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Paper F8: Audit and Assurance


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ACCA Paper F8 – Audit and Assurance – Mnemonics and Charts

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An overview of what is involved in


Paper F8 …… (1 of 4)

Start here and


get an overview
of what Paper
F8 entails …..

You are a partner at Green, Green and Associates, a medium to large accounting firm. One Thursday
morning a letter is received from Goodies Sweet Manufacturing (GSM) Company, a local unlisted UK
company which requests your company to submit a proposal for its current audit. You understand, from the
letter, that GSM is of a size considered ‘small’ by UK legislation but that its principal shareholder, who is not
employed by the company, using a legal entitlement has insisted on an audit by an independent auditor. This
will be GSM’s first independent audit.

The senior partner in your firm has assigned you to be GSM’s ‘engagement partner’.

The following ‘overview’ takes us through the stages, procedures and documents involved in such an audit
engagement (and also gives you quite a good idea of what is involved in the ACCA Paper F8 syllabus).

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An overview of what is involved in


Paper F8 …… (2 of 4)
Before you get involved in the audit work itself, you must be aware of the
background requirements. In essence, you must know and act
What you according to:
BEFORE need to know
YOU  the objectives of the audit
START  the legal requirements
 the auditing standards that you will use (your firm has adopted the
International Auditing Standards issued by the IAASB)
 the code of ethical behaviour of your professional body (you are
an accredited member of the ACCA)
 the procedures and rules of your accounting firm.

This is no problem for you. You are a professional accountant


accredited by ACCA.

Obtaining the Acceptance OF the client ….. Acceptance BY the client


engagement
PHASE 1 This is the first step on your journey through the audit. In this phase of the
audit you will have two objectives:

(i) To examine GSM (the client - who the International Auditing Standards
refer to as ‘entity’) to determine whether there is any reason to reject
the engagement. In others words, do we want the audit engagement?

(ii) On the basis that you do want to obtain the audit engagement to
convince GSM to employ your firm.

This first step involves six procedures:

1. Determine whether your accounting firm is able to meet the ethical


requirements regarding the client.

2. Determine whether your firm will need to employ the work of other
specialists or experts as part of the audit.

3. Communicate with predecessor auditor. (Not in this case because it


is a ‘first’ audit.)

4. Select the staff who will form the audit team and consider the audit
costs and budget.

5. Prepare a client proposal.

6. Prepare and obtain an engagement letter which will only be issued


when the client agrees to your proposal.
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An overview of what is involved in


Paper F8 …… (3 of 4)

So you have obtained the audit ….. Now you need to


Planning the plan it!
audit
PHASE 2 One day, soon after submitting your proposal a telephone call from GSM’
finance director confirms that your accounting firm has been awarded the
engagement contract. You have sent your new client the engagement letter
and all is satisfactory. So now you need to plan the audit – not an easy task!

Your audit will be made of two main parts:

(i) Tests of controls. This is sometimes referred to as the ‘interim audit’


and involves mainly testing the entity’s internal control structure to
establish how much reliance can be placed on it.

(ii) The final audit. This involves detailed substantive procedures such as
gathering and assessing evidence.

The aim of the audit is to give assurance to the users of the financial
statements (mainly the shareholders of GSM) that there is no material
misstatement of the financial statements.

The procedures involved in planning the two parts of your audit will be:

(i) To collect and analyse more information about GSM. This will help
you understand the entity and its environment, including its internal
controls.

(i) Assess the risks of material misstatements of GSM’s financial


statements.

(ii) Determine the level of materiality you consider acceptable.

(iii) Use the information and your analysis to prepare a planning


memorandum for the audit.

(v) Prepare an audit plan (or ‘programme’) which will contain the
procedures you plan in response to the risks you have identified.

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An overview of what is involved in


Paper F8 …… (4 of 4)
Down to work …… gathering data and carrying out audit
Testing and tests
evidence
PHASE 3 The audit team have been assigned. Your plan is established …. after
discussion with the members of the audit team Now the audit work begins.
Your aims in this, the main part of the audit, are to test for evidence of the
strengths or weakness of GSM’s internal control structure (interim) and then
test for evidence of the fairness of the financial statements (final).

This phase of your audit will involve five main procedures:

1. Tests of GSM’s internal control


2. Substantive tests of transactions.
3. Analytical procedures.
4. Tests of details of balances.
5. Search for unrecorded liabilities.

Everything that is done and all the evidence gathered will be documented in
the audit’s ‘working papers’.

You will now need to wrap up the audit …… and of


Evaluation course produce reports
and reporting
PHASE 4
Your objective in this final phase of the audit is to complete the audit
procedures, form an audit opinion and issue audit reports.

There are at least seven procedures involved:

1. Evaluate evidence of governance in GSM.


2. Perform procedures to identify subsequent events.
3. Review financial statements and other relevant materials to assess
the going concern assumption for GSM.
4. Perform wrap-up procedures.
5. Prepare Matters for Attention of Partners.
6. Report to the board of directors. This is called a ‘Management Letter’.
7. Prepare Audit report.

Now you can relax ……


a job well done!

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ACCA Paper F8 syllabus:


Map of the mnemonics and charts
The Audit and Assurance syllabus is essentially divided into seven areas. The Tony Surridge +AddVance e-
book is based on the ACCA syllabus and contains the following seven sections:

1. The concept of audit and other assurance engagements


AUDIT FRAMEWORK
Section 2. Statutory audits
AND REGULATION
A 3. The regulatory environment and corporate governance
4. Professional ethics and ACCA’s Code of Ethics and Conduct

1. Internal audit and corporate governance


INTERNAL AUDIT 2. Differences between external and internal audit
Section
3. The scope of the internal audit function
B
4. Outsourcing the internal audit department
5. Internal audit assignments

1. Objective and general principles


PLANNING AND RISK 2. Understanding the entity and knowledge of the business
Section ASSESSMENT 3. Assessing the risks of material misstatement and fraud
C
4. Analytical procedures
5. Planning an audit
6. Audit documentation
7. The work of others

1. Internal control systems


INTERNAL CONTROL 2. The use of internal control systems by auditors
Section
3. Transaction cycles
D
4. Tests of control
5. The evaluation of internal control components
6. Communication on internal control

1. The use of assertions by auditors


Section AUDIT EVIDENCE 2. Audit procedures
E 3. The audit of specific items
4. Audit sampling and other means of testing
5. Computer-assisted audit techniques
6. Not-for-profit organisations

1. Subsequent events
REVIEW 2. Going concern
Section F 3. Management representations
4. Audit finalisation and the final review

1. Audit reports
REPORTING 2. Reports to management
Section G 3. Internal audit reports

Click on Section E above, in the pink box, to review a small extract.


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Section E:
AUDIT
EVIDENCE

1. The use of assertions by auditors


2. Audit procedures
3. The audit of specific items
4. Audit sampling and other means of testing
5. Computer-assisted audit techniques
6. Not-for-profit organisations

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Relevant standard:
Substantive procedures ISA 500

Substantive procedures are tests performed to obtain audit evidence to detect material misstatements in
the financial statements, are of two types:

(a) tests of detailed transactions; and


(b) analytical procedures.

We should remember what was discussed earlier:

Para 4, ISA 500

‘The objective of the auditor is to design and perform audit procedures in such a way as to enable
the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor’s opinion’.

‘Sufficiency’ and ‘appropriateness’ are interrelated and apply to both tests of controls and substantive
procedures.

Sufficiency

Sufficiency is the measure of the QUANTITY of audit evidence. (Sufficient evidence has been gathered
when AUDIT RISK is considered to be at an acceptable level. Auditors use professional judgement to
determine the extend of tests necessary to obtain sufficient evidence. In exercising this professional
judgement, auditors consider both the materiality of the item in question (e.g. monetary size) as well as
the inherent risk of the item (e.g. cash, due to its liquidity, may have a higher inherent risk than do certain
property, plant and equipment items).

Appropriateness

Appropiateness is the measure of the QUALITY or RELIABILITY of the audit evidence. The quantity of
audit evidence required is affected by the level of risk in the area being audited. The quality and
reliability of audit evidence is influenced by its source and by its nature. The following generalisations
may help in assessing the quality and reliability of audit evidence.

Whenever an individual or a business decides that


success has been attained, progress stops.

Thomas J. Watson Jr

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Substantive procedures:
What you need to know …..

Assertions
We start here
Substantive tests:
Shareholders’ equity Sufficient and
appropriate
evidence

Substantive tests:
Long-term debt Gathering
evidence

Substantive tests:
Property, plant
and equipment
PP&E) Confirmation

Sampling

Substantive tests:
Accounts payable

Accounting
Substantive tests: estimates
Inventory

Substantive tests: Opening


Bank and cash balances

Substantive tests: Substantive tests:


Accounts receivable Bank and cash

Substantive procedures form


the main part of the audit

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Gathering evidence:
Financial statements assertions
Audit tests are designed and conducted to obtain evidence about the financial statement assertions.
Financial statement assertions are the representations of the directors that are contained in the financial
statements. By authorising the financial statements, the directors are making representations about the
information therein. In planning and performing the audit, an auditor considers these assertions for the
various financial statements and accounts. When all of these assertions have been met for an account, the
account is confirmed with the accepted accounting principle. Thus, errors or fraud may be viewed as having
the effect of misstating one or more of the assertions. These representations or assertions may be described
in general terms in a number of ways, for example:

C Completeness. The assertion is that all transactions and accounts are included, and there are no
liabilities, transactions, events, unrecorded assets or undisclosed items.
O Occurrence. The assertion is that the transaction or event took place during the relevant period.
M Measurement. The assertion is that the transaction or event is recorded in the proper amount.
P Presentation and disclosure. The assertion is that the item is disclosed, classified and described in
accordance with the applicable reporting framework (relevant legislation and applicable accounting
standards).
A Appropriate valuation. The assertion is that the asset or liability is recorded at the appropriate
carrying value (e.g. inventories are stated at lower of cost or market value).
R Rights and obligations. The assertion is that assets or rights of the entity are liabilities or obligations
at a given date (e.g. that the firm has legal right to the inventory).
E Existence. The assertion is that the asset or liability exists at a given date.

Memory jog: in order to obtain evidence about


the financial statement assertions the auditor
needs to ‘COMPARE’ many things against
the financial statements.

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Gathering evidence:
Assertions tested by the auditor
Management assertions
used by the auditor about …… that transactions and events that have been
OCCURRENCE recorded have occurred and pertain to the
organisation.
About ……
COMPLETENESS …… that all transactions and events that should have
been recorded have been recorded.
CLASSES OF
TRANSACTIONS …… that amounts and other data relating to recorded
ACCURACY
AND EVENTS FOR transactions and events have been recorded
THE PERIOD appropriately.
UNDER REVIEW
CUTOFF …… that transactions and events have been recorded
in the correct accounting period.

CLASSIFICATION …… that transactions and events have been recorded


in proper accounts.

…… that assets, liabilities and equity interests exist.


About …… EXISTENCE
…… that the organisation holds or controls the rights
to assets, and liabilities are the obligations of
RIGHTS AND the organisation.
BALANCES AT OBLIGATIONS
THE PERIOD END …… that all assets, liabilities and equity interests
that should have been recorded have been
COMPLETENESS recorded.

