Chapter 1: Audit and Other Assurance Engagements

 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:

o preparing and fairly presenting the financial statements;

o designing, implementing and maintaining internal control;

o selecting and applying appropriate accounting policies; and

o making reasonable accounting estimates.

 The auditor is responsible for expressing an opinion on the financial statements.

 An auditor should conduct an audit in accordance with ISAs and comply with IESBA's Code of
Ethics for Professional Accountants.

 Key concepts in auditing are reasonable assurance, materiality, professional judgment,

professional scepticism and "true and fair".

 The audit process includes:

o agreeing to the terms of the engagement;

o planning and risk assessment;

o understanding and testing the effectiveness of internal controls (when appropriate);

o substantive procedures; and

o 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 reasonable (positive/high) or limited (negative/lower)

assurance. Audit engagements provide reasonable assurance, and review engagements
provide limited assurance.

Chapter 2: External Audit

 IFAC includes the International Auditing and Assurances Standards Board (IAASB) and the
International Ethics Standards Board for Accountants (IESBA).

 The IAASB aims to improve the uniformity of auditing practices and related services globally
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.

 ISAs set out the standards 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 auditor's reports.

 The primary duty of a statutory auditor is to express an opinion of the annual financial
statements. The auditor must have a legal right to access information and explanations to
fulfil this duty.

 Generally, auditors are appointed, re-appointed and removed by the shareholders in general
meetings. 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.

Chapter 3: Corporate Governance

 Corporate governance includes oversight of an entity's strategy, economic development,
executives, risk and control activities, and auditors.

 The five main principles of the UK Corporate Governance Code concern:

o Board Leadership and Company Purpose

o Division of Responsibilities

o Composition, Succession and Evaluation

o Audit, Risk and Internal Control

o Remuneration.

 An audit committee of at least three independent NEDs is an integral element of corporate

governance for listed companies and is considered best practice for unlisted entities.

 The audit committee is responsible for monitoring the integrity of the financial statements
and financial reporting controls, monitoring and reviewing the internal audit function,
overseeing the appointment of the external auditor and reviewing and monitoring the
relationship with the external auditor, including providing non-audit services.

Chapter 4: Professional Codes of Ethics and Conduct

 The ACCA's Code of Ethics and Conduct applies to all students and members.

 The five fundamental principles are:

o Integrity

o Objectivity
 o Professional competence and due care

o Confidentiality

o Professional behaviour

 The conceptual framework assists the auditor in identifying, evaluating and responding to
threats to compliance with the fundamental principles. The categories of threats are:

o Self-interest

o Self-review

o Advocacy

o Familiarity

o Intimidation

 Threats must be eliminated, reduced to an acceptable level or the professional activity

declined/relationship ended.

 Safeguards are actions taken by the professional accountant (e.g. independent review).

 Independence requires independence of mind and independence in appearance.

 A public interest entity (PIE) is a listed entity, or an entity required to be audited as if it were
listed, or an entity of significant public interest.

 The fee dependency threshold is 15% for a PIE client and 30% for a not PIE client.

 Many firms require all professional employees not to hold any financial interest in any audit
client.

 A partner or employee of the firm must not serve as a director or officer of an audit client of
the firm.

 A firm must not assume management responsibility for an audit client.

 Most accounting and bookkeeping services should not be provided to a PIE audit client.

 Exceptions to the duty of confidentiality include:

o a statutory duty to disclose (e.g. under court order);

o a professional duty to disclose (e.g. suspected money laundering); and

o a professional right to disclose (e.g. defending the auditor against disciplinary

proceedings).

 A professional accountant should not use or appear to use information acquired during
professional work for personal advantage or the advantage of a third party.

 Conflicts of interest include conflicts between:

o the professional accountant's interests and the client's interests; and

o the interests of two or more clients.

Chapter 5: Auditor Appointment
 The stages of the auditor appointment process are:

o client acceptance;

o engagement acceptance; and

o professional appointment.

 Before accepting a new engagement, the nominee should contact the existing auditor to
request information relevant to accepting the nomination.

 Both the prospective and existing auditors must have the entity's permission to
communicate with each other. If permission is refused, the nomination must be declined.

