ACCA - Audit and Assurance (AA)

Non-compliance

Refers to acts of omission or commission, intentional or unintentional, committed by the entity, or by those charged with governance, by management or by other individuals working for or under the direction of the entity, which are contrary to the prevailing laws of regulations. Non-compliance does not include personal misconduct unrelated to the business activities of the entity.

Stewardship

Refers to the duties and obligations of a person who manages another persons property.

Performance materiality

The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low-level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. It also refers to the amount or amount set by the auditor at less than the materiality level or levels for particular classes of transactions account balances or disclosures.

Professional judgment

The application of relevant training, knowledge and existence in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Will be required in the following areas: Materiality and audit risk. Nature, timing and extent of audit procedures. Evaluation of whether sufficient appropriate audit evidence has been obtained. Evaluating management judgements in applying the applicable financial reporting framework. Drawing conclusions based on the order evidence obtained.

Independence in appearance

The avoidance of facts and circumstances that are so significant that a reasonable and informed third-party would be likely to conclude, weighing all the specific facts and circumstances, that offence, or member of the audit or assurance teams, integrity, objectivity or professional scepticism has been compromised.

Chair

The chair and the chief executive cannot be the same individual. There is a time limit on the chairs position, and cannot remain in post for beyond nine years. They must be independent, and cannot be a former Chief Executive of the same company except in exceptional circumstances.

Practitioner

The individual conducting the engagement which will usually be the engagement partner or other members of the engagement team, or as applicable, the firm.

Intended users

The individual or organisation, or group thereof that the practitioner expects will use the assurance repot.

Audit risk

The it's good that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. It will have two major components: One is dependent on the entity, and is the risk of material misstatement that arises in the financial statements, this will include inherent risk and control risk. The other will be dependent on the auditor, and is the risk that auditor will not detect material misstatements in the financial statements, and this will be detection risk.

Objective of an external audit

The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with applicable financial reporting framework. An audit of financial statements is an example of an assurance engagement.

Reasonable party

The party responsible for the underlying subject matter.

Those charged with governance

The person or organisation with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity.

Management

The persons with executive responsibility for the conduct of the entities operations.

Internal control

The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.

Value for money audits

The purpose is to examine the economy, efficiency and effectiveness of activities and processes within a business. These are very important for assessing the performance of not-for-profit organisations. Their performance cannot be properly assessed using conventional accounting ratios. The internal audit function or try to determine whether the optimal combination of goods and services have been obtained for the lowest level of resources.

Accountability

The quality or state of being accountable; that is, being required or expected to justify actions and decisions. It suggests an application or willingness to accept responsibility for one's actions.

Regulatory compliance audit

The regulation which affects companies all vary depending on the nature of the organisation. Some regulations will be specific to the industry that the client operates in and some will apply to all companies operating in a region or country. The purpose of this audit is to assess the effectiveness of the business systems and processes that are designed to ensure that the company complies with the relevant laws and regulations.

Efficiency

The relationship between goods and services produced (outputs) and the resources used to produce them. Using the resources purchased as wisely as possible and obtaining maximum usage.

Financial statement assertions

The 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 statements that may occur.

Control risk

The risk that a material misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entities internal control.

Detection risk

The risk that the procedure is performed by the auditor to reduce audit risk to an acceptably low level will not detect and a statement that exists and that could be material, either individually or when aggregated with other misstatements.

Independence of mind

The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity, and exercise objectivity and professional scepticism.

Inherent risk

The susceptibility of an assertion about a class of transactions, account balance or disclosure to have a statement that could be material either individually or when aggregated with other misstatements, before consideration of any related internal controls. The risk that the financial statements contain a material misstatement due to the nature of the business.

Self-interest threat

The threat that a financial or other interest will inappropriately influence the professional accountants judgement or behaviour.

Preconditions of an audit

The used by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an order is conducted.

Analytical procedures

Consist of evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. They also encompass investigation of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. The relationship between two items of information.

Audit plan

Converts the audit strategy into a more detailed plan and includes the nature, timing and extent of audit procedures to be performed by engagement team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptable level.

