NOTES AAA Important for revision

Table of Contents
PART A............................................................................................................................................................................................3
2 Money Laundering.............................................................................................................................................................4
3 Laws and Regulations.......................................................................................................................................................7
PART B..........................................................................................................................................................................................9
1 Code of Ethics for Professional Accountants...............................................................................................................10
2 Fraud and Error....................................................................................................................................................................15
3 Professional Liability.......................................................................................................................................................18
PART C........................................................................................................................................................................................21
1 Quality Management (firm-wide)...................................................................................................................................22
2 Advertising, Tendering, and Obtaining Professional Work and Fees.......................................................................26
ADVERTISING.....................................................................................................................................................................26
TENDERING........................................................................................................................................................................27
3 Professional Appointments............................................................................................................................................31
PART D.......................................................................................................................................................................................33
1 Business Risk....................................................................................................................................................................34
2 Audit Risks........................................................................................................................................................................35
3 Evidence............................................................................................................................................................................36
4 Audit Procedures.............................................................................................................................................................37
5 Using Work of Others......................................................................................................................................................38
6 Group Audits.....................................................................................................................................................................39
PART E........................................................................................................................................................................................40
1 Subsequent Events..........................................................................................................................................................41
GOING CONCERN.............................................................................................................................................................41
AUDIT EVIDENCE.............................................................................................................................................................43
2 Completion and Final Review.........................................................................................................................................46
3 Auditor’s Report...............................................................................................................................................................47
4 Reports to Those Charged with Governance (TCWG) and Management.................................................................48
PART F........................................................................................................................................................................................49
1 Audit-related and Assurance Services..........................................................................................................................50
2 Specific Assignments.......................................................................................................................................................51
Review of Prospective Financial Information.............................................................................................................51
Due Diligence Review....................................................................................................................................................51
Forensic Service.............................................................................................................................................................51
3 Audit of Social, Environment, and Integrated Reporting...........................................................................................52
4 Audit of Performance Information in the Public Sector.............................................................................................53
5 Reporting on Other Assignments..................................................................................................................................54
EXAM TIPS...................................................................................................................................................................................55
PART A
Regulatory
Environment
2 Money Laundering
Definition
=> process by which criminals attempt to conceal the true origin and
ownership of the proceeds of their criminal activity
=> include: possessing or concealing the proceeds of any crime + failure
by an individual to inform the NCIS or MLRO of knowledge or suspicion
that another person is engaged in money laundering

Indicators of Money Laundering

Step 1: Placement
This is the initial placing of ill-gotten cash into the financial system. Cash-
based business provide good cover for this, as it is easier for criminals to
disguise dirty money as clean, eg by mixing it in with cash receipts.
[cash-based business and mixing of illegal and legitimate sources of cash]

Step 2: Layering
This is the creation of 'layers' of transactions which seek to disguise the
original origin of the placed cash. In practice this can be so complex that
the cash is almost impossible to trace.
[complex transactions to hamper tracing the cash such as transfer
overseas]

Step 3: Integration
This is the integration of the money back into the legitimate economy, so
that the criminals can use it to make purchases or investments.
[investing or spending cash to place it into the legitimate economy]

Implications of Money Laundering

There is a risk that the senior has ‘tipped off’ money launderer by
questioning him about the transfer. This is itself an offence, although it
may be argued here that the auditor was not aware that the disclosure
could prejudice any future money laundering investigation. ** tip off =>
the money launderer knows that the auditors knew there is
money laundering going on

If the amount is clearly highly material, it is possible that the firm may
seek to withdraw from the engagement. However, there is a risk that this
could be construed as ‘tipping off’ if money launderer thinks it is because
the audit firm has suspicions over money laundering. The firm should
obtain advice from its legal counsel.

Professional Duty of Confidence

=> auditors will not be in breach of any professional duty of
confidence if the report any ML knowledge, in good faith (having a
reasonable ground to believe)
Audit or Policies Procedures (ML Programme)
1) FIRM should have place internal controls and policies before accepting
a new client. This would involve investigating the background of the
company as well as the background of the directors, because the firm can
be implicated if the client or its directors are involved in malpractices,
such as money laundering.

2) The firm ought to establish and maintain proper record keeping system
that contain evidence of client involvement in money laundering as this
will be used by the authority to prosecute the client. In the meantime,
there must be a proper recording of the outcome of the client accepting
procedure to prove that such an activity is being carried out that no
indication client involvement in money laundering.

3) Firm-wide elements include a training programme for staff, so that they

are aware of
relevant legislation and what they must do if they suspect or encounter
money laundering. Training should include money laundering risk factors,
so that individuals are better able to spot money laundering and respond
appropriately.
** educate and train all staff – establish a culture of complying with money
laundering requirements – provision of training should be documented to
demonstrate compliance

4) The audit senior should report such situation to the firm’s MLRO. The
MLRO is the internal person (senior position) responsible for receiving and
evaluating reports of suspected money laundering, and for making any
reports to external bodies.
** include the name of the suspect, the amounts involved, the reasons for
suspicion and the whereabouts of any laundered money / made as soon as
possible - an offence to not report suspicions

5) Customer Due Diligence / Know Your Client procedures involve an audit

firm
establishing the identity of clients, eg through passports, and
understanding the
sources of clients' income and the rationale for business transactions.

Identity of CEO – passport for photographic evidence / recent utility bills

or bank statements to identify its address

Identity of other shareholders including the other family members and

other x% shareholders

CLIENT - the company certificate of incorporation to confirm legal status,

date and place of incorporation / A Companies House search (or
equivalent) to confirm the existence of the company, the shareholders
and directors, beneficial owners

Review of the latest financial statements of CLIENT, and the other

companies in which CEO has an interest should be reviewed

Identify the source of funding, when funding is repayable, and the

existence of any security provided by the company or by personal
guarantee of owners

Politically Exposed Persons (PEPs)

=> individuals who are entrusted with prominent public functions in a
foreign country

1) have appropriate risk management systems to determine whether

CLIENT is PEP
2) obtain senior partner approval for establishing business relationships
with PEPs
3) establish the source of wealth and source of funds (if the nature of
service involves handling CLIENT’s funds)
4) conduct enhanced ongoing monitoring on continuing basis of such
business relationships
3 Laws and Regulations
EXAM APPROACH
(case study) raises concerns that CLIENT may not be complying with
regulations such as (laws and regulations). It is management’s
responsibility to ensure that CLIENT’s operations are conducted in
accordance with the provisions of laws and regulations. However, the
auditor does have some responsibility, especially where NOCLAR has an
effect on the financial statements.