 The existing auditor should transfer client information to the successor auditor promptly.

 Preconditions for an audit are management's use of an acceptable financial reporting

framework and acknowledgement of responsibilities (e.g. internal controls).

 The engagement letter documents respective responsibilities, the financial reporting

framework, the scope of the audit, the form and content of the reports, fees, etc.

 Audit and assurance fees cannot be based on a percentage of profits or a contingency basis.

 The level of fees for the audit engagement must not compromise audit quality.

 The engagement partner is responsible for quality management at the engagement level.

 Engagement performance includes:

o the direction and supervision of the audit team;

o the review of their work;

o consultation on difficult matters; and

o engagement quality review.

 An engagement quality review is a requirement for listed companies.

Chapter 6: Audit Documentation

 Working papers should provide a record of the basis for the auditor's report and evidence
that the audit was planned and performed in accordance with ISAs and legal and regulatory
requirements.

 Documentation techniques include narrative notes, graphics, questionnaires and checklists

(in paper or electronic media).

 The permanent audit file contains information of continuing importance to the audit and
provides a history of significant audit matters.

 The current audit file (CAF) contains information relevant to the audit for the current period
and is usually split into stages (e.g. interim, year-end and final).
  Assembly of working papers should be completed within 60 days of signing the auditor’s
report.

 Working papers should be retained for a period sufficient to meet the needs of the audit firm
and to comply with legal and professional requirements (e.g. ACCA recommends seven years
minimum).

 Working papers are the property of the auditor.

Chapter 7: Audit Planning

 The engagement partner is responsible for planning the audit, which includes developing an
overall audit strategy and plan.

 Preliminary planning activities include:

o reassessing the client relationship and management integrity;

o evaluating compliance with ethical requirements;

o assessing threats to fundamental principles; and

o reviewing the terms of the engagement.

 The audit strategy establishes the scope, timing, and direction of the audit and guides the
development of the audit plan.

 An interim audit is optional stage in an overall audit strategy.

 Audit direction includes:

o determination of materiality;

o identification of high-risk areas;

o consideration of the likely effectiveness of internal control; and

o determination of staffing levels, timing, etc.

 The audit plan includes a description of the nature, timing and extent of:

o planned risk assessment procedures;

o audit procedures for each material class of transactions and balances; and

o other audit procedures (e.g. for audit finalisation).

 The audit strategy and plan should be revised during the audit as evidence is gathered that
causes the auditor to reassess materiality, the risk of material misstatement and the planned
nature, timing and extent of audit procedures.

Chapter 8: Identifying and Assessing Risk

 Risk assessment procedures are required to obtain an understanding of:
 o the entity and its environment;

o the applicable financial reporting framework and accounting policies; and

o how inherent risk factors affect the susceptibility of assertions to misstatements.

 Risk assessment procedures include:

o Inquiry

o Observation

o Inspection

o Analytical procedures.

 Audit risk is the risk that the auditor will express an inappropriate audit opinion on the
financial statements. It is the risk of material misstatement arising (inherent risk) which is not
prevented or corrected by the entity (control risk) or detected by the auditor (detection risk).

 Inherent risk factors arise from complexity, subjectivity, change, uncertainty, and the
susceptibility to misstatement due to management bias or other fraud risk factors.

 Significant risks may be non-routine (e.g. fraud) or involve significant estimation uncertainty
(e.g. complex provisions) and require special consideration (e.g. more persuasive evidence).

 Inherent risk and control risk require separate assessments.

 Control risk is assessed if the auditor plans to test the operating effectiveness of controls. If
not, the assessment of the RoMM is the same as the assessment of inherent risk.

 Detection risk is managed by changing the nature, extent and timing of audit work. Detection
risk is "inversely" related to inherent risk and control risk. Low detection risk is achieved
through increased substantive procedures.

Chapter 9: System of Internal Control

 The system of internal control is the system that is designed, implemented and maintained
to provide reasonable assurance about:

o the reliability of financial reporting;

o the effectiveness and efficiency of operations; and

o compliance with laws and regulations.

 The components of internal control are:

o the control environment;

o the entity’s risk assessment;

o the information system and communication;

o control activities; and

o monitoring.
  The control environment, which includes the attitudes, awareness and actions of
management, provides the foundation for the operation of the system of internal control.

