F8 Audit & Assurance[INT] Sample Note

Transcription

1 F8 Audit & Assurance[INT] Sample Note For Exams in June2015 1

2 Content CORPORATE GOVERNANCE:... 9 AUDIT COMMITTEE:... 9 Corporate governance... 9 ISA PILOT PAPER Q3 CG and audit committee: Answer to PILOT PAPER Q3[CG and audit committee:]: AUDIT PROCESS: STAGE ,Ethics principles by ACCA Code of Ethics Ethical threat to objectivity Safeguards to ethical threats DEC2007 Q2(a) [Ethics]: Answer to DEC2007 Q2(a) [Ethics]: DEC2008Q3(a) Ethical Threats Answer to DEC2008Q3(a) Ethical Threats June2009 Q5(b) Safeguards Answer to June2009 Q5(b) Safeguards Precondition: DEC2010 Q3 Precondition: Answer to DEC2010 Q3 Precondition: Engagement letter: June2011 Q2 Engagement Letter Answer to June2011 Q2 Engagement Letter Rights and duties of auditors:

3 DEC2008 Q2 rights and duties: Answer to DEC2008 Q2 rights and duties: Audit documentation: Current audit file Permanent audit file Standardised working papers Example of audit working paper: DEC2010 Q2 audit documentation Answer to DEC2010 Q2 audit documentation STAGE2 PLANNING THE AUDIT Audit strategy: ISA Ways that auditors use to understand client s business: [AEIOU] Audit Plan: Risk equation: DEC2009 Q3(a) Understand the environment of Client: Answer to DEC2009 Q3(a) Understand the environment of Client: June2010 Q2(b) Materiality: Answer to June2010 Q2(b) Materiality: June2009 Q1(a+b) Audit Strategy Document Answer to June2009 Q1(a+b) Audit Strategy Document DEC2009 Q1 Audit plan: Answer to DEC2009 Q1 Audit plan: June2010:Q1: Audit risks Answer to June2010:Q1: Audit risks DEC2011 Q3 Risk assessment Answer to DEC2011 Q3 Risk assessment

4 STAGE 3:ASSESS THE INTERNAL CONTROL SYSTEM OF CLIENT S ENTITY:.. 57 Three important concepts: Sales cycle: Purchase cycle: Payroll Cycle: Inventory System Revenue and capital expenditure system June2008 Q1:(only (a&b)) (sales system) Answer to June2008 Q1:(only (a&b)) (sales system) June2011 Q1(Tests of controls (sales system) (a&c) Answer to June2011 Q1 (a&c) DEC2010 Q1:purchase system (a&b) Answer to DEC2010 Q DEC2008 Q1(only a&b) Wages system Answer to DEC2008 Q1(only a&b) Wages system June2012 Q1(a) purchase system Answer to June2012 Q1(a) DEC2011:Q1Payroll system (a&c&e) Answer to DEC2011 Q1 (a&c&e) DEC2012 Q1(a) inventory system Answer to DEC2012 Q1(a) STAGE 4: PERFORM ACTUAL TESTING Basic Accounting knowledge recaps How to prepare financial statements? Format of Financial Statements Double Bookkeeping (6 steps) Controlling the bookkeeping systems Control account reconciliations

5 Bank reconciliations Q June2008 Q3 Analytical Procedures Answer to June2008 Q Q:DEC2009 Q3(c) non-current assets Answer to DEC2009 Q3(c) Q:DEC2010:Q4(c) PPEs (amended) Answer to DEC2010:Q4(c) Inventory: (subsequent measurement: cost & NRV) Q:DEC2009 Q1(e) Inventory Answer to Q:DEC2009 Q1(e) Inventory Q: June2010 Q1: (c&d) inventory Answer to June2010 Q1: (c&d) Q:DEC2011 Q3(c) inventory: Answer to DEC2011 Q3(c): Q: June2009 Q1(d) Receivable: Answer to June2009 Q1(d): Q: June2010 Q3(a): sales and receivables Answer to June2010 Q3(a) Q: June2011 Q1(b+d) receivable Answer to June2011 Q1(b+d) Cash Cycle Bank confirmation letter: Bank reconciliation Q: Recon Cash audit: June2010 Q3(c) Cash and cash at bank:

6 Answer to June2010 Q3(c) June2010 Q1(d(ii)) provisions: Answer to June2010 Q1(d(ii)) DEC2009 Q5(a) payables: Answer to DEC2009 Q5(a) Q: Intangible assets: Answer for intangible assets: STAGE5: REVIEW/ COMPLETION STAGE ISA 560 Subsequent events[auditors job] Going Concern Indications of going concern problems Ways to see whether company is still a going concern entity: Written Representation: Contents: Mnemonics: Briefl : Accounting policy and estimate: Stage6: Audit Report: Content: [TAIRBOS] Types: DEC2011 Q5 subsequent events Answer to DEC2011 Q June2010 Q5[Going concern] Answer to June2010 Q5 Going concern DEC2010 Q5[written representation]: Answer to DEC2010 Q CHAPTER3 EXTRAS: non audit engagement: Q: DEC2009 Q4: [non audit engagement]:

7 Answer to DEC2009 Q4: [non audit engagement]: Non profit making organization: Value for Money (VFM) Audit: Difference between internal and external auditors: Whether internal audit department is needed? DEC2010 Q4[value for money audit]: Answer to DEC2010 Q BASIC REVISIONS FOR F8: DEC2008 EuKaRe Q Answer to DEC2008 EuKaRe Q Dec2007 Q1 Dinzee Answer to Dec2007 Q1 Dinzee Q: JUNE 2011 Q Answer to JUNE 2011 Q Lesco Group Limited, April 2016 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Lesco Group Limited. 7

8 How to study and pass ACCA F8 Audit&Assurance: You should print this study note out in front of you before watching any videos. You should also have 50 blank pages in front of you to copy note from tutors as well. You should also be able to answer all questions from the study note. After completing the tuition study please go to the revision phase and practise all recommended questions. Good luck! 8

9 Corporate governance: Audit committee: Corporate governance This means to make directors work in the best interest of the company rather than of their own. This is based on agency theory, ie, separation of duties between owner and manager. And in order to make directors work in the best interest of the company, company has to incur agency costs, ie, salary, corporate governance, audit fees etc. Best practices: 1. The board of directors An effective board of directors should: Lead company strategy, with prudent controls and risk management, to maximise sustainable long term success of company. Should meet regularly, with a formal agenda. Should detail its membership (including Chairman, CEO, Senior Independent Director, Committee members) and work in the Annual Report. Should ensure Chairman and Non Executive Directors (NEDs) meet without the Executives, to consider their performance. Should ensure NEDs meet without Chairman annually, to consider the performance of the Chairman. 2. Chairman and Chief Executive Officer Issues that relate to the Chairman and CEO: Should not be the same person. Chairman leads Board, and sets agenda for Board Meetings ensuring there is enough time for important matters and all directors contribute. Chairman is key contact for shareholders. CEO runs the company. 9

10 3. Board composition No one person, or group, should be able to dominate the Board. Should be an appropriate size, and right balance of skills and experience. This includes diversity, including by gender. 4. Appointments to the board Have objective merit-based criteria for selection of new Board members. Oversee induction and training for all directors (likely to be organised by Chairman, assisted by Company Secretary). 5. Annual performance review Board, its committees, and individual directors should have performance appraised at least annually. 6. Re-election of board members At 1st AGM after appointment to Board, and at least every 3 years afterwards, by shareholders (note, for FTSE 350 companies, all directors are up for reelection every year). If not annual re-election for all directors, sensible to retire by rotation and avoid potentially losing all the Board in one go. 7. Remuneration of directors Significant proportion should be performance-related. Should consider industry pay levels. Enough to attract, retain and motivate. Notice periods no longer than 1 year. 8. Internal control Board should ensure a sound system of Controls. 10

