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Chapter 1

What is an audit
1. Express an opinion whether Fs give a true and fair view of the entitys financial position.
2. Ensure Fs have been properly prepared in accordance with applicable reporting
(Fs consists of SOFP, SOCI, SOCIE, SOCF and accompanying notes)
Reasons for an audit
1. Shareholders r d owners
2. S/h appoints directors to run d Co. on their behalf.
3. Directors prepare Fs
4. Fs lack of credibility.
5. Independent auditor examine Fs r free frm material misstatement.
Benefits of an audit
1. Adds credibility to Fs
2. Detection of fraud and errors during audit procedures
3. Improvements in Internal Control Procedures.
4. Deterrence of possible fraudulent acts
Meaning of true and fair views
True : 1. Information is factual, conforms with reality, no factual errors.
2. Comply with accounting standards and any relevant legislation.
3. Data being correctly transferred frm accounting records to Fs.
Fair : 1. Information is clear, impartial and unbiased
2. Reflects plainly the commercial substances of the transactions of the entity.
Responsibilities of directors
1. Preparation and presentation of Fs.
2. Applicable financial reporting framework.
3. Directors responsibility to present Fs that show a true and fair view, not materially
4. Directors responsibility to ensure adequate accounting and control system.
5. Select and apply only appropriate ACCT policies.
6. Make reasonable ACCT estimates.
7. Auditor does NOT certify or guarantee Fs are correct. (Absolute assurance), he only
providing REASONABLE ASSURANCE due to inherent limitations.
Inherent limitations
1. Accounting estimates Eg. Allowance for doubtful debts / inventory obsolescence
2. Inherent limitations of internal controls Eg. Management overrides, collusion or
manipulation of evidence, human errors.
3. Opinion involves judgement on (i) gathering evidence in determining NTE.
(ii) conclusions drawn based on the evidence gathered
4. Most audit evidence are persuasive rather than conclusive believe the substances, no
5. Method of testing Sampling
Time constraints, technical knowledge & cost vs. benefits
Audit (-ve)
1. Substantial cost
2. Disruption to clients operations
Audit (+ve)
1. Improve operational efficiency, accounting and IC system
(auditor is able identify weakness during the audit)
2. Ensures directors have fulfilled their statutory obligations

3. Provide other services advice and assistance on accounting, taxation and so forth
(easier to sell / merge the biz)
Audit regulation
International Federation of Accountant (IFAC)
International Auditing & Assurance Board (IAASB) Develop & issue high quality auditing
stds (uniformity)
Confidence in the audit process globally
International Standards on Auditing (ISAs) Statements containing principles & essential
Setting of ISAs (5 stages)
1. IAASB set up a subcommittee develop a draft std (exposure draft) based on research &
2. ED presented & debate at IAASB meeting
3. ED placed on IAASBs website not fewer than 120 days
4. All commets & suggestions r considered ED being revised & re-issued where necessary
5. Finalised & approval of ED affirmative vote of at least two thirds majority of the
members ( >10 )
Clarity project
2004 to enhance the clarity of ISAs
2008 IAASB had finalised all its clarified ISAs
(36 newly updated & clarified ISAs resulted in major changes
Authorities attached to ISAs
1. In 2009 ISAs does not have :
Introduction purpose, scope, subject matter of ISA & auditors respoesibility
2. Exceptional cases depart from ISA, justify the departure
3. Does not override the local regulations (encourage changes in local regulations to
comply with ISAs)

Chapter 2 Professional Ethics

Fundamental Principles (IOPCP)
1. Integrity
(i) impose obligations on members to be straightforward & honest
(ii) implies fair dealing & truthfulness
2. Objectivity
Not to compromise professional & business judgements bcoz of bias, conflict of interest
or undue influence of others
3. Professional Competence and Due Care
Competently carry out the professional work with due skill, care, diligence & expedition
To attend Continuous Professional Development (CPD) courses
4. Confidentiality
Shud not use / disclose information without obtaining client permission
5. Professional Behaviour
impose obligations on members to behave with courtesy and consideration, to comply
with relevant Law
and Regulations
Threats (FASSI)
Self-interest (i) benefitting frm the clients
(ii) shareholding, undue dependence (significant recurring fee income,
substantial outstanding