 The entity’s risk assessment process is management’s process for identifying risks, assessing
their significance and developing approaches to address them.

 The information systems include procedures to initiate, record, process, report and maintain
information needed by management and financial reporting.

 Significant matters should be communicated within the entity, between management and
TCWG, and with external parties.

 Control activities are policies and procedures that help manage risk. They include
authorisation and approval, reconciliations, verifications, physical or logical controls and
segregation of duties.

 Monitoring is a process that evaluates the effectiveness of controls and identified and
rectifies control deficiencies.

 The auditor must identify and evaluate the design of control activities (e.g. through inquiry,
observation, inspection, previous experience and walk-throughs) and whether they have
been implemented.

Chapter 10: Audit Materiality

 Materiality is the expression of the relative significance or importance of a particular matter
to the financial statements as a whole.

 Materiality may be set for particular transactions, balances and disclosures for which
misstatements less than overall materiality may influence the decisions of users.

 The auditor also sets performance materiality (at less than materiality for the financial
statements) to use in performing audit tests.

 Factors that affect the materiality assessment include the economic decisions of users,
professional judgment, quantitative amounts and qualitative aspects.

 Overall materiality is a matter of professional judgment based initially on a percentage

applied to a chosen benchmark.

 All material matters must be subject to substantive audit procedures.

 There is an "inverse" relationship between audit risk and materiality. The amount considered
material must be decreased as the risk of misstatement increases

Chapter 11: Fraud, Law and Regulations

 An error is an unintentional mistake in the financial statements. In contrast, fraud is
intentional.

 The types of fraud which result in financial statement misstatement are:

 o Fraudulent financial reporting – the misstatement or omission of amounts or
disclosures to deceive users of financial statement.

o Misappropriation of assets – the theft or misuse of company assets.

 Management is responsible for the prevention and detection of fraud and errors.

 The auditor is responsible for obtaining reasonable assurance that the financial statements
are free of material misstatement, whether caused by error or fraud.

 Fraud risk assessment procedures include consideration of fraud risk factors:

o events or conditions that indicate an incentive or pressure to commit fraud;

o the opportunity to commit fraud; and

o the attitude or environment that rationalises fraud.

 The nature, timing and extent of audit procedures should change in response to the assessed
risk of material misstatement due to fraud.

 Written representations regarding fraud should be obtained from management.

 Actual or suspected fraud should be communicated to management on a timely basis and to

TCWG if the fraud is material or involves management or an employee in a significant control
role.

 Generally, the auditor does not report fraud to third parties unless there is a statutory duty
to report fraud.

 The auditor should obtain sufficient appropriate audit evidence regarding compliance with
laws and regulations that directly affect the determination of material amounts and
disclosures in the financial statements.

Chapter 12: Tests of Control

 The IT environment is the IT applications and supporting IT infrastructure including the IT
processes (and personnel involved in those processes) used to support business operations
and achieve business strategies.

 General IT controls are implemented to address risks arising from the use of IT.

 Information processing controls include controls in IT applications and manual information

processes that directly address risks to the integrity of information (i.e. the completeness,
accuracy and validity of transactions and other information).

 Tests of control are audit procedures designed to evaluate the operating effectiveness of
controls in preventing or detecting and correcting material misstatements at the assertion
level.

 Tests of controls must be performed when the auditor decides to place reliance on them (i.e.
assesses control risk) or when substantive procedures alone are not sufficient.
  Some substantive procedures must be carried out for all material account balances,
transactions and disclosures (regardless of the reliance on controls).

 The procedures used to test control effectiveness are observation, inspection and re-
performance (also inquiry, but not inquiry alone).

 Tests of controls only provides evidence of effectiveness at a point in time.

 When tests of controls identify deviations, the auditor must determine how they arose,
whether they are isolated or whether more audit evidence must be obtained from
substantive procedures.

 Each control to be relied on must be tested at least once in every third audit and in the
current audit if it has changed or relates to a significant risk.

 To answer exam questions related to internal controls, specify control objectives and control
activities, suggest tests of control, identify deficiencies and make recommendations.

