audit risk, sue for negligence, unappropriate conduct

intimedation: 恐吓  base on contract renew or to grant an engagement

mitigation  缓解，减弱

mitigate the risk

identify the r=ethic issue and analysis and discuss, why it is a problem and how it will impact our professional conduct

principle and objectivity

identified the threat

assess the siginificant of the risk

safeguard to practice and conduct code of ethic of conduct

ethic behaviour

explaining how it could affect negligence practice

ethic issues: objective, competence, integrity, profesional behaviour

intimidated by the clients, risk to threat objective, lower cost bring the not enoughresources be organized to practice, competence and tech

responsibilities and liability:

three key areas here:

fraud and error

laws and regulation

negligence for practice

1. fraud and error/laws and regulations:

-responsibilities of auditor and management

-how to assess the risk at the planning stage

-procedures to address the risk during the audit

-who to report to

2. Negligence-can be sued

-the three tests for negligence

•  did we own a duty of care
• was that duty breached:
• was a loss suffered?

great structure to answer a negligence question

-how to spot a lack of audit quality

-how to reduce the risk/impact of negligence claim

things to look out for regarding to audit quality:

• not comply with an ISAs
• lack of direction, supervision and review
• evidence of rushing, not gathering enough evidence
• to few staff
• work assigned to inappropriate staff
• unauthourized change of the audit plan
• wrong type of evidence be gathered

common pitfalls

1. complains of ISA and laws and regulations

2. mis reading the requirement

3. not explain why something impact audit quality'

4. not conclusion a negligence question

tendering, advertise and acceptance of engagement:

• lots of consideration at the acceptance stage- not only ethics
• rules surrounding the professionalism of advertisement and use of ACCA title and name
• the process of tendering and what to put in a tender

skills to solve these kind of problems:

-everything need to considering during acceptance stage, why

the various rules regarding advertice and use of ACCA

spotting subtle unprofessional language /suggestion in 

being able o tell

common pitfalls:

thingking that an acceptance question is just about ethics

not explain why we through acceptance procedures

not identifying the point in time(confusing pre-acceptance with planing)

talking about engagement letter in the pre-acceptance phase

not appreciating pitfalls of tender process

too little to discuss about the ternder document

financial statement audit

performance audit:

audit of performance information

pre determined objectives

value of money: effective, efficient, and economic

effective   works and perform its duties as required

economic : under budget

effeciencetive: lower cost and higher performance

examation procedures 

definition:

public section: controlled and funded by government

public deserved to know how these public sections spend the money from taxes

defnitions of performance information of public sections:

how is the organisation doing

KPI  key performance indicators

usefulness  可用性

measurablity 可衡量性

reliablity: 可靠性

the data and result is resonable and consistent

forensic audit assurance: investigation procedures:  put the audit technicial and experts to investgation in senario where financial loss could quantified

insurancel claim is one kind of forensic audit

definition： claim analytical procedures, enquiry, inspection, confirmation, CAATs, test of control 

fraud investgation:

• has there be one
• who did it
• how much did they take try to quantified the loss
• are we needing to appear in court

issurance claims:

• is the policy valid
• value of the item

ethical principles  consideration and guidance 

professional due care  completence checklist

accuracy

confidential 

internal control

check list

evidences

professional behaviour

plan and perform forensic audit/insurance claim:

• enquires /interviews of key staff   people involved
• detailed inspection and aalysis of documentary evidence
• test control
• analytical procedures to compary trends over time or between business segments
• CAATs computer assised audit technical
•  

Due Diligence 尽职调查/履职调查

definition of due diligence assignment: a fact finding exercise usually conducted to reduce the risk of making a bad investment decision

forewarned===forearmed ,n

purpose of due diligence : weather to buy? how much to buy, and when to process

types of engagement:

• assurance engagement
• what is our conclusion
• limited assurance only

CFO value and pricing of the entity

CEO  maxmize the wealth of the sharehoulders, use the resource under money in value

survey and valuation

on investment: purchase PPE

subsitantial procedures to obtain (gather)evidence

subsequent event:

definition

responsibilities of the governance who charge the  management of the entity

responsibilities of auditors

signigficant concept of going concern:

definition: the entitiy will continue to do business in foresee future at least 12month

need for going concern reviewst

the fundamential princinple of FR is all the financial statement are prepared on going concern basis, unless is told the revise one.

going concern   the business will continue in the foresee future, in UK is regard to at least 12month from the date the financial statement is presented 

break up basis: there are non current asset

there are uncertainties over going concern, prepare the FS on going concern basis , but in the note appropriate represent the situation the entity faced.

insolvent : net liability/net current liability 

cash run out: borrowing facilities refused, cannot borrow

trade difficulty: trade term be refused / limited, lost biggest customer, major litimation 

procedures:

inspect: forecast, loan aggreement

assess: relationship with lender,cusomer, supplier,...