fees, excessive gifts & hospitality

Self-review (i) prior to audit, auditor involved in reviewing & implementing ICS
(ii) he may not highlight his own work done earlier
Advocacy (i) auditors require to promote the clients position / represent them in some
way, objectivity
(ii) auditor act as advisor/ promoter of client or representing them in court
Familiarity (i) auditor vry familiar with client (auditor-in-charge for excessively long
(ii) close relationship / long association with clients directors
Intimidation (i) client is in position to bargain for an audit opinion they want
(ii) clients recurring fees is of significance in relation to auditors total income
(auditor has to compromise in order to retain the client)

Obligatory Disclosure
Drug trafficking / terrorist offences
Court demand
Voluntary Disclosure
Protect members interest
Public duty (client committed action against public interest unauthorised release of
toxic chemicals)
Conduct that is careless or unintentional in nature which entails a breach of contractual
obligations to another person.
(a) Duty of care DOC enforceable by law
(b) Negligence judged by the accepted professional standard
(c) Damages suffered monetary loss
Auditors only liable to parties with whom there is a contractual relationship which r
specifically known to rely on Fs for specific purpose (Caparo Industries Pty Ltd v Dickman
and Others)
Engagement Letter
The company and auditors bond by a contract.
Express terms:
1. Responsibility of management preparation& fair presentation of Fs
2. Responsibility of management auditors with access to all information & records
3. Responsibility of management audit evidence
Terms stipulated in EL
Auditors have duty / right to:
1. exercise reasonable care (diligence, cautious)
2. reasonable expediency (time limit)
3. reasonable remuneration (audit fees)
CoEC - Independence requires independence of mind & independence in appearance.
- muz b, n muz b seen 2 b, independent. (impartial)
Auditor hav PD of Con. However dey may b compelled by law/desirable in public interest 2
disclose details of clients affairs 2 3rd parties.
SI threat
1. Audit firm has direct financial/indirect material interest in audit client (partner, family
audit team hold share)
2. Audit staff r offered gifts/hospitality by client (value not modest)
3. Audit fees frm single client r a high % of d firms total fees (undue dependence on fees)

4. Business relations (JV/Joint marketing policies)

5. Audit firm / engagement individual enter a loan/guarantee arrangement wif client (eg.
Lower than bank rates charge, outstanding fees)
Safeguard of SI threats
1. Particular auditor shud b removed frm engagement/assurance team
2. Politely decline d offer
3. Fees ruling 10%-15%
4. Cooling off periods (i) issuance of audited Fs covering a period of 12 mths or more after
a key audit partner
join d audit client (key auditor not involved in dat Fs)
(ii)a period of 12 mths without d requirement of Fs to issue
SR threat
1. Audit staff member recently worked for the audit client
2. Audit firm carries out more than audit for de audit client (eg. Preparing a/c n Fs,
temporary staff cover and litigation support)
3. Key question does providing de service result in de audit firm carrying out activities dat
wud generally b considered a management responsibility?
4. Audit firm r nt permitted 2 assume a MR for de client which include:
Setting policies n strategic direction
Directing n taking responsibility for de actions of de entitys employees
Authorising transactions (carry out transactions on behalf of client)
Deciding recommendations of de firm/3 rd parties 2 implement
Responsibility P&P Fs
Responsibility designing, implement n maintaining ctrl
(* determine/change journal entries without client approval, authorise/approve
source documents/invs/bank reconciliation, shud nt underwrite de client shares)
Advocacy threat
1. Audit firm takes part of de client then he loses his objectivity
(eg. Auditor provides legal support to a client in a legal dispute arise when an audit firm
offers certain corporate finance services such as pitches a client reconstruction to de
2. Rotation of audit partners
Familiarity threat
1. Relationships between audit firm/staff n audit client/staff (risk relationship/long
2. Individual shall nt b a key audit partner for more than 7 yrs, after dis, dat person shall nt
b de engagement team member for 2 yrs. During dis period, he shall nt participate in de
audit of de entity, provide quality ctrl for de engagement, consult wif de engagement
team regarding technical/industry specific issues which directly influence de outcome of
de engagement
3. Rotation of audit partners
Intimidation threat
1. Audit staff hav de reason 2 b intimidated by client staff (eg. Client threatens de firm wif
litigation, audit firm shud stand down as auditors)
2. Threaten 2 b removed (SG inform audit committee/tender resignation)

