@snpp percent i ee tee, te as ‘Composers: Do Hong Quan ~ Le Dinh Dat Reviewer: Nguyen Duc Thai ~ Vu Cam Tu Reference: © ACCA Audit and Assurance (AA) Study text (June 2020) ~ BPP Learning media © ACCA Audit and Assurance (AA) Practice and revision kit (June 2020) ~ BPP Learning media © AA-F8 Study text 2019-20 ~ Kaplan Publishing UK © https://kfknowledgebank. kaplan. ‘+ https://knowledge.sapp.edu.vn/ + bttps://www.accaglobal.com/gb/en.html * ACCA Code of Ethics Page 1 of 283CONTENTS, CHAPTER 1; AUDIT AND OTHER ASSURANCE ENGAGEMENTS...... LEARNING OUTCOMES 6 1. ASSURANCE ENGAGEMENT Il AUDIT ENGAGEMENT. oe ncnotacen Hmmm lil, REVIEW ENGAGEMENT... IV. PRACTICE... CHAPTER 2: AUDIT LAW AND REGULATION... LEARNING OUTCOMES... |. STATUTORY REGULATION... 16 Il AUDIT REGULATION sn 20 IIL INTERNATIONAL LEVEL OF AUDIT REGULATION... a1 IV. PRACTICE... cnt 24. CHAPTER 3: CORPORATE GOVERNANCI LEARNING OUTCOMES... |. OBJECTIVES OF CORPORATE GOVERNANCE... 26 Il. THE CORPORATE GOVERNANCE CODE .. 27 Il, CORPORATE GOVERNANCE IN ACTION... sssrnsnnnnnnntnninmnnsnnsnsie 32 Iv. AUDIT COMMITTEES fi 35 V. COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE.. 40 IV, PRACTICE sno CHAPTER 4: PROFESSIONAL ETHICS AND ACCEPTANCE. .ssssssssnsesne LEARNING OUTCOMES 00 43 |. FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ETHICS ...- 43 Il, THREATS AND SAFEGUARDS... 45 I ACCEPTING/CONTINUING AN AUDIT ENGAGEMENT 60 Iv, ENGAGEMENT LETTER... Ve PRACTICE saree F 67 CHAPTER 5: RISK ASSESSMENT . LEARNING OUTCOME... Page 2 of 283,@sap seinen nr et 1, THE OVERALL OBJECTIVES OF THE AUDITOR, I. AUDIT RISK... 70 pad 76 78 ai 2 84 VI. LAW AND REGULATION (ADDITIONAL READING)... eee Vil. RESPONDING TO THE RISK ASSESSMENT. VII, PRACTICE. IL MATERIALITY..... IV. RISK ASSESSMENT PROCEDURES «ns V. FRAUDS AND ERRORS.. 86 feria 102) CHAPTER 6: AUDIT PLANNING AND DOCUMENTATION .. 104 LEARNING OUTCOMES jo. ag 104 |. PURPOSE OF PLANNING AND THE PLANNING PROCESS ees 104 I THE AUDIT STRATEGY. 105 THE AUDIT PLAN... 110 IV, QUALITY CONTROL. 113 V. AUDIT DOCUMENTATION ...ccsesesennnne erent VI PRACTICE Pee rs . sn 118 CHAPTER 7: INTERNAL CONTROL. 118 LEARNING OUTCOME «cscs us 118 124 127 L._ INTERNAL CONTROL SYSTEM... I DOCUMENTING CLIENT SYSTEMS. eae ll, THE EVALUATION OF INTERNAL CONTROL COMPONENTS...... IV, COMMUNICATION OF DEFICIENCIES IN INTERNAL CONTROL. 129 V. INTERNAL CONTROLS IN A COMPUTERISED ENVIRONMENT na 082: Mle PRACTICE strstr ty erneeti aba 133, CHAPTER 8: TESTS OF CONTROLS. 135 LEARNING OUTCOME... 135 1. THE SALES SYSTEM... 135 Ml THE PURCHASES SYSTEM ese 141 Il, THE INVENTORY SYSTEM. ..0. 146 IV. THE BANK AND CASH SYSTEM. eee 149 Page 3 of 283V. THE PAYROLL SYSTEM cece 154 VI. NON-CURRENT ASSETS... VIL PRACTICE... CHAPTER 9: INTERNAL AUDIT..... LEARNING OUTCOMES |. THE SCOPE OF INTERNAL AUDIT FUNCTION... Il. INTERNAL AUDIT ASSIGNMENTS... I INTERNAL AUDIT REPORT. IV. OUTSOURCING INTERNAL AUDIT FUNCTION...cccesnesnnnnne i {Vi pI PRACTIGE sri tet erect niteecreseti net etrtcesritrarrr 185 CHAPTER 10: EVIDENCE, ASSERTION AND SAMPLING ...ss.ssese LEARNING OUTCOMES, |. AUDIT EVIDENCE... I. FINANCIAL STATEMENT ASSERTION ... Il, SELECTING ITEMS TO TEST 2 IV. COMPUTER-ASSISTED AUDIT TECHNIQUES V. USING THE WORK OF OTHERS VI. PRACTICE CHAPTER 11: AUDIT PROCEDURE 0:0 LEARNING OUTCOMES ....0 |. TEST OF CONTRO! Il SUBSTANTIVE PROCEDURES. Ill, TYPICAL AUDIT PROCEDURES.. IV, PRACTICE CHAPTER 12: THE AUDIT OF SPECIFIC ITEMS LFARNING QUTCOMES |. NON-CURRENT ASSET... i accra 217 ML INVENTORY... ee 224 lll RECEIVABLES 226 IV. BANK AND CASH... Page 4 of 283©®snpp Sica um rt et, ‘roy Ho" 2A Loti Mu Khanh, Distt 190 CH Cy V. _NON-CURRENT LIABILITIES, PROVISIONS AND CONTINGENCIES.. vos BBL VL. PAYABLES, ACCRUALS... : oe 233 Vil. SHARE CAPITAL, RESERVE, DIRECTOR'S EMOLUMENTS..... 236 Vill, ACCOUNTING ESTIMATES .... 238 1X. EXAM FOCUS. X. PRACTICE CHAPTER 13: AUDIT FOR NON-PROFIT ORGANISATIONS AND SMALLER ENTITIE LEARNING OUTCOMES..... sais : 239 243 248 248 |. NON-PROFIT ORGANISATIONS. 248 Il SMALLER ENTITIES... 251 CHAPTER 14: AUDIT REVIEW AND FINALISATION ese 254 LEARNING OUTCOMES..... 254 1. SUBSEQUENT EVENTS. 254 I. GOING CONCERN .. 259 lll WRITTEN REPRESENTATION. 267 IV. OVERALL REVIEW OF FINANCIAL STATEMENTS - 268 Ve PRACTICE sssre CHAPTER 15: AUDIT REPORTING. LEARNING OUTCOMES... m |, _ INDEPENDENT AUDIT REPORT... 273 I. AUDIT OPINION... MW PRACTICE ssn ieee Sonnet Page 5 of 2839pre acateny ‘et 0406 70988 i A Faw A Banking Le Thanh Ng Haan tie, Ia Noi Sopp SX For Groom Str Tor, Ha 261 Phown Van Dong, fae Tu Liem st aged Helin 0968 29463 1 Foor, Ne. 2ALivon Haw Khanh, De, Mo CN Ra Cay CHAPTER 1: AUDIT AND OTHER ASSURANCE ENGAGEMENTS LEARNING OUTCOMES + Have knowledge of assurance engagements; + Have knowledge of audit engagement and review engagement. ‘Audit engage |. ASSURANCE ENGAGEMENT 1. Definition and Characteristic 1.1. Definition ‘An assurance engagement is an engagement in which a practitioner obtains sufficient appropriate evidence in order to express 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. Accountability is being required or expected to justify actions and decisions, It suggests an obligation or willingness to accept responsibility for one's actions. Page 6 of 283SAPP Aeadony Toto4es 7091808 "Floor, Narn ABank bung 54 Le thant gh Maia Truny dati Ha Nol Sapp va 2n* Flow, Gtesn Slr tower, No. 261 Pam Ven Dong. fae Tut iam dott Havel Hone 000 729463 pi ‘oc, Ho 2A cet as Ky, Dis 1 Ho Cr fl Cay Stewardship refers to the duties and obligations of a person who manages another person's property. Agents are people employed or used to provide a particular service. In the case of a company, the people being used to provide the service of managing the business also have the second role of trying to maximize their personal wealth in their own right. Exampl Shareholders (Principal) There have agency relationship between directors and shareholders, Directors act as stewards of the shareholders’ investments. They are agents of the shareholders and they have accountability to shareholder. 1.2. Characteristics ‘Assurance can never be absolute, Assurance providers will never give a certification of absolute correctness due to the limitations set out below. Page 7 of 283®sapp Ci anagram oa ee ae oor No. 2h arg Ha Khanh, Ds , Ho cs wn hy Some users incorrectly believe that an audit provides absolute assurance that the audit opinion is a guarantee the financial statements are ‘correct’. This and other misconceptions about the role of an auditor are referred to as the expectation gap. Example: Auditors test all transactions and balances. | Auditors test on a sample basis. Auditors are required to detect all fraud, ‘Auditors are required to provide reasonable assurance that the financial statements are free from material misstatement, which may be caused by fraud, | Auditors are responsible for preparing the __| Preparing the financial statement is the financial statements, responsibility of management. 2. Key elements of assurance engagement There are 5 key elements of an assurance engagement. Three party Practitioner (the review of the ‘Auditor involvement subject matter who provides the assurance). Intended users (of the information). | Shareholders Responsible party (those Directors/Managers responsible for preparing the subject matter). ‘Appropriate subject —_| The information subject to Financial statements matter: examination by the practitioner. Suitable criteria The subject matter is evaluated Financial reporting framework jence is | Sufficient appropriate : against the suitable crite Sufficient appropriate | Sufficient appropriate evidence needed to provide a basis for the evidence is obtained by opinion/conclusion. performing audit procedures Written assurance The output of the assurance — Independent auditor's report report in an engagement expressing a providing an opinion asto | appropriate form conclusion/opinion about the whether the financial subject matter. statements give a true and fair view Page 8 of 283,SAPP Aeadnny Tet 0405 705498 8° Flor Nam A Bork blog. Le than ig Hala Teg dave Ha Nok Sapp vn 2," Floor, eves Sta Tu, Ho. 261 Pha Va Dong, ac tim ve, Haha: OO 729.463, Fi eae 1 oe Ho 2A Ln Hhar Khanh, Ds 1, Ho Cah hy Exam focus: Explain the five elements of an assurance engagement | Example: You are an accountant who has been approached by Jamal, who wants to invest in Company X. He has asked you for assurance whether the most recent financial statements of Company X are a reliable basis for him to make his investment decision. Identify the key elements of an assurance engagement in this scenario, if you accepted the engagement. Answer: Three party «Jamal (the intended user); ie vement * You {the practitioner); «The directors of Company X as they produce the financial statements (the responsible party) Subject matter | The most recent financial statements of Company X are the subject. matter. Suitable criteria | It is most likely in this instance that the criteria would be accounting standards, so that Jamal was assured that the financial statements were properly prepared and comparable with other companies’ financial statements. : Evidence You would have to agree the extent of procedures in relation to this assignment with Jamal so that he knew the level of evidence you were intending to seek. This would depend on several factors, including the degree of secrecy in the proposed transaction and whether the directors of Company X allowed you to inspect the books and documents, Report The nature of the report would be agreed between you and Jamal, however, it would be a written report containing your opinion on the financial statements. 3. Level of assurance ‘There are 2 levels of assurance set out below. Ahigh level of assurance, that is less than absolute assurance, Gathers sufficient & appropriate evidence. ‘A meaningful level of assurance, that is less than reasonable assurance. Gathers sufficient & appropriate evidence but at lower level Page 9 of 283& SAPP Acaemy. Fotos 709 998 Fos. Ham A Bonk king, 4 Le than Mah ak Tung dei, Enno 7" Fn No 7A oa Ha Khanh este Ha CI Rt CY Gives a positively worded assurance [Gives a negatively worded assurance conclusion. conclusion. Concludes that the subject matter conforms | Concludes that the subject matter, in all material respects with identified respect to identified suitable criteria, is suitable criteria, plausible in the circumstances, | Example: ion, the statement by the “In the course of my seeking evidence about Chairman regarding X is reasonable”. the statement by the Chairman, nothing has come to my attention indicating that the statement is not reasonable” Exam focus: Explain the purpose of review engagements and how these differ from external audits june 2015-Sample Question-5c Exampl Sycamore’s new finance director has read about review engagements and is interested in the possibility of Maple & Co undertaking these in the future. However, she is unsure how these engagements differ from an external audit and how much assurance would be gained from this type of engagement. Require: Describe the level of assurance provided by external audits and review engagements. Guidance: Thisis a simple question (theory), you just make sure your answer meets all requirements of the question: Follow the content of the question to describe each level of assurance. Always remember that: assurance can never be absolute and level of audit is higher than level of review Answer: ‘The level of assurance provided by audit and review engagements is as follows: ‘© External audit ~ A high but not absolute level of assurance is provided, this is known as reasonable assurance, This provides comfort that the financial statements present fairly in all material respects (or are true and fair) and are free of material misstatements. ‘© Review engagements — where an opinion is being provided, the practitioner gathers sufficient evidence to be satisfied that the subject matter is plausible; in this case negative assurance is given whereby the practitioner confirms that nothing has come to their attention which indicates that the subject matter contains material misstatements Page 10 of 283,@snpp SAPP Acadny BP Hor Nat A Bark big, 4 Lo Thanh Nl, Hal fa Teun da, Ha Not 2 Foor, Geen Sta Towa, No. 261 Pham Van Dag, a Ts ar se, Han 1 rer Wo, 2A toon at Kb, Dstt 1H Gh tit Cy 4, Type of assurance engagement ‘Audit engagement ‘An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client's accounting records and financial statements Reasonable Tet 0408 709 68 Sapp vn othe 0009 729 463 Review engagement ‘Areview engagement is conducted to provide assurance that there are no material modifications that should be made to the financial statements for them ‘to be in conformity with the financial reporting framework. Limited 5. Benefits of assurance There are some benefits of assurance and their