perform sensbility analysis on the forecast, the worst/worse situation result to compare with 

obtain managerment representation that they believe they are a going concern

these briefing notes evaluate the business risks of ...,our new audit client, which operate retail industry , and has anyear ened 30 november 20x6

these briefly notes evaluate the business risk face      our new audit client, which operate reail industry , and has year ended 30 november 20X6

the most important procedures in audit:

substantive and test of control 

to obtain sufficient and appropriate evident:

effectively carry out a planned engagement or specific aspect of an engagement

analytical procedures to fiannceial and non-financial data

related parties:

explain the specific audit probles and procedures concerning 

recognize circumstance that may indicate the existance of unidentified related parties and recommend appropriate audit procedures

financial statement assertions and accounting treatment

support disclosure s made in note

explain hoew the auditor's responsibilities for corresponding figures, comparative fianncial statement  and other information s are dischaged

business acuman

professional scepticism

business insight

problem solving and decision making

use of third party both have opportunity and treat

three suitable source of third parties work to applied:

expert, internal control, service organiztion

corresponding figures and comparative financial statement

identify and describe the maters to be cosidered and procedures to be performed at the planning stage

• assessment of materality both for group and each componenets
• the impact of non-contermious year end of a group
• change group structure

recommend and discuss the communication ad content to the components

recognize the audit problems and describe proceduresL

1. business combination, include classfication of investment

2. the determination of goodwill and its impairment

3. group accounting policy

4. inter company trading

5. equity account, association and join ventures

6. changes in group structure include acquisition and disposal

7. accounting for subsidiaries in other countries

in respect of consolidated process,identify and explain the relvant audit risk and audit procedure nessary to obtain sufficient appropriate evidence

how to evaluate the audit work performed by a component auditor

explain the responsibility of the component auditr before accep appointment, and the procedures to be performed in a group situation

group and transnational entity

main issue about consolidated reports and transnatinal auditor:

1. list of laws and standards

2. seriers adjustment review if sufficient or not

3. cancellation of inter-company balances and mid-year acquisition

4. use of component audit

procedure and quality control

component auditor:

independent of entire group

experience

key issues in group or transnational audit:

1. business combination, classfication and investment

2. goodwill and its impairment

3. group accounting policies

4. inter-company transaction (trading)

5. equity accounting for associatation and joint ventures

6. change in group structures include acquisition and disposal

7. foreign subsidianary  accounting policies

8. consider hoe th group should evaluage the component audit work performance

in respect of the consolidation process, identify and explain the relevent audit risk and audit preocedure necessary to obtain sufficient appropriate evidence 

define materiality and performance materiality

application in fiancial reporting and audit

evaluate business risk

evaluate audit risk

evaluate risk of material misstatement

discuss and demonstrate the use of anyalytical procedure in planing state of audit

result of planning procedure determing the relevent audit stratege

recognize maters that are not relevant to the planning assignment

ethics and integrity

business insight (acumen)

building relationship

communication

leadership

problem solving and decision making

always have behaviour in 

professional scepticism

and flexibility

audit stratege is the key document in planning process, the contents include:

1. overall audit approach  

• financial report framework
• industry report
• knowlesge of business
• service organization
• third parties use of  CAATs
• internal control
• availability of client staff

2. reporting objectives ,timing and communication

• timetable
• communication with client, team, and third parties

3. significant factors, preliminary engagement activities

• materiality
• risk assessment
• internal control
• need for scepticism
• change in laws and regulations
• significant development

4. nature, timing and extent of resource

• selection of audit team
• budget

plan is far more detail about each approach in the stratege:

what, who, how much work (big sample), when 

risk assessment techniques:

• making enquires of knowledge people
• conduct analytical procedures on financial statement number
• observing things at the client
• inspecting document

analytique analysis:

compare with related piece of financial information  

compare with historic data

compare with budget

compare with other non fiancial information

main ratios will require to calculate 

entity: its pressure and encentive, its governance, its key customer and suppliers

environment: industry, complex or new laws and regulations, competition

applicable financial report framework

interna control effevtiveness of internal control, system of internal control, segregation of duties

material: ommision or mistatement may influence the decision of the user

guidance for materiality:

0.5-1% of turnover

1-2% of total assets

5-10% of profit

also need to consider the nature and relevent of the error, if the item is materiality or not is based on prfessioanl judgement.

performance materiallity: aggregate exceed the materility as a whole

material misstatement include:

1. incorect number

2. missing or inadaquate disclosure

3. wrong basis of preparation

audit risk=inherent risk * clients control risk * detection risk

inherent risk is the error make in prepare the statement.

