CPA
ADVANCED AUDITING AND ASSURANCE
CPA SECTION 6
KASNEB STUDY TEXT
REVISED SYLLABUS
17.1 Assurance and non-assurance
- The concept of assurance and non-assurance engagements
- Agreed upon procedures
- Compilation engagements
- Assurance reports
17.2 Audit framework and regulations
- Objective and general principles
- Legal framework
- International, regulatory framework for audit and assurance services
- Auditors’ professional liability and legal responsibilities
17.3 Professional and ethical considerations
- Code of ethics for professional accountants
- Fundamental principles, threats and safeguards
- Advertising, publicity, obtaining professional work and fees and money Laundering
- Professional skepticism (in the context of errors and fraud)
17.4 Management of audit practice
- Client acceptance and retention
- Tendering for audit services
- Professional appointments
- Planning, materiality and assessing risk of misstatement (audit risk)
- Methods and techniques of auditing high risk areas
- Use and evaluation of internal control system by auditors
- Preparation of audit working papers
17.5 Audit evaluation and reviews
- Financial statement assertions and audit procedures
- Subsequent events
- Going concern
- Related parties management representation
- Group audit/joint/component audit
- Analytical review
- The company audit
- Audit of consolidated financial statements
- Audit of banks and non banking financial institutions
- Audit of general insurance companies
- Audit of cooperatives societies
- Audit under taxation laws
- Other special audit assignments
17.6 Audit related assurance services
- Prospective financial information,
- Investigations and due diligence
- Special audit assignments (social and environment audit)
- Audit committee and corporate governance
- Operations and internal audit management
- Audit under computerised information systems
- Audit of public sector undertakings
17.7 Forensic accounting
- Conduct of forensic investigations: accepting the investigation, planning, evidence gathering, reporting
- Rules of evidence in court proceedings
- Regulations and standards on forensic accounting
- Applicable codes of ethics
17.8 Audit clearance and reporting
- Quality control and peer review
- Reports to those charged with governance
- Reporting on compliance and other information (Chairman’s statement and directors report)
- Auditors report on financial statements
17.9 Emerging issues and trends
TABLE OF CONTENT
- ASSURANCE AND NON-ASSURANCE SERVICES…………….5
- AUDIT FRAMEWORK AND REGUALTIONS……………………22
- PROFESSIONAL AND ETHICAL CONSIDERATIONS………39
- MANAGEMENT OF AUDIT PRACTICE……………………………70
- AUDIT EVALUATION AND REVIEWS…………………………….121
- AUDIT RELATED ASSURANCE SERVICES………………………172
- FORENSIC ACCOUNTING………………………………………………223
- AUDIT CLEARANCE REPORTING…………………………………..237
- BLOCK REVISION………………………………………………258
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TOPIC 1
ASSURANCE AND NON-ASSURANCE SERVICES
The incorporation of business entity usually creates two implications namely;
- The requirement for a distinction between the entity itself and the owners leading to a requirement that the entity be managed by separate persons.
- Granting a limited liability status to the entity so that if the entity fails, the owners may only stand to lose a specific amount of money.
A legal framework is therefore needed for running the company in order to;
- Protect the owners of the company from bad managers
- Protect the business entity from the public at large because the owners may also take advantage of the company’s limited liability status.
It is for the above reasons that a discussion is required in dealing with the following concepts;
- Stewardship concept
- Accountability concept
- Agency concept
Stewardship concept
In most countries, Financial Statements of companies are required to be produced by the directors and management on a regular basis to be able to account to the shareholders and other interested parties regarding their stewardship responsibilities.
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TOPIC 2
AUDIT FRAMEWORK AND REGULATIONS
The auditor’s legal and regulatory framework depend on the environment in which the auditor is operating e.g. an auditor who is operating within our local environment should be guided by the following;
- Provisions of the applicable auditing standards i.e. ISAS.
- The provisions of the applicable financial reporting standards e.g. IAS/IFRS
- The ethical code laid down by the International Federation of Accountants Council (IFAC)
- Provision of the company’s act in terms of appointment procedures, duties, rights, removal e.t.c
- Other regulations e.g. stock exchange/listing requirements, CMA Act and corporate governance requirements.
- The provisions of the Accountants Act (15) of 2008.
Objectives and scope of auditing (ISA 200)
The objective of an audit of FSs is to enable the auditor to produce a report indicating whether FSs comply with all materials in respect to an identified financial reporting framework.
Under the provisions of the Company’s Act, the auditor should include the matters of the 7th schedule of the Company’s Act.
- An indication as to whether the auditor has received all information and explanation required for the purpose of audit.
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TOPIC 3
PROFESSIONAL AND ETHICAL CONSIDERATIONS
Code of ethics for professional accountants
Ethics consists of a set of rules required to be followed or to guide members of a particular profession regarding their conduct.
The accountancy profession has various guidelines which usually originate from the international federation of accounting council and are required to be implemented through its corporate member e.g. ICPAK.
Auditors are also required locally to comply with the provisions of Accountant Act 15 of 2008.
The institute of certified public accountants has already established a disciplinary committee which deals with any cases of professional misconduct by the members of the institute.
The main purpose of the ethical code include;
- Maintenance of the dignity of professional accountants
- Minimizing possible liabilities which may affect the auditor
- Avoidance of any situations which may cause an embarrassment to the profession.