impacts for the entities. Page 11 of 283SAPP Acateny Tot o405 709.090 A loo, Ham A Bank tse. Le thon Not Sapp Dat Fh, Crees Stay Rowe, 261 Pha Yan Dg ee cy Mane Has 720.464 Flor No. 2A ona Hn Khanh, De i, AUDIT ENGAGEMENT 1, External audit engagement An external audit is a type of assurance engagement that is carried out by an auditor to give an independent opinion on a set of financial statements. SER MeL eT aT) Purpose of audit engagement: Achieved by Enhance the degree of confidence of intended users in financial ‘agtemiants, Near eRe curl eee ec iA UY applicable financial reporting Geen i Objectives of auditor according to ISA 200: + Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement. + Express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. + Report on the financial statements, and communicate as required by ISAs, in accordance with the auditor's findings. “True: factually correct information which conforms with accounting standards and relevant legislation, and agrees with the underlying records. ** Fair: clear, impartial and unbiased information which reflects the commercial substance of the transactions of the entity. Page 12 of 283,Sy? Sseseecee St. 2. Statutory and Non-statutory audit The table shows the main points of distinction between statutory audit and non-statutory audit. Requirement Authorized and governed by law ora statute, The company's owners, proprietors, members, trustees, professional and governing bodies or other interested parties want them, rather than because the law requires them. Itisvoluntary ‘The auditor need not possess any academic or professional qualifications. ‘The audit report is made known to the ‘employers or partners. Nature Practitioner Itis compulsory ‘The academic or professional qualification is prescribed for the auditor. The audit report is published for the public. IIL REVIEW ENGAGEMENT The review (not legally required) will still provide some assurance to users but is likely to cost, less and be less disruptive than an audit. The objective of a review engagement is to obtain limited assurance about whether the subject matter information is free from material misstatement. There are 2 types of review engagement \ttestation engagement and direct engagement. ‘The underlying subject matter has not been measured or evaluated by the practitioner. The underlying subject matter has been measured and evaluated by the practitioner. ‘The practitioner concludes whether or not the subject matter information is free from material misstatement, The practitioner presents conclusions on the reported outcome in the assurance report | Bample: review of a sustainability report, which has been prepared by management. Example: review of the effectiveness of a company's system of internal controls. Page 13 of 283,@®sapp Seeenhogn tents en ee a ee, a IV. PRACTICE 1. Question Question 4: Which of the following is NOT a benefit of an audit? ‘A. Increased credibility of the financial statements B. Deficiencies in controls may be identified during testing C. Fraud may be detected during the audit D. Sampling is used Question 2; Which of the follo 1g are examples of the expectation gap? (i) The independent auditor's report confirms the financial statements are accurate. {ii) An unmodified opinion means the company is a going concern. {ii The auditor tests all transactions. (iv) The auditor can be sued for negligence if they issue an inappropriate opinion, A. (i), i) and (i) 8. (i), (i) and (Iv) C (i)and (i) only D. Gi) and (ii) only ‘Question 3: What level of assurance will be provided by the independent auditor's report? A. Absolute B. Reasonable C. Moderate D. Limited Page 14 of 283,& SAPP Acatny Tet ous ro ane 2a peo cio Sater he 20 Pamir earner as RS rma ae Trtaihe Shlomprtutecacuower recone, 2. Answers Question 1: D. ‘Sampling provides a limitation of the audit process, not a benefit luestion 2: A. The auditor cannot confirm the accuracy of the financial statements as they contain estimates and judgments of management. The company may not be a going concern and the financial statements may correctly reflect this resulting in an unmodified audit opinion. The auditor does not test all transactions, Question Reasonable assurance is given in an independent auditor's report. Page 15 of 283Floor, ier A Rank bing, tLe Thanh Nah a Ba Tang dst a toh Speck Fo Gran Sr Tower, te 261 Pham Van Dong, ae Tw lam eset, Haned Het 0969729 463, oor fe. 2k img a han, Este, en ty @®snrp CHAPTER 2: AUDIT LAW AND REGULATION LEARNING OUTCOMES + Introduce audit law. + Have knowledge of duties and rights of auditor; + Introduce audit regulation and level of audit regulation. Appointment Removal Rights & Duties of National audit International audit Resignation of auditor regulation regulation auditor |. STATUTORY REGULATION 1. Appointment, Removal and Resignation of auditor 11.1. Appointment The auditors should be appointed by and therefore answerable to the shareholders. The table below shows what the position should ideally be, again using the UK as an example: Directors Can appoint auditor: * Before company's first period for appointing auditors; © Following a period during which the company did not have an auditor (as exempt), at any time before the next period for appointing auditors; * Tofillacasual vacancy. ‘Can appoint auditor by ordinary resolution: Members © During a period for appointing auditors; Page 16 of 283®snpp seem mm en eo te A eer 1 tooo 2A Lucena Khan Dt 1 Gti Cy, ‘© If company should have appointed auditor during a period for appointing auditors but failed to do so; # Ifdirectors fail to do so. Secretary of State | Can appoint auditors if no auditors are appointed per above. 1.2, Removal Arrangements for removing the auditor have to be structured in such a way that: © The auditor has sufficiently secure tenure of office, to maintain independence of management, © Auditors can be removed if there are doubts about their cont their duties effectively. ing abilities to carry out The chart below shows how to remove an auditor: ‘Auditor action The auditors have the right to make representations of reasonable length to the company if a resolution is proposed either to; + Remove the auditors before their term of office expires; + Change the auditors when their term of office is complete, se Company action + Notify members in the notice of the meeting of the representations; * Send a copy of the representations in the notice; + If tis not sent out, the auditors can require ee Convening of general meeting ‘Auditors removed before expiry of their office may: + Attend the meeting at which their office would have expired; + Attend any meeting at which the appointment of their successors is discussed. If auditors are removed at a general meeting they must make a statement of circumstances for members and creditors, is read at the meeting, Page 17 of 283,®sapp Rrbetiehowy plang mentite emt as 1.3. Resignation In practice, if the auditor and management find it difficult to work together, the auditor will usually resign. The chart below shows procedures for resignation of auditors an auditor: Auditor action ‘Auditors must deposit a statement of circumstances at the registered office with their resignation statin = For quoted companies — the circumstances around their departure; + Fornon-quoted public companies and all private companies — there are no circumstances that the auditor believes should be brought to the attention of the members or creditors. Company action + The company must send notice of the resignation to the Registrar.) The company must send a copy of the statement of circumstances to every person entitled to receive a copy of the accounts. Ss Convening of general meeting Ifthe auditors have deposited a statement of circumstances, they may: * Circulate a statement of reasonable length to the members; + Requisition a general meeting to explain their reasons; Attend and speak at any meeting where appointment of successors is to be discussed. Page 18 of 283@snpp cette is met teense a as ys Soon Tee Mo 2A rg thas ha Ds 1, Ho Cu ety Cy 2, Duties and Rights of auditor 2.1, Duties of auditor The auditors are required to comply with following duties: Compliance with Whether the financial statements have been prepared in legislation accordance with the relevant legislation. Truth and fairness of Whether the financial statements shows a true and fair view of the company's affairs ‘Adequate accounting ‘Whether adequate accounting records have been kept and records and returns returns adequate for the audit received from branches not visited by the auditor. ‘Agreement of accounts to | Whether the accounts are in agreement with the accounting records records and returns. ‘Consistency of other Whether the information in the directors’ report is consistent information with the financial statements. Directors’ benefits Whether disclosure of directors’ benefits has been made in accordance with the law. 2.2. Rights of auditor ‘The auditors must have certain rights to enable them to carry out their duties effectivel | Access to records ‘A right of access at all times to the books, accounts and vouchers of the company Information and A right to require from the company's officers such information explanations and explanations as they think necessary for the performance of their duties as auditors. é ‘Attendance at/notices of — | A right to attend any general meetings of the company and to general meetings receive all notices of and other communications relating to such meetings which any member of the company is entitled to receive Right to be heard at ‘A right to be heard at general meetings which they attend on general meetings any part of the business that concerns them as auditors. Rights in relation to A right to receive a copy of any written resolution proposed. written resolutions Page 19 of 283,Eerie nantes enritraint ses Hl. AUDIT REGULATION 1. The regulatory environment The role of the auditor has come under increased scrutiny over the last thirty years due to an increase in high profile audit failures (the collapse of Enron and its auditor Arthur Andersen). In order to achieve this try and re follow regulatory guidance: trust in the auditing profession, practitioners have to ‘© National corporate law; '* Auditing Standards (the ba Of this text is International Standards on Auditing); © Code of Ethics. 2, The reasons for regulation Regulators aim for audits to be valuable both to shareholders and to the wider public. 3. Level of audit regulation ‘There are two types of audit regulation: National level and International level. The accounting and auditing profession varies in structure from country to country. Therefore, regulations governing auditors will, in most countries, be most important at the national level. International regulation, however, can play a major part. Page 20 of 283,®snpp Ema a a a YF Por No 2 aon Kha, stat, ho Cla hn Cy IIL. INTERNATIONAL LEVEL OF AUDIT REGULATION __ International G sas * Isac * hics for Professional International Standards International Standards. CO® eae Pere on Auditing on Quality Control Jk Not mentioned in this lecture note 1. International organization 1.4. IFAC The international Federation of Accountants (IFAC) is the global organization for the accountancy profession. IFAC promotes international regulation of the accountancy profession. By ensuring minimum, requirements for accountancy qualifications, post qualification experience and guidance on accounting and assurance for accountants around the world, there will be greater public confidence in the profession as a whole. 1.2. IAASB ‘The International Auditing and Assurance Standards Board or IASB is an independent standard- setting board that develops the International Standards on Auditing. 1AASB issues International Standards on Auditing covering various services offered by professional accountants world like auditing, review, other assurance, quality control, and related services. Page 21 of 283,SAP Acadery ‘et 0400 70900 {3 Fos Rim A Genk ulin, 54 Lo Thaah Ng HniBa Teng dati. Hla Hei Sapp sn 24" Fa, Goon Star Tey 261 Pham Van Dong, Bae T Lams, Harel Metin: 0960 720 463 1 Hono 2A sng Hi khan, ist, Ho Ch Cy 2, International standards on auditing (ISAs) 2.1, Main features of ISAs Page 22 of 283y spe Aeasony Teo 700088 fcr Remaking, Abe ha Ba Tag ve Moa Sepa RSE her ak Lng ash Dates Gs Oy 2.2. Development of ISAS For an ISA to be issued, a lengthy process of discussion and debate occurs to ensure the members affected by the guidance have had an input. The process sets out below: HHH 2.3. The relationship between international and national standards and regulation IFAC is simply a grouping of accountancy bodies, therefore it has no legal standing in individual countries. Countries therefore need to have their own arrangements in place for: © Regulating the audit profession; ‘© Implementing auditing standards. National standard setters: © May develop their own auditing standards and ethical standards; © May adopt and implement ISAs, possibly after modifying them to suit national needs; In the event of a conflict between the two sets of guidance, local regulations will apply. Page 23 of 283,@snpp i estes ie ai ig st be engage Fact IV. PRACTICE 1, Question Question 1: Which of the following statements is FALSE? ‘A. Auditing standards are laws which must be followed during all audits. 