control risk is the internal control fail to detect and correct the error

inherent risk * control risk    form the materiallity misstatement

and the audit detect risk(procedure deficiency ) will cause the total audit risk

business is scepticism concerning:

• fraud  /money laudering
• complex of accounting 
• mamagement judgement and mamagement(internal control)

audit planning:

1. characteristics of the engagement: 

• know your client: industry, list or not, which accounting standard are applied with, internal control and internal audit reliability, if any third parter or external expert are needed
• FR framework
• knowledge of the industry
• knowledge of the business
• internal audit services
• organisation
• use of CAATs 
• availability of staff of clents

2. reporting obnjectives, things and communication

• works cover the charactics
• time table, schedule, internal dealine
• third parties schedule and requirement , not delays whole schedure, especially valuer...
• communication with clients, team, and 3nd parties

3. sigbificant factors, preliminary engagement activities

• show work on risk assessment, materiality calculation, view of clients internal control
• ongoing clients, highlight siginificant changes since prior year
• materiallity
• risk assessment
• internal controls
• need for scepticism
• changes in laws and regulation, policies and major estimation\
• sigificant development

4. nature, things and extent of resources

• budget
• context of works
• extend of third parties not excess budget

audit strategy which should be coved in planing overall : 

audit plan: what specific work on each area, who, how much, when

control activities comprise segregation of duties, reconcillication, authourisation, physicial or logical controls, and verification

applicable financial reporting framework: key area includes: revenue recognisation, financial instruments, foreign currency transaction, unusual or infrequecy transactions

environment: industry, laws and regulation, competition, revenue generation, net relisable value of inventory, provision on penality

entity: incentives or pressures, government, revenue, receivable, purchases and payables on major customer or supplier

scenarios around ethical and professional issues------lots to consideration and analyse

identify and explain any ethicial and professional issues

outline actions

1. find the issues in astory

2. why it is a issue  (not obvious)

3 several reasons 

ethical:

framwork principles 

threats 

explain the potential impact and safeguard

quality :

1, why not of acceptable standard   

• no comliance with ISAs
• competence issues
• lack of surpervision or review
• insufficient appropriate evidence gathered
• poor planing

 professional issues

• training
• disciplinary
• reputation
• any changes need in firm's internal process
• discipline

the considerstions about weather or not to attend the tender:

1. the cost to prepare the tender document, by which way the tender is performed

2. the fair of the fees need to charge to the suervice provide

3. if we are able to provide the promosion 

infomation required:

1.know your clients

2.waht your clients want

make the tender document

amount and base of fee

requirement of an audit and other services the clien want

selling point of an audit firm

advertise should be inform, not inpress

1. the cost and time exhust to prepare the tender documents

2. the fair and realistic fee

3, the possibility of fail to deliver the promise services

information needed to prepare a tender:

1. information about the clients

2. what the clients want

3.competitors

contents of a tender document:

1. amount abd base of fee

2. requirements of an audit, and other service provided 

3. selling points

auditor selection sonsideration:

1. independence

2. scepticism

3. quality control

implication of low balling:

1. self interest

2. cut concern

3. higher chance to issue inappropriate opinion

banned contingent fees, which is dependent on outcomes, which influence independence of the auditor

process of acceptence:

1. professional clearance    outgoingauditor to find more about the reason they leave

2. own independence review

3. integraty of managemnt

4. complaince with money laudering regulation

5. level resources needed

6. risk analysis

7. your fee

8. your competency

9. pre conditions: report framework , management responsibilities(1. prepare the statement, have suitabe internal control, provide infor and explaination to audit), ways to communication 

outgoing auditor       incoming auditor 

elements of a system of quality management

• leadership responsibilities 
• ethical requirement
• acceptance and continuance
• engagement resources
• engagement performance
• monitoring and remedication
• overall responsibilities
• documentation

the principle and standards:

responsibilities:

1. to perform work in accordance with the professional standards

2. to issue the appropriate report

evaluate a system of quality control

identification and impact of deficiencies

three standard of quality control

respective responsibility and potiential liabilities of management and suditors cncerning compliance with laws and regulations in audit of financial statements.

key concerns:

complaince with law and regulations

audit planning: consideration and plan procedure in detect non compliance

non-compliance : how and to whom should be reported  

withdraw: recognization and  recommendation

identify and establish procedure (remedy) in circumstance which indicated of high risk of error, irregulation and fraud

compare and contrast the responsibility of management and auditors for fraud and error

management:

auditors:

fraud： intentional act by one or more individuals among management, thise charge with governance, employees and third parties, involving the use of deception to obtain  an unjust illegal advantange

procedures to be carried up:

1. investigation

2. reporting non compliance

roles of auditors in ：

preventing:

detecting: we must conduct procedures to detect any material non compliance

reporting:

auditors legal liability :

negligent and potiential liability of auditors:

compare and contrast liability owed to customer and third parties(duty of care)

to customers:

to third parties: 

expection gap  and how to bridge

assess the risk of fraud in planing stage

legally liability:

contractural liability

or

test of negligence: was a duty owned, was the duty of care be breached, was there a loss suffered?

restricts:

restrick to usage of auditor report

engage letter, only share holders and the company only and no other part owned the duty of care

screening: assess the risk of fraud and not accepting clients with high risk

take  legal advice

respective reponsibilities and duty exxpectation gap

Issurance

carry out quality audit work

take on LLP(limited liability partnership)

Set a liability cap with clients

definition：

money laundering: the process to conceal the real source of money:

three steges:

1. placement: get the money into financial system (unusual big deposit into business account)

2. layering: attempt are made to disguise the fund and investigation into its source more difficult.(moving through lots of transactions, use bakings indifferent countries, where banking privicy more strict.)

3. integration: getting the "clean " money back into circulation, so the criminal will get benefit from it. (large investment transaction)

international methods to combet with money laundrying.

scope of criminal offences of money laundrying

criminal and civil liability

with the regulation:

all audit firms are required to have a n anti-money laundering program, which should consist of various basic elements.

• risk assessment (CDD)(KYC)
• systems and policies (policies and procedures in place to minimise the risk 

1. appointment a money laundering  reporting officer (MLRO)

2. creating set procedures for reporting suspicious to MLRO

3. creating set of procedure when MLRO reporting externally to financial intelligence Unit (FIU)

4. training of all staff in the requirement of the regulations, itherwise they could fall four of them without even knowing

5. setting up an independent audit function to make sure that policies and procedures in the program are sufficient and effective.

• dul dilligence (on acceptance and retention of clients)  CDD KYC
• record keeping *(at least 5 years after the relationship with customer ended)

prevent and detect money laundrying

suspicious potiential threat of money laundry

customer due  diligence(CDD)

know your customer(KYC)

recocnizition potiential suspicious transactions and assess their impact on report duties

describe, with reasons, the basic elements of anti-money laundrying program

business insight

ligislation

professiona sceptisism

money laundring offences:

tipping off: under the regulation, auditor are required to report externally, suspicious we have over money laundering without ask customer(clients's)'s permission.   if the report of suspicious are under good feith, auditor can never be found to be in breach of the confidentiallity priciple, even if the clients was later to be found innocent of any illegal activity.

ACCA code of ethics ad conduct 

 transaction of money laundering 

Key issues in this chapter 

• explain the need for laws ,regulations, standards and other relating to audit,assurance and related services.
• outline and explain  the need of legal and professional framework inxlude:
• public oversight of audit and assurance practice
• the impact of corporate governance principle on audit and assurance practice
• the role of audit committees nd impact on audit and assurance practice.

oversight: public consense on list company sudit and auurance practice

governance principle on audit and assurance practice

business insight

exam highlight:  governance principle

                            examples of bad practice in public oversight

audit commision

professional scepticism

adds value: market confident

                    continunous improvement

• coounting principles relating to a business combination achieved in stages
• implications of changes in ownership interest and loss control or significant influence
• activities have been discontinued, or have been acquired or dispososed of the period
• subsidiary has been acquired exclusicely with a view to subsequent disposal (held for sale)

acquisition: two seneria in practice:

1. mid year acquisition

2. step acquisition

related parties:

identify related parties and assess the implications of related party relationships in the preparation of corporate reports

knowledge:

• business acumean
• legislation

skills:

• business insight

in the integrated reports:

related party disclosures:

• the relationships of related parties
• transaction between related parties

transperency requirement

subsidiraies and its parrents

ISAs 24  related parties

strateige rreport:

share-based payment

employee benefits:

1. salary ,commission, bonus   expenses

2. termination benefirs

3. pension scheme

4. leave payment 

ISA 19 Employee Benefits 

accural means payable

prepayment   

the elements of lessor account:

lease liability:

• lease payable
• residual value guarentees
• option to purchase in certain
• termination penalties
• discount rate /incremental borrowing rate

right_of _use asset

• lease liability
• at or before inception(commence)
• inotal direct cost
• estimate removing cost

lease term

• non cancelled tern(period)
• option to extend in certain
• terminate in certain

initial entry:

• Dr right-to -use asset
• Cr  Lease liability
• Cr cash
• Cr defored cost

sunbsequentl entry:

interest cost (financial cost)

• Dr finance Cost 
• Cr lease liability

cash payment

• Dr lease leability
• Cr Cash 

Dr P/L (current liability)

Cr Accumulated depreciation  

annual depreciation=right to use asset/lease term