Areas covered;
- Fundamental principles of audit and assurance
- Independence of auditors
- Confidentiality
- Advertising and publicity
- Conflict of interest
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TOPIC 4
MANAGEMENT OF AUDIT PRACTICE
- a) Tendering for audit services
The most common way by which auditors get potential clients is through recommendations made by existing clients based on the auditor’s reputation and performance during client relationships or through a tendering process initiated by clients who may put up advertisements in newspapers seeking for audit and assurance.
During such a process, various audit firms may be involved in determining whether they have the capacity to serve the potential client and therefore make appropriate tender proposals.
Audit firms considerations
During a tendering process, audit firms are required to consider the following important aspects;
- Competencies of the audit firm
- Information required from the potential client
- Tendering procedures to be followed
- Risks associated with tendering process.
- Competencies of the audit firm
- Scope of work
The auditors are required to consider details relating to the potential client e.g. its financial reporting framework such as accounting and auditing requirements, size of client entity, the
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TOPIC 5
AUDIT EVALUATION AND REVIEWS
The work of an auditor mainly involves gathering of evidence and making professional judgment based on the evidence gathered which is documented in form of audit working papers.
Audit evidence may be obtained in form of either primary evidence which is evidence obtained internally from client and may depend on the nature of the client system e.g. whether strong or weak and secondary evidence which is mainly obtained from external independent sources.
Auditors may also gather evidence directly using procedures such as physical inspection, observation, analytical review etc.
Auditors are required to distinguish between quality and quantity of evidence by considering the following features;
- Relevance Reliability 3. Sufficiency
- Relevance
This feature relates to appropriateness of audit evidence and is mainly connected with the extent to which any evidence being gathered is able to support a particular FS assertion.
It therefore relates to the extent to which evidence being gathered is persuasive to the auditor for purposes of supporting the ultimate audit opinion.
It is also important because it may influence the auditor’s time budget in avoiding spending too much time on matters that may not be useful to the auditor.
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TOPIC 6
AUDIT RELATED ASSURANCE SERVICES
PROSPECTIVE FINANCIAL INFORMATION (PFI)
The term prospective means ‘future’ and sometimes companies may need to predict their future financial position especially where they are in need of new share capital from the public or where they are intending to obtain loans from banks and financial institutions.
To determine such future financial positions companies are required to apply logical and reasonable estimates and also make assumptions based on past experience.
The international standard on Assurance Engagement 3400 (ISAE 3400) provides guidance to auditors and gives the definitions of PFI as information based on assumptions about future events which may occur and possible actions that may be taken by the entity such assumptions may take the form of either forecasts or projections or a combination of both and may be considered to be highly subjective requiring a high degree of judgment by the preparers.
EXAMPLES OF PFI
- Projected cash flow statements and forecasts.
- Projected incomes and expenditures account (P &L alc).
- Capital budgets in respect of fixed assets.
- Projected earnings of an entity.
- Projected statement of financial position (balance sheet)
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TOPIC 7
FORENSIC ACCOUNTING
During planning of the audit, auditors are normally required to consider the possibility that errors and fraud may significantly affect the FSs being audited and also have an implication on the auditor’s report.
Under the provisions of ISA 240 on fraud and error, the following matters should be considered;
- Implications of errors and fraud to the client systems and indicators of irregularities.
- The respective responsibilities for fraud and error
- Reporting implications for the auditors
Implications for errors and fraud
- An indication that proper books of account are not being kept by the client implying that the FSs produced may not portray a true and fair view as required.
- An indication that the accounting and ICSs are not achieving the required objectives meaning that the auditors are likely to adopt a vouching/substantive audit which has cost implications -in terms of resources and competence of auditors.
- An indication that the level of audit risk is high meaning that auditors have a higher chance of making mistakes such as non-discovery of irregularities affecting FSs.
An indication that auditors may need to adopt a skeptical approach during the audit work which implies doubting some types of evidence produced by management e.g. if management lack integrity the management representations may be unreliable
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TOPIC 8
AUDIT CLEARANCE AND REPORTING
ISA 720 on other information relating to FSs deals with the auditors responsibilities over such information and requires the auditors to read such information and determine whether there could be any material inconsistencies with the audited FSs.
The FSs normally include;
- The statement of financial position.
- The statement of comprehensive income.
- The statement of cash flows.
- The statement of changes in equity.
- The explanatory notes to the FSs.
MANAGEMENT REPRESENTATIONS (ISA 580)
NATURE
During the audit process, auditors come across various types of evidence which can broadly be classified into 3 groups namely:
- Evidence which is not material in the context of FSs and therefore can be discussed verbally with the clients officials to enable the auditors to draw conclusions.
- Evidence that is materials in the context of FSs and which auditors can use various procedures and tests to be able to evaluate and draw conclusions.
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BLOCK REVISION
MAY 2016.
QUESTION ONE
- i) These are accounting estimates made by the management requiring auditors to perform substantiation tests.
- Holding discussions with credit controller to discuss issues regarding calculations of change.
- Obtaining schedule of analysis of bad debt provisions and costing the schedule to confirm its completeness.
- Discussing internal procedures performed by the client entity in recording provisions for bad and doubtful debts.
- Performing ARPs by comparing the bad debts account in the previous years to the current year and determining whether the change in the percentage is appropriate.
- Checking appropriateness of calculations by determining whether the 2.5 % was computed on the basis of total receivables.
- Analyzing the aging of receivables by reviewing correspondences with the client to confirm whether the position has improved.
- Reviewing the minutes of the BODs to confirm approval of the provisions for bad debts.
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