8. Auditing standards should be followed during all audits unless there are exceptional circumstances which would mean the audit objective would not be met. C. Auditing standards are professional regulations. D. Auditing standards may be different in different countries, even those using ISAs. Question 2: Which of the following are reasons for the audit profession issuing auditing standards? {i) To ensure consistency of audits across different firms. (ii) To provide bureaucracy for auditors. (ii) To ensure quality in the standard of audits performed. A. (i) and (i) only 8. (i)and (iil) only Gil) and (ii) only D. Allof them Question 3: Using the UK as an example, who can appoint an auditor? Page 24 of 283(®sapp Sitters ee a a a a Ps Seen ‘ror fl. 2h tong Hau Ka, Disht eC i Cy 2, Answer Juestion 1: Auditing standards are professional guidance, not law, Question, By issuing standards, audits should be performed more consistently which should improve quality. Question 3: * Members can appoint the auditors (at each general meeting where accounts are laid), ® Directors can appoint the auditors (before the first general meeting where accounts are laid or to ill a casual vacancy), © The Secretary of State can appoint the auditors (if no auditors are appointed/reappointed at the general meeting where accounts are laid). Page 25 of 283Qu Seer ee EE. CHAPTER 3: CORPORATE GOVERNANCE LEARNING OUTCOMES Understand the objectives of Corporate Governance; Understand the Corporate Governance code; Understand the Corporate Governance in action, especially audit committees; ‘Acknowledge the need and matters to be communicated with those charged with governance. composton | onmess Chairman Risk > Chief > Remuneration executive Executive |» Nomination I+ Non-executive > WV. Audit ‘committees |. OBJECTIVES OF CORPORATE GOVERNANCE Corporate Governance is the means by which a company is operated and controlled. Objective of corporate governance: ‘* To ensure that companies are run well in the interests of their shareholders, employees, and other key stakeholders such as the wider community. Page 26 of 283,(®snpp Simatgtnamy tic eh et ed a pi nee ‘Pron "2A Luong Hu Han, Otel, Ho Chin Oy To try and prevent company directors from abusing their power which may adversely affect these stakeholder groups. For example, the directors may pay themselves large salaries and bonuses whilst claiming they have no money to pay a dividend to shareholders. Advantages of a company following good corporate governance principles: Greater transparency; Greater accountabil Efficiency of operations; Better able to respond to risks; Less likely to be mismanaged Il, THE CORPORATE GOVERNANCE CODE ‘The Organisation for Economic Co-operation and Development (OECD) - an international organization who works on establishing evidence-based international standards and finding solutions to a range of social, economic and environmental challenges, has produced a set of six principles of corporate governance to guide policy makers when setting regulations for their ‘own country. The six OECD Principles are: Ensuring the basis of an effective corporate governance framework; The rights of shareholders and key ownership functions; The equitable treatment of shareholders; ‘The role of stakeholders in corporate governance; Disclosure and transparency; The responsibilities of the board. ‘The UK Corporate Governance Code reflects the OECD principles. The main requirements of the Code are given below. Leadership Each company should have an effective board who take collective responsibility for the long term success of the company. * There should be clear division of responsibilities between running the board and the running of the company. No one should have unlimited | powers of decision. © The chairman should lead the board and ensure it is effective. Page 27 of 283roy, Harm Aan dng 5 Le Than gh Ha Ba Tong atic, Na) Spd {Voor No. 2A Lung Hea Khia, Ist 1, He Chi inh Cay | Non-executive directors should constructively challenge and help | develop strategy. Effectiveness The board should have the appropriate balance of skills, experience, independence and knowledge of the company. Appointment of directors should be made through a formal, transparent and rigorous process. Directors should allocate sufficient time to discharge their responsibilities. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge. The board should be supplied with timely information in an appropriate form and quality. The board should undertake formal and rigorous evaluation of its performance and that of its committees and individual directors. All directors should be submitted for re-election at regular intervals subject to satisfactory performance. Accountability | Remuneration The board should present a balanced and understandable assessment of | the company's position and prospects. The board is responsible for determining the nature and extent of the significant risks itis willing to take in achieving its strategic objectives, The board should maintain sound risk management and internal control systems. The board should establish formal and transparent arrangements for maintaining an appropriate relationship with the company's auditor. Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required but should not pay more than necessary. Remuneration should be designed to promote the long-term success of the company. The board should establish formal and transparent procedures for developing the policy for executive directors’ remuneration No director should be involved in setting his own pay. Relations with There should be dialogue with shareholders based on a mutual Page 28 of 283SAPP Academy Tet ots 700 886 8° For Mam A Bark tag. Le Tha Noh, Hala Trung usec. Har Sapp 2nM Floor, Gua Star Towa No. 261 Phen Var Dong, ac Tu ttn Ue wd Hate: 0999729 403, Ps eon eter He. 2A Lung Pas Kah, Dist 1, Ho Cnn hy shareholders | understanding of objectives. zi © The board as a whole has responsibility for ensuring satisfactory dialogue with shareholders takes place. * The board should use general meetings to communicate with investors and encourage their participation. Exam focus: Identify corporate governance deficiencies and make recommendations to improve corporate governance. Example: (March/June 2019 ~ Sample Questions) Freesia Co is a company listed on a stock exchange. It manufactures furniture which it supplies to a wide range of retailers across the region. The company has an internal audit (IA) department and the company's year end is 30 June 20X9. You are an audit supervisor with Zinnia & Co, preparing the draft audit programmes and reviewing extracts from the internal controls documentation in preparation for the interim audit. The listing rules of the stock exchange require compliance with corporate governance principles and the directors of Freesia Co are confident that they are following best practice in relation to this. However, the chairman recently received correspondence from a shareholder, who is concerned that the company is not fully compliant. The company's finance director has therefore requested a review of the company’s compliance with corporate governance principles, Freesia Co has been listed for over eight years and its board comprises four executive and four independent non-executive directors (NEDs), excluding the chairman. An audit committee comprised of the NEDs and the finance director meets each quarter to review the company's, internal controls. ‘The directors’ remuneration is set by the finance director. NEDs are paid a fixed fee for their services and executive directors are paid an annual salary as well as a significant annual bonus based on Freesia Co's profits. The company's chairman does not have an executive role and so she has sole responsibility for liaising with the shareholders and answering any of their questions. Page 29 of 283,21" Fleer, Groon Stat Toner, No 261 Pham Vian Dong, Bae 1 Liem dsl, Hot Motine. 0869 729 453 1 Hr 2A tang ama Manin Ose ct Ch Ra ty Required: Describe TWO corporate governance weaknesses faced by Freesia Co and provide a recommendation to address each weakness to ensure compliance with corporate governance principles. Guidance: Step 1: Identify corporate governance deficiencies Candidates can answer based on requirement of UK Corporate Governance Code. Most candidates were able to confidently identify weaknesses from the scenario, However many could not explain the weakness, relying on explanations such as “this is not good corporate governance”, This was not sufficient to score the extra & marks available for each point. Candidates needed to be able to explain how these weaknesses impacted the company. Step 2: Provide recommendation Be careful with recommendation provided. Candidates often give insufficient ansert or give corporate governance objectives rather than recommendations, such as, “the board should be balanced between executive and non- executives” This is an objective; the recommendation should have been to “appoint additional non- executive directors to ensure a balanced board”. Answer: The finance director is a member of | Leadership | The audit committee must be the audit committee. comprised of independent NEDs only; therefore the finance director The audit committee should be made should resign from the committee. Up entirely of independent NEDs. The role of the committee is to maintain reporting; this is difficult if the finance director is a member of the committee as the finance director will be responsible for the preparation of the financial statements. ‘The remuneration for directors is set | Remuneration | There should be a fair and | by the finance director. However, no transparent policy in place for Page 30 of 283@sapp et 0806 7094 director should be involved in setting their own remuneration as this may result in excessive levels of pay being set setting remuneration levels. The NEDs should form @ remuneration committee to decide on the remuneration of the executives. The board as a whole should decide on the pay of the NEDs. Executive remuneration includes a significant annual profit related bonus. Remuneration should motivate the directors to focus on the long-term growth of the business, however, annual targets can encourage short-term strategies rather than maximising shareholder wealth, Remuneration The remuneration of executives should be restructured to include a significant proportion based on long- term company performance. For example, executives could be granted share options, as this would ‘encourage focus on the longer term position, The chairman has sole responsibility for liaising with the shareholders and answering any of their questions. However, this is a role which the board as a whole should undertake Relation with shareholders Page 31 of 283, All members of the board should be involved in ensuring that satisfactory dialogue takes place with shareholders, for example, all should attend meetings with shareholders such as the annual general meeting. The board should state in the annual report the steps they have taken to ensure that the members of the board, and in particular the non- executive directors, develop an understanding of the views of major shareholders about the company.gp0P Academy Tet o4en 709 808 fF oor, HamA Bonk bing, Lo Thanh Noh a Trung die, or Dx Floor, Groom Sae Ter No. 261 Pham Van Ding, ie Ts e009 720 42 1 loo, 28 ur a khan ste 1, Ho CRA Cy Ill, CORPORATE GOVERNANCE IN ACTION 1. Board composition ‘The board should comprise a balance of executive directors (headed up by the chief executive} and non-executive directors (headed up by the chairman). Having a balanced board will mean that board decisions are not influenced by one group of directors, The roles of the chairman and chief executive officer (CEO) should be held by two separate people to avoid concentration of power. Page 32 of 283“siseq Aep on fep e uo Auedwioa ap Sujuuny « “huedwioo ay Jo aahojdua auyny aya si 2us/2y se om se wuy ay; jo quewazeuew 2ugnos ayy ut panjonut uo aus! soyauig annnoaxg uy ‘uo129uIp anlynDaxe 342 Jo PDH “Aueduios a3 Jo uonevado annzaye ayy saunsuz £82 JO €€ aBeq i juapuadapur i '8q 07 S1apjsuod peog ay WoYM | stoysauip aagnsaxs-uou astiduioa ! Pinoys pueog ayy yjey sea] ay ° “pueog ayy 03 sitys ‘a2uaadxe ‘quawagpn! annoafgo Sug ‘suomauip ananoaxe ay} J011UOW SC3N © ‘Auedwioa ayy jo quawaBeuew annnoaxe aunnos ‘aug ul ed 292 10U op pue siseq aun ~ued 2 uo patojdua Aljensn aie sa3N © i i i i i i i i dl i i “SsauannDe]jo SoueYUs 02 auepuadapul aq pjnoys uews!ey> a4, “seayyuuos-qns, pueog jo uonesado annzay seansu3 Jewsayxa aun Ym UoegUNULOD Jo sjauueyp Aio33¢ysnes seunsug sBuaau pieog ye uoIssnosip pue uoneuuoyul Jo moy saiqeug i iL i i i 1 ‘suoMpne i i i i i ‘suomauip angnaxs-uou aur jo peaH « |SAPP Aendony Tet 046 700 aa For, Ham A Ba bldng, 54 Lo Thos Ng Ha Ba Trang dst Ha Nk Sapp 24 Foor, Grog Star Tae Ho. 261 Pham Van ong. ae Tu Liem ast Heol bine O99 29468 ‘heer, Wo, 28g as Kha, Disk, HCH Cy ‘Advantages and disadvantages of participation by NEDs ‘© Oversight of the whole board; '* May not be sufficiently well-informed or hhave time to full the role competently; As they are independent they act as a eaenty ‘corporate conscience’; ‘© They are subject to the accusation that they are staffed by an ‘old boy’ network and may fail to report significant problems and approve unjustified pay rises. © They bring external expertise to the ‘company. 