifying and Assessing the
Risks of Material Misstatement.........8-2
ISA 320 Materiality in Planning and
Performing an Audit..................... 10-2
ISA 330 The Auditor's Procedures
in Response to Assessed
Risks.................................. 7-11, 24-3
ISA 402 Audit Considerations Relating
to Entities Using a Service
Organisation............................... 14-2
ISA 450 Evaluation of Mistatements
Identified During an Audit............. 29-6
ISA 500 Audit Evidence...................... 15-2
ISA 501 Audit Evidence—
Special Considerations for
Selected Items............................ 23-4
J
Judgemental sampling................. 19-2,
K
M
SA
34-2
19-6
Key control questions.............. 12-14,
12-19
L
Laws and regulations....................... 11-12
Liability............................................ 27-2
Limited assurance.............................. 1-18
Liquidity ratios.................................. 16-6
Loans
audit procedures............................. 26-4
self-interest threat.......................... 4-17
Logical access controls....................... 12-2
Lowballing........................................ 5-14
M
Management
representations.............................. 20-2
Management's
expert........................................... 18-2
responsibilities........................ 20-5, 31-3
Manual controls...................................9-9
Materiality....................... 1-11, 10-2, 30-11
Material misstatement........................ 8-11
Misappropriation of assets.................. 11-3
Misconduct.........................................4-2
Misstatements
assessing risk................................. 8-11
evaluating..................................... 29-6
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F8 Audit and Assurance (INT)
Session 34 • Index
Modified
opinion................................... 18-8, 30-4
reports.......................................... 30-6
Monetary unit sampling...................... 19-6
Monitoring controls..............................9-8
N
O
PL
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Negative confirmations....................... 24-4
Net realisable value (NRV)................ 23-13
New professional work.........................5-2
Non-adjusting events....................... 29-11
Non-compliance.............................. 11-14
Non-current assets............................ 22-2
Non-sampling risk..................... 8-17, 19-4
Non-statistical sampling................... 19-11
Not-for-profit organisations................. 28-6
NRV, See Net realisable value
Plant and equipment
additions..................................... 15-14
existence..................................... 15-10
Preliminary engagement activities..........7-5
Prepayments.................................... 24-6
Previous experience........................... 9-15
Prior-year controls........................... 12-11
Process-based audit......................... 32-16
Professional
behaviour........................................4-4
codes..............................................4-2
competence.....................................4-3
scepticism..................... 1-12, 4-10, 11-6
Professional judgement.............. 1-12, 10-5
Proof in total.................... 16-9, 26-10, 28-9
Provision of other services.................. 4-18
Provisions......................................... 27-4
Public interest client........................... 4-12
Public Interest Oversight Board
(PIOB)..........................................2-4
Purchases cycle...................... 12-20, 12-35
SA
M
Objectivity.................................. 4-3, 18-3
Obligations....................................... 15-6
Observation...................................... 9-15
Occurrence....................................... 15-6
OECD principles..................................3-4
Off-the-shelf audit software................ 21-9
Open confirmations............................ 24-4
Operational
audit........................................... 32-16
Opinion shopping............................... 4-30
Other information (ISA 720)............... 29-9
Outsourcing
internal audit................................. 32-7
Overall audit plan................................6-7
Overdue fees.................................... 4-17
Overstatement testing....................... 15-9
Ownership of working papers.............. 6-13
P
Payable
confirmation.................................. 27-6
days............................................. 16-7
Payroll.................................... 16-9, 12-25
Performance
materiality..................................... 10-4
ratios............................................ 16-5
reviews...........................................9-7
Permanent audit file.............................6-6
Perpetual inventory system................. 23-6
Personal relationships........................ 4-15
Petty cash........................................ 26-5
Physical
controls................................... 9-7, 12-7
inventory counting.......................... 23-4
PIOB, See Public Interest Oversight Board
Planning........................................... 1-14
materiality..................................... 10-7
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Q
Qualified opinions............................ 30-12
Qualitative materiality........................ 10-6
Quantitative materiality...................... 10-5
Quick ratio........................................ 16-6
R
Random selection.............................. 19-6
Reappointment of auditor................... 5-15
Reasonable assurance................ 1-11, 1-18
Receivables
accounts........................................ 24-6
confirmation.................................. 24-9
control account.................... 15-15, 24-12
cut-off......................................... 15-16
days............................................. 16-7
Recognised Supervisory Bodies
(RSBs)....................................... 2-12
Relevance......................................... 15-5
Reliability......................................... 15-8
Reliance on internal audit................... 33-2
