focus area for the next 3 days

Question 1 Structure-
1- Significant Business risks
2- Audit Risk/Risk of Material misstatement Prioritization of significant Audit Risk/ROMM E.g
order of prioritization includes, Detection risk issue is first, Management Bias, first time
adoption of accounting policy, Related party transactions, etc)- Share issues to executive,
employees’ pension benefits, deferred tax treatment, these are issues that are complicated
by nature, thus inherent risk is high, thus poses significant Audit risk.
3- Other requirements tested in Question 1
 Ethics and professional issues (arising from any request by management/ specific
exhibit address this in exam
 Audit procedures on accounting matters
 Matters in accepting an engagement from the client.
 Matters to be considered in using the work of component/ expert or internal Audit.
 Matters to be considered in agreeing the terms of engagement.
 Matters in planning the first year Audit.
 Evaluating the component Auditors strategy
 Auditors’ responsibility for laws and regulations or opening balances and money
Laundering, fraud,
 Auditing Outsourced services


SECTION B Structure

2. Completion and review

 Going concern matters, procedures, and implication for Audit report

 Critical appraisal of the Audit report could feature in future exams.
 Reporting implications for multiple uncorrected misstatement
 Matters and evidence in relation to accounting issues including implication for Audit opinion.
 Matters to be communicated to those charged with governance.
 matters specific to the planning of an initial audit engagement which should be considered
in developing the audit strategy

3: Other Matters

 Matters and Procedures relating to other assignments offered by Auditors.

 Quality management and professional issues
 Review of prospective financial information
 Due diligence and forensic Audit
4. Articles to be read/ should not be avoided.

 Laws and regulations

 Ethics in the AAA Exams- Completed
 Climate Risk and role of Auditor
 International standards on Quality Management Part 1 & 2
 Approach to section A Questions-Completed
 Exams technique 1- Planning questions and risk- Business risk (d)- Completed.
 Exams Technique 2- Audit risk and ROMM- completed.
 Group Audit
 Going concern
 Auditors’ responsibility to those charged with governance.
 The Assurance on social, environmental and sustainability information

Other areas

- Share based payment scheme.

- Pension benefits
- Deferred Tax

What to do in the last three days

- Revise things you are not good at

- Read examiners reports.
- Spend more time on practice.

IFRS 2 Treatment

Most important Topics for the upcoming AAA exam

1. Quality Management
2. Audit Report ( Both Impact and critical Evaluation )
3. Audit Risk with loads and loads of Financial Reporting Standards
4. For Risk Questions, depth of your answer is more important than anything else
5. Procedures and Evidence are your easy marks
6. Due diligence, Advertisement.

ANSWERING SIGNIFICANT BUSINESS RISK

When answering significant business risk, follow below procedures, USE APPROACH OF WHAT, WHT,
IMPLICATION

- Identify issues from the scenario causing the risk.

- Explain the risk, link to the scenario.
- Explain implication of the risk
 - Give justification on why the risk is significant.
-

ANSWERING QUESTIONS ON AUDIT RISK/RISK OF MATERIAL MISTATEMENT PRIORITISATION

For each of the Risk Identified use Approach of MTRI, that is

- Issue
- Materiality
- Risk
- Treatment
- Implications

When prioritizing Audit risk/Room, Use below guidance

- Detection risk is the most significant risk as it relates to the Auditor.

- Management Bias- this is the next big risk.
- First time adoption of accountings policy/Treatment
- Unusual events, event that is occurring for the first time. E.g. fire outbreak,
- Revenue, risky by nature as its an avenue to fabricate financial statements to report high
revenue.
- Related party Transaction
- High inherent risk due to complexity, subjectivity, management bias, change, uncertainty,
- Significant risk are those that appear on the upper spectrum of risks
- Assessment of inherent risk is the first step in determining significance of risk of material
misstatement.

