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AUDITING AND ASSURANCE NOTES
CONTENT
- Nature and purpose of an audit
- Nature and objectives of an audit
- Development of audit (early audit and modern audit)
- Users of audited financial statements
- Features of audits
- Distinction between auditing and accounting
- Types and classification of audits
- Situations when different audits are performed (interim, continuous, final, operational)
- Advantages and disadvantages of various types of audits
- Nature of work done for different audits
- Inherent limitations of an audit
- Assurance and non- assurance engagements
- Definition and objectives of assurance engagements
- Audit as an assurance engagement
- Elements of an assurance engagement
- Types of assurance engagements (Audit, Review assignments)
- Differences between audit and review engagements
- International Standard on Assurance Engagement-ISAE 3000
- Accepting appointment to perform assurance engagement
- Review of interim financial information – ISRE 2410
- Levels of assurance and reports issued on assurance engagements
- Non-assurance engagements (Agreed upon procedures engagement -ISRS 4400 and compilation assignments-ISRS 4410
- Attestation and direct reporting engagements
- Legal and professional framework
- Regulatory framework for external audits
- Appointment of the auditors
- Qualifications and disqualifications of auditors
- Removal and resignation of auditors
- Remuneration of the auditors
- Rights and duties of auditors
- Mechanisms of regulations of auditors-role of professional bodies, Audit committee, rotation of audit firms
- Professional ethics/code of ethics for professional accountants
- Importance of the professional ethics
- Basic/fundamental principles for Code of Ethics for accountants
- Other professional guidelines on audit fees, conflict of interest, advertising and publicity and opinion shopping by clients
- Auditors independence /objectivity and its importance
- Threats to independence and safeguards.
- Threats on adherence to other fundamental principles and safeguards to the threats
- Development and status of ISAs in execution of audits
- Relationship between International Standards of Auditing and National Auditing Standards
- Purposes/importance of adoption of ISA in the audit.
- Planning and Risk Assessment
Obtaining, accepting and retention of an audit engagement
- Matters to consider before and after acceptance of nomination
- Pre-conditions of an audit
- Engagement letter, procedure of sending letter, purposes and contents of the letter-ISA 210
- Circumstances for revision of engagement terms
- Understanding the entity and its environment
- Background information about the entity or client.
- Ways of gathering knowledge about the business
- Reasons/importance of information gathered about the client
- Reasons of review of previous audit files and communication with previous auditors
- Overview of audit process
- Audit risk assessment
- Components of audit risk (Inherent, Control and Inherent risks)
- Assessment of different types of audit risks
- Factors leading to increase or decrease of inherent, control and detection Risks
- Adoption of risk based audit, reasons and procedure
- Advantages and Disadvantages of the approach
- Evaluating and prioritising risk and control factors
- Mechanisms to minimise the risks associated with client audits.
- Audit planning
- Purpose and challenges in audit planning
- Planning for new and existing clients
- Development of the overall audit strategy
- Contents of audit planning memorandum/ overall plan
- Relationship between audit strategy and audit plan
- Design of audit programs, importance and problems of the programs
- Impact of material misstatements on audit strategy and degree of work done
- Influence of interim audit work on the year end/final audit.
- Audit documentation
- Reasons and importance of audit documentation
- Sources, features and purposes of working papers
- Storage of working papers-permanent audit file and current audit file, auditors note book or diary
- Lien or custody on working papers
- Standardisation of working papers – advantages and disadvantages
- Safe custody and retention of working papers
- Form and content of working papers
- Automated working papers
- Quality control policies and procedures implemented by audit firm
- Objectives of quality controls to the audit firm/ auditors
- Peer review and its objectives
- Internal control systems and Internal Audit Function
Internal control systems (ICS)
- Objectives of internal control system
- Component of internal control system
- Features of Internal control system
- Designing of internal control system.
- Auditors and management responsibility over ICS
- Advantages and disadvantages /inherent limitations of ICS
- Indicators of weaknesses in ICS and actions taken by management
- The evaluation of internal control systems by auditors using Internal Control Questionnaire, Flow charts and narrative notes
- Tests of controls on specific control environments
- Internal controls theory and practice-sales and debtors, purchases and creditors, inventories and work in progress, fixed assets, salaries and wages
- Communication of improvements on ICS weaknesses/ risks associated – Management letter.
- Internal Audit Function
- Scope and objectives of internal audit
- Criteria of using internal audit work
- Areas of support on external auditors’ work
- Internal audit review reports and actions by management and those charged with governance
- Design of risk based internal audit plan
- Internal audit key performance indicators
- Managing and monitoring follow up of audit recommendations made to board/ management.
- Outsourcing internal audit function-advantages and disadvantages.
- Audit committee-functions, merits and demerits.
- Internal check systems-scope, features, advantages and disadvantages
- Information technology threats and control
- Auditors duty on compliance with laws and regulations.
