PAPER NO.10 AUDITING AND ASSURANCE
UNIT DESCRIPTION
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to conduct the audit of an entity.
LEARNING OUTCOMES
A candidate who passes this paper should be ableto:
- Demonstrate an understanding of the regulatory framework governing the external audit of financial statements
- Demonstrate an understanding of International Standards on Auditing where appropriate and the International Code of Ethics for Professional Accountants (including International Independence Standards)
- Implement the process of planning an audit, prepare audit programs and effectively conduct an audit
- Undertake audit risk assessments (excluding group accounts)
- Apply the risk based audit approach to audit of limited companies
- Prepare non – complex audit reports for audit engagements.
CONTENT
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Nature and purpose of an audit
- Nature and objectives of an audit
- Development of audit (early audit and modern audit)
- Users of audited financial statements
- Features of audits
- Distinction between auditing and accounting
- Types and classification of audits
- Situations when different audits are performed (interim, continuous, final, operational)
- Advantages and disadvantages of various types of audits
- Nature of work done for different audits
- Inherent limitations of an audit
2.Assurance and non- assurance engagements
- 2.1 Definition and objectives of assurance engagements
- 2.2 Audit as an assurance engagement
- 2.3 Elements of an assurance engagement
- 2.4 Types of assurance engagements (Audit, Review assignments)
- 2.5 Differences between audit and review engagements
- 2.6 International Standard on Assurance Engagement-ISAE 3000
- 2.7 Accepting appointment to perform assurance engagement
- 2.8 Review of interim financial information – ISRE 2410
- 2.9 Levels of assurance and reports issued on assurance engagements
- 2.10 Non-assurance engagements (Agreed upon procedures engagement -ISRS 4400 and compilation assignments – ISRS 4410
- 2.11 Attestation and direct reporting engagements
3.Legal and professional framework
- 3.1 Regulatory framework for external audits
- Appointment of the auditors
- Qualifications and disqualifications of auditors
- Removal and resignation of auditors
- Remuneration of the auditors
- Rights and duties of auditors
- Mechanisms of regulations of auditors-role of professional bodies, Audit committee, rotation of audit firms
- 3.2 Professional ethics/code of ethics for professional accountants
- 3.2.1 Importance of the professional ethics
- 3.2.2 Basic/fundamental principles for Code of Ethics for accountants
- 3.2.3 Other professional guidelines on audit fees, conflict of interest, advertising and publicity and opinion shopping by clients
- 3.2.4 Auditors independence /objectivity and its importance
- 3.2.5 Threats to independence and safeguards.
- 3.3 Threats on adherence to other fundamental principles and safeguards to the threats
- 3.4 Development and status of ISAs in execution of audits
- 3.5 Relationship between International Standards of Auditing and National Auditing Standards
- 3.6 Purposes/importance of adoption of ISA in the audit.
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Planning and Risk Assessment
- 4.1 Obtaining, accepting and retention of an audit engagement
- 4.1.1 Matters to consider before and after acceptance of nomination
- 4.1.2 Pre-conditions of an audit
- 4.1.3 Engagement letter, procedure of sending letter, purposes and contents of the letter-ISA 210
- 4.1.4 Circumstances for revision of engagement terms
- 4.1.5 Understanding the entity and its environment
- 4.1.5.1 Background information about the entity or client.
- 4.1.5.2 Ways of gathering knowledge about the business
- 4.1.5.3 Reasons/importance of information gathered about the client
- 4.1.5.4 Reasons of review of previous audit files and communication with previous auditors
- 4.1.6 Overview of audit process
5. Audit risk assessment
- 5.1 Components of audit risk (Inherent, Control and Inherent risks)
- 5.2 Assessment of different types of audit risks
- 5.3 Factors leading to increase or decrease of inherent, control and detection risks
- 5.4 Adoption of risk based audit, reasons and procedure
- 5.5 Advantages and Disadvantages of the approach
- 5.6 Evaluating and prioritising risk and control factors
- 5.7 Mechanisms to minimise the risks associated with client audits.
6. Audit planning
- 6.1 Purpose and challengesin audit planning
- 6.2 Planning for new and existing clients
- 6.3 Development of the overall audit strategy
- 6.4 Contents of audit planning memorandum/ overall plan
- 6.5 Relationship between audit strategy and audit plan
- 6.6 Design of audit programs, importance and problems of the programs
- 6.7 Impact of material misstatements on audit strategy and degree of work done
- 6.8 Influence of interim audit work on the year end/final audit.
- Reasons and importance of audit documentation
- Sources, features and purposes of working papers
- Storage of working papers-permanent audit file and current audit file, auditors note book or diary
- Lien or custody on working papers
- Standardisation of working papers – advantages and disadvantages
- Safe custody and retention of working papers
- Form and content of working papers
- Automated working papers
- Quality control policies and procedures implemented by audit firm
- Objectives of quality controls to the audit firm/ auditors
- Peer review and its objectives
8. Internal control systems and Internal Audit Function
- 8.1 Internal control systems (ICS)
- 8.1.1 Objectives of internal control system
- 8.1.2 Component of internal control system
- 8.1.3 Features of Internal control system
- 8.1.4 Designing of internal control system.
- 8.1.5 Auditors and management responsibility over ICS
- 8.1.6 Advantages and disadvantages /inherent limitations of ICS
- 8.1.7 Indicators of weaknesses in ICS and actions taken by management
- 8.1.8 The evaluation of internal control systems by auditors using Internal Control Questionnaire, Flow charts and narrative notes
- 8.1.10 Tests of controls on specific control environments
- 8.1.11 Internal controls theory and practice-sales and debtors, purchases and creditors, inventories and work in progress, fixed assets, salaries and wages
- 8.1.12 Communication of improvements on ICS weaknesses/ risks associated- Management letter.