POSSIBLE CAUSE OF DETECTION RISKS

- Group Audit, where Group Auditor is reliant on the work of component Auditor
- New client where there is no past experience of client and their business
- Audits where quality management or ethical threats may prevent the auditor from obtaining
sufficient appropriate evidence e.g. specialized industry where Audit team may not have
appropriate experience and skills to Audit the industry
- Lack of professional scepticism increase detection risks
-

ANSWERING ETHICS AND PROFESSIONAL QUESTIONS

Use approach- Identify- Evaluate- Apply

- The threat
- Implication of threat
- Possible Safeguards or further actions to be taken

This identification is the first step to answering the question, but these points alone will score
minimal credit in the exam. Candidates should be aiming to demonstrate they understand how the
issue has arisen and what the implication of that threat may be
Possible list of threats

ACCA code of Ethics and Conduct:

o Integrity
o Confidentiality
o Objectivity
o Professional Competence and due care
o Professional behavior

Threats To Objectivity:
o Management Threat
o Advocacy Threat
o Self Interest Threat
o Self Review Threat
o Intimidation Threat
o Familiarity Threat

Ethical Issues:
o Independent Threats (M A S S I F )
o Conflict of Interest
o Confidentiality
o Integrity of The Client

Professional Issues:
o Money Laundering
o Auditor’s Liability
o Practice Management
o Impact on Audit

RESPONSIBILITY OF AUDITOR OVER LAWS AND REGULATIONS

- To obtain sufficient appropriate evidence that client has complied with all applicable laws
and regulations that have direct effect on financial procedures.
- To perform specific procedures to help identify instances of non-compliance to laws and
regulations that may have material impact on financial statement.
- To respond appropriately to identified instances of non-compliance to laws and regulations
during the Audit.
To earn professional marks for evaluation you need to explain why the identified risks are of
significance,

Scepticism, - identifying management bias in a scenario and drawing conclusion on accounting

treatment used by management.

A very sound accounting knowledge is important in passing AAA Paper

How to grab the professional marks

How to bring you closer to the mindset of examiners

Watch Kashif Kamran webinar, why students fail.

YOU Need to write a case specific answer.

If an insurance claim is probable, we disclose a contingent asset, if insurance claim is certain we

recognize other income receivable.

Certain- Recognize receivable.

Probable- Contingent Asset

Where the condition is for sales and lease back, profit is not recognized on the sales of the Assets,
the proceed received from the sales should be recognized as lease liability. . when we have the rights
to re-purchase the property, we cannot recognize profit on sale.

FRS 2 Share-based Payment requires the expense of an equity-settled scheme to be recognized over
the vesting period and calculated using the fair value of the share options at the grant date. At each
reporting date the expense should be calculated by consider

List of 10 important technical articles to read before exams

1. Professional skills- AAA

2. Approach to section A

3. Exams Technique-1 Planning questions and Risk- Part 1- Business risk

4. Exam Technique-2 Planning Question and Risk- Part 2- Risk of Material misstatement and Audit.

5. Reading the mind of the marker

6. Quality Management part 1

7. Quality management part 2

8. Examining Evidence

9. The Assurance of Social, environmental and Sustainability information part 1

10. The Assurance of Social, environmental and Sustainability information part 2

11. Auditors responsibility in respect to climate related risks.

Auditor is only responsible to review other information to ensure that it is consistent with audited
financial statements.

If there is any inconsistency it will not impact on auditor opinion

Auditor only ask management to correct these inconsistency. If management not correct this
mistake. Then auditor will include this in other information paragraph to notify users of financial
statement

Audit procedures
(i)Measurement of share based payment expense
–
Obtain management calculation of the expense and agree the following
from the calculation to the contractual terms of the scheme:
–Number of employees and executives granted options
–Number of options granted per employee
–The official grant date of the share options
–Vesting period for the scheme
–Required performance conditions attached to the options.
–Recalculate the expense and check that the fair value has been
correctly spread over the stated vesting period
Agree fair value of share options to specialist’s report and calculation, and evaluate whether the
specialist report is a reliable source of evidence
Agree that the fair value calculated is at the grant date.
Obtain and review a forecast of staffing levels or employee turnover rates for the duration of the
vesting period, and scrutinise the assumptions used to predict level of staff turnover.
–Discuss previous levels of staff turnover with a representative of the human resources department
and query why 0% staff turnover has been predicted for the duration of the vesting period.
–Perform sensitivity analysis on the assumptions used in the valuation, focusing on the assumption
of 0% staff turnover.
–Obtain written representation from management confirming that the assumptions used in
measuring the expense are reasonable

(ii)AUDIT PROCEDURES: Recognition and measurement of deferred tax asset

–Obtain a copy of Bransfield Co’s current tax computation and deferred tax calculations and agree
figures to any relevant tax correspondence and/or underlying accounting records.
–Develop an independent expectation of the estimateof future taxable profits to corroborate the
reasonableness of management’s estimate.
–Obtain forecasts of profitability and agree that there is sufficient forecast taxable profit available for
the losses to be offset against. Evaluate the assumptions used in the forecast against
business understanding. In particular consider assumptions regarding the growth rate of taxable
profit in light of the underlying detrimental trend in profit before tax.
–Assess the time period it will take to generate sufficient profits to utilise the tax losses. If it is going to
take a number of years to generate such profits, it may be that the recognition of the asset should be
restricted.
–Inspect correspondence from the tax authority to confirm there is no restriction on the ability of
Bransfield Co to carry the losses forward and to use the losses against future taxable profits