2. Committees Page 34 of 283®sapp feet te Dae areas ote a oo, Xt Ih Dit Ha Cn hy IV. AUDIT COMMITTEES: ‘An audit committee is a committee, consisting of non-executive directors, which is able to view a company’s affairs in a detached and independent way and liaise effectively between the main board of directors and the external auditors. 1, Membership of audit committees © — Agroup of independent, non-executive directors. Audit committees * The committee should have at least 3 members (2 for smaller @@ @ companies). J © Atleast one member should have recent and relevant financial experience with an appropriate professional accountancy qualification, © Atleast 3 members # Atleast one * Committee members should be independent of operational member should have management. recent and relevant financial experience © Appointments to the audit committee should be made by the board on the recommendation of the nomination committee. ‘© Appointments should be for a period of up to 3 years, extendable by no more than two additional 3 year periods, All requirements is subject to increase independence of audit committees, Page 35 of 2832. The objectives and functions of the audit committee Increasing public confidence in the credibility and objectivity of published financial information; + Assisting reporting; rectors in meeting their responsi ies in respect of financial + Strengthening the independent position of a company's external auditor by providing an additional channel of communication. * Monitoring the integrity of the financial statements; + Reviewing the company's internal financial controls; + Monitoring and reviewing the effectiveness of the internal audit function; * If there is no internal audit function, consider annually whether there is ‘anneed for one and recommend to the board; + Recommend in relation to the appointment and removal of the external auditor and their remuneration; Reviewing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process; Developing and implementing policy on the engagement of the external. auditor to supply non-audit services. [ Exam focus: Benefits of establishing an audit committees Exampl eptember ~ December 2014 ~ Sample Question Bluebird Enterprises Co (Bluebird) isa retail company planning to list on a stock exchange within the next six months, and management has been advised by the company’s auditors about the heed for compliance with corporate governance provisions. In particular, the finance director is looking to recruit non-executive directors as he understands that Bluebird will need to establish an audit committee. The finance director has two potential non-executive directors whom he is considering, approaching to join the board of Bluebird. Antony Goldfinch is currently an executive sales director of a listed multi-national banking company; he sits on an audit committee of another Page 36 of 283,(®snpp eek tn rae, A Stes 1 ar, Ne. 2A Loy Ha sn, Oe 1, Ho Ch Cy company as a non-executive director and Is agreeable to being paid a fixed fee which is not related to profits. Jacob Mallard is currently a finance director of a small retail company, which does not compete with Bluebird; he has expressed an interest in a fixed seven year contract and he is the brother of Bluebird’s chief executive. Required 1) Explain the benefits to Bluebird Enterprises Co of establishing an audit committee. 2) Discuss the advantages and disadvantages of appointing: ‘© Anthony Goldfinch; and * Jacob Mallard ‘as non-executive directors of Bluebird Enterprises Co. Guidance: You will be given a case study in which a company has problems. Audit committee could help company solve these problems and increasing public confidence in the credibility and objectivity of published financial information. Make sure you understand the functions of audit committees so you are able to explain their benefits, You should analyse the case using input information given in the question. Answer: 1) Appointing an audit committee will benefit Bluebird in the following ways: © Bluebird does not currently have any non-executive directors, hence once appointed, they will bring considerable external experience to the board as well as challenging the decisions of executive directors and contributing to independent judgements, ‘©The finance director will benefit in that he will be able to raise concerns and discuss accounting issues with the audit committee. + {twill help to improve the quality of the financial reporting of Bluebird; whilst the company already has a finance director, the audit committee will assist by reviewing the financial statements. ‘© The establishment of an audit committee can help to improve the internal control environment of the company. The audit committee is able to devote more time and attention to areas such as internal controls. Page 37 of 283,@snpp 2 Peen, Gro Sat Ton, No.2 v8 4 ror, No, tong Khao Ds © If Bluebird has an internal audit (1A) department, then establishing an audit committee will also improve the independence of I. ‘+ The audit committee can also provide advice on risk management to the executive directors. They can create a climate of discipline and control and reduce the opportunity for fraud, and increase public confidence in the credibility and objectivity of the financial statements. © The audit committee will assume responsibility for appointing and liaising with the external audit firm, thus ensuring the independence of the external auditor especially in cases of dispute with management. oO) i i ‘Antony Goldfinch Jacob Mallard ‘Advantages Antony Goldfinch already has, experience of being a NED for another company and he has sat on an audit committee, hence he will be familiar with what the role entails and will be able to bring experience of being a NED to Bluebird. In addition, Antony Goldfinch has indicated he is agreeable to being paid a fixed fee which is not profit related; this is important as an independent NED's remuneration should be unrelated to the performance of the company. Jacob Mallard is currently a finance director and so he possesses recent and relevant financial experience which is required for at least one member of the audit committee. In addition, he operates in the retail industry and so would be aware of key issues facing companies like Bluebird and so would have an appropriate mix of experience and knowledge. Disadvantages Appointing Antony Goldfinch as a NED has disadvantages as he works for a banking company and so would not have relevant experience of companies such as Bluebird; hence he could lack the critical skills and relevant experience needed to provide meaningful advice to the executive directors. In addition, ‘Antony Goldfinch is already an executive director for a _large Jacob Mallard is the brother of the chief executive and therefore he is ot an independent NED. He might be inclined to agree with the chief executive as he is his brother rather than providing the level of objective judgement required from a NED. Also he wants a contract as a NED for a period of seven years; all directors including NEDs must be subject to re-election at _regular Page 38 of 283,LAPP Rcaeny Bh Hor, Nam A Baw tld, 58 Le Thin Nl a Trg dst, a Nod 2 Foot, Geer Star Mo, 261 Ph Nn Oey, ae Tra Ql, Had another company; it 3. Benefi and problems © Improve credibility of the financial statements through an impartial review of the financial statements and discussion of significant issues with the external auditors, ‘© Increase public confidence in the audit opinion as the audit committee will monitor the independence of the external auditors. © Stronger control environment as the audit committee help to create a culture of compliance and control. © The internal audit function will report to the audit committee increasing their independence and adding weight to their recommendations. The skills, knowledge and experience (and independence) of the audit committee members can be an invaluable resource for a business, © It may be easier and cheaper to arrange finance, as the presence of an audit committee can give a perception of good corporate governance. ¢ It will be less of a burden to meet listing requirements if an audit committee (which is usually a listing requirement) is |__ already established. multinational company and a NED for might difficult for him to devote sufficient time to his role at Bluebird. | be intervals not exceeding three years. Difficulties recruiting the right -non- executive directors who have relevant skills, experience and sufficient time to become effective members of the ‘committee. ‘The cost. Non-executive directors are normally remunerated and their fees can be quite expensive, Page 39 of 283@®snpp Teeth rats nti orat te Sn V. COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE 1, The need of communicating with those charged with governance Those charged with governance is defined by ISA 260 as: “The person(s) or organisation(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity.” ISA 260 (Revised) Communication with Those Charged with Governance, sets out guidance for auditors on the communication of audit matters arising from the audit of the financial statements of an entity with those charged with governance. ‘Communication with those charged with governance is necessary because: © It assists the auditor and those charged with governance to understand audit-related ‘matters in context and allows them to develop a constructive working relationship. © Itallows the auditor to obtain information relevant to the audit. ‘© It assists those charged with governance to fulfil their responsibility to oversee the financial reporting process, thus reducing the risks of material misstatement in the financial statements. 2. Matters to be communicated by auditors to those charged with governance © The auditor's responsibilities in relation to the financial statement audit. © Planned scope and timing of the audit. ‘© Significant findings from the audit. © Auditor independence. Page 40 of 283ha, Nam ABan bldg, 54 La Than Ng Ht a Tung die, a Noi Seppe ray Si oa 20 Pa ht fo at Hane Ht 29483 IV. PRACTICE 1. Question Question 1: Which TWO of the following are functions of audit committees? (i) Planning the annual external audit. (ii) Reviewing the effectiveness of internal financial controls. (iil) Reviewing and monitoring the external auditor's independence. (iv) Processing year-end journal adjustments to the financial statements. A. (i)and (iv) 8. (i) and (ii) Cc. il) and (iv) D. Gi) and (i Question 2: Cocklebiddy Co does not currently have an internal audit function. Which of the following summarises the requirements of corporate governance regulations in respect of internal audit? ‘A. The audit committee must review the need for an internal audit function on an annual basis. B. The audit committee must establish an internal audit committee as soon as possible. CC. There must either be an audit committee or internal audit fun requirement to have both, n in place but there is no D. The finance director must review the need for an internal audit function and should make a request to the audit committee if itis decided that an internal audit function would be beneficial Question 3: Which of the following is the main purpose of the remuneration committee? A. To ensure that the costs of the company are kept under control. 