11 Annual review of effectiveness of Controls, and report this in Annual Report. Audit Committee of at least 3 Independent NEDs. Main role is liaison with the internal and external auditors on all matters. 9. Relations with shareholders Regular dialogue with shareholders. Chairman to ensure shareholder views communicated to Board. Communicate with investors and encourage debate through AGM. Separate resolutions on each issue. 10. Institutional shareholders Should themselves ensure dialogue with directors. Should make considered use of their considerable voting power. 11

12 ISA 260 ISA 260 Communication with Those Charged with Governance includes issues such as: The auditor s responsibilities in relation to the financial statement audit The scope and timing of the audit Significant findings arising on the audit Any independence issues Possible modifications necessary to the audit report Any management representation points requested Any suspected or actual cases of fraud. 12

13 PILOT PAPER Q3 CG and audit committee: You are the audit manager in the audit firm of Dark & Co. One of your audit clients is NorthCee Co, a company specialising in the manufacture and supply of sporting equipment. NorthCee have been an audit client for five years and you have been audit manager for the past three years while the audit partner has remained unchanged. You are now planning the audit for the year ending 31 December Following an initial meeting with the directors of NorthCee, you have obtained the following information. (i) NorthCee is attempting to obtain a listing on a recognised stock exchange. The directors have established an audit committee, as required by corporate governance regulations, although no further action has been taken in this respect. Information on the listing is not yet public knowledge. (b) Explain the actions that the board of directors of NorthCee Co must take in order to meet corporate governance requirements for the listing of NorthCee Co. (6 Marks) (c) Explain why your audit firm will need to communicate with NorthCee Co s audit committee for this and future audits. (4 Marks) 13

14 Answer to PILOT PAPER Q3[CG and audit committee:]: (b) 1, audit committee The management must finish the process of forming an audit committee. 2,CEO&chairman Most stock exchanges require the separation of these two key roles. 3,intenal audit Stock exchanges often require that companies have an internal audit department to review the internal control systems and report to audit committee. 4,non-executive directors Most stock exchanges require that the main board of directors include non-executive directors. 5, other information Some stock exchanges require that annual financial report contains information on corporate governance. 6, meetings Establishing procedures to maintain contact with institutional shareholders and any other major shareholders. The evening reception for shareholders could become a regular event in this respect. 14

15 (c) 1 Objectivity The audit committee consists of non-executive directors (NEDs), who by definition are independent of the company and can therefore take an objective view of the audit report. 2 recommendations The audit committee can ensure that any recommendations from the auditor are implemented. The audit committee has independent NEDs who can pressure the board to taking action on auditor recommendations 3 review reports The audit committee will have more time to review the audit report and other communications to the company from the auditor (eg management letters) than the board. The auditor should therefore benefit from their reports being reviewed carefully. 4 review work done by auditors The audit committee also has more time to review the effectiveness and efficiency of the work of the external auditor than the board. The committee can therefore make recommendations on the re-appointment of the auditor, or recommend a different firm if this would be appropriate. 15

16 1,Ethics Audit Process: Stage 1 5 principles by ACCA Code of Ethics 1. Professional behavior Accountants must comply with all relevant laws and regulations. There is also a test whereby actions suggested by a third party which would bring discredit to the profession should also be avoided. An accountant is required to treat all people contacted in a professional capacity with courtesy and consideration. Similarly, any marketing activities should not bring the profession into disrepute. 2. Integrity Integrity implies fair dealing and truthfulness. Members can t lie to others by preparing a material misstated statement or mislead others by window dress the financial statement. 3. Competence and due care Pass exams + accumulate experience + stick to standards when doing the work. 4. Confidentiality Accountants can t disclose confidential information of client to 3 rd party without approval. If client is involved in illegal activities like money laundering then accountant is able to disclose this to 3 rd party. 5. Objectivity When preparing the financial statement, accountant should only focus on standards not other factors like personal bias, conflict of interest, or the undue influence of others. 16