Implications on FS or audit work

The auditor needs to consider the potential implications for the financial
statements. The NOCLAR could lead to regulatory authorities imposing
fines or penalties on CLIENT, which may need to be provided for directly in
the financial statements. Audit procedures should be performed to
determine the amount, materiality and probability of payment of any such
fine or penalty imposed. ** any accounting issues

Audit procedures
Auditing standard requires that the auditor should obtain an
understanding of the legal and regulatory framework in which CLIENT
operates. Therefore, the auditors should obtain a full knowledge and
understanding of the laws and regulations relevant to (case study),
focusing on (what regulations?) and the implications of NOCLAR.

Standard also requires that in the event of a suspected or identified

NOCLAR, the auditors shall obtain an understanding of the nature of the
act and of the circumstances in which it has occurred, and further
information to evaluate the possible effect on the financial statements.
Therefore, procedures should be performed to obtain evidence about the
suspected or identified non-compliance.

If FIRM believes that NOCLAR is taking place, then according to auditing

standard, the matter should be reported to those charged with
governance of CLIENT. The communication should be conducted as soon
as the auditor suspected or actual of non-compliance without delay as
there could be potential severity of such situation.

The auditor should request that those charged with governance make any
necessary disclosure to the relevant authorities, clearly state the reasons
why CLIENT should make the disclosure and that if the board fails to
comply, that FIRM will be compelled to make the disclosure themselves.

> If the auditor suspects that members of senior management including

the board of directors are involved with the non-compliance, the matter
should be communicated to the next level of higher authority such as AC
or supervisory board. If family-managed client, FIRM should take
appropriate legal advice if the matter may not be communicated by the
entity.

> If the management does not report to relevant authority or fail to make
the necessary disclosures to parties outside CLIENT, then the auditor
should consider whether they should make the disclosure which depends
on whether there is legal duty to disclose if related to public interest.
+ should obtain a written representation regarding the reason for the non-
disclosure.

Throughout the audit process, the auditor should remain vigilant for signs
of non-compliance or suspected non-compliance that might emerge from
regular audit procedures. These could be discovered through other areas
of testing or discussions with management.

FIRM owes CLIENT a duty of confidentiality and should therefore not

disclose the accident without CLIENT’s prior consent. This duty may,
however, be overridden where disclosure is in the public interest or is
required by legislation. The auditor should consult with legal counsel to
determine whether it has any legal duty to disclose, or whether disclosure
would be appropriate here on public interest grounds.
PART B
Professional and
Ethical
Considerations
 1 Code of Ethics for Professional Accountants
Threats & Safeguards to Professional Ethics
FASSI (b) EXAMPLE (c) IMPLICATIONS (d) SAFEGUARDS (e)

Familiarity 1) Close relationship 1) Both hold higher positions that 1) 1 Remove and replace auditor
could influence the outcome of audit
(occur when, 2) Long association / and place family relationship above 2) 1 Rotated off for two years of
because of a EQCR is a former AP the need of users of financial cooling period after 7 years (AP) / 2 to
close statements 3 years (ATM)
relationship, 2 Appoint an alternative AP (AP) /
members 2) AP is more favourable to CLIENT AP should not serve as EQCR for 2
become too which will be reluctant to issue a years or involve in audit engagement
sympathetic to modified opinion and lack professional 2 Arrange regular independent
the interests of scepticism reviewer for audit engagement (ATM)
others)
Advocacy Representing CLIENT; FIRM may be seen publicly supporting Not allowed by ACEC due to likelihood
Acting on behalf of CLIENT which not seen as having of arising material impact on financial
CLIENT; independence in appearance and statements.
Promoting CLIENT independence of mind to view
financial statements / be less likely to Decline invitation politely as it
* include 3 party
rd
challenge the figures included represents too great threats to
independence
Conflict of Interest 1 Notify both CLIENTs (potential and existing) and obtain consent
2 Advise both clients to seek additional independent advice
- Auditing two CLIENTS in the same 2 Establish Chinese Walls by separating team with different AP and ATM
industry which are rivals at the same 3 ATM need to sign confidentiality agreement
time. 5 Regular monitoring of the application safeguards by an independent senior
 individual in FIRM not involved in either audit
Intimidation 1)Removal/litigation FIRM may feel under pressure to cut 1) 1 Inform AC
threat/ fees pressure corners / not raise issues in order to 2 Consider to withdrawal from
(occur when an (satisfy the deadlines) and then signing the contract
auditor is compromise the objectivity of FIRM
deterred from and quality of the audit performed 2) 1 Discuss with FD to reschedule
acting 2) Short reporting time timing of audit work
objectively due CLIENT’s lack of co-operation with 2 If not possible, inform FD that
to threats, auditors can lead to impose limitations audit needs to comply with ISA and QC
actual or on auditors to perform their work procedures
perceived) 3 Consider resignation if threat
continues
Self-review 1) Provision of NAS 1 Potential acquisition is subsequently 1) 1 Decline if listed (not allowed)
[+ MT] (accounting; design reflected in FS / FIRM may be less 2 Establish Chinese wall (listed) and
controls; corporate likely to challenge the figures included arrange for additional review to be
(occurs when a works) / FIRM may not admit any errors undertaken / Use separate teams and
previous ** Can use contingency discovered partners (unlisted)
judgement fees
needs to be re-
evaluated by 2) If FIRM prepares a tax return, there
members 2 Preparing FS may draw the ATM is no threat.
responsible for 2) Tax services inadvertently into performing If FIRM calculates tax, yes.
that management functions
judgement) 3) 1 Clarify the exact areas that
loaned staff will assist
3) Temporary 2 If directly related to financial
assignment of staff statements, remove audit staff
(Auditor loaned / seconded from audit engagement
seconded to CLIENT)
[MT:Care must be taken not to make
 [MT: assume management management decisions]
[MT: FIRM undertaking responsibility, making decisions and
management judgements on behalf of client]
responsibilities]
Self-interest 1) Contingent fees (% of 1) FIRM may feel incentivized to allow 1) 1 Not agree to the proposal
X) incorrect accounting treatments in 2 Declined politely as it is not
(occurs as a * NAS, not allowed if it order to maximise profits allowed by ACEC
result of auditor is significant 3 Communicate to TCG regarding
benefitting from FEE = rate x time spent audit fees is charged based on time
CLIENT in spent, skill and experience of ATM
financial and
non-financial 2) FIRM may not be objective and lack 2) 1 Review the terms of the loan. If
way) 2) Loan from CLIENT professional scepticism not, no further action.
(bank) 2 If preferential, either term
amended or remove ATM