8. To ensure no director is involved in setting his own pay and the pay that is set is at an To ensure decision making power for the company is not concentrated in the hands of one individual D, To ensure executives are paid a large basic salary irrespective of performance. Page 41 of 283APP Acadamy Yet 406 700 #8 Foy, Nam Aan balding 4 Le Thanh Nigh Ha a Tang atic, Ha Nah Spe Dn Pot, anen Stor tes fn 261 Pham Van Dong, fae Unmet Hank MefineOa68 72046 2. Answer: Question 1: D Reviewing the effectiveness of internal financial controls and reviewing and monitoring the external auditor's independence. Question 2: A Reviewing the effectiveness of internal financial controls and reviewing and monitoring the external auditor's independence. Question 3: 8 Directors should not be involved in setting their own pay. Remuneration should be performance related. Remuneration should be sufficient to attract, retain and motivate but should not be excessive, Page 42 of 283,(®snpp Peeing ero ea ae Teo: Ho 2ALtong Fu Kan Dobe 9, Ho Chek hy CHAPTER 4: PROFESSIONAL ETHICS AND ACCEPTANCE LEARNING OUTCOMES * Acknowledge fundamental principles of ethical behavior. © Understand and be able to identify Potential threats recommend safeguards. © Understand actions auditor need to carry out when accept/continuing an audit engagement. ‘* Understand the importance of engagement letters and their contents. |. Fundamental — i ae principles |. FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ETHICS, 1. The need of professional ethics The purpose of assurance engagements is to increase the confidence of the intended users. To do that, the assurance provider needs to be independent of their client, behave and be seen to behave in an ethical, professional manner. 2. The fundamental principles The ACCA's Code of Ethics and Conduct sets out five fundamental principles of professional ethics and provides a conceptual framework for applying those principles. Page 43 of 283Bh or Nem A nding 5 Le Thanh Ng Ha a Tung ee Ha Noh Sappeiin 2a Foon Groen Stor orto, 26% Pham Van Gang fae Tu amshet Hanol tine Ha 729468 The five fundamental principles are summarised in the table below: Integrity Members shall be ‘straightforward and honest in all professional and business relationships'. | Members shall ‘not allow bias, conflicts of ‘Objectivity interest or undue influence of others to override professional or business judgements’ Members have a continuing duty to ‘maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques Act diligently and in accordance with applicable technical and professional standards’, Members shall ‘respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and spe authority, or unless Comidenaly there is a legal or professional right or duty to disclose’. Confidential information acquired as a result of professional and business relationships must not be used for the personal advantage of members or third parties. Members shall comply with relevant laws and Professional behaviour regulations and avoid any action that discredits. the profession, Professional competence and due care Page 44 of 283,Sap Acton Tel 0466 709 848 Sappoauvn att 0309 729469 Il, THREATS AND SAFEGUARDS 1, Threats to independence and objectivity Roce ee a cerca er urn eae or regulation, into the profession, ional development, 's, monitoring and dis stion/ren feguards created by inc professional devel contentious iss rofessional bo 1.1. Self-interest threats Aselt-interest threat is the threat that a financial or othe the professional accountant's judgement or behaviour’ Fee dependency Non-listed clients Over-dependence on an audit client could | ¢ Reducing dependency on the client. lead the auditor to ignore adjustments required in the financial statements for fear of losing the client © Consulting with a third party on key audit judgments, ‘© Having an external quality control review. Listed clients A firm's independence is threatened, and Page 45 of 2834" Flor, Mo. 24 Long Has Khan, Obit 1, No Ci in Cay | @sapp Gifts and hospitality Acceptance of goods, services or hospitality from an audit client can create self-interest and familiarity threats as the auditor may feel indebted to the client, ‘Owning shares/financial interests ‘The auditor will want to maximise return from the investment and overlook audit adjustments which would affect the value of their investment Loans and guarantees A loan or guarantee from (or deposit with) an assurance client will not create a threat to independence provided that: © Itis on commercial terms, and Made in the normal course of business. Business relationships ‘Audit firms (or members) enter into business relationships with clients (e.g. joint ventures, marketing arrangements). Potential employment with an audit client should be reviewed if total fees from a listed audit client exceed 15% of the firm's total fees for two consecutive years. * Disclose the issue to those charged with governance at the client. * An independent review of the work should be performed Gifts may be accepted if: © Trivial and inconsequential. ‘© Offered in the normal course of business without intention to influence decision- making. * Approved by a partner. ‘The offer of gifts and hospitality must be documented in the audit file even if refused. Dispose of the shares immediately or be removed from the team. External review of the work performed, © In the case of audit firms, or partners of those firms, unless immaterial, no safeguard can reduce this threat to an acceptable level. In the case of audit team members, the individual should be removed from the audit team. © The policies and procedures of the fir Page 46 of 283,PP Academy Tet 00 70944 1h or, Nm A Bank nag, Lo Than Nh, Hal a Trung dic a Noi Sappedv 4 2 Foor, Gree Star Toa, No. 261 Phat Van bang, Hac Tuam dt, Hanh Hat G89 729463 Teer No 2 tong a, Ds 3 Chi i ay ‘A member of the engagement team has reason to believe they may become an employee of the client they will not wish to do anything to affect their potential future employment. should require such individuals to notify the firm of the possibility of employment with the client. ‘© Remove the individual from the assurance engagement. * Perform an independent review of any significant judgments made by that “individual. Overdue fees The overdue fees may be regarded as a loan (loans are not permitted to an audit client) © Do not perform any further work for, or issue any reports to, the client until the outstanding fees are paid or arrangements have been agreed with the client for payment. * An independent review of the work should be performed. Contingent fees The auditor would have incentive to ensure a particular outcome is achieved in order to maximise the audit fee. £.g. overlook audit adjustments that would reduce profit if the fee is a percentage of the profit. ‘Compensation and evaluation policies ‘A member of the audit team is evaluated on ‘or compensated for selling non assurance services to that audit client. As a result, they will compromise their independence. ‘Actual or threatened litigation Litigation could represent a breakdown of trust in the relationship between auditor and dient. This may affect the impartiality of the auditor, and lead to a reluctance of management to disclose _—_relevant information to the auditor. Fees based on a particular outcome, e.g. level | of profits of the company, are not permitted for assurance services. © Removing such members from the audit team. © Having a professional accountant review the work of the member of the audit team. vee © Discussing the matter with the client's audit committee. © If the litigation involves an individual, removing that individual from the engagement team, © Obtaining an external review of the work done. * If adequate safeguards cannot be implemented the firm must withdraw from or decline the engagement. Page 47 of 283supp ala eo St rin 26 Pn a a he Toor, Mo. 28 Ler Kha, Ds 1, oh Mh hy 1.2. Familiarity threats Familiarity threat can occur when the auditor becomes too sympathetic or too trusting of a client and loses professional scepticism, or where the relationship between the auditor and client goes beyond professional boundaries. Long association of senior personnel Using the same senior personnel in an Rotate senior personnel. engagement team over a long period may cause the auditor to become too trusting/less sceptical of the client resulting in material misstatements going undetected. | Listed clients * Independent partner/quality control reviews, + Key audit partners must be rotated after ‘no more than seven years with a minimum break of two years. Ifthe client becomes listed, the length of time the partner has served before becoming listed is taken into account. * In exceptional circumstances, a maximum ‘one year extension is permitted where necessary to maintain audit quality Family and other personal relationships | «Remove the individual from the A partner (or employee) of the firm has a engagement teams: family or personal relationship with © Structisre the engagement team so that someone at the client who is able to exert the individual does not deal with matters significant influence over the financial that are the responsibility of the close statements (or subject matter of another family member. assurance engagement) Recruitment services The firm cannot provide recruitment services. Familiarity, self.interest and intimidation _| if FesPect of directors or senior management threats may occur ifthe firm is involved in _| For listed clients, recruiting senior personnel for the client. ‘Audit staff leave the firm to join the client | © Assign individuals to the audit team who A self-interest, familiarity or intimidation havessufficientexper/ence in relation to threat may arise where an employee of the | the individual who has joined the client, firm becomes a director or employee of an_| » Perform a quality control review of the Page 48 of 283SAPP Acadony Tet 0406 709 898 18 Flor, Nam A Bark Luling Le thant Mg, Haifa Teng dati Ha Nol Suppo rn 24 Flot, Green Sta Toes Wo. 201 Pham Yan Dov, Hae tiem Stel, anol Hodes 0 72946 pn Me) 1 oar, No 2A Lng Has hon, Ds 1, Ho CaM iy assurance client (in a position to exert significant influence over the financial statements or subject matter of another assurance engagement). 1.3. Self-review threats assurance engagement, ‘Accounting and bookkeeping services Self-review threats arise when members review their own work or advice as part of an ‘engagement. © For partners joining public interest entities, independence would be deemed to be compromised unless: © Subsequent to the partner ceasing to be a key audit partner or senior partner, the public interest entity had issued audited financial statements covering a period of not less than ‘twelve months and © The partner was not a member of the audit team with respect to the audit of those financial statements. Non-listed clients © Afirm can provide accounting and bookkeeping services, including payroll services, of a routine or mechanical nature. © Separate teams must be used, © Managerial decisions must not be made by the firm, and the source data, underlying assumptions, and subsequent adjustments must be originated or approved by the client, Listed clients ‘* Afirm cannot provide accounting and bookkeeping services. * A firm can provide accounting services for divisions or related entities of a listed client if separate teams are used and the service relates to maltersinmmaterial tothe | Page 49 of 283Qu SSeecccerce SE: division/related entity. Internal audit services In addition to the self-review threat, the auditor needs to be careful not to assume ‘management responsibilities. ‘A firm cannot provide internal audit services for a listed audit client. Where services are provided, separate teams must be used. Taxation services Tax calculations for inclusion in the financial statements and tax planning advice create a self-review threat. Completion of tax returns is not deemed to create a self-review threat. Non-listed clients ‘© Advice should be obtained from an external tax professional © The work should be reviewed by a senior person with appropriate expertise that has not been involved with the audit. Listed clients A firm cannot prepare tax calculations. Tax advice IT services IT services may create a self-review threat and also be considered to be assuming management responsibilities. Valuation services The firm should not provide tax advice that depends on a particular accounting treatment and is material to the financial statements. Other tax advice is allowable with safeguards. The firm can only provide IT services which involve: ‘© Design or implementation of IT systems unrelated to internal controls or financial reporting. ‘© Implementation of off-the-shelf accounting software, ‘© Evaluating and making recommendations ‘on a system designed or operated by another service provider or by the entity. Non-listed clients ‘© Valuation services that are material to the. financial statements and involve a significant degree of subjectivity should not be provided. © Where the threat is not deemed significant, different personnel should be used. Page 50 of 283 Httne 0369 729.468SAPP Acadeny Tol 0466 709 a8 