…… that assets, liabilities, and equity interests are


VALUATION AND
included in the financial statements at
ALLOCATION
appropriate amounts and any resulting
valuation or allocation adjustments are
appropriately recorded.

…… that disclosed events, transactions and other


OCCURRENCE AND matters have occurred and pertain to the
About …… RIGHTS AND organisation.
OBLIGATIONS
…… that all disclosures that should have been
COMPLETENESS included in the financial statements have been
PRESENTATION
included.
AND DISCLOSURE
CLASSIFICATION AND …… that financial information is appropriately
UNDERSTANDABILITY presented and described, and disclosures are
clearly expressed.
ACCURACY AND
VALUATION …… that financial and other information are disclosed
fairly and at appropriate amounts.

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Procedures and approach:


Substantive audit tests: terms
Note: Some of the more frequent terms you will find in written audit programmes include the following:

Agree To confirm that balances in the general ledger are correct.

Analyse Separation of account balances into separate parts and the ascertainment of
those parts.

Compare To set one group of figures with another set so as to ascertain how far
they agree or disagree, such as to compare the beginning balances with
last year’s audited figures.

Count To sum the value of (volume, monetary value, etc), such as reckoning the
value of cash, inventory, etc.

Examine To enquire into evidence, such as to enquire into authoritative documents.

Foot Add figures, such as to add the figures in a column of monetary values.

Prove To test the genuineness of, such as to re-calculate totals to ascertain their
correctness.

Read To interpret facts, such as to read minutes of directors’ meetings, etc.

Reconcile To prove consistency, such as to test that cash balances, or accounts


receivables balances are consistent with the facts.

Review An inspection of, such as the inspection of disclosures, legal documents,


etc.

Scan To examine critically, for example to study a set of data to specifically


identify unusual items.

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Gathering evidence:
Sufficient and appropriate audit evidence
We must remember that the objective of an audit
Audit of financial statements is to enable the auditor to
objective express an opinion whether the financial
statements are prepared, in all material respects,
in accordance with an identified financial reporting
framework.

Which
requires …… … the auditor to obtain SUFFICIENT
and APPROPRIATE audit evidence.

Audit evidence is the information that


Audit auditors obtain in arriving at the
evidence conclusions on which their report is
based.

Definition
Audit evidence includes all the information
contained within the accounting records and
accounting system underlying the financial
statements, and other information gathered by
the auditors, such as confirmations from third
Evidence parties. They are not expected to look at all the
is obtained information and will usually select samples.
from ……

Tests of controls are conducted to obtain audit


evidence about the effectiveness of the:
 design of the accounting and internal control
systems to establish whether they are suitably
Audit tests designed to prevent or detect and correct
material misstatements; and
 operation of the internal controls throughout
the period being audited.
Test of controls
Substantive procedures are tests to obtain audit
evidence to detect material misstatements in the
To reach a position in which to
financial statements. There are generally of two
express a professional opinion,
types:
the auditor needs to gather
Substantive  Analytical procedures
evidence from various sources.
procedures  Other substantive procedures such as tests of
There are two types of test which
detail of transactions and balances, review of
the auditor will carry out.
minutes of directors’ meetings and enquiry.

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Gathering evidence: Relevant standard:


ISA 500
Quality of evidence
ISA 500 Audit evidence requires auditors to

‘obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to
base the audit opinion’.

‘Sufficiency’ and ‘appropriateness’ are interrelated and apply to both tests of controls and substantive
procedures.

Sufficiency is the measure of the QUANTITY of audit evidence. (Sufficient


Sufficiency evidence has been gathered when AUDIT RISK is considered to be at an
acceptable level. Auditors use professional judgement to determine the
extend of tests necessary to obtain sufficient evidence. In exercising this
professional judgement, auditors consider both the materiality of the item in
question (e.g. monetary size) as well as the inherent risk of the item
(e.g. cash, due to its liquidity, may have a higher inherent risk than do certain
property, plant and equipment items).

Appropiateness is the measure of the QUALITY or RELIABILITY of the


Appropriateness audit evidence. The quantity of audit evidence required is affected by the
level of risk in the area being audited. The quality and reliability of audit
evidence is influenced by its source and by its nature. The following
generalisations may help in assessing the quality and reliability of audit
evidence.

W Written. Evidence in the form of documents (paper or electronic) or written representations are
more reliable than spoken words or representations.
O Originals. Original documents are more reliable than photocopies, or facsimiles.
R Records with strong controls. Evidence obtained from the organisation’s records is more
reliable when the system that produces them uses strong and effective controls.
D Directly by the auditor. Evidence obtained directly by the auditor is more reliable than that
obtained indirectly or by inference.
S Sources that are external. Audit evidence from external sources is more reliable than that
obtained from the organisation’s records.

Memory jog: ‘WORDS’ are more reliable when they come from
external sources, and are obtained directly by the auditor, and
written (not just spoken), are from originals and are produced by
systems using strong and effective controls.

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Gathering evidence:
Audit procedures for obtaining audit information

Audit evidence can be obtained by one or more of the following procedures:

C Confirmation. Seeking confirmation from another source concerning details in the organisation’s
accounting records, e.g. confirmation from customers of debtor balances.
A Assets inspection. Inspection of assets that are recorded in the accounting records to confirm
existence, to give evidence of valuation, but without confirming rights and obligations.
R Recalculation. Checking arithmetic of organisation’s records, e.g. totalling a ledger account.
R Re-performance. Independently executing procedures or controls, either through the use of
computer assisted audit techniques (CAATs) or manually.
I Inquiry. Seeking information from the organisation’s staff or external sources. Strength of
evidence depends on the knowledge and the integrity of the source of information.
E Evaluation by analytical procedures. Evaluating and comparing financial and/or non-financial
data for plausible relationships.
S Sight (observation). Involves watching a procedure being performed, e.g. cash and cheques
being banked. This has limited value, as it only confirms the procedure took place when the
auditor was present.

I’m telling
you….. This is
an important
page
Memory jog: the auditor ‘CARRIES’ out
these procedures in order to obtain the
necessary audit evidence.

Note: Some sources add TWO more procedures to this list

1. Vouching - checking from recorded entry to supporting document.


2. Tracing - checking from supporting document to recorded entry.

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Gathering evidence:
Audit procedures for obtaining audit information – 1 of 2

CONFIRMATION INSPECTION
Used to corroborate Consists of
information contained in examining records,
the accounting records documents, or
tangible assets

Examples
Used to review:
Examples
 sales orders
Used to confirm:
 sales invoices
 accounts receivable
 purchase invoices
 accounts payable
 shipping documents
 balances held with banks
 bank statements
 cash surrender value of life insurance
 customer return documents
 notes payable (with lenders or bond holders)
 customer complaint letters
 etc.
 etc.

RECALCULATION RE- PERFORMANCE


Consists of checking the
Consists of independent
arithmetical accuracy of
execution of procedures or
source documents and
controls that were originally
accounting records or
performed as part of the
performing independent
entity’s internal control.
calculations.

Examples
 Extending sales invoices and inventory.. Examples
 Adding journal and subsidiary records.  Re-perform aging of accounts receivable.
 Checking the calculation of prepaid expenses.  Use of CAATs* to check controls recorded
 Calculation of depreciation expense. in the database.
 etc.

* CAATs are ‘Computer aided auditing techniques’ (which we cover later.)

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Gathering evidence:
Audit procedures for obtaining audit information – 2 of 2

ANALYTICAL
PROCEDURES
Consist of the analysis of
significant ratios and trends
INQUIRY including the resulting
Consists of seeking investigation of fluctuations
information of and relationships that are
knowledgeable inconsistent with other
persons inside or relevant information or that
outside the entity deviate from predictable
amounts.
Examples
Obtaining written or Examples
oral information from  Calculation trends in sales over the past few
the client in response years.
to specific questions  Comparing net profit as a percentage of sales
during the audit in current year with the percentage of the
preceding year.
 Comparing client current ratio to the industry
current ratio.
 Comparing budgets to actual results.
 Etc.

OBSERVATION
Consists of looking at a process or
procedure being performed by others.

Examples
 Observation by the auditor of the
counting of inventories by
entity’s personnel.
 Site visit at the client’s facilities.
 Etc.

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When asked a general question about how to design audit


procedures you should remember the auditor’s need to:

1. Concentrate on management’s financial statements


assertions.
2. Link them to the three main aspects that concern the audit.
3. Use appropriate procedures to seek assurance about the
three main aspects.

What are management’s assertions?

Financial statements assertions:

C Completeness How does the auditor do it?


O Occurrence
M Measurement
P Presentation and disclosure Audit procedures:
A Appropriate valuation
R Rights and obligations C Confirmation
E Existence A Assets inspections
R Re-calculations
Click here for the mnemonic COMPARE R Re-performance
I Inquiry
E Evaluation by analytical
techniques
S Sight (observation)

What is the auditor doing? Click here for the mnemonic


CARRIES

Seeking assurance about the assertions in


terms of the three main aspects of:

1. Classes of transactions and events for


the period under review.
2. Balances at the period end.
3. Presentation and disclosure

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Gathering evidence: Substantive audit tests

Corroborating evidence is the supporting documentation that is the basis for a transaction recorded in the
journals and ledgers, and assertions represented in the financial statements. While there may be many types
of corroborating evidence, the following list are the ones mainly used by auditors carrying out substantive
procedures. Remember them as the mnemonic: IS A CAP.

I Interrelationships. Interrelationships within the data such as interest expense and accrued interest
payable, unusual items, etc. provide assurance as to the reasonableness of items and the absence of
material misstatements due to errors.
S Subsequent events. Subsequent events confirm the status of estimates and assertions at the
financial date. For example, subsequent collection of receivables gives evidence as to their valuation
and collectibility.

A Authoritative statements. Authoritative statements by a client provide support for a treatment of


certain items in the recording and aggregation of transaction data. Authoritative statements by third
parties such as confirmations provide evidence concerning the existence of transactions with third
parties.

C Calculations. Calculations by auditors such as the calculation of depreciation expense, tax liabilities,
etc. support the application of IASs.
A Authoritative documents. Authoritative documents such as property deeds, suppliers’ invoices.
P Physical existence. Physical existence is determined by observation and count.

Memory jog: just remember it as ‘IS A CAP’.

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Gathering evidence: Confirmation


What you need to know ……

We start here

Gathering
evidence:
Confirmation
method

Negative
Problems
confirmation
associated with
may be
confirmation
appropriate

Confirmation

Situations
Risks where
where
confirmation
confirmation
may be
may not be
appropriate
appropriate

In the main confirmation


means writing a letter to a
third party

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Gathering evidence: Confirmation method – 1 of 5

Confirmation consists of the response to an enquiry of a third party to collaborate


information contained in the accounting records. The procedure is the process of
Confirmation asking third parties to confirm information known to them, such as asking
receivables (debtors) to confirm amounts due to them. Confirmation is the auditor’s
receipt of a request from an independent third party verifying the accuracy of the
information requested. It is the act of obtaining audit evidence from a third party.

Confirmation, say confirmation of balances of accounts receivable, will provide a


Confirmation is an
test of the ending account balance and is therefore a detailed test of a balance – a
example of a
type of substantive test.
substantive test

Confirmation is a But take note of the Mnemonic: ACCA.


generally accepted
auditing procedure

Key procedures 1. Auditor reviews the need to obtain a confirmation using the information
necessary to obtained from the preliminary risk assessment of the client.
obtain a
confirmation 2. Auditor prepares the confirmation letter as appropriate for the particular
request, for example in the case of a bank confirmation the letter is in the
format agreed with banks in the client’s jurisdiction.