Characteristics os the audit engagement

Financial reporting framework. Industry specific reporting requirements. Expected audit coverage. Nature of the business segments. Availability of internal audit work. Use of service organisations. Effect of information technology on audit procedures. Availability of client personnel and data.

Procurement audits

Is the process of purchasing for the business. This audit will therefore concentrate on the systems of purchasing departments. The internal audit out will be checking that the system achieves key objectives and that it operates accordingly to the company guidelines.

Audit documentation

Is the record of audit procedures performed, relevant audit evidence obtained and conclusions the auditor reached.

Corporate governance

Is the system by which companies are directed and controlled.

Outsourcing

Is the use of external suppliers as a source of finished products, components or services. It is also known as subcontracting.

Advantages of a non-statutory audit

It can provide a means of settling accounts between the partners. Where audited accounts are available this may make the accounts more acceptable to taxation authorities. The sale of the business or the negotiation of loan or overdraft facilities may be facilitated if the firm is able to produce audited accounts. An audit on behalf of a sleeping partner is useful since generally such a personal have you have a means of checking the accounts of the business or confirming the share of profits due to them.

Professional competence and due care

Members have a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards.

Integrity

Members shall be straightforward and honest in all business and personal relationships.

Professional behaviour

Members shall comply with relevant laws and regulations and avoid any action that discredits the profession.

Objectivity

Members shall not allow bias, conflict-of-interest or undue influence of others to override professional or business judgements.

Confidentiality

Members shall respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not to disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships must not be used for the personal advantage of members or third parties.

Remuneration committee

Must be established, made up of at least 3 independent non-executive directors, but in smaller companies it may be 2. Executive directors cannot sit on this committee. The chair of the board cannot chair on this committee, but they can be a member of it if they were independent on appointment. It is responsible for: Setting remuneration for the chair, executive directors and senior management. Setting the remuneration policy for executive directors. Reviewing workforce remuneration and policies.

The auditor obtains audit evidence by undertaking

Obtaining an understanding of the entity and its environment to assess the risks of material misstatement at the financial statement and assertion levels - risk assessment procedures. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the insertion level - test of controls. Detect material misstatements at assertion level - substantive procedures.

Quality of evidence - Originals

Original documents are more reliable than photo copies or facsimiles, which can easily be altered by the client.

The audit plan includes

A description of the nature, timing and extent of planned further audit procedures at the insertion level. Other planned audit procedures required to be carried out for the engagement to comply with ISAs. Examples of items included in the audit plan can be: Timetable of audit work. Allocation of work to the audit team members. Audit procedures for each major account area. Materiality for the financial statements as a whole and performance materiality.

Internal audit function

A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entities governance, risk management and internal control processes.

Cold review (post-issuance review)

A peer review carried out after the auditors report is signed.

Hot review (pre-issurance review)

A peer review carried out before the auditors report is signed.

Assurance engagement

A practitioner that aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against criteria.

Peer review

A review of the audit file carried out by another partner in the assurance firm.

Audit committee

A subcommittee of the board of directors, usually containing a number of independent non-executive directors. The role and function of this committee should be set out in written terms of reference and extract from the UK corporate governance code.

Elements of an assurance engagement

A three party relationship. The three parties are the intended user, the responsible party and the practitioner. A subject matter, where the data to be evaluated has been prepared by the responsible party. It can take many forms, including the financial performance, non-financial performance, process and behaviour. Suitable criteria, where the subject matter is evaluated or measured against criteria in order to reach an opinion. Evidence, where sufficient appropriate evidence needs to be gathered to support the required level of assurance. An assurance report, where a written report containing the practitioners opinion is issued to the intended user in the form appropriate to reasonable assurance engagement or a limited assurance engagement.

Professional scepticism

An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of all the evidence. The auditor should be alert to: Audit evidence that contradicts other audit evidence which has been obtained. Information that brings into question the reliability of documents and responses to enquiries to be used as audit evidence. Conditions that could indicate fraud. Circumstances which suggest need for audit procedures in addition to those required by ISAs.

Reasonable assurance

An audit gives the reader this assurance on the truth and fairness of the financial statements, which is high, but not absolute, level of assurance. The auditors report does not guarantee that the financial statements are correct, but that they are true and fair with in a reasonable margin of error.