3) FIRM may seem making a loan to 3) 1 Discuss with TCG for reasons of
CLIENT which is prohibited by non-payment
3) Overdue fees ACEC / may feel pressure to agree on 2 Request for immediate settlement
(perceived as ’loan’ to certain accounting adjustments in / agree on payment schedule
CLIENT order to have the last year and current 3 Start audit work only once
year’s audit fee paid overdue fees paid

4) 1 Assess if total fees exceed 15%

4) FIRM could become overly reliant on threshold for 2 consecutive years
CLIENT and be less challenging / 2 If likely to be significant, consider
4) Fee’s dependency on objective due to fear of losing such a which NAS to be undertaken
LISTED (>15%) significant CLIENT 3 If exceeds, disclose to TCG
* UNLISTED, not major 4 If FIRM retain all works, arrange
issue (increase client for pre/post issuance review to be
base + have undertaken by external accountant or
independent review) regulatory body

5) Politely decline the offer / gifts if

5) It may be favourably disposed value significant
towards CLIENT / be less inclined or
5) Gifts and hospitality reluctant to report, highlight and
* (+) Familiarity investigate any potential errors
6) Dispose of its shares in CLIENT’s
6) FIRM may intend to maximise capital
financial interest in CLIENT / not
6) Financial interest (eg suggest audit adjustments which
shareholding) would lead to a modified opinion and
affect the share price
7) 1 Recruitment services allowed
7) FIRM may be assumed to make provided that CLIENT makes all
7) AP recruit senior / management decisions and management decisions.
board members: NED judgements 2 FIRM is limited to reviewing
[+ MT] qualification & shortlist of candidates
3 FIRM cannot provide recruitment
services in respect of BOD who would
be in a position to influence over the
FS
[MT: Care must also be taken not
to make management or final
decisions]

8) FORMER is familiar with the audit 8) 1 Appoint new AM

8) Employment with plan which is to be adopted at CLIENT 2 Perform independent review on
CLIENT: and he may also have commenced the work that have been done by the
- Member to CLIENT work on this year’s audit former AM
- AM/AP join CLIENT’s 3 Modify audit plan (not familiar
BOD level with the approach)
Professional Scepticism
=> defined as an attitude which includes a questioning mind, being alert
to conditions which may indicate possible misstatement due to fraud or
error, and a critical assessment of audit evidence.

This means being alert to the actual circumstances of the engagement

and the work being done. If an auditor is not sceptical in this way, then
they may not realise that something is unusual; they may not tailor audit
procedures to the actual risk at hand; or they may jump to hasty
decisions.

Off-shoring audit work

‘Off-shoring’ arrangement is not prohibited by the auditing standard as
long as it is not using judgemental. For instance, numerical checks on
documentation included in such arrangement is appropriate and non-
judgemental work.

However, the overseas office also read the minutes of the board meetings
to identify issues relevant to the audit. This will involve judgemental from
the auditors which require specialise knowledge. Therefore, the offshore
office may not be competence to perform such service which can effect on
audit engagement of Wire.

The audit firm should have an independent quality reviewer to review the
work performed by the offshore auditors to ensure its reliability. This will
ensure consistency and adherence to local audit standards.
2 Fraud and Error
EXAM APPROACH

Characteristics
=> fraud (intentional) / error (unintentional)

1) Fraudulent financial reporting: This involves intentional

manipulation of financial statements to mislead stakeholders, such as
inflating revenues or hiding liabilities (eg – earning management / window
dressing FS / FS manipulation).

2) Misappropriation of assets: This refers to theft or misuse of a

company’s assets, like embezzlement or unauthorized personal use of
company funds that causing amount reported to be overstated.

Auditor’s Responsibility
Detecting fraud is the primary responsibility of management, not the
auditor. However,
the matter is complicated because the auditor is required to give
reasonable assurance
that the financial statements are not materially misstated as a result of
fraud (or error).
Moreover, auditors are required by auditing standard to identify and
assess the risks of material misstatements due to fraud. This means that
the audit conducted in line with ISAs should obtain evidence specifically in
relation to fraud.

Owing to the inherent limitations of an audit, there is an unavoidable

risk that some material misstatements of the financial statements may
not be detected, even though the audit is properly planned and performed
in accordance with the ISAs.

This is because fraud may involve sophisticated and carefully organized

schemes designed to conceal it, such as forgery, deliberate failure to
record transactions, or intentional misrepresentations being made to the
auditor. Such attempts at concealment may be even more difficult to
detect when accompanied by collusion.

When obtaining reasonable assurance, the auditor is responsible for

maintaining professional scepticism throughout the audit, considering the
potential for management override of controls and recognizing the fact
that audit procedures that are effective for detecting error may not be
effective in detecting fraud.
Subsequently, the auditors are required to design and perform audit
procedures which will take into consideration the fact that there is a risk of
material misstatement due to fraud.