 The transaction cycles relevant to the exam are revenue, purchases, payroll, inventory, bank
and cash and non-current assets.

Chapter 13: Communication on Internal Control

 The auditor's communication with TCWG should include the auditor's responsibilities for the
financial statements, the form and timing of the audit, any significant findings and a
statement of auditor independence.

 Significant findings include matters related to accounting policies, estimates, disclosures,

significant difficulties encountered during the audit and important issues discussed with
management.

 The auditor should promote effective two-way communication with TCWG.

 A deficiency in internal control exists when a control is missing or unable to prevent or detect
and correct material misstatements on a timely basis.

 A significant deficiency is one of such importance that it merits the attention of TCWG. All
significant deficiencies should be reported in writing in a report to management.

 The report to management generally includes a covering letter and supporting details that
describe the significant deficiencies, the possible effects, recommendations for corrective
action and management response.

 The report to management should not be disclosed to third parties without management's
consent.

Chapter 14: Internal Audit

 Internal audit is an independent, objective assurance and consulting activity designed to add
value and improve an organisation's operations.
  Internal auditors are appointed by the highest level of management with responsibility for
internal audit and, for listed companies, should report to the audit committee.

 Internal auditors report on operational and financial risk management, internal control and
performance quality.

 Internal audit is needed as organisations become large, complex, geographically diverse and
develop new products or enter new markets.

 Internal auditors appear to be less objective than external auditors (because they are
employees).

 The benefits of outsourcing internal audit include lower cost, consistency with external audit
and access to a broader range of skills and new techniques.

 Disadvantages of outsourcing include loss of specialist skills in-house, service constraints,

less flexibility, conflicting reporting lines, expectation gap, possible lower standard of service
and potentially adverse effects on corporate culture.

 Other internal audit assignments include value-for-money auditing.

 Internal auditors may issue reports that provide management with an opinion or inform
management of significant findings, conclusions and recommendations.

 There is no formal structure for the reports of internal auditors.

Chapter 15: Audit Evidence

 The auditor must obtain sufficient appropriate audit evidence on which to base the audit
opinion.

 Audit evidence may be internal or external, oral or written, direct or indirect, or auditor-
generated.

 Sufficiency (concerning quantity) depends on audit risk, reliance on effective controls, the
auditor's experience, materiality and audit findings. It also depends on the quality of the
evidence (i.e. source and reliability).

 Appropriate evidence must be both relevant and reliable.

 Relevance means that the audit evidence supports management's assertions:

o For transactions and events and related disclosures, these are completeness,
occurrence, classification, cut-off, accuracy and presentation (COCO AP).

o For account balances and related disclosures, these are completeness, accuracy,
valuation and allocation, rights and obligations, existence, presentation and
classification (CARE PC).

 Reliability is influenced by source (e.g. an external source is more reliable than internal and
written is more reliable than oral). Evidence is more persuasive if it is consistent with other
evidence.
  When testing for overstatement, the direction of the testing is from the financial statements
to the supporting evidence.

 When testing for understatement, the direction of the testing is from the source to the
financial statements.

 Evidence is obtained in risk assessment procedures, tests of controls and substantive

procedures.

 Procedures to gather evidence include inspection, observation, inquiry, confirmation,

recalculation, re-performance and analytical procedures.

 Substantive procedures are performed to detect material misstatement at the assertion level
(i.e. classes of transaction, account balances and disclosures) and include:

o substantive analytical procedures; and

o tests of details.

 The greater the reliance placed on controls, the lower the level of substantive procedures.

 The greater the risk of material misstatement, the greater the extent of substantive
procedures.

Chapter 16: Analytical Procedures

 Analytical procedures evaluate financial information by analysing plausible relationships
between financial and non-financial data.

 Analytical procedures are required during the planning and review stages of the audit and
may be used as substantive procedures.

 Analytical procedures are performed during the planning stage to assist in understanding the
business, identifying risks of material misstatement and planning the nature, extent and
timing of further audit procedures.

 Key ratios include:

o Gross profit percentage;

o Liquidity ratios (e.g. current ratio);

o Efficiency ratios (e.g. inventory holding period).