3. The client authorises (signs) the letter thus giving the third party (e.g. the
debtor) ‘permission’ to divulge confidential details. Where the client has
provided the third party with a ‘standing authority to disclose information to the
auditor’, the authorising reference is quoted on the ‘confirmation request letter’.

4. The auditor, not the client, mails these letters. The auditor should check
randomly to ensure that letters are addressed to the respondents that the
auditor chose, and for the amounts shown in the books of account.

5. The third party is requested to respond in writing directly to the auditor.

An auditor may use confirmation in response to a specific risk of misstatement.


Confirmation may
Examples of likely risks are shown in the Mnemonic: A CA IS BLIND.
be used for
specific risks

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Gathering evidence: Confirmation method – 2 of 5


Relevant standard:
ISA 505

 Confirmation provides highly persuasive evidence, because audit evidence is


more reliable when it is obtained from independent sources, para A1,
Advantages of
ISA 500 Audit Evidence states:
using confirmation
‘The reliability of information to be used as audit evidence, and therefore of
the audit evidence itself, is influenced by its source and its nature, and the
circumstances under which it is obtained, including the controls over its
preparation and maintenance where relevant. Therefore, generalizations
about the reliability of various kinds of audit evidence are subject to
important exceptions. Even when information to be used as audit evidence is
obtained from sources external to the entity, circumstances may exist that
could affect its reliability. For example, information obtained from an
independent external source may not be reliable if the source is not
knowledgeable, or a management’s expert may lack objectivity. While
recognizing that exceptions may exist, the following generalizations about
the reliability of audit evidence may be useful:

The reliability of audit evidence is increased when it is obtained from


independent sources outside the entity’.

Problems
- There is, however, a distinction between evidence provided by independent
associated with
third parties acting in a professional capacity, e.g. a bank manager, lawyer,
confirmation
other qualified accountants, and evidence from the third parties such as
customers and suppliers in the business contact group.

- A letter from, say a debtor, confirming that the amount due from him/her is
correctly recorded in the books of the client, is useful to the auditor, but
generally, non-professional business contacts such as debtors may have a
closer, more dependent relationship to the client.

- Neither can the auditor be certain that the debtor’s accounting and control
systems are reliable.

For possible disadvantages of using confirmation refer to Mnemonic: CINT

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Gathering evidence: Confirmation method – 3 of 5

ISA 505
Positive and External Confirmations identifies two forms of confirmation:
negative (i) Positive confirmation
confirmation (ii) Negative confirmation
Relevant standard:
ISA 505
Positive
confirmation

 The positive form/letter requests a reply from the recipient by either


confirming agreement with stated information or by asking the
respondent to fill in information (a ‘blank’ confirmation).

 By using the ‘blank’ confirmation approach the auditor may reduce the
risk that a respondent replies to a request without verifying the
information. With a blank confirmation the recipient must enter the
value from their own records.

 However, the ‘blank’ confirmation letter requires more work from the
recipient and this may result in lower response rates.

 When no reply is received to a positive confirmation request, a second


letter is normally mailed to the third party. If a reply is still not received,
or the first confirmation request is returned undelivered, the auditor
normally performs alternative procedures. Para 6, ISA 505 defines
‘non-response’ as:

‘A failure of the confirming party to respond, or fully respond, to a


positive confirmation request, or a confirmation request returned
undelivered.

Para 12, ISA 505 states:

‘In the case of each non-response, the auditor shall perform alternative
audit procedures to obtain relevant and reliable audit evidence. (Ref:
Para A18-A19)’.

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Gathering evidence:
Confirmation method- 4 of 5
Relevant standard:
ISA 505

Positive and  Positive confirmation requests are normally appropriate when inherent
negative and/or control risk is assessed as high (in other words a low level of
confirmation detection risk is to be achieved).
(continued)

Negative
confirmation

 The negative confirmation form/letter confirmation requests the


recipient to respond only if he/she disagrees with the information
stated on the request. Para 15, ISA 505 External Confirmations states
as follows:

‘Negative confirmations provide less persuasive audit evidence than


positive confirmations. Accordingly, the auditor shall not use negative
confirmation requests as the sole substantive audit procedure to
address an assessed risk of material misstatement at the assertion
level unless all of the following are present: (Ref: Para. A23)

(a) The auditor has assessed the risk of material misstatement as low
and has obtained sufficient appropriate audit evidence regarding
the operating effectiveness of controls relevant to the assertion;

(b) The population of items subject to negative confirmation


procedures comprises a large number of small, homogeneous,
account balances, transactions or conditions; (See Mnemonic:
LANE and para 15, ISA 505)

(c) A very low exception rate is expected; and

(d) The auditor is not aware of circumstances or conditions that would


cause recipients of negative confirmation requests to disregard
such requests’.

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Gathering evidence: Confirmation method – 5 of 5


If the auditor concludes that management’s refusal to allow the auditor to send a
When client does
confirmation request is unreasonable, or the auditor is unable to obtain relevant
not authorise
and reliable audit evidence from alternative audit procedures, the auditor would
confirmation
communicate with those charged with governance in accordance with ISA 260
(continued)
(Revised and Redrafted) Communication with Those Charged with Governance.

The auditor also would determine the implications for the audit and the auditor’s
opinion in accordance with ISA 705 Modifications to the Opinion in the
Independent Auditor’s Report.

The implications of ISA 505 External Confirmations are:

(i) When the auditor seeks an external confirmation and management refuses
to grant permission for him/her to do so, the auditor should carefully balance
the validity of the client’s request and the validity of the third-party
confirmation.

(ii) If the auditor agrees with the reasonableness of management’s request not
to seek third-party confirmation regarding a particular matter, the auditor
should apply alternative procedures to obtain sufficient and adequate
evidence regarding that matter.

(iii) If the auditor does not accept the validity of management’s refusal and is
prevented from carrying out the confirmation, there has been a limitation
on the scope of the auditor’s work and he/she should consider the impact of
this limitation on the auditor’s opinion and report.

Situations where negative confirmation may be appropriate


Negative confirmation requests may be appropriate where:
L Large numbers of small homogeneous, account balances, transactions or
conditions is involved in the test.
A Assessed level of inherent risk and control risk is low, and therefore there is a low risk of
material misstatement.
N No obvious reason exists why respondents will disregard the confirmation requests. The
auditor is not aware of circumstances or conditions that would cause recipients of negative
confirmation requests to disregard such requests.
E Errors of a substantial number are not anticipated. ‘A very low exception rate is expected.’

Memory jog: in such cases the negative confirmation request is a


‘LANE’ the auditor can use.
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Gathering evidence:
Specific risks for which confirmation may be relevant
A Accounts receivable balance with debtors.
- the auditor may take a random sample, or
- may list customers with very large balances or very small balances, customers that are slow in
paying, and/or that buy and pay erratically
- the auditor then gives this list to the client to prepare a confirmation letters (format already
agreed) requesting that customers reply direct to the auditor
- the auditor, not the client, mails these letters.

C Contract terms with customers, creditors or suppliers. Auditors are interested in all contracts
and in particular long-term notes and bonds payable, stock options, pension agreements, contracts
with vendors for future delivery of supplies, government contracts for completion, royalty agreements,
trade-union contracts, and leases. Contracts may affect the assessed inherent risk.
A Accounts payable balance. Similar approach is taken to that adopted for accounts receivable (see
above).

I Inventory quantity and value held by third parties. For example, if the client is involved with
timber importation and the timber is held in bonded warehouses until required by the entity for
manufacture and sale, the auditor would normally regard a letter from the bonded warehouse
company that they hold stocks of timber (of a stated quantity/value/date) on behalf of the client as
good evidence, provided that the warehouse company is of good reputation.
S Shares outstanding with stock transfer agents. A stock transfer agent is a company (broker),
usually a third party unrelated to stock transactions, which cancels the name and certificate of the
former stockholder who 'sold' the stock, and substitutes the 'new' owner's name on the Official Master
Shareholder listing.

B Bank balances with banks As part of their verification procedures, auditors obtain confirmation from
bank managers of bank balances and other matters at the year-end. The letter requests the bank to
give details of bank accounts, of customers assets held, either as a security or for safe custody, of
contingent liabilities and certain other information. (A contingent liability is a potential future obligation
to an outside party for an unknown amount resulting from the outcome of a past event).
L Life insurance cash surrender value with insurer.
I Insurance cover with insurer.
N Notes payable with lender – such as promissory notes held by suppliers.
D Debenture or bond holders – to determine indenture conditions.

Memory jog: ‘A’ certified auditor (‘CA’) ‘IS’ often ‘BLIND’


concerning existence, quantity and condition of assets and liabilities
relating to a third party without obtaining independent confirmation
from that third party.

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Gathering evidence:
Situations where confirmation may not be appropriate
Confirmation of accounts or balances is a generally accepted auditing procedure, unless:

A Account or balance is immaterial.


C Confirmation would be ineffective as an audit procedure possibly due to the inability of the
confirmations to adequately address the completeness assertion.
C Combined assessment of inherent and control risk is low e.g. in situations where the auditor
feels that there is low risk of material misstatement.
A Assessment using other substantive evidence is sufficient to reduce the audit risk to an
acceptable level e.g. confirmation procedures may be omitted due to the availability of externally
generated evidence (e.g. both purchase agreements and suppliers’ invoices)

Memory jog: blame the ‘ACCA’ for having to learn all this.

Gathering evidence:
Problems associated with confirmation
Possible disadvantages of confirmations are:

C Costly way of gathering evidence.


I Inconvenient to those asked to supply the information.
N Non-compliance by recipients of confirmation letters.
T Time-consuming for the auditor.

Memory jog: ‘CINT’ is a word that has no meaning (but that’s the
case with Kit-Kat, Kodak, Twix and many other brand names which are
used specifically for quick memory recall!)

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Gathering evidence by sampling:


What you need to know ……

Relevant standard:
ISA 530 We start here

Main
aspects
Disadvantages
of statistical Three steps
sampling

Where
Advantages sampling is
of sampling not
appropriate

Sampling
Statistical
Design of the
sampling sample
techniques

Evaluation Deciding
of tests sample size

Sample
Testing the
selection
sample
methods

Many students find sampling


a difficult concept.
ISA 530
might help!

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Gathering evidence by sampling

Relevant standard:
Objectives Testing by ISA 530
sample
Sample
population

Design of Random
Sample size
sample selection
Selection Haphazard
method selection
Judgemental
Testing by selection
Test of sample
Block
controls
sampling
Substantive Systematic
procedures sampling
Evaluation of
test results

Analysis
of errors
Statistical v
Inferences non-statistical
Risk
assessment

Statistical
sampling
techniques
Risk-based
auditing
Attribute
sampling Audit risk

Variables
sampling
Inherent risk

Monetary-unit
Control risk
sampling

Detection risk

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Appendix A:
International Standards:
June 2010 and December 2010 – 1 of 7

The following six screens itemise the International


Audit Standards and other examinable documents for
the June 2010 and December 2010 examination.

Reference is made to them as applicable in the body


of this Tony Surridge +AddVance e-publication.