Materiality

An expression of the relative significance or importance of a particular matter in the context of the financial statements as a whole. The matter is material if it's a mission or misstatement would reasonably be expected to influence the economic decisions of use is taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.

Management expert

An individual or organisation possessing expertise in the field other than auditing or accounting, whose work is in a field used by the entity to assist the entity in preparing the financial statements.

Fraud

An intentional act by one or more individuals amoung management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or a legal advantage. Fraud may be perpetrated by an individual, or colluded in with people internal or external to the business.

Operational audits

Are audits of the operational processes of the organisation. They are also known as management or efficiency audits. Their prime objective is the monitoring of management performance, ensuring that company policy is adhered to.

Non-executive directors

Are directors who do not have day-to-day operational responsibility for the company. They are not employees of the company or affiliated with it in any way. They can be compromised by the following: Employment with the company or group in the last five years. Material business relationships with the company in the past three years. Remuneration beyond the basic fee for the role. Close family ties with any of the companies advisors, directors or senior employees. Representing a significant shareholder. Serving longer than nine years on the board.

Contingent fees

Are fees calculated on a predetermined basis relating to the outcome of result of a transaction or the result of the work performed.

Agents

Are people who are employed or used to provide a particular service. In the case of a company, the people being used to provide the service or managing the business also have the second role of trying to maximise their personal wealth in their own right.

Significant risks

Are risks that require special audit consideration. The following factors indicate that a risk might be significant: Risk of fraud. The relationship with recent economic, accounting or other developments. The degree of subjectivity. It has unusual transactions. It is significant transaction with a related party. The complexity of transactions.

Engagement letter

Are written terms of an engagement in the form of a letter.

Self-review threat

Arise when members review their own work or advice as part of an assurance engagement.

Advocacy threat

Arises in those situations where the audit firm promotes a position or opinion to the point that subsequent objectivity is compromised.

Intimidation threat

Arises when members of the audit team may be deterred from acting objectivity by threats, actual or perceived. These could arise from the family and personal relationships, litigation, or close business relationships.

Economy

Attaining the appropriate quantity and quality of physical, human and financial resources (inputs) at lowest cost. Buying the resources at the cheapest cost - the best price.

Quality of evidence - External

Audit evidence from external sources is more reliable than that obtained from the entities records because it is from an independent source.

Substantive procedures

Audit procedures designed to detect material misstatement at the assertion level. They consist of tests of details and substantive analytical procedures. That also will always carry these out on material items.

Test of controls

Audit procedures that are designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the session level. The auditor will conduct these when it is not possible to obtain sufficient appropriate audit evidence simply from substantive procedures. These are procedures to test the effectiveness of the entities internal controls in preventing or detecting material misstatements.

Valuation

Comprises the making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, a liability or the business as a whole.

Interim audits

Designed to be carried out during the period of review. Procedures will include: Inherent risk assessment and gaining an understanding of the entity. Recording the entity system of internal control. Evaluating the design of internal controls. Carrying out tests of control and the companies internal controls to ensure they are operating as expected. Performing substantive testing of transactions and balances to gain evidence that the books and records are a reliable basis for the preparation of financial statements. Identification of issues that may have an impact on work to take place at the final audit.

Fraud risk factors

Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud.

Quality of evidence - Written

Evidence in the form of documents either paper or electronic or written representations or more reliable than oral representations, since oral representations can be retracted.

Quality of evidence - Auditor

Evidence obtained directly by auditors is more reliable than that obtained indirectly or by inference.

Quality of evidence - Entity

Evidence obtained from the entities records is more reliable when the related control system operates effectively.

Financial interest

Exists where an audit firm has a financial interest in the clients affairs, for example, that audit firm owns shares in the client or is a trustee of the trust that holds shares in the client.

Familiarity threat

Having an audit client for a long period of time may create this threat to independence. The severity of the threat depends on such factors as how long the individual has been on the audit team, have seen the other person is, with the clients management has changed and whether the clients accounting issues have changed in nature or complexity.