Audit Procedures
Responsive Risk Assessment
Test the appropriateness of journal Inquiries with management to
entries recorded in the general assess management’s views on
ledger and other adjustments fraud risks and understand
made in the preparation of the management's processes for
financial statements. identifying and responding to
fraud.
Review accounting estimates for Assess how governance oversees
biases and evaluate whether the management’s fraud risk
circumstances producing the bias, processes and controls.
if any, represent a risk of material
misstatement due to fraud.
For significant transactions that are Evaluate any unusual relationships
outside the normal course of in data, especially in revenue
business for the entity, or that accounts, for potential fraud
otherwise appear to be unusual indicators.
given the auditor’s understanding
of the entity and its environment **inconsistency between current
and other information obtained year with previous year or budget
during the audit, the auditor shall or industry average’s result
evaluate whether the business ** inconsistency between client’s
rationale (or the lack thereof) of results and auditor’s expectations
the transactions suggests that they in the context of knowledge
may have been entered into to
engage in fraudulent financial
reporting or to conceal
misappropriation of assets.
Evaluate whether the outcomes of Identify conditions that allow fraud:
analytical procedures are incentive, opportunity, and
consistent with the auditor’s rationalization.
understanding of the entity, or 1) incentive or pressure 2)
they indicate risk of material perceived opportunity 3) ability to
misstatement due to fraud. rationalise
The auditor shall obtain written Identify areas susceptible to
representations from management material misstatement due to
and, where appropriate, those fraud, setting aside any
charged with governance that assumptions of integrity about
they: management.

i. acknowledges their responsibility

for the design, implementation and
maintenance of internal control to
prevent and detect fraud;

ii. have disclosed to the auditor the

results of management’s
assessment of the risk that the
financial statements may be
materially misstated as a result
of fraud;

iii. have disclosed to the auditor

their knowledge of fraud, or
suspected fraud, affecting the
entity involved
To respond appropriately to fraud Gather knowledge of any
or suspected fraud identified suspected or actual fraud from
during audit. If fraud is identified, governance, corroborating
auditors are responsible to management responses.
communicate/report the fraud to
appropriate level mgt or report to
third parties e.g regulatory
authorities if it affects public
interest.
Although the auditor’s professional Consult internal auditors or others
duty to maintain the confidentiality for knowledge of actual or
of client information may preclude suspected fraud.
such reporting, the auditor’s legal
responsibilities may override the
duty of confidentiality in some
circumstances.

Implications of Frauds on Audit Engagement

Misstatement Evaluation: Management Involvement:

(a) Identify Fraud Indicators If fraud is suspected involving

Assessment of Misstatements: management, reassess risks and
Determine if misstatements modify audit approach accordingly.
suggest fraud and consider
implications for the audit.

(b) Reassess Risks of Material

Misstatement

Auditor Unable to Continue the Engagement

=> auditor resignation
Exceptional Circumstances:
(a) Determine Responsibilities
Legal and Professional Obligations:
Assess responsibilities to report findings to appropriate parties.
(b) Consider Withdrawal
Withdrawal Assessment:
Evaluate if withdrawing from the engagement is appropriate.
(c) If Withdrawal Occurs
Communicate Withdrawal:
Discuss reasons for withdrawal with management and governance.
Assess any reporting obligations related to the withdrawal.
In cases where fraud raises serious concerns, auditors may need to
withdraw from the engagement. This section emphasizes the
importance of understanding legal responsibilities and ensuring clear
communication regarding withdrawal.
3 Professional Liability
EXAM APPROACH
- Not auditor's primary responsibility to detect fraud unless it is material
in impact on financial statements
- Reasons why fraud is hard to detect
- Audit firm may not have been sufficiently sceptical
- Determine that the (account or system) fraud would have been material
(include calculation)
- Non-adherence to ISAs on controls assessment and evidence obtained
- Discuss whether duty of care owed to client
- Discuss breach of duty of care
- Identify financial loss suffered and firm likely to have been negligent

Auditor’s Responsibilities
Detecting fraud is the primary responsibility of management, not the
auditor. However,
the matter is complicated because the auditor is required to give
reasonable assurance
that the financial statements are not materially misstated as a result of
fraud (or error).
Moreover, auditors are required by auditing standard to identify and
assess the risks of material misstatements due to fraud. This means that
the audit conducted in line with ISAs should obtain evidence specifically in
relation to fraud.

The audit process is, however, subject to inherent limitations which are
particularly relevant to the problem of fraud. Fraud may involve
sophisticated attempts at management which makes the auditor's
task even more difficult. It is therefore quite
possible for the auditor to have conducted an audit in accordance with
ISAs, but still have failed to detect a material misstatement resulting from
fraud.

Conduct of audit
Professional scepticism is a key weapon in the auditor's attempt to detect
misstatements resulting from fraud. The audit of CLIENT does not appear
to have been conducted with an attitude of professional scepticism,
possibly as a result of it being a long-standing audit.

However, irrespective of the auditor's specific duties in relation to fraud,

sufficient appropriate evidence does not in any case seem to have been
obtained in relation to (account or system). ISAs require the auditor to
design and perform tests of controls in each period under audit.
Substantive evidence should have been obtained in relation to (account or
system). This is particularly important given that (account or system) is
likely to be a material area.
Negligence?
Three things must be proved for the auditor to be found to have been
negligent:
- A duty of care existed / The duty of care was breached / A financial loss
resulted from the negligence

Liability to Third Parties Under Tort of Negligence

1) Duty of Care to Third Parties:
- The auditor must owe a duty of care to third parties, meaning the third
party is a foreseeable user of the financial statements, or there is
"proximity" between the third party and the statements.
- The auditor is aware, or should reasonably be aware, that the third party
is relying on the financial statements for decision-making.
- The third party did, in fact, rely on these financial statements.
- The economic decision of the third party would have changed if the
financial statements had been prepared differently.

2) Breach of Duty of Care:

- The auditor fails to apply the latest accounting and auditing standards.
- The auditor does not adhere to the ethical standards set by professional
bodies.
- The auditor fails to meet the conditions outlined in the letter of
engagement.
- The auditor uses incompetent or unqualified staff to carry out the audit.

3) Financial Loss Due to Breach:

The third party must prove they suffered financial losses as a direct result
of the auditor’s breach of duty. Tort law applies to third parties, where the
auditor can be sued for negligence if the third party suffers financial
losses after relying on faulty financial statements. This depends on
whether a duty of care exists, whether that duty was breached, and
whether the breach caused financial harm.

Precedent Case Laws: Caparo Case

In this case, the House of Lord ruled that:

1. Auditor’s responsibilities are towards the shareholders as a body NOT

individual
shareholder.