Hyperlinks are provided both on the following


screens or when referred to in the text.

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EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010


AUDIT INTERNATIONAL – 2 of 7
Knowledge of new examinable regulations issued by 30th September will be examinable in examination
sessions being held in the following calendar year. Documents may be examinable even if the effective date is
in the future. This means that all regulations issued by 30th September 2009 will be examinable in the June
and December 2010 examinations.

The study guide offers more detailed guidance on the depth and level at which the examinable documents
should be examined. The study guide should therefore be read in conjunction with the examinable documents
list.
The linkages are disabled for the
Accounting Standards
purpose of this free download
Paper F8 Audit and Assurance
The accounting knowledge that is assumed for Paper F8 is the same as that examined in Paper F3. Therefore,
candidates studying for Paper F8 should refer to the Accounting Standards listed under Paper F3.

Paper P7 Advanced Audit and Assurance


The accounting knowledge that is assumed for Paper P7 is the same as that examined in Paper P2.
Therefore, candidates studying for Paper P7 should refer to the Accounting Standards listed under Paper P2.

N.B. P7 will only expect knowledge of accounting standards and financial reporting standards from Paper P2.
Knowledge of exposure drafts and discussion papers will not be expected.

Click here Title F8 P7


International Standards on Auditing (ISAs)
CLICK Glossary of Terms √ √
http://web.ifac.org/download/2009_Auditing_Handbook_A005_Glossary.pdf

CLICK International Framework for Assurance Assignments √ √


http://web.ifac.org/download/2008_Auditing_Handbook_A055_Framework.
pdf

CLICK Preface to the International Standards on Quality Control, √ √


Auditing, Review, Other Assurance and Related Services
http://web.ifac.org/download/2009_Auditing_Handbook_A004_2009_Prefa
ce-WithConformingAmendments.pdf

ISA 200 Overall Objectives of the Independent Auditor and the Conduct √ √
of an Audit in Accordance with International Standards on
Auditing
http://web.ifac.org/download/2009_Auditing_Handbook_A008_ISA_200.pdf

ISA 210 Agreeing the Terms of Audit Engagements √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A009_ISA_210.pdf

ISA 220 Quality Control for an Audit of Financial Statements √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A010_ISA_220.pdf
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EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010


AUDIT INTERNATIONAL - 3 of 7

Click here Title F8 P7


ISA 230 (Redrafted) Audit Documentation √ √
http://web.ifac.org/download/2009_Auditing_Handbook_A011_ISA_230.pdf

ISA 240 (Redrafted) The Auditor’s Responsibilities Relating to Fraud in √ √


an Audit of Financial Statements
http://web.ifac.org/download/2009_Auditing_Handbook_A012_ISA_240.pdf

ISA 250 (Redrafted) Consideration of Laws and Regulations in an Audit √ √


of Financial Statements
http://web.ifac.org/download/2009_Auditing_Handbook_A013_ISA_250.pdf

ISA 260 (Revised and Redrafted) Communication with Those Charged √ √


with Governance
http://web.ifac.org/download/2009_Auditing_Handbook_A014_ISA_260.pdf

ISA 265 Communicating Deficiencies in Internal Control to those √ √


Charged with Governance and Management
http://web.ifac.org/download/2009_Auditing_Handbook_A015_ISA_265.pdf

ISA 300 (Redrafted) Planning an Audit of Financial Statements √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A016_ISA_300.pdf

ISA 315 (Redrafted) Identifying and Assessing the Risks of Material √ √


Misstatement Through Understanding the Entity and Its
Environment
http://web.ifac.org/download/2009_Auditing_Handbook_A017_ISA_315.pdf

ISA 320 Materiality in Planning and Performing and Audit √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A018_ISA_320.pdf

ISA 330 (Redrafted) The Auditor’s Responses to Assessed Risks √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A019_ISA_330.pdf

ISA 402 Audit Considerations Relating to an Entity Using a Service √ √


Organisation
http://web.ifac.org/download/2009_Auditing_Handbook_A020_ISA_402.pdf

ISA 450 Evaluation of Misstatements Identified During the Audit √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A021_ISA_450.pdf

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EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010


AUDIT INTERNATIONAL – 4 of 7

Click here Title F8 P7


ISA 500 Audit Evidence √ √
http://web.ifac.org/download/2009_Auditing_Handbook_A022_ISA_500.pdf

ISA 501 Audit Evidence – Specific Considerations for Selected Items √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A023_ISA_501.pdf

ISA 505 External Confirmations √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A024_ISA_505.pdf

ISA 510 (Redrafted) Initial Audit Engagements – Opening Balances √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A025_ISA_510.pdf

ISA 520 Analytical Procedures √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A026_ISA_520.pdf

ISA 530 Audit Sampling √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A027_ISA_530.pdf

ISA 540 (Revised and Redrafted) Auditing Accounting Estimates, √ √


Including Fair Value Estimates and Related Disclosures
http://web.ifac.org/download/2009_Auditing_Handbook_A028_ISA_540.pdf

ISA 550 (Revised and Redrafted) Related Parties √


http://web.ifac.org/download/2009_Auditing_Handbook_A029_ISA_550.pdf

ISA 560 (Redrafted) Subsequent Events √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A030_ISA_560.pdf

ISA 570 (Redrafted) Going Concern √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A031_ISA_570.pdf

ISA 580 (Revised and Redrafted) Written Representations √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A032_ISA_580.pdf

ISA 600 (Revised and Redrafted) Special Considerations - Audits of √


Group Financial Statements (Including the Work of Component
Auditors)
http://web.ifac.org/download/2009_Auditing_Handbook_A033_ISA_600.pdf

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EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010


AUDIT INTERNATIONAL – 5 of 7

Click Title F8 P7
here
ISA 610 Using the Work of Internal Auditors √ √
http://web.ifac.org/download/2009_Auditing_Handbook_A034_ISA_610.pdf

ISA 620 Using the Work of an Auditor’s Expert √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A035_ISA_620.pdf

ISA 700 Forming an Opinion and Reporting on Financial Statements √ √


http://web.ifac.org/download/2009_Auditing_Handbook_A036_ISA_700.pdf

ISA 705 Modifications to the Opinion in the Independent Auditor’s √ √


Report
http://web.ifac.org/download/2009_Auditing_Handbook_A037_ISA_705.pdf

ISA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs √ √


in the Independent Auditor’s Report
http://web.ifac.org/download/2009_Auditing_Handbook_A038_ISA_706.pdf

ISA 710 Comparative Information – Corresponding Figures and √ √


Comparative Financial Statements
http://web.ifac.org/download/2009_Auditing_Handbook_A039_ISA_710.pdf

ISA 720 (Redrafted) The Auditor’s Responsibilities Related to Other √ √


Information in Documents Containing Audited Financial
Statements
http://web.ifac.org/download/2009_Auditing_Handbook_A040_ISA_720.pdf

ISA 800 Special considerations – Audits of Financial Statements √


Prepared in Accordance with Special Purpose Frameworks
http://web.ifac.org/download/2009_Auditing_Handbook_A041_ISA_800.pdf

International Auditing Practice Statements (IAPSs)


IAPS Inter-bank Confirmation Procedures √
1000 http://web.ifac.org/download/2008_Auditing_Handbook_A220_IAPS_1000.
pdf

IAPS The Consideration of Environmental Matters in the Audit of √


1010 Financial Statements
http://web.ifac.org/download/2008_Auditing_Handbook_A240_IAPS_1010.
pdf

IAPS Electronic Commerce: Effect on the Audit of Financial √ √


1013 Statements
http://web.ifac.org/download/2008_Auditing_Handbook_A250_IAPS_1013.
pdf

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EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010


AUDIT INTERNATIONAL – 6 of 7

Click here Title F8 P7


IAPS 1014 Reporting by Auditors on Compliance with International √ √
Financial Reporting Standards
http://web.ifac.org/download/2008_Auditing_Handbook_A255_IAPS_1014.
pdf

International Standards on Assurance Engagements (ISAEs)


ISAE 3000 Assurance Engagements other than Audits or Reviews of √ √
Historical Financial Information
http://web.ifac.org/download/2008_Auditing_Handbook_A270_ISAE_3000.
pdf

ISAE 3400 The Examination of Prospective Financial Information √


http://web.ifac.org/download/2008_Auditing_Handbook_A275_ISAE_3400.
pdf

International Standards on Quality Control (ISQCs)


ISQC 1 Quality Control for Firms that Perform Audits and Reviews of √
Historical Financial Information and Other Assurance and
Related Services Engagements
http://web.ifac.org/download/ISQC_1_standalone_2009_Handbook.pdf

International Standards on Related Services (ISRSs) √ √


ISR 4400 Engagements to Perform Agreed-Upon Procedures Regarding √
Financial Information
http://web.ifac.org/download/2008_Auditing_Handbook_A280_ISRS_4400.
pdf

ISR 4410 Engagements to Compile Financial Information √


http://web.ifac.org/download/2008_Auditing_Handbook_A285_ISRS_4410.
pdf

International Standards on Review Engagements (ISREs)


ISRE 2400 Engagements to Review Financial Statements √ √
http://web.ifac.org/download/2008_Auditing_Handbook_A260_ISRE_2400.
pdf

ISRE 2410 Review of Interim Financial Information Performed by the √


Independent Auditor of the Entity
http://web.ifac.org/download/2008_Auditing_Handbook_A265_ISRE_2410.
pdf

Exposure Drafts (EDs)

Other documents
CLICK ACCA’s ‘Code of Ethics and Conduct’ √ √
http://rulebook.accaglobal.com/
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EXAMINABLE DOCUMENTS JUNE 2010 AND DECEMBER 2010


AUDIT INTERNATIONAL - 7 of 7
Click here Title F8 P7
CLICK IFAC’s ‘Code of Ethics for Professional Accountants’ √
http://web.ifac.org/download/2008_Auditing_Handbook_A025_Code_of_Et
hics.pdf

CLICK FFE Integrity in Professional Ethics A Discussion Paper √


http://www.icaew.com/index.cfm/route/168076/icaew_ga/Technical_and_Business_
Topics/Thought_leadership/Market_foundations/Integrity_in_professional_ethics_F
EE_discussion_paper/pdf

CLICK ACCA’s Technical Factsheet 94 – Anti Money-Laundering √


(Proceeds of Crime and Terrorism)
http://www.accaglobal.com/pubs/members/publications/technical_factshee
ts/downloads/94.pdf

CLICK The Combined Code (of the Committee on Corporate √


Governance) as an example of a code of best practice
http://www.frc.org.uk/documents/pagemanager/frc/Combined%20Code%2
0June%202006.pdf

CLICK Background Information on the Clarity Project of the √


International Auditing and Assurance Standards Board
http://web.ifac.org/clarity-center/index

CLICK IAASB Practice Alert Challenges in Auditing Fair Value √


Accounting Estimates in the Current Market Environment
(October 2008)
http://web.ifac.org/publications/international-auditing-and-assurance-
standards-board/practice-alerts-and-q-as#audit-considerations-in-res

CLICK IAASB Practice Alert Audit Considerations in Respect of √


Going Concern in the Current Economic Environment
(January 2009)
http://web.ifac.org/publications/international-auditing-and-assurance-
standards-board/practice-alerts-and-q-as#audit-considerations-in-res

CLICK IAASB Applying ISAs Proportionately with the Size and √


Complexity of an Entity (August 2009)
http://web.ifac.org/publications/international-auditing-and-assurance-
standards-board/practice-alerts-and-q-as#applying-isas-proportionate
Note: Topics of exposure drafts are examinable to the extent that relevant articles about them are published
in student accountant.