Obligatory disclosure

If members know or suspect their clients to have committed money laundering, treason, drug trafficking or terrorist offences, they are obliged to disclose all the information at their disposal to a competent authority. Auditing standards require auditors to consider whether non-compliance with laws and regulations affects the accounts.

Key audit partner

Is the engagement partner, individual responsible for the engagement quality-control review or one of the other audit partners on the engagement team. They make key decisions or judgements on significant matters with respect to the audit of the financial statements on which the firm will express an opinion. Depending on the circumstances and the role of the individuals on the audit, other audit partners may include, audit partners responsible for significant subsidiaries or divisions.

Financial audits

Is the internal audits of traditional role. Its purpose is to evaluate the operating effectiveness of the key business processes which relate to the financial statements.

The appropriateness of audit evidence

Is the measure of the quality of all the evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditors opinion is based.

Sufficiency of audit evidence

Is the measure of the quantity of audit evidence. The quantity of all the evidence needed is affected by the auditors assessment of the risks and material misstatements and also by the quality of such audit evidence.

Control environment

Includes the governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entities internal control and its importance in the entity.

True

Information is factual and conforms with reality. In addition, the information conforms with required standards and law. The financial statements have been correctly extracted from the books and records.

Fair

Information is free from discrimination and bias and is in compliance with expected standards and rules. The accounts should reflect the commercial substance of the companies underlying transactions.

Fraudulent financial reporting

Involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users.

Misappropriation of assets

Involves the theft of an entity's assets and is often perpetrated by employees in a relatively small and in immaterial amounts. However, it can also involve management who are usually more able to disguise or conceal misappropriations in ways that are difficult to detect.

Best value audits

Is a performance framework introduced into local authorities by the UK government. They are required to publish annual best value performance plans and review all their functions over five-year period. As a part of best value, authorities are required to strive for continuous improvement by implementing: challenge, compare, consult, compete.

Objective of a reasonable assurance engagement

Is a reduction in assurance engagement risk to an acceptably low level in the circumstances of engagement as the basis for the insurance practitioners conclusion. The conclusion would usually be expressed in a positive forum.

Information technology audits

Is a test of controls in a specific area of the business, the computer systems. Increasingly in modern business, computers are vital to the functioning of the business, and therefore the controls over them are key to the business.

Audit evidence

Is all the information used by the auditor in arriving at the conclusions on which the auditors opinion is based.

Objective of a review engagement

Is obtain limited assurance about whether the subject matter information is free from material misstatement.

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.

Audit strategy

Sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.

Nomination committee

Should be established to lead the process for making nominations for board appointments. This committee should be made up of a majority of independent non-executive directors. All directors are then subject to annual re-election by shareholders.

Effectiveness

This it's connected with how well an activity is achieving its policy objectives or other intended effects. Doing the right things and meeting the organisation's objectives.

Fraud investigations

To determine whether fraud risk management controls are adequate to ensure that fraud is prevented and or detected and to make recommendations if they are not. They will also determine whether fraud has actually occurred based on information which has come to light.

Customer experience audit

To help a business understand how it manages its customer relationships and to maximise the potential value of its customers. This will involve evaluating existing customer journey in order to identify any improvements which can be made and the systems which need to be in place.

A direct engagement

Where the underlying subject matter has been measured and evaluated by the practitioner, and the practitioner then presents conclusions on the reported outcome in the insurance report.

An attestation engagement

Where underlying subject matter has not been measured or evaluated by the practitioner, and the practitioner concludes whether or not the subject matter information is free from material misstatement.

Internal audit function

Will perform assurance and consulting activities designed to evaluate and improve the effectiveness of the entities governance, risk management and internal control processes.

Final audits

Will take place after the year end. Final audit procedures include: Substantive procedures involving verification of statement of financial position balances and amounts in the statement of profit or loss. Obtaining third-party confirmations. Analytical procedures relating to figures in the financial statements. Subsequent events review. Agreeing the financial statements to the accounting records. Examining adjustments made during the process of preparing the financial statements. Consideration of the current concern status of the entity. Performing tests to ensure that the conclusions formed at the interim audit are still valid. Obtaining written representations.