These EEC notes are intended to help students kick start their P7 and to get an overall idea of the

subject; without wasting much time on bulky text books.

P7 Advance Audit and Assurance

Created by : Excellence Education Centre, Doha www.eec-doha.com Exce

Ex = Exam Tips Ex Know all the Standards, IAS Ex Always explain why Ex Real time exams. So take care of dates-timelines Ex past papers = work experience

Assurance = Opinion External audit is only one of the assurance services. Internal audit Social + Environmental audit Due diligence (especially mergers & acquisitions) Business risk (not much figures in here) Big Topics Risks Audit evidence, procedures etc. Next Biggest Other Assurance services Audit Reports Ethics Group Audits very heavily examined Other Areas Practice Management ( running your own company)

 Money laundering

Laws Regulations that relate to all client Telling the BOD or outside body Provisions & contingencies needed Regulations ACCA Professional Oversight Board(nonaccountants) IAASB- International Auditing (Austrailia,Us,Uk) Subsidiary Money laundering Hiding the true source of proceeds of crime International Regulations You can move money around to avoid investigation Responsibilities of Accountants (Auditors) 1. Have a money laundering reporting officer (MLRO) 2. KYC procedures-(Know your clients) Identify Source of funds 3. Train staff in how to spot clues. 4. Situation where ML more likely to happen Politically

Exposed Persons Clues to Money Laundering Overly complicated transactions Businesses / groups more complicated then should be. Moving money through suspicious countries Fraud (RARE) Preventing & detecting fraudulent auditors responsibility but fraud affects the true and fair view of F/S so linked. Directors may be involves. So report to audit committee (NEDS).Some situations report outside the company. Auditor liability(current issues) To whom are we liable Shareholders

How much far ?(check solutions next page)

Anyone else if Auditors know of their plans when signing audit report Audit work was neglected (poor quality) This person lost money as a result of poor quality work but can issue a disclaimer to these extra people

Why people like to sue audit firms rather then directors for fraud? Audit firms traditionally o Partnerships o Seem as rich Directors may be seen as guilty but have no money Audit firms have insurance May settle out of court to avoid court cares. Solutions LLC Directors insurance Liability cap figure for claims Current issue for a long time. when it comes to ethical issues ,consider: Action identify issues seniority of staff involved dates Deal with the people involved Deal with the audit process Make sure t never happens again.

3 Ways Auditors can leave a company:1. Resignation 2. Removal 3. Not seeking re-appointment.

Ethics [integrity,honesty] Due care + competence Objectivity-free from bias Confidentiality professional behavior Forced to introduce client confidentiality Suspicion of money laundering Terrorism Treason acting against the government An ACCA investigation Objectivity Having a clear mind when doing something Shouldnt be thinking about irrelevant stuff You must be objective and be seen to be objective Key to objectivity is independence !!!! Threats Self-interest you think about yourself Intimidation forced to do stuff Self-review ACCA allows you to mark yourself Familiarity Advocacy hardest Advocate:-representative (Tax) One side of the argument Management What people think; is important for YOU Safeguards

 2nd Part HOT Review of audit files. Rotate staff an audit team every few years Take care when providing ethic services Conflicts of interest Use 2 separate teams Each team headed by different partner Use staff from 2 different offices 3rd partners to ensure 2 teams kept apart Tell both clients Resign from one/both Confidentially for client files Ethics is all about question practice Practice Management (comes up often) 1. Quality control 2. Tendering 3. Advertising 4. Fees
Have been tested

QC
f

Firm as a whole
Recruitment + training

Each piece of work

Attitude of partners( Quality)

 Partners in charge of quality Documented policies + procedures Specialists/consultatio n Cold file review process Pre-appointed checks

Planning Planning meeting for whole team Documenting all work Direction, supervision, review of all work done Work delegated board on skills + experiences

Small Firms Can Take Can take care of quality control by haring resources with other smaller firms e.g. (training)

Tendering What do companies consider when choosing auditors? People Price Location Services available Reputation (recommendation) Experience

Advertising and fees Fees

Lowballing-setting a low price to attract client , then making money from other services, or by putting prices up in the future. Contingency fees: Fees dependent on something else. Advertising Clear Any claims must be backed up Must not criticize other accountants Overall manner + location should be professional

Audit strategy (most important area of the syllabus & very vast )

Plan
Good Bad

They work

Dont work

Reduced substantive tests

Full substantive tests

Completion

e.g. subsequent events

Report
A lot of small transactions-> test controls Few big transactions -> substantive testing Substantive tests Analytical procedures Enquiry + Confirmation [management, 3rd parties] Inspection Observation Analytical procedures

Work well if Not a new client Company is stable similar things to previous years, not much growth Company has several divisions doing the same thing Similar company exists in the industry During audits the main focus is mainly on the B/S assets and liabilities

Accounting Equation Opening net assets + profits drawings dividends = closing net assets Audited (corrected) ignore Audit this!