2 Flor, NA Hank bang, $4 Le Thanh Noh Ha Ba Teng dae ta Not Sappe sn 29 Foor Gree Star Towet, No. 201 Phan Yan Dor, 8 Trem asic Hanct—— Hotis a 729463 Pi Rear 7 Flo Ho. 2A veg Ht Khanh, Dist! Ha Ch hl Cy © A professional should review the valuation work performed. Listed clients Valuation services that are material to the financial statements should not be provided, Temporary staff assignments A self-review threat will be created if staff are loaned from the audit firm to the client. If the person was assigned to the audit they would be evaluating work for which they had been responsible during the temporary assignment and may not detect errors in their work. Corporate finance services Self-review and advocacy threats may be created if a firm: © Assists an audit client in developing corporate strategies. © Identifies possible targets for the audit client to acquire. '* Advises on disposal transactions. ‘© Assists finance raising transactions. © Provides structuring advice. Client staff joins audit firm A director or employee of an assurance client becomes an employee of the firm. 1.4. Advocacy threats Staff may be loaned to the client provided: © The loan period is short. © The person does not assume management responsibilities, © The client is responsible for directing and supervising the person. © The loaned staff member is nota member of the audit team, If there is doubt over the accounting treatment or if the outcome will materially affect the financial statements, the service should not be provided. Where services can be provided, the firm should use professionals who are not members of the audit team to perform the service, or advise the audit team on the service. Such individuals should not be assigned to the audit if that person would be evaluating elements of the financial statements for which they had prepared accounting records. ‘An employee or partner of a firm cannot also be an employee or director of an assurance: client Advocacy threats arise in those situations where the audit firm promotes a position or opinion to the point that subsequent objectivity is compromised. Advocacy threats might also arise if the firm promoted shares in a listed audit client. Page 51 of 283,(®sapp recreeonmeeee mene aera Set Reet a Examples include: © Representing the client in court or in any dispute where the matter is material to the financial statements. © Negotiating on the client's behalf for finance. Where the amounts are material the audit firm must not act for the audit client in this way. Any request for such services must be politely declined: Where the matter is not material to the financial statements the firm should: © Use professionals who are not members of the audit team to perform the service, or © Have a professional who was not involved in providing the legal services advise the audit team on the service and review any financial statement treatment. Providing services involving promoting, dealing in, or underwriting an audit client’s shares would create an advocacy or self-review threat so significant that no safeguards could reduce the threat to an acceptable level. Accordingly, a firm shall not provide such services to an audit lent. 15. Intimidation threats ‘Actual or perceived pressures from the client, or attempts to exercise undue influence over the assurance provider create an intimidation threat, e.g. actual or threatened litigation between the auditor and audit client (in which case it may be necessary to resign from the engagement). Intimidation can arise from some of the same situations mentioned above, for example: © Fee dependency. © Personal relationships. © Audit partner joining the client. © Litigation between the audit firm and client. ‘The safeguards to address these threats are the same as to address the other threats. If the threat cannot be eliminated or reduced to an acceptable level, the assurance provider must decline or resign from the engagement. Page 52 of 283,(®snpp Seoermete Sete pe PaO Ho Chan chy Exam focus: Identify ethical threats and suggest safeguards Guidance: Step 1: Identify ethical threats Candidates need to identify the threats incurred from the scenario which may affect independence and then identify which category of which each ethical threat belongs to. Just restating the fact would not score any marks, as the identification of the ethical threat was required along with an explanation. Step 2: Suggest safeguards Candidates need to explain how this may affect the auditor's independence. Many candidates did not explain the threats correctly or in sufficient details, often stating “this will reduce independence and objectivity’, this is not an explanation of HOW objectivity could be affected. 1.6. Example Example 1 You are an audit manager at Buffon & Co, responsible for the audit of Maldini Co, The audit engagement partner for Maldini Co, a listed company, has been in place for approximately eight years and her son has just been offered a role with Maldini Co as a sales, manager. ‘This role would entitle him to shares in Maldini Co as part of his remuneration package. Maldini Co's board of directors are considering establishing an internal audit function, and the finance director has asked the audit firm, Buffon & Co, about the differences in the role of internal audit and external audit. If the internal audit function is established, the directors have suggested that they may wish to outsource this to Buffon & Co. ‘The finance director has suggested to the board that if Buffon & Co are appointed as internal as well as external auditors, then fees should be renegotiated with at least 20% of all internal and external audit fees being based on the profit after tax of the company, as this will align the interests of Buffon & Co and Maldini Co. In relation to the audit engagement partner holding the role for of employment with Maldini Co ight years, and her son's offer Page 53 of 283®snpp ree rea i pe eee RE Required: 1) Identify which of the following facts from the scenario represent valid threats to independence, matching each threat to the appropriate category. Facts Category of threat (1) Maldini Co has asked for advice regarding Familiarity role of internal audit (2) Partner's son may hold share in Maldini Co. Self interest (3) Maldini Co has asked Buffon & Co to carry Self — review cout internal audit work. (4) Audit partner has been in position for eight Self - interest years. (5) Fee will be 20% of profit after tax. No threat 2) Which of the following safeguards should be implemented in order to comply with ACCA's Code of Ethics and Conduct? ‘A. The audit partner should be removed from the audit team. 8. - The audit partner should be removed if her son accepts the position. C. An independent review partner should be appointed. D. Buffon & Co should resign from the audit. Page 54 of 283,(sapp ‘erentrwmi ss nearest et a 7 Bor Mo 2A ong Hs Kan vst, Ho hb Answer: et) ‘Audit partner has been in position for eight years > Familiarity (Long association of senior personnel). Partner's son may hold shared in Maldini Co > Selt-interest (Owning shares/finani iterests). Maldini Co has asked Buffon & Co to carry out internal audit work > Self-review (Internal audit services) Fee will be 20% of profit after tax > Self-interest (Contingent fees). 2A If the engagement partner's son accepts the role and obtains shares in the company it would constitute a self-interest threat BUT as the partner has already exceeded the seven-year. selationship rule, in line with ACCA’s Code of Ethics and Conduct, the partner should be rotated off the audit irrespective of the decision made by her son. ‘As Maldini Co is a listed company an engagement quality control reviewer should already be in place in line with ISA 220. It is unlikely that the firm needs to resign from the audit (due to the stated circumstances) as the threat to objectivity can be mitigated. Example 2: (March/June 2017 ~ Sample Questions) You are an audit supervisor of Caving & Co and you are planning the audit of Hurling Co, a listed company, for the year ending 31 March 20X7. The company manufactures computer components and forecast profit before tax is $33-6m and total assets are $79-3m. Hurling Co distributes its products through wholesalers as well as via its own website, The website was upgraded during the year at a cost of $1:1m. Additionally, the company entered into a transaction in February to purchase a new warehouse which will cost $3-2m. Hurling Co's, legal advisers are working to ensure that the legal process will be completed by the year end, The company issued $5m of irredeemable preference shares to finance the warehouse purchase. During the year the finance director has increased the useful economic lives of fixtures and fittings from three to four years as he felt this was a more appropriate period. The finance director has informed the engagement partner that a revised credit period has been agreed with one of its wholesale customers, as they have been experiencing difficulties with repaying the balance of $1:2m owing to Hurling Co. In January 20X7, Hurling Co introduced a new bonus based on sales targets for its sales staff. This has resulted in a significant number of new Page 55 of 283,@®snpp SFr ate tts ea eg sa 1 Foor, Ho: 2R Lg as Khanh, Ds Ho Cn ly, wholesale customer accounts being opened by sales staff. The new customers have been given favorable credit terms as an introductory offer, provided goods are purchased within a two- month period. Asa result, revenue has increased by 5% on the prior year. The company has launched several new products this year and all but one of these new launches have been successful. Feedback on product Luge, launched four months ago, has been mixed, and the company has just received notice from one of their customers, Petanque Co, of intended legal action, They are alleging the product sold to them was faulty, resulting in a significant loss of information and an ongoing detrimental impact on profits. As a precaution, sales of the Luge product have been halted and a product recall has been initiated for any Luge products sold in the last four months. The finance director is keen to announce the company’s financial results to the stock market earlier than last year and in order to facilitate this, he has asked if the audit could be completed in a shorter timescale. In addition, the company is intending to propose a final dividend once the financial statements are finalised Hurling Co's finance director has informed the audit engagement partner that one of the ‘company's non-executive directors (NEDs) has just resigned, and he has enquired if the partners at Caving & Co can help Hurling Co in recruiting a new NED. Specifically, he has requested the engagement quality control reviewer, who was until last year the audit engagement partner on. Hurling Co, assist the company in this recruitment. Caving & Co also provides taxation services for Hurling Co in the form of tax return preparation along with some tax planning advice. The finance director has recommended to the audit committee of Hurling Co that this year's audit fee should be based on the company's profit before tax. At today's date, 20% of last year’s audit fee Is still outstanding and was due to be paid three months ago. Required: 1) Identify and explain FIVE ethical threats which may affect the independence of Caving & Co's audit of Hurling Co; and 2) For each threat, suggest a safeguard to reduce the risk to an acceptable level. Page 56 of 283sup Answer Co's financial results earlier than normal and has asked if the audit can be completed in a shorter time frame, This may create an intimidation threat on the team as they may feel under pressure to cut corners and not raise issues in order to satisfy the deadlines and this could compromise the audit performed. ‘A non-executive director (NED) of Hurling Co hhas just resigned and the directors have asked whether the partners of Caving & Co can assist them in recruiting to fill this vacancy. This represents a self-interest threat as the audit firm cannot undertake the recruitment of | members of the board of Hurling Co, especially a NED who will have a key role in overseeing the audit process and audit firm The engagement quality control reviewer (EQCR) assigned to Hurling Co was until last year the audit engagement partner. This represents a familiarity threat as the | partner will have been associated with Hurling Co for a tong period ot time and so may not retain professional scepticism and objectivity. Caving & Co provides taxation services, the to the recruitment of the NED. The finance director is keen to report Hurling objectivity of the audit team and quality of audit engagement and possibly services related | 8 Flos, aA fan ug, Le Th Nght, Hal a Trung disie, Ha Nok Sapa 2a Flour, Coen Star fe, No 261 Pham Van