A.

AUDIT FRAMEWORK AND REGULATIONS

1. The concept of audit and other assurance engagements

2. Statutory audits
3. The regulatory environment and corporate governance
4. Professional ethics and ACCA’s Code of Ethics and Conduct

The Concept of Audit and other Assurance Engagements

What is assurance and why is it important?

Assurance is opinion expressed by an assurance provider on a subject matter. It is important

because it enhances the degree of confidence place in the subject matter by the intended
users as to the evaluation or measurement against suitable criteria.

What are the features of an assurance engagement?

 Subject matter
 The three main parties involve:
o Responsible person
o Assurance provider (practitioner)
o Intended user
 The report

What are the levels of assurance?

Levels of assurance: Positive or Negative assurance

What is Positive Assurance?

Positive assurance is where a lot of detail work has been carried out on a subject matter and
therefore the assurance provider can conclude confidently, in their opinion, that the subject
matter has been either properly prepared or not. Positive assurance is a high level of
assurance and therefore a high level of reliance can be placed upon it.

PLEASE NOTE: Positive assurance does not mean that the subject matter has been prepared
well it just means that we the auditors can positively say that we did sufficient work and
found that the subject matter is either good or bad.

What then is Negative Assurance?

Negative assurance is where a smaller amount of work has been carried out on a subject
matter and no errors were discovered, they maybe errors or inaccuracies but none were
discovered with the level of work. This is a much lower level of assurance and therefore less
reliance should be placed on negative assurance.

What are the different types of audit engagements?

They are two types of assurance engagements:

 Internal audit and other types of assurance services

 The external (or statutory) audit
 Statutory Audits
What are Statutory Audits?

Statutory audits are a legal requirement. This is where a team of auditors independent of
the company check the Financial Statements on behalf of the shareholders as to the Truth
and Fairness of the figures reported, as well as, if they were prepared in accordance with the
relevant accounting standards and legal framework.

What do we mean by “True and Fairness” and “Material”?

True; Financial Statements are factual and are free from material error, Fairness; Financial
Statements are free from bias and reflect the commercial substance of the transactions that
have taken place. Material; an item is material if it is important enough to affect the users of
the financial statements. This could be due to the size (amount possibly in error) or nature
(fraud regardless of amount).

True or False: Do Auditors give a 100% guarantee that Financial Statements are true and
fair?

False! Financial statement are based upon historic information, therefore, auditors should
be able to obtain the evidence they need to give assurance that they are correct, however,
the Statutory Audit will never give a 100% guarantee that the financial statements are true
and fair because of inherent limitations, such as:

 The impracticality of testing ALL transactions

 The possibility of fraud
 The inherent limitations of internal control
 Audit work is permeated by judgment

Is it important that auditor remain independent of their client and why?

Readers need to be able to trust that the reports are reliable and correct and if there are
links between the auditors and the things audited, they may not trust the opinions given. It
is there a requirement that auditors are independent from those they audit.

External audit process:

 Appointment of external auditors

 Determine audit/Strategy planning
 Gathering evidence
 Completion
 Audit report

The amount of substantive testing to be done is determined by the assessment of the

company’s internal controls:

 If strong controls reduced substantive testing

 If weak controls increased substantive testing
The final stage in the audit engagement is for the auditors to give their opinion on the
financial statements through the audit report and this is addressed to the shareholders.

The Regulatory Environment and Corporate Governance

Who is allowed to be an External Auditor?

Individuals must go through an approval process before they are allowed to perform
external audits. The approval process involves passing a set of examinations set by a
Recognised Qualifying Board and by becoming a member and remaining one of a Recognised
Supervisory Board.

In addition, the individual must not be a director, a business partner or an employee of the
client or any of its associated companies or directors.

How are external auditors appointed?

The company’s shareholders appoint the external auditors this may be done by the Board of
Directors proposing an Audit Firm for the shareholders’ approval. Shareholders approve by
passing an ordinary resolution.

How are External Auditors removed?

External auditor can be removed either by the Board of Directors or the Shareholders by
passing an ordinary resolution. External Auditor may themselves wish to be removed and
can do so by resigning. In the latter case, they have the right to speak to the shareholders
explaining their reasons at a general meeting and to send a written explanation to
shareholders.

What legal rights do auditors have?

Auditors have legal rights to:

 Access all books and records of the company

 Access to all information and explanation
 Receive notice of a general meeting
 Attend a general meeting
 Speak at a general meeting
 To resign
 To circulate information to shareholders

What responsibilities do Auditors have?

