Fundamental principles of ethics

Fundamental principles of ethics

Here are Fundamental principles of ethics described by ACCA to be followed by all ACCA members, Students must be memorized all of them, this can be tested straightforward and in MCQ’s in CBE.

AA & AAA

5 Fundamental principles of ethics described by ACCA

Integrity

The auditor should be straight forward & honest in all professional and business relationships. Auditors will be associated with communications, returns or other information and reports where they believe that the information contains materially false or misleading statements.


Objectivity

Members should not allow bias, conflicts of undue or interest influence of others to override professional or business judgments.


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Appointment Removal & Role Of An Auditor

Appointment Removal & Role Of An Auditor

Appointment Removal & Role Of An Auditor. an auditor is a compulsory requirement for all companies to operate in the majority all over the world. So here are a few rules…

The Auditor’s duties 

Fundamental duties are to: 

– An opinion that shows whether the financial statements give a true and fair view and are prepared in accordance with the applicable reporting framework 

– issue an audit report. 

Duty to check and ensure: Adequate accounting records, Compliance with legislation, Truth and fairness, Adequacy of financial statements disclosures 

The Auditor’s Right

1. Right of access at all times to the company’s books, accounts, and vouchers.

2. The right to require from the staff of the company such information or explanations as they think necessary for the performance of their duties as auditors.

3. Right to receive all communications relating to written resolutions.

4. Right to receive all notices of, and other communications relating to, any general meeting which a member of the company is entitled to receive.

5. Right to attend any general meeting of the company.

6. Right to be heard at any general meeting in which an auditor attends on any part of the business of the meeting which concerns them as an auditor.

Appointment of auditors

Only a member of a recognized supervisory body is eligible to be appointed as an auditor. The person to be appointed as the auditor is required to hold a professional accountancy qualification.

1. Appointed by shareholders

2. The appointment of the auditor runs from the end of the Annual General Meeting (AGM) until the end of the next AGM.

3. On appointment, need to ask ‘clearance’ from the outgoing auditor

For entities in which a share is owned by the state, the auditor is appointed by the Secretary of State or Ministry of Finance (or a person authorized by the Ministry of Finance)

Removal of Auditors

1. RESIGNATION: Sometimes it is necessary for the auditors to resign. If an auditor resigns, they should do so in writing and they may wish to speak to the shareholders to explain their reasons

2. FORCED REMOVALSometimes, the Board of Directors or some shareholders may wish to remove the auditors. A General Meeting must be called so that the shareholders can vote on the proposal of a new auditor (via an ordinary resolution).

3. AUDITORS DO NOT WISH TO SEEK REAPPOINTMENT: Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years. As such, when the board asks them to accept nomination for the following year, the auditors should politely decline and issue a Statement of Circumstances.

Key points

1. Directors cannot remove the auditors themselves.

2. Auditors Can be removed by a simple majority at a general meeting.

3. The auditors should be given notice of such a meeting

4. They are allowed to speak at the general meeting

5. Deposit at the company’s registered office a statement of the circumstances connected with the removal/resignation or a statement that there are no such circumstances. They can request an Extraordinary General Meeting (EGM) of the company to explain the circumstances of the resignation.

Audit exemption for small companies

However, the main reasons for exempting small companies are:

– for owner-managed companies, those receiving the audit report are those running the company (and hence preparing the accounts!)

– the advice/value which accountants can add to a small company is more likely to concern other services, such as accounting and tax, rather than audit and which may also give rise to a conflict of interest under the ethics rules

– the impact of misstatements in the accounts of small companies is unlikely to be material to the wider economy

– it may also not be cost beneficial for the small entities.

Read More: True & Fair Presentation

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Types of Assurance Engagement

Types of Assurance Engagement

What is assurance & Types of Assurance Engagement

What is Assurance Engagement:

Assurance Engagement Definition: Any assignment/engagement which has five elements(Below) becomes an assurance engagement

Five Elements of an Assurance Engagement

A three-party relationship, involving: the practitioner, a responsible party and intended users.
Appropriate subject matter.
Suitable criteria.
Sufficient, appropriate evidence to support the conclusion.
A conclusion contained within a written report.
  1. An assurance engagement will require a three-party relationship comprising:
    • a) The intended user who is the person who requires the assurance report (Share Holders, Lenders, etc, etc)
    • b) The responsible party, which is the organization responsible for preparing the subject matter to be reviewed (Board of Directors)
    • c) The practitioner who is the professional who will review the subject matter and provide assurance. (i.e. an accountant)
  2. The second element is required for an assurance engagement is a suitable subject matter. The subject matter is the data that the responsible party has prepared and which requires verification (e.g Financial statements)
  3. The subject matter is then evaluated or assessed against suitable criteria in order for it to be assessed and an opinion provided (e.g IAS & IFRS)
  4. The practitioner must ensure that they have gathered sufficient appropriate audit evidence in order to give the required level of assurance engagement.
  5. In the last one, an assurance report provides the opinion which is given by the practitioner to the intended user(ShareHolders)