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Internal Audit Function
- 9.1 Scope and objectives of internal audit
- 9.2 Criteria of using internal audit work
- 9.3 Areas of support on external auditors’ work
- 9.4 Internal audit review reports and actions by management and those charged with governance
- 9.5 Design of risk based internal audit plan
- 9.6 Internal audit key performance indicators
- 9.7 Managing and monitoring follow up of audit recommendations made to board/ management.
- 9.8 Outsourcing internal audit function-advantages and disadvantages.
- 9.9 Audit committee-functions, merits and demerits.
- 9.10 Internal check systems-scope, features, advantages and disadvantages
- 9.11 Information technology threats andcontrol
- 9.12 Auditors duty on compliance with laws and regulations.
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Overview of Forensic Accounting, Errors, Frauds and Irregularities
- 10.1 Overview of forensic accounting
- 10.1.1 Nature, purpose and scope of forensic accounting
- 10.1.2 Types of forensic investigations: corruption, asset misappropriation, financial statement fraud, others
- 10.1.3 Asset Recovery process and legal framework
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Errors, Frauds and Irregularities
- 11.1 Differences between error andfrauds
- 11.2 Types of errors-omission, commission, principle, reversal of entries
- 11.3 Types of Frauds-Teeming and lading, ghost employees, window dressing, misappropriation of goods and fraudulent financial reporting
- 11.4 Causes of frauds and fraudtriangle
- 11.5 Indicators of errors andfrauds
- 11.6 Detection and prevention of errors and frauds and deterrence-role of internal audit
- 11.7 Materiality and Implications of errors and frauds in the financial statements
- 11.8 Impact of errors and frauds on the audit plan
- 11.9 Reporting on error andfrauds
- 11.10 External auditors and Management responsibility on errorand frauds
- 11.11 Auditors professional skepticism.
12.Audit evidence
- 12.1 Financial statement assertions and audit evidence
- 12.2 Types and features of audit evidence (sufficiency, reliability and relevance)
- 12.3 Audit evidence gathering procedures/ techniques
- 12.4 Materiality and limitations of audit evidence
- 12.5 Financial statement assertions and audit evidence
- 12.6 Audit sampling techniques – statistical and non-statistical
- 12.7 Analytical reviews procedures- nature, objectives, timing and extent of support evidence
- 12.8 Types of analytical Procedures-Variance analysis, reasonableness tests, trend analysis
- 12.9 Using the work of experts- areas of support and considerations
- 12.10 Using management representations (importance, procedures adopted and matters covered).
13.Auditing in the public sector
- 13.1 Introduction to auditing in the public sector and regulatory provisions
- 13.2 Objective and scope of public sector audit (compliance, performance, financial, value for money)
- 13.3 Establishment, mandate and functions of public sector auditors
- 13.4 The parties to audit in public sector-auditor, responsible party and intended users
- 13.5 Role of internal audit function in public entities
- 13.6 Relationship between external and internal auditors in the publicsector
- 13.7 Audit reports by office of Auditor General.
- 13.8 Functions of audit advisory board and executive committee in Auditor General office.
14.0 Auditors Reports
- 14.1 Purposes of auditors’ report and concept of true and fair view
- 14.2 Legal /Statutory provisions on audit reports
- 14.3 Basic elements contents of audit reports
- 14.4 Emphasis of the matter paragraph and key audit matters
- 14.5 Types and Consequences of different types of audit reports issued.
- 14.6 Features of unqualified and qualified audit reports
- 14.7 Reasons for qualifications of audit reports (Limitation of scope, inherent uncertainties, disagreements)
- 14.8 Types of qualifications-disclaimer, except for and adverse opinions.
- 14.9 Overall audit review and finalisation
- 14.10 Subsequent events/Post balance sheet events review (adjusting and non – adjusting events, auditor’s responsibility and audit procedures)
- 14.11 Going concern review (Auditors and management responsibility, indicators of going concern difficulties, audit procedures, mitigation plans and reporting)
- 14.12 Management representations on contentious matters affecting financial statements like guarantees made, capital commitments, borrowings, unusual accounting adjustments.
- 14.13 Review of compliance with accounting policies, opening balances, prior period audits by other auditors
- 14.14 Format for presentation of independent auditor’s report.
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Auditing in a computerised system
- 15.1 Audit objectives in computerised systems
- 15.2 Differences between computerised and manual systems
- 15.3 Benefits and drawbacks of computerised accounting systems
- 15.4 Types of controls in computerised systems (Administrative, system development, processing controls, application controls, master files and standing data
- 15.5 Auditors use of computers in the course of audit
- 15.6 Planning the audit in computerised systems
- 15.7 Audit approaches – audit around, with and through the computer and circumstances when each is applied
- 15.8 Loss of audit trail, causes and measures to mitigate the loss of audit trail
- 15.9 Computer Assisted Audit Techniques (CAATS) – Audit software and test data
- 15.10 Types of audit software and functions and types of test data
- 15.11 Factors considered before using CAATS and steps in CAATS application
- 15.12 Advantages and disadvantages of CAATS
- 15.13 Use of embedded audit modules and integrated test facilities
- 15.14 Information security controls (Encryption, Firewalls, Passwords, Antivirus)
16. Contemporary and emerging issues in audit
- 16.1 E- commerce auditing
- 16.2 Cloud documentation
- 16.3 Use of data analytics tools in audit (Anomaly detection, diagnostic analysis, predictive analysis.