- Overview of Forensic Accounting, Errors, Frauds and Irregularities
Overview of forensic accounting
- Nature, purpose and scope of forensic accounting
- Types of forensic investigations: corruption, asset misappropriation, financial statement fraud, others
- Asset Recovery process and legal framework
- Errors, Frauds and Irregularities
- Differences between error and frauds
- Types of errors-omission, commission, principle, reversal of entries
- Types of Frauds-Teeming and lading, ghost employees, window dressing, misappropriation of goods and fraudulent financial reporting
- Causes of frauds and fraud triangle
- Indicators of errors and frauds
- Detection and prevention of errors and frauds and deterrence-role of internal audit
- Materiality and Implications of errors and frauds in the financial statements
- Impact of errors and frauds on the audit plan
- Reporting on error and frauds
- External auditors and Management responsibility on error and frauds
- Auditors professional skepticism.
- Audit evidence
- Financial statement assertions and audit evidence
- Types and features of audit evidence (sufficiency, reliability and relevance)
- Audit evidence gathering procedures/ techniques
- Materiality and limitations of audit evidence
- Financial statement assertions and audit evidence
- Audit sampling techniques – statistical and non-statistical
- Analytical reviews procedures- nature, objectives, timing and extent of support evidence
- Types of analytical Procedures-Variance analysis, reasonableness tests, trend analysis
- Using the work of experts- areas of support and considerations
- Using management representations (importance, procedures adopted and matters covered).
- Auditing in the public sector
- Introduction to auditing in the public sector and regulatory provisions
- Objective and scope of public sector audit (compliance, performance, financial, value for money)
- Establishment, mandate and functions of public sector auditors
- The parties to audit in public sector-auditor, responsible party and intended users
- Role of internal audit function in public entities
- Relationship between external and internal auditors in the public sector
- Audit reports by office of Auditor General.
- Functions of audit advisory board and executive committee in Auditor General office.
- Auditors Reports
- Purposes of auditors’ report and concept of true and fair view
- Legal /Statutory provisions on audit reports
- Basic elements contents of audit reports
- Emphasis of the matter paragraph and key audit matters
- Types and Consequences of different types of audit reports issued.
- Features of unqualified and qualified audit reports
- Reasons for qualifications of audit reports (Limitation of scope, inherent uncertainties, disagreements)
- Types of qualifications-disclaimer, except for and adverse opinions.
- Overall audit review and finalisation
- Subsequent events/Post balance sheet events review (adjusting and non – adjusting events, auditor’s responsibility and audit procedures)
- Going concern review (Auditors and management responsibility, indicators of going concern difficulties, audit procedures, mitigation plans and reporting)
- Management representations on contentious matters affecting financial statements like guarantees made, capital commitments, borrowings, unusual accounting adjustments.
- Review of compliance with accounting policies, opening balances, prior period audits by other auditors
- Format for presentation of independent auditor’s report.
- Auditing in a computerised system
- Audit objectives in computerised systems
- Differences between computerised and manual systems
- Benefits and drawbacks of computerised accounting systems
- Types of controls in computerised systems (Administrative, system development, processing controls, application controls, master files and standing data
- Auditors use of computers in the course of audit
- Planning the audit in computerised systems
- Audit approaches – audit around, with and through the computer and circumstances when each is applied
- Loss of audit trail, causes and measures to mitigate the loss of audit trail
- Computer Assisted Audit Techniques (CAATS) – Audit software and test data
- Types of audit software and functions and types of test data
- Factors considered before using CAATS and steps in CAATS application
- Advantages and disadvantages of CAATS
- Use of embedded audit modules and integrated test facilities
- Information security controls (Encryption, Firewalls, Passwords, Antivirus)
- Contemporary and emerging issues in audit
- E- commerce auditing
- Cloud documentation
- Use of data analytics tools in audit (Anomaly detection, diagnostic analysis, predictive analysis.
CONTENT PAGE
Topic 1: Nature and purpose of an audit ……………….….….……………………………..8
Topic 2: Assurance and non- assurance engagements …………………………………..…33
Topic 3: Legal and professional framework ……………….……….…….…………………48
Topic 4: Planning and Risk Assessment ……………………………………………………89
Topic 5: Audit risk assessment ……………………………………………………………..97
Topic 6: Audit planning ……………………………………………….…….…………….131
Topic 7: Audit documentation …………………………………………………………….145
Topic 8: Internal control systems and Internal Audit Function Internal control systems (ICS) ………….……………………………………………………………………………………157
Topic 9: Internal Audit Function …………………………………………….….…………175
Topic 10: Overview of Forensic Accounting, Errors, Frauds and Irregularities ………….194
Topic 11: Errors, Frauds and Irregularities ………………………….………….………….205
Topic 12: Audit evidence………………………………………………………………….216
Topic 13: Auditing in the public sector…………………………………………………….270
Topic 14: Auditors Reports…………………………………………………………….….285
Topic 15: Auditing in a computerised system……………………………………………..320
Topic 16: Contemporary and emerging issues in audit……………………………………332
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TOPIC 1
NATURE AND PURPOSE OF AN AUDIT
NATURE AND OBJECTIVES
Definition of an Audit:
An audit is the examination of the financial report of an organisation – as presented in the annual report – by someone independent of that organisation. The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.