Turnbull’s Report (Internal Control) Click here


http://www.frc.org.uk/documents/pagemanager/frc/Revised%20Turnbull%20Guidance%20October%202005.pdf

Smith’s Report (Audit Committee) Click here


http://www.frc.org.uk/documents/pagemanager/frc/Smith%20Report%202005.pdf

Higgs Report (Non-Executive Directors) Click here


http://www.berr.gov.uk/files/file23012.pdf
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Appendix B
Extracts of UK Companies Act, 2006
(Used only as an illustration of typical legislation in different countries)

Examples below are taken from UK legislation (Companies Act, 2006). (Note: It is a lengthy Act and
if you want to see it in its complete form will take time to download. Each separate Section [indicated
below] is hyperlinked almost instantly.)

Sec. 248 Minutes of directors' meetings Only the first two are active
Sec. 382 Companies qualifying as small: general for demonstration
Sec. 415 Duty to prepare directors' report
Sec. 418 Contents of directors' report: statement as to disclosure to auditors
Sec. 419 Approval and signing of directors' report
Sec. 437 Public companies: laying of accounts and reports before general meeting
Sec. 475 Requirement for audited accounts
Sec. 476 Right of members to require audit
Sec. 477 Small companies: conditions for exemption from audit
Sec. 478 Companies excluded from small companies exemption
Sec. 489 Appointment of auditors of public company: general
Sec. 490 Appointment of auditors of public company: default power of Secretary of State
Sec. 491 Term of office of auditors of public company
Sec. 492 Fixing of auditor's remuneration
Sec. 495 Auditor's report on company's annual accounts
Sec. 496 Auditor's report on directors' report
Sec. 497 Auditor's report on auditable part of directors' remuneration report
Sec. 498 Duties of auditor
Sec. 499 Auditor's general right to information
Sec. 501 Auditor's rights to information: offences
Sec. 502 Auditor's rights in relation to resolutions and meetings
Sec. 503 Signature of auditor's report
Sec. 507 Offences in connection with auditor's report
Sec. 510 Resolution removing auditor from office
Sec. 511 Special notice required for resolution removing auditor from office
Sec. 516 Resignation of auditor
Sec. 517 Notice to registrar of resignation of auditor
Sec. 518 Rights of resigning auditor
Sec. 519 Statement by auditor to be deposited with company
Sec. 520 Company's duties in relation to statement
Sec. 521 Copy of statement to be sent to registrar
Sec. 1212 Individuals and firms: eligibility for appointment as a statutory auditor
Sec. 1213 Effect of ineligibility
Sec. 1214 Independence requirement
Sec. 1215 Effect of lack of independence
Sec. 1217 Supervisory bodies

Note: the term ‘public company’ as used in the Act refers to a plc (i.e. public limited company).

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Appendix B
Extracts of UK Companies Act, 2006
(Used only as an illustration of typical legislation in different countries)

248
Minutes of directors' meetings
(1) Every company must cause minutes of all proceedings at meetings of its directors to be recorded.

(2) The records must be kept for at least ten years from the date of the meeting.

(3) If a company fails to comply with this section, an offence is committed by every officer of the
company who is in default.

(4) A person guilty of an offence under this section is liable on summary conviction to a fine not
exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not
exceeding one-tenth of level 3 on the standard scale.

382
Companies qualifying as small: general
(1) A company qualifies as small in relation to its first financial year if the qualifying conditions are met
in that year.

(2) A company qualifies as small in relation to a subsequent financial year —

(a) if the qualifying conditions are met in that year and the preceding financial year;
(b) if the qualifying conditions are met in that year and the company qualified as small in relation
to the preceding financial year;
(c) if the qualifying conditions were met in the preceding financial year and the company
qualified as small in relation to that year.

(3) The qualifying conditions are met by a company in a year in which it satisfies two or more of the
following requirements —

1. Turnover Not more than £5.6 million


2. Balance sheet total Not more than £2.8 million
3. Number of employees Not more than 50

(4) For a period that is a company's financial year but not in fact a year the maximum figures for
turnover must be proportionately adjusted.

(5) The balance sheet total means the aggregate of the amounts shown as assets in the company's
balance sheet.

(6) The number of employees means the average number of persons employed by the company in the
year, determined as follows —

(a) find for each month in the financial year the number of persons employed under contracts of
service by the company in that month (whether throughout the month or not),
(b) add together the monthly totals, and
(c) divide by the number of months in the financial year.
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Appendix C:
Codes: June 2010 and December 2010
Title F8 P7
Click here ACCA’s ‘Code of Ethics and Conduct’ √ √

Click here IFAC’s ‘Code of Ethics for Professional Accountants’ √

Click here ACCA’s Technical Factsheet 94 – Anti Money-Laundering √


(Proceeds of Crime and Terrorism)

Click here The Combined Code (of the Committee on Corporate √


Governance) as an example of a code of best practice

Click here Background Information on the Clarity Project of the International √


Auditing and Assurance Standards Board

Click here Status of the IAASB’s Work to Clarify the Status of its Standards √
(IAASB document)

CLICK AND GO

Note:
Topics of exposure drafts are examinable to the extent that relevant articles about them are published in
student accountant.

OTHER USEFUL LINKS


Title F8 P7
Click here Turnbull’s Report (Internal control) √
Click here Guidance on Audit Committees The Smith Guidance) √
Click here Review on the role and effectiveness of non-executive directors √
(Higgs Report)

Click here Tony Surridge Online Glossary of Terms √ √

CLICK AND GO

The linkages are disabled for the


purpose of this free download

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APPENDIX D
Specimen audit working papers:

The following screens provide specimen audit working papers. They are not exclusive.

You do not have to reproduce these forms in the exam. They are included simply to help
enlarge your understanding.

Except for the single linkage coloured


pink all linkages are disabled for the
purpose of this free download

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APPENDIX D
Specimen Working Papers: Index 1 of 2
Specimen Audit Working Papers are also hyperlinked from relevant screens in the text.

SPECIMEN AUDIT WORKING PAPERS


‘Click and Title Number of F8 P7
go’ screens

Title Screen 1 √ √
Click here Permanent File 1 √ √
Click here Current File 1 √ √

Click here Account Analysis Schedule 1 √ √

Click here Client Risk Evaluation Questionnaire 7 √ √

Click here Risk Assessment Internal Control Questionnaire 1 √ √

Click here Audit Planning Memorandum 6 √ √


Click here Audit Programme – Accounts Receivable 1 √ √
Click here Organisation Chart of Assignment of Authority 1 √ √
and Responsibility
Click here Trial Balance 1 √ √
Click here Lead Schedule 1 √ √
Click here List Schedule 1 √ √

Click here Reconciliation: Accounts Receivable 1 √ √


Click here Test of Reasonableness Schedule 1 √ √
Click here Narrative Description of the Control Environment 1 √ √

Click here Internal Control Narrative Table 1 √ √

Click here Internal Control Questionnaire: 2 √ √


Accounts Receivable
Click here Internal Control Questionnaire: 2 √ √
General Accounting System
Click here Internal Control Questionnaire: 2 √ √
Cash Funds
Click here Internal Control Questionnaire: 2 √ √
Cash Receipts
CLICK AND GO

Please go to the next screen to continue ‘Specimen Audit Working Papers’


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APPENDIX D
Specimen Working Papers: Index 2 of 2
SPECIMEN AUDIT WORKING PAPERS - 2
Click and Title Number of F8 P7
go screens
Click here Internal Control Questionnaire: 2 √ √
Cash Disbursements
Click here Internal Control Questionnaire: 2 √ √
Inventory and Cost of Sales
Click here Internal Control Questionnaire: 2 √ √
Fixed Assets

Click here Internal Control Questionnaire: 2 √ √


Accounts Payable

Click here Internal Control Questionnaire: 2 √ √


Payroll

Click here Manual System: Chart of Accounts 1 √ √

Click here Computer System: Chart of Accounts 1 √ √


Click here Analytical Review: Planning Stage 3 √ √
Click here Computer Input Control Forms: Title Screen 1 √ √

Click here Sales Invoices 1 √ √


Click here Sales Credit Notes 1 √ √
Click here Sales Receipts 1 √ √
Click here Purchase Invoices 1 √ √
Click here Purchase Payments 1 √ √
Click here Bank Receipts 1 √ √
Click here Bank Payments 1 √ √
Click here Petty Cash Receipts 1 √ √
Click here Petty Cash Payments 1 √ √
Click here Journal 1 √ √

CLICK AND GO

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Specimen Working Papers: Permanent File


PERMANENT FILE Engagement Code: Client:
Index # Pages Description
I General Client and Engagement Information
1 Client information form
2 Engagement proposal
3 Engagement letter
II Statutory and Legal Information
1 Articles of Association, Memorandum of Association
2 Special legal, statutory or contractual definitions
3 Members’ register
4 Extracts of continuing importance:
Legal documents
Contracts
Loan agreements
Other funding agreements
Pension plans
Others
5 Copies: Title deeds
6 Borrowing agreements, lease agreements
7 Lease agreements
8 Details of other important agreements
III Accounting System and Internal Control
1 Organisation Chart of assignment of authority and responsibility
2 Documentation of accounting system and internal control structure
3 Chart of accounts
4 Authorisation limits, initials and signature list
5 Accounting policy documents and procedure instructions
IV Continuing Audit
1 Minutes of continuing relevance
2 Correspondence of continuing relevance
3 Documentation: computer applications
4 Configuration and registration codes: hardware and software
V Financial Statement Information
1 Financial statement analysis/previous year’s summary
2 Details: intangible on-current assets
3 Details: property, and other single assets with value exceeding $1m
4 Details: other tangible non-current assets
5 Details: holding, subsidiary, associates and other participants
VI Personnel, employment conditions
1 Previous year’s summary: personnel establishment
Collective bargaining agreements, standard employee contracts, salary scales and
2
individual employee contracts
3 Composition of board of directors
4 Names of directors, roles and contacts
5 Pension arrangements/early retirement rules and regulations
6 Expense allowance rules and regulations
7 Other employment conditions
VII Taxation

Just cast your eyes over the separate constituent parts of the typical ‘Permanent Audit File’. They are
self-explanatory.
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APPENDIX E:
GLOSSARY OF TERMS
(* International Auditing and Assurance Standards Board [IAASB] - February 2009)

A B C D E F G H I J K

L M N O P Q R S T U V W

Only a small sample of our Glossary is


available in this free download. The
hyperlinks indicated above have been
disabled for this download.

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GLOSSARY OF TERMS
(* International Auditing and Assurance Standards Board [IAASB] - February 2009)

Appropriateness (of audit evidence)*


The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for
the conclusions on which the auditor’s opinion is based.

Archived files
An archive is a collection of records, and the location in which the collection is kept. Archives contain records
which have accumulated over the course of time. The archives of an organisation tend to contain
administrative files, business records, memos, official correspondence and meeting minutes. In general,
archives consist of records which have been selected for permanent or long-term preservation,

Arm’s length transaction*


A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are
unrelated and are acting independently of each other and pursuing their own best interests.