Dor, ac TuCian Hetil Hanoi Hotun 009 729463 Fr No. 2A wong Haar anh Ove 1 Ho Cun cy The engagement partner should discuss the timing of the audit with the finance director to understand if the audit can commence earlier, so as to ensure adequate time for the team to gather evidence, If this is not possible, the partner should politely inform the finance director that the team will undertake the audit in accordance with all relevant ISAs and quality control procedures. Therefore the audit is unlikely to be completed earlier. If any residual concerns remain or the intimidation threat continues, then Caving & Co may need to consider resigning from the engagement. Caving & Co is able to assist Hurling Co in that they can undertake roles such as reviewing a shortlist of candidates and reviewing qualifications and suitability. However, the firm must ensure that they are not seen to undertake management decisions and so must not seek out candidates for the position or make the final decision on who is appointed. | As Hurling Co is a listed company, then the previous audit engagement partner should not be involved in the audit for at least a period of two years. An alternative EQCR should be appointed instead. Caving & Co should assess whether audit, recruitment and taxation fees would | represent more than 15% of gross practice Page 57 of 283,@®sarp Li etn ‘rac 2 2n' Foon Green Star lef 26 am Van ara ae Unmet Noctis cy There is a potential self-interest or intimidation threat as the total fees could represent a significant proportion of Caving & Co's income and the firm could become overly reliant on Hurling Co, resulting in the firm being less | challenging or objective due to fear of losing such a significant client. income for two consecutive years. If the recurring fees are likely to exceed 15% of annual practice income this year, additional consideration should be given as to whether the recruitment and taxation services should be undertaken by the firm. In addition, if the fees do exceed 15%, then this should be disclosed to those charged with governance at Hurling Co. If the firm retains all work, it should arrange for a pre-issuance (before the audit nis issued) or post-issuance (after the opinion has been issued) review to be undertaken by an external accountant or by a regulatory body. The finance director has suggested that the audit fee is based on the profit before tax of Hurling Co which constitutes a contingent fee. Contingent fees give rise to a self-interest threat and are prohibited under ACCA’s Code of Ethics and Conduct. If the audit fee is based ‘on profit, the team may be inclined to ignore audit adjustments which could lead to a reduction in profit. Caving & Co will not be able to accept contingent fees and should communicate to those charged with governance at Hurling Co that the external audit fee needs to be based on the time spent and levels of skill and experience of the required audit team members. At today’s date, 20% of last year’s audit fee is still outstanding and was due for payment three months ago. A self-interest threat can arise if the fees remain outstanding, as Caving & Co may feel pressure to agree to certain accounting adjustments in order to have the previous year and this year’s audit fee paid. In addition, outstanding fees could be perceived as a loan to a client which is strictly prohibited. Caving & Co should discuss with those charged with governance the reasons why the final 20% of last year’s fee has not been paid, They should agree a revised payment schedule which will result in the fees being settled before much more work is performed for the current year audit. Page 58 of 283©®sapp piece ti emt ea LE oy os | 1 Floar o. 2AL ong has Kaa, Diu, Ho Chi Cty 2. Conflicts of interest A conflict of interest arises when the same audit firm is appointed for two companies that interact with each other, for example: ® Companies which compete in the same market. © Companies which trade with each other. A conflict of interest may create a threat to the fundamental principles of objectivity and confidentiality. It may be perceived that the auditor cannot provide objective services and advice to a company where it also audits a competitor. Professional accountants should always act in the best interests of the client. However, where conflicts of interest exist, the firm's work should be arranged to avoid the interests of one being adversely affected by those of another and to prevent a breach of confidentiality, In order to ensure this, the firm must notify all affected clients of the conflict and obtain their consent to act. The following additional safeguards should be considered: ® Separate engagement teams (with different engagement partners and team members). # Procedures to prevent access to information, e.g, physical separation of the team members and confidential/secure data filing. ‘© Signed confidentiality agreements by the engagement team members. ‘© Regular review of the application of safeguards by an independent person of appropriate seniority. © Advise the clients to seek independent advice. If adequate safeguards cannot be implemented (i.e. where the acceptance/ continuance of an engagement would, despite safeguards, materially prejudice the interests of any clients) the firm must decline or resign from one or more conflicting engagements. Example: Murray case study: Ethical issues You are an audit manager in Wimble & Co, a large audit firm which specialises in providing audit, and accountancy services to manufacturing companies. Murray Co has asked your firm to accept appointment as external auditor. Murray Co manufactures sports equipment. Your firm also audits Barker Co, another manufacturer of sports equipment, and therefore your firm is confident it has the experience to carry out the audit. Page 59 of 283,| SAPP Acatomy Tet 466 7098 A Hoo, Horm A Bane bing 5 19 Thanh Noi a Ba Tung esi, tai Sager 2x Foon Goon Stor Tony No 261 Pham Nan Deng fae I Unmet. ennt Metin: 0888 729463 {Pras No: 2g Khan, Dstt No Nt Cy Required: Describe the steps Wimble & Co should take to manage the conflict of interest arising, from performing the audit of Murray Co and Barker Co. Answer: Wimble & Co must inform both clients of the conflict and obtain their consent to act. Separate teams and engagement partners must be used for each audi Procedures should be in place to prevent access to information e.g. using teams from different offices, The audit teams should sign confidentiality agreements. An independent review partner should be assigned to ensure the safeguards have been effective. Ill, ACCEPTING/CONTINUING AN AUDIT ENGAGEMENT 1 Appointment H ‘ethics 1 t | Accept/ continuing an audit 1. Appointment ethics 1.1. Before accepting nomination Before anew audit client is accepted, the auditors must ensure: * No independence or other ethical problems likely to cause conflict with the ethical code. © The audit have been appointed in a proper and legal manner. ‘An appointment decision chart is shown below: Page 60 of 283PP Rcadeay Approach by new audit client from client to contact old auditor?, Yes Le Than Nh Ba Tangs, Ha to No need to follow professional rules ~ the auditor can make own decision ¥ Write for all information pertinent to the appointment section Prospective auditor should, decline appointment Old auditor have permission to reply?, Old auditor provide Information?, Accept/reject appointment decision ¥ Give old auditor due notice then decide on basis of knowledge obtained otherwise Page 61 of 283nkctaing, Le Thanh Nh Hol Ra Tg il, Ha Nov Sapp 1.2 Procedures after accepting nomination ‘© Ensure that the outgoing auditors’ removal or resignation has been properly conducted in accordance with national legislation. © Ensure that the new auditors’ appointment is valid, © Set up and submit a letter of engagement to the directors of the company. ‘These procedures should not be carried out until the client screening procedures discussed in Section 2 have been carried out. 1.3 Other matters Where the previous auditors have fees still owing to them by the client, the new auditors need not decline appointment solely for this reason, They should decide how far they may go in aiding the former auditors to obtain their fees, as well as whether they should accept the appointment. Once a new appointment has taken place, the new auditors should obtain all books and papers which belong to the client from the old auditors. 2. Client screening ‘As well as contacting the previous auditors many firms, particularly larger ones, carry out stringent checks on potential client companies and their management. Some of the basic factors for consideration are given below. 2.1. Management integrity The integrity of those managing a company will be of great importance, particularly if the company is controlled by one or a few dominant personalities. Page 62 of 283,®sapp ithe hte atte an a ae a a 1 Floor, Mo 2 Lucey as Kath, Ds 1, Ho Cut hy 2.2. Risk ‘The following table contrasts low and high risk clients: Good long-term prospects. Poor recent or forecast performance: Well-financed. ‘Likely lack of finance. re Strong internal controls. Significant control deficiencies. Conservative, prudent accounting policies. | Evidence of questionable integrity, doubtful | accounting policies | Competent, honest management. Lack of finance director. Fewunusualtransactions. ——=——SS——= Significant related party or unexplained | transactions. It might be necessary to assign specialists in response to these risks, particularly industry specialists, as independent reviewers. 2.3. Engagement economics ‘The firm should consider the acceptability of the fee. The fee should be commensurate with the level of risk. In addition, the creditworthiness of the prospective client should be considered as non-payment of fees can create a self-interest threat. 2.4, Relationship with client The audit firm will generally want the relationship with a client to be long term. This is not only to enjoy receiving fees year after year but also to allow the audit work to be enhanced by better, knowledge of the client, thereby offering a better service. Conflict of interest problems are significant here; the firm should establish that no existing clients will cause difficulties as competitors of the new client. Other services to other clients may have an impact here, not just audit 2.5. Ability to perform the work The audit firm must have the resources to perform the work properly, as well as any specialist knowledge or stills, Page 63 of 283(®sapp HimtenhoenniattementsisensTwmawain | Sa ay 4 rar No. 2g Fu Mann, Dab, No Ch chy 3. Preconditions for an audit ISA 210 Agreeing the Terms of Audit Engagements and the Code of Ethics and Conduct provides guidance to the professional accountant when accepting new work. Before accepting (or continuing with) an engagement the auditor must establish whether the preconditions for an audit are present and that there is a common understanding between the auditor and management and, where appropriate, those charged with governance. The preconditions for an audit are that management acknowledges and understands its responsibility for © Preparation of the financial statements in accordance with the applicable financial reporting framework. * Internal control necessary for the financial statements to give a true and fair view. ‘© Providing the auditor with access to all relevant information and explanations. If the client imposes a limitation on the scope of the auditor's work to the extent that the auditor believes it likely that a disclaimer of opinion will ultimately be issued then the auditor shall not accept the engagement, unless required to do so by law. 4. Approval Once all the relevant procedures and information gathering has taken place, the company can be put forward for approval. The engagement partner will have completed a client acceptance form and this, along with any other relevant documentation, will be submitted to the partner who is in overall charge of accepting clients. 5. Col Once the engagement is complete, the audit firm must revisit the acceptance considerations again to ensure it is appropriate to continue for the following year. If any significant issues have arisen during the year such as disagreements with management or doubts over management integrity, the firm may consider resigning. uance assessments Page 64 of 283,SAPP Acad ToL o40e 709 488 8 Flor, NamtA Bark ualng 58. Thiet Hot, Hala Trang doe, Hat Sapp 2A Floor, Groen Sta Tes, to. 201 Pham Van Oung, Bae Tu Lian Mow Neal Hotine: C09 729469 gas ‘Fac, Wo. 24 Luang Mas Khe, Ost, Ho Gta Cy IV. ENGAGEMENT LETTER 1. Purpose ‘The engagement letter specifies the nature of the contract between the firm and client. Its purpose is to: © Minimise the risk of any misunderstanding between the practitioner and client. © Confirm acceptance of the engagement. '* Set out the terms and conditions of the engagement. The letter will be sent before the audit commences. 