Types of assurance Engagement

Difference between audit and assurance OR Assurance meaning in accounting OR Types of assurance services

Types of Assurance assignments 

Types of assurance assignments
Types of assurance assignments
Types of Assurance Engagement

Reasonable Assurance

An Assurance engagement in which the Practioner(Auditor) reduces engagement risk to an
acceptably lower level in the circumstances of the engagement as the basis for the practitioner’s conclusion.
Example: External Audit
High level of assurance but NOT absolute or 100%
A high level of assurance but not the absolute level of assurance is provided, this is known as reasonable assurance.
More testing (Analytical procedures, a test of controls and substantive testing) Going concern review also carried out
Positive conclusion- Wording:
‘in our opinion, the financial statements give (or do not give) a true and fair view of the state of the company’s affairs’.

Limited Assurance

An assurance engagement in which the practitioner(Auditor) reduces engagement risk to an acceptable level in the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement
Example: Review of financial statements
Moderate level of assurance
The practitioner gathers sufficient appropriate audit evidence to be satisfied that the subject matter is credible, in this case, negative assurance is given whereby the practitioner confirms
that nothing has come to auditor's attention which indicates that the subject matter contains
material misstatements in financial statements
Lesser testing-focus on obvious errors only
(Analytical testing and Enquiry)
Going concern review will not be performed
The procedures undertaken are not nearly as comprehensive in assurance engagement,
with procedures such as analytical review and inquiry used extensively. Also, the practitioner does not need to comply with ISAs And IFRSs as these only relate to external audits.
Negative conclusion-Wording:
“Nothing has come to light to suggest errors or problems exist’'
However, the assurance is given in the absence of any indication to the contrary.
Review engagements are often take up as an alternative to an audit and involve a
practitioner reviewing financial data, such as six-monthly figures.
This would involve the
the practitioner takes up procedures to state whether anything has come to their attention which is the reason the practitioner to believe that the financial data is not in accordance with the financial reporting framework.

Assignments were no Assurance is given

Agreed-upon procedures: A report on factual findings is given but assurance will not be given. Users must judge for themselves and draw their own conclusions
Compilation engagement: Users of the compiled information gain benefit from the accountant’s involvement but no assurance is expressed. It is used to collect, classify, and summarise financial information. It means to present data in a manageable and understandable form

See also: Ratio Analysis

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True and Fair presentation

True and Fair presentation

True and Fair presentation Definition

Financial statements are produced by the Board of directors which give a true and fair view of the entity’s results. The auditor in reviewing these financial statements gives an opinion on the truth and fairness of them. Although there is no definition in the International Standards on Auditing of true and fair it is generally considered the meaning of

True and Fair presentation as following

True – Information is based on facts and conforms with reality in that there are no factual errors. In addition, it is assumed that to be true it must comply with accounting standards and any relevant legislation. True includes data that is correctly transferred from accounting records to the financial statements.

Fair – Information is impartial, clear and unbiased, and representing the commercial substance of the transactions of the entity.

Board of directors = The person who is responsible for overviewing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overviewing the financial reporting process.

Management – The persons with executive responsibility for the conduct of the companies operations. In some cases, all of those charged with governance are involved in managing the company, Example, a small business (sole trader) where a single owner manages the entity and no one else has a governance role

Engagement partner – The partner in the firm who is responsible for the audit engagement and its performance (who is authorized to sign the audit report), and for the auditor’s report that is issued on behalf of the firm and who has the authority from a professional, legal or regulatory body.

Professional judgment – The application of audit training, experience and knowledge, within the context provided by the client, accounting and principles of ethical standards, in making decisions on the base of information about the courses of action that are appropriate in the circumstances of the audit engagement.

Professional skepticism – An attitude that includes a questioning mind, being alert to conditions which can indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. Professional skepticism includes being alert to, for example:

• Audit evidence that conflicts with other audit evidence obtained by the auditor.