 Substantive analytical procedures are suitable for obtaining evidence on large volumes of
predictable transactions with effective internal controls.

 Analytical procedures performed during the overall review stage assist the auditor in forming
an overall conclusion and corroborating the conclusions formed during the audit.

 The auditor must investigate further when there is an unacceptable or unexpected difference
between the expected and actual analytical result.
Chapter 17: Accounting Estimates
 An accounting estimate is an approximation of a monetary amount in the absence of a
precise means of measurement. Accounting estimates are subject to estimation uncertainty.

 The auditor must obtain sufficient appropriate audit evidence that accounting estimates are
reasonable and adequately disclosed.

 Management is responsible for making accounting estimates and regularly reviewing the
methods used to calculate them.

 The auditor must understand the financial reporting framework and how management
develops its estimates.

 The auditor performs substantive procedures to assess their reasonableness using the
following methods:

o Obtaining audit evidence from subsequent events;

o Test how management made the accounting estimate;

o Develop an auditor’s point estimate or range.

Chapter 18: The Work of Others

 Management's expert is an individual or organisation whose work in a field other than
accounting or auditing is used by the entity to prepare its financial statements.

 An auditor's expert is used to help obtain sufficient appropriate audit evidence.

 When an expert is a source of audit evidence, the auditor must consider the expert's
competence and objectivity and the relevance of the expert's work to audit assertions.

 An auditor's expert is effectively a member of the audit team (i.e. competent, independent,
etc.).

 The use of an expert is not mentioned when the audit opinion is unmodified.

 If the audit opinion is modified, reference to management's expert may be appropriate.

However, the auditor must obtain the expert's permission to refer to the expert by name.

 The external auditor is responsible for the audit opinion. This responsibility cannot be
delegated or assigned to the internal auditor.

 If the external auditor plans to rely on the internal auditor's work, he should assess the
internal auditor's competence, objectivity and methodology.

 The external auditor should evaluate and test the internal auditor's work if seeking to rely on
it.

 The external auditor cannot use the internal audit function to provide direct assistance if it
lacks sufficient competence or significant threats to its objectivity exist.
  When an audit client uses a service organisation, the auditor must understand the services
provided and assess the service organisation's controls when determining the risks of
material misstatement.

 The auditor may obtain sufficient appropriate evidence about a service organisation's
controls by relying on a report issued by the service organisation's auditor:

o A Type 1 report addresses the design and implementation of the service

organisation's controls (i.e. is relevant to obtaining an understanding).

o A Type 2 report also addresses the operating effectiveness of the controls.

Chapter 19: Audit Sampling

 When gathering evidence about a population, the auditor may select all or specific items or
use audit sampling.

 Stages in audit sampling include:

o Sample design;

o Determination of sample size;

o Sample selection;

o Testing;

o Evaluation.

 Sample size can be determined using probability theory or professional judgment. The lower
the acceptable sampling risk, the larger the sample size.

 When selecting a sample, all sampling units should have an equal chance of being selected
(for meaningful extrapolation of results). The principal methods are random selection,
systematic selection, monetary unit sample selection, haphazard selection and block
selection.

 The auditor should consider the nature and cause of deviations or misstatements and
determine whether they are isolated or indicative of a common feature.

 Monetary misstatement should be projected to the population to determine whether the

potential misstatement is material.

 If a sample in a test of controls indicates that control risk is higher than initially assessed, the
auditor may extend the sample size, test alternative controls or extend substantive
procedures.

 If the result of a sample in a test of details indicates that the potential misstatement exceeds
the tolerable misstatement, the auditor should ask management to correct identified
misstatements and then re-evaluate the uncorrected misstatements.

 Statistical sampling uses random sample selection and probability theory to evaluate sample
results and measure sampling risk.
Chapter 20: Written Representations
 Written representations include statements by management provided to the auditor to
confirm certain matters or support other audit evidence.

 Representations include:

o Acknowledgement of responsibilities for the financial statements.

o All relevant information has been provided.

o All transactions have been recorded and events disclosed.

o Other specific representations that provide audit evidence.

 When representations are inconsistent with other audit evidence, the contradiction must be
resolved.

