ACCA F8 (INT) Audit & Assurance - 2010 - Study text

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Practice questions

returned. A few of the missing PCs have been traced to directors who

borrowed them for use at home.

(2) Two customers had been allowed to exceed their credit limits and new

customers in the last year had not been allocated credit limits.

Required

Draft the section of your report to management dealing with the above weaknesses.

Set out the weaknesses, their implications and your recommendations for

improvement.

Paper F8: Audit and assurance (International)

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Paper F8 (INT)

Audit and assurance

Q&A

Answers

Contents

Page

The meaning of audit and assurance

1 Audit and review 400

Corporate governance and auditing

2 Corporate governance 401

The statutory audit

3 Zubrovka 402

4 Babushka 404

Professional ethics and codes of conduct

5 Keane 405

6 Dilemma and Co 407

7 Engagement letters 409

Internal audit

8 Usefulness of internal audit 410

9 Venture Videos 411

Planning and risk assessment

10 Planning 412

11 Beautiful Jewels 413

12 Woolacombe Souvenirs 415

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Introduction to audit evidence

13 Financial statement assertions 417

14 John 418

15 Blunkett Manufacturing 419

16 Internal audit questionnaire 422

Internal control: ISA 315

17 Sopot 423

18 Control activities 425

19 Ascertaining and recording accounting

systems 426

20 Grander Products 427

21 Pivo 428

Tests of controls

22 Sales cycle controls 432

23 Countrywide Sales 434

24 Faroff Supplies 435

Introduction to substantive procedures

25 Caraway Manufacturing 436

26 Opening balances 438

27 Compton Components 439

Substantive procedures: non-current assets

28 Ray Products 440

29 Invisible Industries 441

Substantive procedures: inventory

30 Plastico Products 442

31 Count instructions 443

Substantive procedures: other current assets

32 DebtCo 445

33 Cash and bank 447

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Substantive procedures: other areas

34 Payables ledger balances 448

35 Audit of accounting estimates 449

Audit finalisation

36 Izzard Electronics 449

37 Subsequent events 451

The external audit report

38 Eden Electronics 452

39 Posh Perfumes 453

Other audit and assurance situations and reports

40 Creed Computers 454

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1 Audit and review

(a) Difference between an audit and a review

Both an audit and a review are types of assurance engagements. In an

assurance engagement, an assurance firm is engaged by one party to give an

opinion on a piece of information which has been prepared by another party.

The opinion is an expression of assurance, or comfort, about the information

which has been reviewed.

 An audit

In a statutory audit, rather than the shareholders merely accepting the

information provided by the financial statements as being sufficiently

accurate and reliable, the statutory audit provides assurance as to the

quality of that information. That assurance adds credibility to the

information provided by the financial statements, making the information

more reliable and therefore more useful to the user.

An audit is the work carried out by an auditor in order to reach his opinion

on those financial statements. That opinion is usually expressed in terms of

whether (or not) the financial statements show ‘a true and fair view’ (see

below).

An audit provides a high, but not absolute, level of assurance that the

information being audited is free of material (see below) misstatement.

This is often referred to as reasonable assurance.

 A review

A review provides a moderate level of assurance that the information under

review is free of material misstatement. The resultant opinion is usually

expressed in the form of negative assurance i.e. ‘nothing has come to our

attention to suggest that the information is misstated’.

Because the level of assurance given by a review is lower than that

provided by an audit, a review usually involves less work on the part of

the reviewer than the auditor would carry out.

(b) Why an audit is necessary

An audit is necessary because, in incorporated entities, the shareholders own

the company, but the directors manage that company on the shareholders’

behalf. The directors have a stewardship role.

Although in small companies the shareholders may be the same people as the

directors, in large companies, the two groups are likely to be very different.

In order to show their accountability to the shareholders it is therefore a general

principle of company law that the directors are required to prepare financial

statements, which are presented to the shareholders. An independent audit

report, addressed to the shareholders, is published with those financial

statements. Thus the audit report adds credibility to the financial statements

produced by management.