Arrestment
An arrestment is a notice which prohibits a debtor from handing over to his creditor money or property until a
debt due by that creditor to a third party, the arrester, is paid or secured.

Assertions*
Representations by management, explicit or otherwise, that are embodied in the financial statements, as
used by the auditor to consider the different types of potential misstatements that may occur.

Assertions (and the ‘assertion level’, i.e. the assertion for which audit procedures are used) used by the
auditor fall into the following categories:

(a) Assertions about classes of transactions and events for the period under audit:
(i) Occurrence—transactions and events that have been recorded have occurred and pertain to the
entity.
(ii) Completeness—all transactions and events that should have been recorded have been recorded.
(iii) Accuracy—amounts and other data relating to recorded transactions and events have been
recorded appropriately.
(iv) Cutoff—transactions and events have been recorded in the correct accounting period.
(v) Classification—transactions and events have been recorded in the proper accounts.

(b) Assertions about account balances at the period end:


(i) Existence—assets, liabilities, and equity interests exist.
(ii) Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.
(iii) Completeness—all assets, liabilities and equity interests that should have been recorded
have been recorded.
(iv) Valuation and allocation—assets, liabilities, and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded.

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GLOSSARY OF TERMS
(* International Auditing and Assurance Standards Board [IAASB] - February 2009)

Carrying value
Is the value of an asset or liability in a company’s books or balance sheet.

Casual vacancy
Is an unforeseen vacancy

Check-point restart
Checkpoint restart is a facility offered by some database management systems (DBMSs) and backup-restore
software. Checkpoints are taken in anticipation of the potential need to restart a software process.
Many ordinary batch processes on impersonal computers are time-consuming, as are backup and restore
operations. They consist of many units of work. If checkpointing is enabled, checkpoints are initiated at
specified intervals, in terms of units of work or of processing time. At each checkpoint the process's progress
is saved to back-up storage. The contents of the program's memory area may also be saved. The purpose of
checkpointing is to minimise the amount of time and effort wasted when a long software process is
interrupted by a hardware failure, a software failure, or resource unavailability. With checkpointing, the
process can be restarted from the latest checkpoint rather than from the beginning.

Compare
To set one group of figures with another set so as to ascertain how far they agree or disagree, such as to
compare the beginning balances with last year’s audited figures.

Comparative financial statements*


Comparative information where amounts and other disclosures for the prior period are included for
comparison with the financial statements of the current period but, if audited, are referred to in the auditor’s
opinion. The level of information included in those comparative financial statements is comparable with that of
the financial statements of the current period.

Comparative information*
The amounts and disclosures included in the financial statements in respect of one or more prior periods in
accordance with the applicable financial reporting framework.

Compare
To set one group of figures with another set so as to ascertain how far they agree or disagree, such as to
compare the beginning balances with last year’s audited figures.

Compensating cash balance


A compensating cash balance is an account with a bank in which a company has agreed to maintain a
specified minimum amount; compensating balances are typically required under the terms of bank loan
agreements. Such restrictions on cash, when material, should be disclosed in financial statements.

Compliance
Agreement with, such as agreement that there has been correct application of International Financial
Reporting Standards.

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Contents
Tony Surridge Online +
AddVance Mnemonics and Charts e-book for ACCA Paper F8

The Contents section of this e-book which can be accessed on the


following screens is designed for two purposes:

1. To provide page numbers for hard-copy reference if printed.

2. To provide the basis for individual mnemonics, charts or text sections


to be hyperlinked directly.

The following 22 screens show the contents of our


e-book. Except for those coloured pink, the
hyperlinks have been disabled for the purpose of
this free download

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Contents- 1 of 22
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Type Title Start screen no No. of screens

SECTION A: AUDIT FRAMEWORK AND REGULATION


Chart An overview of what is involved 28 4

Chart The concept of audit and other assurance 37 1


engagements. What you need to know ….

Chart What is an audit? What is an auditor? 38 6

Chart Audit staff 44 1

Chart The need for auditing 45 1

Chart The audit link and terminology 46 1

Mnemonic Assurance engagements 47 1

Chart Services of the professional accountant 48 1

Mnemonic Characteristics of an assurance engagement or a 49 1


review engagement

Mnemonic Examples of suitable criteria used in an assurance 50 1


review

Mnemonic Characteristics for assessing suitable criteria in 51 1


assurance reviews

Mnemonic Subject matter of an assurance engagement 52 1

Chart Engagements to review financial statements 53 7

Chart Example of an Engagement Letter for a Review of 60 1


Financial Statements

Chart Example of an unqualified report for a Review of 61 1


Financial Statements

Chart Example of a report other than unqualified for a 61 1


Review of Financial Statements

Mnemonic Assurance engagements on subject matters other 62 1


than historical financial information

Mnemonic Factors to consider when providing assurance 63 1


services on matters other than historical financial
information

Chart The 5 elements of ALL assurance engagements 64 2

Chart Levels of assurance 66 1

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Contents – 2 of 22
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Type Title Start screen no No. of screens

SECTION A: AUDIT FRAMEWORK AND REGULATION


Chart Services performed by professional accountants – a 67 1
summary

Chart What is a financial audit? 68 1

Mnemonic Purposes and advantages of an audit 69 1

Mnemonic Disclosures are audited as well as historical financial 70 1


statements
Chart Limitations of auditing 71 1

Mnemonic The limitations of modern auditing 72 1

Mnemonic Concept of ‘Principal-Agency Theory (PAT) applied to 73 1


shareholders and directors
Chart Protecting the interests of shareholders and other 74 1
stakeholders
Chart Differences between internal and external audit 75 1

Chart Our first look at Internal Audit and review 76 1

Chart Interim and final audits 77 1

Chart The audit report 78 1

Chart The meaning of ‘true and fair’ 79 1

Chart Materiality of misstatement 80 2

Chart Statutory audit. What you need to know. 82 1

Chart Audit regulation 83 1

Chart International Federation of Accountants (IFAC) 84 3

Chart Relationship between International Standards on 87 2


Auditing and national standards – The UK’s APB
Mnemonic Statutory framework of auditing 89 1

Chart Auditing and company legislation 90 1

Mnemonic Eligibility to conduct a statutory audit (external audit) 91 1

Chart ACCA is a ‘Recognised Supervisory Body’ 92 1


(Sec. 1217 of UK Companies Act, 2006)

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Contents – 3 of 22
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Type Title Start screen no No. of screens

SECTION A: AUDIT FRAMEWORK AND REGULATION


Mnemonic Audit exemption 93 1

Mnemonic The audit requirement: Small entity 94 1

Mnemonic The benefits of the statutory audit to small companies 95 1

Mnemonic The arguments against the statutory audit of small 96 1


companies
Chart Appointments of auditors 97 2
(Reference made to UK legislation by way of example.)

Chart Removal of auditors 99 1


(Reference made to UK legislation by way of example.)

Chart Resignation of auditors 100 1

Mnemonic Auditor’s rights and duties: DUTIES 101 1

Mnemonic The auditor’s duties 102 1

Mnemonic Auditor’s rights and duties: RIGHTS 103 1

Chart Reports of listed companies: Directors’ report 104 1


(Reference made to UK legislation by way of example.)

Chart Reports of listed companies: Auditor’s report 105 1


(Reference made to UK legislation by way of example.)

Mnemonic The statutory audit opinion 106 1

Chart Public sector auditing 107 1


(Reference made to UK by way of example.)

Chart The regulatory environment and corporate 108 1


governance. What you need to know.

Chart The rights and privileges of the STAKEHOLDER 109 1

Chart Typical stakeholder groups 110 1

Chart The relationships companies have with their 111 1


stakeholders
Mnemonic OECD Principles of Corporate Governance 112 1

Mnemonic General principles of governance 113 1

Mnemonic Features of poor governance 114 1

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Contents – 4 of 22
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Type Title Start screen no No. of screens

SECTION A: AUDIT FRAMEWORK AND REGULATION


Mnemonic Corporate governance: Best Practice 115 1

Chart The FRC’s ‘Combined Code’ (UK) 116 1


(FRC is the Financial Reporting Council, UK)
Chart The FRC’s Combined Code: Directors 117 1

Mnemonic Role of the Chairman 118 1

Mnemonic Role of the Board of Directors 119 1

Mnemonic Role of Non-Executive Directors 120 1

Mnemonic Problems with non-executive directors 121 1

Mnemonic Independence of non-executive directors 122 1

Chart Corporate Governance reports which make up the 123 1


FRC’s ‘Combined Code’ (UK)
Chart Committees recommended by Cadbury 124 1

Chart The Audit Committee. What you need to know. 125 1

Chart The FRC’s: Accountability band audit 126 1

Mnemonic Aims of the Audit Committee 127 1

Mnemonic Duties of the Audit Committee 128 1

Mnemonic Benefits of the Audit Committee 129 1

Mnemonic Problems associated with having an Audit Committee 130 1

Mnemonic The Audit Committee and internal audit 131 1

Mnemonic Review of Internal Audit by the Audit Committee 132 1

Mnemonic Review of the remuneration of directors’ policy 133 1

Chart The FRC’s ‘Combined Code’: Directors’ remuneration 134 1

Mnemonic The role of the Nomination Committee 135 1

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Contents – 5 of 22
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Type Title Start screen no No. of screens

SECTION A: AUDIT FRAMEWORK AND REGULATION


Chart The FRC’s ‘Combined Code’: Relations with 136 1
shareholders

Chart Professional ethics and the ACCA’s ‘Code of Ethics 137 1


and Conduct’. What you need to know.

Mnemonic ACCA’s ‘Fundamental Principles’ 138 1

Mnemonic Summary: Integrity, objectivity and independence 139 1

Mnemonic Potential threats to an auditor’s independence 140 1

Chart Potential threats to an auditor’s independence 141 1

Mnemonic Threats to independence and objectivity 142 1

Mnemonic Examples of conflict of self-interest 143 1

Mnemonic Family and other personal relationships 144 1

Mnemonic Factors which have an impact on the auditor’s ability 145 1


to withstand pressure on his/her independence
Chart Safeguards to protect audit independence 146 1

Mnemonic Safeguards to protect audit independence created by 147 1


the accounting profession, legislation or regulation
Mnemonic Safeguards to protect audit independence within the 148 1
client firm

Mnemonic Safeguards to protect audit independence within the 149 1


audit firm

Mnemonic Preserving independence and objectivity 150 1

Mnemonic Rotation of auditor appointments 151 1

Chart Statement 3.5: The professional duty of confidence 152 1

Mnemonic Statement 3.5: The professional duty of confidence 153 1

Chart The use of confidential information 154 1

Mnemonic Due skill and care 155 1

Chart Enforcement mechanisms associated with ACCA’s 156 2


‘Code of Ethics and Conduct’

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SECTION A: AUDIT FRAMEWORK AND REGULATION


Chart Areas of controversy 158 1

Mnemonic Range of business services which an audit firm’s 159 1


portfolio could include
Mnemonic Whistleblowing 160 1

Chart Do we want the audit? 161 1

Chart The procedure for tendering and accepting a new 162 1


audit assignment
Chart Sources of information for client evaluation 163 1

Mnemonic Source of information about new clients 164 1

Mnemonic Client acceptance: Topics for discussion with 165 1


prospective client to help evaluate their background
Mnemonic The client’s regulatory framework 166 1