2. For third parties to successfully sue an auditor, the following conditions

must be satisfied:
(i) Financial losses must have occurred.
(ii) Clear case of negligence on the part of the auditor.
(iii) Auditor is aware of the existence of the third party.
(iv) The third party had relied on the representations made without
undertaking any
further independent investigation i.e. the financial losses was directly
attributable to
the representations made by the auditor. (ADT Vs BDO Binder)

Expectation Gap
=> refers to the deviation between client’s expectations of auditor’s
duties and the auditors’ actual duties

1. Engagement Letter: Auditors should provide as much detail as

possible in the engagement letter to clarify the scope of their work
and avoid any misunderstandings regarding what will be done. This
helps to prevent clients from forming unrealistically high
expectations about the audit’s outcomes.
2. Audit Report: Auditors should expand the audit report to explain
their duties and responsibilities, as well as the duties of the
directors. This ensures that all parties are clear about their
respective roles and helps prevent confusion or misinterpretation of
the audit findings.

The notes emphasize the importance of transparency and clear

communication to reduce the risk of misunderstanding between the
auditor, client, and other stakeholders.
PART C
Quality
Management
and
Practice
Management
1 Quality Management (firm-wide)
Issue Actions
Audit Planning
Increased materiality level – reduces audit work and If a higher materiality level is determined to be
increases detection risk appropriate, the auditor should ensure that audit
procedures still provide reasonable assurance that
material misstatements will be detected. This may
involve increasing the sample size for testing,
performing additional substantive procedures, or
focusing on areas where there is a higher risk of
Materiality level has not been reassessed during the material misstatement.
audit
Materiality should be reassessed throughout the audit,
especially if there are changes in circumstances or new
information that impacts the audit. According to ISA,
materiality should be revised if the auditor obtains
additional information that could influence it, such as
unexpected financial results or operational
developments.
A quick look unlikely to be sufficient especially as this is Other information must be read with objective of
a new audit client – the fact that it is deemed low risk identifying material inconsistencies
does not negate the need for analytical review
No audit planning meeting - lack of direction According to ISA, a planning meeting should involve the
audit team, including the engagement partner and
senior members, to discuss the client’s business
environment, financial reporting risks, materiality
thresholds, and significant areas requiring focused
attention. This would provide the team with a
structured approach to the audit and highlight any new
 risks.
Time pressure increased detection risk and impacts on Invest more time in planning at the beginning of the
the quality of the audit performed audit to create a realistic timeline and allocate
sufficient resources. By identifying peak periods,
complex areas, and high-risk sections early on, the
team can manage time more effectively throughout the
engagement.

GOVERNANCE and LEADERSHIP

Junior asked to challenge FD – inappropriate delegation Challenge should have been done by either AM or AP
(in a position to understand and carry sufficient
authority)
Absence of manager and senior – lack of supervision If the audit manager and senior were frequently
unavailable or absent, the firm should have designated
an alternative senior auditor or a temporary supervisor
to oversee key audit activities. This would ensure that
all staff had adequate guidance, issues could be
resolved promptly, and documentation was reviewed
regularly.
Review left too late and should be ongoing during the
audit

ETHICAL REQUIREMENT

ACCEPTANCE and CONTINUANCE

 INFORMATION and COMMUNICATION
Audit manager's instructions are not appropriate and Analytical review mandatory at the final review stage
increase detection risks

HUMAN RESOURCES
Junior assigned difficult audit work (areas which require Junior should not be assigned such audit works –
specialised skills and experienced) – unlikely to have allocate to more senior and experienced which needed
developed the judgement needed to audit these areas skills to perform – otherwise, pairing system to offer
additional guidance
Junior helped out with inventory count - lack of Auditor should instead have been observing that the
understanding/supervision client’s staff were counting them correctly and
accordingly

ENGAGEMENT PERFORMANCE
Use of judgement for sampling – increases sampling Instead of relying solely on judgment, auditors should
risk – some items excluded from sample, so sample use statistical sampling methods such as random
cannot be representative of population sampling, systematic sampling, or stratified sampling,
which help in selecting samples that are more
representative of the entire population. These
techniques provide a quantifiable measure of sampling
risk and help auditors make more accurate
 generalizations about the population.
Changed item selected in sample – inappropriate to
pressure – increases detection risk led to wrong opinion Sample sizes detailed in audit plan should have been
/ Changed sample size - inappropriate response to time signed to gather SAAE / Audit time budgets should
pressure allow staff enough time to complete the audit
Insufficient audit evidence obtained in relation to The auditor should communicate with management to
(issue) – possible limitation on scope imposed by understand the reasons for the imposed limitation and
management and discuss the importance of allowing access to the
intimidation threat necessary information. This conversation could help
resolve misunderstandings or reveal if the limitation is
intentional, potentially indicating a broader issue.

If management continues to restrict access, the auditor

should escalate the matter to those charged with
governance, such as the audit committee or board of
directors, to emphasize the impact of the limitation on
the audit's reliability and transparency.
Lack of organisation at inventory count should have Test count discrepancies should be extrapolated over
been discussed with management the population

Audit staff may need training on inventory count

attendance

Misstatements should be accumulated and with

management

The inaccuracy of the client's test counts should be

reported to management as a control deficiency
Matter is immaterial but the issue is potential (under or Further procedures should be performed, necessary to
over) exercise professional scepticism
MONITORING
2 Advertising, Tendering, and
Obtaining Professional Work and
Fees
ADVERTISING
TENDERING
Matters to be included in TENDERING
Brief outline of FIRM
A short history of the firm, including a description of its organisational
structure, the
services it can offer and the locations in which it operates.

Proposed audit approach

This section should include a description of the methodology to be used in
the audit. For instance:
1 How the firm would acquire knowledge of the business
2 Methods used in planning and risk assessment
3 Procedures used to gather audit evidence

Other services
A description of any other services FIRM can offer, such as offering advice
in relation to the proposed stock exchange listing. Careful consideration
should be given to ethical requirements relating to independence when
offering other services to a potential audit client.

Key staff
Details of the proposed engagement partner and of his experience that is
relevant to this audit. Details should also be given of the approximate size
and composition of the audit team, together with a description of the
relevant experience of key members of that team.

Communication with management

An outline of the various communications that will be made to
management over the course of the audit. This may include information
on the way in which these reports could add value to the Dragon Group's
business, for instance the production of a written report on the
effectiveness of internal control procedures.

Timing
Details should be provided of the timeframe envisaged for the various
aspects of the audit. This might include details of when the subsidiaries
would be audited, when the consolidation process would be audited, and
an estimate of by when the group audit opinion could be completed.