• The questionable information brings the reliability of documents and responses to inquiries to be used as audit evidence.

• Conditions that may indicate possible fraud.

• Circumstances that suggest the need for audit procedures required by the ISAs.

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Analytical Procedures

Analytical Procedures

Analytical Procedures in Audit

In audit Analytical Procedures that seek to provide evidence as to the completeness, accuracy, and validity of the information contained in the accounting records or in the financial statements.

Analytical Procedures consists of the systematic study and comparison of relationships among elements of financial information and the investigation of significant fluctuations and variances from the expected relationship

Examples of Analytical Procedures
Examples of Analytical Procedures

Steps involved in analytical procedures

  1. Expectation: This step involves developing an expectation of what the financial information figures should be. This can be agreed upon through comparisons of financial information or considerations of relationships (ratio analysis).
  2. Identification: This step involves the identification of significant variations between the actual data with the expected data.
  3. Investigation of unusual variances: Once the variation has been computed, and if significant variations are found, the auditor would consult the management in order to establish explanations for the variations revealed.
  4. Performance of alternate procedures: If the auditor or the management does not find the variation reasonable, then they investigate further and perform analytical procedures to satisfy themselves.

When performing an analytical procedure, the auditor compares numbers, ratios or even non-financial information in order to identify unexpected trends or unexpected relationships, which may indicate the existence of errors.

There are many different analytical procedures including the comparisons listed below

  1. Year on year (e.g. revenue this year compared to revenue last year);
  2. To budget or forecast (e.g. actual purchases compared to budgeted purchases);
  3. To predictions made by the auditors-proof in total (e.g. auditor’s calculation of depreciation compared to the client’s calculation);
  4. Through industry information (e.g. client’s revenue compared to competitor’s revenue).
  5. Comparison/analysis of relationships between different elements of the financial statements ( for example gross profit compared to sales)
  6. Comparison of financial info with non-financial info ( for e.g. payroll expense matched to the number of employees)
  7. Non-financial information. For Example, sales revenue for a client from the hotel industry may be available data as to room occupancy rates basis.
Analytical procedures at various stages of audit
Analytical procedures at various stages of the audit
Analytical Procedures at the
Planning stage
To assist the auditor in the planning stage the
nature, timing, and extent of other
audit procedures. Use at this stage
should add to the firm’s
understanding of the business and
identify the risky areas in which audit
resources should
be targeted.
Analytical Procedures at 
substantive testing stage
at the detailed testing stage –
in most instances analytical
procedures should be used in
conjunction with tests of detail
to achieve a particular audit
the objective in relation to specific
financial statement assertions..
Analytical Procedures at 
the Review stage
At the final review stage the
the auditor must design and perform
analytical procedures that assist
him when forming an overall
conclusion as to whether the
financial statements are consistent with the auditor’s understanding
of the entity and that all of the
audit
objectives with regard to the
financial statements have been
met.

Using Ratios

In the Paper Audit and Assurance exam, you may be asked to compute and interpret the key ratios used in analytical procedures at both the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts can be wrong, and where additional auditing effort needs to be spent.

Ratio’s

Ratio Analysis Plays a key Roll to determine the business circumstance, here are a few Ratios are given below.

In the examination, you will be asked to calculate and interpret the ratios used in analytical procedures at the audit planning stage and when collecting audit evidence. Ratios and comparisons can be used to identify where the accounts might be wrong or right, and where additional auditing effort should be a need to spend. 

Calculating a ratio is an easy step, divide a number by another number, the calculations are so basic that they can be calculated using a spreadsheet.

The real skill is the interpretation of results and using that information to conduct out a better audit. Saying that a ratio has increased because the top line in the calculation has increased or the bottom line decreased is rather had no point, this is simply translating the calculation into words. the interpretation is another thing. 

Gross Profit Margin: Gross profit/Sales Revenue x 100

Operating profit margin =Operating profit/Sales Revenue x 100

Return on capital employed (ROI) = Operating profit/ Capital employed x 100

Current Ratio= Current Assets/Current Liabilities

Quick ( or asset test) ratios =Current assets minus inventory/ current liabilities

Inventory holding period or Inventory days =Inventory/Cost of sales x 365

Receivable days/ Receivables collection period =Trade receivables/Sales x 365

Trade payable Days/Payables payment period =Trade payables/Cost of sales x 365

Interest cover = profit before interest/ interest

Gearing = Long-term loan finance/ equity finance x 100  The gearing ratio can also be defined 
in other words, particularly by comparing long-term loan finance to total finance.