 If there are significant doubts about the reliability of management's representations or if

management refuses to provide representations, the auditor will be unable to obtain
sufficient appropriate audit evidence and should issue a disclaimer of opinion (see Chapter
30).

Chapter 21: Automated Tools and Techniques

 Automated tools and techniques (ATTs) is a broad term describing the tools and techniques
used by auditors in performing audit procedures.

 Test data incorporates correct and incorrect data, which is processed to test the effectiveness
of programmed controls and determine whether the controls are operating as intended.

 The test data process involves:

o establishing a dummy profile;

o identifying current control balances;

o preparing and entering test data;

o review reports; and

o reversing/removing test data.

 Error-trapping is the programmed handling of exceptions (e.g. the error routine for a credit
sale to a customer not included in the customers master file).

 Audit software, which may be off-the-shelf, bespoke or embedded, is used to process and
analyse the client's data independent of the client's system to verify the accuracy of the
system.

 Audit software is widely used for data file interrogation (e.g. sequence checking and sample
selection).
  Data analytics for audit is the science and art of discovering and analysing patterns,
deviations and inconsistencies, and extracting other useful information through analysis,
modelling and visualisation for planning and performing the audit.

 The main benefits of ATTs are increased audit efficiency and improved accuracy that
contributes to the overall quality and reliability of the audit results.

 The main challenges of ATTs are data quality and integrity and the risk of over-reliance,
which may lead to a lack of professional judgment.

Chapter 22: Non-current Assets

 The main assertions for tangible and intangible non-current assets include completeness,
accuracy, valuation and allocation, existence, and rights and obligations.

 Substantive Audit procedures for tangible non-current assets include:

o Testing additions (occurrence, accuracy, classification).

o Reviewing repairs and maintenance expenses (completeness, classification).

o Confirming revaluations (may include reliance on management's expert).

o Examining documents for evidence of the right of control or ownership.

o Physical inspection of assets (existence).

o Testing disposals (occurrence, completeness).

o Testing depreciation (accuracy, valuation, allocation, completeness).

o Confirming disclosure complies with IAS 16 (completeness).

 Substantive Audit procedures of intangible non-current assets are similar. Specifics include:

o Testing existence other than by physical inspection (e.g. income stream).

o Testing amortisation (usually on a straight-line basis) (valuation).

o Obtaining evidence that capitalisation criteria are met for internally generated
research and development costs.

o Confirming disclosure complies with IAS 38.

Chapter 23: Inventory

 Inventory is usually material to the financial statements and directly affects the statement of
financial position (inventory asset) and profit or loss (cost of sales).

 Key assertions for inventory include existence, valuation, rights, completeness and
presentation.

 The auditor obtains evidence of the existence and condition of inventory by attending the
physical inventory count (unless impracticable).
  A perpetual inventory system facilitates continuous stock-checking as an alternative to a full
physical count.

 When the auditor cannot attend the inventory count, alternative procedures must be
performed (e.g. direct confirmation of inventory held by a third party).

 Cut-off testing verifies that inventory, purchases and sales are recorded in the correct
accounting period. For example:

o Purchases recorded before the year end should be included in inventory (unless
sold).

o Sales recorded before the year end should be excluded from inventory.

 Inventory must be measured at the lower of cost and net realisable value (IAS 2).

 For manufactured goods, cost includes production overhead (i.e. absorption cost).

 Standard cost and the retail method may provide acceptable approximations to actual cost.

 Audit procedures to verify net realisable value include a review of post-year-end sales and
goods returns.

Chapter 24: External Confirmations, Receivables and

Sales
 An external confirmation is a direct written response from a third party to the auditor.

 Confirmations can be in paper form or electronic. When receiving electronically, the auditor
should confirm the sender and the security of the content.

 Positive confirmation (a request to confirm agreement or disagreement with the balance

shown) should be used when controls are weak, there is suspicion of fraud or numerous
bookkeeping errors exist.

 Negative confirmation (a request to reply only in the case of disagreement) should be used
when controls operate effectively, there are many small accounts, few errors are expected,
and recipients are expected to respond to the request.

 An open confirmation asks the respondent to enter the balance and is used when testing
primarily for possible understatement.

 A closed confirmation shows the balance and is used when testing primarily for
overstatement.