Consideration of climate related Risks in planning and Audit

- Obtain an understanding of the industry and its exposure to climate related risks.
- These risks must be taken into consideration when deciding the risk of material
misstatement.
- Client should have their own risk assessment procedures for identifying and assessing its
exposure to climate risks
- Assessment of CRR will impact on determination of materiality

Matters to be considered in agreeing terms of enegagement

- Management responsibility
- Auditors’ responsibility
- Intended users
 - Period covered
- Content/ element of the report, business plan
- Assumptions used
- Content of the report
- Scope of work
- Resources and skills
- Clients’s integrity
- Ethical matters

Audit of cashflow forecast

-Analytical procedure

- confirm consistency of the accounting policy

- confirm accourance of opening banalance, by reconciling with cashbook

- Discuss key assumptions with management

- Performed trend analysis

- Agree predicted revenue/collection to current sales level

- Recalculate patter of cashflows bases on management historical information

- Perform sensitivity analysis

- Agree salary payment to latest payroll

- obtain and review breakdown of forecast overhead payment

- review board minutes for discussions

- request bank confirmation for terms of new finance

- consider reasonableness of the finance charges

Audit of FORECAST
(b)General procedures
- Recalculate the forecast financial statements to confirm the arithmetic accuracy.
- Agree the unaudited figures for the period to management account and agree cashflows to cashflow and Bank
statement.
- Confirm the consistency of the accounting policies used in the preparation of the forecast financial statements
with those used in the last audited financial statements.
- Consider the accuracy of forecasts prepared in prior periods by comparison with actual results and discuss
with management the reasons for any significant variances.
- Review any agreement with LazarevCo, or minutes of meetings at which the joint arrangementhas been
discussed to understand the nature, scale, and timeframe of the proposed joint business arrangement and
discuss the extent to which the joint arrangement with Lazarev Co has been included in the forecast financial
statements.
 -
Forecast statement of profit or loss
•Consider the reasonableness of forecast trends in the light of auditor’s knowledge of the client. business and the
current and forecast economic situation and any other relevant external factors.
•Discuss the reason for the anticipated 21.4% increase in revenue with management, to understand if the increase
is due to the inclusion of figures relating to the joint arrangement
•Discuss the trend in operating profit with management
–the operating margin is forecast to improve from 30% to 33.8%. This improvement may
be due to the sale of the underperforming Bellinghausen
Retail Park.
•Obtain a breakdown of items included in forecast operating expenses and compare to those included in the 20X5
management accounts to identify any omissions.
•Using the cost breakdown, consider whether depreciation charges have
increased in line with the planned capital expenditure.
•Request confirmation from the bank of the potential terms of the $30million loan being negotiated, to confirm the
interest rate at 4%. Consider whether the finance charge in the forecast statement of profit or loss appears
reasonable. (If the loan is advanced in August, it should increase the company’s finance charge by $1 million
($30 million × 4% × 10/12).)
•Discuss the potential sale of BellinghausenRetail with management and review relevant board minutes, to obtain
understanding of the likelihood of the sale, and the main terms of the sale negotiation.
•Recalculate the profit on the planned disposal, agreeing the potential proceeds to any written documentation
relating to the sale, vendor’s due diligence report, or draft legal documentation if available.
•Agree the potential proceeds on disposal to management’s cash flow forecast, and confirm that operating cash
flows relevant to Bellinghausen. Retail are not included from the anticipated date of its sale.
3
•
Discuss the reason for not including income taxexpensein the profit forecast.