Fees
The proposed fee should be included, along with an explanation of how it
is calculated. This would include details of the charge-out rates of the staff
likely to be used on the audit, along with estimates of the amount of time
the audit would be likely to take.
 Advantages Disadvantages
1) Reduction in external audit costs 1) Loss of long-term relationship
– ultimately increase the returns to with the auditors:
shareholders - incumbent auditor not being
reappointed if rate quoted by
former auditor not the most
competitive
- frequent change in auditor may
not be favourable as new
relationship takes time to be
established
2) More efficient auditing can be 2) High first year audit cost – new
expected auditor spending substantial time
to familiarise with CLIENT’s
business and the accounting
system (expect additional time to
be spent)
3) Greater reliance on computer 3) Loss of trust from stakeholders –
assisted audit techniques CAATs – the change of auditor as client
improve audit efficiency – can having disputed with previous
counter the low audit fee auditor – indication of poor
relationship

Possible Reasons for the Change of Auditor

** Initiated by CLIENT
Disagreement with client
The auditor may have disagreed with the client in past, for instance over
accounting treatments. There is a possibility that the relationship between
auditor and client could break down, which would make it very difficult to
carry out the audit effectively.

Resources
An auditor may find that it lacks the resources to carry out an audit,
perhaps because the client has grown rapidly so that the firm lacks the
staff to provide a big enough audit team.

Competence
An auditor might believe itself not to be competent enough to carry out
the audit, perhaps because the client operates in an industry with highly
specialised accounting requirements, in respect of which the firm lacks the
necessary expertise.

Ethics - management's integrity

The auditor might feel that it has reason to doubt the integrity of
management, for instance because of a breakdown in relationship, or an
unproven suspected fraud. This would lead to a breakdown in the
relationship between auditor and management.
Ethics - Fee level
The fees necessary to make a profit may have reached an inappropriate
level, for instance 15% of total practice income in line with ACCA guidance
(ACCA Code of Ethics). If the fees are too high, there is considered to be
an independence problem because the audit opinion might be influenced
by a fear of losing the client.

Matters to be Considered before Tender for an Audit

or Other Professional Engagement
The fundamental requirements are that a firm must consider:

1) Its competence to perform the engagement and whether the firm has
the capabilities, including time and resources to do so

2) Whether the relevant ethical requirements can be complied with

3) The integrity of the client, and whether there is information which

would lead it to conclude that the clients lack integrity

(1) BEFORE responding to an (2) BEFORE accepting the

invitation to tender appointment
Review accounts
Contact the previous auditor
CDD procedures: obtain
information to be able to identify
who the client / verify identity by
reference to independent and
reliable source material

Contents of a Proposal
1) Nature, Purpose, and Legal Definition of Audit:
Clarify the legal responsibilities of management under the Companies Act.
Define the auditor's roles in a statutory audit to establish a clear
understanding and minimize any expectation gap.
=> only if CLIENT is never being audited before

2) Client Expectations:
Clearly outline what the client expects from the audit engagement, as this
framework guides the
=> ensure FIRM understanding and CLIENT expectation are correct
auditor's work.

3) Proposed Time Frame:

Present a realistic duration for completing the audit that reassures the
client of the auditors' ability to meet deadlines for filing or decision-
making.
=> so that senior personnel will be available on that period

4) Audit Methodology:
Describe the proposed audit methodology, taking into account existing
internal controls and the specific risks associated with the client’s
business.
=> reflect the controls that exist in the CLIENT

5) Quotation of Fees: [ 40% on appointment / 40% on commencement /

20% on report ]
Include a detailed fee structure, outlining the basis for charges, estimated
staffing costs, and reimbursement of out-of-pocket expenses.
Provide a timeline for billing and payment to assist the client in budgeting
for these costs.

6) Profile of the Firm and Staff:

Highlight the academic qualifications and experience of partners and
senior staff, along with a brief overview of existing clientele, to
demonstrate the firm’s competence.

7) Other Professional Services:

List additional services offered by the firm that could appeal to the client
seeking comprehensive solutions. However, auditors should remain
mindful of potential ethical issues related to pricing practices.
=> so that FIRM can be seen as one stop centre for the perspective
CLIENT
3 Professional Appointments
Matters to be considered before:
Accepting new client: Continuing current client:
Brief outline of FIRM
A short history of the firm, including a description of its organisational
structure, the
services it can offer and the locations in which it operates.
Staffs
1) Specialised department – staff with needed expertise and skills –
increase confidence
2) Background and profile of senior – boost the confidence of client
Assessment of CLIENT’s needs
1) Structure – clarify that each of
subs as single companies, likewise
the parent and the group as a
whole
Audit approach: this section should include a description of the
methodology to be used in the audit.
1) Reliance on internal controls – point out that controls would be tested
before can be relied upon – if reliable, shorten time of audit work
(impress client)
2) How the firm would acquire knowledge of the business
3) Methods used in planning and risk assessment
4) Procedures used to gather audit evidence
Deadline – propose a more appropriate and sufficient deadline for audit
completion – ensure relevant personnel will be available during this
period
Fees – The proposed fee should be included, along with an explanation
of how it is calculated. This would include details of the charge-out rates
of the staff likely to be used on the audit, along with estimates of the
amount of time the audit would be likely to take ** breakdown of the
cost
Quality management – state FIRM
adherence to IESBA and ISQM –
give confidence in auditor’s report
Non-audit services
1) A description of any other services FIRM can offer, such as offering
advice in relation to (what?). Careful consideration should be given to
ethical requirements relating to independence when offering other
services to a potential audit client.
Communication with management
An outline of the various communications that will be made to
management over the course of the audit. This may include information
on the way in which these reports could add value to the CLIENT’s
business, for instance the production of a written report on the
effectiveness of internal control procedures.
If CLIENT is LISTED / PIE: Previous auditors:
 1) Non-audit services => outline FIRM should consider the reason
any relevant NAS that it could for CLIENT seeking to change its
provide – beneficial if CLIENT is auditor, as
listed or PIE (can be seen as one this might affect the decision to
stop centre) accept the engagement.
2) Experience => enhance CLIENT
confidence – familiar with listing On the face of it, it appears likely
rules that the quickly growing CLIENT
has outgrown its previous auditors,
but FIRM should still seek to obtain
the reason for the change from the
previous auditors.