Chapter 3 Statutory Auditing Requirement

Appointment engagement process
Main areas:

1. statutory requirements Cos Act

2. ethical requirements ACCAs CoEC
3. auditing std ISAs
Auditors can be appointed by the s/hs or directors (within 3 mths of incorporation or to fill a
casual vacancy) or the Secretary of State (if s/hs or directors hav failed to make an
appointment). The duration of tenure (hold office) of the auditor is 1 yr.
Removal of auditor
1. Special notice of 28 days n a copy of resolution must be given of a general meeting.
2. Auditor may on receipt of the notice, make written representations or stmt y he ought to
stay n sd them to the s/hs prior to the meeting.
3. The notice and stmt of circumstances (minimize speculation) frm auditors would b given
to the authorities.
4. The auditor read out at the meeting, as well as speak.
5. Co. has to appoint another auditor to replace the existing auditor.
Resignation of auditor
1. Auditor muz deposit a written notice of resignation
2. Notice muz include a SOC
3. Client will then sd a copy of SOC & notice to the regulatory authorities
4. Notice n SOC circulated to members
5. Auditor entitled to attend n received communication regarding the resignation
6. This is also applies when an audit firm fails to seek re-appointment as auditor.
*Auditor duties
R - return frm branches nt visited r received
A - a/c (Fs) r in agreement wif the accounting records
P - proper accounting records r kept
I - Information n explanation hev been received
D - Directors benefit (loans, emoluments, pensions) hav been correctly disclosed in the Fs
**Auditor rights
1. To access to books, records n documents of the Co.
2. To obtain information n explanation
3. To attend, speak n read at general meetings
4. To receive any notices or written resolutions
5. To report in writing to the register the breach of any provisions of the Co. Act
Engagement procedure
Before accepting a nomination, an auditor shud:
1. Ensure dat he is professionally qualified to the act, no independence issues on legal or
ethical grounds
2. Ensure existing resources r adequate in terms of time, staff availability n technical
3. Obtain references in regards of management integrity n risk
4. Professional Clearance(only if we r replacing the outgoing auditor):
(i) Ask client for permission to contact the outgoing auditor, client refuses, refuse
Communicate wif existing/outgoing predecessor write letter to ask whether thr
r any professional reasons why nomination shud not b accepted.
(iii) Outgoing auditor ask the client for permission to reply, client refuses, refuse
(iv) Outgoing auditor reply, stating:
No professional reasons









Client screening procedure

To determine prospective client or recurring client is suitable for the firm (to identify
potentially high risk client). The firm shud evaluate the potential risk to the firm of the
acceptance in accordance wif the procedure. Firm shud decline the appointment of high
audit risk client.
Procedures after the nomination
1. Ensure outgoing auditors resignation was conducted properly (valid notice given)
2. Ensure appointment is valid by obtaining a copy of the ordinary resolution
3. Client to sign an engagement letter
*Engagement letter
- is prepared prior to the commencement of the audit by auditor to client which sets out the
terms of the audit engagement
Purposes: # Hlp to avoid misunderstandings as to nature of the auditors appointment, scope of
audit wrk & responsibilities of the auditor and the client.
Terms of audit engagement
1. Application of FRF in the preparation of Fs
2. Client responsible for implementing ICS
3. Unrestricted access
4. Information & explanation
Refer txxt bk pg 28 & 29
New EL require when:1. Client misunderstands the objectives & scope of audit
2. Terms of engagement is revised
3. Recent chg of senior management/ownership
4. Significant chg in nature/size
5. Legal requirement