ACCA Paper F8 Auditiing and Assurance F8AA(Int)DSGuide d08

(1)

Introduction Syllabus and Examination Technique

Read the aim. The overview diagram shows how the syllabus topics are related. Note the format of the exam – all questions must be attempted, there is no choice.

Note that the examiner has stated that he will examine the WHOLE syllabus over a number of sessions. So no area can be considered as “not examinable”.

Ensure you apply appropriate examination technique to all questions that you attempt. It is important to understand exactly what the examiner requires and how to structure your answers.

Appx 6 Glossary

Use this to help you understand the meaning of new terms when you first meet them and for revision purposes. Many of these terms can be used as definitions in your examination answers.

1 Audit and other assurance engagements Learn and understand the basic elements of an audit, assurance service and review assignments. All of the content of the headings and sub-headings can be examined. Many aspects dealt with here will also be expanded upon throughout the study system

After studying this session you should be able to:

¾

explain the nature and development of audit

and other assurance engagements;

¾

identify and describe the objective and general principles of external audit engagements;

¾

discuss the concepts of accountability,

stewardship and agency;

¾

discuss the concepts of materiality, true and fair presentation and reasonable assurance;

¾

explain reporting as a means of

communication to different stakeholders; and

(2)

2 Regulatory environment – statutory audit Questions have been set on the due process of developing auditing standards and the removal of auditors. So all of the topics in this session cannot be ignored even if you think they are not core areas. After studying this session you should be able to:

¾

explain the development and status of

International Standards on Auditing;

¾

describe the regulatory environment within which statutory audits take place;

¾

discuss the reasons and mechanisms for the regulation of auditors;

¾

explain the statutory regulations governing the appointment, removal and resignation of auditors;

¾

describe the limitations of statutory audits.

(3)

3 Regulatory framework – corporate governance Make sure that you also read the examiner’s article “The regulatory environment” – basically understand the need for corporate governance, what constitutes good corporate governance and the role of the audit committee. Note that this area can be examined as part of any question in the examination.

After studying this session, you should be able to:

¾

discuss the objective, relevance and

importance of corporate governance;

¾

discuss the need for auditors to communicate with those charged with governance;

¾

discuss the provisions of international codes of corporate governance (such as OECD and the UK Combined Code) that are most relevant to auditors;

¾

describe good corporate governance requirements relating to directors’

responsibilities (e.g. for risk management and internal control) and the reporting

responsibilities of auditors;

¾

analyse the structure and roles of audit committees and discuss their drawbacks and limitations.

(4)

4 Professional codes of ethics and conduct All of this session is highly examinable and could feature in every examination. Ensure you understand the application of the conceptual framework and can recognise threats to the fundamental principles when described in a question (and safeguards).

¾

define and apply the fundamental principles of professional ethics of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour; and

¾

define and apply the conceptual framework.

5 – 7

5 Auditor appointment

Ensure you fully understand this professional process from the perspective of all the players. Note the wording of the engagement letter and that elements are repeated in representation letter and the auditor’s report. Also note that re-appointment is often overlooked by students in their answers.

¾

discuss the requirements of professional ethics

and other requirements in relation to the acceptance of new audit engagements;

¾

discuss the process by which an auditor

obtains an audit engagement;

¾

explain the importance of engagement letters and state their contents.

(5)

6 Documentation

Be prepared to answer questions on the typical contents of a current audit file, a permanent audit file and the layout of working papers.

After studying this session you should be able to

¾

explain the need for and the importance of

audit documentation;

¾

describe and prepare working papers and supporting documentation; and

¾

explain the procedures to ensure safe custody and retention of working papers

10 & 11

7 Audit planning

Broadly understand the need for planning, the

preliminary engagement procedures, the audit strategy and documenting the plan. Sessions 8 through to 14 all deal with separate aspects of planning.

¾

identify and explain the need for planning an

audit;

¾

identify and describe the contents of the overall audit strategy and audit plan; and

¾

develop and document an audit plan.

(6)

8 Business risk and internal control

This session deals with the theoretical aspects of

business risk and internal control. It is critical that you fully understand the role of both elements within an audit.