Reasons why Auditors may not seek Re-Election

Disagreement with client
The auditor may have disagreed with the client in past, for instance over
accounting treatments. There is a possibility that the relationship between
auditor and client could break down, which would make it very difficult to
carry out the audit effectively.

Resources
An auditor may find that it lacks the resources to carry out an audit,
perhaps because the client has grown rapidly so that the firm lacks the
staff to provide a big enough audit team.

Competence
An auditor might believe itself not to be competent enough to carry out
the audit, perhaps because the client operates in an industry with highly
specialised accounting requirements, in respect of which the firm lacks the
necessary expertise.

Ethics – management’s integrity

The auditor might feel that it has reason to doubt the integrity of
management, for instance because of a breakdown in relationship, or an
unproven suspected fraud. This would lead to a breakdown in the
relationship between auditor and management.

Ethics - fee level

The fees necessary to make a profit may have reached an inappropriate
level, for instance 15% of total practice income in line with ACCA guidance
(ACCA Code of Ethics). If the fees are too high, there is considered to be
an independence problem because the audit opinion might be influenced
by a fear of losing the client.

** Independence
** Conflict of interest
PART D
Planning and
Conducting and
Audit of Historical
Financial
Information
1 Business Risk
EXAM APPROACH [Identify (from PAP and notes in FS) + Implications
(negative -> financial or non-financial data from study case)]

Identify – categories of risk

1) strategic – business strategy
2) financial
3) reputation
4) compliance

BR translated to ROMM
example: started to stop selling one product – sell new products – revenue
might be affected (BR)  (ROMM) affected in inventory balance – failed to
sell products which will reduce the value of inventory – follow IAS 2 –
valued at the lower of cost and NRV

Business strategy
– what they are planning to do
Accounting policies
2 Audit Risks
EXAM APPROACH => ROMM [Identify + Materiality + Standard + Implications on FS]
Standard (IFRS / IAS) Implications on FS

EXAM APPROACH => Audit Risks

IR - IMSR
CR – related to poor controls (no standard)
DR + definition + why
**
3 Evidence
EXAM APPROACH
4 Audit Procedures
EXAM APPROACH [A E I O U + source of evidence + why]

Analytical procedures - compare

Enquire – inquire or discuss (persons) / obtain written representation letter

Inspect – review

Observe – attend / observe

compUtation – recalculate /

Obtaining Sufficient and Appropriate Audit Evidence

Must know the ROMM to write PAP
Sufficient => quantity of evidence Sampling methods
Sampling results
Appropriate => relevance and PAP =>
reliability
Relevance of PAP => according to
the situations (right)

Reliability of PAP => source of

evidence
1) external > internal
2) document or written > oral
5 Using Work of Others
Experts

Component Auditor
6 Group Audits
PART E
Completion, Review and
Reporting
Role: reviewer
Review the AWP fo the team (refer Implications of the matters and
back to QM topic) => pre- impact on audit report (unmodified
issuance or modified – qualified or adverse
or disclaimer)
- whether the team has obtained [Material + Opinion + Types of
SAAE report – M+P?]
- areas / ROMM which are
considered are high risks Material but unresolved =>
Modified (if resolved =>
Matters to be considered: related UNModified)
to accounting matter ~ Qualified (notP) or Adverse (P):
[Identify + Materiality + Standard – related to FS
correct and wrong matter) ~ Qualified (notP) or Disclaimer
(P): unable to obtain SAAE
Evidence expect to find
[Source + why] – no Verb !! ** NotP => relating to one or few
matters
** P => relating to substantial
matters (eg: did not depreciate –
co shows profit)
1 Subsequent Events
GOING CONCERN
Financial statements should be prepared on a going concern basis unless
that basis is inappropriate. As a fundamental principle the going concern
basis is assumed in the absence of information to the contrary. Material
uncertainties which cast significant doubt on the appropriateness of the
going concern basis should be disclosed.

In relatively rare circumstances when the going concern basis is not used,
the financial statements should disclose:
- that fact;
- the basis of preparation (e.g. on a liquidation/break-up basis);
- why the entity is considered not to be a going concern (e.g. if the
company is subject to insolvency proceeding).

Auditor’s Responsibility
The auditor should consider the appropriateness of management's use of
the going concern basis (in preparing the financial statements) when
planning, conducting and evaluating the results of audit procedures. The
auditor must also consider whether material uncertainties relating to the
going concern basis require disclosure.

Statement of Auditor's Responsibility

The auditor's report includes a statement that the auditor's responsibilities
are to conclude on:
 the appropriateness of management's use of the going concern
basis; and
 whether a material uncertainty exists that may cast significant
doubt on the entity's ability to continue as a going concern.
The auditor's conclusions are based on evidence obtained up to the date
of the auditor's report.

Management's Responsibility
IAS 1 requires management to assess the entity's ability to continue as a
going concern. (Where a financial reporting framework is not explicit
about management's responsibility, it is implied because going concern is
a fundamental principle.)

This involves making a judgement about inherently uncertain future

outcomes of events or conditions. Relevant factors include:
 the degree of uncertainty associated with the event or condition
increases the further into the future that event or condition is
expected to occur;
 the size and complexity of the entity, the nature and condition of its
business and environment;
  the degree to which external factors will impact the judgement
required; and
 the effect of subsequent events on the original judgement (that
seemed reasonable at the time it was made).

Statement of Management's Responsibility

The auditor's report contains a description of management's responsibility
for assessing the entity's ability to continue as a going concern and
whether the use of the going concern basis of accounting is appropriate.

Planning Considerations
Events or conditions which may cast doubt on the entity's ability to
continue as a going concern should be considered when planning the
audit.

1) Preliminary Assessment
Management may have already made a preliminary assessment of going
concern issues and plans to address them, for example:
 raise capital;
 increase borrowings;
 restructure debt;
 defer capital expenditure;
 put research and development projects on hold;
 liquidate assets.

If not, management should be asked to make an assessment, particularly

if such events and conditions are apparent. Clearly, management's
assessment may not require detailed analysis when the entity is profitable
and has adequate financial resources.