Forecast statement of financial position

•Agree the increase in noncurrent assetsto an authorised capital expenditure budget, and to any plans for the joint
development with Lazarev
Co.
•Obtain and review a reconciliation of the movement in non current assets
. Agree that all assets relating to BellinghausenRetail are derecognised on
its disposal, and that any assets relating to the joint development with
LazarevCo are recognised in accordance with capital expenditure
forecasts, and are properly recognised per
IFRS 11 Joint Arrangements
.
•Discuss the planned increase in equity with management to understand the reason for any planned share issue, its
date and the nature of the share issue (rights issue or issue at full market price being the most likely).
•Enquire of management why forecast equity does not include a share premium account as the proceeds of the
share issue would be likely to be in excess of nominal value.
•Perform analytical procedures on working capital and discuss trends with management, for example, the receivables
collection period is forecast to reduce from 58 to 53 days, and the reason for this should be obtained.
•Agree the increase in longterm borrowings to documentation relating to the
new loan, and also to the forecast cash flow statement (where it should be included as a cash flow arising from
financing activities).
•Discuss the deferred tax provision with management to understand why no movement on the balance is forecast,
particularly given the planned capital expenditure.
•Obtain and review a forecast statement of changes in equity to ensure that movements in retained earnings appear
reasonable. (Retained earnings are forecast to increase by $800,000, but the profit forecast for the period is $10.52
million there must be other items taken through retained earnings such as a planned dividend.)
•Agree the movement in cash, and the forecast closing cash position to a
cash flow forecas

Audit evidence

- Written representation provides necessary but not sufficient evidence

-

Related party transaction is material by nature.

Where individual variance is immaterial, the aggregate varuiance can be material. Thus there is need
to consider both individual and aggregate

Advantages of joint Audit

- Specialisation
- Two firms can stand against aggressive management

Disadvantages

-Costly

- Segregation of duties

- Liability incase of any legal issues because both firms have provided an opinion

Responsibility of Auditors in relation to fraud

- Sufficient appropriate evidence

- Sceptical
- Report matter to appropriate level of management
-

In preparation, you should have holistic overview of the following areas

SECTION A

Sylabus are D: Contributes heavily in AAA Paper. As question now? How confident am I in this area

-Audit risks

-Audit procedures

Section B:

Sylabus area E: completion, review and preparation of financial statement

Sylabus area F: Other assignments

Sylabbus area ABC can be tested anywhere in the paper

1- Using work of others i.e. experts, internal auditors or component auditors

2- Auditor responsibility regarding lwas and regulations
3- Money laundering
4- Quality management
5- Practice management
6- Current issues

CORE SYLABUS ARES VS. PREPARATION : check your self on the following areas and make sure you
are competent with the following areas.

SYLABUS AREA DEF IS VERY IMPORTANT IN AAA- QUESTIONS ARE ALWAYS TESTED FROM THESE
AREAS

1. Audit risk/Risk of material misstatement- Always there

2. Business risks
3. Audit procedures- Always asked
4. Audit evidence -Always asked
5. Going concern
6. Audit report
7. Communicating to those charged with governance
8. Reviewing prospective financial statements- very popular
9. Due Diligence review
10. Forensic Audits
11. Matter to consider whether to accept new Audit or not- very popular
12. Ethical and Professional Issues
13. Money Laundering
14. Auditor responsibility for Fraud, laws and regulations, and opening balances
15. Using the work of others i.e. Experts, component Auditors and Internal Auditors- very
popular
16. Quality management
17. Current issues-climate risks
1. Which area am weak at
2. Which area am I stron

Question 1

1. Planning stage of an Audit

The question may cover individual companies or group companies.
Most risks can be identified from the background information.
 Sylabus area D dominates the paper
ABC syllabus areas can also be tested in question 1
- Using the work of others
- Ethical and professional issues

Question 2 & 3

1. At least one question has to come from Sylabus area E

2. Question on Matters, evidence, going concern and communicating with TCWG , Implication
of Audit report and critical appraisal of Audit evidence
3. Section E is the most important area in section B. at least one question has to come.
4. Current issues can also come in section B

You have to be very good and confident in syllabus area DEF. makes sure you check you self on these
areas ahead of the exam.

Day 1

New developments

Boosting professional marks

Time management

Right study planner

Three new articles by Examining team.

1. Syllabus change from quality control to quality management.

2. Climate risk and Auditors responsibility
3. 20 professional marks
4. Slight adjustment in the marking scheme
5.

Watch webinar on climate risk and Quality management by Kashif Kamran

New Articles 1: Assurance on social, environmental and sustainability information part 1- Syllabus
area F

New Articles 2: Assurance on social, environmental and sustainability information part 2- Syllabus
area F

New Article 3: International standard on quality management- Part 1

Watch video on consideration of climate related risk in Audit of financial statement.

How to earn professional Marks.

Professional marks are achieved as you work through the technical marks. As you work through
technical marks, you are ensuring that the checklist for professional is embedded in your answers.

You need to ensure you have embedded the skills in your answers.

Time management is for 80 technical marks.