Chart Client screening 167 1

Mnemonic Low risk clients 168 1

Mnemonic High risk clients 169 1

Mnemonic Client acceptance: Determine whether the audit firm 170 1


is able to meet ethical requirements regarding the
engagement – review of existing auditor and audit-
team competence
Mnemonic Client acceptance: Determine whether the audit firm 171 1
is able to meet ethical requirements regarding the
engagement

Mnemonic Changes in professional appointments 172 1

Mnemonic Matters which may warrant the existing auditor 173 1


bringing to the attention of the prospective auditor

Mnemonic Issues to be considered before submitting a proposal 174 1


(tender) for the engagement

Mnemonic Tendering and obtaining audit work 175 1

Chart Client acceptance: Prepare the Client Proposal 176 1

Mnemonic Contents of an audit engagement letter 177 1

Chart Example: ‘Audit Engagement Letter’ 178 2

MAP
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SECTION A: AUDIT FRAMEWORK AND REGULATION


Mnemonic Other matters that could be included in an 180 1
engagement letter

SECTION B: INTERNAL AUDIT


Chart Internal audit: Things you need to know. 182 1

Mnemonic The scope of the internal audit function 183 1

Chart The role of internal audit 184 1

Chart Internal audit and risk 185 1

Mnemonic Means of identifying risk 186 1

Mnemonic Main types of risk faced by business entities 187 1

Mnemonic Factors contributing to business risk 188 1

Mnemonic Considerations concerning entity objectives, 189 1


strategies and related business risks
Mnemonic External risks 190 1

Mnemonic Internal risks 191 1

Mnemonic Factors contributing to financial risk 192 1

Mnemonic Ways of identifying risk 193 1

Chart A risk management policy 194 1

Chart Dealing with risk (risk response) 195 1

Mnemonic Benefits of a risk policy 196 1

Chart The main process of Internal Audit when auditing 197 1


internal controls
Chart Internal audit assignments 198 1

Mnemonic Computer systems audits 199 1

Mnemonic Fraud risk factors 200 1

MAP
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SECTION B: INTERNAL AUDIT


Chart Internal audit assignments – Operational audits 201 3

Chart Value for Money 204 1

Mnemonic Value for Money audit coverage 205 1

Mnemonic The problems with Value for Money (VFM) audits 206 1

Chart Best Value 207 1

Mnemonic Benefits of internal audit 208 1

Mnemonic Potential limitations associated with internal audit 209 1

Mnemonic Minimising the limitations of internal audit 210 1

Mnemonic Reasons why management might be against 211 1


establishing an internal audit department
Mnemonic Increasing the effectiveness of internal auditors 212 1

Mnemonic The advantages of outsourcing the internal audit 213 1


function
Mnemonic The disadvantages of outsourcing the internal audit 214 1
function

Chart Differences between internal and external audit (a 215 1


second look …… just to remind us!)
Mnemonic External auditors using the work of internal auditors 216 1

Mnemonic The responsibility of the external (independent) 217 1


auditor when relying upon the work on internal
auditors

SECTION C: PLANNING AND RISK ASSESSMENT


Chart Audit process model 219 1

Chart So we have the audit …… 220 1

Mnemonic Objectives of planning audit work 221 1

Chart Typical audit planning procedures 222 2

Mnemonic Planning the audit: Perform audit tasks to understand 224 1


the entity and its environment
Mnemonic Planning the audit: Perform audit tasks to understand 225 1
the entity and its environment – The business
operations of the client
MAP
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SECTION C: PLANNING AND RISK ASSESSMENT


Mnemonic Planning the audit: Perform audit tasks to understand 226 1
the entity and its environment – Investments of the
client

Mnemonic Planning the audit: Perform audit tasks to understand 227 1


the entity and its environment – Financing and capital
structure

Mnemonic Planning the audit: Perform audit tasks to understand 228 1


the entity and its environment – Financial reporting

Chart Planning the audit: Perform audit tasks to understand 229 1


the entity and its environment – Classification of
individual business risk

Chart Planning the audit: Evaluation of the client’s internal 230 1


control

Chart Assessing the risks of material misstatement. What 231 1


you need to know
Chart Audit planning – The role of Risk Assessment 232 1

Chart Audit risk: inherent risk, control risk and detection risk 233 1

Chart Components of audit risk 234 1

Chart Components of audit risk (another look!) 235 2

Chart Components of audit risk (a deeper look!) 237 1

Chart Components of audit risk – example 238 1

Chart The risk approach to auditing 239 1

Chart Structure of the audit: 3 possible ‘routes’ 240 1

Chart A business risk approach to auditing: Assessing 241 1


inherent risk
Mnemonic Inherent risk: Risks that require special audit 242 1
consideration

Chart Deciding materiality 243 3

Chart Tolerable error: reliability, precision and amount of 246 1


evidence

Chart Analytical procedures. What you need to know 247 1

MAP
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SECTION C: PLANNING AND RISK ASSESSMENT


Chart Appropriateness of analytical procedures 248 1

Mnemonic Analytical procedures 249 2

Mnemonic Analytical procedures: developing an ‘expectation’ 251 1

Mnemonic Analytical procedures: plausible relationships 252 1

Mnemonic Analytical procedures: customary ratios 253 1

Mnemonic Analytical procedures: limitations 254 1

Chart Analytical procedures - Question 255 2

Chart Analytical procedures – Answer to the question 257 5

Chart Analytical procedures: used at the planning stage 262 1

Mnemonic Analytical procedures: used at the planning stage 263 1

Chart Audit documentation. What you need to know 264 1

Mnemonic Audit working papers: ACCA ‘Code of Ethics and 265 1


Conduct’
Mnemonic Audit documentation and working papers 266 4

Mnemonic Significant findings or issues documented 270 1

Mnemonic The ways that documentation is useful for auditors 271 1

Mnemonic Audit working papers: Form and content of working 272 1


papers: The permanent audit file

Mnemonic Audit working papers: Form and content of working 273 1


papers: The current audit file

Mnemonic Audit working papers: Preparation of working papers 274 1

Mnemonic Audit working papers: Automated working papers 275 1

Chart Audit working papers: Schedules 276 1

Chart Summary of Audit Process Documents and the 277 1


people responsible for the documentation
Chart Using the work of other. What you need to know 278 1

Mnemonic Client acceptance: Determine the need for other 279 1


specialists
Mnemonic Client acceptance: Using the work of experts 280 1

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SECTION C: PLANNING AND RISK ASSESSMENT


Chart Using the work of an expert: Communicating, 281 1
evaluating and reporting

Chart Rules for using the work of an expert 282 1

SECTION D: INTERNAL CONTROL


Chart Internal control: The two dimensions 284 1

Chart The Up and Down effect 285 1

Chart Planning the audit: Assessing the risks of material 286 1


misstatements of the financial statements. Internal
control: What you need to know

Mnemonic Planning the audit: Assessing the risks of material 287 1


misstatements of the financial statements. Internal
control structure

Chart Planning the audit: Assessing the risks of material 288 1


misstatements of the financial statements. Internal
controls used to reduce risk

Mnemonic Planning the audit: Assessing the risks of material 289 1


misstatements of the financial statements. Internal
control: Administration controls

Mnemonic Planning the audit: Assessing the risks of material 290 1


misstatements of the financial statements. Internal
control: Social controls

Mnemonic Planning the audit: Assessing the risks of material 291 1


misstatements of the financial statements. Internal
control: Self imposed control

Mnemonic Planning the audit: Assessing the risks of material 292 1


misstatements of the financial statements. Internal
control: Control environment

Mnemonic Planning the audit: Assessing the risks of material 293 1


misstatements of the financial statements. Internal
control: Requirement for a strong control environment

Mnemonic Planning the audit: Assessing the risks of material 294 1


misstatements of the financial statements. Internal
control: Risk assessment

Mnemonic Planning the audit: Assessing the risks of material 295 1


misstatements of the financial statements. Internal
control: Employment of accounting information system
and communication
Mnemonic Planning the audit: Internal control 296 1

MAP
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SECTION D: INTERNAL CONTROL


Mnemonic Planning the audit: Assessing the risks of material 297 1
misstatements of the financial statements. Internal
control: Activities designed for control purposes

Mnemonic Planning the audit: Assessing the risks of material 298 1


misstatements of the financial statements. Internal
control: Physical controls over assets

Mnemonic Planning the audit: Assessing the risks of material 299 1


misstatements of the financial statements. Internal
control: Authorisation and approval controls

Chart Planning the audit: Assessing the risks of material 300 2


misstatements of the financial statements. Internal
control: Segregation of duties controls
Mnemonic Planning the audit: Assessing the risks of material 302 1
misstatements of the financial statements. Internal
control: Segregation - authorisation

Mnemonic Planning the audit: Assessing the risks of material 303 1


misstatements of the financial statements. Internal
control: Segmentation - custody

Mnemonic Planning the audit: Assessing the risks of material 304 1


misstatements of the financial statements. Internal
control: Segregation - recording

Mnemonic Planning the audit: Assessing the risks of material 305 1


misstatements of the financial statements. Internal
control: Supervision controls

Mnemonic Planning the audit: Assessing the risks of material 306 1


misstatements of the financial statements. Internal
control: Arithmetic and accounting controls
Mnemonic Planning the audit: Assessing the risks of material 307 1
misstatements of the financial statements. Internal
control: Management controls

Mnemonic Planning the audit: Assessing the risks of material 308 1


misstatements of the financial statements. Internal
control: Organisational controls

Chart Planning the audit: Assessing the risks of material 309 1


misstatements of the financial statements. Internal
control: Personnel controls

MAP
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SECTION D: INTERNAL CONTROL


Chart Planning the audit: Assessing the risks of material 310 1
misstatements of the financial statements. Internal
control: Human resources management

Mnemonic Planning the audit: Assessing the risks of material 311 1


misstatements of the financial statements. Internal
control: Recruitment and selection (problems)

Mnemonic Planning the audit: Assessing the risks of material 312 1


misstatements of the financial statements. Internal
control: Recruitment and selection

Mnemonic Planning the audit: Assessing the risks of material 313 1


misstatements of the financial statements. Internal
control: Causes of high labour turnover in the
financial accounting system
Mnemonic Planning the audit: Assessing the risks of material 314 1
misstatements of the financial statements. Internal
control: Performance reviews

Chart Planning the audit: Assessing the risks of material 315 1


misstatements of the financial statements. Internal
control: Computer-based systems
Mnemonic Planning the audit: Assessing the risks of material 316 1
misstatements of the financial statements. Internal
control: General controls used in IT systems

Mnemonic Planning the audit: Assessing the risks of material 317 1


misstatements of the financial statements. Internal
control: Software controls

Mnemonic Planning the audit: Assessing the risks of material 318 1


misstatements of the financial statements. Internal
control: Computer-based systems – Continuity of
operations

Mnemonic Planning the audit: Assessing the risks of material 319 1


misstatements of the financial statements. Internal
control: Computer-based systems – Main threats to
data security

Chart Planning the audit: Assessing the risks of material 320 1


misstatements of the financial statements. Internal
control: Computer-based systems – Back up

Chart Planning the audit: Assessing the risks of material 321 1


misstatements of the financial statements. Internal
control: Computer-based systems - Access controls

MAP
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SECTION D: INTERNAL CONTROL