 The auditor should control the confirmation process, including sample selection,
confirmation design and sending/receiving the confirmation.

 When a response indicates disagreement, the auditor should distinguish errors from
reconciling items and perform further audit procedures if there is an increased risk of
material misstatement.

 Assertions for receivable balances include existence, valuation, cut-off and rights.
Chapter 25: Share Capital, Reserves and Directors'
Remuneration
 Assertions for share capital and reserves include:

o Occurrence (e.g. of share issues and dividend payments)

o Valuation (e.g. of a revaluation surplus)

o Classification (e.g. between distributable and non-distributable reserves).

 Audit procedures for ordinary shares include:

o Review of permanent file information and board minutes.

o Inspection of statutory books (e.g. of shareholdings).

o Agree opening balance, closing balances and movements during the period reported
on the statement of changes in equity (e.g. confirm proceeds of share issues to the
bank statement).

 The most common reserves are retained earnings, share premium and revaluation surplus.
Audit procedures include:

o Agree that any use (e.g. to pay dividends) complies with the company's constitution
and legal and accounting requirements.

o Agree opening balance, closing balance and movements shown on the reconciliation
of movement for each reserve (e.g. recalculate transfer of excess depreciation
between revaluation surplus and retained earnings).

 Audit procedures for dividends include confirmation of payments to bank statements.

 Directors' emoluments are material by nature. Audit procedures include the completion of a
checklist to ensure that regulatory and disclosure requirements are met.

 statutory books and records are a source of audit evidence. The auditor should perform
procedures to verify that all statutory books and records have been kept as required by law.

Chapter 26: Bank and Cash

 Assertions for loan, bank and cash balances include existence, cut-off, rights and obligations,
completeness and presentation.

 Audit procedures for loans received include:

o Examining new loan agreements

o Confirming repayments

o Obtaining direct confirmation from lenders

o Re-computing interest expense and interest accrual.

  Audit procedures for cash at bank include examination of the bank reconciliation and bank
confirmation report for all accounts.

 The bank confirmation report may also provide evidence of:

o Loan/overdraft facilities (relevant to going concern)

o Guarantees given (may give rise to contingent liabilities)

o Security held (e.g. property may be mortgaged).

Chapter 27: Liabilities, Provisions and Contingencies

 Assertions for trade payables, accrued expenses and provisions include completeness, cut-
off, obligations, valuation and existence.

 Obtaining direct confirmation from suppliers is a routine audit procedure unless the risk of
misstatement is low and the reconciliation of supplier statements from the client provides
sufficient reliable evidence.

 To test for completeness (understatement), suppliers should be selected from purchases (or
goods received notes) and not the list of payable balances.

o Purchase invoices on the supplier's statements but not included in the client's
accounting records should be accrued if goods are received before the year end.

o Payments in the client's books but not included in the supplier's year-end statements
should appear in the following month's statement.

 Review of after-date purchase invoices and payments for goods/services received before the
year end is an audit procedure for completeness of liabilities and cut-off.

 Audit procedures for provisions include:

o Reviewing the outcome of the prior year's provisions and contingent liabilities.

o Reviewing correspondence and board minutes for evidence of unrecorded liabilities.

o Subsequent events review.

o Reassessing the continuing need for provisions still unused.

o Direct confirmation from lawyers.

o Obtaining written management representations (e.g. concerning completeness)

Chapter 28: Small Business and Not-for-Profit

Organisations
 The characteristics of small businesses and not-for-profit organisations include limited
segregation of duties and domination by senior management or owners.

 The engagement letter should include details of additional accountancy or tax services.
  Involvement of owners may:

o Decrease the risk of material misstatement through effective control and the
prevention/detection of errors.

o Increase risk of profit manipulation.

 Any accountancy work carried out by the auditor may provide audit evidence but cannot
replace the evidence obtained from direct confirmation, physical inspection, etc.

 Not-for-profit organisations use surplus funds to pursue goals rather than make distributions
to owners or shareholders.

 When auditing a not-for-profit entity:

o Inherent risk and the risk of material misstatement are likely to be high. Therefore
detection risk should be made low.

o Income is likely to be the principal basis for materiality.

o Generally, more evidence can be derived from analytical procedures.

o Cash transactions are likely to be material and a high-risk audit area.