Time management

1. The expectation of examiners on quality of answers will rise considering that students have
incremental time to answer questions.
2. Students should not overrun time in any one number.

Critical exams techniques

1. Read questions requirement carefully.

2. Student should not overrun time on any question.
3. Plan your answer.
4. Pay particular attention to verbs.
5. Pay attention to the signpost/ Warning signs.
6. If you get stuck, leave the question, and come back later.
7. Do everything to make life easier for marker. Make points in different paragraph.
8. Avoid lists and bullets unless requested.
9. Structure question 1 in a briefing note
10. Watch video on Communication skills by Kashif Kamran

Professional Marks

Communication

Analysis

Evaluation

Scepticism

Commercial acumen

Watch Kashif Kamran video on professional skills

Boosting Professional marks checklist for AAA

 1. Putting question 1 in the format for briefing note. = format+ logical flow of answers +
introductions + heading+ subheadings+ conclusions)- up to 4marks are available for
communication skills in Question 1 only
2. Calculate and comment on materiality where possible, calculate materiality where it possible
across the entire paper. You can calculate even 10 times and comment on all the calculations.
to get the professional marks, you have to calculate and comment.
3. Calculating rations, trends, and calculation where possible and commenting on them as to
what they prove in justifying your point. Calculate and justify.
4. Prioritizing significant risks. Watch You tube video on how to identify significant risks. When
writing Answers, first three risks have to be significant risks.
5. Explain implication of ethical threat. You need to justify why.
6. Recommending actions and procedures which are in context of the case and reasonable.
Avoid irrelevant actions and procedures.
7. Case specific answer, your answer should be linked to the case as much as possible.
8. Provide conclusion in questions asking for evaluate or assess.
9. Investigate management statements carefully. In examples such as in the basis for provision
or the basis of amortization of purchased intangible assets, as management statements or
claims could be bias.
10. Challenge why evidence collected by the audit team is insufficient or inappropriate.
11. Explain a clear impact of business risk on business objectives- present or future.
( Profitability, Reputation, liquidity, going concern), etc.
12. Exercise a careful decision on whether to accept a new client audit or not. You cannot accept
a client who is involved in money laundering. During the Audit, its your responsibility to
report money Laundering, however before Accepting, you need to reject client involved in
money laundering for the purpose of your good company image.
13. Evaluate going concern matters carefully. And its impact on the foreseeable future of the
business. Material uncertainty relating to going concern but don’t say the company is not a
going concern.
14. Evaluate whether assumptions used by management in preparing forecast are realistic or not
in context of the situation provided in the case of study. Be critical on the assumption,
challenge the assumption, critically analyze the assumption, and justify why.
15. Carefully explain the impact on the Audit report / opinion – Take a sound judgement.

YOU HAVE TO DEMONSTRATE PROFESSIONAL SKILLS IN YOUR RESPONSES

Incremental time equals rise in quality of your answer’s threshold, rise in markers expectation with
the quality of your answers, = Writing an impressive answer = TECHNICAL AND PROFFESIONAL SKILLS
DEMONSTRATED.

Impressive answers

Materiality

Trend

Calculations

Conclusion

Justification

Why reasonings
Case specific answers

In an instance where management plan to sell shares, there is a high risk of management bias as they
may be under pressure to present favourable results such that the company can look attractive to the
potential investors. This increases risk of Assets being overstated and revenue as being overstated
such that financial ratios are impressive and high profit is reported.

Matters specific to initial planning of Audit should be considered in developing Audit strategy.

- Communicate with the outgoing Auditors to review their working papers, this will help in
Audit planning and may highlight matters patterning to opening balances.
- As part of clients acceptance, professional clearance should be sought from the outgoing
Auditors
- Consider the implications of any ethical issues raised during clients acceptance
procedures
- Issue discussed with management at the planning stage and how this impact on the
audit strategy
- Planning Audit procedures to obtain sufficient appropriate evidence over opening
balances
- Understanding the business including its legal and regulatory environment.
Understandings must be fully documented as this will help the Audit team perform
detailed risk assessment at planning stage
- Quality management procedures in place
- Experience Audit team

With reference to using work of the expert, we look at the following regarding the experts
appointment process

- The competenece of the expert

- The qualifications
- The experience
- The independence
- Assess assumptions made and conclusions reached by the experts.
- Confirm valuation has been carried out at the reporting date and is in line with
company’s accounting policies.
- Re-perform calculations.
- Review instruction to the expert by management and agree valuation method is in
accordance with IFRS