(i) A true and fair view

The auditor reports on whether (or not) the financial statements give ‘a

true and fair view’ of the period end position and the performance of the

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company for the period. He does not certify or guarantee that those

financial statements are correct.

The use of such a phrase indicates the use of judgement which is

exercised both by the directors in preparing the financial statements, and

by the auditor in reaching his opinion. The phrase ‘true and fair’

indicates that overall the financial statements can be relied upon and

have been properly prepared in accordance with an appropriate

financial reporting framework (for example, International Financial

Reporting Standards).

Although the phrase has no legal definition, ‘true’ implies free from

error, ‘fair’ implies that there is no undue bias in the financial statements

and the way in which they have been presented.

(ii) Materiality

Materiality is defined by International Standards on Auditing as follows:

‘Information is material if its omission or misstatement could influence

the economic decisions of users taken on the basis of the financial

statements.’

The auditor will not aim to examine every number in the financial

statements. He will concentrate his efforts on the more significant items

in the financial statements, either because of their (high) value, because

they are at a greater risk of misstatement or because of their nature (i.e.

they are of particular interest to the user).

In this way the auditor should pick up any errors which would be

significant to the shareholders. This might be because of the size of the

error (e.g. a $500,000 misstatement in a company with revenue of $1

million) or because of the nature of the error (e.g. areas such as directors’

salaries are usually expected by the user of the financial statements to be

disclosed with 100% accuracy).

2 Corporate governance

(a) Meaning of corporate governance

Corporate governance is the system by which a company is directed and

controlled. For a company to be properly directed and controlled there must

be a clear view of the entity’s objectives and risks and how those risks will be

managed.

(b) Parts played in corporate governance

(i) Management

It is management’s responsibility to put in place a suitable system of

internal controls to manage the risks of the company. These controls will

include:

 controls to safeguard the assets of the company

 the maintenance of adequate books and records

 the preparation and delivery of annual financial statements.

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(ii) The external auditor

The external auditor is part of the corporate governance system. He:

 provides an independent check on the integrity of the financial

information prepared by the directors for the use of the shareholders

 may have a responsibility for forming an opinion on the extent to

which the directors have complied with the specific corporate

governance regulations imposed on them either voluntarily or by

law.

In order to do this the external auditor will examine the company’s

systems and controls but he is not responsible for those systems or

controls.

(iii) The internal auditor

The internal audit function is used by management as a means of

monitoring the controls management has set up. The internal audit

function is seen as an essential element of sound corporate governance,

because one of the key functions of internal audit is to review and report

to the directors on the effectiveness of the organisation’s accounting and

control systems. This will help the organisation to achieve its corporate

goals.

(iv) The use of audit committees

The existence of an audit committee is one way in which the

independence of the external auditor can be maintained, as the audit

committee can act as a ‘buffer’ between the external auditor and the

executive directors, who may, on occasions, place undue pressure on the

auditor. This should strengthen the independence of the external auditor

by providing a point of liaison for him and lead to better communication

between the external auditor and the board of directors.

The existence of an audit committee should also assist the executive

directors in meeting their responsibilities.

3 Zubrovka

(a) Duties of auditor

The duties of the auditor of Zubrovka are defined by statute. An audit is an

independent, professional examination of, and expression of an opinion on,

the financial statements of the company.

The opinion is given as to whether the financial statements have been

properly prepared in accordance with the applicable financial reporting

framework. If that framework is a “fair presentation framework” then the

report will also give an opinion stating whether or not the financial statements

“give a true and fair view” or “present fairly” the position and results of the

entity.

The auditor may also be required by local law to report on such matters as

whether:

 adequate accounting records have been kept or adequate returns from

branches have been received

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 the financial statements are in agreement with the accounting records

 he did received all the information he required during the audit, or

 certain disclosures of directors’ remuneration as specified by law have

been made.