¾

explain the components of business risk;

¾

discuss the importance of risk analysis;

¾

describe and explain the key components of

an internal control system;

¾

explain the importance of internal control and risk management;

¾

identify and explain management’s risk assessment process with reference to internal control components;

¾

identify and describe the important elements of internal control including the control environment and management control activities;

¾

describe good corporate governance requirements relating to directors’

responsibilities (e.g. for risk management and internal control) and the reporting

responsibilities of auditors.

(7)

9 Understanding the entity, audit risk and engagement risk

The practical aspects of dealing with business risk and internal controls for planning. Ensure you appreciate that at this stage it is essential to understand the design and implementation of controls as an integral part of assessing the risk of material misstatement.

Understand how business risk can feed through to audit risk (via financial statement risk) and how both relate to engagement risk.

¾

explain how auditors obtain an initial

understanding of the entity and knowledge of its business environment;

¾

explain the components of audit risk;

¾

explain why an auditor needs to obtain an

understanding of internal control activities relevant to the audit;

¾

describe the use of information technology in risk analysis;

¾

identify and describe engagement risks affecting the audit of an entity

12 – 15

10 Audit materiality

Whilst a specific question on the nature of materiality may come up in the examination, it is very often referred to when considering planning, evaluating errors and the impact on the auditor’s report (e.g. the matter must be material) – see Session 30

¾

define and explain the concepts of materiality

and tolerable error; and

¾

compute indicative materiality levels from financial information.

(8)

11 Fraud & Error, Laws & Regulations

Make sure you understand the difference between the responsibilities of management and auditors. Appreciate that the risk of fraud is now an integral aspect of understanding the entity and internal control. Note its content within the engagement letter,

management representations and auditor’s report.

¾

define and distinguish between the terms

“error”, “fraud” and “misstatement”;

¾

compare and contrast the respective

responsibilities of management and the auditor regarding fraud & error

¾

discuss the effects of fraud and misstatements on the audit strategy and extent of audit work.

3

12 Computer information systems (CIS)

Extending the control environment into CIS. Make sure you understand the forms of controls. Use Section 5 (IAPS 1013) as a form of case study – it covers a lot of useful applications of the CIS environment which are often examined, eg use of websites to order goods. Sections 6 to 8 apply CIS to assumed knowledge. Assume the control environment to be computerised unless told otherwise by the examiner.

After studying this you should be able to

¾

appreciate the planning considerations

associated with CISs

¾

suggest appropriate IT (“general”) and application controls

¾

recognise the audit implications of microcomputers, on-line and database systems.

(9)

13 Appx 1, 2, 3

and 5

Reliance on control effectiveness & substantive testing

It is important to always state the reason why tests are carried out. Ensure you understand, from Section 4 on exam skills, the differences between “control

objectives”, “control procedures” and “tests of control”. Session 36, Appendix 2, on transaction cycles is a key element of your studies. It is also common for the examiner to ask you to prepare your answer in the form of a management letter.

After studying these sessions you should be able to:

¾

explain the importance of internal controls to auditors;

¾

explain how auditors identify weaknesses in internal control systems and how those weaknesses limit the extent of auditors reliance on those systems;

¾

discuss the difference between tests of control and substantive procedures;

¾

explain, analyse and provide examples of internal control procedures and control activities;

¾

explain and tabulate tests of control suitable for inclusion in audit working papers;

¾

analyse the limitations of internal control

components in the context of fraud and error;

¾

explain the need to modify the audit strategy

and audit plan following the results of tests of control;

¾

discuss and provide examples of how the reporting of internal control weaknesses and recommendations to overcome those

weaknesses are provided to management.

16 – 22 (see also Appx 1 & 2

(10)

Appx 2 Transaction cycles

You should read this Session at least once to get an idea of the practicalities. If your practical audit experience is limited you may need to refer back to this more than once!

Ensure you can identify control objectives and the controls that should be in place to meet them.

14 Service organisations –

Ensure you understand when the auditor needs to obtain an understanding of the controls and their implementation at the service organisation. They will then use professional judgement to decide if they will place reliance on the operating effectiveness of the controls. Understand the concept of the Type A and Type B reports and do not confuse them with the service provider’s auditor’s report on their financial

statements.

¾

discuss the audit considerations relating to

(11)

15 Audit evidence

Use the “sources ideas list” and mnemonics if you find them useful. In the exam do not quote mnemonics – use them to help you remember.

Ensure you understand the terms “relevant”, “reliable” and “sufficient” and the concept of

directional testing. The examiner does require you to state the assertion being tested for each test you suggest.