Mnemonic Planning the audit: Assessing the risks of material 322 1
misstatements of the financial statements. Internal
control: Computer-based systems – Contingency
arrangements

Mnemonic Planning the audit: Assessing the risks of material 322 1


misstatements of the financial statements. Internal
control: Computer-based systems – Concept of
‘disaster pack’
Mnemonic General IT controls: Problems associated with web- 323 1
based technology: protecting against virus

Mnemonic General IT controls: Problems associated with web- 324 1


based technology: safety measures

Chart General IT controls: Security and its management 325 1

Chart IT Application controls: Input controls 326 1

Mnemonic IT Application controls: Output controls 327 1

Mnemonic Planning the audit: Assessing the risks of material 328 1


misstatements of the financial statements. Internal
control: Computer-based systems – Audit trail
Chart The next step: Tests of control 329 1

Chart Down to work ….! 330 1

Chart The process of auditing based on internal controls 331 1

Chart Understanding the system of internal controls 332 5

Chart Transaction cycles: Audit documentation of controls 337 1

Chart Flowcharting - Don’t’ panic! 338 1

Chart Transaction cycles: Flowcharts 339 1

Chart Transaction cycles: Organisation chart: ‘Assignment 340 1


of Authority and Responsibility’
Chart Transaction cycles: Flowcharts– Sales Orders 341 5
Processing (manual system)
Chart Transaction cycles: Flowcharts– Sales Order 346 3
Processing (computer system)

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SECTION D: INTERNAL CONTROL


Chart Transaction cycles: Flowcharts - Cash Receipts 349 5
(manual system)

Chart Transaction cycles: Flowcharts - Accounts Payable 354 7


Disbursements (manual system)

Chart Transaction cycles: Flowcharts – Accounts Payable 361 4


Disbursements (computer system)

Chart Transaction cycles: Flowcharts – Payroll (manual 365 7


system)
Chart Transaction cycles: Flowcharts – Payroll (computer 372 3
system)

Chart Other transaction types 375 2

Chart Internal Control Questionnaire forms 377 2

Chart Tests of controls 379 1

Chart Tests of control: Sales system 380 6

Chart Tests of control: Purchasing system 386 6

Chart Tests of control: Payroll 392 6

Chart Cash system 398 7

Chart Inventory 405 3

Chart Capital expenditure 408 2

Chart Summary of the main areas of controls testing 410 1

SECTION E: AUDIT EVIDENCE


Chart Substantive procedures 412 1

Chart Substantive procedures. What you need to know 413 1

Chart Gathering evidence: Financial statements assertions 414 1

Chart Gathering evidence: Assertions tested by the auditor 415 1

Chart Procedures and approach: Substantive audit tests - 416 1


terms
Chart Gathering evidence: Sufficient and appropriate audit 417 1
evidence

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SECTION E: AUDIT EVIDENCE


Mnemonic Gathering evidence: Quality of evidence 418 1

Mnemonic Gathering evidence: Audit procedures for obtaining 419 1


audit information

Chart Gathering evidence: Audit procedures for obtaining 420 2


audit evidence
Mnemonic Exam tip …… 422 1

Mnemonic Gathering evidence: Substantive audit tests 423 1

Chart Gathering evidence: Confirmation. What you need to 424 1


know
Chart Gathering evidence: Confirmation method 425 5

Mnemonic Situations where negative confirmation may be 429 1


appropriate
Mnemonic Gathering evidence: Specific risks for which 430 1
confirmation may be relevant

Mnemonic Gathering evidence: Situations where confirmation 431 1


may not be appropriate
Mnemonic Gathering evidence: Problems associated with 431 1
confirmation

Chart Gathering evidence by sampling. What you need to 432 1


know

Chart Gathering evidence by sampling 433 1

Chart Gathering evidence by sampling: Three steps for 434 1


testing by using statistical sampling
Mnemonic Gathering evidence by sampling: Cases where audit 435 1
sampling is not appropriate

Chart Gathering evidence by sampling: Design of the 436 6


sample

Chart Gathering evidence by sampling: Selection of the 442 1


sample and using the sample
Chart Gathering evidence by sampling: Evaluation of tests 443 1
obtained

Chart Gathering evidence by sampling: Statistical sampling 444 2


techniques

Mnemonic Audit sampling: Advantages of statistical sampling 446 1

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SECTION E: AUDIT EVIDENCE


Mnemonic Disadvantages of statistical sampling 447 1

Chart Gathering evidence by sampling: A summary 448 1

Chart Management’s accounting estimates 449 5

Chart Opening balances 454 4

Chart Audit objectives and substantive audit tests (in more 458 1
detail)
Chart Substantive audit tests: Bank and cash 459 1

Mnemonic Typical substantive audit procedures for bank and 460 1


cash
Mnemonic Main substantive audit procedures for bank and cash 461 1

Chart Substantive audit tests: Bank and cash (topics) 462 2

Chart Substantive audit tests: the Bank confirmation 464 1


procedure
Chart Substantive audit tests: typical bank confirmation 465 2
letter

Chart Substantive audit tests: the Cash count 467 2

Chart Substantive audit tests: Receivables 469 1

Chart Substantive audit tests: Confirmation of Receivables 470 2

Chart Substantive audit tests: Accounts receivable 472 1


confirmation letter

Chart Substantive audit tests: Reconciliation of Accounts 473 1


Receivable

Chart Substantive audit tests: Provision for bad debts 474 1

Chart Substantive audit tests: Inventory 475 1

Chart Substantive audit tests: Inventory (observation) 476 1

Chart Substantive audit tests: inventory count 477 1

Chart Substantive audit tests: inventory count – after the 478 1


count

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SECTION E: AUDIT EVIDENCE


Chart Substantive audit tests: inventory – the importance of 478 1
cut-off

Chart Substantive audit tests: inventory – cost versus net 478 1


realisable value

Chart Substantive audit tests: Accounts payable 479 1

Chart Substantive audit tests: Confirmation of Payables 480 1

Chart Substantive audit tests: Payroll 481 1

Chart Substantive audit tests: Property, plant and equipment 482 1


(PP&E)

Chart Substantive audit tests: PP&E 483 1

Chart Substantive audit tests: Long-term debt 484 1

Chart Substantive audit tests: Long-term debt 485 1

Chart Substantive audit tests: Long-term debt: Test of 486 1


reasonableness schedule - debt
Chart Substantive audit tests: Shareholders’ equity 487 1

Chart Computer-assisted audit techniques (CAATs). What 488 1


you need to know
Chart Computer-assisted audit techniques (CAATs): 489 1
Computers used for different aspects of audit work

Mnemonic Computer-assisted audit techniques (CAATs): The 490 1


use of computers in auditing

Mnemonic Computer-assisted audit techniques (CAATs): The 491 1


use of computers in auditing (2)

Mnemonic Computer-assisted audit techniques (CAATs): Special 492 1


features of computer-based systems

Mnemonic Computer-assisted audit techniques (CAATs): 493 1


Auditing in a computer environment

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SECTION E: AUDIT EVIDENCE


Mnemonic Computer-assisted audit techniques (CAATs): Using 494 1
the computer to gather evidence – Use of audit
software

Chart Computer-assisted audit techniques (CAATs): The 495 1


three main focus areas

Chart Computer-assisted audit techniques (CAATs): Main 496 1


types of CAATs
Chart Computer-assisted audit techniques (CAATs): Other 497 1
types of CAATs

Mnemonic Computer-assisted audit techniques (CAATs): The 498 1


advantages of CAATs to the auditor

Mnemonic Computer-assisted audit techniques (CAATs): 499 1


Difficulties of using CAATs

Mnemonic Computer-assisted audit techniques (CAATs): 500 1


Problems associated with small computer systems

Chart Computer-assisted audit techniques (CAATs): 501 1


Computer software used by auditors
Mnemonic Computer-assisted audit techniques (CAATs): The 502 1
auditor’s consideration of internal control when a
computer is present in the audit area

Mnemonic Computer-assisted audit techniques (CAATs): 503 1


Information and communications technology (ICT)
provide advantages for the accounting function

Chart Not-for-Profit organisations. What you need to know 504 1

Chart Not-for-profit organisations 505 4

Chart Audit report – in accordance with a compliance 508 2


framework

Mnemonic Audit problems associated with charities and other 511 1


small entities

Chart Internal Control Questionnaire: Small Entity 512 4

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SECTION F: REVIEW
Chart The Final Review Stage 517 1

Chart At last …. The reports! 518 1

Chart Subsequent events. What you need to know 519 1

Chart Subsequent events 520 6

Mnemonic Events occurring between the date of the financial 526 1


statements and the date of the auditor’s report
Mnemonic Enquiries of management and, where appropriate 527 1
those charged with governance, as to whether any
subsequent events have occurred that might affect
the financial statements

Chart Review for discovery of Subsequent Events 528 1

Chart Going concern. What you need to know 529 1

Chart Going concern: Indications that the Going Concern 530 5


assumption might be questioned

Chart The ‘Going concern assumption’ 535 1

Mnemonic Implications that the ‘going concern assumption’ might 536 1


be questioned: Financial implications

Mnemonic Implications that the ‘going concern assumption’ might 537 1


be questioned: Operating implications

Mnemonic Implications that the ‘going concern assumption’ might 538 1


be questioned: Other implications

Mnemonic ‘Going concern assumption’ – The auditor’s 539 1


responsibilities
Mnemonic ‘Going concern assumption’ – Procedures to gather 540 1
sufficient appropriate audit evidence

Chart Management representations. What you need to 541 1


know

Chart Management representations 542 5

Mnemonic Management Representations Letter 547 1

Chart Example: Management Representations Letter 548 3

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SECTION F: REVIEW
Chart Audit finalisation and the final review 551 1

Chart Matters for the Attention of Partners (MAPs) 552 1

SECTION G: REPORTING
Chart Now we are able to produce appropriate audit reports 554 1

Chart Audit reports. What you need to know 555 1

Chart Audit reports 556 7

Chart Audit reports – Unqualified Report 563 2

Chart Audit reporting 565 1

Mnemonic The statutory audit opinion 566 1

Chart Modifications to the audit report. What you need to 567 1


know
Chart Modifications to the audit report 568 3

Chart The audit report: Unqualified Opinion with Going 570 2


Concern emphasis of matter paragraph
Chart The audit report: Unqualified opinion with legal 572 2
uncertainty emphasis of matter paragraph

Chart The audit report: Limitation on Scope – Qualified 575 2


opinion

Chart The audit report: Disagreement on accounting policies 577 2


– inappropriate accounting method – qualified opinion
Chart The audit report: Limitation on Scope – Disclaimer of 579 2
opinion

Chart The audit report: Disagreement on accounting policies 581


– inadequate disclosure – adverse opinion

Chart Circumstance that may result in other than an 583 3


unqualified opinion: Limitation on scope

Chart Circumstance that may result in other than an 586 2


unqualified opinion: Disagreement with management

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SECTION G: REPORTING
Chart Summary of the different forms of Auditor’s Report 588 3

Chart Audit reporting - overview 591 1

Chart Private reporting to the client’s management. What 592 1


you need to know.
Chart Private reporting: to the client’s management 593 2

Chart Reports to the management by the external auditor: 595 2


The Management Letter
Chart Example: Management Letter 597 6

Chart Well done! 603 1

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