Where there are conflicts of interest, the Auditors should seek consent from both parties on whether
to proceed with the engagement.
Possilbe conflict of interest

-Objectivity

- Audit firm assuming management responsibility

Completion and review – Audit completion

The Audit review help to confirm that;

- The Audit has been completed in line with ISA.
- Sufficient appropriate evidence has been collected.
- Material matters identified been properly dealt with
- Audit work support audit opinion

.1.1 Professional Scepticism

Professional scepticism should be applied at all stages of the review process, for example:
Was the audit appropriately planned?
Have any critical areas been omitted?
Has sufficient, appropriate audit evidence been obtained to support each conclusion?
Has there been sufficient inquiry and challenges made relating to management's estimations?
Have management's assertions been sufficiently tested?
Where there are plausible alternative treatments of an item in the financial statements (e.g. a fair
valuation) have these been adequately assessed to ensure that the one selected is the most
appropriate?
Is adequate evidence recorded for audit judgments – conclusions, rationale for the conclusion and
detail of the challenges made to reach the conclusion?
Have all members of the audit team been challenged about the adequacy and professionalism of
their work?
Have the audit team and firm been wholly independent of the client to ensure the application of
robust professional scepticism?

1.3 Matters to be Documented

All critical matters, particularly those requiring exercise of professional judgement,
must be documented before concluding on the audit, for example:
 provisions and contingencies;
 subsequent events (s.2);
 going concern (s.3);
 settling contentious issues; and
 finalising uncorrected misstatements (see also Chapter 13).
Discussions and "negotiations" with management on significant areas must be
adequately documented together with the conclusions reached and the rationale for
supporting such conclusions.
A “potential adjustments” schedule documents misstatements identified during the
audit that must be accumulated, unless clearly trivial (ISA 450 Evaluation of
Misstatements Identified During the Audit).
Events after the reporting period (IAS 10) – events, both favourable and
unfavourable, that occur between the end of the reporting period and the date on
which the financial statements are authorised for issue.
Subsequent events (ISA 560) – events occurring between the date of the financial
statements and the date of the auditor's report, and facts that become known after
the date of the auditor's report.

The auditor must be alert ("proactive") to identify subsequent events before the date
of auditor's report. The auditor should, for example:
 Review and understand management's procedures for identifying
subsequent events.
 Read minutes of meetings of shareholders, board of directors, audit
committees, etc held after period end.
 Inquire about matters discussed at meetings for which minutes are not yet
available.
 Read latest available interim financial statements, budgets, cash flow
forecasts, management reports, etc.
 Inquire of management and TCWG if they are aware of any subsequent
events that would affect the financial statements.
 Inquire of lawyers concerning litigation and claims.
The auditor should also make relevant inquiries of management on specific matters,
for example:
 Have new commitments, borrowings or guarantees been entered into?
 Have sales of assets occurred or are any planned?
 Is the issue of new shares or debentures or an agreement to merge or
liquidate being planned?
 Have any assets been appropriated by government or destroyed (e.g. by
fire or flood)?
 What developments are there regarding risk areas and contingencies?
 Have any unusual accounting adjustments been made or contemplated?
 Have events occurred (or are likely to occur) which will call into question
the appropriateness of accounting policies used (e.g. concerning the
validity of the going concern basis)?
 Have any events occurred that are relevant to the measurement of
estimates or provisions made?

Practice Management/ Professional Appointment: Syllabus area C

In practice management, commercial acumen skills are very important, reasons to reject even
though you are going to forgo the money. Commercial acumen is tested in this area.

Analysis and evaluation skills have to be demonstrated, by giving conclusions.

Total fee of the client should not exceed 10% of total practice fee and 15% of total firm income.

1. Matters to consider in Deciding whether to accept the new Audit client.

Client acceptance procedures need to safeguard against the following engagement risks that arise in
accepting a client.

 reputation risk and/or credit risk.

 regular changes in the audit appointment (i.e. making it difficult to recover set up costs);
 lack of necessary expertise in the audit firm (i.e. a threat to competence);
 engagement in fraudulent activities

Procedures for new clients acceptance include

 Client screening/ Due Deligence and understanding the entity and its environment.
 Professional clearance from the outgoing Auditor, if permission is refused, the
appointment must be declined. If a conflicting view between client and current
auditor/adviser is raised, discuss with the client to be satisfied that. If the current
auditor/adviser does not respond within a reasonable time, phone, fax, email , if all else
fails, send a final letter by recorded delivery stating that "no matters" will be assumed,
unless advised otherwise within, for example, seven days
 Engagement acceptance
 Quality Management practice
 Necessary expertise in the Audit firm to perform the audit work

The following matters should be considered in deciding whether to accept new client or not.