Removal of auditors........................... 2-14
Reperformance................................ 15-13
Representations, See Written
representations
Reserves.......................................... 25-7
Retail method................................. 23-14
Retention of working papers................ 6-13
Return on capital employed (ROCE)..... 16-5
Revaluation...................................... 22-4
Revenue, See Sales cycle
34-3
Session 34 • Index
F8 Audit and Assurance (INT)
Review
analytical procedures...................... 16-5
assignments.................................. 1-20
audit completion............................. 29-2
ratios............................................ 16-5
self.................................................4-6
working papers.................................5-7
Rights
auditors......................................... 2-13
Risk
assessment......................................9-5
audit............................................. 8-11
internal controls............................. 9-14
material misstatement..................... 8-11
model........................................... 8-18
second opinions.............................. 4-30
service organisations....................... 14-5
significant.............................8-21, 12-11
ROCE, See Return on capital employed
RSBs, See Recognised Supervisory Bodies
Tangible assets........................... 15-3, 22-2
Teeming and lading............................ 24-6
Terms of engagement..........................5-8
Terms of reference
internal audit................................. 32-8
management's expert...................... 18-4
Tests, See also Substantive procedures
control................................. 12-8, 15-12
data.............................................. 21-5
direction........................................ 15-9
objective..................................... 15-11
Threats..............................................4-5
Tolerable misstatement...................... 19-4
Transaction
controls......................................... 12-4
cycles......................................... 12-16
testing........................................ 12-15
Transnational Auditors Committee..........2-4
True and fair view.............................. 1-13
Turnbull Guidance.............................. 9-11
Type 1 report.................................... 14-6
Type 2 report.................................... 14-6
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Safe custody of working papers........... 6-12
Safeguards.........................................4-7
Sales cycle............................ 12-13, 12-16
Sample size...................................... 19-5
Sampling risk.................................... 19-3
Sarbanes-Oxley Act (2002)................. 3-18
Second opinions................................ 4-30
Segregation of duties................... 9-7, 12-2
Service organisations......................... 14-2
Share capital.................................... 25-3
Shareholders......................................1-5
Significant deficiencies....................... 13-2
Small businesses............................... 28-6
Standard cost................................. 23-14
Standardisation of working papers.........6-4
Statement of changes in equity........... 25-5
Statistical sampling............................ 19-4
Statutory
audit............................................. 2-10
books and records.......................... 25-9
Stewardship........................................1-7
Stocktaking...................................... 23-6
Stratification..................................... 19-4
Subsequent events (ISA 560)............ 29-10
Substantive analytical procedures........ 16-8
Substantive
procedures.............. 12-5, 15-12, 15-17
payroll.......................................... 16-9
Sufficient audit evidence.................... 15-4
Supervision...................................... 7-13
Supplier statement reconciliation......... 27-7
Systematic selection.......................... 19-6
34-4
UK Corporate Governance Code, See
also Corporate governance
Uncorrected misstatements................. 29-6
Understandability.............................. 15-6
Understanding the entity.............. 8-2, 28-7
Understatement testing.................... 15-10
Undue dependence...................... 4-5, 4-28
Unmodified report............................. 30-4
V
Valuation
intangible assets............................. 22-7
inventory (IAS 2).......................... 23-13
services......................................... 4-22
tangible assets............................... 22-2
Value for money (VFM) audits........... 32-12
Variables sampling........................... 19-10
W
Wages, See also Payroll
Walk-through.................................... 9-15
Withdrawal, See Engagement withdrawal
Working papers........................... 5-7, 6-11
Written representations....... 11-9, 20-2, 20-3
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This ACCA Study System has been reviewed by ACCA's examining team and includes:
An introductory session containing the Syllabus and Study Guide and approach to examining the
syllabus to familiarise you with the content of this paper
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Comprehensive coverage of the entire syllabus
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Focus on learning outcomes
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Visual overviews
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Definitions of terms
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Illustrations and exhibits
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Examples with solutions
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Key points
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Exam advice
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Commentaries
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Session summaries
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End-of-session quizzes
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A bank of questions
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