As the gearing ratio increases so risk that the interest can’t be paid. But it is difficult to define a
‘safe’ level of gearing. an example is , a property company with properties leased to tenants will have a fairly rental income for one year. 

Such a company can probably safely sustain substantial borrowings (though it could be in trouble if interest rates increased significantly). 

A company with volatile streams of income would have to keep its gearing lower as it must ensure that they have the ability to pay interest during the lean times. 

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Audit planning

Audit planning Importance of audit planning

Audit planning ( Audit Strategy and Audit Plan)

Importance of audit planning

  1. It helps the auditor to devote applicable attention to big areas of the audit.
  2. It helps the auditor spot and resolves potential issues on a timely basis.
  3. This helps the auditor to properly organize and manage the audit engagement so it’s performed in an {efficient|a good} and efficient manner.
  4. It assists within the choice of engagement team members with applicable levels of capabilities and ability to reply to anticipated risks and also the correct assignment of labor to them.
  5. It facilitates the direction and management of engagement team members and also the review of their work.
  6. This assists, where applicable, in the coordination of work done by experts
Audit Planning
Audit Planning

Audit Strategy: Associate in Nursing audit strategy sets the scope, timing, and direction of the audit and guides the development of a more detailed audit plan.

Audit plan: Once the overall strategy has been planned, detailed consideration can be given to each individual audit objective and how it can be best met.

Audit strategy and audit plan
Audit strategy and audit plan

A. UNDERSTANDING THE CLIENT

KNOWLEDGE OF THE BUSINESS / UNDERSTANDING OF THE CLIENT

Understanding the client
Understanding the client

The auditor obtains an Associate in the Nursing understanding of the entity, its control environment, and its detailed internal controls:

  1. To identify and assess the risks of material misstatements in the financial statements and to provide a basis for designing and implementing responses to these risks
  2. To determine the extent to which the auditor would rely on the internal control system.
  3. To assess whether the team is competent to perform the audit
  4. To understand relevant laws and regulations impacting the entity
  5. To consider the reliability of various evidence sources.

Understanding to be gained about– Industry, regulatory, and other external factors
( for example financial reporting framework, laws and regulations, stakeholders, economic conditions like the volatility of exchange rates, competition, level of technology.

type of entity and accounting policies ( legal structure, ownership, and governance, main sources of finance).

Objectivesstrategies…related business risks!– Measurement and review of Financial performance ( measures important to the client, KPIs, budgets, targets).

Internal control (gain an understanding of the design and implementation of internal controls)

other issues that arose in the prior year’s audit and how these were resolved.
Also whether any points brought forward were noted for consideration for this year’s audit.
Internal control deficiencies noted in the prior year;
if these have not been rectified by management then they could arise in the current year audit as well as significant changes in the entity as compared to prior years. Is the company using e-commerce?

Understanding can be gained from the prior year’s financial statements:

  • It provides information in relation to the size of the client as well as the key accounting policies, disclosure notes, and whether the audit opinion was modified or not.
  • Discussions with the previous auditors/access to their files: Provides data on key problems known throughout the previous year’s audit further because of the audit approach was adopted.
  • Previous year report back to management: If this may be obtained from the previous auditors or from management, it can provide information on the internal control deficiencies noted last year. If these haven’t been corrected by management, then they could arise in the current year’s audit as well and may impact the audit approach.
  • The client‘s accounting systems notes/procedural manuals: Provides information on how each of the key accounting systems operates and this will be used to identify areas of potential control risk and help determine the audit approach.
  • Discussions with management: Provides information in relation to the business, any important issues which have arisen, or changes to accounting policies from the prior year.
  • Review of board minutes: Provides an outline of key problems that have arisen throughout the year and the way those charged with governance have self-addressed them.
  • Current year budgets and management accounts: Provides relevant financial information for the year to date. It will facilitate the auditor throughout the look stage for preliminary limited review and risk identification.
  • The client’s website: Recent press releases from the company may provide background on the business during the year as this will help in identifying the key audit risks.

Important: Risks in companies using E-commerce

  • Loss of transaction integrity
  • Security risks e.g. virus attacks
  • Adoption of improper accounting policies e.g.improper revenue recognition
  • Non- compliance with tax and legal requirements
  • Failure to ensure that e-commerce contracts are binding in a court of law
  • Over-reliance on e-commerce
  • Systems and infrastructure crashes

Read More: AUDIT RISK and Auditor Response

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