 Timing of the audit;

 Availability of sufficient staff at appropriate grades to meet deadlines;
 Number and location of premises;
 Specialist industry knowledge required; and
 Professional independence rules.
 History of modified audit opinions;
 Seeking an auditor towards or just after the year end;
 The reason for current change in auditors;
 Risks inherent in type of business;
 Management's "track record" and perceived integrity;
 Weak internal control and/or organisation;
 Poorly maintained accounting records;
 Frequent involvement in litigation;
 Evidence or likelihood of going concern problems;
 Poor application of corporate governance;
 Reputation or notoriety of prospective client;
 Disagreements with predecessor auditor (see "professional clearance" in s.3

2. Matters to consider in deciding to accept an additional non- Audit engagement from an

existing client.
- Conflict of interest
- Quality management practice
- Expertised within the Audit firm
- Independence of the Audit firm
 3. Matters in agreeing the terms of engagement.
- Specific requirement of the engagement
- Purpose of the engagement
- Scope of the engagement
- The intended purpose of the report
- The Distribution of the report
- Auditor and Management responsibilities
-

(a) Main roles of an audit committee

The basis for establishing an audit committee primarily concerns corporate governance (i.e. the
ethical corporate behaviour of directors or others charged with governance in the creation of wealth
for all stakeholders). Such committees have been mandatory for domestic companies listed on the
New York Stock Exchange for many years and are also a requirement of the London Stock Exchange
for UK listed companies.

An audit committee is the sub-committee of the board, established by the board, which provides an
independent oversight of the organisation’s system of internal control and financial reporting
process. This separate committee:

enables the board to delegate a thorough and detailed review of audit matters;

enables non-executive directors to contribute an independent judgment and play a positive role in an
area for which they are particularly fitted;

offers the external auditors a direct link with non-executive directors.

the main role and responsibilities of the committee members must be set out in written terms of
reference and include:

 monitoring the integrity of the financial statements (and any formal announcements relating
to the company’s financial performance) and reviewing significant financial reporting
judgments contained therein;
 advising the board on whether the annual report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary for shareholders to
assess the company’s performance, business model and strategy;
 reviewing internal financial controls and risk management systems (unless reviewed by a
separate risk committee of independent directors or by the board itself);
 monitoring and review of the effectiveness of the internal audit function or, if there is no
internal audit, consideration (annually) of the need for internal audit and making that
recommendation to the board;
 conducting the tender process and making recommendations to the board, about the
appointment, reappointment and removal of the external auditor, and approving the
remuneration and terms of engagement of the external auditor;
  reviewing and monitoring the external auditor’s independence and objectivity and the
effectiveness of the audit process, taking into consideration relevant UK professional and
regulatory requirements;
 developing and implementing policy on the engagement of the external auditor to supply
non-assurance services, taking into account ethical guidance for the provision of such
services by the external audit firm;

reporting to the board on how it has discharged its responsibilities.

Tutorial note: Only a few examples of responsibilities would need to given for the full 5 marks to be
awarded.

(b) Composition of the committee

Since the primary purpose of an audit committee is to carry out an independent review its members
should be independent of the company’s main executives. This will mean that Arnie should not be a
member of the audit committee.

In a large company there should be a minimum of three members of the audit committee. If Flight
Investment is a smaller company, two members is acceptable. All must be independent, non-
executive directors. At the present time Flight Investments has currently four executive directors plus
Mr Ackroyd. As Mr Ackroyd's relationship with the executive (brother-in-law) will mean that he will
not be perceived to be independent, at least two new non-executive directors (NEDs) should be
appointed. Good corporate governance practice requires at least 50% of the board be independent
NEDs. It is not unusual for the NEDs in major listed companies to be in the majority (e.g. 60 to 70% of
the board). Therefore, to meet good corporate governance guidelines, Flight Investments should
appoint at least four NEDs, and then have a choice of whom to appoint to the audit committee.

At least one of the NEDs on the audit committee must be experienced in financial accounting (i.e.
IFRS) and the other(s) should have sufficient business experience. Because of the specialist business
nature of Flight Investment, it would be advisable that one should have experience of the investment
and property management business.

(c) Specific responsibilities with internal audit and external auditors

(i) Internal audit

If there is no internal audit department, monitor the need for one annually.

Approve the appointment or termination of the head of internal audit.

