ACCA FAU FOUNDATIONS IN AUDIT

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CHAPTER 1 - AUDITING & THE AUDIT PROFESSION

NATURE OF ACCOUNTING RECORDS AND AUDIT

Business stakeholders and their informational requirements:

Shareholders - need info about company performance to aid investment decisions

Lenders/financial institutions - need info about liquidity of a business

Governmental institutions - need info to support the calculation & payment of relevant corporation/income tax

Management - need info to support operational decisions and business strategy

Employees - need info relating to liquidity & performance of a business to access job security & remuneration potential

Customers/suppliers - need info about liquidity to decide whether to commit to long term trading

The public - need wide range of info including environmental and corporate social responsibility

Poor quality info = poor quality decisions

Key documents to prepare for stakeholders:

Management accounts - include budgets/targets, performance to date and management commentaries. Used internally by management for internal, operational and financial decisions

Taxation computations & returns - include summaries of sales and purchases to support sales tax and corporate tax payments and payroll reconciliations

Financial statements - incorporate summaries of historical financial performance (SCI & cash flows) and summaries of year end assets/liabilities (SFP). Usually required by law for most companies and used primarily by stakeholders.

Two requirements of financial information reported:

must be relevant (capable of influencing user's decisions)

must be faithfully represent the transactions and balances it is reporting (complete, neutral, free from error)

Financial info must also be:

understandable

produced on a timely basis

comparable

verifiable

Systems must be in place to support the preparation of this info and controls are designed to reduce the risk of fraud/error. These systems must also be sufficient to keep records as long as they are required by stakeholders.

Audit - The independent examination of evidence from which the financial statements of an enterprise are derived in order to give the reader of those statements confidence as to the 'truth and fairness' of the state of affairs which they disclose

Essential features of an audit:

involves the examination of financial statements and reports on the 'truth and fairness'

end result of an audit is an opinion to assist the user of financial statements - therefore relies heavily on professional judgement not just facts

auditor's opinion makes reference to true and fair but this is a matter of judgement, therefore the auditor should be independent of the enterprise and has no significant personal interest so as to be objective

Content of an auditor's report:

A title identifying the person(s) to whom the report is addressed

The auditors opinion of the financial statements

The basis of the auditor's opinion

Key audit matters

Responsibilities of management

Responsibilities of the auditor

The auditor's signature and address

The date of the report

*Example of auditor's report P4*

Unmodified auditor's report - provides assurance (but not guarantee) that an audit has ot discovered any adjusted material misstatements and statements give a true and fair view

Modified auditor's opinion - where the auditor is either of the opinion that there is a material misstatement in the statements or when the auditor has been unable to obtain sufficient appropriate evidence upon as a basis for the opinion.

A fiduciary relationship - a relationship of 'trust and good faith' such as that between a trustee and beneficiary, and between directors and stakeholders:

Owners Managers

↓ ↓

Shareholders Directors & Managers

↓ ↓

Provide Finance Use Finance

↓

Produce accounts for shareholders showing the results of their use of shareholder funds

↓

Auditors

↑ ↓

← Examine accounts and report to members on their 'truth and fairness'

Divorce of ownership of control - shareholders own the company but the directors manage and control the company on behalf of shareholders (act as agents to shareholders)

PURPOSE OF AN EXTERNAL AUDIT

Advantages of an audit:

Gives assurance to readers of accounts

Disputes between stakeholders may be more easily settled (e.g. partnership with complicated profit sharing arrangement)

Help major changes in ownership (mergers)

Application to 3rd parties may be improved by submission of audited accounts (adds credibility)

Involves in depth review of business so therefore can give constructive advice to management on improving the efficiency of a business

Disadvantages of an audit:

Cost

Staff time - should be organised to minimise disruption

INTERNATIONAL STANDARDS ON AUDITING

International Standards on Auditing (ISAs) - provide guidance to auditors in carrying out audit engagements. Purpose of ISAs:

Harmonisation - of auditing procedures so that audit services are confident of the nature of audits around the world

Focus on audit quality - so that expectations are met

IFAC Code of Ethics and Conduct - sets standards of conduct for professional accountants and states the fundamental principals that should be observed

International Standards on Quality Control (ISQCs) - provides guidance to auditors in their respisibilities to maintain good quality control over audit engagements

International Auditing Practice Statements (IAPSs) - provide practical assistance to auditors in interpreting and implementing standards and promote good practice

International auditing and accoutning standards to not override local regulations and orgs are not compelled to compy with them, however situation will change as more and more countries adopt international standards e.g. all EU countries.

6 Categories of ISAs:

Introduction - purpose, scope and subject of the ISA

Objective - clear statement of the objective of the auditor

Definitions - applicable terms must be defined in each ISA

Requirements - each objective is supported by clearly stated requirements, always expressed by the phrase 'he auditor shall'

Application and other explanatory material - explains more precisely what a requirement means or is intended to cover

Development of ISAs stages:

an exposure draft is issued with a request for comments by a specified date

the comments are reviewed and where appropriate the draft amended

he ISA is issued with a specified implementation date

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CHAPTER 2 - PROFESSIONAL ETHICS

ETHICAL BASE OF AUDITING

The Accounting profession is distinguished by the following characteristics:

mastering of particular skills/techniques acquired through training

development of an ethical approach to work and clients, acquired by experience/supervision under training and safeguarded by a strict disciplinary code

acceptance of duties to society as a whole in addition to duties to employer/client

an outlook which is essentially objective

rendering personal services to standard of conduct/performance

The key requirements that need to be met to achive these objectives of the accountancy profession are seen to be:

Credibility – public needs to be able to believe in the auditing profession

Professionalism – auditors should behave in a professional manner which emphasises client service

Quality of service – clients have a right to expect a service delivered to a high technical standard

Confidence – the public needs to be able to rely on the work of the auditing profession

FUNDIMENTAL PRINCIPLES

The ACCA Code of Ethics and Conduct states that in order to meet the objectives of the accountancy profession members should comply with a number of fundamental principles below:

Integrity - An accountant should be straightforward and honest in all relationships, implies fair dealing and truthfulness

Objectivity & Independence – An accountant should not compromise professional or business judgment because of bias, conflict of interest or undue influence of others

Professional Competence & Due Care – An accountant should:

attain and retain knowledge and skill at the level required to ensure competent professional service is delivered based on current standards and relevant legislation; and

act diligently in accordance with applicable technical and professional standards