2) Indicators of Significant Doubt

Financial: Operation:
Net liability/net current liability Loss of key management without
position. replacement.
Fixed-term borrowings approaching Loss of a major market, franchise,
maturity without realistic prospects license, or principal supplier.
of renewal or repayment.
Withdrawal of financial support Labour difficulties or shortages of
(e.g. by suppliers) important supplies.
Negative operating cash flows –
historical or in prospective financial
information.
Excessive reliance on short-term
borrowings to finance long-term
assets.
Adverse key financial ratios (e.g.
liquidity ratio).
Substantial operating losses. Other:
Arrears or discontinuance of Non-compliance with capital or
dividends. other statutory requirements.
Inability to pay creditors on due Pending legal proceedings against
dates. the entity that may, if successful,
result in judgments that could not
be met.
Difficulty in complying with the Changes in legislation or
terms of loan agreements. government policy.
Change from credit to cash-on-
delivery transactions with
suppliers.
Inability to obtain financing for
essential new product
development or other essential
investments.

3) Mitigating Factors
The auditor should consider factors which mitigate doubts about going
concern, for example:
- Management's plans, which must be feasible, to maintain adequate
cash flows by alternative means: disposal of assets / rescheduling of loan
repayments / obtaining additional capital.
- The availability of a suitable alternative source of finance.

In a "close-call" scenario, management's mitigating plans are just about

sufficient.
** “Close-call” situations – situations when events or conditions were
identified that may cast significant doubt on the entity's ability to continue
as a going concern but, after considering management's plans to deal
with these events or conditions, management and the auditor conclude
that no material uncertainty exists.

4) Throughout the Audit

The auditor should keep alert throughout the audit process for events and
conditions that may cause doubt about the entity’s ability to continue as a
going concern. If identified, the auditor should:
- perform relevant additional procedures; and
- reassess components of audit risk as necessary (e.g. if inherent and
control risk are already assessed 100%, they cannot be further increased).

AUDIT EVIDENCE
1) Evaluating Management's Assessment
Management's assessment of going concern should be evaluated for the
same period as required by the financial reporting framework. This should
be extended to 12 months from the end of the reporting period (if
greater).
2) Sources of Information
Sources of information to support management’s assessment include:
 Client's system for timely identification of warnings of
risks/uncertainties.
 Budgets, forecast information, etc.
 Obligations, undertakings, guarantees with lenders, suppliers, etc.
 Bank borrowing facilities and suppliers' credit.
 Management's plans for future action.

3) Beyond the Assessment Period

The auditor should inquire of management if they have knowledge of
indicators of significant doubt beyond the period of assessment (i.e. at
least 12 months after the reporting period).

This is the only audit procedure required in respect of this period. It

provides a good example of a "certain instance" in which it is appropriate
to obtain written management representation.

4) Additional Procedures
When there are indicators of significant doubts, the auditor should:
 review management's plans for future actions and obtain written
representation thereon;
 gather sufficient appropriate evidence to determine whether or not
a material uncertainty exists.

5) Material Uncertainty
A material uncertainty exists when the magnitude of its potential effect is
such that its disclosure is necessary for the fair presentation of the
financial statements (i.e. a lack of disclosure would render the financial
statements misleading).

6) Cash Flow Forecasts

Factors to consider when analysing and discussing cash flow and profit
forecasts with management include:
- reliability of the entity's system for generating such information;
- appropriateness of underlying assumptions; and
- comparison of prospective financial information for:
- recent prior periods with historical results; and
- current period with results achieved to date.

7) Other Relevant Procedures When Events or

Conditions Are Identified
To obtain sufficient appropriate audit evidence, the auditor should also:
- Review subsequent events for items affecting going concern basis.
- Analyse and discuss latest available interim financial statements.
- Review terms of debentures/loan agreements for possible breaches.
- Read minutes of meetings for reference to financing difficulties.
 - Inquire of the entity's lawyer regarding litigation and claims.
- Confirm existence, legality and enforceability of arrangements to
provide or maintain financial support with related and third parties and
assess the financial ability of such parties to provide additional funds.
- Consider unfilled customer orders.
- Discuss management's plans for future action: to liquidate assets / to
borrow money or restructure debt / to reduce or delay expenditures / to
increase capital.
- Seek written management representations regarding plans that might
have a significant effect on solvency within the foreseeable future.

8) Conclusions
Basic Principle:
The auditor should exercise professional judgement to determine
whether material uncertainty exists.
Disclosure Requirements in the Financial Statements:
Where material uncertainty exists, the notes to the financial statements
must include:
 A description of:
o the principal events or conditions raising significant doubt;
o management's plans (including mitigating factors).
 A statement that there is material uncertainty:- therefore, the
entity may be unable to realise assets and discharge liabilities in
normal course of business.
 A statement that financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts and liabilities.

Situations
1. Based on the audit evidence obtained there is no material
uncertainty.
2. The going concern basis is appropriate but material uncertainty
exists which is adequately disclosed.
3. As for (2) but adequate disclosure is not made.
4. The going concern basis is inappropriate but the financial
statements have been prepared on a going concern basis.
5. The going concern basis is inappropriate and the financial
statements have been prepared on an alternative basis, which is
adequately disclosed.
6. Management does not make an assessment for a period of at least
12 months from the end of the reporting period when asked to do
so.

Audit opinion modification Grounds

1. Unmodified None
2. Unmodified with material uncertainty Significant uncertainty
section
3. Qualified "except for" or Adverse (if Material misstatement (or material and
matter is pervasive) pervasive)
4. Adverse Material and pervasive misstatement
5. Unmodified or Unmodified with None for modification of opinion but emphasis
emphasis of matter of matter may be used to draw users' attention
to basis
6. Qualified "except for" or Disclaimer (if Insufficient audit evidence (unless other
matter is pervasive) evidence dispels significant doubts)
2 Completion and Final Review
3 Auditor’s Report
4 Reports to Those Charged with
Governance (TCWG) and Management
PART F
Other Assignments
1 Audit-related and Assurance Services
2 Specific Assignments

Review of Prospective Financial

Information

Due Diligence Review

Forensic Service
3 Audit of Social, Environment, and
Integrated Reporting
4 Audit of Performance Information in
the Public Sector
5 Reporting on Other Assignments
EXAM TIPS