Ensure that the internal auditor has direct access to the board chairman and to the Audit Committee
and is accountable to the Audit Committee.

Review and assess the annual internal audit work plan, ensuring that it covers all group companies.
Receive a report on the results of the internal auditors’ work on a periodic basis including reports all
group companies and locations visited.

Review and monitor group and local management’s responsiveness to the internal auditor’s findings
and recommendations.

Meet with the head of internal audit at least once a year without the presence of management.

Monitor and assess the role and effectiveness of the internal audit function in the overall context of
the group’s and individual companies risk management systems.

(ii) External audit

Approve the terms of engagement and the remuneration to be paid in respect of audit services
provided for all of the auditors of the group.

Ensure that all external auditors (group and other auditors) are independent of the group and group
companies, for example:

discussion with the auditors;

review of their policies and processes to maintain independence; and

compliance with appropriate ethical guidelines.

At the start of each annual audit cycle, ensure that appropriate plans are in place for the group audit
(e.g. the overall strategy, risk assessment, materiality, resources, work plans and group accounting
instructions).

Review and discuss, with the group auditors, the findings of their work, for example:

the outcome of the audit of each subsidiary;

major issues arising during the audit (resolved and unresolved);

key accounting and audit judgments;

levels of error identified during the audit; and

why certain errors remain unchanged.

Review the audit representation letters (before signing by management).

Review the reports to management and monitor management’s actions taken on its
recommendations.

Consider any modifications made by the group and subsidiary auditors in their reports and in
particular the impact of any subsidiary qualification on the group auditor’s report.

Consider the planning of subsequent audits, with particular reference to:

timing;

use of internal auditors;

use of computer-assisted auditing techniques; and

location visits by rotation.

Annually, assess and report to the board on the qualification, expertise and resources, and
independence of the external auditors and the effectiveness of the audit process. Include in the
report a recommendation whether or not the external auditor’s reappointed should be proposed to
the shareholders

Ensure that the audit services contract is put out to tender at least once every 10 years, to enable
the audit committee to compare the quality and effectiveness of the services provided by the
incumbent auditor with those of other audit firms.

If the external auditor resigns, the audit committee should investigate the issues giving rise to the
resignation and consider whether any action is required.

The audit committee should develop and recommend to the board the company’s policy in relation
to the provision of non-assurance services by the auditor. The audit committee’s objective should be
to ensure that the provision of such services does not impair the external auditor’s independence or
objectivity.

The audit committee section of the annual report should include an explanation of how the
committee has assessed the effectiveness of the external audit process and its approach to the
appointment or reappointment of the external auditor, so that shareholders can understand the
recommended reappointment or change in auditors. It should also include information on the length
of tenure of the current audit firm, when a tender was last conducted and any contractual
obligations that restricted the audit committee’s choice of external auditors.

(a) Need for ethical guidance- MONEY LAUNDERING

Accountants (firms and individuals) working in a country that criminalises money laundering are
required to comply with anti-money laundering legislation and failure to do so can lead to severe
penalties. Guidance is needed because:

legal requirements are onerous;

money laundering is widely defined; and

accountants may otherwise be used, unwittingly, to launder criminal funds.

Accountants need ethical guidance on matters where there is conflict between legal responsibilities
and professional responsibilities. In particular, professional accountants are bound by a duty of
confidentiality to their clients. Guidance is needed to explain:

how statutory provisions give protection against criminal action for members in respect of their
confidentiality requirements;

when client confidentiality over-ride provisions are available.

Further guidance is needed to explain the interaction accountants' responsibilities to report money
laundering offences and other reporting responsibilities, for example:

reporting to regulators;

auditor’s reports on financial statements (ISA 700);

reports to those charged with governance (ISA 260);

reporting misconduct by members of the same body.

Professional accountants are required to communicate with each other when there is a change in
professional appointment (i.e. “professional etiquette”). Further ethical guidance is needed on how
to respond to a “clearance” letter where a report of suspicion has been made (or is contemplated) in
respect of the client in question.

Tutorial note: Although the term “professional clearance” is widely used, remember that there is no
“clearance” that the incumbent accountant can give or withhold.

Ethical guidance is needed to make accountants working in countries that do not criminalise money
laundering aware of how anti-money laundering legislation may nevertheless affect them. Such
accountants may commit an offence if, for example, they conduct limited assignments or have
meetings in a country having anti-money laundering legislation (e.g. UK, Ireland, Singapore, Australia
and the United States).

Prioritization of Risks