¾

explain the assertions contained within the

financial statements;

¾

explain the use of assertions in obtaining audit evidence;

¾

discuss the sources and relative merits of different types of evidence available;

¾

discuss the quality of evidence available;

¾

explain the principles and objectives of

transaction testing, account balance testing and disclosure testing.

27 – 29

(12)

16 Analytical procedures

The examiner has highlighted the importance of analytical procedures in audit and in particular

substantive procedures. Do not forget the usefulness of “proof in total”

¾

describe and explain the nature and purpose

of analytical procedures in planning;

¾

compute and interpret key ratios used in

analytical procedures;

¾

discuss and provide examples of how

analytical procedures are used as substantive procedures.

14 & 30

17 Accounting estimates

Ensure you understand the approaches to auditing accounting estimates and the use of subsequent events. After studying this session you should be able to

¾

discuss the problems associated with the audit

and review of accounting estimates.

32 & 33

18 Using the work of an expert

Note how the approach to using the work of the expert is very similar to that of a member of the audit team. In addition, Session 34 considers using the work of

internal audit.

¾

discuss the extent to which auditors are able

to rely on the work of experts;

¾

discuss why auditors rely on the work of others;

(13)

19 Audit sampling

The examiner has stated that from time to time a computational question may be included which may contain sampling. Be prepared to explain the various elements and definitions.

¾

define audit sampling and explain the need

for sampling;

¾

identify and discuss the differences between statistical and non-statistical sampling;

¾

discuss and provide relevant examples of the

application of the basic principles of statistical sampling and other selective testing

procedures;

¾

discuss the results of statistical sampling including consideration of whether additional testing is required.

31

20 Management representations

This is not an item of evidence to be thrown into your answers for good measure, eg “obtain management representations”. You should appreciate that whilst there are a number of specific representations that are always obtained, in general written representations provide audit evidence in relatively limited situations. The examiner may ask you to write appropriate extracts for inclusion within a representation letter. As in all such answers, marks will be available for the style of your answer.

¾

explain the purpose of and procedure for

obtaining management representations;

¾

discuss the quality and reliability of

management representations as audit evidence;

¾

discuss the circumstances where management

(14)

21 Computer-assisted audit techniques

As you should assume all systems are computerised unless told otherwise, always look for the opportunity to refer to CAATs within your answer. Do not just say “use CAATs” but say why and how the use of CAATs would be effective/efficient.

¾

explain the use of computer-assisted audit

techniques in the context of an audit;

¾

discuss and provide relevant examples of the use of test data.

36

1-21 Test your knowledge to date 60 & 62

22 – 26 These sessions consolidate knowledge of earlier sessions and studies (including Paper 1.1/F3 IASs) and apply it systematically to the main statement of financial position areas.

22 Non-current assets

Before reading the content of this Session have a go at generating sources of evidence for investments using the ideas list which you learned in Session 15. After studying this you should be able to

¾

establish critical aspects of the audit of

non-current assets and investments

¾

identify sources of evidence for intangible assets (including development costs), non-current assets and investments

¾

select appropriate audit procedures for inclusion in a work program relating to financial statement assertions concerning tangible non-current assets.

(15)

23 Inventory

As one of the more material account balances, inventory is an important area. Whilst it is unlikely that a question will appear in every paper, it is broad in scope and presents many areas for the examiner to set a question.

If you are “in audit” and have never attended a physical inventory count, see if you can arrange to go on one before you start your revision. If in commerce, try and arrange to participate in a count if possible. You will remember more from experience.

¾

explain the importance of inventory;

¾

describe physical inventory counting procedures;

¾

explain “cut-off”;

¾

value inventory; and

¾

select appropriate audit procedures for inclusion in a work program relating to financial statement assertions concerning inventory.