17 Ethical threat to objectivity Self interest threat: The threat that a financial or other interest (eg concern about job security) will inappropriately influence the professional accountant s judgement or behaviour. In other words, this relates to the threat of a conflict of interest. Self review threat: The threat that a professional accountant will not appropriately evaluate the results of a previous judgement made by themselves, or by another individual within their organisation, but will rely on that judgement as part of a service they are currently providing. Advocacy threat: It occurs if a professional accountant is promoting a client or employer s position or opinion to the extent that the accountant s subsequent objectivity is compromised. Familiarity threat: If the accountant develops too close a relationship with a client or employer (for example, through length of service) the accountant could become too sympathetic to the interestsof the client or employer such that their professional judgement becomes compromised. Intimidation threat: When an accountant is deterred from acting objectively by actual or perceived threats, including attempts to exercise undue influence over the accountant. 17

18 Safeguards to ethical threats Safeguards are actions of other measures designed to eliminate threats or reduce them to an acceptable level. There are two broad categories of safeguard: (a) Safeguards created by the profession, legislation or regulation: Education, training and experience requirements for entry into the profession Requirements for continuing professional development Corporate governance regulation Professional standards Professional monitoring and disciplinary procedures External review by a legally empowered third party (eg an auditor) of the reports, returns and information produced by a professional accountant (b) Safeguards in the work environment: These include complaint systems within employing organisations which enable staff to draw attention to unprofessional or unethical behaviour. For example, whistleblowing procedures to help protect employees against threats. 18

19 DEC2007 Q2(a) [Ethics]: 2 (a) Explain each of the FIVE fundamental principles of ACCA s Code of Ethics and Conduct. (5 marks) Answer to DEC2007 Q2(a) [Ethics]: Professional behavior A professional accountant should Should respect laws and regulations and not do anything that could discredit the accountancy profession. Integrity A professional accountant should be honest in all business and professional relationships. Competence and due care When performing professional services, a professional accountant should show competence(eg, passing exams and gaining qualifications) and keep up-to-date with developments in related regulations as well as putting diligence into the work. Confidentiality A professional accountant should not use or disclose confidential information of the client s entity to the 3rd party without obtaining client permission,eg, to competitors. But if there is a legal or professional obligation to do so, eg, when client is involved in money laundering issues, then the confidential information can be disclosed to the 3rd party, ie, court. Objectivity A professional accountant should be fair and not allow personal bias, conflict of interest or influence of others to override objectivity. 19

20 DEC2008Q3(a) Ethical Threats You are a manager in the audit firm of Ali & Co; and this is your first time you have worked on one of the firm s established clients, Stark Co. The main activity of Stark Co is providing investment advice to individuals regarding saving for retirement, purchase of shares and securities and investing in tax efficient savings schemes. Stark is regulated by the relevant financial services authority. You have been asked to start the audit planning for Stark Co, by Mr Son, a partner in Ali & Co. Mr Son has been the engagement partner for Stark Co, for the previous nine years and so has excellent knowledge of the client. Mr Son has informed you that he would like his daughter Zoe to be part of the audit team this year; Zoe is currently studying for her first set of fundamentals papers for her ACCA qualification. Mr Son also informs you that Mr Far, the audit senior, received investment advice from Stark Co during the year and intends to do the same next year. In an initial meeting with the finance director of Stark Co, you learn that the audit team will not be entertained on Stark Co s yacht this year as this could appear to be an attempt to influence the opinion of the audit. Instead, he has arranged a balloon flight costing less than one-tenth of the expense of using the yacht and hopes this will be acceptable. The director also states that the fee for taxation services this year should be based on a percentage of tax saved and trusts that your firm will accept a fixed fee for representing Stark Co in a dispute regarding the amount of sales tax payable to the taxation authorities. Required: (i) Explain the ethical threats which may affect the auditor of Stark Co. (6 marks) (ii) For each ethical threat, discuss how the effect of the threat can be mitigated. (6 marks) Please note: It s very common for your F8 examiner to use Colum to answer questions so we use that as well. 20