2. The contents of the engagement letter The form and content of the audit engagement letter may vary for each entity and should include: © The objective and scope of the audit of the financial statements. ‘©The responsibilities of the auditor. ‘© The responsibilities of management. ‘* Identification of the applicable financial reporting framework for the preparation of the financial statements. © _ Reference to the expected form and content of any reports to be issued by the auditor. Example of an audit engagement letter: To the Board of Directors or the appropriate representative of senior management: {The objective and scope of the audit] You have requested that we audit the balance sheet of .... as of .. and the related statements of income and cash flows for the year then ending. We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be made with the objective of our expressing an opinion on the financial statements, [The responsibilities of the auditor] ‘We will conduct our audit in accordance with International Standards on Auditing (or refer to relevant national standards or practices). Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as | evaluating the overall financial statement presentation, | S J Page 65 of 283,yr SSeS. [Limitation of an audit) Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered. [Reporting] In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any material weaknesses in accounting and internal control systems which come to our notice. [The responsibility of the managements] We remind you that the responsibility for the preparation of financial statements including adequate disclosure is that of the management of the company. This includes the maintenance of adequate accounting records and internal controls, the selection and application of accounting policies, and the safeguarding of the assets of the company. As part of our audit process, we will request from management written confirmation concerning representations made to us in connection with the audit. We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our audit. Our fees, which will be billed as work progresses, are based on the time required by the individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary according to the degree of responsibility involved and the experience and skill required. [Other relevant information] insert other information, such as fee arrangements, billings and other specific terms, as ‘appropriate.] Iinsert appropriate reference to the expected form and content of the auditor’s report.) [Confirmation of your agreement] Please sign and return the attached copy of this letter to indicate that itis in accordance with your understanding of the arrangements for our audit of the financial statements. XYZ & Co. ‘Acknowledged on behalf of ABC Company by (signed) Name and Title Date Page 66 of 283,P Acany Tet 06 700 48 Toor, Nam Aank bldg, 54 Le Thanh tl, Mela Tony sui HAN) Sapp ‘eon Sar Towa, No. 261 Pha Varun, aT et ok, Naoko 09 729-409 @snpp ‘The content of the engagement letter should be agreed with the client before any engagement related work commences. V. PRACTICE 1. Question Question 1; Which of these statements provides the best explanation of integrity? Members should act diligently and in accordance with applicable professional standards. A 8. Members should not bring the profession into disrepute. C. Members should not use client information for personal advantage. D. Members should be straightforward and honest in all professional and business relationships. Question 2: Why do auditors need to be independent? A. To ensure users of the auditor's report can place reliance on it and have faith it is not biased. B. Toensure the financial statements give a true and fair view. To provide more regulation for auditors to increase the perception of quality, D. The law requires it Question 3: For clients where the level of fees must be monitored, what safeguard can the firm apply to reduce the threat to an acceptable level? {i) Rotation of audit team members on an annual basis. (ii) Discussion of the matter with the audit committee. (ii) Assign an engagement quality control review partner. ‘A. (i)and (i) only. B. (i) and (ii) only. C. (i) and (iii) only. D.(, (i) and (ii Page 67 of 2831 Aeademy Tet 0466 700 448 Floor, Ham A nk being, Le The Nahi Hal a Tn dic Ha No 2. Answer: Question 1:0 Integrity means straightforward and honest. Question 2: Independence means freedom from bias and influence. Question 3: Independence matters should be discussed with the audit committee and an engagement quality review partner should be assigned. Rotation of the audit team would not provide a safeguard for this self-interest threat. Page 68 of 283,‘SAH Acadtny Teles 709 68 1 oor Natt A ack bud. Le That Nh Hala Trung ds, Hs Not Sapp ata vi 2 Flog, Groen Sta: Towe, Mo. 201 Pham Van Dany, Bac Tu Len Ut, Heel Hot, 0909 720.46 Fron No, 28 wong Hos Khanh, Dstt Ho Cr Tih Ch CHAPTER 5: RISK ASSESSMENT LEARNING OUTCOME © Acquire knowledge of audit risk, materiality. © Understand risk assessment procedure and how to respond to the risk assessment. © Understand frauds, errors, law and regulation, Page 69 of 283@sapp erecta hoe ee ene 1. THE OVERALL OBJECTIVES OF THE AUDITOR Auditor's objectives are given in ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing. Conducting the audit in This is achived by Plan and perform the audi Gideon eyc as be apply professional judgement** h * To obtain reasonable assurance about whether tthe financial statements as a whole are free from material misstatement, whether due to fraud or error; ‘© Express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; © Report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor's findings. “Professional scepticism is ‘an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence’. **Professional judgement is the ‘application of relevant training, knowledge and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement’, In order to achieve these objective, a sk assessment helps the auditor to ensure the key areas more susceptible to material misstatement are adequately investigated and tested during the audit. Page 70 of 28324 Flow, Gree Sta Tow, No. 261 Phat Van Our Bae Tu tlm dle, Mano) Hels 0909 729-403 SAPP Ready oLotes 700885 £8 Foor, am Bank bling, 54 Le Thanh Nh Mala Tung dive, Hates Sapa Pa SESE ‘Flor No.2 Loony Ha Kay Dstt 1 Ho Oh hint hy Ml. AUDIT RISK. 1, Definition There are two basic approaches that auditor use in performing the audit: Aset of standard procedures and Procedures and tests are d tests are carried out regardless of that could lead to material misstatements, the parewlaohalue of Mie cient Priorities, tests, timing can be different between each audit. Auditors usually follow a risk-based approach to auditing as required by ISAs. ‘Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated’. 2. Types of audit risk Audit risk has two major components: ‘We shall look in detail at the concept of materiality in the next section of this chapter. Audit risk can be represented by the audit risk model: hh + as - aa Page 71 of 2832x Foon Groen Star Tee fo. ocr No.2 Lion as Kh 2.1. Risk of material misstatement Risk of material misstatement is the risk that t prior to the audit ‘There are three categories of misstatements: © Factual misstatements: a misstatement ab considers unreasonable, or the selection auditor considers inappropriate. total misstatement in a population throug! sample. ‘The risk of material misstatement comprises of The risk of errors or misstatements due to the nature of the company and its transactions. Example: where an accounting standard provides guidance on a specific accounting treatment this might not be understood by the client and material misstatement could result. Inherent risk may arise due to ® The nature of the industry, entity; or © The nature of the balance itself. 2.2, Detection risk Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material. "Bonk bldg, 64 Lo Thon Nh Ha Ba Trg i Control risk may be high either because Fone C3 72946 2s Pam Van Dan, Bae Ti Lon, Hao rts 1, a CM hy he financial statements are materially misstated out which there is no doubt. Judgmental misstatements: a difference in an accounting estimate that the auditor or application of accounting policies that the Projected misstatements: a projected misstatement is the auditor’s best estimate of the fh the projection of misstatements identified in a inherent risk and control risk. The risk of errors or misstatements because the company’s internal controls are not strong ‘enough to prevent, detect and correct them. Example: Lack of physical controls, e.g. ‘Physical security of assets; Restriction of access; © Noccrv. ‘©The design of the internal control system is insufficient; or © The controls have not been effectively during the period. applied Detection risk comprises sampling risk and non-sampling risk: Page 72 of 283SAPP Acasa Tet oss rou as 5 Flor NamsA Bank bung. 54 Lo Thanh Nh, Hate Wang die, Ha Not Sapp 2A Fou, Gree Sta Tone, Ho. 261 Phat Van Oo Be Tum dc rca Hatin 00 729468 Pi ae ‘Foor, Ho: 2A Luong Hs Khao, Dstt Ho Chitin Cay The risk that the auditor's conclusion based on a sample is different from the conclusion, that would be reached if the whole population was tested. The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk. Example: The application of inappropriate procedures or the failure to recognise a misstatement. Example: The sample was not. representative of the population from. it was chosen. Although increasing sample sizes or doing more work can help to reduce detection risk, the following actions can also improve the effectiveness and application of procedures and therefore help to reduce detection risk: * Adequate planning © Assignment of more experienced personnel to the engagement team ‘© The application of professional skepticism Increased supervision and review of the audit work performed. Example: Identify and classify audit risk. Lack of IT based controls © Lack of password protection. Lack of authorization controls. Lack of segregation of duties. | Account balances for complex, judgemental | areas of accounting, e.g | provision. Page 73 of 283@supp For Nam A ane aldng 64 Le Thanh Noh Hoi Ba Tang da, Neh Sapper 2q For. Green Star Fete 261 Pam Vor era, eT Leak Hanoi Helin 0980 72483 cr No. ahLiung rs Khas, Dash, Ho CMa chy ‘Client operates in a high 5. | tech or fast moving industry. "| New company trades 6 | overseas. "| New computer systems. oe al Tt Temporary staff used 8 | during the year. A it ina speci 9 | industry. y New audit client, a 10 Tight audit deadline 11 | imposed by client. duties, Lack of IT based controls | Computer systems and financial | Control risk 1 | © Lack of password information could be changed or protection. modified without suitable authorization. Lack of authoriz © High risk transactions performed, e.g. | Control risk 2 | controls. credit sales to high risk customers; «Fraudulent transactions. 5 Lack of segregation of | Not identifying errors and fraud as only | Control risk ‘one person doing the job therefore Page 74 of 2832° Flor Grea Sto Tome, fo, 261 PY 4 Flor No: 28 Luong Hu Khan, Dat Toor Nam Bank bung, 54 La Thanh Noh, Hala Tung dite, Hao) Sapte ong, Ba Tuto date Hack Heli 0808 729469 chu hir hy ToLo4a 709 88 ‘Account balances for complex, judgemental Due to the nature of these transactions a Inherent risk a high degree of judgement or estimation areas of accounting, e.g. | is involved and is therefore open to provision. manipulation or error. Client operates in a high | Inventory may become obsolete and may | Inherent risk 5 | tech or fast moving be overstated in the financial statements. industry, iE New company trades |» foreign currency may | Inherent risk g. | overseas. not be translated at the correct rate © The company may make foreign exchange losses. a "| New computer systems. |e Errors in transferring the data from | Control risk + one system to another Inherent risk ui ‘© There may be inherent errors in the new system that have not yet been discovered - |g | Temporary staff used | Errors more likely as staff are not familiar | Control risk during the year. with the client’s systems. 9 | Adientina specialized | Errors more likely or fraud more likely. | Inherent risk industry. | New audit client. Lack of cumulative audit knowledge and | Detection An) experience may lead to increased detection risk. "| Tight audit deadline © Staff working quickly to a tight | Detection risk | imposed by client. deadline are more likely to make a errors © There is a shorter post statement of financial position period that we can use to help with our audit. Page 75 of 283,