39 – 41

24 Trade receivables

Do Example 1 (you should find these get easier). If your firm carries out direct confirmations

(“circularisations”), see if you can get involved in one before your revision. Appreciate the need to be specific when describing how you would test receivables. After studying this session you should be able to:

¾

explain risks of misstatement associated with

trade receivables;

¾

identify sources of audit evidence;

¾

appreciate and explain the importance of

control a/c reconciliations; and

¾

select appropriate audit procedures (including

(16)

25 Loans, bank and cash

Compare the standard request for a bank report for audit purposes with any you encounter in practice. Questions will be set on bank & cash directly, but they have also been set in other contexts eg small businesses and even cash collection controls required in a charity. After studying this session you should be able to

¾

identify risks and appropriate sources of

evidence

¾

suggest cash control objectives and recommend internal control procedures

¾

describe methods used to collect audit

evidence to verify loans, bank and cash (including the bank reconciliation)

¾

state the standard information requested in a bank confirmation request letter

¾

select appropriate audit procedures (including bank confirmations and reconciliations) for inclusion in a work program.

44 & 45

26 Trade payables, accrued expenses and provisions Although a relatively shorter session, payables are no less examinable than receivables. Make sure you appreciate the directional testing differences compared with receivables.

¾

distinguish between

trade payables and accrued expenses provisions per IAS 37and allowances

against asset values

¾

identify risks of misstatements and sources of evidence

¾

select appropriate audit procedures (including

(17)

27 Small businesses and not for profit organisations This Session does not introduce any new technical material. It simply draws on those aspects of earlier topics which are of particular relevance to small businesses. Always remember that the larger the company, the greater the need for internal controls. Whilst core business controls will still be required, the integrity of management often plays a key role in the small business audit approach.

¾

determine areas of audit risk in a given small

entity and describe the types of evidence expected to be available;

¾

recommend appropriate internal controls;

¾

apply suitable audit procedures to small

businesses and not-for-profit organisations.

49 – 51

28 Communications with management and those charged with governance

The technical content of a letter of internal controls has already been covered in the earlier “controls” sessions.

¾

explain the need for timely communication,

clearance, feedback and follow up

¾

discuss communication methods. 29 Audit finalisation

This Session introduces the auditing aspects of further accounting issues introduced in Paper 1.1/F3. All areas are examinable.

¾

discuss the importance of the overall review

of evidence obtained;

¾

explain the significance of unadjusted errors;

¾

explain the purpose of a subsequent events

(18)

30 The auditor’s report on financial statements This fundamentally important topic is deemed knowledge at Paper P7. In auditing terms, this is perhaps the most “technical” topic in the syllabus. If you do not understand any of the justifications to the audit opinions in the question bank answers, make a note to discuss it with your tutor on the revision course. After studying this session you should be able to:

¾

describe and analyse the format and content

of unmodified audit reports; and

¾

describe and analyse the format and content of modified audit reports.

54 – 56

31 Going concern

The inter-relationship of this topic with auditor’s reports is most important. Make sure you also understand the implication of going concern at the planning stage as well as the directors’ requirements on going concern.

¾

define and discuss the significance of the

concept of going concern;

¾

explain the importance of and the need for going concern reviews;

¾

explain the respective responsibilities of auditors and management regarding going concern;

¾

discuss the procedures to be applied in performing going concern reviews;

¾

discuss the disclosure requirements in relation to going concern issues; and

¾

discuss the implications of the findings of going concern reviews

(19)

32 Review assignments

The examiner has stated that he expects students to understand the difference between assurance engagements and reviews.

¾

describe, illustrate and analyse the format and

content of external review assignments (e.g. on financial statements) under review engagements (ISRE 2400).

33 Internal audit & risk management

The internal review provides assurance on risk management and the control framework of an organisation. Students should bear in mind that internal audit and review services are often outsourced and should be able to answer questions on the

advantages and disadvantages of outsourcing.

¾

discuss the factors to be taken into account

when assessing the need for internal audit;

¾

compare and contrast the role of external and

internal audit regarding planning and the collection of audit evidence;

¾

compare and contrast the types of report provided by internal and external audit;

¾

discuss the scope of internal audit and the

limitations of the internal audit function;

¾

explain the types of report provided in

internal audit assignments;

¾

discuss the responsibilities of internal and external auditors for the prevention and detection of fraud and error;

¾

explain the advantages and disadvantages of outsourcing internal audit;

¾

discuss the nature and purpose of internal audit assignments including value for money, IT, best value and financial;

(20)

34 Reliance on internal audit

This session concentrates on the use that can be made of internal audit by the external auditor. Learn the criteria for assessing possible reliance (i.e. use) and the factors which affect the evaluation of the internal audit function (i.e. the extent of reliance).

¾

recognise the factors which determine the

extent to which reliance can be placed on the work of internal audit.