From interactive text

Chapter 1: Business Environment

● Example: Alex’s flower business and Jane’s investment.

● Jane wants assurance on financial statements; solution = external audit.

● Stakeholders (e.g. shareholders, creditors) rely on audited financial statements.

● Concepts: Accountability, Stewardship, and Agency theory.

2. Company and the Law

● Limited liability: Shareholders only lose what they invest.

● Companies must:

○ Keep accounting records (cash books, ledgers, inventory).

○ File financial statements for public view.

● Retention periods:

○ Private Co: 3 years; Public Co: 6 years.

3. The Audit

● Audit = Independent review of financial statements.

● Auditors give reasonable assurance (not absolute).

● True and fair view = factual, unbiased, compliant with standards.

● Fair presentation includes facts + judgements.

4. Internal Control
 ● Purpose: ensure efficient operations and risk management.

● Internal controls reduce business risks (e.g. fraud, inefficiency).

5. Internal Audit

● Internal audit = independent function reviewing operations and risks.

● Focus areas:

○ Controls, compliance, safeguarding assets.

○ Risk management and special investigations.

Chapter 2: Auditors’ Responsibilities

● Main duty: Report on truth and fairness of financial statements.

● Other statutory duties:

○ Check director’s report consistency.

○ Confirm proper records are kept.

2. Statement of Directors’ Responsibilities

● Directors (not auditors) prepare financial statements.

● They must:

○ Choose suitable accounting policies.

○ Keep accurate records.

3. Fraud and Error

● Fraud = intentional misstatement (e.g. fake invoices).

● Error = unintentional (e.g. wrong calculation).

● Prevention = management’s responsibility, not auditors’.

● Auditors must maintain professional scepticism.

4. Contract Law

● Auditor’s contract includes:

○ Duty to use care and skill.

○ Duty to act promptly.

○ Right to be paid.

● Negligence claim requires:

○ Duty of care.

○ Breach of that duty.

○ Financial loss.

5. Third Parties and Negligence

● Third parties (banks, investors) usually can’t sue auditors.

● Exception: if auditor knew third party would rely on the audit.

● Example: Caparo v Dickman – no duty to public.

Chapter 3: Audit Regulation

● Auditors must comply with ethical guidelines and ISAs.

● Independence must be maintained in both mind and appearance.

● Ethical dilemmas often arise when auditors provide non-audit services.

2. International Standards on Auditing (ISAs)

● Set by the IAASB under IFAC.

● Structure includes: Introduction, Objectives, Definitions, Requirements, and Explanatory

● Auditors may deviate from ISAs only in exceptional cases and must justify it.

● ISAs do not override local laws, but local bodies are encouraged to align with them.

3. ACCA Code of Ethics and Conduct

● Five Fundamental Principles:

○ Integrity

○ Objectivity

○ Professional competence and due care

○ Confidentiality

○ Professional behaviour

● Threats to Independence:
 ○ Self-interest (e.g. financial interests)

○ Self-review (auditing your own work)

○ Advocacy (promoting client’s interests)

○ Familiarity (close relationships)

○ Intimidation (pressure from clients)

4. Examples of Independence Threats

● Holding shares in client companies.

● Audit staff joining client companies.

● Excessive audit fees from one client.

● Providing non-audit services like preparing financial statements or taking management decisions.

● Accepting gifts or hospitality.

● Long association with the same client partner (rotation required after 7 years for PIEs).

5. Confidentiality

● Auditors must keep client information confidential, unless:

○ Legally required (e.g. treason, terrorism, money laundering).

○ Public duty exists.

○ Client consents to disclosure.

● Members should never use confidential info for personal gain.

Chapter 4: Audit Appointment

● Proposed auditors must communicate with current auditors before acceptance.

● If client refuses permission, auditors must decline the nomination.

● Aims to preserve integrity and gather background info on client.

2. Appointment Procedures

● Before accepting:

○ Check qualification and resources.

○ Assess independence and ethical conflicts.

○ Seek references and contact outgoing auditors.

● After accepting:

○ Confirm proper removal or resignation of old auditors.

○ Confirm validity of new appointment.

○ Issue engagement letter to client.

3. Risk Assessment

● Consider management integrity, business risks, internal controls, and financial situation.

● Examples of high-risk clients:

○ Poor performance

○ Weak controls

○ Dubious accounting policies

○ Dominant individuals in management

● Confirms:

○ Objective and scope of audit

○ Responsibilities of auditor and management

○ Applicable reporting framework

○ Form and content of audit reports

● May also cover:

○ Fees, team structure, timelines

○ Responsibilities to provide info

○ Involvement of other parties

● Must be reissued if major changes occur (e.g. ownership, legal requirements).

Chapter 5: Risk Assessment

● Audit evidence = info used to form audit opinion.

● Must be sufficient (quantity) and appropriate (quality).

● Sources include accounting records and third-party confirmations.

● Two main testing types:

○ Tests of controls – assess internal control effectiveness.

○ Substantive procedures – detect misstatements in transactions/balances.

2. Audit Approach
 ● Systems-based approach: rely on controls + substantive tests.

● Direct verification: test transactions/balances without relying on controls.

3. Financial Statement Assertions

● Transactions: occurrence, completeness, accuracy, cut-off, classification, presentation.

● Account balances: existence, rights & obligations, completeness, accuracy/valuation,

4. Audit Procedures

● Inspection, observation, inquiry, external confirmation, recalculation, reperformance, analytical

● Evidence from external sources and direct observation is most reliable.

5. Materiality

● Info is material if omission/misstatement affects user decisions.

● Planning materiality is set using benchmarks like:

○ Profit before tax (5%)

○ Revenue or assets (0.5–2%)

● Performance materiality = lower threshold to catch combined small errors.

● Consider qualitative factors too (e.g. director bonuses, legal issues).

6. Understanding the Entity

● Auditors gain understanding via:

○ Observation

○ Analytical procedures

○ Prior audits and internal info

● Focus on industry, operations, objectives, internal controls, and environment.

7. Audit Risk

● Audit risk = risk of wrong audit opinion when statements are misstated.

○ Inherent risk: due to nature of items.

○ Control risk: failures in internal control.

○ Detection risk: auditor fails to detect a misstatement.

● Audit risk model:

○ AR = IR × CR × DR

○ If IR or CR are high, DR must be low (more audit work needed).

8. Professional Skepticism & Judgement

● Professional skepticism: be alert for errors/fraud.

● Professional judgement: used in materiality, procedures, evaluations.

9. Business Risk

● Broader than audit risk; includes all risks to the entity’s objectives.

● Auditors assess how business risks affect financial statement risks.

1. Identify risks while understanding the entity.

2. Relate risks to potential misstatements.

3. Evaluate magnitude and likelihood of misstatement.

4. Design audit response based on this assessment.