21 Answer to DEC2008Q3(a) Ethical Threats (i)ethical threat (ii)mitigation of threat Mr Son, the engagement partner has been involved with the client for the last nine years. This might create familiarity threat to objectivity due to this long association. Mr Son should be rotated from being engagement partner. He can still contact the client but should not be in the position of signing the audit report. There may be the impression of lack of independence as Zoe is related to the engagement partner, a daughter of Mr son and Zoe could be tempted not to identify errors in case this prejudiced her father s relationship with the client. To show complete independence, Zoe should not be part of the audit team. However, if Mr Son is no longer the engagement partner then this removes the ethical threat and Zoe could be included in the audit team. However, continued use of client services could impair its objectivity especially if Mr Far is not paying a full fee and therefore receiving a benefit from the client. To show independence from the client, Mr Far could be asked not to use the services of Stark Co again unless this is first agreed with the engagement partner. The audit team has been offered a balloon flight at the end of the audit. Acceptance of gifts from a client, unless of an insignificant amount, would create a self interest threat to impair objectivity. The balloon flight should not be accepted. Investigation would also be needed to find out why hospitality was accepted in previous years. The firm may try to gain the highest tax refund for the client and this could tempt the audit firm to suggest illegal tax avoidance schemes and this may create a self interest threat to objectivity. The audit firm must confirm that assistance with taxation work is acceptable by law, and the fee must be based on time and experience for the job, not the future outcome(ie, contingent fee) Representing Stark Co in court could be seen as an advocacy threat that is the audit firm is promoting the position of the client and this could damage the objectivity of the firm. To remain independent, the audit firm should decline to represent the client in court. 21

22 June2009 Q5(b) Safeguards (b) For the purposes of this section assume from part (a) that the directors have agreed to value inventory at $15/barrel. Having investigated the matter in part (a) above, the directors present you with an amended set of financial statements showing the emergency reserve stated not at 6,000 barrels, but reported as 60,000 barrels. The final financial statements now show a profit following the inclusion of another 54,000 barrels of oil in inventory. When queried about the change from 6,000 to 60,000 barrels of inventory, the finance director stated that this change was made to meet expected amendments to emergency reserve requirements to be published in about six months time. The inventory will be purchased this year, and no liability will be shown in the financial statements for this future purchase. The finance director also pointed out that part of Tye Co s contract with the government requires Tye Co to disclose an annual profit and that a review of bank loans is due in three months. Finally the finance director stated that if your audit firm qualifies the financial statements in respect of the increase in inventory, they will not be recommended for re-appointment at the annual general meeting. The finance director refuses to amend the financial statements to remove this fictitious inventory. (iii) Discuss the safeguards that the auditors of Tye Co can use in an attempt to overcome the intimidation threat from the directors of Tye Co. (4 marks) 22

23 Answer to June2009 Q5(b) Safeguards 1 Discuss with audit committee The situation can be discussed with the audit committee. non-executive directors who are within the audit committee will be able to discuss the situation with the finance director and point out clearly the auditor s opinion. They can also remind the directors as a whole that the appointment of the auditor rests with the members on the recommendation of the audit committee. If the recommendation of the audit committee is rejected by the board, good corporate governance requires disclosure of the reason for rejection. 2 Obtain second partner review The engagement partner can ask a second partner to review the working papers and other evidence relating to the issue of possible fraud. If this action does not resolve the issue, it does provide additional assurance that the findings and actions of the engagement partner are valid. 3 Resignation If the matter is serious, then the auditor can consider resignation rather than not being re-appointed. If the auditors consider to resign then they can normally require the directors to hold a general meeting to consider the circumstances of the resignation. 23