The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organisation at a given date, for example:
- Are details of what is owned and what the organisation owes properly recorded in the balance sheet?
- Are profits or losses properly assessed?
When examining the financial report, auditors must follow auditing standards which are set by a government body. Once auditors have completed their work, they write an audit report, explaining what they have done and giving an opinion drawn from their work. Generally, all listed companies and limited liability companies are subject to an audit each year. Other organisations may require or request an audit depending on their structure and ownership.
The objective of an audit is to enable the auditor express an opinion whether financial statements show a true and fair view of the company state of affairs in accordance with an identified financial reporting framework.
The purpose of an audit is not to provide additional information but rather it is intended to provide the users of the accounts with assurance that the information provided to then by directors is reliable. However, the users should not assume the auditor’s opinion is one to efficiency with which management has conducted the affairs of the entity.
Financial statement: According to the Companies Act, the company accounts refers to the balance sheet and the profit and loss account but due to development in business practice and shareholders information needs, these are inadequate as to the information regarding financial position and performance of the company. Since most balance sheets and profit and loss accounts are summarized statements amplified by notes to the statements, the business community and the accountancy profession require that a cash flow statement as well as a statement of changes in equity be prepared. The terms company accounts and financial statements have the same meaning.
Financial Reporting framework: According to International Auditing Standards (ISA 200, the framework of international standards of auditing), financial statements are usually prepared and presented annually and are directed at common informational needs of a wide range of users.
Many of the users rely on the financial statements as their major source of additional information to meet their specific information needs. Therefore financial statements need to be prepared in accordance with one or combination of:
- International Financial Reporting Standards (IFRS)or IASs
- National accounting standards
- Any other authoritative and comprehensive financial reporting framework designed for use in financial reporting and is identified in the financial statements. In Kenya the financial reporting framework adopted is as prescribed by IFRS.
Scope of-the Audit
- The auditor’s opinion on the financial statements deals with whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework: Such an opinion is common to all audits of financial statements.
- The auditor’s opinion therefore does not assure, for example, the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity. In some jurisdictions, however, applicable law or regulation may require auditors to provide opinions on other-specific matters, such as the effectiveness of internal control, or the consistency of a separate management report with the financial statements.
- While the ISAs include requirements and guidance_ in relation to such matters to the extent that they are relevant to forming an opinion on the financial statements, the auditor would be required to undertake further work if the auditor had additional responsibilities to provide such opinions.
STAGES OF AN AUDIT
The suggested audit approach is designed to gather sufficient and reliable evidence to support the audit opinion in the most efficient and effective way and to enable the engagement team to fully understand the client’s business. There is no difference between an audit of a large and a small entity except that the procedures adopted may differ depending on the particular circumstances of each audit
- Preliminary Engagement Activities
- Planning
- Execution
- Review and Completion
Preliminary Engagement Activities
At the Pre-planning stage, the engagement partner ensures that:
- The client acceptance and continuation procedures have been carried out;
- The terms of engagement have been agreed in writing;
- The quality control aspects for the assignment have been reviewed including review of the competency of the team to carry out the assignment, review of compliance with the ethical requirements, including review of the independence requirements.
Planning
Planning is an essential component in focusing the audit efforts. The key components of
Identifying the scope of the assignment
Developing an audit strategy taking into consideration the scope of the engagement; the business and the regulatory environment in which the entity operates; entity specific issues including reliance on the work of internal audit; reporting objectives, timing of the audit and the nature of communication required; matters affecting the direction of the audit including preliminary setting of materiality levels, preliminary review of risk including fraud risk, preliminary review of internal control including the control environment, the process adopted by the entity to identify, measure, monitor and control risks.
- Developing, based on the above, the overall audit plan detailing the nature, timing and extent of the audit procedures to be performed in order to reduce the audit risk to an acceptably low level; the nature of tests to be adopted; procedures to be adopted at the assertion level; and tailoring the audit programmes.
- Ascertaining the nature and the extent of the resources required to perform the audit.
iii) Execution
- The key components of the execution stage are:
- Carrying out the test of controls and substantive tests on transactions and balances including substantive analytical procedures to obtain sufficient and appropriate audit evidence to enable the engagement team to draw reasonable conclusions on which to base the audit opinion.
- Evaluating significant assumptions used in fair value measurement to determine the reasonableness of the basis used and the disclosures.
- Identification of related parties and obtaining sufficient and appropriate audit evidence in respect of measurement and disclosure of related party transactions.
- Documenting the nature, timing and extent of the audit procedures performed and the results and conclusions drawn from the audit evidence obtained
While pre-printed forms and programmes are available in the Manual, the extent and the timing of the tests should be tailored to the specific assignment. Different tests and different levels will be appropriate for each assignment. The control of the audit at this stage must be maintained by a senior team member with the appropriate experience and expertise.
