Unformatted text preview: ACCA - AAA Advanced Audit and Assurance
(INT) Study Notes CONTENTS
Sr # Topics Page # 01 About the Exam & How to use this notes 01 02 Re-cap of Important Terms 03 03 Impact of Corporate Governance Principles on Audit 12 04 Laws & Regulations 16 05 Money Laundering 22 06 Code of ethics for Professional Accountants 28 07 Fraud 52 08 Professional Liability 57 09 Quality Control 63 10 Obtaining & Accepting Professional Appointments 73 11 Agreeing the Terms of Engagement 78 12 The Planning Stage of Audit 81 13 Audit Evidence & Audit Procedures 104 14 Group Audit 162 15 The Review Stage of Audit 189 16 Communicating with TCWG & Key Audit Matters 199 17 Evaluation of Misstatements 204 18 Audit Opinion & Audit Report 209 19 Assurance & No-Assurance Engagements 227 20 Review Engagements 231 21 Due Diligence 236 22 Prospective Financial Information 241 23 Forensic Accounting 247 24 Audit of Performance Information in the Public Sector 256 25 Social & Environmental Issues 261 26 Impact of Big Data & Data Analytics on Audit 265 27 Professional Skepticism 270 Syllabus Areas A.
G. Regulatory Environment Professional & Ethical Considerations Practice Management Planning and conducting audit of historical financial information Completion and reporting Other assignments Current issues and development ( ensure you check technical articles on the ACCA website before your exam attempt) About Advanced Audit & Assurance The Exam - 100 marks - 3 hours, 15 minutes - Two sections ( A & B) Section A: One Case Study‐50 marks‐ Requirement from the entire syllabus. Detailed information will be given which is likely to include: - Extracts of financial information, - Strategic, operational and other relevant financial information for a client business, - Extracts from audit working papers - Results of analytical procedures. Includes 4 professional marks Easiest way to get the 4 professional marks! - Format - Introduction and conclusion - Headings - Clarity of explanation Section B: 2 compulsory 25 mark questions‐50 marks - One question from completion, review and reporting - The other can be from any part of the syllabus pg. 1 Using these notes For each area of the syllabus, the notes cover: - The key knowledge/technical areas - The answer technique! It is VERY important to understand that the nature of the AAA exam is such that it cannot be passed without excessive practice so these notes HAVE to be used in combination with revision kit. Use the LATEST revision kits from approved content providers as they update past papers to reflect changes in accounting and auditing standards. The past papers on the ACCA website are not updated for changes in ISAs or IFRS. When you are attempting questions from the latest revision kits, focus on ‘knowing’ the language used and understanding the ‘answer technique’; remember, it’s not the English language which will help you get through the exam‐ it is the ‘audit language’! Lastly, ensure you read the Technical articles on the ACCA website; focus on the ones that have been published in the last 12 months from you exam attempt. pg. 2 Re‐Cap of Important Terms AAA Revision Notes Re‐Cap of Important Terms Terms you should be conceptually clear on! Those charged with governance – The person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner‐
manager. Management – The person(s) with executive responsibility for the conduct of the entity’s operations. For some entities in some jurisdictions, management includes some or all of those charged with governance, for example, executive members of a governance board, or an owner‐manager. In some cases, all of those charged with governance are involved in managing the entity, for example, a small business where a single owner manages the entity and no one else has a governance role Engagement partner – The partner or other person in the firm who is responsible for the audit engagement and its performance, and for the auditor’s report that is issued on behalf of the firm, and who has the appropriate authority from a professional, legal or regulatory body. Engagement quality control review – A process designed to provide an objective evaluation, on or before the date of the auditor’s report, of the significant judgments the engagement team made and the conclusions it reached in formulating the auditor’s report. Engagement quality control reviewer – A partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments the engagement team made and the conclusions it reached in formulating the auditor’s report. Management’s expert – An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements. The preparation of an entity’s financial statements may require expertise in a field other than accounting or auditing, such as actuarial calculations, valuations etc. The entity may employ or engage experts in these fields to obtain the needed expertise to prepare the financial statements. Failure to do so when such expertise is necessary increases the risks of material misstatement. Audit procedure: Analytical procedures: Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among both financial and non‐financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. Audit procedure: Test of controls – An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level pg. 3 Re‐Cap of Important Terms AAA Revision Notes Audit procedure: Substantive procedure – An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise: (i)
Tests of details (of classes of transactions, account balances, and disclosures); and (ii)
Substantive analytical procedures. Internal control – The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The term “controls” refers to any aspects of one or more of the components of internal control. Deficiency in internal control – This exists when: (i)
A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis; or (ii)
A control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis is missing. Test of controls‐ They are audit procedures performed to test the operating effectiveness of controls in preventing or detecting material misstatements in the financial statements. An auditor might use inspection of documents, observations of specific controls, re‐performance of the control, test data or other audit procedures to gather evidence about controls. There are many other issues that auditors struggle with when understanding and testing internal controls in audits of all sizes, including: • Deciding whether to test the operating effectiveness of controls; • Determining what constitutes a deviation and the tolerable deviation rate, and then dealing with deviations; • Revising the control risk assessment, and the effect of a revision on other audit procedures; and • Balancing the results of controls testing with substantive procedures Audit evidence – Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. Appropriateness (of audit evidence) – The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based. Sufficiency (of audit evidence) – The measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence. pg. 4 Re‐Cap of Important Terms AAA Revision Notes Sources of audit evidence Inspection Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. An example of inspection used as a test of controls is inspection of records for evidence of authorization. Observation Observation consists of looking at a process or procedure being performed by others, for example, the auditor’s observation of inventory counting by the entity’s personnel, or of the performance of control activities. Observation provides audit evidence about the performance of a process or procedure, but is limited to the point in time at which the observation takes place, and by the fact that the act of being observed may affect how the process or procedure is performed External confirmation An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium. Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and non‐financial, within the entity or outside the entity. Recalculation Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically Re‐performance Re‐performance involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control. Analytical procedures Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among both financial and non‐financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. Audit documentation – The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “work papers” are also sometimes used).Audit documentation may be recorded on paper or on electronic or other media. Examples of audit documentation include: Audit programs. Analyses. Issues memoranda. Summaries of significant matters. Letters of confirmation and representation. Checklists. Correspondence (including e‐mail) concerning significant matters. Misstatement – A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. pg. 5 Re‐Cap of Important Terms AAA Revision Notes Misstatements may result from: (a) An inaccuracy in gathering or processing data from which the financial statements are prepared; (b) An omission of an amount or disclosure, including inadequate or incomplete disclosures (c) An incorrect accounting estimate arising from overlooking, or clear misinterpretation of, facts; (d) Judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection and application of accounting policies that the auditor considers inappropriate.; (e) An inappropriate classification, aggregation or disaggregation, of information; and (f) For financial statements prepared in accordance with a fair presentation framework, the omission of a disclosure necessary for the financial statements to achieve fair presentation beyond disclosures specifically required by the framework. Misstatement of a qualitative disclosure Each individual misstatement of a qualitative disclosure is considered. This is done to evaluate its effect on the relevant disclosure(s), as well as its overall effect on the financial statements as a whole. The determination of whether a misstatement(s) in a qualitative disclosure is material is a matter that involves the exercise of professional judgment. Examples where such misstatements may be material include: ‐ Inaccurate or incomplete descriptions of information about the objectives, policies and processes for managing capital for entities with insurance and banking activities. ‐ The omission of information about the events or circumstances that have led to an impairment loss (e.g., a significant long‐term decline in the demand for a metal or commodity) in an entity with mining operations. ‐ The incorrect description of an accounting policy relating to a significant item in the statement of financial position, the statement of comprehensive income, the statement of changes in equity or the statement of cash flows. ‐ The inadequate description of the sensitivity of an exchange rate in an entity that undertakes international trading activities. Professional judgment – The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Professional skepticism – 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 skepticism includes being alert to, for example: • Audit evidence that contradicts other audit evidence obtained. • Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. pg. 6 Re‐Cap of Important Terms AAA Revision Notes • Conditions that may indicate possible fraud. • Circumstances that suggest the need for audit procedures in addition to those required by the ISAs. Reasonable assurance – In the context of an audit of financial statements, a high, but not absolute, level of assurance. Assertions – Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. Assertions about classes of transactions and events and related disclosures for the period under audit 1. Occurrence – the transactions and events that have been recorded or disclosed, have occurred, and such transactions and events pertain to the entity. 2.
6. Completeness – all transactions and events that should have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included. Accuracy – amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described. Cut–off – transactions and events have been recorded in the correct accounting period. Classification – transactions and events have been recorded in the proper accounts. Presentation – transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework. Assertions about account balances and related disclosures at the period end 1. Existence – assets, liabilities and equity interests exist.
2. Rights and obligations – the entity holds or controls the rights to assets, and liabilities are the obligations of the entity 3. Completeness – all assets, liabilities and equity interests that should have been recorded have been recorded and all related disclosures that should have been included in the financial statements have been included. 4. Accuracy, valuation and allocation – assets, liabilities and equity interests have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded and related disclosures have been appropriately measured and described. 5. Classification – assets, liabilities and equity interests have been recorded in the proper accounts. 6. Presentation – assets, liabilities and equity interests re appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework Business risk – A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies. pg. 7 Re‐Cap of Important Terms AAA Revision Notes Audit sampling (sampling) – The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population. Sampling risk – The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous conclusions: (i)
In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion. (ii)
In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect. Non‐sampling risk – The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk. Written representation – A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. The date of the written representations shall be as near as practicable to, but not after, the date of the auditor’s report on the financial statements. The written representations shall be in the form of a representation letter addressed to the auditor If the auditor has concerns about the competence, integrity, ethical values or diligence of management, or about its commitment to or enforcement of these, the auditor shall determine the effect that such concerns may have on the reliability of representations (oral or written) and audit evidence in general In particular, if wri...
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