If the opening and closing net assets are always correct , the profit will be correct as well Most auditors focus on B/S, assets and liabilities Most of the areas that come up in exams tend to focus on the B/S.eg Intangible assets, Provisions & Contingencies 4 Things the auditors focuses on DEBITS Too High DEBITS too low CREDITS too Low CREDITS too low

So does the auditor check all of these..? For a DEBIT to be overstated Another DEBIT must be overstated OR A CREDIT must also be overstated Only one thing left ;CREDITS too low So check DEBITS in one direction and CREDITS in the other ,called Directional testing So Test DEBITS for overstatement Test CREDITS for understatement

In P7, say 1 thing, get 1 mark In P7, always breakdown the question. Never read the whole thing Materiality By size or nature Revenue 0.5 -1% (use the whole range ) PBT - 5-10 % Assets 1-2% Always go for Overlap E.g. overlap: $0.7 - $1.0 If a new client, materiality towards the lower end of 0.7m-1.0m We might use last years audited figures If one of the three gives odd results , ignore Audit Risk Risk of wrong audit opinions Audit risk = F/S risk* detection risk (Inherent risk, control risk) Answer Plan For Audit Risk Questions

IR

Going concern Manipulation Key balances

CR
Audit evidence

DR

Documents Assets Directors Accounting system 3rd parties

impact of the risk likelihood how soon

Business risk other assurance engagements Identify Assets + Priorities

Manage Transfer (e.g. insurance) Avoid Reduce ( internal factors, diversification) Accept Dop top down approach etc. Audit risk questions:-IR, CR, DR Mostly IR- key balances in F.S that might be wrong F.S. RISK same as audit risk, but ignore D.R Business risk arises to the companys future performance AUDIT (Evidence & procedures) Ex Sure To Come Up In Exams Ex Accounting knowledge really important here Normally the Questions Ask For The following:Matters to consider Identify The Relevant Accounting Rules If Possible, Is The Company Doing It Right? How Material Is The Error They Are Making (Or Might Be Making)

 If There Is A Definite Mistake, And It Is Material, except for disagreement in audit report

Audit Evidence/Procedures Documents Assets Directors Accounting system 3rd Parties Audit Report- Contents Analytical Enquiry + confirmation Inspection observation Recalculation

Title Report Of Independent Auditors Addressee To The Shareholders Of The ABC Intro what has been audited (F.S rather than audit report) That Other Information Has Been Read But Not Audited Audit responsibilities how audit was done which audit standards followed Basic opinion whether FS are true & fair whether FS properly prepared other opinion as required by the country Possible extra paragraph name of auditor city date report was signed

6 Ouleames

Unmodified report

5 modifications

Unqualified + emphasis of matter

Disagreement Limitation of scope

Except for qualification

Adverse (FS dont give a T+T view)

Except for might qualification

Disclaimer of opinion; cant form an opinion

 Emphasis of matter Standard audit report but . Extra paragraph under opinion Without qualifying opinions Refers to a note in FS, Or Part Of Annual Report E.g. company has a major court cure hut has fully disclosed in the note to FS E.g. in this annual report there are misleading commands/inconsistencies suggesting F.S are working, but auditors believes F.S are F< F Disagreement With figures or disclosures Opinion Heading should make clear that is disagreed Explain the mistake (usually by mentioning an IFRS ) Explain the effect e.g on profits of correcting this mistake Except For OR dont give a T&F view(adverse)

Limitation of scope Audit responsibilities/basis of opinion however, our evidence was limited because What missing Why? Opinion except for might Critising an audit report Also Any Issues with prior year figures need to be reported this year. Clarity Detail consistency Everything in right place The opinion OR cannot give an opinion (disclaimer)

Other information Unaudited information, attached to the F.S + audit report (e.g. mark of Annual Report ) Auditor should read other information. if any of the content is wrong, ask the board to change it If they refuse Tell shareholders at the AGM OR Use emphasis of matter in the audit report Subsequent events If BODs re-issue the F.S Need a new audit report, dated on/after the date the new FS were signed Need to audit the GAP between the original audit report date + today If BODs refuses to correct the F.S Speak at AGM WITH AUDIT OPINION Seek legal advice

Assurance Services
External Audit Detail work is done Allows auditors to provide a relatively high level of assurance (positive assurance) Auditing standards tell us how to audit No Assurance (no opinion given)

e.g. compilation Accounting figures taken from a trial balance, put into F.S formats but figures not checked at all As such, no opinion given as to whether the figures are correct Should report a short report making clear that no checking was done Review Assignments Less detailed checking than an audit Therefore a lower level of assurance is provided= negative assurance I have not seen anything to suggest the figures are net true & fair Audit Analytical forecasts etc Enquiry + confirmation Inspection Observation Recalculation Examples Of Review Assignments 6 months financial statements (interim accounts- negative assurance) e.g. rare in exam Prospective financial information (e.g. forecasts and projections) negative assurance Due diligence review Company X checks out company Y before finalizing the takeover Other non-audit assignments(e.g. ferry question) Business risk management

Identify business risks Suggest solutions. Website security IT audit Social / Environmental audits Internal audits services Forensic accounting + accounting [Examiners favorite ;)]

Issues To Consider Before Accepting Any Assignment Fees Any conflicts of interest with existing clients Time / deadlines Staff other resources Competent? Any other services available Independence (familiarity etc.) Professional clearance Integrity of clients, managers

If Not An Audit Who is the report for Why this work has been requested How much evidence will be available How detailed do they want my work to do How much assurance do they want (inked to the previous 2 points) Any professional guidance on how to do this assignment Learn this additional list
Review Assignment PFI = Prospective financial information = Forecasts + projections

Review Of Forecasts

Analytical procedures A Compare with current year (unaudited) + previous years (audited) Compare last years forecasts wit actuals Compare assumptions in the forecasts with industry (wider economy) expectations Do figures make internal common sense? E.g. if sales Cost of sales Sales related expenses Receivables etc. Enquiry E How were these figures produced? What are the assumptions behind them?