In addition to statutory requirements, the auditor must also ensure that his

audit is performed according to approved auditing standards (e.g.

International Standards on Auditing).

The directors may extend the scope of the audit beyond the statutory

requirements if the auditor is agreeable but they cannot limit the scope of the

audit or indemnify the auditor against any legal action arising from the non-

performance of duties.

(b) Relationship between the auditor and the directors

As Zubrovka is a newly-formed company, the directors may appoint the first

auditor to hold office until the conclusion of the first annual general meeting.

However, the auditor has no relationship with the directors other than as the

practical means by which the company enters into a contract with the auditor.

The directors are responsible for the preparation of financial statements, and

the auditor for the formation and expression of an opinion on those

statements to the members of Zubrovka. The auditor does this for a fee.

Although, in theory, this fee is set by whoever appoints the auditor (usually

the shareholders), in practice this responsibility is delegated to the directors.

 To receive notice, attend and be heard at all meetings of shareholders.

 Access at all times to all books and accounting records.

 To be informed of any proposal to dismiss him and to take certain actions

in that event.

 To obtain all necessary information and explanations required for the

conduct of his audit.

(d) Authority of the directors to dismiss the auditor

The directors do not have the authority to dismiss the auditor – only the

shareholders have that authority. An auditor is removed from office by a

simple majority of shareholder votes, cast at a shareholders’ meeting.

(e) Steps prior to acceptance of the appointment

It would be impossible for the auditor to accept the appointment as currently

specified by the directors. The scope of an audit is limited by statute only, not

at the request of directors.

If the firm still wishes to take up the appointment, it should discuss the matter

with the directors and eliminate their misunderstanding of the audit requirement.

Then a letter of engagement should follow indicating clearly the auditor’s duties

and rights.

Paper F8: Audit and assurance (International)

4 Babushka

(a) Statutory and other procedures to dismiss Old and Co and appoint New and

Before New and Co can accept nomination as auditor of Babushka

 The directors of Babushka should write to Old and Co informing them of

the company’s intention to nominate New and Co as its next auditors.

 With Babushka’s permission, New and Co should write to Old and Co

asking if there is any professional reason why New and Co should not

accept nomination.

 Old and Co will then write back to Babushka asking for permission to

respond.

 Babushka should give that permission.

 Provided that Old and Co give no professional reasons why New and Co

should not accept appointment, New and Co should write to Babushka

formally accepting nomination.

Before and at the general meeting at which Old and Co will be removed

from office and New and Co appointed as auditors

 Old and Co should be given notice of the meeting by Babushka.

 Old and Co have the right to attend the meeting and make statements to

the members of Babushka.

 Alternatively, Old and Co may require written statements to be circulated

to the members in advance of the meeting.

 At the meeting, the shareholders should vote on the appointment of New

and Co as auditors. A simple majority will secure the appointment.

 There is no vote to dismiss Old and Co. They are simply not re-appointed.

Following the general meeting

 New and Co should send a letter of engagement to Babushka.

 Documentation should be filed by Babushka with the appropriate

regulatory authority.

(b) Procedures if Old and Co are willing to resign

 Old and Co should tender their resignation to Babushka in writing.

 Babushka should file this with the appropriate regulatory authority.

 Old and Co should prepare a ‘statement of the circumstances’ of the

resignation, if they believe there are circumstances of relevance to the

shareholders or creditors of the company. If no such circumstances exist,

Old and Co should make a statement to this effect. This statement should

be sent:

− by Old and Co to the regulatory authority

− by Babushka to all persons entitled to receive a copy of the company’s

financial statements (principally the shareholders) and to the Registrar

of Companies.

ACCA F8 (INT) Audit &amp; Assurance - 2010 - Study text - Emile Woolf Publishing

Подождите немного. Документ загружается.

ACCA F8 (INT) Audit & Assurance - 2010 - Study text - Emile Woolf Publishing