Chapter 29: Audit Finalisation

 Reviews conducted before signing the auditor's report include day-to-day reviews, the
engagement partner's review and an independent second-partner review for high-risk
clients.

 All critical matters should be documented, especially those involving judgments and key
decisions.

 Analytical procedures are required in the final stage of the audit to assess the
reasonableness of the figures and other data presented.

 The auditor should consider whether any uncorrected misstatements, individually or in

aggregate, are material to the financial statements.

 If the aggregate of uncorrected misstatements is material, further adjustments will be

necessary to ensure that the financial statements are not materially misstated.

 The auditor should read other information to ensure there are no inconsistencies or material
misstatements of fact. If found, management should be asked to make corrections.

 Events after the reporting period (IAS 10) occur between the end of the reporting period and
the date the financial statements are authorised for issue.

o Adjusting events provide further evidence about conditions existing at the end of the
reporting period.

o Non-adjusting events arise after the end of the reporting period.

  Subsequent events (ISA 560) are events occurring between the date of the financial
statements and the date of the auditor's report and facts which become known after that
date.

o Before the date of the auditor's report, the auditor has an active responsibility to
gather evidence about subsequent events.

o After the date of the auditor's report but before the financial statements are issued,
management is responsible for informing the auditor about subsequent events.

o After issuing the financial statements, the auditor should consider the implications
for the auditor's report if made aware of subsequent events.

Chapter 30: The Independent Auditor's Report

 An auditor's report includes:

o Title

o Addressee

o Audit Opinion

o Basis for Opinion

o Going Concern

o Key Audit Matters

o Responsibilities of Management and Those Charged with Governance

o Auditor's Responsibilities for the Audit of the Financial Statements

o Name of the Engagement Partner

o Auditor's Address and Signature

o Date of the Auditor's Report

 Key Audit Matters are matters that, in the auditor’s professional judgment, were of the most
significance in the audit of the financial statements of the current period.

 A "modified opinion" means that the audit opinion is other than unmodified (i.e. qualified,
adverse or disclaimed).

 "Emphasis of Matter" and "Other Matter" paragraphs do not affect the audit opinion.

 An "Emphasis of Matter" paragraph draws attention to a matter which is appropriately

presented or disclosed in the financial statements but is fundamental to the users'
understanding of the financial statements.

 An "Other Matter" paragraph draws attention to a matter that is not presented or disclosed
in the financial statements but is relevant to the users' understanding of the audit, the
auditor's responsibilities or the auditor's report.
  If the financial statements are not free of material misstatement due to the use of an
inappropriate accounting method or inadequate disclosure, the auditor will issue:

o A qualified opinion if the matter is material but not pervasive.

o An adverse opinion if the matter is material and pervasive.

 When the auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements are free from material misstatement, he will issue:

o A qualified opinion if the limitation is material but not pervasive

o A disclaimer of opinion if the limitation is material and pervasive.

Chapter 31: Going Concern

 Under IFRS, going concern is the only assumption that underlies the basis of the preparation
of financial statements. When the going concern basis is not used, the financial statements
should disclose why the entity is not a going concern and the basis of reporting used.

 Management must assess the entity's ability to continue as a going concern for at least 12
months from the end of the reporting period.

 When performing risk assessment procedures, the auditor must consider whether there is
significant doubt about the entity's ability to continue as a going concern, including
evaluating management's going concern assessment.

 Mitigating factors include:

o Management's plans to maintain adequate cash flows.

o Availability of alternative suppliers.

o Management's intention to financially support the business.

 If doubt about the going concern assumption exists, the auditor performs specific audit
procedures to determine whether the going concern basis is appropriate.

 Audit opinion modifications include:

o Unmodified opinion with material uncertainty related to going concern section if

going concern is appropriate but a material uncertainty exists and is appropriately
disclosed.

o Qualified (or adverse) opinion if going concern is appropriate, but a material

uncertainty exists and is not adequately disclosed.

o Adverse opinion if the going concern assumption is inappropriate.

o Qualified opinion or disclaimer of opinion if management does not make its going
concern assessment.