Auditors have a responsibility to audit the Financial Statements and express an opinion on
the truth and fairness of the figures, as well as, if relevant accounting standards and legal
requirements were observed. Auditors also have a responsibility to issue a statement of
circumstances on resignation or removal from a client and after leaving a client to respond
to any requests for information from the new incoming auditors.

What is the Statement of Circumstances?

This is a statement that explains the specific reasons for the resignation or removal.
What are the responsibilities of the Directors?

Directors are responsible for running the company on a day-to-day basis. Their primary
responsibility, as concerns auditors, is to produce financial statements showing a true and
fair view. Other responsibilities include keeping accurate accounting records, giving auditors
reasonable explanations, applying accounting standards correctly, selecting the appropriate
accounting policies, appropriately apply the going concern basis of accounting, designing
and implement appropriate accounting system and to implement internal controls to
actively prevent and detect errors and fraud.

PLEASE NOTE: It is directors that have the responsibility to prevent fraud, as well as, to
detect it NOT the auditors. Auditors accept some responsibility for detecting fraud but not
preventing it and they have a professional obligation to advise directors how best to prevent
fraud.

Professional ethics and ACCA’s Code of Ethics and Conduct

What is Ethics?

Ethics is concern with behaviour and trying to ensure that auditors act in a professional
manner and stay independent from their clients.

Auditors must follow the ethical guidelines and be perceived to be doing such.

What are some fundamental Ethical principles?

 Professional behaviour:
All members should act in a way that respects the laws and regulations of the
profession.

 Integrity:
All members are required to act in a straightforward and honest manner in all their
business and professional dealings.
 Competence:
All members are required to maintain their professional knowledge and skills. They
should act in accordance with applicable technical and professional standards when
providing professional service.
 Confidentiality:
All members are required to respect the confidentiality of their clients and not
disclose any client information to third parties unless they have a professional or
legal right or duty to disclose.
PLEASE NOTE: Information must be disclosed if the client is suspected of money
laundering, terrorism, treason, the ACCA are investigating the auditor’s work, or a
court order is obtained requiring the auditor to disclose. The auditor may decide to
disclose information if the client gives permission, or the auditor feels that it is in the
public interest to do so.
 Objectivity:
All members are requires to remain independent of their clients in order that their
opinion is unbiased.
Assurance provider may encounter circumstances affecting their ability to comply with the
ACCA’s code of Ethics. Before accepting clients, auditors must assess any ethical threats and
either put in place measures to mitigate the threats or reject the appointment.

What are some Ethical threats that can affect Auditors ability to comply with the ACCA’s
code of Ethics?

These ethical threats are:

 Self-interest threats
 Self-review threat
 Familiarity threats
 Advocacy threats
 Intimidation threats
 Management threats

Self-interest threats

This is where the auditor put their interests above the interests of the client’s and
shareholders. Examples: Auditor receive excessive gifts from clients, auditor receive a large
proportion of their revenue from one client, auditors have personal or business relationships
with a client, audit fees are agreed on a contingent basis, auditors and client lend each other
money, auditors set their fees too low.

Self-review threats

This is where the auditors perform work or produce information for the client that they end
up having to review themselves as part of an assurance engagement.

Familiarity threats

This is where the auditors develop a close relationship with the client that they become
sympathetic to client’s interests or place an abnormal trust in their work.

Advocacy threat

This is where the auditors fail to take a balance view of their client and are perceive to be
either “taking their client’s side” or are biased against their client.

Intimidation threats

This is where the client being in a position to put pressure on an auditor to prevent them
acting objectively.

Management threat

This is where auditors provide services that constitute to acting as management of the client
or making management decisions for the client.

Auditor must be seen to act in the best interest of their client at all times. A conflict of
interest can arise when the auditors act for two companies who are in direct competition
with each other and have access to confidential information.
What other matters should auditors consider before acceptance?

Besides legal and ethical issues auditor should consider other matters, such as:

 The client assessment

 Professional clearance

Client assessment considerations

 Resources (time and staff) available

 The fee
 The client’s credit rating
 Client deadline
 The integrity of the client and its directors
 The level of audit risk
 Verification of the identity of the client and their source of income

Professional clearance process

Ask the client for permission to speak to outgoing auditors, if no then reject appointment.
Ask the outgoing auditor if they are any reasons why appointment should not be accepted, if
no accept appointment. If yes, ask client if the problem can be explained away to auditor’s
satisfaction, if no reject appointment, and if yes accept.

Engagement letter

An engagement letter is a contract that the auditor and the client must sign. The
engagement letter contains the objective and scope of the audit, responsibilities of the
directors and auditors, the nature of audit work, and the basis of which fees are calculated.

 Fees,
 Address,
 Responsibilities,
 Scope,
 Extras,
 Signatures

THE END.